UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March 31, 2006
or
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ________ to ________
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
94-3171943
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
|
2600
Kelly Road, Suite 100
|
|
|
Warrington,
Pennsylvania 18976-3622
|
|
|
(Address
of principal executive offices)
|
|
(215)
488-9300
(Registrant’s
telephone number, including area code)
__________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or 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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES oNO
x
As
of May
9, 2006, 61,199,429 shares of the registrant’s common stock, par value $0.001
per share, were outstanding.
Table
of Contents
PART
I - FINANCIAL
INFORMATION |
Page
|
|
|
Item
1. Financial Statements
|
|
CONSOLIDATED
BALANCE SHEETS -
As
of March 31, 2006 (unaudited) and December 31,
2005
|
Page
1
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited) -
For
the Three Months Ended March 31, 2006 and 2005
|
Page
2
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)-
For
the Three Months Ended March 31, 2006 and 2005
|
Page
3
|
|
|
Notes
to Consolidated Financial Statements - (unaudited)
March
31, 2006
|
Page
4
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
Page11
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
Page
28
|
|
|
Item
4. Controls and Procedures
|
Page
29
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
Page
30
|
|
|
Item
1A. Risk Factors
|
Page
30 |
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
Page
43
|
|
|
Item
3. Defaults Upon Senior Securities
|
Page
43
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
Page
43
|
|
|
Item
5. Other Information
|
Page
43
|
|
|
Item
6. Exhibits
|
Page
46
|
|
|
Signatures
|
Page
47
|
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery Laboratories, Inc., and its wholly-owned, presently
inactive subsidiary, Acute Therapeutics, Inc.
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains “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. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “intends,” “may,” “will” or “should” or, in each case, their
negative, or other variations or comparable terminology, though the absence
of
these words does not necessarily mean that a statement is not forward-looking.
The forward-looking statements include all matters that are not historical
facts
and include, without limitation: statements concerning our research and
development programs and clinical trials; the possibility, timing and outcome
of
submitting regulatory filings for our products under development; the seeking
of
collaboration arrangements with pharmaceutical companies or others to develop,
manufacture and market products; the research and development of particular
compounds and technologies; the period of time for which our existing resources
will enable us to fund our operations; and anticipated cost savings and
accounting charges arising out of our recent workforce reductions and corporate
restructuring.
We
intend
that all forward-looking statements be subject to the safe-harbor provisions
of
the Private Securities Litigation Reform Act of 1995. 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:
|
·
|
risk
that financial conditions may change;
|
|
·
|
risks
relating to the progress of our research and development;
|
|
·
|
the
risk that we will not be able to raise additional capital or enter
into
additional collaboration agreements (including strategic alliances
for our
aerosol and Surfactant Replacement Therapies);
|
|
·
|
risk
that we or our marketing partners will not succeed in developing
market
awareness of our products;
|
|
·
|
risk
that we or our marketing partners will not be able to attract or
maintain
qualified personnel;
|
|
·
|
risk
that the FDA or other regulatory authorities may delay consideration
of
any applications that we file;
|
|
·
|
risk
that the FDA or other regulatory authorities may not approve any
applications we file;
|
|
·
|
risks
that any such regulatory authority will not approve the marketing
and sale
of a drug product even after acceptance of an application we file
for any
such drug product;
|
|
·
|
risks
relating to the ability of our third party materials suppliers and
development partners to provide us with adequate supplies of drug
substance and drug products for completion of any of our clinical
studies;
|
|
·
|
risks
relating to our drug manufacturing
operations;
|
|
·
|
risks
relating to the integration of our recently-acquired manufacturing
operations into our existing
operations;
|
|
·
|
risks
relating to our ability and the ability of our collaborators to develop
and successfully commercialize products that will combine our drug
products with innovative aerosolization
technologies;
|
|
·
|
risks
relating to the significant, time-consuming and costly research,
development, pre-clinical studies, clinical testing and regulatory
approval for any products that we may develop independently or in
connection with our collaboration arrangements;
|
|
·
|
risks
relating to the development of competing therapies and/or technologies
by
other companies;
|
|
·
|
risks
relating to our recent workforce reductions and corporate
restructuring:
|
|
·
|
risks
relating to the impact of litigation that
has been and may be brought against the Company and its officers
and
directors; and
|
|
· |
the
other risks and uncertainties detailed in Part II, Item 1A: Risk
Factors and elsewhere in our Annual Report on Form 10-K for the
year ended
December 31, 2005, and those described from time to time in our
future
reports filed with the Securities and Exchange Commission.
|
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, whether as a result of new information, future
events or otherwise.
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,226
|
|
$
|
47,010
|
|
Restricted
cash
|
|
|
680
|
|
|
647
|
|
Available-for-sale
marketable securities
|
|
|
4,663
|
|
|
3,251
|
|
Prepaid
expenses and other current assets
|
|
|
876
|
|
|
560
|
|
Total
Current Assets
|
|
|
38,445
|
|
|
51,468
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
4,798
|
|
|
4,322
|
|
Other
assets
|
|
|
218
|
|
|
218
|
|
Total
Assets
|
|
$
|
43,461
|
|
$
|
56,008
|
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
8,168
|
|
$
|
7,540
|
|
Credit
facility, current portion
|
|
|
8,500
|
|
|
8,500
|
|
Capitalized
leases and note payable, current portion
|
|
|
1,663
|
|
|
1,568
|
|
Total
Current Liabilities
|
|
|
18,331
|
|
|
17,608
|
|
Capitalized
leases and note payable, non-current portion
|
|
|
3,043
|
|
|
3,323
|
|
Other
liabilities
|
|
|
239
|
|
|
239
|
|
Total
Liabilities
|
|
|
21,613
|
|
|
21,170
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 180,000 shares authorized;
61,537
and 61,335 shares issued,
61,224
and 61,022 shares outstanding
at
March 31, 2006 and December 31, 2005, respectively.
|
|
|
61
|
|
|
61
|
|
Additional
paid-in capital
|
|
|
242,776
|
|
|
240,028
|
|
Unearned
portion of compensatory stock options
|
|
|
(173
|
)
|
|
(230
|
)
|
Accumulated
deficit
|
|
|
(217,760
|
)
|
|
(201,965
|
)
|
Treasury
stock (at cost; 313 shares)
|
|
|
(3,054
|
)
|
|
(3,054
|
)
|
Accumulated
other comprehensive loss
|
|
|
(2
|
)
|
|
(2
|
)
|
Total
Stockholders’ Equity
|
|
|
21,848
|
|
|
34,838
|
|
Total
Liabilities & Stockholders’ Equity
|
|
$
|
43,461
|
|
$
|
56,008
|
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
Contracts
and grants
|
|
$
|
---
|
|
$
|
61
|
|
Expenses:
|
|
|
|
|
|
|
|
Research
& development
|
|
|
7,613
|
|
|
5,120
|
|
General
& administrative
|
|
|
8,682
|
|
|
4,270
|
|
Total
Expenses
|
|
|
16,295
|
|
|
9,390
|
|
Operating
Loss
|
|
|
(16,295
|
)
|
|
(9,329
|
)
|
Other
income / (expense):
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
800
|
|
|
214
|
|
Interest
expense
|
|
|
(300
|
)
|
|
(201
|
)
|
Other
income / (expense), net
|
|
|
500
|
|
|
13
|
|
Net
Loss
|
|
$
|
(15,795
|
)
|
$
|
(9,316
|
)
|
Net
loss per common share -
basic
and diluted
|
|
$
|
(0.26
|
)
|
$
|
(0.18
|
)
|
Weighted
average number of common
shares
outstanding - basic and diluted
|
|
|
61,170
|
|
|
50,784
|
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(15,795
|
)
|
$
|
(9,316
|
)
|
Adjustments
to reconcile net loss to net cash used
in
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
215
|
|
|
214
|
|
Stock
Issued related to 401(k) match
|
|
|
174
|
|
|
53
|
|
Stock-based
compensation expense
|
|
|
1,903
|
|
|
70
|
|
Changes
in:
|
|
|
-
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
(316
|
)
|
|
(50
|
)
|
Accounts
payable and accrued expenses
|
|
|
628
|
|
|
(1,778
|
)
|
Other
assets
|
|
|
-
|
|
|
(50
|
)
|
Net
cash used in operating activities
|
|
|
(13,191
|
)
|
|
(10,858
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(691
|
)
|
|
(118
|
)
|
Restricted
cash
|
|
|
(33
|
)
|
|
9
|
|
Purchases
of marketable securities
|
|
|
(4,631
|
)
|
|
(22,208
|
)
|
Proceeds
from sales or maturity of marketable securities
|
|
|
3,219
|
|
|
2,692
|
|
Net
cash used in investing activities
|
|
|
(2,136
|
)
|
|
(19,624
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of securities, net of expenses
|
|
|
728
|
|
|
27,584
|
|
Proceeds
from credit facility
|
|
|
-
|
|
|
2,571
|
|
Equipment
financed through capital lease obligation
|
|
|
171
|
|
|
225
|
|
Principal
payments under capital lease obligation
|
|
|
(356
|
)
|
|
(205
|
)
|
Net
cash provided by financing activities
|
|
|
543
|
|
|
30,175
|
|
Net
decrease in cash and cash equivalents
|
|
|
(14,784
|
)
|
|
(307
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
47,010
|
|
|
29,264
|
|
Cash
and cash equivalents - end of period
|
|
$
|
32,226
|
|
$
|
28,957
|
|
Supplementary
disclosure of cash flows information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
296
|
|
$
|
176
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Unrealized
loss on marketable securities
|
|
|
--
|
|
|
(4
|
)
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 - THE COMPANY AND BASIS OF PRESENTATION
The
Company
Discovery
Laboratories, Inc. (the “Company”) is a biotechnology company developing its
proprietary surfactant technology as Surfactant Replacement Therapies (SRT)
for
respiratory disorders. Surfactants are produced naturally in the lungs and
are
essential for breathing. The Company’s technology produces a
precision-engineered surfactant that is designed to closely mimic the essential
properties of natural human lung surfactant. The Company believes that through
this technology, pulmonary surfactants have the potential, for the first time,
to be developed into a series of respiratory therapies for patients in the
neonatal
intensive care unit (NICU), critical care unit and other hospital settings,
where there are few or no approved therapies available.
The
Company’s SRT pipeline is initially focused on the most significant respiratory
conditions prevalent in the NICU. The Company’s lead product, Surfaxin®
(lucinactant), for the prevention of Respiratory Distress Syndrome (RDS) in
premature infants, has received two Approvable Letters from the FDA and is
under
review for approval in Europe by the European Medicines Agency (EMEA). The
Company is preparing to conduct multiple Phase 2 pilot studies with Aerosurf™,
aerosolized SRT administered through nasal continuous positive airway pressure
(nCPAP), for the treatment of neonatal respiratory failure.
To
address the various respiratory conditions affecting pediatric, young adult
and
adult patients in the critical care and other hospital settings, the Company
recently completed and announced preliminary results of a Phase 2 clinical
trial
to address Acute Respiratory Distress Syndrome (ARDS) in adults, and is also
developing aerosol formulations of SRT to potentially address Acute Lung Injury
(ALI), cystic fibrosis and other respiratory conditions.
The
Company is implementing a business strategy that includes: (i) undertaking
actions intended to gain regulatory approvals for Surfaxin for RDS in premature
infants, including analysis and remediation of recent regulatory matters and
manufacturing issues (discussed in Note 7 --Subsequent Events, below); (ii)
investing in development of SRT pipeline programs, including Aerosurf, primarily
utilizing the aerosol generating technology rights licensed through a strategic
alliance with Chrysalis Technologies, a division of Philip Morris USA Inc.
(Chrysalis); (iii) continued investment in manufacturing capabilities at
the manufacturing operations in New Jersey acquired by the Company in December
2005 and, potentially, additional facilities to be built or acquired by the
Company for the production of surfactant drug products to meet anticipated
clinical and commercial needs (if approved); and (iv) potentially entering
into strategic partnerships for the development and commercialization of the
Company’s SRT product candidates.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
for interim financial information in accordance with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normally recurring accruals) considered for fair presentation
have been included. Operating results for the three month period ended March
31,
2006 are not necessarily indicative of the results that may be expected for
the
year ending December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2005.
All
of
our current products under development are subject to license agreements that
will require the payment of future royalties.
Certain
prior period balances have been reclassified to conform to the current period
presentations.
NOTE
2 - NET LOSS PER SHARE
Net
loss
per share is computed based on the weighted average number of common shares
outstanding for the periods. Common shares issuable upon the exercise of options
and warrants are not included in the calculation of the net loss per share
as
their effect would be anti-dilutive.
NOTE
3 - STOCK-BASED EMPLOYEE COMPENSATION
The
Company has a stock-based employee compensation plan. Prior to January 1, 2006,
the Company accounted for this plan under the recognition and measurement
provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees,
(Opinion 25) and related interpretations, as permitted by FASB Statement No.
123, Accounting
for Stock-Based Compensation.
Generally, no stock-based employee compensation cost was recognized in the
statements of operations, as options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date
of
the grant. Effective January 1, 2006, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R), Share-Based
Payment,
using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in the three months ended March 31, 2006 includes:
(a) compensation cost for all share-based payments granted prior to, but not
yet
vested as of January 1, 2006, based on the grant date fair market value
estimated in accordance with the original provisions of Statement 123, and
(b)
compensation cost for all share-based payments granted subsequent to January
1,
2006, based upon the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results from prior periods have not been
restated.
As
a
result of adopting Statement 123(R) on January 1, 2006, the Company’s net loss
for the three months ended March 31, 2006 was $1.7 million higher than if it
had
continued to account for share-based compensation under Opinion 25. Net loss
per
share for the three months ended March 31, 2006 would have been $0.23 per share
if the Company had not adopted Statement 123(R), compared to reported net loss
per share of $0.26. Of the total $1.7 million charge, $0.4 million was
classified as research and development and $1.3 million was classified as
general and administrative.
For
comparative purposes, the following table illustrates the effect on net loss
and
net loss per share if the Company had applied the fair value recognition
provisions of Statement 123(R) to options granted under the Company’s stock
option plan for the three months ended March 31, 2005. For purposes of this
pro
forma disclosure, the value of the option is estimated using a Black-Scholes-Merton
option-pricing formula that
uses
the assumptions set forth under “Stock Incentive Plan” below and amortized to
expense over the options’ vesting periods.
|
|
Three
months ended
|
|
(in
thousands, except per share data)
|
|
March
31,
|
|
|
|
2005
|
|
|
|
|
|
Net
Loss, as reported
|
|
$
|
(9,316
|
)
|
Net
Loss per share, as reported
|
|
$
|
(0.18
|
)
|
Add:
Stock-based employee compensation expense included in reported net
loss
|
|
|
___
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair value based method for all awards
|
|
|
(619
|
)
|
Pro
forma net loss
|
|
$
|
(9,935
|
)
|
|
|
|
|
|
Pro
forma net loss per share
|
|
$
|
(0.20
|
)
|
Stock
Incentive Plan
The
Company’s 1998 Stock Incentive Plan (the Plan), which is shareholder-approved,
permits the grant of share options and shares to its eligible employees,
officers, consultants, independent advisors and non-employee directors for
up to
10,075,000 shares of common stock. The Company believes that such awards better
align the interests of its eligible participants with those of its shareholders.
Option awards are granted with an exercise price equal to or greater than the
market price of the Company’s stock at the date of the grant. Although the terms
of any award vary, option awards generally vest based upon three years of
continuous service and have 10-year contractual terms.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing formula that uses assumptions noted in
the
following table. Expected volatilities are based upon the Company’s historical
volatility and other factors. The Company also uses historical data and other
factors to estimate option exercises and employee terminations within the
valuation model. The risk-free interest rates are based upon the U.S. Treasury
yield curve in effect at the time of the grant.
|
|
|
March
31, 2006
|
|
March
31, 2005
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
81%
|
|
81%
|
|
|
Expected
term (in years)
|
|
5
years
|
|
3.5
years
|
|
|
Risk-free
rate
|
|
4.4%
|
|
3.7%
|
|
|
Expected
dividends
|
|
0%
|
|
0%
|
|
A
summary
of option activity under the Plan as of March 31, 2006 and changes during the
period is presented below:
(in
thousands, except for weighted-average data)
Options
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighed-Average
Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2006
|
|
|
8,440
|
|
$
|
6.28
|
|
|
|
|
|
|
|
Granted
|
|
|
904
|
|
|
7.08
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8
|
)
|
|
3.15
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(60
|
)
|
|
6.97
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
9,276
|
|
$
|
6.35
|
|
|
7.31
|
|
$
|
15,050
|
|
Vested
at March 31, 2006
|
|
|
6,769
|
|
$
|
6.63
|
|
|
6.86
|
|
$
|
10,650
|
|
Exercisable
at March 31, 2006
|
|
|
7,548
|
|
$
|
6.23
|
|
|
6.84
|
|
$
|
14,199
|
|
Based
upon application of the Black-Scholes-Merton option-pricing formula described
above, the weighted-average grant-date fair value of options granted during
the
three months ended March 31, 2006 was $4.70. The total intrinsic value of
options exercised during the three months ended March 31, 2006 was $38,149.
A
summary
of the status of the Company’s nonvested shares issuable upon exercise of
outstanding options as of March 31, 2006 and changes during the period ended
March 31, 2006 is presented below:
(in
thousands, except for weighted-average data)
|
Option
Shares
|
|
Amount
|
|
Weighted-Average
Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2006
|
|
|
1,907
|
|
$
|
3.68
|
|
|
Granted
|
|
|
904
|
|
|
4.70
|
|
|
Vested
|
|
|
(252
|
)
|
|
4.55
|
|
|
Forfeited
|
|
|
(53
|
)
|
|
5.15
|
|
|
Nonvested
at March 31, 2006
|
|
|
2,506
|
|
|
3.89
|
|
As
of
March 31, 2006, there was $6.8 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average vesting
period of 2.3 years.
Note
4 - Comprehensive Loss
Total
comprehensive loss was $15.8 million and $9.3 million for the three months
ended
March 31, 2006 and 2005, respectively. Total comprehensive loss consists of
the
net loss and unrealized gains and losses on marketable securities.
Note
5 - Restricted Cash
There
are
cash balances that are restricted as to use and we disclose such amounts
separately on our balance sheets. The primary component of Restricted Cash
is a
security deposit in the amount of $600,000 in the form of a letter of credit
related to the lease agreement dated May 26, 2004 for office space in Bucks
County, Pennsylvania. The letter of credit is secured by cash and is recorded
in
our balance sheets as “Restricted Cash.” Beginning in March 2008, the security
deposit and the letter of credit will be reduced to $400,000 and will remain
in
effect through the remainder of the lease term. Subject to certain conditions,
upon expiration of the lease in November 2009, the letter of credit will
expire.
Note
6 - Treasury Stock
Occasionally,
certain members of our management and certain consultants, pursuant to terms
set
forth in our Amended and Restated 1998 Stock Incentive Plan, tender shares
of
common stock held by such persons in lieu of cash for payment for the exercise
of certain stock options previously granted to such parties. These shares are
accounted for as treasury stock. There were no such shares tendered during
the
three months ended March 31, 2006.
Note
7 - Subsequent Events
Manufacturing
Issue
Surfaxin
is a complex drug and, unlike many drugs, contains four active ingredients.
Surfaxin is aseptically manufactured at our facility as a sterile, liquid
dispersion. The manufacturing process to produce Surfaxin is complex, must
be
conducted in a sterile environment, and requires ongoing monitoring of the
stability and conformance to product specifications of each of the four active
ingredients. Each batch of drug produced at the Company’s manufacturing facility
undergoes a stringent test regimen and a requisite number of batches per year
are placed into a designed stability testing program consisting of specification
testing conducted over multiple time intervals and storage conditions. A batch
of drug product may fail to achieve the specified stability parameters. In
April
2006, analysis of ongoing stability data from Surfaxin “process validation
batches” indicated that certain stability parameters had not been achieved and,
therefore, three additional Surfaxin process validation batches will likely
have
to be produced. These process validation batches were previously manufactured
as
a requirement for the Company’s U.S. New Drug Application (NDA) regulatory
approval and have been undergoing periodic stability testing. The Company
anticipates a potentially significant delay in the U.S. regulatory approval
process for Surfaxin for the prevention of RDS in premature infants. Though
we
are presently assessing the impact of these events on the European regulatory
process, we expect that a similar delay in the Surfaxin European regulatory
approval is likely..
