UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities and
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant[_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional materials [_] Soliciting Material Pursuant to
(S)240.14a-11(c) or (S)240.14a-12
Discovery Laboratories, Inc.
----------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Persons(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
<TABLE>
<CAPTION>
Number of Per Share Merger Proposed Maximum Amount of
Title of Securities Shares Consideration Aggregate Value Filing Fee
- ------------------------- --------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value 1,033,500 $4.6875 $4,844,531 $969(A)
</TABLE>
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $887
2) Form, Schedule or Registration Statement No.: Schedule PRE 14A
3) Filing Party: Discovery Laboratories, Inc.
4) Date Filed: April 9, 1998
(A) Filed with the Securities and Exchange Commission pending payment of the
additional filing fee.
<PAGE>
DISCOVERY LABORATORIES, INC.
509 MADISON AVENUE, 14TH FLOOR
NEW YORK, NEW YORK 10022
(212) 223-9504
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD JUNE 16, 1998
TO ALL HOLDERS OF SHARES OF COMMON STOCK AND SERIES B CONVERTIBLE PREFERRED
STOCK:
NOTICE IS HEREBY GIVEN that an annual meeting of stockholders (the "1998 Annual
Meeting") of DISCOVERY LABORATORIES, INC., a Delaware corporation,
("Discovery"), will be held at 10:00 a.m. on June 16, 1998 for the following
purposes:
1. To approve a proposal to merge a newly formed subsidiary of
Discovery with and into Acute Therapeutics, Inc. ("ATI"), a majority
owned subsidiary of Discovery, and to issue shares of Discovery's
Common Stock, par value $0.001 per share, to holders of ATI's Common
Stock, par value $0.001 per share ("ATI Common Stock"), and to
assume certain outstanding options for the purchase of ATI Common
Stock in connection therewith.
2. To elect ten directors to serve until the next annual meeting and
until each such director's successor is elected and qualified.
3. To approve Discovery's 1998 Stock Incentive Plan.
4. To transact such other business as may properly come before the
meeting.
The foregoing items of business are more fully described in the Proxy Statement
accompanying this Notice.
Management presently knows of no other business to be presented at the 1998
Annual Meeting. If any other matters come before the 1998 Annual Meeting, the
persons named in the enclosed proxy will vote in accordance with their judgment
in such matters.
The Board of Directors has fixed May 4, 1998 as the record date for the 1998
Annual Meeting (the "Record Date"). Only those stockholders of record at the
close of business on the Record Date will be entitled to notice of and to vote
at the 1998 Annual Meeting or any postponements or adjournments thereof. A
complete list of stockholders entitled to vote at the 1998 Annual Meeting will
be open to the examination of any stockholder, for any purpose germane to the
1998 Annual Meeting, during ordinary business hours, for a period of at least
ten days prior to the 1998 Annual Meeting at the principal executive offices of
Discovery listed above.
<PAGE>
The enclosed proxy is solicited by the Board of Directors of Discovery.
Reference is made to the accompanying Proxy Statement for further information
with respect to the business to be transacted at the 1998 Annual Meeting. To
ensure that your vote is counted, please complete, date and sign the enclosed
proxy and return it promptly in the enclosed envelope, whether or not you plan
to attend the 1998 Annual Meeting in person. A self-addressed, postage paid
envelope is enclosed for your convenience. If you do attend the Meeting, you may
then withdraw your proxy and vote your shares in person. In any event, you may
revoke your proxy prior to its exercise. Shares represented by proxies which are
returned properly signed but unmarked will be voted in favor of all proposals.
By Order of the Board of Directors,
/s/ Evan Myrianthopoulos
Evan Myrianthopoulos
Secretary
May 6, 1998
New York, New York
YOUR VOTE IS IMPORTANT.
PLEASE FILL IN, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE ANNUAL
MEETING. NO POSTAGE IS NECESSARY IF THE ENVELOPE IS MAILED IN THE UNITED STATES.
<PAGE>
DISCOVERY LABORATORIES, INC.
509 Madison Avenue, 14th Floor
New York, New York 10022
Telephone: (212) 223-9504
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Discovery Laboratories, Inc. ("Discovery" and, together
with Acute Therapeutics, Inc. ("ATI"), a majority owned subsidiary of Discovery,
the "Company") of proxies to be voted at Discovery's Annual Meeting of
Stockholders and at any adjournments thereof (the "1998 Annual Meeting"), which
is scheduled to be held on June 16, 1998 at 10:00 a.m. at 509 Madison Avenue,
14th Floor, New York, New York 10022 for the purposes set forth in the
accompanying notice of meeting. It is expected that this Proxy Statement, the
foregoing notice and the enclosed proxy card will first be mailed to
stockholders entitled to vote on or about May 11, 1998. Sending a signed proxy
will not affect a stockholder's right to attend the 1998 Annual Meeting and vote
in person since the proxy is revocable. Any stockholder giving a proxy has the
power to revoke it by, among other methods, giving written notice to the
Secretary of the Company at any time before the proxy is exercised by delivering
a duly executed proxy bearing a later date or by attending the 1998 Annual
Meeting and voting in person.
When your proxy card is returned properly signed, the shares represented will be
voted in accordance with your directions. The Board of Directors of Discovery
knows of no matters that are likely to be brought before the 1998 Annual Meeting
other than the matters specifically referred to in the notice of the 1998 Annual
Meeting. If any other matters properly come before the 1998 Annual Meeting,
however, the persons named in the enclosed proxy, or their duly appointed
substitutes acting at the 1998 Annual Meeting, will be authorized to vote or
otherwise act thereon in accordance with their judgment in such matters. In the
absence of instructions, the shares represented at the 1998 Annual Meeting by
the enclosed proxy will be voted "FOR" the merger (the "Merger") of ATI
Acquisition Corp., a wholly-owned subsidiary of Discovery ("Acquisition Sub"),
with and into ATI and the issuance of approximately 1,033,500 shares of
Discovery Common Stock, par value $0.001 per share ("Discovery Common Stock")
and the assumption of options to purchase (following such assumption)
approximately 618,345 shares of Discovery Common Stock in connection therewith;
"FOR" the election of Steve H. Kanzer, Robert J. Capetola, Milton Packer, Marvin
Rosenthale, David Naveh, Max Link, Mark Rogers, Richard Power, Richard Sperber
and Herbert McDade to the Board of Directors of Discovery (or, in the event the
Merger is not consummated, "FOR" the election of Steve H. Kanzer, James S. Kuo,
Evan Myrianthopoulos, Mark Rogers, Herbert McDade, Max Link, David Naveh, Juerg
Geigy, Richard Sperber and Robert J. Capetola to the Board of Directors of
Discovery); and "FOR" the adoption of Discovery's 1998 Stock Incentive Plan.
Stockholders of ATI who object to the Merger may, under certain circumstances
and by following prescribed statutory procedures, exercise appraisal rights to
receive cash for their shares.
The date of this Proxy Statement is May 6, 1998.
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this Proxy Statement, the words "estimate," "project," "intend,"
"forecast," "anticipate" and similar expressions are intended to identify
forward-looking statements. In addition, certain other statements set forth in
this Proxy Statement, including, without limitation, statements concerning the
Company's research and development programs, the possibility of submitting
regulatory filings for the Company's products under development, the seeking of
joint development or licensing arrangements with pharmaceutical companies or
others, the research and development of particular compounds and technologies
for particular indications and the period of time for which the Company's
existing resources will enable the Company to fund its operations and to meet
the continuing listing requirements for the quotation of its securities on the
Nasdaq SmallCap Market and the possibility of contracting with other parties
additional licenses to develop, manufacture and market commercially viable
products, are forward-looking and based upon the Company's current belief as to
the outcome, occurrence and timing of future events or current expectations and
plans. All such statements involve significant risks and uncertainties. Many
important factors affect the Company's ability to achieve the stated outcomes
and to successfully develop and commercialize its product candidates, including,
among other things, the ability to obtain substantial additional funds, obtain
and maintain all necessary patents or licenses, to demonstrate the safety and
efficacy of product candidates at each stage of development, to meet applicable
regulatory standards and receive required regulatory approvals, to meet
obligations and required milestones under its license agreements, to be capable
of producing drug candidates in commercial quantities at reasonable costs, to
compete successfully against other products and to market products in a
profitable manner. Although the Company believes that its assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could
prove inaccurate and, therefore, there also can be no assurance that these
statements included in the Proxy Statement will prove to be accurate. In light
of the significant uncertainties inherent in these statements included herein,
the inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved; in fact, actual results could differ materially from those
contemplated by such forward-looking statements. The Company does not undertake
any obligation to publicly release any revisions to these forward-looking
statements or to reflect the occurrence of unanticipated events.
<PAGE>
TABLE OF CONTENTS
Page
Summary ....................................................... 1
Effective Time of the Merger............................. 1
Manner and Basis of Converting Shares.................... 1
Exchange of Certificates................................. 2
Treatment of Options..................................... 2
Management after the Merger.............................. 2
Conditions to the Merger................................. 2
Accounting Treatment of the Merger....................... 3
Employment Agreements.................................... 3
Recent Events.................................................. 4
Management Agreement..................................... 4
1997 Merger.............................................. 4
Selected Historical and Pro Forma Information.................. 5
Price Range Of Discovery Common Stock.......................... 7
The Annual Meeting............................................. 8
Purpose of the Annual Meeting............................ 8
Voting Rights............................................ 8
Solicitation of Proxies.................................. 9
Description of the Merger...................................... 10
General.................................................. 10
Background to the Merger................................. 10
Management Agreement..................................... 12
Interests of Certain Persons in the Merger............... 12
Discovery's Reasons For The Merger....................... 13
ATI's Reasons For The Merger............................. 14
Terms of the Merger............................................ 15
Effective Time of the Merger............................. 16
Manner and Basis of Converting Shares.................... 16
Exchange of Certificates................................. 16
Treatment of Options..................................... 17
Conduct of Business Prior to the Merger.................. 17
Conditions to the Merger................................. 19
Termination or Amendment of the Merger Agreement......... 20
Accounting Treatment of the Merger....................... 20
Certain Federal Income Tax Consequences.................. 20
i
<PAGE>
Management after the Merger.............................. 22
Restrictions on Sale of Discovery Common Stock........... 24
Governmental and Regulatory Approvals.................... 24
Merger Expenses.......................................... 24
Appraisal Rights......................................... 25
Employment Agreements.................................... 25
Unaudited Pro Forma Condensed Consolidated Financial Statements 27
Notes to Unaudited Pro Forma Condensed Financial Statements.... 30
Management's Discussion and Analysis of Financial Condition
and Plan of Operations of Discovery and ATI.................. 31
Plan of Operations....................................... 31
Liquidity................................................ 32
Comparative Per Share Data..................................... 32
Information Concerning Discovery and ATI....................... 32
General.................................................. 32
Ownership Structure of ATI............................... 33
Products and Technologies Under Development.............. 33
SuperVent(TM)......................................... 33
Surfaxin(TM).......................................... 34
ST-630................................................ 35
Other Technologies in Product Portfolio.................. 36
Apafant Injection..................................... 36
AN10.................................................. 36
Licensing Arrangements; Patents and Proprietary Rights... 37
CMHA License Agreement: SuperVent(TM)/Tyloxpol........ 37
J&J License Agreement: Surfaxin(TM)................... 37
WARF License Agreement: ST-630........................ 38
Boehriger Ingelheim License: Apafant.................. 38
Bar-Ilan License: AN10................................ 38
Risk of Loss of Technology/Technological Uncertainty and
Obsolescence........................................... 39
Third Party Suppliers; Manufacturing and Marketing....... 40
Competition.............................................. 42
Government Regulation.................................... 43
Employees................................................ 44
Legal Proceedings........................................ 45
Facilities............................................... 45
Election of Discovery Directors................................ 45
Director Compensation.................................... 50
ii
<PAGE>
Executive Compensation................................... 51
Employment Agreements.................................... 53
Adoption of 1998 Stock Option Plan............................. 54
Discretionary Option Grant Program....................... 56
Stock Issuance Program................................... 57
Automatic Option Grant Program........................... 57
General Provisions....................................... 58
Federal Income Tax Consequences.......................... 60
Accounting Treatment..................................... 62
New Plan Benefits........................................ 62
Stockholder Approval..................................... 63
Relation to the Merger................................... 63
General and Other Matters...................................... 63
Certain Relationships and Related Transactions................. 63
Security Ownership of Principal Stockholders and Management.... 66
Management............................................... 66
Principal Stockholders................................... 69
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 75
Section 16(a) Beneficial Ownership Reporting Compliance........ 76
Description of Securities...................................... 76
Discovery Common Stock................................... 76
Preferred Stock.......................................... 77
Discovery Series B Preferred Stock....................... 77
Discovery Series C Preferred Stock....................... 79
Placement Agent Warrants................................. 81
Registration Rights...................................... 82
Transfer Agent........................................... 82
Proxy.......................................................... 84
Annex A -- Agreement and Plan of Merger (including Amendment No. 1 thereto
dated as of May 1, 1998)
Annex B -- 1998 Stock Incentive Plan
iii
<PAGE>
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SUMMARY
The following is a brief summary of certain information concerning the Merger.
This summary does not contain a complete statement of all material features of
the Merger and is qualified in its entirety by the more detailed information
appearing elsewhere in this Proxy Statement and in the Annexes hereto.
Effective Time of the Merger
The Merger will be effective when the certificate of merger relating thereto
(the "Certificate of Merger") is filed with the Secretary of State of the State
of Delaware in accordance with the Delaware General Corporation Law (the "DGCL")
or at such other time as is mutually agreed upon by the parties to the Merger
(the "Effective Time"). If approved by Discovery and ATI stockholders, the
Merger is expected to be consummated as soon as practicable after the 1998
Annual Meeting. It is anticipated that, subject to the fulfillment or waiver of
all conditions to the Merger, the Certificate of Merger will be filed on or
about June 16, 1998.
Manner and Basis of Converting Shares
As of the Effective Time, each issued and outstanding share of the Common Stock,
par value $0.001 per share, of ATI (the "ATI Common Stock") as to which
appraisal rights have not been perfected in accordance with Section 262 of the
DGCL will be converted into 3.90 shares of Discovery Common Stock (the "Exchange
Ratio"); the outstanding shares of the common stock of Acquisition Sub will be
converted into shares of ATI Common Stock; and each issued and outstanding share
of the Series B Preferred Stock, par value $0.001 per share, of ATI (the "ATI
Series B Preferred Stock") will be converted into one share of the Series C
Preferred Stock, par value $0.001 per share, of Discovery (the "Discovery Series
C Preferred Stock"). Pursuant to an Agreement and Plan of Merger dated as of
March 5, 1998, as amended by Amendment No. 1 thereto dated as of May 1, 1998,
among Discovery, Acquisition Sub and ATI (the "Merger Agreement"), the present
holders of outstanding shares of ATI Common Stock will be issued approximately
1,033,500 shares of Discovery Common Stock (representing approximately 13.5% of
Discovery's outstanding voting securities on an as converted basis immediately
following the Merger).
No fractional shares of Discovery Common Stock will be issued in connection with
the Merger. In lieu of fractional shares, each holder of ATI Common Stock who
would otherwise be entitled to a fractional share will receive cash equal to
such fraction multiplied by the fair market value of the Discovery Common Stock
determined based on the average of the last reported closing bid prices of the
Discovery Common Stock over the 20 trading days preceding the closing of the
Merger.
The financial terms of the Merger, including the Exchange Ratio, were negotiated
at arm's length by representatives of Discovery and ATI.
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1
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Exchange of Certificates
As soon as practicable after the Effective Time, Discovery will mail or
otherwise deliver to each ATI stockholder of record at the Effective Time a
letter of transmittal with instructions to be used by such stockholder in
surrendering certificates that, prior to the Merger, represented shares of ATI
Common Stock. The outstanding shares of ATI Series B Preferred Stock will be
exchanged for shares of Discovery Series C Preferred Stock pursuant to an
exchange agreement to be entered into by Discovery and the holder of the ATI
Series B Preferred Stock.
Treatment of Options
Each outstanding option to purchase ATI Common Stock that is assumed by
Discovery will become exercisable for a number of shares of Discovery Common
Stock equal to the number of shares of ATI Common Stock for which such option
was previously exercisable multiplied by the Exchange Ratio at a per share
exercise price equal to the original exercise price divided by the Exchange
Ratio.
Management after the Merger
It is a condition to the consummation of the Merger that the following persons
be elected to the Board of Directors of Discovery at the 1998 Annual Meeting:
Steve H. Kanzer (who will be Chairman of the Board of Discovery), Max Link and
Mark Rogers, each of whom is presently a director of both Discovery and ATI;
Richard Sperber, Herbert McDade and David Naveh, each of whom is presently a
director of Discovery; and Robert J. Capetola, Milton Packer, Marvin Rosenthale
and Richard Power, each of whom is presently a director of ATI. All such
directors will serve until their successors have been duly elected and qualified
or otherwise as provided by law.
Upon consummation of the Merger, Dr. Capetola, who is currently the Chairman and
Chief Executive Officer of ATI, will become the Chief Executive Officer of the
Company. Other principal officers of the Company, who are also currently
officers of ATI, will be Harry Brittain, Vice President of Pharmaceutical and
Chemical Development; Laurence B. Katz, Vice President of Project Management and
Clinical Administration; Chris Schaber, Vice President of Regulatory Affairs and
Quality Control; Huei Tsai, Vice President of Biometrics; Thomas E. Wiswell,
Vice President of Clinical Research; Lisa Mastroianni, Director of Clinical
Research. Evan Myrianthopoulos, who is currently the Chief Operating Officer,
Chief Financial Officer and Secretary of Discovery, will be the Vice President
of Finance. The ATI management team is managing Discovery pending the closing of
the Merger pursuant to an interim management agreement. See "Recent Events."
Conditions to the Merger
The Merger is subject to a number of conditions precedent in addition to the
approval by the stockholders of Discovery and ATI of the Merger. Such additional
conditions precedent include the execution of certain lock-up agreements by ATI
stockholders and optionholders; the execution of employment agreements between
Dr. Capetola and other key ATI executives, on the one hand, and Discovery, on
the other; and appraisal rights not having been exercised by
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2
<PAGE>
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holders of more than 5% of the ATI Common Stock. At any time at or prior to the
Effective Time, to the extent legally allowed, either of Discovery or ATI,
without approval of the stockholders of such company, may waive compliance with
any of the agreements or conditions contained in the Merger Agreement for the
benefit of such company.
Accounting Treatment of the Merger
The Merger will be accounted for using the purchase method, whereby the purchase
price will be allocated based on the fair value of the assets acquired and the
liabilities assumed.
Employment Agreements
Upon consummation of the Merger, the members of ATI's management team (the "ATI
Management Members") will enter into employment agreements with Discovery. Dr.
Capetola will receive a $100,000 bonus upon execution of his employment
agreement with Discovery (the "New Capetola Employment Agreement") and a $50,000
bonus upon the execution of each partnering or similar arrangement involving
Surfaxin(TM) having a value in excess of $10 million. He will be entitled to an
initial base salary of $236,250 per annum. The remaining ATI Management Members
will hold positions with Discovery on terms, including compensation terms, that
are substantially similar to the terms of their present employment with ATI.
Upon consummation of the Merger, options to purchase, in the aggregate, 338,500
shares of Discovery Common Stock, which will be vested in full upon grant for
Dr. Capetola and will vest in three equal annual installments for the remaining
ATI Management Members, will be granted to the ATI Management Members pursuant
to the foregoing employment agreements. The options will be exercisable at a
price equal to the fair market value of the Discovery Common Stock on the date
of the grant. These options are in addition to a grant of options to purchase,
in the aggregate, 126,500 shares of Discovery Common Stock, to the ATI
Management Members pursuant to the Management Agreement. See "Recent Events -
Management Agreement."
The ATI Management Members will be entitled to the following aggregate milestone
incentive payments (in each case in either cash or equity and allocated at the
discretion of Discovery's compensation committee following receipt of a
recommendation from Dr. Capetola): $150,000 upon the successful completion of
Phase 2 studies of any portfolio compound; $500,000 upon the successful
completion of Phase 3 studies of any portfolio compound; and $1,000,000 upon the
receipt of marketing approval in the United States for any portfolio compound.
Each of the foregoing milestone payments shall be payable no more than once. In
addition, the ATI Management Members shall be entitled, in the aggregate, to
receive options exercisable at a price equal to the fair market value of
Discovery Common Stock at the Effective Time (i) for the purchase of 175,000
shares of Discovery Common Stock at such time as the market capitalization of
Discovery (based on the average closing price and amount of Discovery Common
Stock outstanding over a 30-trading-day period) exceeds $75 million and (ii)
options for the purchase of 160,000 shares of Discovery Common Stock upon
consummation of a corporate partnering transaction involving any portfolio
compound having a total value of at least $20 million. The options will be
exercisable at a price equal to the fair market value of the Discovery Common
Stock on the date of the grant.
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3
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RECENT EVENTS
Management Agreement
Concurrently with the execution of the Merger Agreement on March 5, 1998,
Discovery and ATI entered into a management agreement (the "Management
Agreement") pursuant to which the ATI Management Members are managing both
Discovery and ATI pending the closing of the Merger. In the event the Merger is
not consummated on or prior to July 15, 1998 due to any breach by Discovery or
its stockholders of their obligations under the Merger Agreement, Discovery
shall pay to ATI on such date (or any earlier date of the abandonment of the
transactions contemplated hereby) (the "Date of Termination") 50% of the salary
expense attributable to the ATI Management Members from the date of execution of
the Merger Agreement through the Date of Termination. Pursuant to the Management
Agreement, the ATI Management Members have been granted options to purchase, in
the aggregate, 126,500 shares of Discovery Common Stock. Such of the foregoing
options as have been allocated to Dr. Capetola shall be fully vested upon the
closing of the Merger and the remaining options shall vest in three equal
installments on the first, second and third anniversaries of the Merger,
provided that in the event the Merger is not consummated on or prior to July 15,
1998 due to the breach by Discovery or its stockholders of any of their
obligations under the Merger Agreement, all of the options granted pursuant to
the Management Agreement shall be immediately vested in full. The options will
be exercisable at a price equal to the fair market value of Discovery Common
Stock on the date of the grant.
1997 Merger
On November 25, 1997, Discovery (which, prior to such time, was named Ansan
Pharmaceuticals, Inc.) and Discovery Laboratories, Inc., a former Delaware
corporation ("Old Discovery"), effected a merger in which Discovery was the
surviving corporation (the "1997 Merger"). Pursuant to the 1997 Merger, among
other things, (i) the outstanding securities of Old Discovery were exchanged for
securities of Discovery representing approximately 92% of the securities of
Discovery outstanding at such time (exclusive of Discovery's Class A and Class B
Warrants (the "Class A Warrants" and "Class B Warrants," respectively)), (ii)
the name of Discovery was changed to Discovery Laboratories, Inc., (iii) the
Board of Directors of Discovery was reconstituted to consist of the seven
members of the Board of Directors of Old Discovery and three members of the
Board of Directors of Discovery prior to the 1997 Merger, (iv) the management of
Old Discovery succeeded to the management of Discovery, (v) the Company acquired
the product portfolio of Old Discovery, which included the Company's
SuperVent(TM), Surfaxin(TM) and products under development, (vi) certain of
Discovery's products under development were transferred to Titan
Pharmaceuticals, Inc. ("Titan"), which was a 32% stockholder of Discovery
immediately prior to the 1997 Merger and (vii) Titan's interest in Discovery was
surrendered for cancellation. Concurrently with the closing of the 1997 Merger,
Discovery effected a 1-for-3 reverse split of the Discovery Common Stock, Class
A Warrants and Class B Warrants (the "Reverse Split").
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4
<PAGE>
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SELECTED HISTORICAL AND PRO FORMA INFORMATION
The following selected historical financial information of the Company at
December 31, 1997 and for the year ended December 31, 1997 has been derived
from, and should be read in conjunction with, the Company's audited historical
financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Plan of Operations included elsewhere in
this Proxy Statement.
The selected pro forma condensed financial information has been derived from the
unaudited pro forma consolidated condensed financial statements, which give
effect to the Merger as a purchase, and should be read in conjunction with such
pro forma statements and the notes thereto included elsewhere in this Proxy
Statement. The unaudited pro forma condensed consolidated financial statements
for the year ended December 31, 1997 have been partially derived from the
historical consolidated financial statements for the year then ended.
The Merger will be accounted for using the purchase method of accounting. The
unaudited pro forma condensed consolidated financial statements have been
prepared on the basis of assumptions described in the notes thereto and include
assumptions relating to the allocation of the consideration paid to the minority
stockholders of ATI based on preliminary estimates of the fair value of such
consideration. The actual allocation of such consideration may differ from that
reflected in the unaudited pro forma condensed consolidated financial statements
after final valuation procedures are completed following the closing of the
Merger. The final allocations of the aggregate consideration for the Merger is
not expected to differ materially from the preliminary allocations. In the
opinion of the Company, all adjustments necessary to present fairly the
unaudited pro forma condensed consolidated financial statements have been made
based on the proposed terms and structure of the Merger.
Selected Historical Financial Information
(in thousands, except share and per share data)
Year Ended
December 31, 1997
Historical Consolidated Statement of
Operations Data:
Write-off of acquired research and development in process $ 3,663
Research and development expenses 4,378
General and administrative expenses 1,836
Net loss (9,164)
Net loss per share - basic and diluted (3.42)
Weighted average number of shares used in
computing basic and diluted net loss per share 2,678,803
As of December 31, 1997
Historical Consolidated Balance Sheet
Data:
Cash, cash equivalents and short-term investments $ 11,254
Working capital 10,879
Total assets 11,655
Total liabilities 565
Deficit accumulated during the development stage (12,656)
Total stockholders' equity 8,813
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5
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Selected Proforma Condensed Financial Information
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Proforma
Proforma Reflecting
Historical Adjustments Merger
<S> <C> <C> <C>
Statement of Operations Data:
Write-off of acquired research and development in-process $ 3,663 $ -- $ 3,663
Research and development expenses 4,378 -- 1,836
General and administrative expenses 1,836 -- 1,836
Net loss (9,164) -- (9,164)
Net loss per share - basic and diluted (3.42) -- (2.47)
Shares used in computing basic and diluted net loss per share 2,678,803 -- 3,712,303
<CAPTION>
December 31, 1997
Proforma
Proforma Reflecting
Historical Adjustments Merger
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 11,254 $ 11,254
Working capital 10,879 (300)(1) 10,579
Total assets 11,655 11,655
Total liabilities 565 300 (1) 865
Deficit accumulated during the development stage (12,656) (8,288)(2) (20,944)
Total stockholders' equity 8,813 1,739 (3) 10,552
</TABLE>
(1) Reflects the estimated costs incurred to complete the Merger.