Surfaxin
Regulatory Approval
In
April
2006, the Company received a second Approvable Letter from the FDA for Surfaxin
for the prevention of RDS in premature infants. The Approvable Letter is an
official notification from the FDA and contains conditions that must be
satisfied by the Company prior to obtaining final U.S. marketing approval.
Specifically, the FDA is requesting certain information primarily focused on
the
Chemistry, Manufacturing and Controls (CMC) section of the NDA. The information
predominately involves the further tightening of active ingredient and drug
product specifications and related controls. Consistent with previous review,
the FDA does not have any clinical or statistical comments.
The
Company is currently analyzing the second Approvable Letter and preparing a
comprehensive information package for the FDA addressing some of the issues
in
the second Approvable Letter. Once the analysis is completed and the
manufacturing issues discussed above have been remediated, the Company will
request a meeting with the FDA and submit the comprehensive information package.
Upon receipt of the Company’s request, procedurally, the FDA must respond within
14 days and the meeting must occur within 75 days of the written request. At
the
meeting, the Company will seek to clarify the issues identified by the FDA
in
the second Approvable Letter. Thereafter, and conditioned upon satisfactory
Surfaxin process validation and stability, the Company will submit its formal
response to the second Approvable Letter. The FDA will then advise the Company
if it will accept the submitted response to the second Approvable Letter as
a
“complete” response and establish the time frame in which it will complete its
review of the response. This
is
the second Approvable Letter received by the Company from the FDA since the
Company's NDA for Surfaxin was filed in April 2004. The
previously submitted responses to the first Approvable Letter were accepted
by
the FDA as a complete response in October 2005.
New
Committed Equity Financing Facility (CEFF)
In
April
2006, the Company entered into a new Committed Equity Financing Facility (CEFF)
with Kingsbridge Capital Limited (Kingsbridge), a private investment group,
in
which Kingsbridge committed to provide up to $50 million
of
capital to support the Company’s future growth through the purchase of
newly-issued shares of its common stock. The Company’s previous Committed
Equity Financing Facility, entered into with Kingsbridge in July 2004 (2004
CEFF) and which presently has capital of up to $47.6 million available, will
automatically terminate upon effectiveness of the registration statement filed
in connection with the new CEFF.
The
Company will determine the exact timing and amount of any CEFF financings,
subject to certain conditions. The CEFF allows the Company to raise capital,
at
the time and in amounts deemed suitable to the Company, during a three-year
period once a related registration statement that was recently filed by the
Company is declared effective by the Securities and Exchange Commission. The
Company is not obligated to utilize any of the $50 million available under
the
CEFF. The purchase price of the shares sold to Kingsbridge under the new CEFF
will be at a discount ranging from 6% to 10% of the volume weighted
average of the price of our common stock for each of the eight trading days
following our election to sell shares, or “draw down” under the
CEFF.
Kingsbridge is not obligated to purchase any shares at a stock price per share
(before the applicable discount) that is less than $2.00.
In
connection with the CEFF, the Company issued a warrant to Kingsbridge to
purchase up to 490,000 shares of common stock at an exercise price of $5.6186
per share, which represents a 30% premium over the average of the
closing
bid prices of the Company’s common stock for the five trading days preceding the
signing of the agreement. The exercise term of the warrant is five years
beginning with the six-month anniversary of the closing date of the agreement.
The warrant must
be
exercised for cash, except in limited circumstances.
Corporate
Restructuring
In
order
to lower the Company’s cost structure and re-align its operations with business
priorities, the Company has reduced its staff levels and has determined to
conclude
its
Phase 2 clinical trial of Surfaxin for the prevention and treatment of
Bronchopulmonary Dysplasia (BPD) in premature infants. The Company took these
actions to respond to the anticipated significant delay in the regulatory
approval and commercial launch of Surfaxin for RDS in premature
infants.
Workforce
Matters
On
May 4,
2006, the Company announced a reduction in the number of its employees and
a
reorganized management structure. The workforce reduction totaled 55 employees,
representing approximately
34%
of the Company’s workforce, and was focused primarily on its commercial
infrastructure, the development of which is no longer in the Company’s near-term
plans. Included in the workforce reduction were three senior executives:
Christopher J. Schaber,
Ph.D.,Executive Vice President and Chief Operating Officer; Deni M. Zodda,
Ph.D., Senior
Vice President of Business Development;
and Mark
G. Osterman, Senior Vice President of Sales and Marketing. The affected
employees are eligible for certain severance payments and continuation of
benefits. The Company expects to take a one-time restructuring charge of
approximately $4.5 to $5.0 million in the second quarter ending June 30, 2006
related to the staff reductions and the wind down of certain commercial programs
The Company expects to realize annual expense savings of approximately $8.0
million from the reduction in work force and related operating expenses.
Additionally, certain commercial programs are being discontinued and related
costs will no longer be incurred. Such commercial program expenses totaled
approximately $5.0 million over the past two fiscal quarters (fourth quarter
of
2005 and first quarter of 2006).
In
connection with the corporate restructuring and in order to retain and provide
incentives
to
the Company’s senior management, the Board of Directors has authorized amended
and restated employment agreements for certain key executive officers, which
generally extend the term of employment, and entering into new employment
agreements with other
key
management employees.
See also
Part II, Item 5 - Other Information.
Surfaxin
Phase 2 Clinical Trial for BPD
On
May 9,
2006, the Company determined to conclude its Phase 2 clinical trial of Surfaxin
for the prevention and treatment of BPD in premature infants. The Company plans
to analyze the clinical data from this trial, report top-line results and submit
these data for publication.
This
determination is related to the Surfaxin regulatory and manufacturing issues
that are anticipated to significantly delay the potential regulatory approval
of
Surfaxin for RDS and may potentially adversely affect the availability of
Surfaxin drug product for this Phase 2 clinical trial.
Litigation
In
early
May 2006, a number of law firms issued press releases indicating that three
putative shareholder class actions against the Company and its Chief Executive
Officer, Robert J. Capetola, Ph.D., had been filed in the United States District
Court for the Eastern District of Pennsylvania. The Company has been
served recently with one such complaint and is assessing the purported class
action claims at this time.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” should
be read in connection with our accompanying Consolidated Financial Statements
(including the notes thereto) appearing elsewhere herein.
OVERVIEW
We
are a
biotechnology company developing our proprietary surfactant technology as SRT
for respiratory diseases. Surfactants are produced naturally in the lungs and
are essential for breathing. Our technology produces a precision-engineered
surfactant that is designed to closely mimic the essential properties of natural
human lung surfactant. We believe that through this technology, pulmonary
surfactants have the potential, for the first time, to be developed into a
series of respiratory therapies for patients in the NICU, critical care unit
and
other hospital settings, where there are few or no approved therapies available.
Our
SRT
pipeline is initially focused on the most significant respiratory conditions
prevalent in the NICU. Our lead product, Surfaxin (lucinactant) for the
prevention of RDS in premature infants, has received two Approvable Letters
from
the FDA and is under review for approval in Europe by the EMEA. Our proprietary
SRT is also being developed in an aerosolized form under the name Aerosurf,
for
the treatment of neonatal respiratory failure. We are preparing to conduct
multiple Phase 2 pilot studies with Aerosurf, aerosolized SRT administered
through nCPAP. In addition, also for premature infants, we have recently
concluded early a Phase 2 clinical trial of Surfaxin for the prevention and
treatment of BPD.
Based
on
recent events, we anticpate a potentially significant delay in the U.S.
regulatory approval process for Surfaxin for the prevention of RDS in premature
infants. Though we are presently assessing the impact of these events on the
European regulatory process, we expect that a similar delay in the Surfaxin
European regulatory approval process is likely. For a discussion of these
events, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Plan of Operations.”
|
·
|
In
April 2006, analysis of ongoing stability data from Surfaxin “process
validation batches”, which were produced as a requirement for our U.S.
NDA, indicated that certain stability parameters had not been achieved
and, therefore, three additional process validation batches will
likely
have to be produced. We are presently conducting an investigation
to
determine the cause and define the corrective actions needed to
potentially remediate these manufacturing
issues.
|
|
·
|
In
April 2006, we received a second Approvable Letter from the FDA for
Surfaxin for the prevention of RDS in premature infants, requesting
certain information primarily focused on the Chemistry, Manufacturing
and
Controls (CMC) section of the NDA. We are preparing a comprehensive
information package and, after the manufacturing issues discussed
above
have been remediated, we will request a meeting with the FDA to clarify
the issues identified in the second Approvable Letter. Thereafter,
we will
submit our formal response to the second Approvable Letter. The issues
identified in the second Approvable Letter are not related to the
clinical
data from our multinational SELECT study, which demonstrates that
Surfaxin
was significantly more effective in the prevention of RDS and also
improved survival (continuing through at least one year of life)
and other
outcomes versus the comparator
surfactants.
|
To
address the various respiratory conditions affecting pediatric, young adult
and
adult patients in the critical care and other hospital settings, we recently
completed and announced preliminary results of a Phase 2 clinical trial to
address Acute Respiratory Distress Syndrome (ARDS) in adults, and are also
developing aerosol formulations of SRT to address Acute Lung Injury (ALI),
cystic fibrosis, and other respiratory conditions.
Based
upon our current expectations of the financial impact of the delay in the
regulatory approval and commercial launch of Surfaxin for RDS, we undertook
the
following actions to lower our cost structure and re-align our operations with
our business priorities.
|
·
|
On
May 4, 2006, we announced a reduction in personnel from 160 to 105
employees, representing approximately 34% of our workforce, and
reorganized corporate management. We have also entered into new employment
agreements intended to retain and provide incentives to our executive
management and other key management
employees.
|
|
·
|
On
May 9, 2006, we determined to conclude our Phase 2 clinical trial
of
Surfaxin for the prevention and treatment of BPD in premature infants.
The
Company plans to analyze the clinical data from this trial, report
top-line results, and submit these data for publication. This
determination is also related to the potentially adverse affect that
recent events may have on the availability of Surfaxin drug product
for
this Phase 2 clinical trial.
|
The
foregoing recent events have had a significant impact on our business strategy.
We are now implementing a business strategy which includes:
|
·
|
undertaking
actions intended to gain regulatory approvals for Surfaxin for RDS
in
premature infants, including analysis and remediation of recent regulatory
matters and manufacturing issues;
|
|
·
|
investing
in development of SRT pipeline programs, including Aerosurf, primarily
utilizing the aerosol generating technology rights licensed through
a
strategic alliance with Chrysalis Technologies, a division of Philip
Morris USA Inc. (Chrysalis);
|
|
·
|
use
of our newly-acquired manufacturing facility, which is critical to
the
production of Surfaxin and our SRT clinical programs, to produce
Surfaxin,
other SRT formulations and aerosol development capabilities. We view
our
acquisition of manufacturing operations as an initial step in our
manufacturing strategy for the continued development of our SRT portfolio,
including life cycle management of Surfaxin, potential formulation
enhancements, and expansion of our aerosol SRT products, beginning
with
Aerosurf. Our strategy also includes building or acquiring additional
manufacturing capabilities for the production of our precision-engineered
surfactant drug products; and
|
|
·
|
securing
additional strategic partnerships for the development and
commercialization of our proprietary SRT product candidates, including
Surfaxin.
|
Since
our
inception, we have incurred significant losses and, as of March 31, 2006, we
had
an accumulated deficit of $217.8 million (including historical results of
predecessor companies). The majority of our expenditures to date have been
for
research and development activities and, since 2005, also include significant
general and administrative, primarily pre-commercialization, activities.
Research and development expenses represent costs incurred for scientific and
clinical personnel, clinical trials, regulatory filings and developing
manufacturing capabilities. We expense research and development costs as they
are incurred. General and administrative expenses consist primarily of Surfaxin
pre-launch commercialization sales and marketing, executive management,
financial, business development, legal and general corporate activities and
related expenses. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings, debt arrangements and strategic
collaborations. As of March 31, 2006, we had: (i) cash and investments of $37.6
million; (ii) $47.6 million available under the 2004 CEFF)with Kingsbridge,
subject to the terms and conditions of that 2004 CEFF;
(iii) a
$9.0 million capital equipment lease financing arrangement with General Electric
Capital Corporation (GECC), of which an aggregate of $6.5 million has been
drawn
during the life of the facility and, after giving effect to principal payments,
$4.7 million of which was still payable; and (iv) a secured revolving credit
facility of $8.5 million with PharmaBio Development Inc. (PharmaBio), of which
the entire amount was drawn and payable. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.”
RESEARCH
AND DEVELOPMENT
Research
and development expenses for the three months ended March 31, 2006 and 2005
were
$7.6 million and $5.1 million, respectively. These costs are charged to
operations as incurred and are tracked by category rather than by project.
Research and development costs consist primarily of expenses associated with
research and pre-clinical operations, manufacturing development, clinical and
regulatory operations and other direct clinical trials activities.
These
cost categories typically include the following expenses:
Research
and Pre-Clinical Operations
Research
and pre-clinical operations reflects activities associated with research prior
to the initiation of any potential human clinical trials. These activities
predominantly represent projects associated with the development of aerosolized
and other related formulations of our precision-engineered lung surfactant
and
engineering of aerosol delivery systems to potentially treat a range of
respiratory disorders prevalent in the NICU and the hospital. Research and
pre-clinical operations costs primarily reflect expenses incurred for personnel,
consultants, facilities and research and development arrangements with
collaborators (including a research funding and option agreement with The
Scripps Research Institute which expired in February 2005).
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to develop current good
manufacturing practices (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Manufacturing development activities
include external contract manufacturing resources (including expenses associated
with technology transfer and significant development costs associated with
the
implementation of enhancements to quality controls, process assurances and
documentation requirements that support the production process at the Totowa,
NJ
manufacturing facility that we acquired in December 2005), securing our own
manufacturing capabilities and expanding the operations to meet production
needs
for our SRT pipeline, employee costs, depreciation, and expenses for the
purchase of raw materials, quality control and assurance activities, and
analytical services.
Unallocated
Development -- Clinical and Regulatory Operations
Clinical
and regulatory operations reflect the preparation, implementation and management
of our clinical trial activities in accordance with current good clinical
practices (cGCPs). Included in unallocated clinical development and regulatory
operations are costs associated with personnel, supplies, facilities, fees
to
consultants, and other related costs for clinical trial implementation and
management, clinical quality control and regulatory compliance activities,
data
management and biostatistics.
Direct
Expenses -- Clinical Trials
Direct
expenses of clinical trials include patient enrollment costs, external site
costs, expense of clinical drug supply and external costs such as contract
research consultant fees and expenses.
The
following summarizes our research and development expenses by the foregoing
categories for the three months ended March 31, 2006 and 2005:
(
in thousands)
|
|
Three
Months Ended
March
31,
|
|
Research
and Development Expenses:
|
|
2006(1)
|
|
2005
|
|
|
|
|
|
|
|
Research
and pre-clinical operations
|
|
$
|
507
|
|
$
|
929
|
|
Manufacturing
development
|
|
|
2,507
|
|
|
1,390
|
|
Unallocated
development - clinical and regulatory operations
|
|
|
2,523
|
|
|
1,639
|
|
Direct
clinical trial expenses
|
|
|
2,076
|
|
|
1,162
|
|
Total
Research and Development Expenses
|
|
$
|
7,613
|
|
$
|
5,120
|
|
(1)
Included in expenses for the three months ended March 31, 2006 is a charge
of
$0.4 million associated with stock-based employee compensation in accordance
with the provisions of FAS No. 123(R).
Due
to
the significant risks and uncertainties inherent in the clinical development
and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are not reasonably estimable.
Results from clinical trials may not be favorable and data from clinical trials
are subject to varying interpretation and may be deemed insufficient by the
regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All
of
our potential products are in regulatory review, clinical or pre-clinical
development and the status and anticipated completion date of each of our lead
SRT programs is discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations,” below. Successful
completion of development of our SRT is contingent on numerous risks,
uncertainties and other factors, some of which are described in detail in the
section entitled “Risk Factors”.
These
factors include:
·
|
Completion
of pre-clinical and clinical trials of our product candidates with
the
scientific results that support further development and/or regulatory
approval;
|
·
|
Receipt
of necessary regulatory approvals;
|
·
|
Obtaining
adequate supplies of surfactant raw materials on commercially reasonable
terms;
|
·
|
Obtaining
capital necessary to fund our operations, including our research
and
development efforts, manufacturing requirements and clinical
trials;
|
·
|
Obtaining
corporate partnerships for the development of our SRT pipeline, including
Surfaxin.
|
·
|
Performance
of our third-party collaborators on whom we rely for supply of raw
materials and related services necessary to manufacture our SRT drug
product candidates, including
Surfaxin;
|
·
|
Timely
resolution of the CMC and cGMP-related matters at our manufacturing
operations in New Jersey with respect to Surfaxin and certain of
our other
SRTs presently under development, including matters that were noted
by the
FDA in its inspectional reports on Form FDA-483 and our recent drug
stability testing issues;
|
·
|
Successful
manufacture of SRT drug product candidates, including Surfaxin, at
our
operations in New Jersey; and
|
·
|
Obtaining
additional manufacturing operations, for which we presently have
limited
resources.
|
As
a
result of the amount and nature of these factors, many of which are outside
our
control, the success, timing of completion, and ultimate cost, of development
of
any of our product candidates is highly uncertain and cannot be estimated with
any degree of certainty. The timing and cost to complete drug trials alone
may
be impacted by, among other things,
·
|
Slow
patient enrollment;
|
·
|
Long
treatment time required to demonstrate
effectiveness;
|
·
|
Lack
of sufficient clinical supplies and
material;
|
·
|
Adverse
medical events or side effects in treated
patients;
|
·
|
Lack
of compatibility with complimentary
technologies;
|
·
|
Lack
of effectiveness of the product candidate being tested;
and
|
·
|
Lack
of sufficient funds.
|
If
we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. If we do not obtain and maintain regulatory
approval for our products, we will not generate any revenues from the sale
of
our products and the value, financial condition and results of operations will
be substantially harmed.
CORPORATE
PARTNERSHIP AGREEMENTS
Chrysalis
Technologies, a Division of Philip Morris USA Inc.
In
December 2005, we entered into a strategic alliance with Chrysalis Technologies
(Chrysalis), a division of Philip Morris USA Inc., to develop and commercialize
aerosol SRT to address a broad range of serious respiratory conditions, such
as
ALI, neonatal respiratory failure, COPD, asthma, cystic fibrosis and others.
The
alliance unites two complementary respiratory technologies - our
precision-engineered surfactant technology with Chrysalis’ novel aerosolization
device technology that is being developed to enable the delivery of therapeutics
to the deep lung.
Chrysalis
has developed a proprietary aerosol generation technology that is being designed
with the potential to enable targeted upper respiratory or deep lung delivery
of
therapies for local or systematic applications. The Chrysalis technology is
designed to produce high-quality, low velocity aerosols for possible deep lung
aerosol delivery. Aerosols are created by pumping the drug formulation through
a
small, heated capillary wherein the excipient system is substantially converted
to the vapor state. Upon exiting the capillary, the vapor stream quickly cools
and slows in velocity yielding a dense aerosol with a defined particle size.
The
defined particle size can be readily controlled and adjusted through device
modifications and drug formulation changes.
The
alliance focuses on therapies for hospitalized patients, including those in
the
neonatal intensive care unit (NICU), pediatric intensive care unit (PICU) and
the adult intensive care unit (ICU), and can be expanded into other hospital
applications and ambulatory settings. We and Chrysalis are utilizing their
respective capabilities and resources to support and fund the design and
development of integrated drug-device systems that can be uniquely customized
to
address specific respiratory diseases and patient populations. Chrysalis is
responsible for developing the design for the aerosol device platform, patient
interface and disposable dose packets. We are responsible for aerosolized SRT
drug formulations, clinical and regulatory activities, and the manufacturing
and
commercialization of the drug-device products. We have exclusive rights to
Chrysalis’ aerosolization technology for use with pulmonary surfactants for all
respiratory diseases and conditions in hospital and ambulatory settings.
Generally, Chrysalis will receive a tiered royalty on product sales: the base
royalty generally applies to aggregate net sales of less than $500 million
per
contract year; the royalty generally increases on aggregate net sales in excess
of $500 million per contract year, and generally increases further on aggregate
net sales of alliance products in excess of $1 billion per contract
year.
Our
lead
neonatal program utilizing the Chrysalis technology is Aerosurf administered
via
nCPAP to treat premature infants in the NICU at risk for respiratory failure.
Our lead adult program utilizing the Chrysalis technology is the development
of
aerosolized SRT administered as a prophylactic for patients in the hospital
at
risk for Acute Lung Injury (ALI).
Laboratorios
del Dr. Esteve, S.A.
In
December 2004, we reached an agreement with Esteve to restructure our
pre-existing strategic alliance for the development, marketing and sales of
our
products in Europe and Latin America. Under the revised alliance, we regained
full commercialization rights in key European markets, Central America and
South
America for SRT, including Surfaxin for the prevention of RDS in premature
infants and the treatment of ARDS in adults. Esteve will focus on Andorra,
Greece, Italy, Portugal, and Spain, and now has development and marketing rights
to a broader portfolio of potential SRT products. Esteve will pay us a transfer
price on sales of Surfaxin and other SRT. We will be responsible for the
manufacture and supply of all of the covered products and Esteve will be
responsible for all sales and marketing in the revised territory. Esteve has
agreed to make stipulated cash payments to us upon its achievement of certain
milestones, primarily upon receipt of marketing regulatory approvals for the
covered products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the revised territory.
In
October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy
to
Dompe Farmaceitici Spa (Dompe), a privately owned Italian company. Under the
sublicense agreement, Dompe will be responsible for sales, marketing and
distribution in Italy of Surfaxin.
PLAN
OF OPERATIONS
The
Company has incurred substantial losses since inception and expects to continue
to expend substantial amounts for continued product research, development,
manufacturing, and general business activities. We anticipate that during the
next 12 to 24 months:
Research
and Development
We
will
focus our research, development and regulatory activities in an effort to
develop a pipeline of potential SRT for respiratory diseases. The drug
development, clinical trial and regulatory process is lengthy, expensive and
uncertain and subject to numerous risks including, without limitation, the
applicable risks discussed in the “Risk Factors” section herein and those
contained in our most recent Annual Report on Form 10-K.
Our
major
research and development projects include:
SRT
for Neonatal Intensive Care Unit
|
|
In
order to address the most prevalent respiratory disorders affecting
infants in the NICU, we are conducting several NICU therapeutic programs
targeting respiratory conditions cited as some of the most significant
unmet medical needs for the neonatal community.
|
In
April
2006, we received a second Approvable Letter from the FDA for Surfaxin for
the
prevention of RDS in premature infants. Specifically, the FDA requested certain
information primarily focused on the Chemistry, Manufacturing and Controls
(CMC)
section of the NDA. The information predominately involves the further
tightening of active ingredient and drug product specifications and related
controls. Consistent with previous review, the FDA did not have any clinical
or
statistical comments. We are currently analyzing the second Approvable Letter
and preparing a comprehensive information package for the FDA addressing some
of
the issues in the second Approvable Letter. Once the analysis is completed,
and
conditioned upon the satisfactory resolution of our Surfaxin manufacturing
issues (discussed below), we will request a meeting with the FDA and submit
the
comprehensive information package. Upon receipt of our request, procedurally,
the FDA must respond within 14 days and the meeting must occur within 75 days
of
the written request. At the meeting, we will seek to clarify the issues
identified by the FDA in the second Approvable Letter. Thereafter, conditioned
upon satisfactory Surfaxin process validation and stability, we will submit
our
formal response to the second Approvable Letter. The FDA will then advise us
if
it will accept the submitted response to the second Approvable Letter as a
“complete” response and the time frame in which it will complete its review.
In
April
2006, analysis of ongoing stability data from Surfaxin process validation
batches indicated that certain stability parameters had not been achieved and,
therefore, additional process validation batches will likely have to be
produced. These process validation batches were previously manufactured as
a
requirement for the Company’s U.S. NDA regulatory approval and have been
undergoing periodic stability testing. We anticipate a potentially significant
delay in the U.S. regulatory approval process for Surfaxin for RDS in premature
infants. Though we are presently assessing the impact of these events on the
European regulatory process, we expect that a similar delay in the Surfaxin
European regulatory approval process is likely.
With
respect to our manufacturing problems, we have initiated a detailed
investigation to determine the cause of the failure of our Surfaxin process
validation to meet the designated stability parameters in our stability testing
program. Following the conclusion of our investigation, we will have to
implement a remediation program (the length of which cannot be determined at
this time), manufacture additional process validation batches and subject them
to the stability testing program (which we anticipate will require a minimum
of
six months after the new process validation batches have been manufactured).
At
this time, we cannot predict when the potential approval and commercial launch
of Surfaxin in the United States and Europe will occur.
We
have
filed a Marketing Authorization Application (MAA) with the EMEA for clearance
to
market Surfaxin for the prevention and rescue treatment of RDS in premature
infants in Europe. Activities associated with this regulatory filing are
ongoing. We have received the Day 180 List of Outstanding Issues from the
Committee for Medicinal Products for Human Use (CHMP) in relation to our MAA
for
Surfaxin for the prevention and rescue treatment of Respiratory Distress
Syndrome in premature infants. We submitted a written response to all of the
CHMP’s outstanding issues in April 2006 and, according to standard CHMP
procedures, the Committee is expected to make a recommendation on whether to
grant a Marketing Authorization for Surfaxin and issue a formal Opinion in
late
July 2006. We are presently assessing the impact our recent manufacturing issues
will have on the Surfaxin European regulatory approval process, including the
likelihood of a significant delay.
On
May 9,
2006, with enrollment totaling approximately 130 patients, the Company
determined to conclude early its Phase 2 clinical trial of Surfaxin for the
prevention and treatment of BPD in premature infants. This double-blind,
controlled Phase 2 clinical trial was intended to enroll up to 210 very low
birth weight premature infants born at risk for developing BPD. The study’s
objective is to determine the safety and tolerability of administering Surfaxin
as a therapeutic approach for the prevention and treatment of BPD. In January
2006, the FDA granted Fast Track designation to Surfaxin for prevention and
treatment of BPD in premature infants and, in October 2005, the Office of Orphan
Products Development of the FDA granted Orphan Drug designation to Surfaxin
for
the treatment of BPD. The Company plans to perform a comprehensive analysis
of
the clinical data from this trial, report top-line results and submit these
data
for publication.
|
|
Aerosurf
is our precision-engineered aerosolized SRT administered via nCPAP
intended to treat premature infants at risk for respiratory failures.
In
September 2005, we completed and announced the results of our first
pilot
Phase 2 clinical study of Aerosurf, which was designed as an open
label,
multicenter study to evaluate the feasibility, safety and tolerability
of
Aerosurf delivered using a commercially-available aerosolization
device
via nCPAP for the prevention of RDS in premature infants administered
within 30 minutes of birth over a three hour duration. The study
showed
that it is feasible to deliver Aerosurf via nCPAP and that the treatment
was generally safe and well tolerated.
|
In
December 2005, we entered into a strategic alliance with Chrysalis. The alliance
unites two highly complementary respiratory technologies - our
precision-engineered surfactant technology with Chrysalis’ novel aerosolization
device technology that is being developed to enable the delivery of therapeutics
to the deep lung. Through this alliance, we gained exclusive rights to their
aerosolization technology for use with pulmonary surfactants for all respiratory
diseases. Our lead neonatal program utilizing the Chrysalis technology is
Aerosurf administered via nCPAP to treat premature infants in the NICU at risk
for neonatal respiratory disorders. We anticipate initiating a pilot Phase
2
clinical study of Aerosurf utilizing the Chrysalis aerosolization technology
late 2006 or early 2007, which may be impacted by the remediation of our
manufacturing issues discussed above.
SRT
for Critical Care and Hospital Indications
In
March
2006, we completed and announced preliminary results of a Phase 2 clinical
trial
for the treatment of Acute Respiratory Distress Syndrome (ARDS) in adults using
our precision-engineered surfactant delivered via bronchoscopic segmental lavage
(Surfactant Lavage). The ARDS Phase 2 clinical trial was an open-label,
controlled, multi-center, international study of Surfactant Lavage for the
treatment of ARDS in adults that was designed to enroll up to 160 patients.
Total enrollment in the trial was 124 patients.
The
objective of the Surfactant Lavage was to restore functional surfactant levels
in the patients’ lungs, thereby improving oxygenation in order to remove
critically ill patients from mechanical ventilation sooner. Comprehensive
analysis of the data from this trial is ongoing and we continue to assess safety
and tolerability. Following this analysis, we plan to submit these data for
publication in a peer review journal. We plan to seek potential partners, with
which we can apply the scientific and clinical observations generated from
this
trial to support the design of potential future trials to treat
ARDS.
We
are
also evaluating the development of aerosol formulations of SRT to potentially
address ALI, cystic fibrosis, and other respiratory conditions. In December
2005, we entered into a strategic alliance with Chrysalis to develop and
commercialize aerosolized SRT to address a broad range of serious respiratory
conditions. Our lead adult program utilizing the Chrysalis technology is the
development of aerosolized SRT administered as a prophylactic for patients
in
the hospital at risk for Acute Lung Injury (ALI). Given our current priority
to
focus on developing the SRT pipeline for the NICU, we will be assessing the
timing and further prioritization of these adult programs.
Manufacturing
Surfaxin
is a complex drug and, unlike many drugs, contains four active ingredients.
Surfaxin is aseptically manufactured at our facility as a sterile, liquid
dispersion. The manufacturing process to produce Surfaxin is complex, must
be
conducted in a sterile environment, and requires ongoing monitoring of the
stability and conformance to product specifications of each of the four active
ingredients.
We
will
invest in and support our manufacturing strategy for the production of our
precision-engineered SRT to meet anticipated clinical needs and, if approved,
commercial needs in the United States, Europe and other markets:
Manufacturing
in our New Jersey Operations
In
December 2005, we purchased the manufacturing operations of Laureate Pharma
(our
contract manufacturer at that time) that are critical to the production of
Surfaxin and our SRT clinical programs. This facility is our only validated
clinical facility in which we produce clinical grade material of our drug
substance. We will use this pharmaceutical manufacturing and development
facility for the production of Surfaxin and for the development and enhanced
formulations of Surfaxin and the development of aerosol formulations including
Aerosurf. In connection with our purchase of the facility, we entered into
a
transitional services arrangement under which Laureate will provide us with
certain limited manufacturing-related support services through December 2006.
In
April
2006, analysis of ongoing stability data from Surfaxin “process validation
batches” indicated that certain stability parameters had not been achieved and,
therefore, three additional process validation batches will likely have to
be
produced. These process validation batches were previously manufactured as
a
requirement for the Company’s U.S. NDA regulatory approval and have been
undergoing periodic stability testing. We anticipate a potentially significant
delay in the U.S. regulatory approval process for Surfaxin for RDS in premature
infants. Though we are presently assessing the impact of these events on the
European regulatory process, we expect that a similar delay in the Surfaxin
European regulatory approval process is likely. We are investing in
manufacturing and regulatory activities intended to gain regulatory approvals
for Surfaxin for RDS in premature infants, including analysis and remediation
of
recent regulatory matters and manufacturing issues.
Longer-Term
Manufacturing Capabilities
We
view
the recent acquisition of a New Jersey manufacturing facility as an initial
step
of our manufacturing strategy for the continued development of our SRT
portfolio, including life cycle management of Surfaxin, potential formulation
enhancements, and expansion of our aerosol SRT products, beginning with
Aerosurf. The lease for our New Jersey manufacturing operations is through
December 2014. In addition to the customary terms and conditions, the lease
contains an early termination option, first beginning in December 2009. The
early termination option can only be exercised by the landlord upon a minimum
of
two years prior notice and, in the earlier years, payment to us of significant
early termination amounts, subject to certain conditions. Taking into account
this early termination option for our Totowa, NJ, facility, our long-term
strategy includes building or acquiring additional manufacturing capabilities
for the production of our precision-engineered surfactant drug
products.
Aerosol
Devices and Related Componentry
For
our
planned clinical trials, we plan on utilizing third-party contract
manufacturers, suppliers and assemblers for the aerosolization devices and
related componentry for our aerosol SRT product candidates.
See
the
applicable risks discussed in the “Risk Factors” section herein and those
contained in our most recent Annual Report on Form 10-K.
General
and Administrative
We
intend
to invest in general and administrative resources primarily to support our
legal
requirements, intellectual property portfolios (including building and enforcing
our patent and trademark positions), our business development initiatives,
financial systems and controls, management information technologies, and general
management capabilities.
We
will
need to generate significant revenues from product sales, related royalties
and
transfer prices to achieve and maintain profitability. Through March 31, 2006,
we had no revenues from any product sales, and had 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 suppliers.
Moreover, we may never achieve significant revenues or profitable operations
from the sale of any of our products or technologies.
Through
March 31, 2006, we had not generated taxable income. On December 31, 2005,
net
operating losses available to offset future taxable income for Federal tax
purposes were approximately $187.0 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 $3.8 million at December 31, 2005. The
Federal net operating loss and research and development tax credit carryforwards
expire beginning in 2009 through 2024.
RESULTS
OF OPERATIONS
For
the
quarter ended March 31, 2006, the net loss was $15.8 million, or $0.26 per
share, on 61.2 million weighted average common shares outstanding, compared
to a
net loss of $9.3 million, or $0.18 per share, on 50.8 million weighted average
shares outstanding for the same period in 2005.
We
adopted Financial Accounting Standards No. 123(R) (“FAS 123(R)”) on January 1,
2006 using the modified prospective method, which resulted in the recognition
of
stock compensation expenses in the statement of operations during the quarter
ended March 31, 2006 without adjusting the prior year first quarter. The net
loss includes $1.7 million, or $0.03 per share, of stock-based compensation
expenses as a result of our adoption of FAS 123(R). Excluding this charge,
the
net loss for the quarter ended March 31, 2006 was $14.1 million, or $0.23 per
share.
Revenues
Revenue
for the three months ended March 31, 2006 and 2005 was $0 and $61,000,
respectively. The revenue in 2005 was associated with our corporate partnership
agreement with Esteve to develop, market and sell Surfaxin in Southern Europe.
Research
and Development Expenses
Research
and development expenses for the three months ended March 31, 2006 and 2005
were
$7.6 million and $5.1 million, respectively, and the increase as compared to
the
same prior year period primarily reflects:
(i)
|
manufacturing
development activities to support the production of clinical and
commercial drug supply for our SRT programs, including Surfaxin,
in
conformance with current Good Manufacturing Practices (cGMPs). Expenses
related to manufacturing development activities were $2.5 million
and $1.4
million for the three months ended March 31, 2006 and 2005, respectively.
The increase is primarily associated with the ownership of our NJ
manufacturing operations which we purchased from Laureate Pharma,
Inc.
(our contract manufacturer at that time) in December 2005.
|
(ii)
|
U.S.
and European regulatory activities associated with Surfaxin for RDS;
(ii)
clinical activities for the Phase 2 trial for ARDS in adults and
the Phase
2 trial for BPD in premature infants; and (iii) development activities
related to Aerosurf for Neonatal Respiratory Disorders. These research
and
development expenses, excluding manufacturing development activities,
were
$5.1 million and $3.7 million for the three months ended March 31,
2006
and 2005, respectively. Additionally, there was a charge of $0.3
million,
for the three months ended March 31, 2006, associated with stock-based
employee compensation in accordance with the provisions of SFAS No.
123R.
|
(iii)
|
development
activities related to Aerosurf for Neonatal Respiratory Disorders.
These
research and development expenses, excluding manufacturing development
activities, were $5.1 million and $3.7 million for the three months
ended
March 31, 2006 and 2005, respectively. Additionally, there was a
charge of
$0.3 million, for the three months ended March 31, 2006, associated
with
stock-based employee compensation in accordance with the provisions
of
SFAS No. 123R.
|
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2006 and
2005 were
$8.7
million and $4.3 million, respectively. General and administrative expenses
consist primarily of the costs of executive management, finance and accounting,
business and commercial development, pre-launch commercial sales and marketing,
legal, facility and other administrative costs.
The
increase in general and administrative expenses for the three months ended
March
31, 2006 as compared to the same prior year period primarily
reflects:
(i)
|
pre-launch
commercialization activities related to building a United States
commercial infrastructure to market our SRT to address respiratory
disorders in the NICU. Expenditures are for sales, marketing and
medical
affairs activities and, for the three months ended March 31, 2006
and
2005, were $5.0 million and $2.4 million, respectively. Additionally,
there is a charge of $0.3 million, for the three months ended March
31,
2006, associated with stock-based employee compensation in accordance
with
the provisions of SFAS No. 123R.
|
(ii)
|
business
administrative expenses related to building management and systems
for
financial and information technology capabilities, business development
activities related to potential strategic collaborations, legal activities
related to the preparation and filing of patents in connection with
the
expansion of our SRT pipeline, facilities expansion activities to
accommodate existing and future growth, and corporate governance
initiatives to comply with the Sarbanes-Oxley Act. Such expenses
were $3.7
million and $1.9 million for the three months ended March 31, 2006
and
2005, respectively. Additionally, there is a charge of $1.0 million,
for
the three months ended March 31, 2006, associated with stock-based
employee compensation in accordance with the provisions of SFAS No.
123R.
|
Other
Income/(Expense)
Other
income and (expense) for the three months ended March 31, 2006 and 2005 was
$500,000 and $13,000, respectively.
Included
in other income for the three months ended March 31, 2006 was $280,000 of
proceeds from the sale of our State of Pennsylvania research and development
tax
credits.
Interest
income for the three months ended March 31, 2006 and 2005 was $520,000 and
$214,000, respectively. The
increase is primarily due to a general increase in earned market interest rates.
Interest
expense for the three months ended March 31, 2006 and 2005 was $300,000 and
$201,000, respectively. The increase is primarily due to interest expense
associated with our credit facility and capital lease financing arrangements.
See “Liquidity and Capital Resources.”
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital
Cash
is
required to fund our working capital needs, to purchase capital assets, and
to
pay our debt service, including principal, interest and capital lease
obligations. We have funded our cash requirements primarily through the issuance
of equity securities and the use of credit and capital lease facilities. We
plan
to fund our future cash requirements through:
|
·
|
the
issuance of equity and debt
financings;
|
|
·
|
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
|
·
|
sales
of Surfaxin, if approved;
|
|
·
|
capital
lease financings; and
|
|
·
|
interest
earned on invested capital.
|
After
taking into account the recently taken cost containment measures, we believe
our
current working capital is sufficient to meet planned activities into late
2006,
before taking into account any amounts that may be available through the 2004
CEFF or the new CEFF (as described below). We anticipate using, if available,
the new CEFF to support working capital needs in 2006. We will need additional
financing from investors or collaborators to complete research and development,
manufacturing, and commercialization of our current product candidates under
development, and satisfy debt obligations. Working capital requirements will
depend upon numerous factors, including, without limitation, the progress of
our
research and development programs, clinical trials, the timing and cost of
obtaining regulatory approvals, remediation of manufacturing issues, levels
of
resources that we devote to the further development of manufacturing and product
development capabilities, technological advances, status of competitors, ability
to establish collaborative arrangements with other organizations, the ability
to
defend and enforce intellectual property rights, litigation and regulatory
activities, and the establishment of additional strategic or licensing
arrangements with other companies or acquisitions.
Cash,
Cash Equivalents and Marketable Securities
As
of
March 31, 2006, we had cash, cash equivalents, restricted cash and marketable
securities of $37.6 million, as compared to $50.9 million as of December 31,
2005, a decrease of $13.3 million. The decrease primarily consists of cash
used
in operating and investing activities of $13.9 million, offset by $0.7 million
of proceeds from the exercise of stock options and warrants.
Committed
Equity Financing Facility
In
July
2004, we entered into the 2004 CEFF with Kingsbridge, pursuant to which
Kingsbridge committed to finance up to $75.0 million of capital for newly-issued
shares of Common Stock. In connection with the 2004 CEFF, we issued a Class
B
Investor warrant to Kingsbridge to purchase up to 375,000 shares of Common
Stock
at an exercise price equal to $12.0744 per share. The warrant, which expires
in
January 2010, must be exercised for cash, except in limited circumstances,
for
total proceeds equal to approximately $4.5 million, if exercised. As of March
31, 2006, the Class B Investor Warrant had not been exercised in whole or in
part.
On
April
17, 2006, we entered into a new CEFF with Kingsbridge,
by way of a Common Stock Purchase Agreement, pursuant to which Kingsbridge
committed to purchase, subject to certain conditions, the lesser of up to $50
million or up to 11,677,047 shares of our common stock. Upon effectiveness
of
the new CEFF, our 2004 CEFF, which presently has capital of up to $47.6 million
available subject to certain conditions thereof, will automatically terminate.