(2) Reflects the allocation of the estimated purchase price of approximately
$8,288,000 to the historical balance sheet.
(3) Reflects the issuance of 1,033,500 shares of Discovery Common Stock to the
ATI Common Stockholders and the assumption of options to purchase 618,345
shares of Discovery Common Stock pursuant to the Merger and Discovery
Series C Preferred Stock to Johnson & Johnson Development Corporation ("J
& J") in exchange for ATI Series B Preferred Stock.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
PRICE RANGE OF DISCOVERY COMMON STOCK
The Discovery Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "DSCO." In addition, the Company's units (consisting of Discovery Common
Stock, Class A Warrants and Class B Warrants), Class A Warrants and Class B
Warrants are approved for listing on the Nasdaq SmallCap Market. As of May 1,
1998, the number of stockholders of record of the Discovery Common Stock was
approximately 105, and the number of beneficial owners of shares of the
Discovery Common Stock held in street name was approximately 465. As of May 1,
1998, there were approximately 3,176,000 shares of Discovery Common Stock
outstanding.
The following table sets forth the quarterly price ranges of the Discovery
Common Stock for the periods indicated, as reported by Nasdaq. The following
price ranges are adjusted for the Reverse Split.
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
First Quarter 1996 ................................. $ 10.88 $ 15.75
Second Quarter 1996 ................................ $ 12.00 $ 15.38
Third Quarter 1996 ................................. $ 7.50 $ 14.25
Fourth Quarter 1996 ................................ $ 6.00 $ 9.38
First Quarter 1997 ................................. $ 6.38 $ 9.75
Second Quarter 1997 ................................ $ 3.75 $ 6.00
Third Quarter 1997 ................................. $ 3.56. $ 6.00
Fourth Quarter 1997 ................................ $ 3.75. $ 10.31
First Quarter 1998 ................................. $ 3.87 $ 9.00
Second Quarter 1998 (through April 30) ............. $ 4.00 $ 5.00
</TABLE>
The Company has not paid dividends on the Discovery Common Stock. It is
anticipated that the Company will not pay dividends on the Discovery Common
Stock in the foreseeable future.
On February 4, 1998, the day prior to the announcement of the execution of the
letter of intent regarding the Merger, the Discovery Common Stock traded at a
high of $4.94 per share and a low of $4.81 per share.
- --------------------------------------------------------------------------------
7
<PAGE>
THE ANNUAL MEETING
Purpose of the Annual Meeting
At the 1998 Annual Meeting, Discovery stockholders will be asked to consider and
act upon a proposal to approve the Merger of Acquisition Sub with and into ATI
pursuant to the Merger Agreement. As a result of the Merger, (i) the outstanding
shares of ATI Common Stock will be converted into approximately 1,033,500 shares
of Discovery Common Stock, (ii) the outstanding shares of common stock of
Acquisition Sub will be converted into shares of ATI Common Stock, (iii) the
2,039 outstanding shares of ATI Series B Preferred Stock will be converted into
2,039 shares of Discovery Series C Preferred Stock and (iv) the outstanding
options to purchase shares of ATI Common Stock will be assumed by Discovery and
will become exercisable for the purchase of 618,345 shares of Discovery Common
Stock. The shares of Discovery Common Stock to be issued to ATI stockholders in
connection with the Merger, together with the shares of Discovery Common Stock
that will be issuable upon the exercise of options assumed by Discovery in the
Merger, are expected to represent approximately 16.5% of the Discovery Common
Stock on a fully-diluted basis immediately following the merger (exclusive of
Discovery's Class A and Class B Warrants).
Discovery stockholders will also be asked to consider and vote upon the election
of ten directors to the Board of Directors of Discovery and a proposal to
approve the 1998 Discovery Laboratories, Inc. Stock Incentive Plan (the "1998
Stock Incentive Plan"). It is a condition to the Merger that the persons
contemplated to be elected to the Board of Directors at the 1998 Annual Meeting
by the Merger Agreement (the "Post-Merger Board") be so elected and that the
1998 Stock Incentive Plan be approved by the Discovery stockholders. Discovery
stockholders will be asked to consider and vote upon the alternative election of
ten directors to the Board of Directors of Discovery (the "Alternative Board")
to serve in the event the Merger is not consummated.
Discovery expects that a representative of Richard A. Eisner & Company, LLP
("RAE"), the Company's independent auditors, will attend the 1998 Annual
Meeting. Such representative will have the opportunity to make a statement, if
he or she desires, and will be available to respond to appropriate questions
from stockholders.
THE DISCOVERY BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE MERGER
AGREEMENT; THE ELECTION OF EACH MEMBER OF THE POST-MERGER BOARD; THE APPROVAL OF
THE 1998 STOCK INCENTIVE PLAN; AND THE ALTERNATIVE ELECTION OF EACH MEMBER OF
THE ALTERNATIVE BOARD.
Voting Rights
Holders of record of Discovery Common Stock and Series B Convertible Preferred
Stock, stated value $10.00 per share, of Discovery (the "Discovery Series B
Preferred Stock") as of the close of business on May 4, 1998, the record date
fixed by the Board of Directors of the Company for the determination of
stockholders entitled to notice of and to vote at the 1998 Annual Meeting
8
<PAGE>
(the "Record Date"), will be entitled to notice of and to vote at the 1998
Annual Meeting and at any adjournments thereof. As of the Record Date, there
were 3,175,955 shares of Discovery Common Stock and 2,200,256 shares of
Discovery Series B Preferred Stock (on an as converted basis entitled to cast
votes equivalent to 3,424,980 shares of Discovery Common Stock) outstanding. The
holders of Discovery Common Stock and Discovery Series B Preferred Stock may
vote on all matters presented at the 1998 Annual Meeting and will vote together
as a class. Each outstanding share of Discovery Common Stock entitles the holder
to one vote. Each outstanding share of Discovery Series B Preferred Stock
entitles the holder to the number of votes equal to the number of shares of
Discovery Common Stock issuable upon conversion of the Discovery Series B
Preferred Stock as of the Record Date.
The presence, in person or by proxy, of the holders of at least a majority of
the outstanding Discovery Common Stock and Discovery Series B Preferred Stock
(on an as converted basis) entitled to vote is necessary to constitute a quorum
for the taking of any action at the 1998 Annual Meeting. Abstentions with
respect to the approval of the Merger and of any other proposals will be counted
for the purpose of determining whether a quorum is present at the 1998 Annual
Meeting and as votes cast, and will have the effect of a no vote. Broker
non-votes with respect to all proposals will not be counted in determining the
presence of a quorum and will not be considered as votes cast, and thus will
have no effect on the results of any such vote. A broker non-vote occurs when a
nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power with
respect to that item and has not received instructions from the beneficial
owner.
The affirmative vote of a majority of the Discovery Common Stock and Discovery
Series B Preferred Stock on an as converted basis (collectively, on such basis,
the "Voting Stock"), voting together as a class, is required to approve the
Merger. Discovery directors will be elected by a plurality of the votes cast by
holders of Voting Stock represented in person or by proxy at the 1998 Annual
Meeting. The affirmative vote of a majority of the Voting Stock present in
person or by proxy is required to approve the 1998 Stock Incentive Plan. It is
not expected that any matters other than those set forth above will be brought
before the 1998 Annual Meeting. However, if other matters are properly
presented, the persons named in such proxy will have authority to vote in
accordance with their judgment on any such matters, including without
limitation, a proposal to adjourn the 1998 Annual Meeting. If a proxy is
returned which specifies a vote against the Merger, such discretionary authority
will not be used to adjourn the 1998 Annual Meeting in order to solicit
additional votes in favor of the Merger.
Solicitation of Proxies
The expense of the proxy solicitation will be borne by Discovery. In addition to
solicitation by mail, proxies may be solicited in person or by telephone or
telecopy by officers or other regular employees of Discovery, without additional
compensation. The Company is required to pay the reasonable expenses incurred by
record holders of Discovery Common Stock and Discovery Series B Preferred Stock,
who are brokers, dealers, banks or voting trustees, or other nominees, for
mailing proxy material and annual stockholder reports to any beneficial owners
of Discovery Common Stock and Discovery Series B Preferred Stock they hold of
record, upon request of such record holders.
9
<PAGE>
DESCRIPTION OF THE MERGER
The following discussions summarize all material terms of the proposed Merger
and related transactions but is not a complete statement of all provisions of
the Merger Agreement and related agreements. Detailed terms of and conditions to
the Merger and certain related transactions are contained in the Merger
Agreement, a conformed copy of which is attached to this Proxy Statement as
Annex A. Statements made in this Proxy Statement with respect to the terms of
the Merger and such related transactions are qualified in their entirety by
reference to the more detailed information set forth in the Merger Agreement.
General
At the Effective Time, Acquisition Sub will be merged with and into ATI, with
ATI surviving as a wholly-owned subsidiary of Discovery. As a result of the
Merger, the separate corporate existence of Acquisition Sub will cease and ATI
will succeed to all the rights and be responsible for all the obligations of
Acquisition Sub in accordance with the DGCL. Subject to the terms and conditions
of the Merger Agreement, each share of ATI Common Stock outstanding immediately
prior to the Effective Time will be converted into 3.90 shares of Discovery
Common Stock. Cash will be paid in lieu of any fractional share of Discovery
Common Stock.
The Merger will become effective upon the filing of the Certificate of Merger by
the Secretary of State of the State of Delaware unless the Certificate of Merger
provides for a later date of effectiveness (not to exceed 90 days after the date
that the Certificate of Merger is so filed). The filing of the Certificate of
Merger will occur as soon as practicable following the satisfaction or waiver of
the conditions set forth in the Merger Agreement.
Background to the Merger
The Company has been engaged in pharmaceutical research and development
activities since its inception. Consideration of the long-term financing
objectives of the Company have led the Board of Directors of Discovery and the
Board of Directors of ATI to believe that it is in the best interests of the
respective stockholders of Discovery and ATI to consummate the Merger on the
terms described herein.
On June 10, 1997, Dr. Capetola, the President and Chief Executive Officer of
ATI, visited New York for a planning and strategy meeting with Messrs. Kanzer,
Kuo and Myrianthopoulos, the Chairman of the Board, the President and the Chief
Financial Officer of Discovery, respectively. During the meeting Mr. Kanzer
suggested the possibility of ATI merging with Discovery, noting that such a
transaction would reduce overhead, consolidate operations and resolve the chief
executive officer succession issue at Discovery.
On June 13, 1997, Discovery presented ATI with a merger proposal.
At a regularly scheduled meeting on June 16, 1997, the Board of Directors of ATI
were presented with Discovery's merger proposal. To evaluate the proposal, the
Board of Directors of
10
<PAGE>
ATI created a merger evaluation committee comprised of the independent directors
of ATI, Messrs. Packer, Rosenthale and Power (the "ATI Independent Committee").
After discussion among themselves and Dr. Capetola and after receiving advice
from legal counsel of ATI on July 2, 1997 the ATI Independent Committee sent a
letter to Dr. Capetola suggesting that the Discovery merger proposal was not in
the best interests of the stockholders of ATI because it would not adequately
recognize the equity interests of ATI stockholders and noting the Independent
Committee's concern that the ATI Management would be diverted from its focus on
ATI products under development.
On July 9, 1997, Dr. Capetola sent a letter to Dr. Kuo reporting the findings of
the ATI Merger Evaluation Committee.
On August 7, 1997, Discovery sent Dr. Capetola a revised merger proposal letter.
On August 28, 1997 Dr. Capetola sent Dr. Kuo a counterproposal by ATI regarding
the proposed merger transaction.
On September 3, 1997, Discovery sent ATI a further counterproposal regarding the
proposed merger transaction. Over the following days, numerous discussions
ensued regarding the merger proposal and it was ultimately determined that
merger discussions would be terminated.
On or about December 13, 1997, merger discussions were reopened between Dr.
Capetola and Mr. Kanzer.
On December 16, 1997, Dr. Capetola sent Mr. Kanzer a proposed post-merger
capitalization structure for Discovery.
On December 17, 1997, a meeting was held in New York among Dr. Capetola, Mr.
Kanzer, Mr. Myrianthopoulos and Dr. Lindsay Rosenwald, the President of
Paramount Capital Asset Management, Inc. ("PCAM") at which the terms of the
proposed merger were discussed and further revised.
Over the next several weeks a letter of intent with respect to the proposed
merger was negotiated by Dr. Capetola and Messrs. Kanzer, Kuo and
Myrianthopoulos with the assistance of legal counsel to each company. On January
30, 1998, the merger letter of intent was approved by the Board of Directors of
ATI.
On February 4, 1998, the Board of Directors of Discovery ratified the Merger
Letter of Intent and the Merger Letter of Intent was executed by Discovery and
ATI.
On March 5, 1998, Discovery and ATI executed the definitive merger agreement
relating to the Merger and the Management Agreement.
On March 20, 1998 Vaughn Shalson resigned from the Board of Directors of
Discovery. In a letter to the Company Mr. Shalson stated that he was resigning
from the Board of Directors of
11
<PAGE>
Discovery as a result of his opposition to the compensation terms contained in
the Merger Agreement with respect to the ATI Management Members. Mr. Shalson had
not been nominated to serve on the post-Merger Board of Directors of Discovery.
Amendment No. 1 to the Agreement and Plan of Merger was entered into by the
parties thereto as of May 1, 1998.
Management Agreement
Concurrently with the execution of the Merger Agreement on March 5, 1998,
Discovery and ATI entered into the Management Agreement, pursuant to which the
ATI Management Members are currently managing both Discovery and ATI pending the
closing of the Merger. In the event the Merger is not consummated on or prior to
July 15, 1998 due to any breach by Discovery or its stockholders of their
obligations under the Merger Agreement, Discovery shall pay to ATI on the Date
of Termination 50% of the salary expense attributable to the ATI Management
Members from the date of execution of the Merger Agreement through the Date of
Termination. Pursuant to the Management Agreement, the ATI Management Members
have been granted options to purchase, in the aggregate, 126,500 shares of
Discovery Common Stock. Such of the foregoing options as have been allocated to
Dr. Capetola shall be fully vested upon the closing of the Merger and the
remaining options shall vest in three equal installments on the first, second
and third anniversaries of the Merger, provided that in the event the Merger is
not consummated on or prior to July 15, 1998 due to the breach by Discovery or
its stockholders of any of their obligations under the Merger Agreement, all of
the options granted pursuant to the Management Agreement shall be immediately
vested in full.
Interests of Certain Persons in the Merger
In considering the recommendations of the Discovery Board with respect to the
Merger, stockholders of Discovery should be aware that certain officers and
directors of Discovery and ATI have interests in the Merger in addition to those
of stockholders generally, as described below. The Discovery Board was aware of
these interests and considered them in their deliberations concerning the
Merger.
Should the Merger be approved by the stockholders of Discovery and ATI, the ATI
Management Members will assume positions with Discovery corresponding to the
positions currently held by them at ATI. Each ATI Management Member is currently
serving as an acting officer of Discovery pursuant to the Management Agreement.
Pursuant to the Management Agreement, each ATI Management Member is entitled to
be indemnified by Discovery in connection with his or her service as an acting
officer of Discovery to the same extent as Discovery's current officers and
directors. Similarly, in the event the Merger is consummated, the ATI Management
Members will be entitled to such indemnification as officers (and, in the case
of Dr. Capetola, a director) of Discovery.
At the Effective Time, each ATI Management Member, including Dr. Capetola, who
is a member of the ATI Board, will enter into an employment contract with
Discovery providing for cash compensation, a substantial award of options to
purchase Discovery Common Stock,
12
<PAGE>
options for the purchase of additional shares of Discovery Common Stock
contingent upon the achievement by Discovery of certain corporate milestones and
other incentive-based compensation arrangements. See "Terms of the Merger
- --Employment Agreements".
Steve H. Kanzer, C.P.A. Esq., James S. Kuo, M.D., Max Link, Ph.D. and Mark C.
Rogers, M.D., who are directors of Discovery, also are directors of ATI. Such
individuals did not participate in the vote of the Boards of Directors of
Discovery and ATI approving the Merger.
Except as noted above, no officer or director of Discovery or ATI has any
interest in the Merger that is in addition to his interest as a stockholder of
Discovery or ATI.
Discovery's Reasons For The Merger
The Discovery Board believes that the Merger is in the best interests of
Discovery and its stockholders. The Discovery Board believes that the Merger
represents an opportunity to simplify the corporate and financial accounting
structure of the Company and that Discovery's acquisition of the significant
minority interest in ATI currently held by ATI's other stockholders is likely to
result in increased opportunities for Discovery to obtain third party financing.
Discovery also believes that the Merger is likely to result in greater
recognition of the value of Discovery's indirect interest in Surfaxin(TM), which
is the focus of ATI's development activities, and that such recognition will
enhance the value of Discovery in the long run. Discovery also believes that the
Merger will bring opportunities for cost savings (most immediately by
eliminating the need for separate management and office facilities for Discovery
and ATI), economies of scale and other synergies, resulting in improved cash
flow potential for the long-term growth of the Company and of shareholder value.
For the foregoing reasons, the Discovery Board believes that the terms and
conditions of the Merger Agreement are in the best interests of Discovery and
its shareholders. The following are the material factors considered by the
Discovery Board in reaching its conclusions, certain of which factors contained
both positive and negative elements:
(i) the opportunity to resolve the issue of chief executive officer
succession as well as to add depth to the management team responsible for
Discovery's product portfolio;
(ii) the Discovery Board's belief that the Merger will improve Discovery's
opportunities to obtain equity and debt financing that will be necessary
to pursue the development of the products and technologies to which
Discovery has obtained development rights as well as any additional
products and technologies acquired or licensed by Discovery in the future,
and the costs of capital likely to be associated with such financing;
(iii) the synergies, cost reductions and operating efficiencies that may
become available to the combined enterprise as a result of the Merger, as
well as the management challenges associated with successfully integrating
the businesses of Discovery and ATI;
13
<PAGE>
(iv) the judgment, advice and analyses of its management with respect to
the strategic, financial and operational benefits of the Merger, based in
part on the business, financial, and legal due diligence investigations
performed with respect to ATI;
(v) the market value of Discovery, including the perception of Discovery's
management that such market value does not adequately reflect the value of
Surfaxin(TM) and Discovery's indirect interest therein;
(vi) the advice of counsel that the Merger should be treated as a tax-free
reorganization; (vii) the corporate governance aspects of the Merger,
including that fact that those persons currently serving as Discovery
directors would constitute a majority of the Board of the Company
following the Merger;
(viii) the number of shares of Discovery Common Stock and Discovery Series
C Preferred Stock to be issued to shareholders of ATI in the Merger, the
percentage ownership of the post-Merger Company represented thereby and
the dilutive effect of such issuances; and
(ix) the possibility that the Merger might not be consummated, and the
effects of the public announcement of the Merger on Discovery's ability to
attract and retain key management and technical personnel and the progress
of Discovery's development projects.
The foregoing discussion of the information and factors considered and given
weight by the Discovery Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the Discovery Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination. In addition, individual members of the Discovery Board may
have given different weights to different factors.
As outlined above, the Board of Directors of Discovery took into account a
variety of financial and nonfinancial considerations in reaching its decision to
approve the Merger. Discovery's Board has not obtained a fairness opinion or any
expert opinion with regard to the fairness of the Exchange Ratio, from a
financial point of view, to Discovery stockholders. The Board of Directors has
reviewed and considered, among other things, the financial position, cash
position, cash burn rate and projected operating budget for ATI, as well as the
non-financial considerations discussed above, in reaching its determination that
the Merger is in the best interests of Discovery.
At its February 4, 1998 meeting, the Discovery Board approved the Merger, with
four directors, Messrs. Kanzer, Kuo, Link and Rogers (all of whom also serve on
the Board of Directors of ATI), abstaining from voting, four directors voting in
favor of the Merger, one director voting against the Merger and one director
being absent from the meeting.
DISCOVERY'S BOARD RECOMMENDS THAT THE DISCOVERY STOCKHOLDERS VOTE FOR THE
PROPOSED MERGER.
14
<PAGE>
ATI's Reasons For The Merger
The ATI Board believes that the terms and conditions of the Merger Agreement are
in the best interests of ATI and its shareholders. The following are the
material factors considered by the ATI Board in reaching its conclusions,
certain of which factors contained both positive and negative elements:
(i) the ATI Board's belief that the Merger will improve the combined
companies' opportunities to obtain equity and debt financing that will be
necessary to pursue the development of ATI's products and technologies, as
well as the products and technologies acquired or licensed by Discovery
now or in the future, and the costs of capital likely to be associated
with such financing;
(ii) the fact that ATI's management will manage the combined companies and
the synergies and operating efficiencies that may become available to the
combined enterprise as a result of the Merger;
(iii) the advice of counsel that the Merger should be treated as a
tax-free reorganization;
(iv) the number of shares of Discovery Common Stock and Discovery Series C
Preferred Stock to be issued to shareholders of ATI in the Merger, the ATI
stock options to be assumed and the Discovery options to be granted to ATI
employees in the Merger and the percentage ownership of the post-Merger
Company represented by such Discovery Common Stock and options; and
(v) The possibility that the Merger might not be consummated, and the
effects of the announcement of the Merger on ATI's ability to retain key
management and technical personnel.
The foregoing discussion of the information and factors considered and given
weight by the ATI Board is not intended to be exhaustive. In view of the variety
of factors considered in connection with its evaluation of the Merger, the ATI
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the ATI Board may have given
different weights to different factors.
As outlined above, the Board of Directors of ATI took into account a variety of
financial and nonfinancial considerations in reaching its decision to approve
the Merger. ATI's Board has not obtained a fairness opinion or any expert
opinion with regard to the fairness of the Exchange Ratio, from a financial
point of view, to ATI stockholders.
At its January 30, 1998 meeting, the ATI Board approved the Merger, with four
directors, Messrs. Kanzer, Kuo, Link and Rogers (all of whom also serve on the
Board of Directors of Discovery), abstaining from voting and all remaining
directors voting in favor thereof.
TERMS OF THE MERGER
15
<PAGE>
The detailed terms of, and conditions to, the Merger are contained in the Merger
Agreement (including the Exhibits thereto), a copy of which is attached to this
Proxy Statement as Annex A and is incorporated herein by reference. The
statements made in this Proxy Statement with respect to the terms of the Merger
and related transactions are qualified in their entirety by reference to the
Merger Agreement.
Effective Time of the Merger
The Merger Agreement provides for the merger of Acquisition Sub with and into
ATI, with ATI surviving as a wholly-owned subsidiary of Discovery. As a result
of the Merger, the separate corporate existence of Acquisition Sub will cease to
exist and all of its assets and liabilities will be assumed by ATI.
The Merger will be effective when the Certificate of Merger is filed with the
Secretary of State of the State of Delaware in accordance with the DGCL, or such
other time that is mutually agreed upon by the parties to the Merger. It is
anticipated that, if the Merger is approved at the 1998 Annual Meeting and
pursuant to the written consent to be solicited by ATI from its stockholders and
all other conditions to the Merger have been fulfilled or waived, the
Certificate of Merger will be filed on or about June 16, 1998.
Manner and Basis of Converting Shares
As of the Effective Time, each issued and outstanding share of ATI Common Stock
(other than shares, if any, as to which appraisal rights have been exercised
pursuant to the DGCL) will be converted into 3.90 shares of Discovery Common
Stock and each issued and outstanding share of ATI Series B Preferred Stock will
be converted into one share of Discovery Series C Preferred Stock. The issued
and outstanding shares of Series A Convertible Preferred Stock, par value $0.001
per share, of ATI, all of which are held by Discovery, will be cancelled without
any further consideration therefor. Shares of the Common Stock of Acquisition
Sub held by Discovery immediately prior to the consummation of the Merger will
be converted into newly issued shares of ATI Common Stock.
No fractional shares of Discovery Common Stock will be issued in connection with
the Merger. In lieu of fractional shares, each holder of ATI Common Stock who
would otherwise be entitled to a fractional share will receive cash equal to
such fraction multiplied by the fair market value of the Discovery Common Stock
determined based on the average of the last reported closing bid prices of the
Discovery Common Stock over the 20 trading days preceding the closing of the
Merger.
The financial terms of the Merger, including the Exchange Ratio, were negotiated
at arm's length by representatives of Discovery and ATI.
Exchange of Certificates
As soon as practicable after the Effective Time, Discovery will mail or
otherwise deliver to each ATI stockholder of record at the Effective Time a
letter of transmittal with instructions to be
16
<PAGE>
used by such stockholder in surrendering certificates that, prior to the Merger,
represented shares of ATI Common Stock (the "ATI Stock Certificates"). Until an
ATI Stock Certificate has been surrendered to Discovery, each such certificate
shall be deemed at any time after the Effective Time to represent the right to
receive, upon such surrender, certificates for such number of shares of
Discovery Common Stock as the stockholder is entitled to receive under the
Merger Agreement. After the Effective Time, there will be no further
registrations of transfers of ATI Common Stock.
The outstanding shares of ATI Series B Preferred Stock will be exchanged for
shares of Series C Preferred Stock, par value $0.001 per share, of Discovery
(the "Discovery Series C Preferred Stock") pursuant to an exchange agreement to
be entered into by Discovery and the holder of the ATI Series B Preferred Stock.
Treatment of Options
Each option to purchase ATI Common Stock will become exercisable for a number of
shares of Discovery Common Stock equal to 3.90 times the number of shares of ATI
Common Stock for which such option was previously exercisable at a per share
exercise price equal to the original per share exercise price divided by the
Exchange Ratio and will otherwise have the same exercise period and other terms
and conditions. Upon consummation of the Merger, outstanding options exercisable
for ATI Common Stock that are assumed by Discovery will become exercisable, in
the aggregate, for approximately 618,345 shares of Discovery Common Stock. In
addition, upon consummation of the Merger, options to purchase an additional
338,500 shares of Discovery Common Stock will be granted pursuant to employment
agreements with Discovery's new management team and options for the purchase of
an additional 335,000 shares of Discovery Common Stock upon the achievement of
corporate milestones will also be granted to such persons. See "Terms of the
Merger--Employment Agreements." Following the Merger, taking into account the
options granted to the ATI Management Members pursuant to the Management
Agreement (which are exercisable for 126,500 shares of Discovery Common Stock in
the aggregate), the former holders of options to purchase ATI Common Stock,
including the members of Discovery's new management team, as a group will hold
options exercisable, subject to vesting, for the purchase of approximately
1,418,345 shares of Discovery Common Stock. Such shares of Discovery Common
Stock will represent approximately 15.8% of the Discovery Common Stock (and,
together with the Discovery Common Stock to be issued to ATI stockholders in the
Merger, approximately 24.6% of the Discovery Common Stock) on a fully-diluted
basis (exclusive of Discovery's Class A and Class B Warrants) immediately
following the Merger.
Conduct of Business Prior to the Merger
Under the Merger Agreement, Discovery, Acquisition Sub and ATI have each agreed
that, until the Effective Time, it will carry on its business in the ordinary
and usual course, it will use reasonable commercial efforts to preserve its
business organization intact and maintain its existing business relationships
and that it will not, without the prior written consent of the other, enter into
certain specified transactions outside the ordinary course of business (except
as contemplated by the Merger Agreement). Specifically, neither Discovery,
Acquisition Sub nor
17
<PAGE>
ATI shall, without the prior written consent of the other: (a) directly or
indirectly amend its or any of its subsidiaries' certificate of incorporation or
bylaws or similar organizational document; (b) declare, set aside or pay any
dividend or other distribution payable in cash, stock or property with respect
to such party's capital stock or that of its subsidiaries, or redeem, purchase
or otherwise acquire directly or indirectly their respective capital stock (or
options, warrants, calls, commitments or rights of any kind to acquire any
shares of capital stock), or that of their subsidiaries'; (c) issue, sell,
pledge, dispose of or encumber any additional shares of, or securities
convertible into or exchangeable for, or options, warrants, calls, commitments
or rights of any kind to acquire, capital stock of any class of such party or
its subsidiaries, other than as provided for in the Merger Agreement; (d) effect
any stock split, combination, or reclassification with respect to outstanding
capital stock or amend or modify the terms of any rights, warrants, or options
with respect to its or its subsidiary's capital stock; (e) acquire or agree to
acquire, or dispose of or agree to dispose of, any material assets, either by
purchase, merger, consolidation, sale of shares in any of its subsidiaries or
otherwise; (f) transfer, lease, license, sell, mortgage pledge or encumber any
asset or allow its subsidiaries to do same; (g) grant any increase in
compensation payable to any of its officers, directors or key employees; (h)
adopt any new, or amend or otherwise increase or accelerate the payment or
vesting of the amounts payable or to become payable under any existing bonus,
incentive compensation, deferred compensation, severance, profit sharing, stock
option, stock purchase, insurance, pension, retirement or other employee benefit
plan, agreement or arrangement, except as expressly contemplated by the Merger
Agreement; (i) enter into, modify or amend any employment or severance agreement
with or, except as required by applicable law, grant any severance or
termination pay to any officer, director or employee of ATI; (j) enter into any
collective bargaining agreement; (k) modify, amend or terminate any of its
contracts or waive, release or assign any rights or claims; (l) incur or assume
any indebtedness for money borrowed or modify any such indebtedness or other
liability; (m) assume, guarantee, endorse or otherwise become liable or
responsible for the obligations of, or make any loans, advances or capital
contributions to, any other person, other than immaterial amounts; (n) change
any method of reporting income or deductions for federal income tax purposes
from those employed in the preparation of the party's federal income tax returns
for the year ended December 31, 1997, or make any tax election (unless required
by law) or settle or compromise any income tax liability; (o) enter into any
material commitment or transaction other than as contemplated by the Merger
Agreement; (p) change accounting principles or methods except as may be required
by a change in generally accepted accounting principles; (q) make or agree to
make any new capital expenditures in excess of $10,000 in the aggregate; (r)
agree, commit, contract or arrange to do any of the things described in the
preceding clauses (a) to (q), or authorize, recommend, propose or announce an
intention to do any of the foregoing.
Discovery and ATI have each agreed, until the termination of the Merger
Agreement, not to directly or indirectly encourage, solicit, initiate,
facilitate or conduct discussions or negotiations with, provide any information
to, or enter into any agreement with, any corporation, partnership, person or
other entity or group concerning or expressing an interest in or proposing any
merger, consolidation, reorganization, share exchange, business combination,
liquidation, dissolution, sale of all or significant assets or securities or
other similar transaction involving Discovery or ATI, except to the extent
required by their fiduciary duties as determined by the Boards of Directors of
Discovery or ATI, as the case may be, after discussion with their counsel.
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<PAGE>
Discovery and ATI have each also agreed to advise the other of any event that
would render any representation or warranty contained in the Merger Agreement
untrue or inaccurate in any material respect and of any material adverse change
in such company's financial position, results of operations, assets, liabilities
or business. Each of Discovery and ATI has further agreed to advise the other of
any notice or other communication from any governmental entity in connection
with the Merger and any material action, suit, proceeding or investigation
initiated by or against it, or known by such company to be threatened against it
and to use its best efforts to obtain all authorizations, approvals and consents
necessary for the consummation of the Merger.
In addition, Discovery and ATI have agreed pursuant to the Merger Agreement to
cooperate with one another with a view toward consolidating their operations at
ATI's offices, located in Doylestown, Pa., and eliminating any duplicative
staffing and overhead.
Conditions to the Merger
In addition to the approval by the stockholders of Discovery and ATI of the
Merger, the obligations of Discovery and ATI to consummate the Merger are
subject to the satisfaction of a number of conditions, including: (a) the
absence of any statute, rule, order, decree or regulation enacted or promulgated
by any governmental entity prohibiting the consummation of the Merger; (b) there
shall be no order or injunction of a court or other governmental authority
precluding, restraining, enjoining or prohibiting the consummation of the
Merger; (c) the representations and warranties made by each of Discovery and ATI
in the Merger Agreement being true in all material respects as of the Effective
Time; (d) the performance in all material respects of the covenants each of
Discovery and ATI contained in the Merger Agreement; (e) the execution of
certain lockup agreements by ATI stockholders and option holders; (f) the
receipt by each of Discovery and ATI of a certificate certifying to the
fulfillment of certain conditions to the Merger; (g) the Chief Executive Officer
of ATI, Robert J. Capetola, Ph.D., and other key ATI executives having entered
into employment agreements in the forms provided for in the Merger Agreement;
(h) appraisal rights not having been exercised by holders of more than 5% of the
ATI Common Stock; (i) all action having been taken to provide for the Discovery
Board structure specified herein; (j) the granting of stock options to certain
of ATI's employees as provided for in the Merger Agreement; (k) there shall not
be threatened, or instituted and continuing, any action, suit or proceeding by
any governmental entity or any other person directly or indirectly relating to
the Merger which could have a material adverse effect on the business,
operations, properties (including intangible properties), condition (financial
or otherwise) assets or liabilities of either party; (l) approval by the
stockholders of Discovery of a stock option plan in the form provided for in the
Merger Agreement; (m) the holder of the ATI Series B Preferred Stock having
entered into an agreement in form and substance satisfactory to Discovery and
ATI (the "Exchange Agreement") providing for the exchange of such securities for
shares of Discovery; (n) each holder of ATI Common Stock having executed and
delivered to Discovery an agreement confirming certain matters relating to the
issuance of Discovery securities to such holders; (o) Discovery having entered
into an agreement with certain holders of ATI Common Stock providing for
registration rights in favor of such holders comparable to the registration
rights presently afforded them under a registration rights agreement with ATI;
(p) ATI having entered into a letter agreement terminating a certain co-sale
agreement entered into previously among ATI and certain stockholders; and (q)
the receipt by each of Discovery and
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<PAGE>
ATI of an opinion from the other party's counsel as to certain matters as
specified in the Merger Agreement and confirming that the Merger shall
constitute a tax-tree reorganization under Section 368(a) of the Internal
Revenue Code.
At any time at or prior to the Effective Time, to the extent legally allowed,
either of Discovery or ATI, without approval of the stockholders of such
company, may waive compliance with any of the agreements or conditions contained
in the Merger Agreement for the benefit of such company. No agreement has been
reached between Discovery and ATI as to the prospective waiver of any provision
of the Merger Agreement. However, it is likely the parties would waive
conditions to the Merger of relatively minor significance, if such conditions
could not be practicably fulfilled, rather than terminate the Merger Agreement
and forego the expected benefits of the Merger.
Termination or Amendment of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective Time,
without regard to whether stockholder approval of the Merger has been obtained:
(a) by mutual written consent of the Boards of Directors of Discovery and ATI;
(b) by either Discovery or ATI if any of the conditions precedent to the
obligations of such party have not been fulfilled or such breach cannot be cured
pursuant to the terms contained in the Merger Agreement; (c) by either Discovery
or ATI if the Merger has not been consummated by July 15, 1998; or (d) by either
Discovery or ATI if any governmental entity shall have issued an order, decree
or ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting consummation of the Merger and such order, decree or
ruling or other action has become final and nonappealable, provided, however,
that such termination shall not be available to any party whose lack of
performance has caused such failure of the Merger to occur. See "Terms of the
Merger--Conditions to the Merger".
The Merger Agreement may be amended, modified or supplemented by written
agreement of the parties thereto whether before or after the approval of the
Merger by the stockholders of ATI and Discovery. However, no amendment,
modification or supplement may be made that would reduce the amount or alter the
form of the consideration to be received by stockholders of ATI in the Merger.
Accounting Treatment of the Merger
The Merger will be accounted for using the purchase method, whereby the purchase
price will be allocated based on the fair value of the assets acquired and
liabilities assumed.
Certain Federal Income Tax Consequences
The following discussion summarizes certain Federal income tax consequences of
the Merger to holders of ATI Common Stock. The discussion does not address all
aspects of Federal income taxation that may be relevant to particular ATI
stockholders, such as stockholders who are dealers in securities, foreign
persons, or stockholders who acquired their shares in connection with stock
option or stock purchase plans or other compensatory transactions, nor does the
20
<PAGE>
discussion address the tax consequences of transactions effected prior to or
after the Merger (whether or not in connection with the Merger), nor the effect
of any applicable foreign, state, local or other tax laws. This discussion
assumes that ATI stockholders hold their ATI Common Stock as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
The parties anticipate that the Merger will constitute a "reorganization" within
the meaning of Section 368(a) of the Code, with each of ATI and Discovery
qualifying as a party to the reorganization under Section 368(b) of the Code,
assuming the Merger does constitute a reorganization the following tax
consequences will result (subject to the limitations and qualifications referred
to herein):
1. No gain or loss will be recognized by holders of ATI Common Stock as a
result of the exchange of such shares solely for shares of Discovery
Common Stock pursuant to the Merger.
2. Gain or loss will be recognized on the receipt of cash paid to an ATI
stockholder in lieu of a fractional share of Discovery Common Stock. Any
cash received by a stockholder of ATI in lieu of a fractional share will
be treated as received in exchange for such fractional share and not as a
dividend, and any gain or loss recognized as a result of the receipt of
such cash will be capital gain or loss equal to the difference between the
cash received and the portion of the stockholder's basis allocable to the
ATI Common Stock for which such cash was received.
3. The aggregate tax basis of the shares of Discovery Common Stock
received by each stockholder of ATI will equal the aggregate tax basis of
such stockholder's shares of ATI Common Stock (reduced by any amount
allocable to a fractional share of ATI Common Stock for which cash is
received) exchanged in the Merger.
4. The holding period for the shares of Discovery Common Stock received by
each stockholder of ATI in the Merger will include the period during which
such stockholder held the shares of ATI Common Stock surrendered in
exchange therefor.
5. Neither Discovery nor ATI will recognize gain or loss as a result of
the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. Furthermore, neither Discovery nor ATI
has received an opinion from its legal counsel to the effect that, for Federal
income tax purposes, the Merger will qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
A successful IRS challenge to the "reorganization" status of the Merger would
result in an ATI stockholder recognizing gain or loss with respect to each share
of ATI Common Stock surrendered equal to the difference between such
stockholder's basis in such stock and the fair market value, as of the time of
the Merger, of the Discovery Common Stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the Discovery Common
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<PAGE>
Stock so received would equal such fair market value and his holding period for
such stock would begin the day after the Merger.
Management after the Merger
Directors
The Post-Merger Board will consist of Steve H. Kanzer, C.P.A., Esq., (who will
be the Chairman of the Board of the Company), Max Link, Ph.D., and Mark Rogers,
M.D., each of whom is presently a director of Discovery and ATI; Richard
Sperber, Herbert McDade and David Naveh, Ph.D., each of whom is presently a
director of Discovery, and Robert Capetola, Ph.D., Milton Packer, M.D., Marvin
Rosenthale, Ph.D., and Richard Power, each of whom is presently a director of
ATI. All such directors will serve until their successors have been duly elected
and qualified or otherwise as provided by law. It is a condition to the Merger
that such directors be elected at the 1998 Annual Meeting.
For a description of the principal qualifications of each member of the
Post-Merger Board, see "Election of Discovery Directors".
Officers
Upon consummation of the Merger, Robert Capetola, Ph.D., currently Chairman and
Chief Executive Officer of ATI, will be the Chief Executive Officer of the
Company. Upon consummation of the Merger, the following principal officers of
ATI will assume the following offices of the Company: Harry Brittain, Ph.D.,
Vice President of Pharmaceutical and Chemical Development; Laurence B. Katz,
Ph.D., Vice President of Project Management and Clinical Administration; Chris
Schaber, Vice President of Regulatory Affairs and Quality Control; Huei Tsai,
Ph.D., Vice President of Biometrics; Thomas E. Wiswell, M.D., Vice President of
Clinical Research; and Lisa Mastroianni, R.N., Director of Clinical Research.
Evan Myrianthopoulos, who is currently the Chief Operating Officer, Chief
Financial Officer and Secretary of Discovery, will become the Vice President of
Finance of Discovery following the Merger.
The principal qualifications of the proposed non-director officers of Discovery
are as follows:
Harry G. Brittain, Ph.D., has served as the Vice President for Pharmaceutical
and Chemical Development of ATI since November 1996. He is a graduate of Queens
College (B.S., 1970; M.S., 1972), and of the City University of New York (Ph.D.
in physical chemistry, 1975). He was a postdoctoral fellow at the University of
Virginia, and has held faculty positions at Ferrum College and Seton Hall
University. Prior to joining ATI, Dr. Brittain served as Director of
Pharmaceutical Development for the Pharmaceutical Products Division of Ohmeda,
Inc. Before that, he worked at Bristol-Myers Squibb, where he led a variety of
groups within the Analytical R&D department. His research interests include
studies of molecular optical activity and chirality, development of
pharmaceutical dosage forms, and the physical characterization of pharmaceutical
materials. He has authored approximately 195 research publications, and is a
member of the editorial boards of numerous journals.
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Laurence B. Katz, Ph.D., has served as Vice President of Project Management and
Clinical Administration since November 1996. Prior to joining the Company, Dr.
Katz was employed from April 1993 to November 1996 by Ohmeda Pharmaceutical
Products Division, a division of The BOC Group, as Senior Director of Project
Management and Clinical Administration. At Ohmeda, Dr. Katz was project team
leader for the inhaled nitric oxide project and was responsible for the
administration of all clinical trials within the company. Previously, Dr. Katz
was employed by Ortho Pharmaceutical Corporation and the R.W. Johnson
Pharmaceutical Research Institute, divisions of Johnson & Johnson, Inc. While
there he served as Senior Project Manager in the Project Planning & Management
department from January 1990 to April 1993, and as a Principal Scientist in the
Drug Discovery department from February 1983 to January 1990. Dr. Katz received
a B.S. degree in biology from the University of Pennsylvania, his M.S. and Ph.D.
degrees in pharmacology form the Philadelphia College of Pharmacy & Science, and
was a post-doctoral research fellow at the University of Wisconsin-Madison.
Lisa Mastroianni, R.N., has served as Director of Clinical Research since
January of 1997. Prior to joining the Company, Ms. Mastroianni was employed from
November of 1994 to November of 1996 by Ohmeda Pharmaceutical Products Division,
a division of The BOC Group as Senior Clinical Research Associate. At Ohmeda,
Ms. Mastroianni was responsible for the management and completion of the Phase
2/3 clinical study in acute respiratory distress syndrome, supervision of
internal personnel as well as management of a Contract Research Organization,
and assisting in the development and management of a Phase 1 clinical study in
congestive heart failure. Previously Ms. Mastroianni was employed by Sandoz
Pharmaceuticals from March 1992 to November 1994 in their cardiovascular
clinical research department and was responsible for monitoring Phase 3 lipid
studies and managing and monitoring Phase 1 CHF studies. Ms. Mastroianni has her
Bachelors degree in Nursing from Bloomfield College and has worked as a critical
care nurse in a number of hospitals in the United States from 1985 to 1992.
Christopher J. Schaber has served as Vice President of Regulatory Affairs and
Quality Assurance since November 1996. Prior to joining ATI, Mr. Schaber was
employed from October 1994 to November 1996 by Ohmeda Pharmaceutical Products
Division, a division of The BOC Group, as Director of Regulatory Affairs. At
Ohmeda, Mr. Schaber was directly responsible for all regulatory strategies
with the Food and Drug Administration and other Health Authority bodies.
From 1989 to 1994, Mr. Schaber held a variety of regulatory positions of
increasing importance with The Liposome Company, Inc. and Elkins-Sinn Inc., a
division of Wyeth-Ayerst Laboratories. Mr. Schaber received his B.A. from
Western Maryland College and his M.S. from Temple University. Mr. Schaber is
currently pursuing his Ph.D. in Pharmaceutical Sciences-Regulatory Affairs
with the Union Graduate School and is estimated to complete his doctoral
program in May 1998. In 1994, Mr. Schaber also received his Regulatory
Affairs Certification (RAC) from the Regulatory Affairs Professional Society.
Huei Tsai, Ph.D. has served as Vice President of Biometrics since February,
1997. Prior to joining ATI, Dr. Tsai was a statistical consultant after retiring
from the position of Director of Biometrics and Clinical Information at Ohmeda
Pharmaceutical Products Division, a division of The BOC Group. At Ohmeda, Dr.
Tsai was responsible for all statistical, computer operations, database and data
coordination. From 1994 to 1995, Dr. Tsai was a statistical consultant to a
variety of companies, including Janssen Pharmaceutical Company. For seventeen
years prior to
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that, Dr. Tsai held a variety of biostatistical positions at the Robert Wood
Johnson Pharmaceutical Research Institute and Ortho Pharmaceutical Corporation
(both wholly-owned subsidiaries of J&J), including Director of Biostatistics for
Clinical Pharmacology. Dr. Tsai received a B.A. degree in economics from Tunghai
University in 1962 and a Ph.D. in mathematical statistics from Oklahoma State
University in 1976.
Thomas E. Wiswell, M.D., has served as Vice President of Clinical Research of
ATI since April 1997. Since 1993, he has been a Professor of Pediatrics at
Jefferson Medical College at Thomas Jefferson University in Philadelphia,
Pennsylvania. From 1988 to 1993, he was an Associate Professor of Pediatrics at
the F. Edward Herbert School of Medicine in Bethesda, Maryland. He retired as a
Lieutenant Colonel from the U.S. Army on June 30, 1993 after twenty years on
active duty. Dr. Wiswell is a graduate of the United States Military Academy at
West Point and the University of Pennsylvania Medical School.
Evan Myrianthopoulos has served as Chief Financial Officer of Discovery since
December 1997 and as Chief Operating Officer, Secretary and a Director of
Discovery since the effective time of the 1997 Merger. From June 1996 until such
time he held such positions (other than Chief Financial Officer) with Old
Discovery. Prior to joining Old Discovery, he was a Technology Associate of
Paramount Capital Investments, L.L.C. from December 1995 until January 1997.
Before joining Paramount Capital Investments, LLC, Mr. Myrianthopoulos managed a
hedge fund for S + M Capital Management in Englewood Cliffs, New Jersey. The
fund specialized in syndicate and secondary stock issues and also engaged in
arbitrage of municipal and mortgage bonds. Prior to his employment with S + M
Capital Management, Mr. Myrianthopoulos was employed at the New York Branch of
National Australia Bank where he was Assistant Vice President of Foreign
Exchange trading. Mr. Myrianthopoulos has a B.S. in Economics from Emory
University.
Restrictions on Sale of Discovery Common Stock
The shares of Discovery Common Stock to be issued in the Merger are not being
registered under the Securities Act and may not be resold absent their
registration under the Securities Act or an exemption from registration. In
addition, it is a condition to the Merger that each ATI stockholder and
optionholder execute a written agreement not to sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale or pledge of or
otherwise dispose of any Discovery Common Stock prior to November 25, 1998.
Governmental and Regulatory Approvals
Discovery is not aware of any governmental or regulatory approvals required for
consummation of the Merger, other than compliance with applicable securities and
"blue sky" laws of various states and the filing and recording of the
Certificate of Merger required under the DGCL.
Merger Expenses
Whether or not the Merger is consummated, Discovery and ATI will be responsible
for their own costs and expenses incurred in connection with the Merger and the
transactions contemplated
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thereby, except that if the Merger is consummated, any such expenses which are
then unpaid will be the responsibility of the Company. In the event the Merger
is not consummated on or prior to July 15, 1998 due to a breach by Discovery or
its stockholders of their obligations under the Merger Agreement, Discovery
shall pay to ATI on the Date of Termination 50% of the salary expense
attributable to the ATI management team from the date of execution of the Merger
Agreement through the Date of Termination.
Appraisal Rights
Holders of shares of ATI Common Stock ("Appraisal Shares") who follow the
procedures set forth in Section 262 of the DGCL ("Section 262") will be entitled
to have their Appraisal Shares appraised by the Delaware Chancery court and to
receive payment in cash of the "fair value" of such Appraisal Shares, exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, as determined by such
court. Under Section 262, where a proposed merger is to be submitted for
approval by written consent of the stockholders (as will be the case with ATI),
the surviving or resulting corporation, not later than 10 days after the
effective date of the merger, must notify each of its stockholders who was such
on the record date for such meeting with respect to shares for which appraisal
rights are available, that appraisal rights are so available, and must include
in such notice a copy of Section 262. Within 120 days after the consummation of
the Merger, ATI or any stockholder who has complied with the statutory
requirements summarized above may file a petition in the Delaware Chancery Court
demanding a determination of the fair value of the Appraisal Shares.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Chancery Court will determine the stockholders entitled
to appraisal rights and will appraise the "fair value" of their Appraisal
Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value.
If any stockholder who properly demands appraisal of his Appraisal Shares under
Section 262 fails to perfect, or effectively withdraws or loses, his right to
appraisal as provided in the DGCL, the Appraisal Shares of such stockholder will
be converted into the right to receive the consideration receivable with respect
to such Appraisal Shares in accordance with the Merger Agreement. It is a
condition of the Merger Agreement that appraisal rights not be exercised or
purported to be exercised by holders of ATI Common Stock representing in excess
of 5% of the ATI Common Stock.
Employment Agreements
Upon consummation of the Merger, Robert Capetola, Ph.D., the Chairman and Chief
Executive Officer of ATI, will become the Chief Executive Officer of Discovery
and the other ATI Management Members will assume executive positions with
Discovery. It is a condition to the closing of the Merger that the ATI
Management Members enter into employment agreements with Discovery on terms
provided for in the Merger Agreement.
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Pursuant to the New Capetola Employment Agreement, Dr. Capetola shall be
retained as the President and Chief Executive Officer of Discovery for a term of
three years. Dr. Capetola shall receive a $100,000 bonus upon execution of the
New Capetola Employment Agreement and a $50,000 bonus upon the execution of each
partnering or similar arrangement involving Surfaxin(TM) having a value in
excess of $10 million to Discovery. Dr. Capetola's base compensation under the
New Capetola Employment Agreement shall be $236,250 per annum and shall increase
by a minimum of 5% per year at the beginning of each year of the employment
term. Dr. Capetola will be entitled to a minimum year end bonus equal to 20% of
his base compensation. Dr. Capetola shall be entitled to 18 months severance
(without set-off, subject to the receipt of a general release by Discovery with
respect to all employment-related matters) in the event of termination other
than for death, disability or cause. Such severance shall be payable in six
equal installments, the first payable on the date of receipt of the foregoing
release and the subsequent installments payable at three-month intervals
thereafter. Shares underlying or attributable to options held by Dr. Capetola
shall be subject to a one-year lock-up following any termination of Dr.
Capetola's employment by either (i) Discovery for cause or (ii) Dr. Capetola to
the extent such termination constitutes a breach of his employment agreement.
The remaining members of ATI's management team shall hold positions with
Discovery, commencing upon the effective date of the Merger, corresponding to
their present positions with ATI and on substantially their present terms,
including compensation terms. See "Executive Compensation--Employment
Agreements".
Upon consummation of the Merger, ATI Management Members will be issued options
exercisable at a price equal to the fair market value of Discovery Common Stock
at the Effective Time in the aggregate for 338,500 shares of Discovery Common
Stock pursuant to their employment agreements. Such options will vest over a
3-year period, with acceleration upon termination other than for death,
disability or cause, except that Dr. Capetola's options shall be vested
immediately.
The ATI Management Members shall be entitled to the following aggregate
milestone incentive payments (in each case in either cash or equity and
allocated at the discretion of Discovery's compensation committee following
receipt of a recommendation from Dr. Capetola) pursuant to their employment
agreements with Discovery: $150,000 upon the successful completion of Phase 2
studies of any portfolio compound; $500,000 upon the successful completion of
Phase 3 studies of any portfolio compound; and $1,000,000 upon the receipt of
marketing approval in the United States for any portfolio compound. Each of the
foregoing milestone payments shall be payable no more than once. In addition,
upon consummation of the Merger the ATI Management Members shall be entitled, in
the aggregate, to receive (i) options for the purchase of 175,000 shares of
Discovery Common Stock at such time as the market capitalization of Discovery
(based on the average closing price and amount of Discovery Common Stock
outstanding over a 30-trading-day period) exceeds $75 million and (ii) options
for the purchase of 160,000 shares of Discovery Common Stock upon consummation
of a corporate partnering transaction having a total value of at least $20
million. For purposes of determining the vesting of the options described in
clause (ii) of the preceding sentence, "value" shall mean the total payments,
including without limitation contingent payments prior to or at receipt of
marketing approval for the compound involved in the relevant agreement, to be
paid to Discovery from
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corporate partnering transactions or from any other transactions for the
development, clinical testing, regulatory approval, manufacturing and/or
marketing of a portfolio compound, including without limitation upfront fees,
milestone payments and research and development and other contractual
commitments.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements
give effect to the Merger of Acquisition Sub and ATI and the other transactions
contemplated by the Merger Agreement. The unaudited pro forma condensed
consolidated balance sheet gives effect to the Merger as if it occurred on
December 31, 1997. The unaudited pro forma condensed consolidated statements of
operations gives effect to the Merger as if it occurred on January 1, 1997.