This
new
CEFF allows us to raise capital, subject to certain conditions that we must
satisfy, at the time and in amounts deemed suitable to us, during a three-year
period once a related registration statement is filed by us and declared
effective by the Securities and Exchange Commission. We are not obligated to
utilize any of the $50 million available under the new CEFF.
The
purchase price of the shares sold to Kingsbridge will be at a discount ranging
from 6 to 10 percent of the volume weighted average of the price of our common
stock (VWAP) for each of the eight trading days following our election to sell
shares, or “draw down” under the CEFF. The discount on each of these eight
trading days will be determined as follows:
VWAP*
|
|
Percent
of VWAP (Applicable Discount)
|
|
Greater
than $10.50 per share
|
|
|
94
|
%
|
|
(6
|
)%
|
Less
than or equal to $10.50 but greater than $7.00 per share
|
|
|
92
|
%
|
|
(8
|
)%
|
Less
than or equal to $7.00 but greater than or equal to $2.00 per
share
|
|
|
90
|
%
|
|
(10
|
)%
|
_____
*
As such
term is set forth in the Common Stock Purchase Agreement.
During
the eight trading day pricing period for a draw down, if the VWAP for any one
trading day is less than the greater of (i) $2.00 or (ii) 85 percent of the
closing price of our common stock for the trading day immediately preceding
the
beginning of the draw down period, the VWAP from that trading day will not
be
used in calculating the number of shares to be issued in connection with that
draw down, and the draw down amount for that pricing period will be reduced
by
one-eighth of the draw down amount we had initially specified.
Our
ability to require Kingsbridge to purchase our common stock is subject to
various limitations. Each draw down is limited to the lesser of 2.5 percent
of
the closing price market value of our outstanding shares of common stock at
the
time of the draw down or $10 million. Unless Kingsbridge agrees otherwise,
a
minimum of three trading days must elapse between the expiration of any draw
down pricing period and the beginning of the next draw down pricing period.
Kingsbridge is not obligated to purchase shares at prices below $2.00 per share,
before taking into account the applicable discount. In addition, Kingsbridge
may
terminate the CEFF under certain circumstances, including if a material adverse
effect relating to our business continues for ten trading days after notice
of
the material adverse effect.
In
connection with the new CEFF, we issued a Class C Investor Warrant to
Kingsbridge to purchase up to 490,000 shares of common stock at an exercise
price of $5.6186 per share, which is fully exercisable beginning October 17,
2006 and for a period of five years thereafter. The warrant must be exercised
for cash, except in limited circumstances.
Potential
Financings under the October 2005 Universal Shelf Registration
Statement
In
October 2005, we filed a universal shelf registration statement on Form S-3
with
the SEC for the proposed offering, from time to time, of up to $100.0 million
of
our debt or equity securities. In December 2005, we completed a registered
direct offering of 3,030,304 shares of our common stock to select institutional
investors resulting in gross proceeds to us of $20.0 million.
The
universal shelf registration statement may permit us, from time to time, to
offer and sell up to an additional approximately $80.0 million of equity or
debt
securities. There can be no assurance, however, that we will be able to complete
any such offerings of securities. Factors influencing the availability of
additional financing include the progress of our research and development
activities, investor perception of our prospects and the general condition
of
the financial markets, among others.
Debt
Facilities
Credit
Facility with Quintiles Transnational Corp.
We
entered into a collaboration arrangement with Quintiles Transnational Corp.
(Quintiles), in 2001, to provide certain commercialization services in the
United States for Surfaxin for the treatment of RDS in premature infants and
MAS
in full-term infants. In connection with the commercialization agreement,
PharmaBio, Quintiles strategic investment group, extended to us a secured,
revolving credit facility of $8.5 to $10.0 million to fund pre-marketing
activities associated with the launch of Surfaxin in the United States. The
interest rate is the greater of 8% or prime rate plus 2% annually and payments
are due quarterly in arrears. As of March 31, 2006, $8.5 million was outstanding
under the credit facility and is classified as a current liability. Outstanding
principal and interest due under the credit facility are due and payable as
a
balloon payment on December 31, 2006.
Capital
Lease and Note Payable Financing Arrangements with General Electric Capital
Corporation
Our
primary capital lease financing arrangement is with the Life Science and
Technology Finance Division of General Electric Capital Corporation (GECC).
Under this arrangement, we purchase capital equipment, including manufacturing,
information technology systems, laboratory, office and other related capital
assets and subsequently finance those purchases through this capital lease
financing arrangement. The capital lease is secured by the related assets.
Subject to certain conditions, this arrangement provides for financing of up
to
$9 million. On May 9, 2006, GECC agreed to amend the arrangement, which would
have expired April 30, 2006, such that the funds are now available through
October 2006,
subject
to certain conditions and in consideration of certain undertakings on our part,
including a pledge of certain proceeds of certain components of our intellectual
property and an agreement not to pledge, with certain exceptions, any interest
in our intellectual property. Laboratory and manufacturing equipment is financed
over 48 months and all other equipment is financed over 36 months. Interest
rates vary in accordance with changes in the three and four year treasury rates.
As of March 31, 2006, $4.7 million is outstanding ($1.7 million classified
as
current liabilities and $3.0 million as long-term liabilities) and $2.5 million
remains available for future use, subject to certain conditions.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania, New Jersey and
California.
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, sales and marketing, and administration. The lease expires in
February 2010 with total aggregate payments of $4.6 million.
We
lease
a 21,000 square foot pharmaceutical manufacturing and development facility
in
Totowa, NJ that is specifically designed for the production of sterile
pharmaceuticals in compliance with cGMP requirements. The lease expires in
December 2014 with total aggregate payments of $1.4 million ($150,000 per year).
The lease contains an early termination option, first beginning in December
2009. The early termination option can only be exercised by the landlord upon
a
minimum of two years prior notice and payment of significant early termination
amounts to us, subject to certain conditions.
We
also
lease approximately 11,000 square feet of office and laboratory space in
Doylestown, Pennsylvania. We maintain the Doylestown facility for the
continuation of analytical laboratory activities under a lease that expires
in
May 2006, subject to monthly extensions.
We
lease
office and laboratory space in Mountain View, California. The facility is 16,800
square feet and houses our aerosol development operations. The lease expires
in
June 2008 with total aggregate payments of $804,000.
Future
Capital Requirements
Unless
and until we can generate significant cash from our operations, we expect to
continue to require substantial additional funding to conduct our business,
including our manufacturing and research and product development activities
and
to repay our indebtedness. 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. Other than our
CEFF
financing arrangements with Kingsbridge and our capital lease financing
arrangement with General Electric Capital Corporation, we have not entered
into
any additional arrangements to obtain additional financing. The sale of
additional equity and debt securities may result in additional dilution to
our
shareholders, and we cannot be certain that additional financing will be
available when needed or on terms acceptable to us, if at all. If we fail to
receive additional funding or enter into collaborative ventures, we may have
to
reduce significantly the scope of or discontinue our planned research and
development activities, which could significantly harm our financial condition
and operating results.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and,
by
policy, limit the amount of credit exposure to any one issuer. We currently
do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses
in
principal if forced to sell securities that have declined in market value due
to
a change in interest rates.
ITEM
4. CONTROLS
AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls or internal control over financial
reporting will prevent all error and all fraud. A control system, no matter
how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also
be
circumvented by the individual acts of some persons, by collusion of two or
more
people, or by management override of the controls. The design of any system
of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls
may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or
fraud may occur and not be detected. In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our
Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of
our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by
this
Quarterly Report
on Form
10-Q.
Based
on this
evaluation,
the
Chief Executive Officer and Chief Financial Officer
concluded that as
of the
end of the period covered by this report,
the
disclosure controls and procedures were
effective in their
design to ensure that
information
required
to be disclosed in
the
reports that
we
file
or
submit
under
the
Exchange Act
is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
(b) Changes
in internal controls
There
were no changes in internal controls over financial reporting or other factors
that could materially affect those controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
On
May 1,
2006, Hal Unschuld, individually and purportedly on behalf of a class of the
Company’s investors who purchased the Company’s publicly traded securities
between December 28, 2005 and April 25, 2006, filed an action in the United
States District Court for the Eastern District of Pennsylvania against the
Company and the Company’s Chief Executive Officer, Robert J. Capetola (the
“Unschuld Action”). This action alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act in connection with various
public statements made by the Company and seeks an order that the action may
proceed as a class action and an award of compensatory damages in favor of
the
plaintiff and the other class members in an unspecified amount, together with
interest and reimbursement of costs and expenses of the litigation and other
equitable or injunctive relief.
The
Company has been notified that two additional class actions seeking the same
relief have since been filed in the United States District Court for the
Eastern
District of Pennsylvania, although the Company has not been served with a
complaint in these actions.
Additional
actions may be filed against the Company. Although we cannot predict the outcome
of such actions, an adverse result could have a potentially material adverse
effect on the Company’s business, results of operations and financial condition.
Item
1A. Risk
Factors
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.
The
risk
factors set forth below have been revised based on recent events related
to the
Company and described elsewhere in this report. These risk factors
should be read together with the factors discussed in Part I, Item 1A
-
Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2005.
The
risks
described in this report and in our Annual Report on Form 10-K are not the
only
risks we face. Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.
Refocusing
our business subjects us to risks and uncertainties.
Since
we
received our second Approvable Letter from the FDA, we have been reassessing
the
business environment, our position within the biotechnology industry and our
relative strengths and weaknesses. As a result of this reassessment, we
have implemented significant changes to our operations as part of our overall
business strategy. For example, we have reduced the size of our workforce
and made changes to senior management. Additional changes to our business
will be considered as our management seeks to strengthen financial and
operational performance. These changes may be disruptive to our
established organizational culture and systems. In addition, consideration
and planning of strategic changes diverts management attention and
other
resources from day to day operations.
We
may fail to realize the benefits that we expect from our cost-savings
initiatives.
We
have
undertaken and expect to continue to undertake cost-savings initiatives.
However, we cannot assure you that we will realize on-going cost savings or
any
other benefits from these initiatives. Even if we realize the benefits of
our cost savings initiatives, any cash savings that we achieve may be offset
by
other costs, such as costs related to ongoing development activities and pilot
studies. Staff reductions may reduce our workforce below the level needed
to effectively manage our business and service our development programs.
Our failure to realize the anticipated benefits of our cost-savings initiatives
could have a material
adverse effect on our business, results of operations and financial
condition.
We
may not successfully develop and market our products, and even if we do, we
may
not become profitable.
We
currently have no products approved for marketing and sale and are 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 our
products. Our long-term viability will be impaired if we are unable to obtain
regulatory approval for, or successfully market, our product
candidates.
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 before 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 March 31, 2006, we have an accumulated
deficit of approximately $218 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.
The
regulatory approval process for our products is expensive and time-consuming,
and the outcome is uncertain. We may not obtain required regulatory approvals
for the commercialization of our products.
To
sell
Surfaxin or any of our other products under development, we must receive
regulatory approvals for each product. The FDA and foreign regulators
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 the safety and effectiveness of each
product and the confirmation by the FDA and foreign regulators that, in
manufacturing the product, we maintain good laboratory and manufacturing
practices during testing and manufacturing. Even if favorable testing data
is
generated by clinical trials of drug products, the FDA or EMEA may not accept
or
approve an NDA or MAA filed by a pharmaceutical or biotechnology company for
such drug product. 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.
We
have
filed an NDA with the FDA for Surfaxin for the prevention of RDS in premature
infants. As part of the review of the Surfaxin NDA, the FDA, in January 2005,
issued a Form 483 to our then contract manufacturer, Laureate Pharma, Inc.
citing inspectional observations related to basic quality controls, process
assurances and documentation requirements that support the commercial production
process necessary to comply with current good manufacturing practices (cGMPs).
The FDA issued an Approvable Letter to us in February 2005 regarding our NDA.
To
address the Form 483 inspectional observations, we and Laureate implemented
improved quality systems and documentation controls believed to support the
FDA’s regulatory requirements for the approval of Surfaxin. In October 2005, the
FDA accepted our responses to the Approvable Letter as a complete response
thereby establishing April 2006 as its target to complete its review of our
NDA.
In April 2006, analysis of ongoing stability data from Surfaxin “process
validation batches”, which were produced as a requirement for our U.S. NDA,
indicated that certain stability parameters had not been achieved and,
therefore, three additional process validation batches will likely have to
be
produced. We are presently conducting an investigation to determine the cause
and define the corrective actions needed to potentially remediate these
manufacturing issues. Also in April 2006, the FDA issued a second Approvable
Letter to us, requesting certain information primarily focused on the Chemistry,
Manufacturing and Controls (CMC) section of the NDA. We are preparing a
comprehensive information package and, after the manufacturing issues discussed
above have been remediated, we will request a meeting with the FDA to clarify
the issues identified in the second Approvable Letter. Thereafter, we will
submit our formal response to the second Approvable Letter. At that time, the
FDA will advise us of the time frame in which it will complete its review and
advise us if it will accept our response to the second Approvable Letter as
a
complete response. After the FDA has accepted our response as a complete
response, the FDA might still delay its approval of our NDA or reject our NDA,
which would have a material adverse effect on our business.
We
have
filed an MAA with the EMEA for clearance to market Surfaxin for the prevention
of RDS in premature infants in Europe. In February 2006, we received the Day
180
List of Outstanding Issues from the Committee for Medicinal Products for Human
Use (CHMP) in relation to our MAA. We submitted a written response to all of
the
CHMP’s outstanding issues in April 2006 and, according to standard CHMP
procedures, the Committee is expected to make a recommendation on whether to
grant a Marketing Authorization for Surfaxin and issue a formal Opinion in
late
July 2006. The EMEA, however, may delay its decision or not complete the review
or may reject the MAA. In addition, we do not know at this time whether the
failure of process validation batches (which are a part of the U.S. NDA) to
achieve stability parameters in periodic stability testing will have any impact
on the Surfaxin European regulatory approval process, but such approval is
likely to be delayed.
See
also
Item 1: “Financial Statements: Note 7 - Subsequent Events” and Item 2:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation - Overview and Plan of Operations.”
If
the FDA and foreign regulators do not approve our products, we will not be
able
to market our products.
The
FDA
and foreign regulators have not yet approved any of our products under
development for marketing in the United States or elsewhere. The FDA or a
foreign regulator could withdraw any approvals we obtain, if any. 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 or a foreign regulator 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.
Our
pending NDA for Surfaxin for the prevention of RDS in premature infants may
not
be approved by the FDA in a timely manner or at all, which would adversely
impact our ability to commercialize this product.
We
submitted an NDA to the FDA for Surfaxin for the prevention of RDS in premature
infants. In April 2006, we received a second Approvable Letter from the FDA,
which contained a list of inspectional observations on Form 483. Thereafter,
we
learned that analysis of ongoing stability data from Surfaxin “process
validation batches”, which are a part of our NDA, indicated that certain
stability parameters had not been achieved and, therefore, three additional
Surfaxin process validation batches will likely have to be produced. These
events are expected to significantly delay the review of our NDA. When we have
completed and submitted our response to the second Approvable Letter and
remediated our manufacturing issues, the FDA may request additional information
from us, including data from additional clinical trials. Ultimately, the FDA
may
not approve Surfaxin for RDS in premature infants. Any failure to obtain FDA
approval or further delay associated with the FDA’s review process would
adversely impact our ability to commercialize our lead product.
Our
ongoing clinical trials may be delayed, or fail, which will harm our
business.
Clinical
trials generally take two to five years or more to complete. Like many
biotechnology companies, we may suffer significant setbacks in advanced clinical
trials, even after obtaining promising results in earlier trials or in
preliminary findings for such clinical trials. Data obtained from clinical
trials are susceptible to varying interpretations which may delay, limit or
prevent regulatory approval. In addition, we may be unable to enroll patients
quickly enough to meet our expectations for completing any or all of these
trials. The timing and completion of current and planned clinical trials of
our
product candidates depend on, among other factors, the rate at which patients
are enrolled, which is a function of many factors, including:
|
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the
number of clinical sites;
|
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·
|
the
size of the patient population;
|
|
·
|
the
proximity of patients to the clinical
sites;
|
|
·
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the
eligibility and enrollment criteria for the
study;
|
|
·
|
the
existence of competing clinical trials;
|
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·
|
the
existence of alternative available products;
and
|
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·
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geographical
and geopolitical considerations.
|
Delays
in
patient enrollment in clinical trials may occur, which would likely result
in
increased costs, program delays or both. Patients may also suffer adverse
medical events or side effects that are common to those administered with the
surfactant class of drugs such as a decrease in the oxygen level of the blood
upon administration.
It
is
also possible that the FDA or foreign regulators could interrupt, delay or
halt
any one or more of our clinical trials for any of our product candidates. If
we
or any regulator believe that trial participants face unacceptable health risks,
any one or more of our trials could be suspended or terminated. We also may
not
reach agreement with the FDA or a foreign regulator on the design of any one
or
more of the clinical studies necessary for approval. Conditions imposed by
the
FDA and foreign regulators on our clinical trials could significantly increase
the time required for completion of such clinical trials and the costs of
conducting the clinical trials.
In
addition to our efforts to commercialize Surfaxin for the prevention of RDS
in
premature infants, we recently concluded a Phase 2 clinical trial to address
ARDS in adults. As a consequence of our Surfaxin regulatory and manufacturing
issues that are anticipated to significantly delay the potential regulatory
approval of Surfaxin for RDS inpremature infants and may potentially adversely
affect the availability of Surfaxin drug product, we also determined to conclude
early our ongoing Phase 2 clinical trial of Surfaxin for the prevention and
treatment of BPD in premature infants. This Phase 2 clinical trial was being
conducted to determine the safety and tolerability of administering Surfaxin
as
a therapeutic approach for the prevention and treatment of BPD in premature
infants. We are preparing to conduct multiple Phase 2 pilot studies with
Aerosurf for the potential treatment of premature infants in the NICU suffering
from neonatal respiratory failure.
See
also
Item 1: “Financial Statements: Note 7 - Subsequent Events” and Item 2:
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation - Overview and Plan of Operations.”
The
manufacture of our products is a highly exacting and complex process, and if
we
or one of our materials suppliers encounter problems manufacturing our products,
our business could suffer.
The
FDA
and foreign regulators require manufacturers to register manufacturing
facilities. The FDA and foreign regulators also inspect these facilities to
confirm compliance with cGMP or similar requirements that the FDA or foreign
regulators establish. We or our materials suppliers may face manufacturing
or
quality control problems causing product production and shipment delays or
a
situation where we or the supplier may not be able to maintain compliance with
the FDA’s cGMP requirements, or those of foreign regulators, necessary to
continue manufacturing our drug substance. Manufacturing or quality control
problems have already and may again occur at our Totowa facility or our
materials suppliers. Such problems, including, for example, our recent product
stability testing program issues, require potentially complex, time-consuming
and costly investigations to determine the causes and may also require detailed
and time-consuming remediation efforts, which can further delay the regulatory
approval process. Any failure to comply with cGMP requirements or other FDA
or
foreign regulatory requirements could adversely affect our clinical research
activities and our ability to market and develop our products.
In
December 2005, we acquired Laureate’s clinical manufacturing facility in Totowa,
New Jersey. The facility has been qualified to produce appropriate clinical
grade material of our drug product for use in our ongoing clinical studies.
With
this acquisition, we now maintain a complete manufacturing facility and we
will
be manufacturing our products. We currently own certain specialized
manufacturing equipment, employ certain manufacturing managerial personnel,
and
we expect to invest in additional manufacturing equipment. We may be unable
to
produce Surfaxin and our other SRT drug candidates to appropriate standards
for
use in clinical studies or commercialization. If we do not successfully develop
our manufacturing capabilities, it will adversely affect the sales of our
products.
If
the parties we depend on for supplying our drug substance raw materials and
certain manufacturing-related services do not timely supply these products
and
services, it may delay or impair our ability to develop, manufacture and market
our products.
We
rely
on suppliers for our drug substance raw materials and third parties for certain
manufacturing-related services to produce material that meets appropriate
content, quality and stability standards and use in clinical trials of our
products and, after approval, for commercial distribution. To succeed, clinical
trials require adequate supplies of drug substance and drug product, which
may
be difficult or uneconomical to procure or manufacture. We and our suppliers
and
vendors may not be able to (i) produce our drug substance or drug product to
appropriate standards for use in clinical studies, (ii) perform under any
definitive manufacturing, supply or service agreements with us or (iii) remain
in business for a sufficient time to successfully produce and market our product
candidates. If we do not maintain important manufacturing and service
relationships, we may fail to find a replacement supplier or required vendor
or
develop our own manufacturing capabilities which could delay or impair our
ability to obtain regulatory approval for our products and substantially
increase our costs or deplete profit margins, if any. If we do find replacement
manufacturers and vendors, 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
will need additional capital and our ability to continue all of our existing
planned research and development activities is uncertain. Any additional
financing could result in equity dilution.