The unaudited pro forma condensed consolidated financial statements are based on
the historical financial statements of Discovery and ATI. They give effect to
the Merger under the purchase method of accounting and apply the assumptions and
adjustments as discussed in the accompanying notes to the pro forma condensed
consolidated financial statements. The pro forma condensed consolidated
financial statements for the year ended December 31, 1997 have been partially
derived from the historical consolidated financial statements of Discovery for
the year then ended which included the financial statements of ATI.
The Merger will be accounted for using the purchase method of accounting. The
unaudited pro forma condensed financial statements have been prepared on the
basis of assumptions described in the notes thereto and include assumptions
relating to the allocation of the consideration paid for the minority interest
in the assets and liabilities of ATI based on preliminary estimates of their
fair value. The actual allocation of such consideration may differ from that
reflected in the unaudited pro forma condensed financial statements after final
valuation procedures are completed following the closing of the Merger. The
final allocations of the aggregate purchase price for the Merger are not
expected to differ materially from the preliminary allocations. In the opinion
of Discovery and ATI, all adjustments necessary to fairly present the unaudited
pro forma condensed financial statements have been made based on the proposed
terms and structure of the Merger.
The pro forma information is presented for illustrative purposed only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the Merger had been consummated on January 1, 1997, nor is it
necessarily indicative of future operating results or financial position.
The pro forma condensed consolidated financial statements should be read in
conjunction with the historical financial statements and the related notes
thereto of Discovery and ATI included herein and Management's Discussion and
Analysis of Financial Condition and Plan of Operations.
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UNAUDITED PROFORMA CONDENSED CONSOLIDATED
BALANCE SHEET
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Proforma
Proforma Reflecting
Historical Adjustments Merger
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,297 $ -- $ 6,297
Investments 4,957 -- 4,957
Prepaid expenses and other current assets 190 -- 190
-------- -------- --------
Total current assets 11,444 -- 11,444
Furniture and equipment, net of depreciation 181 -- 181
Security deposits and other assets 30 -- 30
-------- -------- --------
$ 11,655 $ -- $ 11,655
======== ======== ========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 565 $ 300 (2) $ 865
-------- -------- --------
Dividends payable on preferred stock 238 -- 238
-------- -------- --------
Minority interest 2,039 (2,039)(3) --
-------- -------- --------
Commitments, contingencies and other matters
STOCKHOLDERS' EQUITY
Series B convertible preferred stock $ 2 $ -- $ 2
Series C preferred stock 2,039 (3) 2,039
Common stock 3 1 (1) 4
Additional paid-in-capital 21,464 7,987 (1) 29,451
Deficit accumulated during the development stage (12,656) (8,288)(1),(2) (20,944)
-------- -------- --------
Total stockholder's equity 8,813 1,739 10,552
-------- -------- --------
& 11,655 $ 11,655
======== ========
</TABLE>
(1) Reflects the issuance of 1,033,500 shares of Discovery Common Stock to the
ATI Common Stockholders and the assumption of options to purchase 618,345
shares of Discovery Common Stock pursuant to the Merger and allocation of
the estimated purchase price of approximately $8,288,000 to the historical
balance sheet.
(2) Reflects the estimated costs incurred to complete the Merger.
(3) Reflects the issuance of Series C preferred stock to J&J in exchange for
ATI's Series B Preferred Stock.
28
<PAGE>
UNAUDITED PROFORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
Year ended December 31, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Proforma
Proforma Reflecting
Historical Adjustments Merger
----------- ----------- -----------
<S> <C> <C> <C>
Costs and Expenses:
Write-off of acquired research and development in-process $ 3,663 $ -- $ 3,663
Research and development 4,378 -- 4,378
General and administrative 1,836 1,836
----------- ----------- -----------
Loss from operations 9,877 -- 9,877
Other (income)/expenses:
Interest income (713) -- (713)
----------- ----------- -----------
Net loss $ 9,164 -- $ 9,164
=========== =========== ===========
Net loss per share - basic and diluted $ (3.42) $ (2.47)
=========== ===========
Weighted average number of common shares outstanding 2,678,803 3,712,303
=========== ===========
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL STATEMENTS
Note 1
The unaudited pro forma condensed consolidated balance sheet has been prepared
as if the Merger was completed as of December 31, 1997. The Merger will be
accounted for as a purchase of the minority interest in ATI by Discovery. The
total cost of the proposed Merger is estimated to be approximately $8,288,000,
including transaction costs incurred of approximately $300,000 which includes
financial advisory, legal, and accounting fees.
The purchase cost of ATI has been determined based on the estimated fair market
value of Discovery's stock. The estimated purchase price consists of the
following (in thousands):
Estimated value of Discovery Common Stock to be held by current
ATI Stockholders following the Merger (1,033,500 shares of
Discovery Common Stock at $4.875 per share)............................$5,038
Estimated value of Discovery Common Stock issuable on exercise
of options to purchase ATI Common Stock (net of exercise proceeds).....$2,950
Estimated transaction costs to be incurred................................$ 300
------
$8,288
The historical consolidated financial statements of Discovery include the
financial position and operations of ATI. The purchase price will be allocated
to in-process research and development which will be charged against earnings.
Such charge has not been reflected in the pro forma condensed statement of
operations as such charge is a non-recurring charge directly attributed to the
Merger.
The pro forma adjustments include accrued liabilities of $300,000 to reflect the
estimated costs incurred to complete the Merger.
No pro forma adjustment has been included to reflect Discovery's investment of
$7,500,000 in ATI's Series A Preferred Stock as such Series A Preferred Stock
was eliminated in the consolidated financial statements and will be cancelled
upon the completion of the Merger.
Note 2
The unaudited pro forma condensed consolidated statements of operations have
been prepared as if the Merger was completed as of January 1, 1997.
Note 3
Combined pro forma net loss per share for the year ended December 31, 1997 is
computed using the historical weighted average number of Discovery Common Stock
outstanding plus the 1,033,500 shares to be issued to ATI common stock holders.
Preferred stock and other common stock equivalents issued in the Merger are not
included, as their effect is antidilutive.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATIONS
OF DISCOVERY AND ATI
The following discussion reflects the historical results of Old Discovery as the
1997 Merger was accounted for as a reverse acquisition with Old Discovery as the
acquirer for financial reporting purposes.
Plan of Operations
Since its inception, the Company has concentrated its efforts and resources in
the development and commercialization of pharmaceutical products and
technologies. The Company has been unprofitable since its founding and has
incurred a cumulative net loss of approximately $12,418,000 as of December 31,
1997. The Company expects to incur significantly increasing operating losses
over the next several years, primarily due to the expansion of its research and
development programs, including clinical trials for some or all of its existing
products and technologies and other products and technologies that it may
acquire or develop. The Company's ability to achieve profitability depends upon,
among other things, its ability to discover and develop products, obtain
regulatory approval for its proposed products, and enter into agreements for
product development, manufacturing and commercialization. None of the Company's
products currently generates revenues and the Company does not expect to achieve
revenues for the foreseeable future. Moreover, there can be no assurance that
the Company will ever achieve significant revenues or profitable operations from
the sale of any of its products or technologies.
The Company is currently engaged in the development and commercialization of
investigational drugs that have previously been tested in humans or animals. The
Company anticipates that during the next 12 months it will conduct substantial
research and development of its products under development, including, without
limitation, a Phase 1/2 clinical trial of SuperVent(TM) for the treatment of
cystic fibrosis ("CF") that was commenced by Discovery on March 17, 1997 (and,
if such clinical trial is successfully completed, a Phase 2 clinical trial of
SuperVent(TM) for the treatment of chronic bronchitis), a Phase 2 clinical trial
of Surfaxin(TM) for the treatment of meconium aspiration syndrome ("MAS") that
was commenced by ATI on May 27, 1997 and a Phase 2 clinical trial of
Surfaxin(TM) for the treatment of acute respiratory distress syndrome ("ARDS")
that was commenced by ATI on August 15, 1997. Discovery initiated on December 5,
1997 a Phase 1 clinical study of ST-630 as a once-daily, orally administered
drug for the treatment of postmenopausal osteoporosis in the United States. Any
clinical trials of the Company's products in development that have not yet
commenced will require the receipt of the United States Food and Drug
Administration (the "FDA") approvals, and there can be no assurance as to the
receipt or the timing of such approvals.
In March 1997, ATI entered into an agreement with Cook Imaging Corporation
("Cook") for the manufacture of Surfaxin(TM) to be used in clinical trials. In
February 1998, ATI and Cook entered into an agreement to provide additional
batches of Surfaxin(TM) for further clinical trials. ATI
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<PAGE>
does not currently intend to seek a long-term agreement with Cook and is
exploring alternatives for the commercial manufacture of Surfaxin(TM).
Liquidity
The Company anticipates that its current resources will permit it to meet its
business objectives until approximately June of 1999. The Company's working
capital requirements will depend upon numerous factors, including, without
limitation, progress of the Company's research and development programs,
preclinical and clinical testing, timing and cost of obtaining regulatory
approvals, levels of resources that the Company devotes to the development of
manufacturing and marketing capabilities, technological advances, status of
competitors and abilities of the Company to establish collaborative arrangements
with other organizations, and as such there can be no assurance that the Company
will not be required to raise additional capital prior to June of 1999 or, in
general, that the Company will be able to achieve its business objectives.
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Discovery
and certain unaudited pro forma per share data of Discovery following the
Merger. This data should be read in conjunction with the financial statements
and other historical and pro forma financial information for Discovery and
Management's Discussion and Analysis of Financial Condition and Plan of
Operations of Discovery and ATI included elsewhere in this Proxy Statement. The
unaudited financial information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated, nor is it
necessarily indicative of future operating results or financial position.
<TABLE>
<CAPTION>
Historical Pro Forma
---------- ---------
<S> <C> <C>
Negative book value per common share at December 31, 1997 $ (6.58) $ (5.04)
Cash dividends per share (year ended
December 31, 1997) ................................ $ 0 $ 0
Net loss per common share (year ended
December 31, 1997) ................................ $ (3.42) $ (2.47)
</TABLE>
Book value per common share is determined after deducting preferred stock
liquidation preferences.
INFORMATION CONCERNING DISCOVERY AND ATI
GENERAL
Discovery is a development stage pharmaceutical company that is focused on
acquiring, developing and commercializing proprietary, investigational drugs
that have previously been tested in humans or animals. Discovery's strategy is
to conduct preclinical and clinical studies on investigational drugs licensed
from third parties, either alone or in collaboration with corporate
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<PAGE>
partners. ATI is a majority-owned subsidiary of Discovery that is involved in
the development of hospital-based pharmaceuticals on a basis consistent with
Discovery's development strategy.
OWNERSHIP STRUCTURE OF ATI
Discovery presently owns 600,000 shares of the Series A Convertible Preferred
Stock of ATI, which it purchased from ATI for $7.5 million in October 1996. The
Series A Convertible Preferred Stock of ATI owned by Discovery presently
represents 69% of the outstanding voting securities of ATI and approximately 59%
of the common equity of ATI (on a fully diluted basis). The remainder of the
common equity of ATI is owned by Dr. Capetola and certain consultants to ATI
(including certain scientific personnel involved in the development of
Surfaxin(TM)), who received an aggregate of 130,000 shares of ATI Common Stock
in connection with ATI's formation; J&J, which received 40,000 shares of ATI
Common Stock pursuant to the J&J License Agreement; and The Scripps Research
Institute ("Scripps"), which holds 30,000 shares of ATI Common Stock it received
in connection with its consent to the J&J License Agreement. In addition, since
ATI's formation, ATI Management Members and others have been granted options to
purchase, in the aggregate, 223,550 shares of ATI Common Stock. As of May 1,
1998, 65,000 shares of ATI Common Stock have been issued pursuant to the
exercise of certain such options.
Pursuant to an inventory transfer agreement executed concurrently with the J&J
License Agreement, J&J contributed its existing Surfaxin(TM) raw material
inventory and specialized manufacturing equipment to ATI in exchange for shares
of nonvoting Series B Preferred Stock of ATI having a $2.2 million liquidation
preference (which liquidation preference was subsequently reduced to $2,039,000
pursuant to a purchase price adjustment).
PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
SuperVent(TM)
Discovery is developing SuperVent(TM) as a stable, aerosolized, multidimensional
therapy for airway diseases such as CF and chronic bronchitis, which are
characterized by inflammation, injurious oxidation and excessive sputum. CF is a
progressive, lethal respiratory disease that afflicts approximately 23,000
patients in the United States and a comparable number in Europe. It is the most
common lethal genetic disease among Caucasians. CF results from a genetic defect
in the CFTR gene. The CFTR gene codes for a membrane protein responsible for the
transport of chloride ions. Because of this genetic defect, CF mucus is
excessively viscous and adherent to airway walls. Destruction of the lungs of CF
patients occurs gradually as the inability to clear mucus from the lungs leads
to blockage of the airways usually beginning in the smaller airways and alveoli.
A new therapy which minimizes the pulmonary complications of CF would have a
major impact on the length and quality of life of its patients.
SuperVent's(TM) active component is tyloxapol, a compound which has been safely
used as an emulsifying agent in drug formulations by the United States
pharmaceutical industry for over 40 years. Experimental research conducted by
consultants to Discovery indicates that tyloxapol may possess biological
activities beyond its well-recognized emulsification properties. Tyloxapol is
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<PAGE>
thought to have three mechanisms of action: anti-inflammatory activity,
anti-oxidant activity and mucolytic activity. This combination of
pharmacological activities is not presently found in any single, safe, effective
therapy for CF or chronic bronchitis in the United States.
Discovery's clinical development plan for SuperVent(TM) is to focus first on CF.
In September 1995, the FDA approved, subject to certain modifications, a
physician-sponsored investigational new drug application ("IND") to begin a
clinical trial of SuperVent(TM) for use in treating CF. The trial, which
commenced on March 17, 1997 at the University of Utah Health Sciences Center, is
designed to determine whether aerosolized SuperVent(TM) holds promise as a low
toxicity, anti-inflammatory, anti-oxidant and mucolytic agent for the treatment
of CF. The preliminary results from this clinical trial in normal healthy
volunteers have indicated that the compound had no significant effects on any
objective measure of safety (although coughing was noted by several subjects at
the highest doses tested). Assuming the successful completion of the Phase 1/2
trial, Discovery intends to commence a multi-center, randomized, double-blinded,
placebo-controlled, Phase 3 clinical trial in CF and to file an additional IND
to commence a Phase 2 clinical trial for the treatment of chronic bronchitis.
Surfaxin(TM)
ATI is developing sinapultide, a proprietary, synthetic lung surfactant that was
invented at Scripps, under the brand name "Surfaxin"(TM) for the treatment of
several conditions characterized by insufficient surfactant. Lung surfactants
are protein-phospholipid complexes which coat the alveoli (air sacs) of the
lungs. Lung surfactants lower surface tension in expiration and raise it during
inspiration to prevent the collapse of alveoli. Replacement surfactants are
currently used mainly to treat idiopathic respiratory distress syndrome
("IRDS"). Infants with this condition, as well as infants born with meconium (a
component of the fetal bowel) in their lungs, which can lead to MAS, typically
suffer from insufficient surfactant that can lead to a life-threatening loss of
pulmonary function. Similarly, patients with ARDS, which can result from trauma,
smoke inhalation, head injury and a variety of other events, typically suffer
from surfactant deficiency.
The potential market for synthetic lung surfactants is substantial. The
incidence of ARDS is approximately 150,000 patients per year in the United
States. IRDS affects 40,000 to 50,000 infants per year in the United States.
Twenty to forty percent of infants with IRDS develop debilitating
bronchopulmonary dysplasia requiring extended ventilatory support and
hospitalization. MAS affects approximately 26,000 newborn infants per year in
the United States.
Surfaxin(TM) is an aqueous suspension of lipid vesicles containing the novel
synthetic peptide sinapultide. Surfaxin(TM) is patterned after human Surfactant
Protein B, shown to have the greatest surfactant activity in humans. The product
was exclusively licensed by Scripps to Johnson & Johnson, Inc. ("J&J"), which,
together with its wholly owned subsidiary, Ortho Pharmaceutical Corporation
("Ortho"), engaged in development activities with respect to sinapultide. ATI
acquired the exclusive worldwide sublicense to the sinapultide technology from
J&J and Ortho in October 1996.
34
<PAGE>
In July 1992, an IND submitted by Scripps relating to the use of Surfaxin(TM) to
treat IRDS was approved by the FDA. J&J subsequently completed a multi-center,
Phase 2 clinical trial of Surfaxin(TM) in 47 infants with IRDS. This trial
demonstrated safety and efficacy comparable to that of the bovine-derived
surfactant, Survanta(TM), marketed by Ross Laboratories. In September 1994, an
IND was submitted by J&J relating to the use of Surfaxin(TM) to treat ARDS and
was subsequently approved by the FDA. Both the IRDS IND and the ARDS IND have
been transferred to ATI. ATI subsequently received FDA approval to amend the
approved ARDS IND and re-initiate Phase 1 clinical trials of Surfaxin(TM) for
the treatment of ARDS. The ARDS trial commenced on August 15, 1997 at Sharp
Memorial Hospital in San Diego, California. ATI amended the existing IRDS IND to
permit the initiation of a Phase 2 clinical trial of Surfaxin(TM) to treat MAS
on May 27, 1997 at Thomas Jefferson University Hospital in Philadelphia.
ATI and Scripps are parties to a sponsored research agreement (the "Sponsored
Research Agreement") pursuant to which ATI will contribute $460,000 to Scripps'
Surfaxin(TM) research efforts through October 1998. ATI has an option to acquire
an exclusive worldwide license to technology developed under the agreement,
which it is required to exercise within 180 days from receipt of notice from
Scripps of the development of such technology. Scripps will own all technology
that it develops pursuant to work performed under the proposed Sponsored
Research Agreement. ATI has the right to receive 50% of the net royalty income
received by Scripps for inventions jointly developed by ATI and Scripps to the
extent ATI does not exercise its option with respect to such inventions. ATI has
entered into consulting agreements with certain key research personnel at
Scripps.
ST-630
ST-630 is being developed by Discovery for use in treating postmenopausal
osteoporosis. Postmenopausal osteoporosis is a disease of postmenopausal women
characterized by decreased bone mass which leads to reduced bone strength and an
increased risk of fractures. ST-630 is an analog of the active circulating
vitamin D hormone, calcitriol, modified to increase its potency and lengthen its
circulating half-life. As a class, vitamin D analogs are commonly used therapies
in Europe and Japan for osteoporosis. In aggregate, this class of compounds is
believed to generate several hundred million dollars in worldwide sales for
osteoporosis.
Published studies have confirmed the efficacy of vitamin D analogs in increasing
bone mass and decreasing fractures. Vitamin D analogs, however, have not been
well accepted in the United States due to certain side effects in the compounds
currently marketed. Specifically, prior studies of vitamin D analogs have been
associated with hypercalcemia in a percentage of patients. Hypercalcemia is
elevated calcium levels in the blood above a generally accepted range. No
vitamin D analogs are currently marketed for osteoporosis in the United States.
In November 1997, Discovery filed an IND with the FDA to initiate Phase 1
clinical studies of ST-630 as a once-daily, orally administered drug for the
treatment of postmenopausal osteoporosis in the United States. On December 5,
1997, Discovery initiated an initial safety and dose-ranging study of ST-630 in
healthy normal volunteers and postmenopausal women either with or without
osteoporis at Covance Clinical Research Unit Inc. in Madison, Wisconsin.
Discovery has recently completed a Phase 1 clinical study of ST-630 in healthy
normal
35
<PAGE>
volunteers and determined that ST-630 does represent a risk of hypercalcemia at
any dosage levels that may prove efficacious for treating postmenopausal
osteoporosis. Based upon the complete results of the dose-ranging study,
Discovery may then either seek to further optimize the delivery of ST-630 by
testing one or more alternative means of delivery or, assuming acceptable
results, seek to initiate a large-scale, multi-center clinical trial in the
United States.
Pursuant to the licensing arrangements described herein with respect to ST-630,
the Wisconsin Alumni Research Foundation ("WARF"), the licensor of ST-630,
undertook to use its best efforts to make available to Discovery preclinical
data generated by Sumitomo Pharmaceuticals ("Sumitomo") and Taisho
Pharmaceuticals ("Taisho"), the licensors of ST-630 in Japan. Discovery has been
advised by Sumitomo and Taisho that they do not intend to pursue the development
of ST-630 for the treatment of postmenopausal osteoporosis and that no such data
will be disclosed to Discovery.
OTHER TECHNOLOGIES IN PRODUCT PORTFOLIO
In addition to the products under development described above, Discovery has
rights to certain drug compounds that are not currently under active development
by Discovery.
Apafant Injection
Apafant is a platelet activating factor antagonist that was originally developed
by Boehringer Ingelheim GmbH ("Boehringer Ingelheim") as an oral treatment for
asthma. Boehringer Ingelheim had previously conducted extensive clinical trials
in the United States and in other countries using the oral form of the drug.
Discovery's development activities with respect to an injectable formulation of
Apafant took place prior to Discovery's merger with Old Discovery pursuant to a
license agreement with Boehringer Ingelheim. Discovery's present management team
is evaluating the Apafant program and is currently considering whether to
discontinue development activities with respect to Apafant. On April 1, 1998,
Discovery was advised by Boehringer Ingelheim that Boehringer Ingelheim intends
to terminate Discovery's license agreement with respect to Apafant in the event
Discovery does not pursue development activities with respect to Apafant.
AN10
AN10 is a novel analog of butyric acid licensed by Discovery from Bar-Ilan
Research & Development Co., Ltd. ("Bar-Ilan"). Recent animal studies suggest
that the topical form of AN10 ("AN10 Topical") may prove to have potential
utility in reducing chemotherapy-induced alopecia, or hair loss, in patients
with cancer. In addition, an intravenous formulation of AN10, Novaheme
Injection, may have potential for the treatment of beta-hemoglobinopathies as
suggested by limited clinical studies that have demonstrated that agents which
increase cellular levels of fetal hemoglobin may reduce disease symptoms in
patients with sickle-cell anemia, a beta hemoglobinopathy.
Discovery is investigating the possibility of outlicensing the topical form of
AN10 Topical and Novaheme Injection to other companies willing to pursue
development of these products. There
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<PAGE>
can be no assurance that Discovery will proceed with such plans or will be
successful in identifying a suitable sublicensee. The regulatory status of AN10
and Novaheme Injection, among other factors, will impact Discovery's ability to
enter into such outlicensing agreements.
LICENSING ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS
CMHA License Agreement: SuperVent(TM)/Tyloxapol
Discovery has obtained the core technology relating to SuperVent(TM) pursuant to
a license agreement with the Charlotte-Mecklenberg Hospital Authority (the "CMHA
License Agreement"). The CMHA License Agreement grants Discovery an exclusive
worldwide license under two issued United States patents (United States Patent
No. 5,474,760 and United States Patent No. 5,512,270) and two pending United
States patent applications held by CMHA, and any later-issued United States and
any foreign patents based on or issuing from the issued patents and the pending
patent applications. The issued United States patents expire in 2013. The United
States patents cover methods of using tyloxapol, the active compound in
SuperVent(TM), to treat cystic fibrosis and methods of treating diseases caused
by oxidant species, such as myocardial infarction, stroke and ARDS. The two
pending United States patent applications relate to the use of tyloxapol as an
anti-inflammatory and anti-oxidant agent.
Tyloxapol, the active compound in SuperVent(TM) was the subject of an issued
United States composition of matter patent which expired in 1965. The patents
and patent applications licensed to Discovery differ from the expired patent,
inter alia, in that one patent application covers proprietary pharmaceutical
formulations containing high concentrations of tyloxapol and the other patents
and patent applications cover uses of tyloxapol to treat certain diseases.
Although Discovery believes that high concentration formulations of tyloxapol
will represent the most practical means to deliver the active compound, there
can be no assurance that any patent application covering this formulation will
issue or that the compound will not prove similarly effective in lower
concentrations which are not covered by any of Discovery's patent applications.
J&J License Agreement: Surfaxin(TM)
ATI has received an exclusive, worldwide sublicense from J&J (the "J&J License
Agreement") to commercialize Surfaxin(TM) for the diagnosis, prevention or
treatment of disease. The J&J License Agreement is a sublicense under certain
patent rights previously licensed to J&J by Scripps (the "Scripps Patent
Rights") and a license under certain other patent rights held by Ortho (the
"Ortho Patent Rights"). The Scripps Patent Rights consist of three issued United
States patents and two pending United States applications. The three issued
patents are United States Patent No. 5,407,914, U.S. Patent No. 5,260,273 and
U.S. Patent No. 5,164,369. These patents relate to synthetic pulmonary
surfactants (including Surfaxin(TM)), certain related polypeptides and a method
of treating respiratory distress syndrome with these surfactants. The first of
these patents will expire in 2009. The two pending United States applications
relate to pulmonary surfactants, related polypeptides, liposomal surfactant
compositions and methods of treating respiratory distress syndromes with these
surfactants and compositions. The Ortho Patent Rights consist of certain pending
United States patent applications which relate to
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<PAGE>
methods of manufacturing certain peptides which may be used in the manufacture
of Surfaxin(TM). J&J is responsible for filing, prosecuting and maintaining the
Ortho Patent Rights.
WARF License Agreement: ST-630
Pursuant to an agreement (the "WARF License Agreement") with WARF, Discovery has
an exclusive license within all countries in the Western hemisphere in the field
of prevention, treatment, amelioration or cure of bone disease, under U.S.
Patent No. 4,358,406 (the "ST-630 Patent") covering the compound ST-630 and U.S.
Patent No. 5,571,802 (the "ST-630 Use Patent") covering a method for treating
postmenopausal osteoporosis. In addition, Discovery has options to extend the
exclusive license to the remaining countries of the world with the exception of
Japan. Discovery's options expire on January 1, 2002.
The ST-630 Patent will expire in July 2001, which Discovery anticipates will be
prior to receipt of any marketing approval for ST-630 in the United States. The
ST-630 Use Patent, which expires in 2014, is limited to claims relating to a
method of treating postmenopausal osteoporosis in humans having such disease
with an effective dosage of ST-630. These claims do not include claims relating
to the use of ST-630 to treat other metabolic bone disorders, such as
age-related osteoporosis (which occurs in men and women) and renal
osteodystrophy. At Discovery's request, WARF filed an application to pursue
additional claims relating to the use of ST-630 to treat other metabolic bone
diseases. However, there can be no assurance that any patent containing such
additional claims will issue in the United States or elsewhere. United States
and foreign patents covering certain processes relating to the manufacture of
vitamin D analogs, which have been nonexclusively licensed to Discovery under
the WARF License Agreement, will expire on various dates up to 2005.
Boehringer Ingelheim License: Apafant
In 1996, Discovery signed an agreement (the "Boehringer Ingelheim License
Agreement") with Boehringer Ingelheim to acquire the rights in the United States
and the European Union to develop a new intravenous formulation of Apafant for
all clinical indications other than asthma. Pursuant to the agreement, Discovery
may be obligated to make future milestone and royalty payments to Boehringer
Ingelheim. However, such license may be required to be reconveyed to Boehringer
Ingelheim in the event that Boehringer Ingelheim exercises an option granted in
the Boehringer Ingelheim License Agreement, following which Boehringer Ingelheim
would have the right to develop and commercialize Apafant and would be obligated
to make milestone and royalty payments to Discovery. Should Boehringer Ingelheim
exercise this option and then fail to pursue development of Apafant on a good
faith efforts basis consistent with good business judgment in any of certain
countries, then the rights to Apafant in the country with respect to which the
failure occurs shall again revert to Discovery.
Bar-Ilan License: AN1O
Discovery's rights with respect to the development of AN10 were obtained
pursuant to an exclusive worldwide license with Bar-Ilan (the "Bar-Ilan License
Agreement") to a United States
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patent and corresponding foreign patents and patent applications directed to the
use of AN10 and other butyric acid analogs in the fields, among others, of
beta-hemoglobinopathies and alopecia.
Discovery is aware of the existence of prior art references which may affect the
validity of certain claims in the issued butyrate patent, which claims broadly
cover AN10, among other compounds. Reexamination or reissue of such patent by
the United States Patent & Trademark Office (the "PTO"), in light of these
references, may be necessary in order to obtain valid claims which are both free
of the prior art and which specifically cover AN10. In any event, given that the
already-uncovered prior art references relates to compounds but not to methods
of treatment, the existence of such references would not, as a matter of United
States patent law, be expected to affect any claims directed to the use of AN10
to treat beta-hemoglobinopathies as covered in United States Patent No.
5,569,675.
Discovery is also aware of other patents (the "Perrine patents") which appear to
cover the administration of butyric acid, during gestation or infancy, to
ameliorate beta-hemoglobinopathies disorders, including sickle cell anemia and
beta-thalassemia, by increasing the level of fetal hemoglobin. To the extent
that AN10 converts to butyric acid and in the event Discovery's or its
licensees' commercial activities include administration of AN10 during gestation
and/or infancy, such activities could give rise to issues of infringement of the
Perrine patents.
The existence of prior art references, and the possibility that administration
of AN10 during gestation and/or infancy could suggest issues of patent
infringement, may affect Discovery's ability to outlicense AN10 Topical and
Novaheme to other companies for further development of these products.
Risk of Loss of Technology/Technological Uncertainty and Obsolescence
Discovery must satisfy the terms and conditions set forth in the license
agreements described above in order to retain its license rights thereunder,
including but not limited to diligent pursuit of product development and the
timely payment of royalty fees (including, with respect to certain such
agreements, minimum royalty payments), milestone payments and other amounts. If
Discovery fails to comply with such terms and conditions as set forth in such
license agreements, its rights thereunder for individual product opportunities
could be terminated.
The patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions. To date, there has emerged no
consistent policy regarding the breadth of claims allowed in biotechnology
patents or the degree of protection afforded under such patents. Discovery's
success will depend, in part, on its ability, and the ability of its
licensor(s), to obtain protection for its products and technologies under United
States and foreign patent laws, to preserve its trade secrets, and to operate
without infringing the proprietary rights of third parties. Discovery has
obtained rights to certain patents and patent applications and may, in the
future, seek rights from third parties to additional patents and patent
applications. There can be no assurance that patent applications relating to
Discovery's potential products which have been licensed to date, or that it may
license from others in the future, will result in patents being issued, that any
issued patents will afford adequate protection to Discovery or not be
39
<PAGE>
challenged, invalidated, infringed or circumvented, or that any rights granted
thereunder will afford additional competitive advantages to Discovery.
Furthermore, there can be no assurance that others have not independently
developed, or will not independently develop, similar products and/or
technologies, duplicate any of Discovery's products or technologies, or, if
patents are issued to, or licensed by, Discovery, design around such patents.
There also can be no assurance that the validity of any of the patents licensed
to Discovery, would be upheld if challenged by others in litigation or that
Discovery's activities would not infringe patents owned by others. Discovery
could incur substantial costs in defending itself in suits brought against it or
any of its licensors, or in suits in which Discovery may assert, against others,
patents in which Discovery has rights. Should Discovery's products or
technologies be found to infringe patents issued to third parties, the
manufacture, use, and sale of Discovery's products could be enjoined and
Discovery could be required to pay substantial damages. In addition, Discovery
may be required to obtain licenses to patents or other proprietary rights of
third parties, in connection with the development and use of its products and
technologies. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to Discovery, if at all.
Discovery also relies on trade secrets and proprietary know-how. Discovery
requires all employees to enter into confidentiality agreements that prohibit
the disclosure of confidential information to third parties and require
disclosure and assignment to Discovery of rights to their ideas, developments,
discoveries and inventions. In addition, Discovery seeks to obtain such
agreements from its consultants, advisors and research collaborators; however,
such agreements may not be possible where such persons are employed by
universities or other academic institutions that require assignment of employee
inventions to them.
THIRD PARTY SUPPLIERS; MANUFACTURING AND MARKETING
To be successful, Discovery's products must be manufactured in commercial
quantities under good manufacturing practice ("GMP") requirements set by the FDA
at acceptable costs. The FDA periodically inspects manufacturing facilities in
the United States in order to assure compliance with applicable GMP
requirements. Foreign manufacturers also are inspected by the FDA if their drugs
are marketed in the United States. Failure of the foreign or domestic suppliers
of Discovery's products or failure of the manufacturers of Discovery's products
to comply with GMP regulations or other FDA regulatory requirements would have a
material adverse effect on Discovery's business, financial condition and results
of operations. Discovery does not have any manufacturing capacity of its own but
instead intends to rely on outside manufacturers to produce appropriate clinical
grade material for its use in clinical studies for certain of its products.
The active compound in SuperVent(TM) is presently manufactured for several third
parties pursuant to GMP standards by an affiliate of Sanofi-Winthrop, Inc.
("Sanofi") a multinational pharmaceutical company. Sanofi is the sole supplier
of tyloxapol with GMP standard manufacturing capabilities and there are few
alternative non GMP approved sources of supply. Currently, Discovery purchases
bulk tyloxapol from Sanofi on an as-needed basis. Although Sanofi has sold a
quantity of tyloxapol sufficient for Discovery's proposed Phase 1/2 clinical
trial of SuperVent(TM), Discovery does not have an agreement with Sanofi to
supply any additional
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material, either in connection with a Phase 3 clinical trial or, following
regulatory approval, for marketing purposes. In addition, Discovery does not
intend to enter into an agreement for supply of the formulated drug containing
tyloxapol unless it plans to initiate a Phase 3 clinical trial of tyloxapol for
the treatment of CF. There can be no assurance that Discovery will be able to
enter into a supply agreement with Sanofi or a supplier of the formulated drug
on terms acceptable to Discovery, if at all. In such case, Discovery would be
required to seek alternate manufacturing sources capable of producing tyloxapol
and the formulated drug. There can be no assurance that Discovery will be able
to identify and contract with alternative manufacturers on terms acceptable to
it, if at all. Any interruption in the supply of tyloxapol would have a material
adverse effect on Discovery's business, financial condition and results of
operations.
ATI has acquired from J&J experimental compounds, the sinapultide and
manufacturing equipment needed to produce and meet its requirements for clinical
supplies of Surfaxin(TM). In March 1997, ATI entered into an agreement with Cook
Imaging Corporation for the manufacture of Surfaxin(TM) to be used in clinical
trials. In February 1998, ATI and Cook entered into an agreement to provide
additional batches of Surfaxin(TM) for further clinical trials. ATI does not
intend to seek a long-term agreement with Cook and is exploring alternatives for
the commercial manufacture of Surfaxin(TM). Failure to identify and reach an
agreement with a third party manufacturer would substantially delay ATI's
development of Surfaxin(TM) and could have a material adverse effect on
Discovery's business, financial condition and results of operations.
Tetrionics, Inc. ("Tetrionics") manufactures, formulates and supplies Discovery
with GMP-grade ST-630 for Discovery's investigational and commercial purposes on
an as-needed basis. Tetrionics presently manufactures and supplies ST-630 to
Penederm, Inc., in the United States for investigational topical use for the
treatment of psoriasis. Discovery does not have a long-term supply agreement
with Tetronics or any other suppliers for ST-630. Any interruption of
Discovery's supply of ST-630 could substantially delay Discovery's development
efforts with respect to ST-630 and could have a material adverse effect on
Discovery's business, financial condition and results of operations.
Pursuant to the Boehringer Ingelheim License Agreement, Boehringer Ingelheim has
in the past provided Discovery with quantities of Apafant sufficient to meet
Discovery's requirements. However, Boehringer Ingelheim has advised Discovery
that it will not be in a position to meet Discovery's Apafant requirements in
the future. There can be no assurance that Discovery will not experience delays
or other supply problems that may materially adversely affect Discovery's
research and development efforts with respect to Apafant or that Discovery will
be able to obtain an alternate source of supply on a timely basis. Apafant
Injection is currently manufactured by Pharmaceutical Development Center
("PDC"). There can be no assurance that PDC will agree to manufacture these
products to meet Discovery's future needs to supply its clinical trials. It is
anticipated that prior to marketing, if any, a new commercial manufacturer of
Apafant Injection will need to be identified, qualified under GMP standards, and
its manufacturing process validated in a manner acceptable to regulatory
authorities. There can be no assurance that a new manufacturer can be
identified, qualified and validated on a timely basis.
The active compound (AN10) in Discovery's AN10 Topical product has previously
been manufactured by Chemsyn. Discovery has no long-term agreement with Chemsyn
for the
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production of AN10. AN10 Topical is currently manufactured by PDC. Discovery has
no long-term agreement with PDC for the production of AN10 Topical or Novaheme.
It is Discovery's long-term goal to market SuperVent(TM) for CF and possibly
certain of its other products through a direct sales force (or, in the case of
SuperVent(TM), possibly through the distribution capabilities of the Cystic
Fibrosis Foundation), if and when any necessary regulatory approvals are
obtained. Discovery currently has no marketing and sales experience and no
marketing or sales personnel. Unless a sales force is established, Discovery
will be dependent on corporate partners or other entities for the marketing and
selling of its products. There can be no assurance that Discovery will be able
to enter into any satisfactory arrangements for the marketing and selling of its
products. The inability of Discovery to enter into such third party
distribution, marketing and selling arrangements for its anticipated products
could have a material adverse effect on Discovery's business, financial
condition and results of operations.
COMPETITION
Discovery is engaged in highly competitive fields of pharmaceutical research.
Competition from numerous existing companies and others entering the fields in
which Discovery operates is intense and expected to increase. Discovery expects
to compete with, among others, conventional pharmaceutical companies. Most of
these companies have substantially greater research and development,
manufacturing, marketing, financial, technological, personnel and managerial
resources than Discovery. Acquisitions of competing companies by large
pharmaceutical or health care companies could further enhance such competitors'
financial, marketing and other resources. Moreover, competitors that are able to
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of new products before Discovery could enjoy a significant
competitive advantage. There are also existing therapies that will compete with
Discovery's products under development.
Genentech has marketed Pulmozyme(TM) in the United States and Canada as a CF
therapy since early 1994. Pulmozyme(TM) reduces the viscosity of CF mucus by
cleaving the DNA released from destroyed inflammatory, epithelial and bacterial
cells which collect in mucus and contribute to its abnormal viscosity and
adherence. The approximate yearly cost of Pulmozyme(TM) treatment for an average
patient is $11,000. Discovery believe that the high cost of this treatment may
reduce its competitive profile as compared with SuperVent(TM).
Presently, there are no approved drugs that are specifically indicated for MAS
or ARDS. Current therapy consists of general supportive care and mechanical
ventilation. Three products are specifically approved for the treatment of IRDS.
Exosurf(TM), marketed by Glaxo Wellcome, contains only phospholipids and
synthetic organic detergents and no stabilizing protein or peptides.
Survanta(TM), which has been shown to be more effective than Exosurf(TM) in
clinical trials, is an extract of bovine lung that contains the cow version of
Surfactant Protein B. Recently, Forest Laboratories has obtained an approvable
letter from the FDA for its calf lung surfactant, Infasurf(TM), for use in IRDS.
Although none of the three approved surfactants for IRDS is approved for ARDS,
which is a significantly larger market, there are a significant number of other
potential therapies in development for the treatment of ARDS that are not
surfactant related. Any of these various drugs or devices could significantly
impact the
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commercial opportunity for Surfaxin(TM). Although the Company believes that
synthetic surfactants such as Surfaxin(TM) will be less expensive to produce
than the animal-derived products approved for the treatment of IRDS, there can
be no assurance that the Company's Surfaxin(TM) product will be successfully
developed and commercialized.
There are numerous approved therapies for osteoporosis which will compete with
ST-630. Such therapies include estrogen, which is of proven benefit in treating
osteoporosis in postmenopausal women, but is associated with significant adverse
effects (including increased breast and uterine cancer risk); Fosamax(TM)
(alendronate), a drug of the bisphosphonate class marketed by Merck; Evista(TM)
a selective estrogen receptor modulator marketed by Eli Lilly; and
Miacalcin(TM), a nasally administered calcitonin marketed by Sandoz
Pharmaceuticals. In addition, there are a number of therapies in development for
osteoporosis that potentially will compete with ST-630.
Discovery is aware that British Biotech plc ("BBP") is currently developing
lexipafant, another platelet activating factor antagonist, for the treatment of
patients with pancreatitis. BBP is currently engaged in Phase 3 clinical trials
in the United States and had filed for marketing approval in the European Union
although that approval will not be forthcoming pending review of the current
Phase 3 study once completed. If lexipafant is approved prior to Apafant, it may
increase the cost and time required to obtain approval of Apafant, or limit the
indications for which Apafant may be marketed if it is approved. There can be no
assurance that Apafant will prove more efficacious than lexipafant in treating
patients with pancreatitis or, if approved, that Apafant will gain market
acceptance.
Discovery is aware that there are several additional butyrate-related treatments
for blood disorders that would directly compete with Discovery's Novaheme(TM)
product under development and, therefore, potentially affect Discovery's ability
to outlicense such product.
GOVERNMENT REGULATION
The testing, manufacture, distribution, advertising and marketing of drug
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Prior to marketing, any pharmaceutical
products developed or licensed by Discovery must undergo an extensive regulatory
approval process required by the FDA and by comparable agencies in other
countries. This process, which includes preclinical studies and clinical trials
of each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over Discovery. The FDA
review process can be lengthy and unpredictable, and Discovery may encounter
delays or rejections of its applications when submitted. If questions arise
during the FDA review process, approval may take a significantly longer period
of time. Generally, in order to gain FDA approval, a company first must conduct
preclinical studies in a laboratory and in animal models to obtain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as part of an IND application that the
FDA must review before human clinical trials of an investigational drug can
start.
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Clinical trials are normally done in three phases and generally take two to five
years or longer to complete. Typically, clinical testing involves a three-phase
process. Phase 1 consists of testing the drug product in a small number of
humans to determine preliminary safety and tolerable dose range. Phase 2
involves larger studies to evaluate the effectiveness of the drug product in
humans having the disease or medical condition for which the product is
indicated and to identify possible common adverse effects in a larger group of
subjects. Phase 3 consists of additional controlled testing to establish
clinical safety and effectiveness in an expanded patient population of
geographically dispersed test sites, to evaluate the overall benefit-risk
relationship for administering the product and to provide an adequate basis for
product labeling.
After completion of clinical trials of a new drug product, FDA and foreign
regulatory authority marketing approval must be obtained. A New Drug Application
("NDA") submitted to the FDA generally takes one to three years to obtain
approval. If questions arise during the FDA review process, approval may take a
significantly longer period of time. The testing and approval processes require
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all. Even if regulatory clearances are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. For marketing outside the United States, Discovery also will
be subject to foreign regulatory requirements governing human clinical trials
and marketing approval for pharmaceutical products. The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement
vary widely from country to country. None of Discovery's products under
development have been approved for marketing in the United States or elsewhere.
No assurance can be given that Discovery will be able to obtain regulatory
approval for any such products under development. Failure to obtain requisite
governmental approvals or failure to obtain approvals of the scope requested
will delay or preclude Discovery or its licensees or marketing partners from
marketing their products, or limit the commercial use of the products, and
thereby could have a material adverse effect on Discovery's business, financial
condition and results of operations.
EMPLOYEES
Discovery utilizes a product development strategy that involves contracting out
research, development and manufacturing functions to third parties in order to
minimize the expense and overhead associated with full-time employees.
Consistent with this strategy, as of the date of this Proxy Statement, Discovery
has only 7 employees, two of whom devote only a portion of their time to the
business of Discovery. Similarly, ATI has only 13 employees. The Company's
future success depends in significant part upon the continued service of its key
scientific personnel and executive officers and its continuing ability to
attract and retain highly qualified scientific and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company can retain its key employees or that it can attract, assimilate or
retain other highly qualified technical and managerial personnel in the future.
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LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened legal actions other than
disputes in immaterial amounts arising in the ordinary course of its business.
FACILITIES
Discovery currently has its executive offices at 509 Madison Avenue, 14th Floor,
New York, New York 10022. The Company's telephone number is (212) 223-9504 and
its facsimile number is (212) 688-7978.
ATI currently has its executive offices at 3359 Durham Road, Doylestown, PA
18901. ATI's telephone number is (215) 794-3064 and its facsimile number is
(215) 794-3239
ELECTION OF DISCOVERY DIRECTORS
The Board of Directors currently consists of ten directors. It is a condition to
the Merger that a Board of Directors of the Company consisting of the following
nominees be elected at the 1998 Annual Meeting, and, accordingly, the Board of
Directors has nominated each such person to serve as a director in the ensuing
year in the event Discovery's 1998 Stock Incentive Plan (the adoption of which
is also a condition to the Merger) and the Merger Agreement are approved:
Nominee Age Year First Elected a Director/*/
- ------- --- --------------------------------
Steve H. Kanzer, C.P.A., Esq.(1)(2) 34 1996
Robert Capetola, Ph.D.(2) 48 --
Milton Packer, M.D.(2) 46 --
Richard G. Power(2) 68 --
Mark G. Rogers, M.D.(1)(2)(3) 54 1996
Marvin E. Rosenthale, Ph.D. 63 --
Max Link, Ph.D.(2)(4) 54 1996
Herbert H. McDade, Jr. (3)(4) 70 1996
Richard Sperber 55 1994
David Naveh, Ph.D. 44 1996
Each of the following persons has been nominated by the Board of Directors to
serve as a director during the ensuing year in the event the Merger is not
consummated:
Nominee Age Year First Elected a Director/*/
- ------- --- --------------------------------
Steve H. Kanzer, C.P.A., Esq.(1)(2) 34 1996
James S. Kuo, M.D.(1)(2) 33 1996
Evan Myrianthopoulos 33 1996
Juerg Geigy, Esq. 62 1996
Mark G. Rogers, M.D.(1)(2)(3) 54 1996
Max Link, Ph.D. (2) 54 1996
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Herbert H. McDade, Jr.(3)(4) 70 1996
Richard Sperber 55 1994
David Naveh, Ph.D. 44 1996
* Includes periods of service as a director of Discovery Laboratories,
Inc., a former Delaware corporation ("Old Discovery"), a predecessor to the
Company.
1. Member of the Executive Committee
2. Member of ATI Board
3. Member of the Compensation Committee
4. Member of the Audit Committee
Each nominee has consented to be named as a nominee and, to the present
knowledge of the Company, is willing and able to serve as a director, if
elected. Should any of the nominees not remain a candidate at the end of the
1998 Annual Meeting (a situation which is not expected), proxies solicited
hereunder will be voted in favor of those who remain as candidates and may be
voted for substitute nominees, unless the Board determines to reduce the number
of directors. Unless contrary instructions are given on the proxy, the shares
represented by a properly executed proxy will be voted "FOR" the election of the
alternative slates of nominees set forth above.
The principal occupation and qualifications of each nominee for Director are as
follows:
Steve H. Kanzer, C.P.A., Esq. has served as Chairman of the Board of Directors
of Discovery Laboratories, Inc. since the effective time of the 1997 Merger.
From June 1996 until such time he was the Chairman of the Board of Old
Discovery. He has been a Director of ATI since November 1996. Mr. Kanzer is also
a Senior Managing Director of Paramount Capital, Inc. ("Paramount Capital"), a
biotechnology investment bank, and Paramount Investments, LLC ("Paramount
Investments"), a medical venture capital group that is an affiliate of Paramount
Capital. Mr. Kanzer is a founder and currently a director of Boston Life
Sciences, Inc. and Atlantic Pharmaceuticals, Inc. and is currently a director of
Endorex, Inc. He has been a founder and director of several other public and
private biotechnology companies including Avigen, Inc., Titan Pharmaceuticals,
Inc. and Xenometrix, Inc. From October 1991 until January 1995, Mr. Kanzer was
General Counsel of The Castle Group Ltd, an affiliate of Paramount Capital. From
1988 to 1991, Mr. Kanzer was an attorney at the law firm of Skadden, Arps,
Meagher, Slate, & Flom. Mr. Kanzer received his J.D. from New York University
School of Law and a B.B.A. in Accounting from Baruch College. He devotes only a
portion of his time to the business of the Company.
Robert J. Capetola, Ph.D. has served as Chairman and Chief Executive Officer of
ATI since its inception in October 1996. From February 1994 to May 1996, Dr.
Capetola was Managing Director of Delta Biotechnology, a subsidiary of Ohmeda
Pharmaceutical Products Division, a division of The BOC Group, plc ("Ohmeda"),
in the U.K. He also served on the Board of Directors of Delta Biotechnology.
From December 1992 to September 1996, Dr. Capetola served as Vice President of
Research and Development at Ohmeda. He served on Ohmeda's operating board and
was responsible for all aspects of Ohmeda's research and development,
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including preclinical research and development, clinical development, biometrics
and regulatory affairs. From 1977 to 1992, Dr. Capetola held a variety of
positions as a drug discovery scientist at Johnson & Johnson Pharmaceutical
Research Institute, including Senior Worldwide Director of Experimental
Therapeutics. Dr. Capetola received his B.S. from the Philadelphia College of
Pharmacy & Science and his Ph.D. in pharmacology from Hahnemann Medical College.
Max Link, Ph.D., has served as a Director of Discovery since the effective time
of the 1997 Merger and was a Director of Old Discovery from 1996 until such
time. He has been a Director of ATI since October 1996. Dr. Link has held a
number of executive positions with pharmaceutical and health care companies. He
currently serves on the Boards of Directors of six publicly-traded life science
companies: Alexion Pharmaceuticals, Inc., Protein Design Labs, Inc., Human
Genome Sciences, Inc., Cell Therapeutics, Inc., Procept, Inc. and Access
Pharmaceuticals, Inc. From May 1993 until June 1994, Dr. Link was Chief
Executive Officer of Corange Limited, the parent company of Boehringer Mannheim
and DePuy, an orthopedic company. Prior to joining Corange, he served in a
number of positions within Sandoz Pharma, Ltd., including Chief Executive
Officer from 1990 until April 1992, and Chairman from April 1993 until May 1993.
Juerg F. Geigy, Esq. has served as a Director of Discovery since the effective
time of the 1997 Merger and was a Director of Old Discovery from June 1996 until
such time. Dr. Geigy is an attorney at law in Basel, Switzerland specializing in
corporate and tax law, portfolio management and venture capital consulting. Dr.
Geigy is a director of the following companies: Pitney Bowes (Switzerland) AG,
U.S. Ventures S.A., Strategic Healthcare Investment Fund and Rothschild Bank AG.
Dr. Geigy has been a director of J. Henry Schroder Bank AG, Biogen S. A., Bank
Julius Baer International Limited, Baer Holding AG, Great Pacific Capital S.A.
and Petroferm N.V. Dr. Geigy has also been a member of the Advisory Board of
Massey Burch Investment Group, a Vice-Chairman and CEO of Rothschild Corporate
Finance Ltd., Chief Executive Officer of Julius Baer Atlantic Limited and a
member of the Management Committee of Bank Julius Baer & Co. AG. Dr. Geigy has
held the position of Treasurer of the parent company of Ciba Geigy Ltd., and
Group Treasurer of J.R. Geigy Limited.
Herbert H. McDade, Jr. has served as a Director of Discovery since the effective
time of the 1997 Merger and was a Director of Old Discovery from June 1996 until
such time. Mr. McDade is the Chairman of Access Pharmaceutical and a member of
the Boards of Directors of two publicly-held companies, Cytrx Corporation and
Shaman Pharmaceuticals, and Clarion Pharmaceuticals, Inc., which is privately
held. Mr. McDade was employed with the Upjohn Company for 20 years and for 14
years as President of Revlon Health Care International.
Mark C. Rogers, M.D. has served as a Director of Discovery since the effective
time of the 1997 Merger and was a Director of Old Discovery from June 1996 until
such time. Dr. Rogers has been Senior Vice President, Corporate Development and
Chief Technology Officer at Perkin-Elmer Corporation since 1996. Prior to
Perkin-Elmer, Dr. Rogers was the Vice Chancellor for Health Affairs, Executive
Director and Chief Executive Officer of Duke University Hospital and Health
Network from 1992 to 1996. Prior to his employment at Duke, Dr. Rogers was on
the faculty of Johns Hopkins University for 15 years where he served as
Distinguished Faculty Professor and Chairman of the Department of Anesthesiology
and Critical
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Care Medicine, Associate Dean for Clinical Practice, Director of the Pediatric
Intensive Care Unit and Professor of Pediatrics. Dr. Rogers received his M.D.
from Upstate Medical Center and his M.B.A. from The Wharton School of Business.
He received his B.A. from Columbia University and held a Fulbright Scholarship
Richard Sperber has been a Director of Discovery since May 1994. Mr. Sperber has
been President and Chief Executive Officer of The Global Medicines Group Inc., a
consulting firm, since 1991. From 1988 to 1991 Mr. Sperber was a Director and
Head of Business Development and Strategic Planning for Glaxo Pharmaceuticals
U.K. Ltd., a subsidiary of Glaxo Holdings plc. Prior to his employment at Glaxo,
Mr. Sperber held a variety of positions including Area Director for Ayerst
International, responsible for Southeast Asia, and Director of Marketing for
Schering-Plough Corp. responsible for Canada, Japan, Australia and Southeast
Asia. Mr. Sperber received his B.S. from the University of Denver and attended
graduate school at Columbia University.