We
will
need substantial additional funding to conduct our presently planned research
and product development activities. Based on our current operating plan, we
believe that our currently available working capital will be adequate to satisfy
our capital needs into 2007, before taking into account any amounts that may
be
available through the CEFF. Our future capital requirements will depend on
a
number of factors that are uncertain, including the results of our research
and
development activities, clinical studies and trials, competitive and
technological advances and the regulatory process, among others. 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 also continue to seek additional funding through capital lease
transactions. 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.
We
have
not entered into arrangements to obtain any additional financing, except for
the
CEFFs with Kingsbridge, our revolving credit facility with PharmaBio and our
capital equipment lease financing arrangement with GECC. Kingsbridge has the
right under certain circumstances to terminate the new CEFF, including as a
consequence of a material adverse effect, including, potentially, our recent
issues with product stability testing. Moreover, Kingsbridge is not obligated
to
purchase shares under the CEFF if our per-share stock price is below $2.00.
If
we seek additional financing, such 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
certain of 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. If we are unable to raise
required capital, we may be forced to limit many, if not all, of our research
and development programs and related operations, curtail commercialization
of
our product candidates and, ultimately, cease operations. See also “Risk
Factors: Our Committed Equity Financing Facility may have a dilutive impact
on
our stockholders.”
Furthermore,
if the market price of our common stock declines as a result of the dilutive
aspects of such potential financings, we could cease to meet the financial
requirements to maintain the listing of our securities on The Nasdaq National
Market. See “Risk
Factors: The market price of our stock may be adversely affected by market
volatility.”
Our
Committed Equity Financing Facilities may have a dilutive impact on our
stockholders.
There
are
12,167,047 shares of our common stock that are reserved for issuance under
the
new CEFF arrangement we entered into with Kingsbridge on April 17, 2006, 490,000
of which are issuable upon exercise of the Class C Investor Warrant we issued
to
Kingsbridge. There are 375,000 shares of common stock that are reserved for
issuance upon exercise of the Class B Investor Warrant we issued to Kingsbridge
under the 2004 CEFF. The issuance of shares of our common stock under the CEFFs
and upon exercise of the warrants will have a dilutive impact on our other
stockholders and the issuance or even potential issuance of such shares could
have a negative effect on the market price of our common stock. In addition,
if
we access the new CEFF, we will issue shares of our common stock to Kingsbridge
at a discount of between 6% and 10% of the daily volume weighted average price
of our common stock during a specified period of trading days after we access
the CEFF. Issuing shares at a discount will further dilute the interests of
other stockholders.
On
July
7, 2004 we entered into the 2004 CEFF with Kingsbridge by way of a Common Stock
Purchase Agreement, pursuant to which Kingsbridge committed to purchase, subject
to certain conditions, up to $75 million of our common stock. In 2005, $20.2
million was successfully raised under the 2004 CEFF in two separate financings
over 15 day periods in September and November, respectively. On the effective
date of the registration statement which we filed in connection with the new
CEFF (described above), the 2004 CEFF will be terminated; provided, however,
that the related registration rights agreement executed in connection with
the
2004 CEFF and the Class B Investor Warrant shall remain in effect. We anticipate
using the new CEFF during 2006 to support corporate manufacturing and
development and research activities.
To
the
extent that Kingsbridge sells shares of our common stock issued under the CEFFs
to third parties, our stock price may decrease due to the additional selling
pressure in the market. The perceived risk of dilution from sales of stock
to or
by Kingsbridge may cause holders of our common stock to sell their shares,
or it
may encourage short sales of our common stock or other similar transactions.
This could contribute to a decline in the stock price of our common
stock.
We
may
not be able to meet the conditions we are required to meet under the CEFF and
we
may not be able to access any portion of the up to $50 million available under
the CEFF. In addition, we are dependent upon the financial ability of
Kingsbridge to fund the CEFF. Any failure by Kingsbridge to perform its
obligations under the CEFF could have a material adverse effect upon us.
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 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.
Our collaboration arrangement with Esteve for Surfaxin and certain other of
our
product candidates is focused on key Southern European markets. Within these
countries, Esteve will be responsible for the development and marketing of
Surfaxin for a broader portfolio of indications, including the prevention of
RDS
in premature infants and ALI/ARDS in adults. Esteve will also be responsible
for
the sponsorship of certain clinical trial costs related to obtaining EMEA
approval for commercialization of Surfaxin in Europe for several indications.
We
will be responsible for the remainder of the regulatory activities relating
to
Surfaxin, including with respect to EMEA filings.
If
we or
Esteve breach or terminate the agreements that make up such collaboration
arrangements or Esteve otherwise fails to conduct their Surfaxin-related
activities in a timely manner or if there is a dispute about their 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. Accordingly,
we
may need to enter into additional collaboration agreements and our success
may
depend upon obtaining additional collaboration partners. In addition, we may
depend on our collaborators’ expertise and dedication of sufficient resources to
develop and commercialize our proposed products.
In
December, 2005, we entered into a Strategic Alliance Agreement with Chrysalis
to
develop and commercialize aerosolized SRT to address a broad range of serious
respiratory conditions. Under the agreement, we have exclusive rights to
Chrysalis’ proprietary aerosolization technology for use with pulmonary
surfactants for all respiratory diseases and conditions in hospital and
ambulatory settings. Chrysalis will assist with the development of certain
combination drug-device surfactant products, and provide certain additional
consultative services to us in connection with combination drug-device
surfactant products, provided that certain terms and conditions are satisfied.
Additionally, Chrysalis is responsible for developing the design for the aerosol
device platform, patient interface and disposable dose packets. We are
responsible for aerosolized SRT drug formulations, clinical and regulatory
activities, and the manufacturing and commercialization of the drug-device
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 “Risk Factors:
We do not have sales and marketing experience and our lack of experience may
restrict our success in commercializing our product candidates.”
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:
|
·
|
these
agreements may be breached;
|
|
·
|
these
agreements may not provide adequate remedies for the applicable type
of
breach;
|
|
·
|
our
trade secrets or proprietary know-how will otherwise become known;
|
|
·
|
our
competitors will independently develop similar technology;
or
|
|
·
|
our
competitors will independently discover our proprietary information
and
trade secrets.
|
We
do not have sales and marketing experience and our lack of experience may
restrict our success in commercializing our product candidates.
We
do not
have experience in marketing or selling pharmaceutical products. As a result
of
our recent manufacturing problems, we have determined that the establishment
of
a commercial infrastructure is no longer in our near-term plans . To achieve
commercial success for Surfaxin, or any other approved product, we will be
dependent upon entering into arrangements with others to market and sell our
products.
We
may be
unable to establish satisfactory arrangements for marketing, sales and
distribution capabilities necessary to commercialize and gain market acceptance
for Surfaxin or our other product candidates. To obtain the expertise necessary
to successfully market and sell Surfaxin, or any other product, will require
the
development of collaborative commercial arrangements and partnerships. Our
ability to make that investment and also execute our current operating plan
is
dependent on numerous factors, including, the performance of third party
collaborators with whom we may contract. Accordingly, we may not have sufficient
funds to successfully commercialize Surfaxin or any other potential product
in
the United States or elsewhere.
We
may enter into distribution arrangements and marketing alliances, which could
require us to give up rights to our product candidates.
We
may
rely on third-party distributors to distribute our products or enter into
marketing alliances to sell our products. We may not be successful in entering
into distribution arrangements and marketing alliances with third parties.
Our
failure to successfully enter into these arrangements on favorable terms could
delay or impair our ability to commercialize our product candidates and could
increase our costs of commercialization. Our dependence on distribution
arrangements and marketing alliances to commercialize our product candidates
will subject us to a number of risks, including:
|
·
|
we
may be required to relinquish important rights to our products or
product
candidates;
|
|
·
|
we
may not be able to control the amount and timing of resources that
our
distributors or collaborators may devote to the commercialization
of our
product candidates;
|
|
·
|
our
distributors or collaborators may experience financial difficulties;
|
|
·
|
our
distributors or collaborators may not devote sufficient time to the
marketing and sales of our products thereby exposing us to potential
expenses in terminating such distribution agreements; and
|
|
·
|
business
combinations or significant changes in a collaborator’s business strategy
may adversely affect a collaborator’s willingness or ability to complete
its obligations under any
arrangement.
|
We
may
need to enter into additional co-promotion arrangements with third parties
where
our own sales force is neither well situated nor large enough to achieve maximum
penetration in the market. We may not be successful in entering into any
co-promotion arrangements, and the terms of any co-promotion arrangements may
not be favorable to us. In addition, if we enter into co-promotion arrangements
or market and sell additional products directly, we may need to further expand
our sales force and incur additional costs.
If
we
fail to enter into arrangements with third parties in a timely manner or if
they
fail to perform, it could adversely affect sales of our products. We and any
of
our third-party collaborators must also market our products in compliance with
federal, state and local laws relating to the providing of incentives and
inducements. Violation of these laws can result in substantial penalties.
We
have
announced our intention to seek to market and sell Surfaxin through one or
more
marketing partners both in the United States and abroad. Although our agreement
with Esteve provides for collaborative efforts in directing a global
commercialization effort, we have somewhat limited influence over the decisions
made by Esteve or their sublicensees or the resources they devote to the
marketing and distribution of Surfaxin products in their licensed territory,
and
Esteve or their sublicensees may not meet their obligations in this regard.
Our
marketing and distribution arrangement with Esteve may not be successful, and
we
may not receive any revenues from it. Also, we may not be able to enter into
marketing and sales agreements on acceptable terms, if at all, for Surfaxin
in
territories not covered by the Esteve agreement, or for any of our other product
candidates.
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
our
key personnel may have a material adverse effect on aspects of our business
and
clinical development and regulatory programs. In
order
to lower the Company’s cost structure and re-align its operations with business
priorities, on May 4, 2006, we announced a reduction in the number of our
employees and a reorganized corporate structure. The workforce reduction totaled
55 employees, representing approximately 34% of the Company’s workforce, and was
focused primarily on commercial infrastructure, the development of
which
is no
longer in our near-term plans. Included in the workforce reduction were three
senior executives. The duties and responsibilities of these executives have
been
transferred within the management organization and the Company presently does
not expect to fill those positions in the near-term. As
a
consequence of this reduction in force, the Company’s dependence on our
remaining management team
is
increased. If we find it necessary or advisable to hire additional managers,
a
portion of the expected cost savings from our recent restructuring might not
be
realized.
To
retain
and provide incentives to certain of our key continuing executives, we recently
entered into amended and new employment agreements with our executive management
and other officers, which agreements provide for employment for a stated term,
subject to automatic renewal, severance payments in the event of termination
of
employment, enhanced severance benefits in the event of a change of control
and
equity incentives in the form of stock and option grants.
Although
these employment agreements generally include non-competition covenants and
provide for severance payments that are contingent upon the applicable
employee’s refraining from competition with us, the applicable noncompete
provisions can be difficult and costly to monitor and enforce. The loss of
any
of these persons’ services would adversely affect our ability to develop and
market our products and obtain necessary regulatory approvals. 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. 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.
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 the United States 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 Risk
Factors.
|
Our
common stock is listed for quotation on The Nasdaq National Market. During
the
twelve month period ended April 30, 2006, the price of our common stock has
ranged from $2.18 to $9.15. We expect the price of our common stock to remain
volatile. The average daily trading volume in our common stock varies
significantly. For the twelve month period ended April 30, 2006, the average
daily trading volume in our common stock was approximately 777,000 shares and
the average number of transactions per day was approximately 2,300. Our
relatively low average volume and low average number of transactions per day
may
affect the ability of our 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 Nasdaq National Market. If the common stock were no longer
listed on The Nasdaq National Market, investors might only be able to trade
on
the Nasdaq Capital Market, in the over-the-counter market in the Pink
Sheets®
(a
quotation medium operated by the National Quotation Bureau, LLC) or on the
OTC
Bulletin Board®
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 31, 2006, we had 61,223,973 shares of common stock issued and outstanding.
We
have a
universal shelf registration statement on Form S-3 (File No. 333-128929), filed
with the SEC on October 11, 2005, for the proposed offering from time to time
of
up to $100 million of our debt or equity securities, of which $80 million is
remaining. We have no immediate plans to sell any securities under this
registration statement. However, we may issue securities from time to time
in
response to market conditions or other circumstances on terms and conditions
that will be determined at such time.
Additionally,
there are 375,000 shares of our common stock that are currently reserved for
issuance under the 2004 CEFF and, assuming the effectiveness of the new CEFF,
12,167,047 shares of our common stock that are currently reserved for issuance
under the new CEFF. See “Risk Factors: Our Committed Equity Financing Facility
may have a dilutive impact on our stockholders.”
As
of
March 31, 2006, up to 11,639,777, shares of our common stock were issuable
upon
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.
The
failure to prevail in litigation or the costs of litigation, including
securities class action and patent claims, could harm our financial performance
and business operations.
We
are
potentially susceptible to litigation. For example, as a public company,
we are subject to claims asserting violations of securities laws, as well
as
derivative actions. In particular, in early May 2006, a number of law firms
issued press releases indicating that a putative shareholder class action
against the Company and its Chief Executive Officer, Robert J. Capetola,
Ph.D.,
has been filed in the United States District Court for the Eastern District
of
Pennsylvania. We have been served with a complaint and are assessing the
class action claims at this time. We have been advised that two additional
complaints have been filed, although we have not been served in those
actions. Additional actions may be filed against the Company.
Although we cannot predict the outcome of any of these actions, an adverse
result in one or more of them could have a potentially material adverse effect
on the Company’s business, results of operations and financial
condition.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In
the
quarter ended March 31, 2006, pursuant to the exercise of outstanding warrants
and options, we issued an aggregate of 108,316 shares of common stock at various
exercise prices ranging from $1.50 to $6.875 per share for a aggregate
consideration equal to $714,000. We claimed the exemption from registration
provided by Section 4(2) of the Securities Act for these transactions. No
broker-dealers were involved in the sale and no commissions were paid.
In
the
quarter ended March 31, 2006, we issued 69,500 shares of restricted stock to
certain employees at no cost. We claimed the exemption from registration
provided by Section 4(2) of the Securities Act for these transactions.
We
have a
voluntary 401(k) savings plan covering eligible employees. Effective January
1,
2003, we allowed for periodic discretionary matches of newly issued shares
of
common stock with the amount of any such match determined as a percentage of
each participant’s cash contribution. The total fair market value of our match
of common stock to the 401(k) for the quarter ended March 31, 2006 was $174,400,
resulting in the issuance of 24,726 shares. There were no stock repurchases
in
the quarter ended March 31, 2006.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER
INFORMATION
Financing
Arrangement with General Electric Capital Corporation
On
May 9,
2006, we entered into an amendment (the “Amendment”) of our Master Security
Agreement, dated as of December 20, 2002, as amended, with General Electric
Capital Corporation (the “GECC Agreement”) and the related loan proposal (the
“Proposal”), which comprise our capital equipment lease financing facility.
Under
the
terms of the Amendment, GECC agreed to extend the GECC Agreement and the
Proposal, which would have expired April 30, 2006, through October
2006,
and,
subject to the conditions set forth in the Amendment and the GECC Agreement,
agreed to make available the entire loan amount provided under the Proposal,
a
portion of which previously would not have been made available prior to the
Company obtaining FDA approval of Surfaxin for the prevention and treatment
of
RDS in premature infants. Under the Amendment, subject to certain
conditions, we will have access to a total of $2.5 million in addition to
amounts already outstanding under the GECC Agreement.
Under
the
Amendment, we have agreed that, except for certain permitted liens, we will
not
subject our intellectual property to any liens, claims or encumbrances of any
kind. For this purpose, “intellectual property” consists of our material owned
and licensed patents, trademarks and copyrights used in our research and
development activities. In addition, we have agreed to provide GECC a limited
security interest in certain proceeds and records related to specified
components of our intellectual property.
Under
the
GECC Agreement, laboratory and manufacturing equipment is financed over 48
months and all other equipment is financed over 36 months, and interest rates
vary in accordance with changes in the three and four year treasury rates.
Employment
Agreements
On
May 4,
2006, the Company entered into amended and restated employment agreements with
five of its executive officers, the primary purpose of which was to extent
the
terms of the agreements beyond December 31, 2006. The amendments are intended
to
retain and provide incentives to the Company’s senior management.
Employment
Agreement with Robert J. Capetola, Ph.D.
Under
the
amended and restated employment agreement, Dr. Capetola will continue to serve
as the Company’s President and Chief Executive Officer for a two-year employment
term ending on May 3, 2008. The agreement will automatically renew for
consecutive additional one-year terms, unless either party gives 90-days prior
notice of termination. Dr. Capetola is currently entitled to an annual base
salary of $470,000 and is also eligible for incentive bonus compensation, in
cash or equity, as determined by the Compensation Committee. Dr. Capetola is
also entitled to reimbursement for leased automobile costs.
If
Dr.
Capetola’s employment is terminated without Cause or he terminates for Good
Reason, as defined in his employment agreement, he will be entitled to severance
benefits including: a pro-rata bonus for the year of termination; a severance
payment equal to twice his salary and bonus; benefits continuation for two
years; and all stock options held by Dr. Capetola shall accelerate and become
fully vested and shall remain exercisable for the remainder of their stated
terms.
If
Dr.
Capetola’s employment is terminated without Cause or if Dr. Capetola resigns for
Good Reason within 36 months after a change in control, or if Dr. Capetola
resigns for any reason in the 30-day period commencing six months after a change
in control, he will be entitled to the benefits described above except that
his
severance payment will be three times his salary and bonus and his benefits
will
continue for three years.
If
there
is a change in control, for each fiscal year ending within the following
36-month period, Dr. Capetola will be entitled to a bonus equal to his highest
annual bonus during the three years preceding such change in control. In
addition, upon any change of control, all outstanding stock options held by
him
shall accelerate and become fully vested.
If
any
compensation payable to Dr. Capetola is subject to an excise tax under Section
4999 of the Internal Revenue Code, the Company will make an additional payment
to Dr. Capetola equal to the amount of such excise tax, as well as the income
tax and excise tax applicable to such payment.
The
agreement prohibits Dr. Capetola from competing with the Company throughout
his
employment term and for a period of 15 months following any
termination.
Employment
Agreement with Kathryn A. Cole
Under
the
amended and restated employment agreement, Ms. Cole will continue to serve
as
the Company’s Senior Vice President of Human Resources through December 31,
2007. On each January 1st thereafter, the agreement will automatically renew
for
an additional one-year term, unless either party gives 90-days prior notice
of
termination. Ms. Cole is entitled to an annual base salary of at least $180,000
and is also eligible for incentive bonus compensation, in cash or equity, as
determined by the Compensation Committee.
Employment
Agreement with John G. Cooper
Under
the
amended and restated employment agreement, Mr. Cooper will continue to serve
as
the Company’s Executive Vice President and Chief Financial Officer through May
3, 2008. On each May 4th thereafter, the agreement will automatically renew
for
an additional one-year term, unless either party gives 90-days prior notice
of
termination. Mr. Cooper is entitled to an annual base salary of at least
$292,000 and is also eligible for incentive bonus compensation, in cash or
equity, as determined by the Compensation Committee.
Employment
Agreement with David L. Lopez, Esq., CPA
Under
the
amended and restated employment agreement, Mr. Lopez will continue to serve
as
the Company’s Executive Vice President and General Counsel through May 3, 2008.
On each May 4th thereafter, the agreement will automatically renew for an
additional one-year term, unless either party gives 90-days prior notice of
termination. Mr. Lopez is entitled to an annual base salary of at least $290,000
and is also eligible for incentive bonus compensation, in cash or equity, as
determined by the Compensation Committee. He is also entitled to $7,000 per
annum to cover the cost of tuition, fees, books and other materials related
to
professional courses, and $1,500 per annum to cover fees and costs relating
to
professional legal and accounting continuing education.
Employment
Agreement with Robert Segal, M.D., F.A.C.P.
Under
the
amended and restated employment agreement, Dr. Segal will continue to serve
as
the Company’s Senior Vice President, Medical and Scientific Affairs and Chief
Medical Officer through December 31, 2007. On each January 1st thereafter,
the
agreement will automatically renew for an additional one-year term, unless
either party gives 90-days prior notice of termination. Dr. Segal is entitled
to
an annual base salary of at least $265,000 and is also eligible for incentive
bonus compensation, in cash or equity, as determined by the Compensation
Committee.