David Naveh, Ph.D. has been a Director of Discovery since May 1996. Dr. Naveh
has served as Director of Process Technology for Bayer Corporation since
September 1994 and was Director of Process Development from 1992 through 1994.
Dr. Naveh was Director of Biotechnology Operations for Centocor from 1990 to
1992 and was Director of Purification for Centocor from 1989 to 1990. From 1984
to 1988, Dr. Naveh was a manager at Schering-Plough Corp. Dr. Naveh was on the
faculty of the University of Wisconsin, Madison as Assistant Professor from 1982
to 1984. He received his B.Sc. and M.S. in 1990 from the Technion, Haifa, Israel
and his Ph.D. from the University of Minnesota.
Richard G. Power is a Principal and Executive Director of The Sage Group,
founded in 1994, which specializes in providing strategic and transactional
services to the managements and boards of, and investors in, health care
companies. He serves on the Board of Directors of The Quantum Group, and
Neuromedica, Inc. From 1980 to 1994, Mr. Power served as President of R.G. Power
& Associates, Inc., which specializes in worldwide business development and
financing strategy for the health care industry. From 1955 to 1980, Mr. Power
held senior management positions with several pharmaceutical industry firms,
including SmithKline, Searle and as a corporate officer at J&J Mr. Power
received his B.A. from Loras College in 1951, and attended graduate school at
the University of Wisconsin.
Marvin E. Rosenthale, Ph.D. has served as President and Chief Executive Officer
of Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") from 1994 until 1997. He
joined the ALRT joint venture formed by Allergan and Ligand, the entity through
which they combined their resources to pursue the development of retinoid
research and development prior to ALRT, in August 1993 as Vice President. Prior
to joining ALRT, Dr. Rosenthale served as Vice President, Drug Discovery
Worldwide, at R. W. Johnson Pharmaceutical Research Institute from 1990 to 1993.
From 1977 to 1990, Dr. Rosenthale served in a variety of positions in drug
discovery research for Ortho Pharmaceutical Corporation, including director of
the divisions of pharmacology and biological research and executive director of
drug discovery research. From 1960 to 1977, he served in various positions with
Wyeth Laboratories. Dr. Rosenthale received a Ph.D. in pharmacology from
Hahnemann Medical College & Hospital, an M.Sc. in pharmacology from
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Philadelphia College of Pharmacy and Science and a B.Sc. in pharmacy from
Philadelphia College of Pharmacy.
Milton Packer, M.D. has served in a variety of roles since 1992 and currently is
the Dickinson W. Richards, Jr. Professor of Medicine, Professor of Pharmacology,
Chief of the Division of Circulatory Physiology at the Columbia University
College of Physicians and Surgeons, and Director of the Heart Failure Center at
the Columbia Presbyterian Hospital. He is also a Clinical Research Scholar at
Columbia. Dr. Packer's major research is focused on the pathophysiology and
treatment of heart failure. He is on the Executive Committee of both the
American Heart Association and the American College of Cardiology. He is a
primary consultant to the National Institutes of Health and the Food and Drug
Administration on the management of heart failure and on matters related to
cardiovascular research and drug development and health care policy. From 1988
to 1992, Dr. Packer was Professor of Medicine at the Mt. Sinai School of
Medicine. Dr. Packer received his B.S. degree from the Pennsylvania State
University in 1971 and his M.D. degree from the Jefferson Medical College in
1973.
James S. Kuo, M.D. has served as President, Chief Executive Officer and a
Director of Discovery since the effective time of the 1997 Merger. From March
1996 until such time he held such positions with Old Discovery. He has been a
Director of ATI since November 1996. Prior to joining Old Discovery, Dr. Kuo was
employed from May 1995 to March 1996 by Pfizer, Inc., a multinational
pharmaceutical company, as Associate Director of the Corporate Licensing and
Development Division. At Pfizer, Dr. Kuo, was directly responsible for
cardiovascular licensing and development, a business segment with approximately
$2.9 billion in sales in 1995. Prior to his employment with Pfizer, Dr. Kuo,
from September 1992 to May 1995, was Managing Director of Venture Analysis at
HealthCare Investment Corporation, a venture capital fund which managed over
$375 million in venture funds predominantly devoted to start up
biopharmaceutical companies. Prior to his employment at HealthCare Investment
Corporation, Dr. Kuo was Vice President of The Castle Group Ltd., a medical
venture capital group. Dr. Kuo received his M.D. from The University of
Pennsylvania School of Medicine and obtained his M.B.A. from The Wharton School
of Business where he concentrated in health care management and finance. He
received his B.A. in molecular biology from Haverford College and has conducted
and published research at The Wistar Institute in Philadelphia.
Evan Myrianthopoulos has served as Chief Financial Officer of Discovery since
December 1997 and as Chief Operating Officer, Secretary and a Director of
Discovery since the effective time of the 1997 Merger. From June 1996 until such
time he held such positions (other than Chief Financial Officer) with Old
Discovery. Prior to joining Old Discovery, he was a Technology Associate of
Paramount Capital Investments, L.L.C. from December 1995 until January 1997.
Before joining Paramount Capital Investments, LLC, Mr. Myrianthopoulos managed a
hedge fund for S + M Capital Management in Englewood Cliffs, New Jersey. The
fund specialized in syndicate and secondary stock issues and also engaged in
arbitrage of municipal and mortgage bonds. Prior to his employment with S + M
Capital Management, Mr. Myrianthopoulos was employed at the New York Branch of
National Australia Bank where he was Assistant Vice President of Foreign
Exchange trading. Mr. Myrianthopoulos received a B.A. in Economics and
Psychology from Emory University in 1986.
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Meetings and Committees of the Board of Directors and Designated Directors
The Board held 10 meetings during Discovery's 1997 fiscal year. Each of
Discovery's incumbent directors attended at least 75% of the aggregate of all
meetings of the Board and of all committees on which he was a member held during
the year except for Mr. Sperber, who attended 70% of such meetings. The standing
committees of the Board are the Executive Committee, the Audit Committee and the
Compensation Committee. The Company does not have a Nominating Committee. The
Executive Committee was created in December 1997 and did not hold any meetings
during the last fiscal year. The Executive Committee consists of Mr. Kanzer, Dr.
Kuo and Dr. Rogers. The Executive Committee is responsible for specific matters
delegated to it from time to time by the entire Board. The Audit Committee did
not meet during the 1997 fiscal year. The Audit Committee was reconstituted
during December 1997 to consist of Messrs. Link and McDade and took action
during January 1998 to appoint RAE as Discovery's auditors. The function of the
Audit Committee is to review the results and scope of audits, internal
accounting controls, tax and other accounting related matters and to review with
the Company's independent auditors the scope and results of their engagement.
The Compensation Committee did not meet during the last fiscal year. The
Compensation Committee was reconstituted during December 1997 to consist of
Messrs. McDade and Rogers. The function of the Compensation Committee is to
review and evaluate the compensation of the Company's executive officers and
administer the Company's stock option plans. Neither Mr. McDade nor Dr. Rogers
serves as a member of the Board of Directors or Compensation Committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
Discovery has agreed, if requested by D.H. Blair Investment Banking Corp.
("Blair"), the underwriter of Discovery's initial public offering (the "IPO"),
which was consummated in August and September of 1995, to nominate a designee of
Blair to Discovery's Board of Directors for a period of five years ending August
8, 2000. Dr. Naveh has been designated as a nominee at the request of Blair.
DIRECTOR COMPENSATION
Pursuant to Discovery's 1995 Stock Option Plan, non-employee Directors of
Discovery are entitled to receive an award of options for the purchase of 1,667
shares of Discovery Common Stock upon their election to the Discovery Board and
an annual award of options for the purchase of 333 shares of Common Stock
following each annual meeting of stockholders at which they are reelected.
Director options are exercisable at a price per share of Discovery Common Stock
equal to the fair market value of the Discovery Common Stock on the date of
grant, become exercisable in four equal annual installments commencing six
months from the date of grant and expire upon the earlier of ten years after the
date of grant or 90 days after the termination of the Director's service on the
Discovery Board. In addition, each Discovery Director receives cash compensation
in the amount of $1,000 per quarter, $1,000 for each meeting of the Board of
Directors attended in person and $500 for each meeting of the Board of Directors
attended telephonically. Directors are not precluded from serving the Company in
any other capacity and receiving compensation therefor.
50
<PAGE>
In connection with their appointment to the ATI Board of Directors in October
and November of 1996, each of Messrs. Link and Rogers received an option grant
to purchase 8,000 shares of ATI Common Stock and each of Messrs. Packer and
Rosenthale received an option grant to purchase 2,000 shares of Common Stock
under ATI's 1996 Stock Option/Stock Issuance Plan. In addition, each of Messrs.
Packer and Rosenthale received an option grant on January 30, 1998 to purchase
2,000 shares of Common Stock under ATI's 1996 Stock Option/Stock Issuance Plan.
Each option granted in connection with the optionee's appointment to the ATI
Board of Directors in October and November of 1996 has an exercise price of
$0.32 per share and each option granted to Messrs. Packer and Rosenthale on
January 30, 1998 has an exercise price of $1.25 and all such options have a
maximum term of ten years, subject to earlier termination should the optionee's
service cease. Each option is immediately exercisable with respect to all of the
option shares. Twenty-five percent of the option shares are fully vested as of
the date of grant. The remaining shares are unvested and subject to repurchase
by ATI, at the exercise price paid per share, in the event of the optionee's
termination of service prior to vesting. The optionee vests in the option shares
in equal annual installments over the three years of service completed after the
option grant date.
Assuming approval by Discovery's stockholders of the 1998 Stock Incentive Plan
at the 1998 Annual Meeting, each individual who has previously served as a
non-employee Board member of Discovery or ATI and who is to serve as a
non-employee Board member of the Company following the Merger will automatically
be granted at that meeting a stock option to purchase 10,000 shares of Common
Stock.. Each individual who first becomes a non-employee member of the Board of
the Company or any of its subsidiaries after the date of the 1998 Annual
Meeting, whether through election by the stockholders or appointment by the
Board, will receive, at the time of such initial election or appointment, an
automatic option grant for 20,000 shares of Discovery Common Stock and, in
addition, following each annual meeting of stockholders at which they are
reelected, will receive an option grant under the Automatic Option Grant Program
of such plan for 10,000 option shares provided that such individual has served
as a non-employee Board member for at least six months. Each such option will
have an exercise price equal to 60% of the fair market value of Discovery Common
Stock on such date and will have a maximum term of ten years, subject to earlier
termination should the optionee cease to serve as a Director of the Company.
Each option will be immediately exercisable for all of the option shares.
However, the option shares will be subject to repurchase by the Company, at the
exercise price paid per share, in the event of the optionee's termination of
service prior to vesting in the shares. The optionee will vest in the option
shares in four equal annual installments commencing six months after the date of
grant. See "Adoption of 1998 Stock Incentive Plan".
In the event the Merger is not approved by the stockholders at the 1998 Annual
Meeting, the 1998 Stock Incentive Plan will not be implemented and the Directors
of Discovery will continue to receive option grants, as described above, under
Discovery's 1995 Stock Option Plan.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned by
the persons who served as Discovery's chief executive officer during the last
completed fiscal year (the
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<PAGE>
"Named Officers" for services rendered in all capacities to Discovery for each
of the last three completed fiscal years). No other executive officer earned
compensation in excess of $100,000 for services rendered to the Company during
the last completed fiscal year, and no executive officer who would have
otherwise been included in such table resigned or terminated employment during
that year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------------------------ -----------------------------
Securities
Name and Other Annual Restricted Underlying All Other
Principal Position Year Salary Bonus Compensation Stock Award(s) Options/SARs Compensation
- ------------------ ---- ------ ----- ------------ -------------- ------------ ------------
($) ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
James S. Kuo, M.D. 1997 $175,000 $50,000(1) -- -- 77,831 --
President, Chief 1996 $102,708 $30,000(1) -- (2) -- --
Executive Officer & 1995 --- --- -- -- -- --
Director
Vaughan Shalson 1997 $150,013 -- -- -- -- (3)
Former President and 1996 -- -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- -- --
S. Mark Moran, M.D. 1997 $ 43,885 -- -- -- -- --
Former President and 1996 $190,657 $157,185 -- $120,000 27,439 --
Chief Executive Officer 1995 $138,750 $120,000 --- -- 20,948 --
</TABLE>
(1) Bonus amounts earned by Dr. Kuo with respect to 1996 and 1997 were paid to
Dr. Kuo in 1997 and 1998, respectively.
(2) In May 1996, Old Discovery issued 340,000 shares of Old Discovery common
stock, par value $0.001 per share ("Old Discovery Common Stock") to Dr. Kuo at a
purchase price of $0.002. At the time of issuance, there was no market for such
shares. Such shares were converted into 132,313 shares of Discovery Common Stock
as a result of the 1997 Merger and the Reverse Split.
(3) Mr. Shalson is entitled to six months' salary as a severance payment
pursuant to his employment agreement with the Company, as amended. $15,417 of
such amount is included in his 1997 salary amount.
52
<PAGE>
Option Grants In Last Fiscal Year(1)
The following table contains information concerning the stock option grants made
to the Named Officers for the fiscal year ended December 31, 1997. No stock
appreciation rights were granted to these individuals during such year.
<TABLE>
<CAPTION>
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base
Name Expiration Date Granted in Fiscal Year Price ($/sh)(2)
---- --------------- ------- -------------- ---------------
<S> <C> <C> <C> <C>
James S. Kuo, M.D.(3) 1/20/07 77,831 21.8% $0.51
Vaughan Shalson 11/25/99 60,666 17.0% $4.50
S. Mark Moran, M.D. -- -- -- --
</TABLE>
(1) Based on combined issuances by the Company and Old Discovery. The options
granted to Dr. Kuo during 1997 vest according to the following schedule: 25% as
of January 1, 1997 and 2.1% on the last day of each month commencing January 31,
1997. The options granted to Mr. Shalson during 1997 are vested and exercisable
immediately.
(2) The exercise price of options issued by Discovery and options issued by Old
Discovery may be paid in cash, in shares of Discovery Common Stock valued at the
fair market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. Discovery may also finance
the exercise of options issued by Discovery by loaning the optionee sufficient
funds to pay the exercise price for the purchased shares.
(3) Represents options granted to Dr. Kuo as Chief Executive Office of Old
Discovery and assumed by the Company in the Merger.
Aggregate Option Exercises In Last Fiscal Year And
Fiscal Year-End Option Values
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1997 with respect to the
Named Officers. No stock appreciation rights were exercised during such year or
were outstanding at the end of that year.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at FY-End (#) In The Money Options at FY-End(1)
Shares Acquired --------------------------------- ---------------------------------
Name on Exercise(#) Exercisable Unexercisable(2) Exercisable Unexercisable(2)
---- --------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
James S. Kuo, M.D. -- 38,915 38,915(3) $130,948 $130,948
Vaughn Shalson -- 60,666 -- 0 --
S. Mark Moran 2,000 -- -- -- --
</TABLE>
(1) Based on the fair market value of the Discovery Common Stock at year-end,
$3.875 per share, less the exercise price payable for such shares.
(2) Will become fully vested and exercisable upon Dr. Kuo's termination in
connection with the Merger.
53
<PAGE>
Employment Agreements
In March 1996, Old Discovery entered into a three-year employment agreement with
Dr. Kuo (the "Kuo Employment Agreement"). The Kuo Employment Agreement was
assumed by the Company in connection with the 1997 Merger. Pursuant to the Kuo
Employment Agreement, Dr. Kuo received a salary of $145,000 per annum during
1996 and a salary of $175,000 per annum during 1997. Dr. Kuo received cash
bonuses of $30,000 with respect to fiscal year 1996 and $50,000 with respect to
fiscal year 1997. Pursuant to his employment agreement, Dr. Kuo is entitled to
health and life insurance coverage for his family. On March 20, 1996, under the
Kuo Employment Agreement, Dr. Kuo purchased 340,000 shares of Common Stock of
Old Discovery for $0.002 per share. Such shares were converted into 132,313
shares of Discovery Common Stock in the 1997 Merger. A portion of such shares of
Discovery Common Stock are subject to the Company's right of repurchase in the
event that Dr. Kuo's employment is terminated prior to the end of the three-year
term of the Kuo Employment Agreement; provided, however, that in the event that
Dr. Kuo's employment is terminated subsequent to the Merger, and certain
conditions are satisfied, the Company's right to repurchase such shares will
lapse.
In June 1996, Old Discovery entered into manager agreements with Mr. Kanzer and
Mr. Myrianthopoulos (the "Manager Agreements"). Pursuant to Mr. Kanzer's Manager
Agreement, which was assumed by the Company in the 1997 Merger, Mr. Kanzer is
entitled to $3,000 per month, while such Manager Agreement remains in effect.
Such Manager Agreement is terminable at any time by the Company. Mr.
Myrianthopoulos' Manager Agreement, pursuant to which he was entitled to receive
$1,500 per month, was terminated in June 1996 when Mr. Myrianthopoulos became a
full-time employee of Old Discovery.
Upon consummation of the Merger, Dr. Capetola will become the President and
Chief Executive Officer of Discovery and the remaining ATI Management Members
will assume executive positions at Discovery corresponding to their present
positions with ATI and on substantially their present terms, including
compensation terms.
The employment agreements between ATI and the remaining ATI Management Members
(the "ATI Management Members' Employment Agreements"), provide for aggregate
base compensation in the amount of $829,000 for each year of their respective
three year employment terms. Pursuant to the ATI Management Members' Employment
Agreements, the ATI Management Members are eligible to receive incentive bonuses
at the discretion of, and in amounts to be determined by, ATI's Chief Executive
Officer. The ATI Management Members' Employment Agreements also provide that
such employees are entitled to health and disability benefits and life insurance
in the amount of the employee's annual base compensation. In the event of
termination without cause, the ATI Management Members' Employment Agreements
typically provide for severance payments of either 3 or 6 months subject to
set-off.
ADOPTION OF 1998 STOCK INCENTIVE PLAN
Discovery's stockholders are being asked to approve the 1998 Stock Incentive
Plan, which will serve as the successor to Discovery's existing 1993 Stock
Option Plan and 1995 Stock Option Plan (the "Predecessor Plans"). The Board of
Directors of Discovery considers it advisable at this time
54
<PAGE>
to replace the Predecessor Plans with a new equity incentive program which will
(i) make an additional 1,002,862 shares of Discovery Common Stock available for
issuance to the Company's service providers pursuant to equity incentive awards,
(ii) modify the automatic option grant program for the Company's non-employee
Board members and (iii) make certain other improvements which will facilitate
administration of the Company's equity incentive programs. The Board believes
the increase in the number of shares available for issuance under equity
incentive plans is necessary, particularly in light of the Merger, in order to
ensure that the Company will have a sufficient reserve of Discovery Common Stock
to continue to utilize stock option grants as an equity incentive to attract and
retain the services of those individuals essential to the Company's growth and
financial success.
The 1998 Stock Incentive Plan became effective upon its adoption by the Board of
Directors of Discovery on March 24, 1998, subject to approval by Discovery's
stockholders at the 1998 Annual Meeting. The Predecessor Plans will terminate,
and no further option grants or share issuances will be made under the
Predecessor Plans, after approval by Discovery's stockholders of the 1998 Stock
Incentive Plan. However, all outstanding options under the Predecessor Plans
will continue to be governed by the terms and conditions of the existing option
agreements for those grants.
The following is a summary of the principal features of the 1998 Stock Incentive
Plan, together with the tax and accounting implications applicable to
transactions effected under such plan. However, the summary does not purport to
be a complete description of all the provisions of the 1998 Stock Incentive Plan
and is qualified in its entirety by reference to such plan, a copy of which is
annexed hereto as Annex B.
Structure
Three separate equity incentive programs will be implemented under the 1998
Stock Incentive Plan: (i) the Discretionary Option Grant Program, (ii) the Stock
Issuance Program and (iii) the Automatic Option Grant Program. The principal
features of each program are described below.
Administration
The Compensation Committee of the Board of Directors of the Company will serve
as the initial Plan Administrator with respect to the Discretionary Option Grant
and Stock Issuance Programs. However, the Board may also administer those
programs or one or more additional Board committees may be appointed to
administer those programs with respect to certain designated classes of
individuals in the Company's service. The term "Plan Administrator" as used in
this summary will mean the Compensation Committee, the Board and any other
appointed committee acting within the scope of its administrative authority
under the 1998 Stock Incentive Plan. Administration of the Automatic Option
Grant Program will be self-executing in accordance with the express provisions
of such program.
Share Reserve
The initial share reserve for the 1998 Stock Incentive Plan will comprise of (i)
the number of shares which remain available for issuance upon exercise of
options outstanding and options
55
<PAGE>
available for grant under the Predecessor Plans as of the date of the 1998
Annual Meeting (estimated to be 398,097 shares as of May 1, 1998) and (ii) an
increase of 1,002,862 shares, subject to approval by Discovery stockholders at
the 1998 Annual Meeting.
In the event any change is made to the outstanding shares of Discovery Common
Stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate structure
effected without the Company's receipt of consideration, appropriate adjustments
will be made to the securities issuable (in the aggregate and to each
participant) under the 1998 Stock Incentive Plan and to each outstanding option.
Shares subject to any outstanding options under the 1998 Stock Incentive Plan
(including options incorporated from the Predecessor Plans) which expire or
otherwise terminate prior to exercise will be available for subsequent issuance.
Unvested shares issued under the 1998 Stock Incentive Plan and subsequently
repurchased by the Company pursuant to its repurchase rights under the 1998
Stock Incentive Plan will also be available for subsequent issuance.
Eligibility
Officers and employees, non-employee Board members and independent consultants
and advisors in the service of the Company or its parent and subsidiaries
(whether now existing or subsequently established) will be eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs. Only
non-employee members of the Board will be eligible to participate in the
Automatic Option Grant Program.
As of the date of this Proxy Statement, 9 executive officers, 11 other employees
and 9 non-employee Board members are eligible to participate in the 1998 Stock
Incentive Plan.
Valuation
The fair market value per share of Discovery Common Stock on any relevant date
under the 1998 Plan will be the closing selling price per share on that date on
the Nasdaq SmallCap Market. On May 1, 1998, the closing selling price per share
was $4.38.
Discretionary Option Grant Program
The options granted under the Discretionary Option Grant Program may be either
incentive stock options under the federal tax laws or non-statutory options.
Each granted option will have an exercise price per share not less than 100% of
the fair market value per share of Discovery Common Stock on the option grant
date, and no granted option will have a term in excess of ten years. The shares
subject to each option will generally vest in a series of installments over a
specified period of service measured from the grant date.
Upon cessation of service, the optionee will have a limited period of time in
which to exercise any outstanding option to the extent exercisable for vested
shares. The Plan Administrator will have complete discretion to extend the
period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of
56
<PAGE>
such options in whole or in part. Such discretion may be exercised at any time
while the options remain outstanding, whether before or after the optionee's
actual cessation of service.
Incentive stock options granted under the Discretionary Option Grant Program may
not be assigned or transferred, except by the provisions of the optionee's will
or the laws of inheritance following his or her death. Non-statutory options may
be assigned or transferred pursuant to the optionee's will or the laws of
inheritance and may also be assigned during the optionee's lifetime, in
connection with the optionee's estate plan, to members of his or her immediate
family or to a trust established exclusively for the benefit of such
individuals.
The Plan Administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
outstanding options under the Predecessor Plans) and to issue replacement
options with an exercise price based on the fair market value of the Discovery
Common Stock at the time of the new grant.
Stock Issuance Program
Shares may be issued under the Stock Issuance Program for such valid
consideration under the DGCL as the Plan Administrator deems appropriate,
provided the value of such consideration, as determined by the Plan
Administrator, is not less than the fair market value of the issued shares on
the date of issuance. Shares may also be issued as a bonus for past services.
Shares issued as a bonus for past services will be fully vested upon issuance.
All other shares issued under the program will be subject to a vesting schedule
tied to the performance of service or the attainment of designated financial or
key project milestones.
The Plan Administrator will have the sole and exclusive authority, exercisable
upon a participant's termination of service, to vest any or all unvested shares
of Discovery Common Stock at the time held by that participant, to the extent
the Plan Administrator determines that such vesting provides an appropriate
severance benefit under the circumstances.
57
<PAGE>
Automatic Option Grant Program
Non-employee Board members are eligible to receive option grants under the
Automatic Option Grant Program of the 1998 Stock Incentive Plan. On the date of
the 1998 Annual Meeting at which the 1998 Stock Incentive Plan is being
submitted to Discovery's stockholders for approval, each individual who has
previously served as a non-employee Board member of Discovery or ATI and who is
to serve as a non-employee Board member of the Company following the Merger will
automatically be granted at that meeting a stock option to purchase 10,000
shares of Common Stock. Each individual who first becomes a non-employee member
of the Board of the Company or any of its subsidiaries after the date of the
1998 Annual Meeting, whether through election by the stockholders or appointment
by the Board, will receive, at the time of such initial election or appointment,
an automatic option grant for 20,000 shares of Discovery Common Stock. In
addition, on the date of each annual stockholders meeting held after the 1998
Annual Meeting, each individual who is re-elected as a non-employee Board member
will automatically be granted at that meeting a stock option to purchase an
additional 10,000 shares of Discovery Common Stock, provided that such
individual has served as a non-employee Board member for at least six months.
Each option will have an exercise price per share equal to 60% of the fair
market value per share of Discovery Common Stock on the option grant date and a
maximum term of ten years measured from the grant date. The option will be
immediately exercisable for all the option shares, but any purchased shares will
be subject to repurchase by the Company, at the exercise price paid per share,
upon the optionee's cessation of Board service prior to vesting in those shares.
The shares subject to each option will vest (and the Company's repurchase rights
will lapse) in four successive equal annual installments over the optionee's
period of Board service, beginning six months after the option grant date, with
the first such installment to vest upon the optionee's completion of 18 months
of Board service measured from the option grant date. The shares subject to each
outstanding automatic option grant will immediately vest should any of the
following events occur while the optionee continues in Board service: (i) the
optionee's death or permanent disability, (ii) an acquisition of the Company by
merger or asset sale or (iii) the successful completion of a hostile tender
offer for more than 50% of the outstanding voting securities or a change in the
majority of the Board occasioned by one or more contested elections for Board
membership. Each automatic option grant held by an optionee upon his or her
termination of Board service will remain exercisable, for any or all of the
option shares in which the optionee is vested at the time of such termination,
for up to a 12-month period following such termination date.
Automatic option grants may be assigned by the provisions of the optionee's will
or the laws of inheritance following his or her death and may also be assigned
during the optionee's lifetime, in connection with the optionee's estate plan,
to members of his or her immediate family or to a trust established exclusively
for the benefit of such individuals.
58
<PAGE>
General Provisions
Acceleration
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed or replaced by the successor corporation will automatically
accelerate in full, and all unvested shares under the Stock Issuance Program
will immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. The
Plan Administrator will have complete discretion to grant one or more options
under the Discretionary Option Grant Program which will become fully exercisable
for all the option shares in the event those options are assumed in the
acquisition and the optionee's service with the Company or the acquiring entity
is involuntarily terminated or the optionee resigns for good cause within a
designated period following such acquisition. The Plan Administrator will have
similar discretion to grant options which will become fully exercisable for all
the option shares should the optionee's service terminate, whether involuntarily
or through a resignation for good reason, within a designated period following a
hostile change in control of the Company (whether by successful tender offer for
more than 50% of the outstanding voting stock or by proxy contest for the
election of Board members). The Plan Administrator may also provide for the
automatic vesting of any outstanding shares under the Stock Issuance Program
upon similar terms and conditions.
The acceleration of vesting in the event of a change in the ownership or control
of the Company may be seen as an anti-takeover provision and may have the effect
of discouraging a merger proposal, a takeover attempt or other efforts to gain
control of the Company.
Financial Assistance
The Plan Administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options under the
Discretionary Option Grant Program or the purchase of shares under the Stock
Issuance Program. The Plan Administrator will determine the terms of any such
assistance. However, the maximum amount of financing provided any participant
may not exceed the cash consideration payable for the issued shares plus all
applicable taxes incurred in connection with the acquisition of the shares.
Special Tax Election
The Plan Administrator may provide one or more holders of options or unvested
shares with the right to have the Company withhold a portion of the shares
otherwise issuable to such individuals in satisfaction of the tax liability
incurred by such individuals in connection with the exercise of those options or
the vesting of those shares. Alternatively, the Plan Administrator may allow
such individuals to deliver previously acquired shares of Discovery Common Stock
in payment of such tax liability.
59
<PAGE>
Amendment and Termination
The Board may amend or modify the 1998 Stock Incentive Plan in any or all
respects whatsoever, subject to any required stockholder approval. The Board may
terminate the 1998 Stock Incentive Plan at any time, and the 1998 Stock
Incentive Plan will in all events terminate upon the expiration of its ten-year
term measured from the date of its adoption by the Board of Directors.
Stock Awards
No options have been granted and no stock issuances have been made under the
1998 Stock Incentive Plan as of the date of this Proxy Statement. The table
below shows, as to each of Discovery's executive officers named in the Summary
Compensation Table and the various indicated individuals and groups, the number
of shares of Discovery Common Stock subject to options granted under the
Predecessor Plans which will be incorporated into the 1998 Stock Incentive Plan
upon approval by Discovery's stockholders of the 1998 Stock Incentive Plan
during the period from January 1, 1997 to the date of this Proxy Statement,
together with the weighted average exercise price payable per share.
================================================================================
STOCK OPTIONS
- --------------------------------------------------------------------------------
Name and Position Options Granted Weighted Average
(Number of Exercise Price
Shares)
- --------------------------------------------------------------------------------
James S. Kuo, M.D., President, Chief 30,000 $3.94
Executive Officer and Director
- --------------------------------------------------------------------------------
Vaughan H.J. Shalson, Former President, 60,666 $4.50
Chief Executive Officer and Director
- --------------------------------------------------------------------------------
S. Mark Moran, Former President, Chief - - - -
Executive Officer and Director
- --------------------------------------------------------------------------------
All current executive officers as a 80,000 $3.94
group (3 persons)
- --------------------------------------------------------------------------------
All current non-employee directors as a 107,540 $4.29
group (8 persons)
- --------------------------------------------------------------------------------
Steve H. Kanzer, C.P.A., Esq., Director 30,000 $3.94
- --------------------------------------------------------------------------------
Robert J. Capetola, Ph.D., Nominee for 43,010 $4.06
Director
- --------------------------------------------------------------------------------
Evan Myranthopoulos, Director 30,000 $3.94
- --------------------------------------------------------------------------------
Juerg Geigy, Esq., Director - - - -
60
<PAGE>
- --------------------------------------------------------------------------------
Mark G. Rogers, M.D., Director - - - -
- --------------------------------------------------------------------------------
Max Link, Ph.D., Director - - - -
- --------------------------------------------------------------------------------
Herbert H. McDade, Jr., Director - - - -
- --------------------------------------------------------------------------------
Milton Packer, M.D., Nominee for Director - - - -
- --------------------------------------------------------------------------------
Richard G. Power, Nominee for Director - - - -
- --------------------------------------------------------------------------------
Marvin E. Rosenthale, Ph.D., Nominee - - - -
for Director
- --------------------------------------------------------------------------------
David Naveh, Ph.D., Director 7,600 $4.50
- --------------------------------------------------------------------------------
Richard Sperber, Director 9,274 $3.84
- --------------------------------------------------------------------------------
All employees, including current officers 15,000 $3.94
who are not executive officers, as a
group (3 persons)
================================================================================
Federal Income Tax Consequences
Option Grants
Options granted under the 1998 Stock Incentive Plan may be either incentive
stock options which satisfy the requirements of Section 422 of the Internal
Revenue Code or non-statutory options which are not intended to meet such
requirements. The Federal income tax treatment for the two types of options
differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the time
of the option grant, and no taxable income is generally recognized at the time
the option is exercised. However, the excess fair market value of the shares
purchased upon exercise over the option exercise price (the "Option Spread") is
includible in the optionee's "alternative minimum taxable income" ("AMTI") for
purposes of the alternative minimum tax. The Option Spread is generally measured
on the date of exercise and is includible in AMTI in the year of exercise.
Special rules regarding the timing of AMTI inclusion may apply for shares
subject to a repurchase right or other "substantial risk of forfeiture." The
optionee will, however, recognize taxable income in the year in which the
purchased shares are sold or otherwise made the subject of a taxable
disposition. For Federal tax purposes, dispositions are divided into two
categories: (i) qualifying and (ii) disqualifying. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held the
shares for more than two years after the option grant date and more than one
year after the exercise date. If either of these two holding periods is not
satisfied, then a disqualifying disposition will result. Upon a qualifying
disposition, the optionee will recognize long-term capital gain in an amount
equal to the excess of (i) the amount realized upon the sale or other
disposition of the purchased shares over (ii) the exercise price paid for the
shares. If there is a disqualifying disposition of the shares, then the excess
of (i) the fair market value of those shares on the exercise date over (ii) the
exercise price paid for the shares will be taxable as ordinary income to the
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<PAGE>
optionee. Any additional gain or loss recognized upon the disposition will be
recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased shares, then
the Company will be entitled to an income tax deduction, for the taxable year in
which such disposition occurs, equal to the excess of (i) the fair market value
of such shares on the option exercise date over (ii) the exercise price paid for
the shares. In no other instance will the Company be allowed a deduction with
respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon the
grant of a non-statutory option. The optionee will in general recognize ordinary
income, in the year in which the option is exercised, equal to the excess of the
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares, and the optionee will be required to satisfy the tax
withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are unvested
and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the 1998 Stock
Incentive Plan will be substantially the same as those summarized above for the
exercise of non-statutory option grants.
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in connection
with disqualifying dispositions of incentive stock option shares or exercises of
non-statutory options granted with exercise prices equal to the fair market
value of the option shares on the grant date will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual on
the deductibility of the compensation paid to certain executive officers of the
Company. Accordingly, all compensation deemed paid with respect to those options
will remain deductible by the Company without limitation under Code Section
162(m).
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<PAGE>
Accounting Treatment
Option grants or stock issuances made at 100% of fair market value on the grant
or issue date and which have no conditions on vesting other than a service or
employment requirement will not result in any charge to the Company's earnings,
but the Company must disclose, in footnotes to the Company's financial
statements, the impact the outstanding options would have upon the Company's
reported earnings were the value of those options treated as a compensation
expense. Option grants or stock issuances with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a direct compensation expense to the Company's earnings equal to the
difference between the exercise or issue price and the fair market value of the
shares on the grant or issue date. Such expense will be accruable by the Company
over the period that the option shares or issued shares are to vest. Option
grants or stock issuances which vest only upon the attainment of performance
milestones will result in a direct compensation expense to the Company's
earnings equal to the difference between the exercise or issue price and the
fair market value of the shares on the date they vest. The number of outstanding
options may be a factor in determining the Company's earnings per share on a
fully-diluted basis.
Should one or more optionees be granted stock appreciation rights which have no
conditions upon exercisability other than a service or employment requirement,
then such rights will result in a compensation expense to the Company's
earnings.
New Plan Benefits
As of the date of this Proxy Statement, no options have been granted under the
1998 Stock Incentive Plan. On the date of the 1998 Annual Meeting, each of the
following non-employee Board members will receive an option grant for 10,000
shares of Discovery Common Stock under the Automatic Option Grant Provisions of
the 1998 Stock Incentive Plan at an exercise price per share equal to 60% of the
closing selling price per share of Discovery Common Stock on that date on the
Nasdaq SmallCap Market: Max Link, Mark Rogers, Richard Sperber, Herbert McDade,
David Naveh, Milton Packer, Marvin Rosenthale and Richard Power. On the
effective date of the Merger, Dr. Capetola will receive option grants to
purchase an aggregate of 228,830 shares of Discovery Common Stock at an exercise
price per share equal to the closing selling price of the Discovery Common Stock
on that date.
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<PAGE>
Stockholder Approval
The affirmative vote of a majority of the outstanding voting shares of Discovery
present or represented and entitled to vote at the 1998 Annual Meeting is
required for approval of the 1998 Stock Incentive Plan. Should such stockholder
approval not be obtained, then the 1998 Stock Incentive Plan will terminate, any
options granted thereunder will terminate without becoming exercisable and the
Predecessor Plans will continue in full force and effect.
Relation to the Merger
Approval of the 1998 Stock Incentive Plan by the Discovery stockholders at the
1998 Annual Meeting is a condition to the obligation of Discovery to consummate
the Merger. Discovery's 1995 Stock Option Plan provides that a total of 395,800
shares of Discovery Common Stock may be issued thereunder. There are currently
options exercisable for the purchase of 377,459 shares of Discovery Common Stock
outstanding under the 1995 Stock Option Plan, leaving an availability of 18,341
shares of Discovery Common Stock to be issued under options granted in the
future under the 1995 Stock Option Plan. The employment agreements to be entered
into with members of ATI's management team in connection with the Merger (See
"Description of the Merger--Employment Agreements") provide for the issuance at
the Effective Time of options exercisable for 338,500 shares of Discovery Common
Stock in the aggregate that are subject to three-year vesting (other than those
allocated to Dr. Capetola, which will vest immediately) and options exercisable
for an additional 335,000 shares of Discovery Common Stock that will vest upon
the achievement of certain corporate milestones. Accordingly, Discovery will be
unable to complete the Merger unless additional availability is created under
Discovery stock options plans in order to accommodate the aforementioned
issuances.
The affirmative vote of a majority of the votes that could be cast by
stockholders who are present or represented at the 1998 Annual Meeting is
required to adopt the 1998 Stock Incentive Plan. Properly executed, unrevoked
proxies will be voted FOR adoption of the 1998 Stock Incentive Plan unless a
vote against such adoption or abstention is specifically indicated in the proxy.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS APPROVE THE ADOPTION OF
THE 1998 STOCK INCENTIVE PLAN
GENERAL AND OTHER MATTERS
The Board knows of no matter, other than as referred to in this Proxy Statement,
which will be presented at the 1998 Annual Meeting. However, if other matters
properly come before the 1998 Annual Meeting, or any of its adjournments, the
person or persons voting the proxies will vote them in accordance with their
judgment in such matters.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 5, 1998, Discovery entered into the Merger Agreement with ATI and
Acquisition Sub relating to the Merger and, concurrently therewith, entered into
the Management Agreement with ATI.
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Simultaneously with and as a condition to the closing of the 1997 Merger, the
Company repaid to Titan, which was a 32% stockholder of the Company at such
time, all outstanding indebtedness of Discovery to Titan (including indebtedness
under a convertible debenture in the original principal amount of $1 million
purchased by Titan in March 1997) pursuant to agreements (the "Titan
Agreements") reached between Discovery and Titan at the time the merger
agreement relating to the 1997 Merger was executed. Such indebtedness aggregated
approximately $1,200,000. Also pursuant to the Titan Agreements, upon
effectiveness of the 1997 Merger, (i) all of the capital stock of Discovery
owned by Titan was surrendered to Discovery for cancellation (other than certain
shares of capital stock currently held in escrow which will be cancelled upon
their release from escrow) and (ii) Discovery's rights pursuant to the Bar-Ilan
License Agreement underlying certain drug products that had been subject to
development efforts by Discovery prior to the Merger were transferred to Titan
in exchange for Titan's agreement to pay a 2% royalty to Discovery on any sales
of such drug products.
From Discovery's inception until the closing of the 1997 Merger, Titan provided
certain executive, administrative, financial, business development and
regulatory services to Discovery. During the year ended December 31, 1996, and
the year ended December 31, 1997, Discovery incurred expenses in the aggregate
of approximately $57,000 and $35,400, respectively, pursuant to the services
arrangement. Discovery has in the past used certain facilities and equipment
leased by Titan and reimbursed Titan for the expenses incurred by Titan with
respect to such use, in addition to having entered an assignment and sublease
with Titan, along with the other subsidiaries of Titan, under such equipment
lease. Discovery's liability with respect to such equipment lease has been
terminated.
In October 1996, ATI entered into a consulting agreement with The Sage Group
pursuant to which The Sage Group will be paid a monthly consulting fee of $7,500
through March 1998, subject to quarterly performance evaluation by the Chief
Executive Officer of ATI. Richard Power, a director of ATI, is a principal and
the executive director of The Sage Group.
Pursuant to a private equity offering conducted during June through November
1996 (the "Unit Offering") in which Paramount Capital acted as placement agent
for Old Discovery, Old Discovery raised aggregate gross proceeds of
approximately $22,002,000. In connection with services rendered by Paramount
Capital as placement agent for the Unit Offering, and pursuant to a placement
agency agreement (the "Placement Agency Agreement") entered into by Old
Discovery and Paramount Capital, Old Discovery paid Paramount Capital cash
commissions of approximately $1,980,000 and a non-accountable expense allowance
of approximately $880,000. In addition, Old Discovery issued placement warrants
to Paramount Capital that were assumed by the Company in the 1997 Merger and are
currently exercisable for 220,026 shares of Series B Convertible Preferred Stock
at an exercise price of $11 per share and 85,624 shares of Common Stock at an
exercise price of $0.64 per share. Pursuant to the Placement Agency Agreement,
on November 7, 1996, Old Discovery and Paramount Capital entered into a
financial advisory agreement (the "Financial Advisory Agreement"), pursuant to
which Paramount Capital receives a monthly retainer of $4,000 per month for a
minimum of 24 months (all of which was pre-paid by Discovery), plus expenses and
success fees. The Financial Advisory Agreement was assumed by Discovery in the
1997 Merger.
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<PAGE>
Old Discovery agreed to indemnify Paramount Capital and certain related parties
with respect to liabilities arising out of the Unit Offering under the Federal
securities laws pursuant to the Placement Agency Agreement. Old Discovery also
agreed to indemnify Paramount Capital and certain related parties with respect
to liabilities arising out of services rendered pursuant to the Financial
Advisory Agreement. Discovery assumed such obligations in connection with the
1997 Merger.
Lindsay A. Rosenwald, M.D., is the Managing Member of RAQ, LLC, a principal
stockholder of Discovery. In May 1993, Old Discovery issued a total of 1,132,500
shares of its common stock (equivalent to 440,720 shares of Discovery Common
Stock) to Dr. Rosenwald for $0.002 per share. Dr. Rosenwald subsequently
transferred these shares to RAQ, LLC. In March 1996, Old Discovery issued an
additional 1,595,100 shares of its common stock (equivalent to 620,744 shares of
Discovery Common Stock) to RAQ, LLC at a price per share equivalent to $0.002.
Dr. Rosenwald is also the sole stockholder of PCAM (which in turn is the general
partner of the Aries Domestic Fund, L.P. ("Aries Domestic") and the investment
manager of The Aries Fund, a Cayman Island Trust ("Aries Fund" and, together
with Aries Domestic, "Aries")) and the Chairman of the Board of Directors, Chief
Executive Officer, President and sole stockholder of Paramount Capital. Dr.
Rosenwald is also a director of Titan and, prior to the 1997 Merger, was a
director of Discovery. Steven H. Kanzer, C.P.A., Esq., the Chairman of the Board
of Directors and a stockholder of Discovery, is a Senior Managing Director of
Paramount Capital and Senior Managing Director--Head of Venture Capital of
Paramount Investments. Kenneth Johnson, the Director of Business Development and
an option holder of Discovery, is a Technology Associate of an affiliate of
Paramount Capital. Evan Myrianthopolous, Chief Financial Officer of Discovery,
was previously a Technology Associate of Paramount Capital Investments, LLC.
Steven Birnbaum, Discovery's Project Manager for the ST-630 program for
postmenopausal osteoporosis, was previously employed by Paramount Investments as
a Technology Associate. Paramount Capital acted as placement agent in connection
with Titan's private equity placement during 1993 and in connection therewith
received fees (including a non accountable expense allowance) totaling
$2,306,100. In 1995, Paramount Capital received $148,500 in fees as placement
agent for a subsequent private equity placement by Titan.
During 1995 and the first quarter of 1996, Dr. Rosenwald provided loans to Old
Discovery in the aggregate amount of $17,794, the proceeds of which were used
for salary and administration purposes. Dr. Rosenwald contributed such loans to
the capital of Old Discovery prior to the initiation of the Unit Offering. Dr.
Rosenwald had guaranteed a credit facility provided by Fleet Bank in favor of
Old Discovery in an amount up to $350,000. The proceeds of these loans were used
by Old Discovery in connection with its entry into a license agreement and for
general operating and working capital purposes. The outstanding balance of such
loans, $201,000, was repaid in September 1996 using a portion of the proceeds of
the Unit Offering.
In February 1995, Old Discovery issued a total of 194,250 shares of its common
stock (equivalent to 75,593 shares of Discovery Common Stock) at a per share
price equivalent to $0.002 to Mr. Kanzer and an additional 85,000 shares
(equivalent to 33,078 shares of Discovery Common Stock) at such price to certain
family member of Mr. Kanzer. In March 1996, Old
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Discovery issued an additional 242,500 shares of its common stock (equivalent to
94,370 shares of Discovery Common Stock) to Mr. Kanzer at such price. In
February 1995, Old Discovery issued an additional 1,500 shares of its common
stock and in March 1996 issued an additional 123,500 shares of its common stock
(equivalent to 583 shares of Discovery Common Stock and 48,061 shares of
Discovery Common Stock, respectively) to Mr. Myrianthopoulos at such price. In
September 1996, Old Discovery issued an additional 62,000 shares of its common
stock (equivalent to 24,127 shares of Discovery Common Stock) to Mr.
Myrianthopoulos at such price in recognition of his identification and
introduction of the Surfaxin(TM) technology to Old Discovery, which preceded his
employment by Old Discovery. In September 1996, Old Discovery issued 50,000
shares of its common stock (equivalent to 19,458 shares of Discovery Common
Stock) to Steve Birnbaum at such price.
In October 1996, Harris Kanzer, who is the father of Steve H. Kanzer, purchased
6,000 shares of Old Discovery's common stock (equivalent to 2,333 shares of
Discovery Common Stock) and 6,000 shares of preferred stock (equivalent to 6,000
shares of Discovery Series B Preferred Stock) from Old Discovery in the Unit
Offering.
Discovery has agreed pursuant to its charter documents to indemnify its
Directors to the maximum extent permissible under the General Corporation Law of
the State of Delaware (the "DGCL").
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following sets forth certain information regarding the beneficial ownership
of each of Discovery Common Stock, Discovery Series B Preferred Stock, ATI
Common Stock and ATI Series A Preferred Stock as of May 1, 1998, and the
beneficial ownership such shares will represent after the Merger (i) by each
person known by Discovery to beneficially own more than five percent of the
Discovery Common Stock or Discovery Series B Preferred Stock, (ii) by each
person known by ATI to beneficially own more than five percent of ATI Common
Stock or ATI Series A Preferred Stock, (iii) by each director and executive
officer of each of Discovery and ATI, respectively, (iv) by all present
directors and executive officers of Discovery as a group, and (v) by all present
directors and executive officers of ATI as a group.
Management
<TABLE>
<CAPTION>
Discovery Shares ATI Shares Beneficial
Name and Address of Beneficially Owned Beneficially Owned Ownership
Beneficial Prior to Merger Prior to Merger After Merger
Owner (1) ------------------- ------------------ ------------
- --------- Title of Stock Number Percent Number Percent Percent
-------------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Steve H. Kanzer, C.P.A., Esq. (2) Common Stock 215,531 6.69% -0- * 5.07%
787 Seventh Avenue, 48th Floor
New York, NY 10019
James S. Kuo, M.D. (3) Common Stock 240,145 7.31% -0- * 5.56%
509 Madison Avenue, 14th Floor
New York, NY 10022
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Discovery Shares ATI Shares Beneficial
Name and Address of Beneficially Owned Beneficially Owned Ownership
Beneficial Prior to Merger Prior to Merger After Merger
Owner (1) ------------------- ------------------ ------------
- --------- Title of Stock Number Percent Number Percent Percent
-------------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Evan Myrianthopoulos (4) Common Stock 112,540 3.50% -- -- 2.65%
509 Madison Avenue, 14th Floor
New York, NY 10022
David Crockford (5) Common Stock 58,916 1.82% -- -- 1.39%
509 Madison Avenue, 14th Floor
New York, NY 10022
Juerg F. Geigy, Esq. Common Stock 13,620 * -- -- *
44 Elisabethenstrasse
CH-4051 Basel, Switzerland
Max Link, Ph.D. (11) Common Stock 13,620 * 8,000 3.07% 1.06%
230 Central Park West, Apt.14A
New York, NY 10024
Herbert H. McDade, Jr. (6) Common Stock 13,620 * -- -- *
Access Pharmaceuticals
660 White Plains Road, Suite 400
Tarrytown, NY 10591
Mark C. Rogers, M.D. (6)(12) Common Stock 18,485 * 8,000 3.02% 1.17%
4406 W. Cornwallis Road
Durham, NC 27705
Vaughn H.J. Shalson (7) Common Stock 60,666 1.87% -- -- 1.42%
39939 Stevenson Common
Apt K-3063
Freemont, CA 94538
Richard Sperber (8) Common Stock 9,274 * -- -- *
304 West 75th Street, Suite 16H
New York, NY 10023
David Naveh, Ph.D. (9) Common Stock 7,600 * -- -- *
Bayer Corporation
800 Dwight Way
P.O. Box 1986
Berkeley, CA 94701-1986
All Discovery directors and officers Common Stock 764,018 24.06% -- -- 18.15%
as a group (11 persons)
Robert J. Capetola, Ph.D.(10) Common Stock 88,803 2.76% 107,200 37.99% 11.65%
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Milton Packer, M.D.(13) Common Stock -- -- 4,000 1.53% *
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Discovery Shares ATI Shares Beneficial
Name and Address of Beneficially Owned Beneficially Owned Ownership
Beneficial Prior to Merger Prior to Merger After Merger
Owner (1) ------------------- ------------------ ------------
- --------- Title of Stock Number Percent Number Percent Percent
-------------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Power(14) Common Stock -- -- 2,000 * *
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Marvin E. Rosenthale, Ph.D.(13) Common Stock -- -- 4,000 1.53% *
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Laurence B. Katz, Ph.D.(15) Common Stock 14,813 * 16,000 6.04% 1.81%
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Harry Brittain(16) Common Stock 14,813 * 16,000 6.04% 1.81%
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Christopher Schaber(17) Common Stock 14,813 * 16,000 6.04% 1.81%
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Thomas E. Wiswell, M.D.(18) Common Stock 14,813 * 16,000 5.95% 1.81%
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Huei Tsai(19) Common Stock 14,813 * 16,000 6.04% 1.81%
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Lisa Mastroianni(20) Common Stock 4,326 * 4,000 1.54% *
c/o Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
All ATI directors and officers as a Common Stock -- -- 213,200 84.51% 24.34%
group (14 persons)
</TABLE>
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<PAGE>
Principal Stockholders
<TABLE>
<CAPTION>
Discovery Shares ATI Shares Beneficial
Name and Address of Beneficially Owned Beneficially Owned Ownership
Beneficial Prior to Merger Prior to Merger After Merger
Owner (1) ------------------- ------------------ ------------
- --------- Title of Stock Number Percent Number Percent Percent
-------------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Aries Fund, a Cayman Island Common Stock 337,105 9.77% -- -- 7.52%
Trust (21)
c/o Mees Pierson (Cayman) Limited
P.O. Box 2003 Series B 173,250 7.82%
British American Centre, Phase 3 Preferred Stock
Dr. Roy's Drive
George Town, Grand Cayman
RAQ, LLC (22) Common Stock 1,001,739 31.54% -- -- 23.80%
787 Seventh Avenue, 48th Floor
New York, NY 10019
Lindsay A. Rosenwald, M.D.(22) Common Stock 1,636,753 42.95% -- -- 33.79%
787 Seventh Avenue, 48th Floor
New York, NY 10019 Series B 326,298 14.18%
Preferred Stock
Paramount Capital Asset Common Stock 481,578 13.49% -- -- 10.46%
Management, Inc. (22)
787 Seventh Avenue, 48th Floor Series B 247,500 11.13%
New York, NY 10019 Preferred Stock
Discovery Laboratories, Inc. Series A -- -- 600,000 100.00%
509 Madison Avenue, 14th Floor Preferred Stock
New York, NY 10022
Charles Cochrane, M.D.(23) Common Stock -- -- 56,200 20.20% 5.11%
The Scripps Research Institute
10550 North Torrey Pines Road
La Jolla, CA 92037
Johnson & Johnson Development Common Stock -- -- 40,000 15.56% 3.71%
Corporation
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
The Scripps Research Institute Common Stock -- -- 30,000 11.67% 2.78%
10550 North Torrey Pines Road
La Jolla, CA 92037
Sage Partners(24) Common Stock -- -- 25,000 9.36% 2.29%
245 Route 22 West,
Suite 304
Bridgewater, NJ 08807
Susan Revak(25) Common Stock -- -- 17,800 6.79% 1.64%
The Scripps Research Institute
Department of Immunology, IMMIZ
La Jolla, CA 92037
</TABLE>
- --------------------------
* Represents less than 1%.