General
Terms of the Employment Agreements of Ms. Cole, Mr. Cooper, Mr. Lopez and Dr.
Segal
If
the
employment of Ms. Cole, Mr. Cooper, Mr. Lopez or Dr. Segal is terminated without
Cause or if any of them should terminate their employment for Good Reason,
as
defined in their respective agreements, such officer will be entitled to
severance benefits including a severance payment equal to such officer’s then
current base salary and bonus, a pro-rata bonus for the year of termination,
and
benefits continuation for a year. However, if the employment of any of such
executive officers is terminated by the Company without Cause or if such officer
resigns for Good Reason within 24 months after a change in control, in addition
to a pro-rata bonus for the year of termination, each such officer will be
entitled to a severance payment equal to two times such officer’s then current
base salary and bonus, severance benefits continuation for two years, the
acceleration and full vesting of all outstanding stock options granted to such
officer and the continued exercisability of such options for the remainder
of
their stated terms.
If
there
is a change in control, then for each fiscal year ending within the 24-month
period following such change in control, each of the foregoing executive
officers is entitled to a bonus equal to his or her highest annual bonus during
the three years preceding such change in control.
All
such
officers have agreed not to engage in activities competitive with the Company’s
business for 12 months (24 months in the case of a termination in connection
with a change in control) following termination of employment.
If
any
compensation payable to any of these officers is subject to an excise tax under
Section 4999 of the Internal Revenue Code, the Company will make an additional
payment to such officer equal to the amount of such excise tax, as well as
the
income tax and excise tax applicable to such payment.
ITEM
6. EXHIBITS
Exhibits
are listed on the Index to Exhibits at the end of this Quarterly Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
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 thereunto
duly authorized.
|
|
|
|
Discovery
Laboratories, Inc. |
|
(Registrant)
|
|
|
|
Date: May
10,
2006 |
By: |
/s/ Robert
J.
Capetola |
|
Robert
J. Capetola, Ph.D. |
|
President
and
Chief Executive Officer |
|
|
|
|
|
|
Date: May
10,
2006 |
By: |
/s/ John
G.
Cooper |
|
John
G. Cooper |
|
Executive
Vice
President and Chief Financial Officer |
|
(Principal Financial
Officer) |
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report. All management
contracts or compensatory plans or arrangements, if any, are marked with an
asterisk.
Exhibit
No.
|
|
Description
|
|
Method
of Filing
|
|
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002.
|
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on
March
31, 2003.
|
|
|
|
|
|
3.2
|
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery, dated
as of
May 28, 2004.
|
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
9,
2004.
|
|
|
|
|
|
3.3
|
|
Certificate
of Amendment to the Restated Certificate of Incorporation of Discovery,
dated as of July 8, 2005.
|
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
8,
2005.
|
|
|
|
|
|
3.4
|
|
Amended
and Restated By-Laws of Discovery.
|
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC on
March
15, 2004.
|
|
|
|
|
|
3.5
|
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004.
|
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company.
|
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 6, 2004.
|
|
|
|
|
|
4.2
|
|
Form
of Class E Warrant.
|
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on March 29, 2000.
|
|
|
|
|
|
4.3
|
|
Form
of Unit Purchase Option issued to Paramount Capital, Inc.
|
|
Incorporated
by reference to Exhibit 4.4 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC
on
March 30, 2000.
|
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Method
of Filing
|
4.4
|
|
Form
of Class A Investor Warrant.
|
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003.
|
|
|
|
|
|
4.5
|
|
Class
B Investor Warrant, dated July 7, 2004, issued to Kingsbridge Capital
Limited.
|
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004.
|
|
|
|
|
|
4.6
|
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery
and
QFinance, Inc.
|
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004.
|
|
|
|
|
|
4.7
|
|
Class
C Investor Warrant, dated April 17, 2006, issued to Kingsbridge Capital
Limited
|
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
|
|
|
|
|
4.8
|
|
$8,500,000
Amended and Restated Promissory Note, amended and restated as of
November
3, 2004, by and between Discovery and PharmaBio Development
Inc.
|
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9, 2004.
|
|
|
|
|
|
4.9
|
|
Registration
Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge
Capital Limited and Discovery.
|
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004.
|
|
|
|
|
|
4.10
|
|
Registration
Rights Agreement, dated April 17, 2006, by and between Discovery
and
Kingsbridge Capital Limited.
|
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
|
|
|
|
|
10.1
|
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by and
between
Discovery and Robert J. Capetola, Ph.D.
|
|
Filed
herewith.
|
|
|
|
|
|
10.2
|
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by and
between
Discovery and John G. Cooper
|
|
Filed
herewith.
|
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
Method
of Filing
|
|
|
|
|
|
10.3
|
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by and
between
Discovery and David L. Lopez, Esq., CPA
|
|
Filed
herewith.
|
|
|
|
|
|
10.4
|
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by and
between
Discovery and Robert Segal, M.D., F.A.C.P.
|
|
Filed
herewith.
|
|
|
|
|
|
10.5
|
|
Amended
and Restated Employment Agreement, dated as of May 4, 2006, by and
between
Discovery and Kathryn A. Cole
|
|
Filed
herewith.
|
|
|
|
|
|
10.6
|
|
Amendment
No. 2, dated as of September 26, 2003, to the Master Security Agreement
between General Electric Capital Corporation and
Discovery.
|
|
Filed
herewith.
|
|
|
|
|
|
10.7
|
|
Amendment
No.3, dated as of December 22, 2004, to the Master Security Agreement
between General Electric Capital Corporation and
Discovery.
|
|
Filed
herewith.
|
|
|
|
|
|
10.8
|
|
Amendment
No.4, dated as of May 9, 2006, to the Master Security Agreement between
General Electric Capital Corporation and Discovery.
|
|
Filed
herewith.
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange
Act.
|
|
Filed
herewith.
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer and Principal Accounting Officer Pursuant
to
Rule 13a-14(a) of the Exchange Act.
|
|
Filed
herewith.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Filed
herewith.
|
Exhibit
10.1
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Amended and Restated Employment Agreement (the “Agreement”)
is
made as of this 4th day of May, 2006, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”),
and
ROBERT J. CAPETOLA, PH.D. (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its President and Chief
Executive Officer pursuant to that certain revised and amended employment
agreement dated as of January 1, 2004, by and between the Company and the
Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement in its entirety as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend
and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions.
Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement.
The
term (“Term”)
of
this Agreement shall commence on the date first above written and shall continue
through May 3, 2008; provided, however, that commencing on May 4, 2008, and
on
each May 4th thereafter, the term of this Agreement shall automatically be
extended for one additional year, unless at least 90 days prior to such May
4th
date, the Company or the Executive shall have given notice that it does not
wish
to extend this Agreement. Upon the occurrence of a Change of Control during
the
term of this Agreement, including any extensions thereof, this Agreement shall
automatically be extended until the end of the Effective Period. Notwithstanding
the foregoing, this Agreement shall terminate prior to the scheduled expiration
date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties.
The
Executive shall continue to serve as the Company's President and Chief Executive
Officer. The Executive shall continue to be responsible for the overall
management of the Company and all duties customarily associated with his title
including, without limitation, activities regarding (i) day-to-day operational
affairs; (ii) the development and commercialization of the Company's products;
(iii) proposed strategic alliances, joint ventures and other potential
collaborations; and (iv) all other appropriate functions for the Company. All
of
the operating managers of the Company shall report to the Executive. The
Executive shall at all times report to, and shall be subject to the policies
established by, the Board and any executive committee thereof (the “Executive
Committee”).
The
Executive hereby agrees to immediately resign from any Board position held
by
him at the expiration or termination of the Term.
(b) Location
of Employment.
The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by
the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Matters.
In
consideration of the covenants contained herein, and further in consideration
of
the Term extension provided by this Agreement in relation to the Employment
Agreement, the Executive hereby agrees to execute the Company's standard form
of
Proprietary Information and Inventions Agreement (the “Confidentiality
Agreement”),
a
copy of which is attached to this Agreement as Exhibit B. The 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.
4. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts.
During
his employment with the Company, the Executive shall devote substantially all
of
his 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, the 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 the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment.
During
the Term and for 15 months from the Date of Termination, the 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 or any other category of
compounds which forms the basis of the Company's material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided,
that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person
to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
(d) Injunctive
Relief.
In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, 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 therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or
the
Confidentiality Agreement, the 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) Reformation.
To the
extent that the restrictions imposed by Section 4(c) 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.
5. Compensation
and Benefits.
(a) Base
Compensation.
During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”)
of at
least $470,000, 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 5. The Base Salary
shall be reviewed at least annually for the purposes of determining increases,
if any, based on the Executive's performance, the performance of the Company,
inflation, the then prevailing salary scales for comparable positions and other
relevant factors; provided,
however,
that
any such increase in Base Salary shall be solely within the discretion of the
Company.
(b) Bonuses.
During
the Term, the Executive:
(i)
shall
be
eligible for such additional 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, provided,
that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year; and
(ii)
may
receive additional incentive bonuses from time to time, at the discretion of
the
Compensation Committee of the Board, 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.
(c) Benefits.
During
the Term, the 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 Term, the Executive shall be
entitled to receive (i) term life insurance on behalf of the Executive's named
beneficiaries in the amount of $2,000,000 and (ii) long-term disability
insurance (subject to a combined annual premium cap of $20,000 for 2006, which
cap shall be increased by 5% for each successive calendar year of the Term),
each 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 the Executive in connection with any such life or disability
insurance.
(d) Vacations.
During
the Term, the Executive shall be entitled to 20 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).
(e) Reimbursement
of Business Expenses.
The
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) Company
Leased Automobile.
In
connection with the Executive's employment hereunder, the Executive shall be
entitled to the use of a suitable automobile (to be determined in the good
faith
discretion of the Executive) (the “Company
Car”)
which
shall be leased on the Executive's behalf by the Company or, in the Company's
sole discretion, the costs therefor shall be reimbursed to the Executive. The
total annual costs incurred by the Company in connection with lease payments
for
such Company Car shall not exceed $10,000; provided,
however,
that
the Company shall be responsible for all other costs in connection with such
Company Car (including, without limitation, insurance, maintenance and repairs,
governmental and regulatory fees, gasoline, parking and tolls) in connection
with the Executive’s service to the Company. The Executive acknowledges and
agrees that the Company Car shall be for the Executive's exclusive use primarily
with respect to Company business. At the Executive's sole expense, the Executive
shall maintain a current United States driving license and shall immediately
inform the Company's Controller if such license is revoked or suspended. Upon
any such revocation or suspension, the Executive will immediately forfeit any
and all entitlement to the Company Car. The Executive hereby agrees to at all
times comply with the Company's written policies regarding Company automobiles
and shall have full responsibility for any fines incurred for motoring offenses
in respect of the Company Car whether such fines are incurred in his personal
use or in connection with Company activities.
6. Change
of Control Benefits.
(a) Bonus.
The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option or restricted stock
agreement between the Company and the Executive, all shares of stock and all
options to acquire Company stock held by the Executive shall accelerate and
become fully vested upon the Change of Control Date. In the case of any Change
of Control in which the Company’s common stockholders receive cash, securities
or other consideration in exchange for, or in respect of, their Company common
stock, (i) the Executive shall be permitted to exercise his options at a time
and in a fashion that will entitle him to receive, in exchange for any shares
acquired pursuant to any such exercise, the same per share consideration as
is
received by the other holders of the Company’s common stock, and (ii) if the
Executive shall elect not to exercise all or any portion of such options, any
such unexercised options shall terminate and cease to be outstanding following
such Change of Control, except to the extent assumed by a successor corporation
(or its parent) or otherwise expressly continued in full force and effect
pursuant to the terms of such Change of Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In
the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of
the
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 owing to the Executive but not yet paid. 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).
(ii)
In
the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option or restricted stock agreement between the
Company and the Executive, all shares of stock and all options to acquire
Company stock held by the Executive shall accelerate and become fully vested
upon the Date of Termination (and all options shall thereupon become fully
exercisable), and all stock options shall continue to be exercisable for the
remainder of their stated terms.
(b) Termination
by the Company without Cause or by the Executive for Good Reason.
If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive
the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control.
If (i)
the Executive’s employment is terminated by the Company other than for Cause or
by the Executive for Good Reason during the Effective Period or (ii) the
Executive terminates his employment for any reason during the Window Period,
then the Executive shall be entitled to receive the following from the
Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of three (3) times the sum of (A) the Executive’s Base Salary
then in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
three
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination
to
the other party hereto given in accordance with Section 12. For purposes of
this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date.
The
failure to set forth in the Notice of Termination any fact or circumstance
which
contributes to a showing of Good Reason or Cause will not waive any right of
the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Cause
unless and until there has been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
(3/4) of the entire membership of the Board at a meeting of the Board called
and
held for such purpose (after reasonable notice is provided to the Executive
and
the Executive is given an opportunity, together with counsel, to be heard before
the Board), finding that, in the good faith opinion of the Board, the Executive
has engaged in the conduct described in Section 1(b) hereof, and specifying
the
particulars of such conduct.
(c) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages.
The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv),
the
amount of any payment or benefit provided for under this Agreement will not
be
reduced by any compensation or benefits earned by the Executive as the result
of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of
the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”)
would
be subject to the excise tax imposed by Section 4999 of the Code or any interest
or penalties are incurred with respect to such excise tax by the Executive
(such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the “Excise
Tax”),
then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”)
in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to
be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether
and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and
the assumptions to be utilized in arriving at such determination, shall be
made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”)
which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely
by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later
of
(i) the due date for the payment of any Excise Tax, and (ii) the receipt of
the
Accounting Firm’s determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with
a
written opinion to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Executive’s applicable federal income tax return will
not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company and
the
Executive. As a result of the uncertainty in the application of Section 4999
of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made (“Underpayment”)
or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event
the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees.
All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute
or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11,
each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if
to the
Board or the Company:
Discovery
Laboratories, Inc.
2600
Kelly Road, Suite 100
Warrington,
PA 18976
Attn:
David Lopez, Esq.
(b) if
to the
Executive:
Robert
J.
Capetola, Ph.D.
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If
the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”),
then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction
for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision
of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered
by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time
of
the arbitration hearing, such arbitration to be completed in a 60-day period.
In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues
to
be arbitrated has satisfied the conditions precedent to such party's right
to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered
by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority
to
award punitive damages. No party shall seek punitive damages in relation to
any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except
as
provided in Section 11, the parties shall bear their own costs in preparing
for
and participating in the resolution of any Dispute pursuant to this Section
15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except
as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted
in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of
the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law.
This
Agreement shall be interpreted, construed, governed and enforced according
to
the laws of the State of New York without regard 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 invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as
to
be enforceable under applicable law, or such provisions 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) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and
the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in
the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of
the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns.
Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary
in
the case of the death of the Executive, this Agreement is not assignable by
any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver.
No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall
be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement.
This
Agreement sets forth the entire agreement of the parties hereto with respect
to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment.
Nothing
contained in this Agreement will be construed as a right of the Executive to
be
continued in the employment of the Company, or as a limitation of the right
of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement.
The
Executive hereby acknowledges that he has read and understands the provisions
of
this Agreement, that he has been given the opportunity for his legal counsel
to
review this Agreement, that the provisions of this Agreement are reasonable
and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be
executed as of the date first above written.
DISCOVERY LABORATORIES,
INC. |
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By: |
/s/
David L. Lopez |
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Name: David L. Lopez, Esq.,
CPA |
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Title: Executive Vice President, General
Counsel |
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/s/
Robert J. Capetola |
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Robert J. Capetola, Ph.D. |
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EXHIBIT
A
(a) “Beneficiary”
means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it
to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form.
If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided
under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause”
means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies
the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii)
the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”),
or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control”
means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of
the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”)
cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided,
that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3)
of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further,
that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of
the
Board or other actual or threatened solicitation of proxies or consents by
or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange Act)
other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”)
other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date”
means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect
the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change
of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination”
means
the date specified in a Notice of Termination pursuant to Section 8 hereof,
or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the
case
may be.
(g) “Disability”
means a
mental or physical condition that renders the 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 or more consecutive months or for a total of six months during any 12
consecutive months; provided,
that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period”
means
the period beginning on the Change of Control Date and ending 36 months after
the date of the related Change of Control.
(i) “Good
Reason”
means,
unless the Executive has consented in writing thereto, the occurrence of any
of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii)
a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions
of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure
by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change
of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; (vi) the
failure of the Company to nominate the Executive for election to the Board
or
the removal of Executive from all positions on the Board at any relevant time
during the Term; or (vii) the failure of the Company to obtain the assumption
in
writing of the Company’s obligation to perform this Agreement by any successor
to all or substantially all of the assets of the Company within 15 days after
a
Business Combination or a sale or other disposition of all or substantially
all
of the assets of the Company.
(j) “Highest
Annual Bonus”
means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
(k) “Window
Period”
means
the 30-day period commencing on the six-month anniversary of a Change of
Control.
Unassociated Document
Exhibit
10.2
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Amended and Restated Employment Agreement (the “Agreement”)
is
made as of this 4th day of May, 2006, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”),
and
JOHN G. COOPER (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Executive Vice
President and Chief Financial Officer pursuant to that certain revised and
amended employment agreement dated as of January 1, 2004, by and between the
Company and the Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement in its entirety as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend
and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions.
Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement.
The
term (“Term”)
of
this Agreement shall commence on the date first above written and shall continue
through May 3, 2008; provided, however, that commencing on May 4, 2008, and
on
each May 4th thereafter, the term of this Agreement shall automatically be
extended for one additional year, unless at least 90 days prior to such May
4th
date, the Company or the Executive shall have given notice that it does not
wish
to extend this Agreement. Upon the occurrence of a Change of Control during
the
term of this Agreement, including any extensions thereof, this Agreement shall
automatically be extended until the end of the Effective Period if the end
of
the Effective Period is after the then current expiration date of the Term.
Notwithstanding the foregoing, this Agreement shall terminate prior to the
scheduled expiration date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties.
The
Executive shall continue to serve as the Company's Executive Vice President
and
Chief Financial Officer. The Executive shall continue to be responsible for
all
duties customarily associated with this title. The Executive shall at all times
report directly to the Company’s Chief Executive Officer.
(b) Location
of Employment.
The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by
the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Matters.
In
consideration of the covenants contained herein, and further in consideration
of
the Term extension provided by this Agreement in relation to the Employment
Agreement, the Executive hereby agrees to execute the Company's standard form
of
Proprietary Information and Inventions Agreement (the “Confidentiality
Agreement”),
a
copy of which is attached to this Agreement as Exhibit B. The 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.
4. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts.
During
his employment with the Company, the Executive shall devote substantially all
of
his 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, the 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 the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment.
During
the Term and for 12 months from the Date of Termination, the 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 or any other category of
compounds which forms the basis of the Company's material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided,
that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person
to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent
contractor.
(d) Injunctive
Relief.
In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, 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 therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or
the
Confidentiality Agreement, the 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) Reformation.
To the
extent that the restrictions imposed by Section 4(c) 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.
5. Compensation
and Benefits.
(a) Base
Compensation.
During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”)
of at
least $292,000, 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 5. The Base Salary
shall be reviewed at least annually for the purposes of determining increases,
if any, based on the Executive's performance, the performance of the Company,
inflation, the then prevailing salary scales for comparable positions and other
relevant factors; provided,
however,
that
any such increase in Base Salary shall be solely within the discretion of the
Company.
(b) Bonuses.
During
the Term, the 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 after consultation with the Company’s
Chief Executive Officer, provided,
that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. 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 Term, the 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 Term, 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 Term, the 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).
(e) Reimbursement
of Business Expenses.
The
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.
6. Change
of Control Benefits.
(a) Bonus.
The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option or restricted stock
agreement between the Company and the Executive, all shares of stock and all
options to acquire Company stock held by the Executive shall accelerate and
become fully vested and, with respect to restricted stock, all restrictions
shall be lifted upon the Change of Control Date. In the case of any Change
of
Control in which the Company’s common stockholders receive cash, securities or
other consideration in exchange for, or in respect of, their Company common
stock, (i) the Executive shall be permitted to exercise his options at a time
and in a fashion that will entitle him to receive, in exchange for any shares
acquired pursuant to any such exercise, the same per share consideration as
is
received by the other holders of the Company’s common stock, and (ii) if the
Executive shall elect not to exercise all or any portion of such options, any
such unexercised options shall terminate and cease to be outstanding following
such Change of Control, except to the extent assumed by a successor corporation
(or its parent) or otherwise expressly continued in full force and effect
pursuant to the terms of such Change of Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In
the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of
the
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 owing to the Executive but not yet paid. 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).
(ii)
In
the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option or restricted stock agreement between the
Company and the Executive, all shares of stock and all options to acquire
Company stock held by the Executive shall accelerate and become fully vested
upon the Date of Termination (and all options shall thereupon become fully
exercisable), and all stock options shall continue to be exercisable for the
remainder of their stated terms.
(b) Termination
by the Company without Cause or by the Executive for Good Reason.
If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive
the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For
one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control.
If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination
to
the other party hereto given in accordance with Section 12. For purposes of
this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date.
The
failure to set forth in the Notice of Termination any fact or circumstance
which
contributes to a showing of Good Reason or Cause will not waive any right of
the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages.
The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv),
the
amount of any payment or benefit provided for under this Agreement will not
be
reduced by any compensation or benefits earned by the Executive as the result
of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of
the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”)
would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties,
are
hereinafter collectively referred to as the “Excise
Tax”),
then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”)
in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to
be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether
and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and
the assumptions to be utilized in arriving at such determination, shall be
made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”)
which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely
by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later
of
(i) the due date for the payment of any Excise Tax, and (ii) the receipt of
the
Accounting Firm’s determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with
a
written opinion to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Executive’s applicable federal income tax return will
not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company and
the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not
have been made by the Company should have been made (“Underpayment”)
or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event
the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees.
All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute
or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11,
each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if
to the
Board or the Company:
Discovery
Laboratories, Inc.
2600
Kelly Road, Suite 100
Warrington,
PA 18976
Attn:
David Lopez, Esq.
(b) if
to the
Executive:
John
G.
Cooper
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement.
This
Agreement contains the entire agreement between the parties with respect to
the
subject matter hereof and supercedes the Employment Agreement and all other
prior agreements, written or oral, with respect thereto.
15. Arbitration.
(a) If
the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”),
then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction
for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision
of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered
by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time
of
the arbitration hearing, such arbitration to be completed in a 60-day period.
In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues
to
be arbitrated has satisfied the conditions precedent to such party's right
to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered
by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority
to
award punitive damages. No party shall seek punitive damages in relation to
any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except
as
provided in Section 11, the parties shall bear their own costs in preparing
for
and participating in the resolution of any Dispute pursuant to this Section
15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except
as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted
in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of
the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law.
This
Agreement shall be interpreted, construed, governed and enforced according
to
the laws of the State of New York without regard 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 invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as
to
be enforceable under applicable law, or such provisions 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) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and
the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in
the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of
the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns.
Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary
in
the case of the death of the Executive, this Agreement is not assignable by
any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver.
No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall
be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement.
This
Agreement sets forth the entire agreement of the parties hereto with respect
to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment.
Nothing
contained in this Agreement will be construed as a right of the Executive to
be
continued in the employment of the Company, or as a limitation of the right
of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement.
The
Executive hereby acknowledges that he has read and understands the provisions
of
this Agreement, that he has been given the opportunity for his legal counsel
to
review this Agreement, that the provisions of this Agreement are reasonable
and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be
executed as of the date first above written.
DISCOVERY LABORATORIES,
INC. |
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By: |
/s/
Robert J. Capetola |
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Name: Robert J. Capetola,
Ph.D. |
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Title: President and CEO |
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/s/
John G. Cooper |
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John G. Cooper |
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EXHIBIT
A
(a) “Beneficiary”
means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it
to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form.
If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided
under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause”
means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies
the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii)
the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”),
or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control”
means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of
the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”)
cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided,
that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3)
of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further,
that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of
the
Board or other actual or threatened solicitation of proxies or consents by
or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid
or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”)
other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date”
means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect
the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change
of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination”
means
the date specified in a Notice of Termination pursuant to Section 8 hereof,
or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the
case
may be.
(g) “Disability”
means a
mental or physical condition that renders the 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 or more consecutive months or for a total of six months during any 12
consecutive months; provided,
that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period”
means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason”
means,
unless the Executive has consented in writing thereto, the occurrence of any
of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii)
a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions
of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure
by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change
of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination
or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus”
means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.3
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Amended and Restated Employment Agreement (the “Agreement”)
is
made as of this 4th day of May, 2006, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”),
and
DAVID L. LOPEZ, ESQ., CPA (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Executive Vice
President and General Counsel pursuant to that certain revised and amended
employment agreement dated as of January 1, 2004, by and between the Company
and
the Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement in its entirety as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend
and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions.
Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement.
The
term (“Term”)
of
this Agreement shall commence on the date first above written and shall continue
through May 3, 2008; provided, however, that commencing on May 4, 2008, and
on
each May 4th thereafter, the term of this Agreement shall automatically be
extended for one additional year, unless at least 90 days prior to such May
4th
date, the Company or the Executive shall have given notice that it does not
wish
to extend this Agreement. Upon the occurrence of a Change of Control during
the
term of this Agreement, including any extensions thereof, this Agreement shall
automatically be extended until the end of the Effective Period if the end
of
the Effective Period is after the then current expiration date of the Term.
Notwithstanding the foregoing, this Agreement shall terminate prior to the
scheduled expiration date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties.
The
Executive shall continue to serve as the Company's Executive Vice President
and
General Counsel. The Executive shall continue to be responsible for all duties
customarily associated with this title. The Executive shall at all times report
directly to the Company’s Chief Executive Officer.
(b) Location
of Employment.
The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by
the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Matters.
In
consideration of the covenants contained herein, and further in consideration
of
the Term extension provided by this Agreement in relation to the Employment
Agreement, the Executive hereby agrees to execute the Company's standard form
of
Proprietary Information and Inventions Agreement (the “Confidentiality
Agreement”),
a
copy of which is attached to this Agreement as Exhibit B. The 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.
4. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts.
During
his employment with the Company, the Executive shall devote substantially all
of
his 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, the 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 the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment.
During
the Term and for 12 months from the Date of Termination, the 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 or any other category of
compounds which forms the basis of the Company's material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided,
that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person
to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent
contractor.
(d) Injunctive
Relief.
In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, 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 therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or
the
Confidentiality Agreement, the 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) Reformation.
To the
extent that the restrictions imposed by Section 4(c) 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.
5. Compensation
and Benefits.
(a) Base
Compensation.
During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”)
of at
least $290,000, 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 5. The Base Salary
shall be reviewed at least annually for the purposes of determining increases,
if any, based on the Executive's performance, the performance of the Company,
inflation, the then prevailing salary scales for comparable positions and other
relevant factors; provided,
however,
that
any such increase in Base Salary shall be solely within the discretion of the
Company.
(b) Bonuses.
During
the Term, the 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 after consultation with the Company’s
Chief Executive Officer, provided,
that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. 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 Term, the 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 Term, the Executive shall be
entitled to receive (i) 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 and (ii) annual payments of up to (A) $7,000 solely to cover the
cost
of tuition, fees, books and other materials related to professional courses
completed and (B) $1,500 solely to cover professional legal and accounting
dues,
association fees and continuing education costs, each of the foregoing payments
shall be subject to documentation in accordance with reasonable policies of
the
Company.
(d) Vacations.
During
the Term, the 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).
(e) Reimbursement
of Business Expenses.
The
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.
6. Change
of Control Benefits.
(a) Bonus.
The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option or restricted stock
agreement between the Company and the Executive, all shares of stock and all
options to acquire Company stock held by the Executive shall accelerate and
become fully vested and, with respect to restricted stock, all restrictions
shall be lifted upon the Change of Control Date. In the case of any Change
of
Control in which the Company’s common stockholders receive cash, securities or
other consideration in exchange for, or in respect of, their Company common
stock, (i) the Executive shall be permitted to exercise his options at a time
and in a fashion that will entitle him to receive, in exchange for any shares
acquired pursuant to any such exercise, the same per share consideration as
is
received by the other holders of the Company’s common stock, and (ii) if the
Executive shall elect not to exercise all or any portion of such options, any
such unexercised options shall terminate and cease to be outstanding following
such Change of Control, except to the extent assumed by a successor corporation
(or its parent) or otherwise expressly continued in full force and effect
pursuant to the terms of such Change of Control.
(c) Promissory
Note.
Notwithstanding any provision to the contrary contained in the Promissory Note
dated July 23, 2001, issued by Executive to the Company (the “Note”),
during the Effective Period the Note shall be callable by the Company, with
respect to the aggregate principal amount then outstanding, together with all
interest thereon accrued yet unpaid, upon 365 days prior written notice to
Executive.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In
the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of
the
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 owing to the Executive but not yet paid. 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).
(ii)
In
the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option or restricted stock agreement between the
Company and the Executive, all shares of stock and all options to acquire
Company stock held by the Executive shall accelerate and become fully vested
upon the Date of Termination (and all options shall thereupon become fully
exercisable), and all stock options shall continue to be exercisable for the
remainder of their stated terms.
(b) Termination
by the Company without Cause or by the Executive for Good Reason.
If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive
the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For
one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control.
If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination
to
the other party hereto given in accordance with Section 12. For purposes of
this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date.
The
failure to set forth in the Notice of Termination any fact or circumstance
which
contributes to a showing of Good Reason or Cause will not waive any right of
the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages.
The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv),
the
amount of any payment or benefit provided for under this Agreement will not
be
reduced by any compensation or benefits earned by the Executive as the result
of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of
the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”)
would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties,
are
hereinafter collectively referred to as the “Excise
Tax”),
then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”)
in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to
be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether
and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and
the assumptions to be utilized in arriving at such determination, shall be
made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”)
which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely
by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later
of
(i) the due date for the payment of any Excise Tax, and (ii) the receipt of
the
Accounting Firm’s determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with
a
written opinion to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Executive’s applicable federal income tax return will
not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company and
the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not
have been made by the Company should have been made (“Underpayment”)
or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event
the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees.
All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute
or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11,
each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if
to the
Board or the Company:
Discovery
Laboratories, Inc.
2600
Kelly Road, Suite 100
Warrington,
PA 18976
Attn:
David Lopez, Esq.
(b) if
to the
Executive:
David
L.
Lopez, Esq., CPA
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.
15. Arbitration.
(a) If
the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”),
then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction
for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision
of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered
by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time
of
the arbitration hearing, such arbitration to be completed in a 60-day period.
In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues
to
be arbitrated has satisfied the conditions precedent to such party's right
to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered
by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority
to
award punitive damages. No party shall seek punitive damages in relation to
any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except
as
provided in Section 11, the parties shall bear their own costs in preparing
for
and participating in the resolution of any Dispute pursuant to this Section
15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except
as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted
in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of
the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law.
This
Agreement shall be interpreted, construed, governed and enforced according
to
the laws of the State of New York without regard 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 invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as
to
be enforceable under applicable law, or such provisions 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) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and
the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in
the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of
the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns.
Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary
in
the case of the death of the Executive, this Agreement is not assignable by
any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver.
No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall
be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement.
This
Agreement sets forth the entire agreement of the parties hereto with respect
to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment.
Nothing
contained in this Agreement will be construed as a right of the Executive to
be
continued in the employment of the Company, or as a limitation of the right
of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement.
The
Executive hereby acknowledges that he has read and understands the provisions
of
this Agreement, that he has been given the opportunity for his legal counsel
to
review this Agreement, that the provisions of this Agreement are reasonable
and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be
executed as of the date first above written.
DISCOVERY LABORATORIES,
INC. |
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By: |
/s/
Robert J. Capetola |
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Name: Robert J. Capetola,
Ph.D. |
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Title: President and CEO |
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/s/
David L. Lopez |
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David L. Lopez, Esq., CPA |
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EXHIBIT
A
(a) “Beneficiary”
means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it
to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form.
If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided
under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause”
means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies
the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii)
the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”),
or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control”
means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of
the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”)
cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided,
that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3)
of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further,
that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of
the
Board or other actual or threatened solicitation of proxies or consents by
or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid
or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”)
other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date”
means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect
the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change
of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination”
means
the date specified in a Notice of Termination pursuant to Section 8 hereof,
or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the
case
may be.
(g) “Disability”
means a
mental or physical condition that renders the 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 or more consecutive months or for a total of six months during any 12
consecutive months; provided,
that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period”
means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason”
means,
unless the Executive has consented in writing thereto, the occurrence of any
of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii)
a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions
of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure
by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change
of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination
or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus”
means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Unassociated Document
Exhibit
10.4
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Amended and Restated Employment Agreement (the “Agreement”)
is
made as of this 4th day of May, 2006, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”),
and
ROBERT SEGAL, M.D., F.A.C.P. (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Senior Vice President,
Medical and Scientific Affairs and Chief Medical Officer pursuant to that
certain revised and amended employment agreement dated as of January 1, 2004,
by
and between the Company and the Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement in its entirety as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend
and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions.
Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement.
The
term (“Term”)
of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2007; provided, however, that commencing on January 1,
2008, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days
prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties.
The
Executive shall continue to serve as the Company's Senior Vice President,
Medical and Scientific Affairs and Chief Medical Officer. The Executive shall
continue to be responsible for all duties customarily associated with this
title. The Executive shall at all times report directly to the Company’s Chief
Executive Officer.
(b) Location
of Employment.
The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by
the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Matters.
In
consideration of the covenants contained herein, and further in consideration
of
the Term extension provided by this Agreement in relation to the Employment
Agreement, the Executive hereby agrees to execute the Company's standard form
of
Proprietary Information and Inventions Agreement (the “Confidentiality
Agreement”),
a
copy of which is attached to this Agreement as Exhibit B. The 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.
4. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts.
During
his employment with the Company, the Executive shall devote substantially all
of
his 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, the 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 the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment.
During
the Term and for 12 months from the Date of Termination, the 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 or any other category of
compounds which forms the basis of the Company's material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided,
that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person
to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
(d) Injunctive
Relief.
In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, 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 therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or
the
Confidentiality Agreement, the 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) Reformation.
To the
extent that the restrictions imposed by Section 4(c) 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.
5. Compensation
and Benefits.
(a) Base
Compensation.
During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”)
of at
least $265,000, 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 5. The Base Salary
shall be reviewed at least annually for the purposes of determining increases,
if any, based on the Executive's performance, the performance of the Company,
inflation, the then prevailing salary scales for comparable positions and other
relevant factors; provided,
however,
that
any such increase in Base Salary shall be solely within the discretion of the
Company.
(b) Bonuses.
During
the Term, the 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 after consultation with the Company’s
Chief Executive Officer, provided,
that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. 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 Term, the 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 Term, 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 Term, the 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).
(e) Reimbursement
of Business Expenses.
The
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.
6. Change
of Control Benefits.
(a) Bonus.
The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option or restricted stock
agreement between the Company and the Executive, all shares of stock and all
options to acquire Company stock held by the Executive shall accelerate and
become fully vested and, with respect to restricted stock, all restrictions
shall be lifted upon the Change of Control Date. In the case of any Change
of
Control in which the Company’s common stockholders receive cash, securities or
other consideration in exchange for, or in respect of, their Company common
stock, (i) the Executive shall be permitted to exercise his options at a time
and in a fashion that will entitle him to receive, in exchange for any shares
acquired pursuant to any such exercise, the same per share consideration as
is
received by the other holders of the Company’s common stock, and (ii) if the
Executive shall elect not to exercise all or any portion of such options, any
such unexercised options shall terminate and cease to be outstanding following
such Change of Control, except to the extent assumed by a successor corporation
(or its parent) or otherwise expressly continued in full force and effect
pursuant to the terms of such Change of Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In
the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of
the
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 owing to the Executive but not yet paid. 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).
(ii)
In
the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option or restricted stock agreement between the
Company and the Executive, all shares of stock and all options to acquire
Company stock held by the Executive shall accelerate and become fully vested
upon the Date of Termination (and all options shall thereupon become fully
exercisable), and all stock options shall continue to be exercisable for the
remainder of their stated terms.
(b) Termination
by the Company without Cause or by the Executive for Good Reason.
If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive
the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For
one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control.
If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and his dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination
to
the other party hereto given in accordance with Section 12. For purposes of
this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date.
The
failure to set forth in the Notice of Termination any fact or circumstance
which
contributes to a showing of Good Reason or Cause will not waive any right of
the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages.
The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv),
the
amount of any payment or benefit provided for under this Agreement will not
be
reduced by any compensation or benefits earned by the Executive as the result
of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of
the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”)
would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties,
are
hereinafter collectively referred to as the “Excise
Tax”),
then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”)
in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to
be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether
and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and
the assumptions to be utilized in arriving at such determination, shall be
made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”)
which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely
by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later
of
(i) the due date for the payment of any Excise Tax, and (ii) the receipt of
the
Accounting Firm’s determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with
a
written opinion to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Executive’s applicable federal income tax return will
not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company and
the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not
have been made by the Company should have been made (“Underpayment”)
or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event
the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees.
All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute
or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11,
each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if
to the
Board or the Company:
Discovery
Laboratories, Inc.
2600
Kelly Road, Suite 100
Warrington,
PA 18976
Attn:
David Lopez, Esq.
(b) if
to the
Executive:
Robert
Segal, M.D.
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement.
This
Agreement contains the entire agreement between the parties with respect to
the
subject matter hereof and supercedes the Employment Agreement and all other
prior agreements, written or oral, with respect thereto.
15. Arbitration.
(a) If
the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”),
then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction
for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision
of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered
by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time
of
the arbitration hearing, such arbitration to be completed in a 60-day period.
In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues
to
be arbitrated has satisfied the conditions precedent to such party's right
to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered
by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority
to
award punitive damages. No party shall seek punitive damages in relation to
any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except
as
provided in Section 11, the parties shall bear their own costs in preparing
for
and participating in the resolution of any Dispute pursuant to this Section
15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except
as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted
in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of
the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law.
This
Agreement shall be interpreted, construed, governed and enforced according
to
the laws of the State of New York without regard 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 invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as
to
be enforceable under applicable law, or such provisions 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) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and
the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in
the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of
the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns.
Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary
in
the case of the death of the Executive, this Agreement is not assignable by
any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver.
No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall
be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement.
This
Agreement sets forth the entire agreement of the parties hereto with respect
to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment.
Nothing
contained in this Agreement will be construed as a right of the Executive to
be
continued in the employment of the Company, or as a limitation of the right
of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement.
The
Executive hereby acknowledges that he has read and understands the provisions
of
this Agreement, that he has been given the opportunity for his legal counsel
to
review this Agreement, that the provisions of this Agreement are reasonable
and
that he has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be
executed as of the date first above written.
DISCOVERY LABORATORIES,
INC. |
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By: |
/s/
Robert J. Capetola |
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Name: Robert J. Capetola,
Ph.D. |
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Title: President and CEO |
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/s/
Robert Segal |
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Robert Segal, M.D., F.A. C.P. |
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EXHIBIT
A
(a) “Beneficiary”
means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it
to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form.
If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided
under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause”
means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies
the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii)
the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”),
or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control”
means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of
the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”)
cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided,
that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3)
of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further,
that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of
the
Board or other actual or threatened solicitation of proxies or consents by
or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid
or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”)
other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date”
means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect
the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change
of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination”
means
the date specified in a Notice of Termination pursuant to Section 8 hereof,
or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the
case
may be.
(g) “Disability”
means a
mental or physical condition that renders the 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 or more consecutive months or for a total of six months during any 12
consecutive months; provided,
that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period”
means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason”
means,
unless the Executive has consented in writing thereto, the occurrence of any
of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii)
a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions
of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure
by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change
of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination
or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus”
means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.5
EXECUTION
COPY
EMPLOYMENT
AGREEMENT
This
Amended and Restated Employment Agreement (the “Agreement”)
is
made as of this 4th day of May, 2006, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”),
and
KATHRYN A. COLE (the “Executive”).
WHEREAS,
the Executive is currently employed by the Company as its Senior Vice President,
Human Resources pursuant to that certain revised and amended employment
agreement dated as of January 24, 2006, by and between the Company and the
Executive (the “Employment
Agreement”);
and
WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement in its entirety as set forth herein.
NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend
and
restate the Employment Agreement in its entirety to read as
follows:
1. Certain
Definitions.
Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto.
2. Term
of the Agreement.
The
term (“Term”)
of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2007; provided, however, that commencing on January 1,
2008, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days
prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.
3. Executive's
Duties and Obligations.
(a) Duties.
The
Executive shall continue to serve as the Company's Senior Vice President, Human
Resources. The Executive shall continue to be responsible for all duties
customarily associated with this title. The Executive shall at all times report
directly to the Company’s Chief Executive Officer.
(b) Location
of Employment.
The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by
the
Executive of her duties shall require frequent travel including, without
limitation, overseas travel from time to time.
(c) Proprietary
Information and Inventions Matters.
In
consideration of the covenants contained herein, and further in consideration
of
the Term extension provided by this Agreement in relation to the Employment
Agreement, the Executive hereby agrees to execute the Company's standard form
of
Proprietary Information and Inventions Agreement (the “Confidentiality
Agreement”),
a
copy of which is attached to this Agreement as Exhibit B. The 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.
4. Devotion
of Time to Company's Business.
(a) Full-Time
Efforts.
During
her employment with the Company, the Executive shall devote substantially all
of
her time, attention and efforts to the proper 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, the 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 the Executive
Committee or the Board.
(c) Non-Competition
During and After Employment.
During
the Term and for 12 months from the Date of Termination, the 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 or any other category of
compounds which forms the basis of the Company's material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided,
that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person
to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent
contractor.
(d) Injunctive
Relief.
In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, 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 therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or
the
Confidentiality Agreement, the 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) Reformation.
To the
extent that the restrictions imposed by Section 4(c) 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.
5. Compensation
and Benefits.
(a) Base
Compensation.
During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”)
of at
least $180,000, 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 5. The Base Salary
shall be reviewed at least annually for the purposes of determining increases,
if any, based on the Executive's performance, the performance of the Company,
inflation, the then prevailing salary scales for comparable positions and other
relevant factors; provided,
however,
that
any such increase in Base Salary shall be solely within the discretion of the
Company.
(b) Bonuses.
During
the Term, the 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 after consultation with the Company’s
Chief Executive Officer, provided,
that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. 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 Term, the 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 Term, 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 Term, the 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).
(e) Reimbursement
of Business Expenses.
The
Executive is authorized to incur reasonable expenses in carrying out her duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.
6. Change
of Control Benefits.
(a) Bonus.
The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.
(b) Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option or restricted stock
agreement between the Company and the Executive, all shares of stock and all
options to acquire Company stock held by the Executive shall accelerate and
become fully vested and, with respect to restricted stock, all restrictions
shall be lifted upon the Change of Control Date. In the case of any Change
of
Control in which the Company’s common stockholders receive cash, securities or
other consideration in exchange for, or in respect of, their Company common
stock, (i) the Executive shall be permitted to exercise her options at a time
and in a fashion that will entitle him to receive, in exchange for any shares
acquired pursuant to any such exercise, the same per share consideration as
is
received by the other holders of the Company’s common stock, and (ii) if the
Executive shall elect not to exercise all or any portion of such options, any
such unexercised options shall terminate and cease to be outstanding following
such Change of Control, except to the extent assumed by a successor corporation
(or its parent) or otherwise expressly continued in full force and effect
pursuant to the terms of such Change of Control.
7. Termination
of Employment.
(a) Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.
(i)
In
the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of
the
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 owing to the Executive but not yet paid. 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).
(ii)
In
the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option or restricted stock agreement between the
Company and the Executive, all shares of stock and all options to acquire
Company stock held by the Executive shall accelerate and become fully vested
upon the Date of Termination (and all options shall thereupon become fully
exercisable), and all stock options shall continue to be exercisable for the
remainder of their stated terms.
(b) Termination
by the Company without Cause or by the Executive for Good Reason.
If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive
the
following from the Company:
(i)
The
amounts set forth in Section 7(a)(i);
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;
(iv)
For
one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and her dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and her dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vi)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
(c) Termination
in connection with a Change of Control.
If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
(i)
All
amounts and benefits described in Section 7(a)(i) above;
(ii)
Within
10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of
days
in the year through the Date of Termination by 365;
(iii)
Within
10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
(iv)
For
two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and her dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination,
and further, to the extent that such post-termination coverages are available
under the Company’s plans), with life, disability, medical and dental coverage,
whether insured or not insured, providing substantially similar benefits to
those which the Executive and her dependents were receiving immediately prior
to
the Date of Termination, or (B) in lieu of providing such coverage, pay to
the
Executive no less frequently than quarterly in advance an amount which, after
taxes, is sufficient for the Executive to purchase equivalent benefits coverage
referred to in clause (A); provided,
however,
that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;
(v)
Notwithstanding
any provision to the contrary in any stock option or restricted stock agreement
between the Company and the Executive, all shares of stock and all options
to
acquire Company stock held by the Executive shall accelerate and become fully
vested upon the Date of Termination (and all options shall thereupon become
fully exercisable), and all stock options shall continue to be exercisable
for
the remainder of their stated terms;
(vi)
Any
other
additional benefits then due or earned in accordance with applicable plans
and
programs of the Company; and
(vii)
The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within
the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.
8. Notice
of Termination.
(a) Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination
to
the other party hereto given in accordance with Section 12. For purposes of
this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date.
The
failure to set forth in the Notice of Termination any fact or circumstance
which
contributes to a showing of Good Reason or Cause will not waive any right of
the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.
(b) A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.
9. Mitigation
of Damages.
The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv),
the
amount of any payment or benefit provided for under this Agreement will not
be
reduced by any compensation or benefits earned by the Executive as the result
of
self-employment or employment by another employer or otherwise.
10. Excise
Tax Gross-Up.
(a) Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of
the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”)
would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties,
are
hereinafter collectively referred to as the “Excise
Tax”),
then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”)
in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to
be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.
(b) All
determinations required to be made under this Section 10, including whether
and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and
the assumptions to be utilized in arriving at such determination, shall be
made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”)
which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely
by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later
of
(i) the due date for the payment of any Excise Tax, and (ii) the receipt of
the
Accounting Firm’s determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with
a
written opinion to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Executive’s applicable federal income tax return will
not result in the imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding upon the Company and
the
Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not
have been made by the Company should have been made (“Underpayment”)
or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event
the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for her Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent she has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent her expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.
11. Legal
Fees.
All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute
or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11,
each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.
12. Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if
to the
Board or the Company:
Discovery
Laboratories, Inc.
2600
Kelly Road, Suite 100
Warrington,
PA 18976
Attn:
David Lopez, Esq.
(b) if
to the
Executive:
Kathryn
A. Cole
The
address on file with the records of the Company
Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.
13. Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.
14. Entire
Agreement.
This
Agreement contains the entire agreement between the parties with respect to
the
subject matter hereof and supercedes the Employment Agreement and all other
prior agreements, written or oral, with respect thereto.
15. Arbitration.
(a) If
the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”),
then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction
for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.
(b) The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision
of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered
by
any court of competent jurisdiction.
(c) Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).
(d) The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time
of
the arbitration hearing, such arbitration to be completed in a 60-day period.
In
addition, the following rules and procedures shall apply to the
arbitration:
(i)
The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues
to
be arbitrated has satisfied the conditions precedent to such party's right
to
commence arbitration as required by this Section 15.
(ii)
The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered
by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.
(iii)
The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority
to
award punitive damages. No party shall seek punitive damages in relation to
any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.
(iv)
Except
as
provided in Section 11, the parties shall bear their own costs in preparing
for
and participating in the resolution of any Dispute pursuant to this Section
15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.
(v)
Except
as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted
in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of
the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.
16. Miscellaneous.
(a) Governing
Law.
This
Agreement shall be interpreted, construed, governed and enforced according
to
the laws of the State of New York without regard 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 invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as
to
be enforceable under applicable law, or such provisions 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) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and
the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in
the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of
the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.
(e) Successors
and Assigns.
Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary
in
the case of the death of the Executive, this Agreement is not assignable by
any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.
(f) Remedies
Cumulative; No Waiver.
No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall
be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.
(g) Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.
(h) Entire
Agreement.
This
Agreement sets forth the entire agreement of the parties hereto with respect
to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto.
(i) Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.
17. No
Contract of Employment.
Nothing
contained in this Agreement will be construed as a right of the Executive to
be
continued in the employment of the Company, or as a limitation of the right
of
the Company to discharge the Executive with or without Cause.
18. Executive
Acknowledgement.
The
Executive hereby acknowledges that she has read and understands the provisions
of this Agreement, that she has been given the opportunity for her legal counsel
to review this Agreement, that the provisions of this Agreement are reasonable
and that she has received a copy of this Agreement.
IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be
executed as of the date first above written.
DISCOVERY LABORATORIES,
INC. |
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By: |
/s/
Robert J. Capetola |
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Name: Robert J. Capetola,
Ph.D. |
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Title: President and CEO |
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/s/
Kathryn A. Cole |
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Kathryn A. Cole |
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EXHIBIT
A
(a) “Beneficiary”
means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it
to
the General Counsel of the Company. The Executive may change her designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form.
If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided
under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.
(b) “Cause”
means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies
the
manner in which the Company believes that the Executive has neglected her
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii)
the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company.
For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”),
or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.
(c) “Change
of Control”
means
the occurrence of any one of the following events:
(i)
any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially
the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of
the
Company’s then outstanding securities;
(ii)
persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”)
cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided,
that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3)
of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further,
that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of
the
Board or other actual or threatened solicitation of proxies or consents by
or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid
or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;
(iii)
the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”)
other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or
(iv)
the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.
(d) “Change
of Control Date”
means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect
the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change
of
Control Date shall mean the date immediately prior to the date of such
termination or event.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.
(f) “Date
of Termination”
means
the date specified in a Notice of Termination pursuant to Section 8 hereof,
or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the
case
may be.
(g) “Disability”
means a
mental or physical condition that renders the 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 or more consecutive months or for a total of six months during any 12
consecutive months; provided,
that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
(h) “Effective
Period”
means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.
(i) “Good
Reason”
means,
unless the Executive has consented in writing thereto, the occurrence of any
of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii)
a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions
of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure
by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change
of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce her benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination
or
a sale or other disposition of all or substantially all of the assets of the
Company.
(j) “Highest
Annual Bonus”
means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).
Exhibit
10.6
Exhibit
10.7
Exhibit
10.8
AMENDMENT
NO. 004
THIS
AMENDMENT NO. 004 (“Amendment”) is made as of the 9th day of May, 2006, between
General Electric Capital Corporation (“Secured Party”) and Discovery
Laboratories, Inc. (“Debtor”) in connection with that certain Master Security
Agreement, dated as of December 20, 2002, as amended from time to time
(“Agreement”). The terms of this Amendment No. 004 are hereby incorporated into
the Agreement as though fully set forth therein.
Secured
Party and Debtor mutually desire to amend the Agreement as set forth below.
Section references below refer to the section numbers of the Agreement.
In
consideration of Secured Party (i) extending the Anticipated Funding Period
under the Confidential Loan Proposal dated October 18, 2004 (“Proposal”) for an
additional period of six (6) months and (ii) making available, subject to the
funding conditions contained in the Proposal, the entire Loan Amount under
the
Proposal (notwithstanding that FDA approval to market Debtor’s Surfaxin™ for RDS
in premature infants (“FDA Approval”) has not been obtained), Debtor agrees that
all existing Indebtedness and all advances from and after the date of this
Amendment No, 004 shall be subject to the Agreement as amended by this
Amendment.
Subsection
2(l) is
hereby added and read as follows:
“(i)
Subject to the rights of PharmaBio Development Inc. (“PharmaBio”) under that
certain Amended and Restated Security Agreement dated December 10, 2001, as
amended and restated as of November 3, 2004 (the PharmaBio Agreement”) and any
rights granted under the terms of this Amendment, Debtor will not subject its
Intellectual Property, as defined in Section 7 below, or permit its Intellectual
Property to made the subject of any liens, claims or encumbrances of any kind
whatsoever, except for Permitted Liens as defined in subsection (k) of this
Section. The prohibitions described in this Section 2(l)(i) shall terminate
upon
Debtor’s receipt of the FDA Approval.
(ii)
Supplemental Collateral. Capitalized terms used but not defined in this Section
2(l)(ii) and not defined in the Agreement shall have the meanings given to
them
in the PharmaBio Agreement.
(A)
Debtor grants to Secured Party, its successors and assigns to Secured Party,
its
successors and assigns, a security interest in all of the Supplemental
Collateral.
(B)
For
purposes of this Section 2(l), “Supplemental Collateral” shall mean (but only to
the extent the following elements of the Supplemental Collateral relate to
or
arise out of or in connection with the sale, lease, conveyance, transfer or
disposition of any right, title or interest in, to or under the Product, the
Product Intellectual Property or the License Agreement in the Territory) all
right, title and interest of Borrower in, to and under any and all of the
following, whether now existing or hereafter existing or acquired from time
to
time, in the Territory: (a) all Accounts, Chattel Paper, Contract Rights,
Contracts, Commercial Tort Claims, Deposit Accounts, Documents, General
Intangibles, Instruments, monies, Payment Intangibles, Promissory Notes and
Receivables, relating to, arising out of or in connection with any sale, lease,
conveyance, transfer or disposition of any right, title or interest in, to
or
under the Product, the Product Intellectual Property or the License Agreement;
(b) all regulatory applications, filings or similar items related to the
Product, including without limitation the NDA for the Product and all
supplements, records, and reports that are required to be maintained under
applicable FDA regulations and all related correspondence to and from the FDA,
and all clinical data related to any such regulatory applications, filings
or
similar items; (c) all books, records, computer information, files, documents,
data or other materials related to or arising out of or in connection with
any
and all of the foregoing; and (d) all Proceeds of any and all of the foregoing;
provided,
however,
that
the Supplemental Collateral shall not include the Product Intellectual Property
or the License Agreement themselves; provided,
further,
that
the Supplemental Collateral shall not include Proceeds derived from or in
connection with the sale, lease, conveyance, transfer or disposition of any
right, title or interest in Intellectual Property of Borrower to the extent,
and
only to the extent, that such Proceeds relate to the sale, lease, conveyance,
transfer or disposition of any right, title or interest in products other than
the Product. For the avoidance of doubt, the Supplemental Collateral shall
not
include any payment rights or proceeds to which Borrower is entitled under
any
third party licensing agreements involving the Product, the Product Intellectual
Property or the License Agreement (each a “Product Licensing Agreement”);
provided,
however,
that
the Supplemental Collateral shall include the proceeds of any outright sale
or
other similar disposition by Borrower of any or all its rights under any such
Product Licensing Agreement.
(C)
The
Supplemental Collateral shall for all purposes constitute “Collateral” under the
terms of the Agreement; provided, however, that the Secured Party’s security
interest in the Supplemental Collateral shall be subordinate to those granted
to
PharmaBio under the PharmaBio Agreement, notwithstanding the time, order or
method of attachment or perfection of security interests, or the time or order
of filing of financing statements or other liens or security interests of
Secured Party or PharmaBio. Secured Party expressly acknowledges and agrees
that
(i) Secured Party expressly agrees that it shall not exercise any rights
provided in this Section 2(l) seek to enforce any remedy with respect to the
Supplemental Collateral until such time as the obligations of Debtor to
PharmaBio have been fully discharged, and (ii) the security interest granted
to
Secured Party by Borrower in the Supplemental Collateral provides only a right
to receive proceeds of any sale, conveyance, transfer or disposition described
in the above definition of Supplemental Collateral and does not provide Secured
Party with any right to commence or demand commencement of any such sale, lease,
conveyance, transfer or disposition or to exercise any other remedies with
respect to the Supplemental Collateral.
(D)
The
rights of Secured Party in and to the Supplemental Collateral granted under
this
Section 2(l)(ii) shall terminate upon the earlier to occur of (x) receipt by
Debtor of the FDA Approval, and (y) payment in full of Debtor’s Obligations
under the PharmaBio Agreement, but only so long as Debtor
has 12 months of cash burn at the time of such payment. If Debtor does not
have
12 months of cash burn at the time of such payment Secured
Party’s rights in and to the Supplemental Collateral shall terminate at any time
thereafter upon demonstration by Debtor that such 12 month cash burn status
has
been achieved.
(E)
Secured Party agrees that, to the extent that Supplemental Collateral is applied
to satisfy any Indebtedness of Debtor to Secured Party under the Debt Documents,
as provided under the terms of this Agreement, Secured Party shall be deemed
to
have consented to any such prepayment.
(F)
Upon
termination of the security interest provided herein, either pursuant to this
Section 2(l) or as a consequence of the full payment by Debtor of all
Indebtedness, Secured Party hereby agrees that it will immediately file
termination statements and execute such other documents and acknowledgments
that
Debtor may reasonably request; provided, that if Secured Party shall fail to
file any termination statement, Secured Party agrees that Debtor as the true
and
lawful attorney-in-fact of Secured Party, may take all appropriate action,
including filing termination statements, to effect the termination of the
security interest provided herein.
Subsection
7(a)(xvi) is
hereby amended and restated in its entirety as follows:
“(xvi)
Debtor or any guarantor or other obligor for any of the Indebtedness
sells,
transfers, assigns, mortgages, pledges, leases, grants a security interest
in or
encumbers any or all of Debtor’s Intellectual Property now existing or hereafter
acquired. For purposes of Subsection 2(l)(i) and this Subsection
7(a)(xvii), “Intellectual Property” shall consist of Debtor’s material owned or
licensed patents, trademarks and copyrights used in Debtor’s research and
development activities in connection with the development of its drug
pipeline;
provided,
that
licenses or sublicenses by the Debtor of its Intellectual Property as
part of a research and development or similar arrangement or otherwise
related to the development, marketing and distribution of its drug products
shall be excluded. For the avoidance of doubt, Intellectual Property shall
not include computer programs owned or leased by Debtor for use in the
administration of its general business activities or installed in computer
hardware that is not a part of Debtor’s research and development activities.
Debtor shall provide Secured Party with a listing of licenses and
sublicenses granted to third parties within ten (10) days of receipt of written
request. Upon
Debtor’s receipt of the FDA Approval this Subsection 7(a)(xvi) shall terminate
and none of the events described herein shall constitute a default under this
Agreement.”
EXCEPT
AS
EXPRESSLY PROVIDED IN SECTION 2(l) OF THE AGREEMENT, ADDED ABOVE, TERMS USED,
BUT NOT OTHERWISE DEFINED IN THIS AMENDMENT SHALL HAVE THE MEANINGS GIVEN TO
THEM IN THE AGREEMENT. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL
REMAIN IN FULL FORCE AND EFFECT. IF THERE IS ANY CONFLICT BETWEEN THE PROVISIONS
OF THE AGREEMENT AND THIS AMENDMENT NO. 004, THEN THIS AMENDMENT NO. 004 SHALL
CONTROL.
IN
WITNESS WHEREOF,
the
parties hereto have executed this Amendment No.004 by signature of their
respective authorized representative set forth below.
General
Electric Capital Corporation
|
Discovery
Laboratories, Inc.
|
|
|
By: /s/
John
Edel
|
By:
/s/
John G.
Cooper
|
|
|
Name:
/s/ John
Edel
|
Name:
/s/ John G.
Cooper
|
|
|
Title:
SVP
|
Title:
Executive
VP,
CFO
|
Exhibit
31.1
CERTIFICATIONS
I,
Robert
J. Capetola, certify that:
1. I
have reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
May 10, 2006
|
/s/
Robert J. Capetola
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer
|
Exhibit
31.2
CERTIFICATIONS
I,
John
G. Cooper, certify that:
1. I
have reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
May 10, 2006
|
/s/
John G. Cooper
John
G. Cooper
Executive
Vice President and Chief Financial
Officer
|
Exhibit
32.1
CERTIFICATIONS
Pursuant
to 18 U.S.C. § 1350, each of the undersigned officers of Discovery Laboratories,
Inc. (the “Company”) hereby certifies that, to his knowledge, the Company’s
Quarterly Report on Form 10-Q for the period ended March 31, 2006 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Date:
May
10, 2006
/s/
Robert J. Capetola
Robert
J.
Capetola, Ph.D.
President
and Chief Executive Officer
/s/
John G. Cooper
John
G.
Cooper
Executive
Vice President
and Chief Financial Officer
A
signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to the Company and will be retained by the Company
and furnished to the SEC or its staff upon request.
This
certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange
Act
of 1934.