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<PAGE>
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934 (the "Exchange Act") and includes voting and
investment power with respect to shares of Discovery Common Stock, Discovery
Series B Preferred Stock and ATI Common Stock. Shares of Discovery Common Stock,
Discovery Series B Preferred Stock, and ATI Common Stock subject to options or
warrants currently exercisable or exercisable within 60 days of the date hereof,
are deemed outstanding for computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person.
(2) Includes 15,566 shares of Discovery Common Stock issuable on the exercise of
outstanding options granted on January 1, 1997 and 30,000 shares of Discovery
Common Stock issuable on the exercise of outstanding options granted on January
2, 1998, all of which are immediately exercisable. Shares of Discovery Common
Stock subject to such options vest twenty five percent at the time of grant with
the balance vesting in thirty-six equal monthly installments upon the optionee's
successive completion of service with the Company. Unvested shares of Discovery
Common Stock subject to such options remain subject to the Company's right to
repurchase at the exercise price paid per share. Does not include an additional
35,413 shares of Discovery Common Stock owned by certain family members of Mr.
Kanzer, as to which Mr. Kanzer disclaims beneficial ownership.
(3) Includes 11,026 shares that are subject to the Company's right to repurchase
in the event Dr. Kuo's employment with the Company is terminated prior to
expiration of such right. The Company's right to repurchase lapses at quarterly
intervals over Dr. Kuo's three year employment term expiring April 1999. In
addition, in the event that Dr. Kuo's employment is terminated subsequent to the
Merger, and certain conditions are satisfied, the Company's right to repurchase
such shares will lapse. Also includes 77,831 shares of Discovery Common Stock
issuable on the exercise of outstanding options granted on January 1, 1997 and
30,000 shares of Discovery Common Stock issuable on the exercise of outstanding
options granted on January 2, 1998, all of which are immediately exercisable.
Shares of Discovery Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in thirty-six equal
monthly installments upon the optionee's successive completion of service with
the Company. Unvested shares of Discovery Common Stock subject to such options
remain subject to the Company's right to repurchase at the exercise price paid
per share.
(4) Includes 11,675 shares of Discovery Common Stock issuable on the exercise of
outstanding options granted on January 1, 1997 and 30,000 shares of Discovery
Common Stock issuable on the exercise of outstanding options granted on January
2, 1998, all of which are immediately exercisable. Shares of Discovery Common
Stock subject to such options vest twenty five percent at the time of grant with
the balance vesting in thirty-six equal monthly installments upon the optionee's
successive completion of service with the Company. Unvested shares of Discovery
Common Stock subject to such options remain subject to the Company's right to
repurchase at the exercise price paid per share. Does not include an additional
1,906 shares of Discovery Common Stock owned by Mr. Myrianthopoulos' brother, as
to which Mr. Myrianthopoulos disclaims beneficial ownership.
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<PAGE>
(5) Consists of 38,916 shares of Discovery Common Stock issuable on the exercise
of outstanding options granted on January 1, 1997 and 20,000 shares of Discovery
Common Stock issuable on the exercise of outstanding options granted on January
2, 1998, all of which are immediately exercisable. Shares of Discovery Common
Stock subject to such options vest twenty five percent at the time of grant with
the balance vesting in thirty-six equal monthly installments upon the optionee's
successive completion of service with the Company. Unvested shares of Discovery
Common Stock subject to such options remain subject to the Company's right to
repurchase at the exercise price paid per share.
(6) Consists of 13,620 shares of Discovery Common Stock issuable on the exercise
of outstanding options, all of which are immediately exercisable and fully
vested.
(7) Consists of 60,666 shares of Discovery Common Stock issuable on the exercise
of outstanding options, all of which are immediately exercisable and fully
vested.
(8) Consists of 9,274 shares of Discovery Common Stock issuable on the exercise
of outstanding options, all of which are immediately exercisable and fully
vested.
(9) Consists of 7,600 shares of Discovery Common Stock issuable on the exercise
of outstanding options, all of which are immediately exercisable and fully
vested.
(10) Includes 64,803 shares of Discovery Common Stock issuable on the exercise
of outstanding options, all of which are immediately exercisable and fully
vested.
Includes 25,200 shares of ATI Common Stock issuable on the exercise of
outstanding options granted October 10, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest upon the
attainment of certain corporate milestones. Unvested shares of ATI Common Stock
subject to such options remain subject to ATI's right to repurchase at the
exercise price paid per share.
(11) Includes 4,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted October 28, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
(12) Consists of 8,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted October 28, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
(13) Consists of 2,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on November 1, 1996 and 2,000 shares of ATI Common
Stock issuable on the
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exercise of outstanding options granted on January 30, 1998, all of which are
immediately exercisable. Shares of ATI Common Stock subject to such options vest
twenty five percent at the time of grant with the balance vesting in three equal
annual installments upon the optionee's successive completion of service with
ATI. Unvested shares of ATI Common Stock subject to such options remain subject
to ATI's right to repurchase at the exercise price paid per share.
(14) Includes 1,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on October 28, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
Also includes 1,120 shares of ATI Common Stock issuable on the exercise of
outstanding options granted October 10, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest upon the
attainment of certain corporate milestones. Unvested shares of ATI Common Stock
subject to such options remain subject to ATI's right to repurchase at the
exercise price paid per share.
(15) Consists of 14,813 shares of Discovery Common Stock issuable on the
exercise of outstanding options granted on March 5, 1998, all of which are
immediately exercisable. Shares of Discovery Common Stock subject to such
options vest in three equal annual installments, the first installment of which
will vest on the first year anniversary of the closing of the Merger. If the
Merger has not occurred by July 15, 1998 due to the failure of Discovery to
perform any of its obligations under the Merger Agreement, all such options
shall be immediately vested in full. Unvested shares of Discovery Common Stock
subject to such options remain subject to the Company's right to repurchase at
the exercise price paid per share.
Includes 8,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on November 4, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest in three
equal annual installments upon the optionee's successive completion of service
with ATI. Unvested shares of ATI Common Stock subject to such options remain
subject to ATI's right to repurchase at the exercise price paid per share.
(16) Consists of 14,813 shares of Discovery Common Stock issuable on the
exercise of outstanding options granted on March 5, 1998, all of which are
immediately exercisable. Shares of Discovery Common Stock subject to such
options vest in three equal annual installments, the first installment of which
will vest on the first year anniversary of the closing of the Merger. If the
Merger has not occurred by July 15, 1998 due to the failure of Discovery to
perform any of its obligations under the Merger Agreement, all such options
shall be immediately vested in full. Unvested shares of Discovery Common Stock
subject to such options remain subject to the Company's right to repurchase at
the exercise price paid per share.
Includes 8,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on November 1, 1996, all of which are immediately
exercisable. Shares of ATI
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Common Stock subject to such options vest twenty five percent at the time of
grant with the balance vesting in three equal annual installments upon the
optionee's successive completion of service with ATI. Unvested shares of ATI
Common Stock subject to such options remain subject to ATI's right to repurchase
at the exercise price paid per share.
(17) Consists of 14,813 shares of Discovery Common Stock issuable on the
exercise of outstanding options granted on March 5, 1998, all of which are
immediately exercisable. Shares of Discovery Common Stock subject to such
options vest in three equal annual installments, the first installment of which
will vest on the first year anniversary of the closing of the Merger. If the
Merger has not occurred by July 15, 1998 due to the failure of Discovery to
perform any of its obligations under the Merger Agreement, all such options
shall be immediately vested in full. Unvested shares of Discovery Common Stock
subject to such options remain subject to the Company's right to repurchase at
the exercise price paid per share.
Includes 8,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on November 12, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
(18) Consists of 14,813 shares of Discovery Common Stock issuable on the
exercise of outstanding options granted on March 5, 1998, all of which are
immediately exercisable. Shares of Discovery Common Stock subject to such
options vest in three equal annual installments, the first installment of which
will vest on the first year anniversary of the closing of the Merger. If the
Merger has not occurred by July 15, 1998 due to the failure of Discovery to
perform any of its obligations under the Merger Agreement, all such options
shall be immediately vested in full. Unvested shares of Discovery Common Stock
subject to such options remain subject to the Company's right to repurchase at
the exercise price paid per share.
Includes 12,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on June 1, 1997, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
(19) Consists of 14,813 shares of Discovery Common Stock issuable on the
exercise of outstanding options granted on March 5, 1998, all of which are
immediately exercisable. Shares of Discovery Common Stock subject to such
options vest in three equal annual installments, the first installment of which
will vest on the first year anniversary of the closing of the Merger. If the
Merger has not occurred by July 15, 1998 due to the failure of Discovery to
perform any of its obligations under the Merger Agreement, all such options
shall be immediately vested in full. Unvested shares of Discovery Common Stock
subject to such options remain subject to the Company's right to repurchase at
the exercise price paid per share.
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Includes 8,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on November 1, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
(20) Consists of 4,326 shares of Discovery Common Stock issuable on the exercise
of outstanding options granted on March 5, 1998, all of which are immediately
exercisable. Shares of Discovery Common Stock subject to such options vest in
three equal annual installments, the first installment of which will vest on the
first year anniversary of the closing of the Merger. If the Merger has not
occurred by July 15, 1998 due to the failure of Discovery to perform any of its
obligations under the Merger Agreement, all such options shall be immediately
vested in full. Unvested shares of Discovery Common Stock subject to such
options remain subject to the Company's right to repurchase at the exercise
price paid per share.
Includes 2,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted on January 2, 1997, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest twenty five
percent at the time of grant with the balance vesting in three equal annual
installments upon the optionee's successive completion of service with ATI.
Unvested shares of ATI Common Stock subject to such options remain subject to
ATI's right to repurchase at the exercise price paid per share.
(21) Beneficial ownership of Discovery Common Stock includes (i) 245,168 shares
issuable on the conversion of Series B Preferred Stock, (ii) 6,129 shares
issuable upon exercise of warrants, all of which are exercisable within 60 days
of the date hereof, and (iii) 24,516 shares issuable on the conversion of Series
B Preferred Stock issuable on the exercise of warrants, all of which are
exercisable within 60 days of the date hereof.
Beneficial ownership of Discovery Series B Preferred Stock includes 15,750
shares issuable on the exercise of warrants, all of which are exercisable within
60 days of the date hereof.
(22) Dr. Rosenwald is Chairman, President and sole stockholder of PCAM. PCAM is
the general partner of Aries Domestic and the investment manager of Aries Fund.
As a consequence of these relationships, each of Dr. Rosenwald and PCAM may be
deemed to share beneficial ownership of the Discovery Common Stock and Discovery
Series B Preferred Stock beneficially owned by Aries. Dr. Rosenwald is also the
Managing Member of RAQ, LLC and, accordingly, may be deemed to have beneficial
ownership of the Discovery Common Stock beneficially owned by RAQ, LLC. Dr.
Rosenwald disclaims beneficial ownership of any securities issuable upon
exercise of warrants granted to employees of Paramount Capital, Incorporated
("Paramount Capital").
PCAM's and Dr. Rosenwald's beneficial ownership of Discovery Common Stock
includes (i) 350,240 shares issuable upon conversion of Discovery Series B
Preferred Stock held by Aries, (ii) 8,755 shares issuable upon exercise of
warrants exercisable for Discovery Common Stock held by Aries, all of which are
exercisable within 60 days of the date hereof, and (iii) 35,023
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shares issuable upon exercise of warrants exercisable for Discovery Series B
Preferred Stock held by Aries, all of which are exercisable within 60 days of
the date hereof. Dr. Rosenwald's beneficial ownership also includes (iv) 111
shares issuable upon exercise of outstanding options held by Dr. Rosenwald, (v)
30,665 shares issuable upon exercise of warrants exercisable for Discovery
Common Stock held by Dr. Rosenwald and (vi) 122,659 shares issuable upon
exercise of warrants exercisable for Discovery Series B Preferred Stock, all of
which are exercisable within 60 days of the date hereof.
PCAM's and Dr. Rosenwald's beneficial ownership of Discovery Series B Preferred
Stock includes 22,500 shares issuable upon exercise of warrants exercisable for
Discovery Series B Preferred Stock held by Aries, all of which are exercisable
within 60 days of the date hereof. Dr. Rosenwald's beneficial ownership also
includes 78,798 shares issuable upon exercise of warrants exercisable for
Discovery Series B Preferred Stock held by Dr. Rosenwald.
(23) Includes 10,000 shares of ATI Common Stock issuable on the exercise of
outstanding options, all of which are immediately exercisable and fully vested.
Also includes 11,200 shares of ATI Common Stock issuable on the exercise of
outstanding options granted October 10, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest upon the
attainment of certain corporate milestones. Unvested shares of ATI Common Stock
subject to such options remain subject to ATI's right to repurchase at the
exercise price paid per share.
(24) Includes 10,000 shares of ATI Common Stock issuable on the exercise of
outstanding options granted January 16, 1998, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest upon the
attainment of certain corporate milestones. Unvested shares of ATI Common Stock
subject to such options remain subject to ATI's right to repurchase at the
exercise price paid per share.
(25) Includes 2,500 shares of ATI Common Stock issuable on the exercise of
outstanding options, all of which are immediately exercisable and fully vested.
Also includes 2,800 shares of ATI Common Stock issuable on the exercise of
outstanding options granted October 10, 1996, all of which are immediately
exercisable. Shares of ATI Common Stock subject to such options vest upon the
attainment of certain corporate milestones. Unvested shares of ATI Common Stock
subject to such options remain subject to ATI's right to repurchase at the
exercise price paid per share.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 16, 1998, the Audit Committee of the Company retained RAE as the
independent auditors to audit the Company's financial statements for fiscal year
1997. Prior to the 1997 Merger, RAE served as the independent accountants for
Old Discovery. In connection with the 1997 Merger, the Company's executive
offices and principal accounting functions were consolidated with Old
Discovery's and, accordingly, the Company determined to maintain the
professional relationship established with RAE by Old Discovery. On January 16,
1998, the
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Company advised Ernst & Young, LLP ("Ernst & Young"), the Company's previous
independent accountants, that the Company would not be retaining Ernst & Young
to audit the Company's financial statements for fiscal year 1997.
The Company believes that, with respect to the fiscal years ended December 31,
1997 and 1996, and the subsequent interim period through January 16, 1998, the
Company did not have any disagreement on any matter of accounting principals or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Ernst & Young would have
caused it to make reference in connection with its report on the Company's
financial statements to the subject matter of the disagreement.
The 1995 and 1996 audit reports issued by Ernst & Young for the Company did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. However, in
reissuing its audit report on the Company's 1996 financial statements in
connection with the filing by the Company of its registration statement on Form
S-4 filed with the Securities and Exchange Commission on August 25, 1997 (and
the amendments thereto), Ernst & Young added an explanatory paragraph to such
report with respect to the ability of the Company to continue as a going
concern. During those years there were no events described in Item 304(a)(1)(iv)
(B) of Regulation S-B promulgated under the Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Discovery's directors, executive
officers (including a person performing a principal policy-making function) and
persons who own more than 10% of a registered class of Discovery's equity
securities ("10% Holders") to file with the SEC initial reports of ownership and
reports of changes in ownership of Discovery's Common Stock and other equity
securities of Discovery. Directors, officers and 10% Holders are required by SEC
regulations to furnish Discovery with copies of all of the Section 16(a) reports
they file. Based solely upon a review of the copies of the forms furnished to
the Company and the representations made by the reporting persons to Discovery,
Discovery believes that during fiscal 1997 its directors, officers and 10%
Holders complied with all substantive filing requirements under Section 16(a) of
the Exchange Act except that Aries Fund and PCAM did not timely file Form 3's
reporting beneficial ownership of more than ten percent of a class of equity
securities of Discovery. A Form 5 was timely filed by each of the Aries Fund and
PCAM.
DESCRIPTION OF SECURITIES
Discovery is authorized to issue up to 20,000,000 shares of Discovery Common
Stock and 5,000,000 shares of Preferred Stock, par value, $0.001 per share. As
of May 1, 1998, 3,175,955 shares of Discovery Common Stock and 2,200,256 shares
of Discovery Series B Preferred Stock were issued and outstanding.
Discovery Common Stock
Each holder of Discovery Common Stock is entitled to one vote for each share
held of record.
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There is no right to cumulative voting of shares for the election of Directors.
The shares of Discovery Common Stock are not entitled to preemptive rights and
are not subject to redemption or assessment. Subject to the rights of holders of
preferred stock of Discovery, each share of Discovery Common Stock is entitled
to share ratably in distributions to stockholders and to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Subject to the rights of holders of preferred stock of the
Company, upon liquidation, dissolution or winding up of Discovery, the holders
of Discovery Common Stock are entitled to receive, pro-rata, the assets of
Discovery which are legally available for distribution to stockholders. The
issued and outstanding shares of Discovery Common Stock are validly issued,
fully paid and non-assessable.
Preferred Stock
The preferred stock of Discovery can be issued in one or more series as may be
determined from time-to-time by the Board of Directors. In establishing a
series, the Board of Directors shall give to it a distinctive designation so as
to distinguish it from the shares of all other series and classes, and shall fix
the number of shares in such series and the preferences, rights and restrictions
thereof. All shares of any one series shall be alike in every particular. The
Board of Directors has the authority, without stockholder approval, to fix the
rights, preferences, privileges and restrictions of any series of preferred
stock including, without limitation: (a) the rate of distribution; (b) the price
at which and the terms and conditions on which shares shall be redeemed; (c) the
amount payable upon shares for distributions of any kind; (d) sinking fund
provisions for the redemption of shares; (e) the terms and conditions on which
shares may be converted if the shares of any series are issued with the
privilege of conversion; and (f) voting rights except as limited by law.
Although Discovery currently does not have any fixed plans to designate any
series of preferred stock other than the Discovery Series C Preferred Stock or
to issue additional shares of preferred stock other than the shares of Discovery
Series B Preferred Stock issuable upon exercise of certain warrants issued in
connection with the Unit Offering conducted by Old Discovery, there can be no
assurance that Discovery will not do so in the future. As a result, Discovery
could authorize the issuance of a series of preferred stock which would grant to
holders preferred rights to the assets of Discovery upon liquidation, the right
to receive dividend coupons before dividends would be declared to holders of
Discovery Common Stock, and the right to the redemption of such shares, together
with a premium, prior to the redemption of Discovery Common Stock. The current
stockholders of Discovery have no redemption rights. In addition, the Board of
Directors could issue large blocks of voting stock to fend off unwanted tender
offers or hostile takeovers without further stockholder approval.
Discovery Series B Preferred Stock
The following is a brief summary of certain provisions of the Discovery Series B
Preferred Stock.
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Dividends
The holders of Discovery Series B Preferred Stock are entitled to receive
dividends if, as and when declared by the Board of Directors of Discovery out of
funds legally available therefor. No dividend or distribution, as the case may
be, will be declared or paid on any junior stock (including the Discovery Common
Stock) unless the dividend also is paid to holders of the Discovery Series B
Preferred Stock. Discovery does not intend to pay cash dividends on the
Discovery Series B Preferred Stock or the underlying Discovery Common Stock for
the foreseeable future.
Conversion
Each share of Discovery Series B Preferred Stock may be converted, in whole or
in part, at the option of the holder at any time after the initial issuance date
into 1.556628 of Discovery Common Stock based upon a conversion price equal to
$6.42 per share of Discovery Common Stock (the "Preferred Conversion Price").
The Preferred Conversion Price is subject to adjustment upon the occurrence of
certain mergers, reorganizations, consolidations, reclassifications, stock
dividends or stock splits that will result in an increase or decrease in the
number of shares of Discovery Common Stock outstanding. In addition, the
Preferred Conversion Price is subject to adjustment on December 1, 1998 (the
"Reset Date") if the average closing bid trading price of the Discovery Common
Stock for the 30 consecutive trading days immediately preceding the Reset Date
(the "Twelve Month Trading Price") is less than 135% of the then applicable
Preferred Conversion Price ("Reset Event"). Upon the occurrence of a Reset
Event, the then applicable Preferred Conversion Price will be reduced to equal
the greater of (i) the Twelve Month Trading Price dividend by 1.35 and (ii) 50%
of the then applicable Preferred Conversion Price.
Mandatory Conversion
Discovery has the right at any time after the Reset Date to cause the Discovery
Series B Preferred Stock to be converted in whole or in part, on a pro rata
basis, into shares of Discovery Common Stock at the applicable Preferred
Conversion Price if the closing price of the Discovery Common Stock exceeds 150%
of the then applicable Preferred Conversion Price for at least 20 trading days
in any 30 consecutive trading days period.
Liquidation Preference
Upon a (i) liquidation, dissolution or winding up of Discovery, whether
voluntary or involuntary, (ii) sale or other disposition of all or substantially
all of the assets of Discovery or (iii) merger, consolidation, combination,
reorganization or other transaction in which Discovery is not the surviving
entity and voting power of Discovery's stockholders after such transaction is
less than 50% (a "Merger Transaction") ((i), (ii) and (iii) being collectively
referred to as a "Liquidation Event"), after payment or provision for payment of
the debts and other liabilities of Discovery, the holders of the Discovery
Series B Preferred Stock then outstanding will be first entitled to receive, pro
rata, and in preference to the holders of the Discovery Common Stock and any
other stock of Discovery junior to the Discovery Series B Preferred Stock, an
amount per share equal
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to $13.50, subject to adjustment, plus accrued but unpaid dividends, if any;
provided, however, that in the case of a Merger Transaction, such $13.50 per
share may be paid in cash and/or securities of the surviving entity in such
Merger Transaction.
Voting Rights
The holders of the Discovery Series B Preferred Stock have the right at all
meetings of stockholders to the number of votes equal to the number of shares of
Discovery Common Stock issuable upon conversion of the Discovery Series B
Preferred Stock at the record date for determination of the stockholders
entitled to vote. So long as a majority of the shares of Discovery Series B
Preferred Stock remain outstanding, the holders of 66.67% of the Discovery
Series B Preferred Stock are required to approve (i) the issuance of any
securities of Discovery senior to or on parity with the Discovery Series B
Preferred Stock, (ii) any material alteration or change in the rights or
preferences or privileges of the Discovery Series B Preferred Stock and (iii)
the declaration or payment of any dividend on any junior stock or the repurchase
of any securities of Discovery. Except as provided above or as required by
applicable law, the holders of the Discovery Series B Preferred Stock, other
than in connection with vesting provisions of employee and consultant
agreements, vote together with the holders of the Discovery Common Stock and not
as a separate class.
Lock-up and Blackout Periods
The holders of shares of Discovery Common Stock issuable upon conversion of
shares of Discovery Series B Preferred Stock (the "Conversion Shares") have
agreed pursuant to their subscription agreements executed in connection with the
Unit Offering not to offer, pledge, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, and Conversion
Shares, without the prior written consent of Paramount. Such restrictions apply
until (i) March 2, 1998 with respect to 100% of each of the holders' Conversion
Shares, (ii) June 1, 1998 with respect to 75% of such Conversion Shares, (iii)
September 1, 1998 with respect to 50% of such Conversion Shares, and (iv)
December 1, 1998 with respect to the remaining 25% of such Conversion Shares.
In addition, any shares of Discovery Common Stock issuable upon conversion of
the Discovery Series B Preferred Stock shall be subject to a blackout period for
the following periods: (i) any period not to exceed two 30-day periods within
any one 12-month period Discovery requires in connection with a primary
underwritten offering of equity securities and (ii) any period, not to exceed a
60-day period per circumstance or development, when Discovery determines in good
faith that offers and sales pursuant thereto should not be made by reason of the
presence of material undisclosed circumstances or developments with respect to
which the disclosure that would be required in such a prospectus is premature,
would have a material adverse effect on Discovery or is otherwise inadvisable.
Discovery Series C Preferred Stock
The Board of Directors of Discovery has authorized the issuance of up to 2,039
shares of Discovery Series C Preferred Stock, the rights, preferences and
characteristics of which are as follows:
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Dividends
The holders of Discovery Series C Preferred Stock will be entitled to receive,
out of funds legally available therefor, dividends at a rate of $100 per share
per annum (subject to adjustment) prior to the payment or declaration of
dividends on any junior stock (including the Discovery Series B Preferred Stock
and Discovery Common Stock). Such dividends will accrue and accumulate and will
be due and payable only upon a Liquidation Event (as defined below) or a
mandatory redemption as described below. Notwithstanding the foregoing,
Discovery has agreed pursuant to the Exchange Agreement to pay to the holders of
the Discovery Series C Preferred Stock, on the 21st day following the closing of
the Merger, shares of Discovery Common Stock, at the then current market price
(based on a 20-trading-day average) of the Discovery Common Stock, having a
value equal to the dividends on the ATI Series B Preferred Stock that were
accrued and unpaid as of the date of the Merger.
Conversion
Each share of Discovery Series C Preferred Stock may be converted, in whole or
in part, at the option of the holder at any time after the first anniversary of
the Merger into a number of shares of Discovery Common Stock equal to (i) $1,000
plus all accrued and unpaid dividends on such share of Discovery Series C
Preferred Stock (the "Liquidation Value") divided by (ii) the then current fair
market value of the Discovery Common Stock based upon the average closing price
of the Discovery Common Stock over a 20 trading day period (the "Fair Market
Value").
In addition, in the event that, prior to the first anniversary of the Merger,
the Fair Market Value of the Discovery Common Stock exceeds 200% of the closing
price on the day following the Merger, 50% of the Discovery Series C Preferred
Stock shall be convertible at any time thereafter, at the option of the holders
thereof, into a number of shares of Discovery Common Stock per share of
Discovery Series C Preferred Stock equal to the Liquidation Value divided by the
Fair Market Value of the Discovery Common Stock.
Mandatory Redemption
Discovery will, upon the first to occur of (i) the approval by the FDA of the
first NDA filed by Discovery relating to or incorporating Surfaxin(TM) or (ii)
18 months after the closing of the Merger (the "Mandatory Redemption Date"),
redeem from each holder of shares of Discovery Series C Preferred Stock, at a
price equal to $1000 per share plus any dividends declared or accrued but unpaid
thereon, all of the outstanding shares of Discovery Series C Preferred Stock
held by such holder on the applicable Mandatory Redemption Date payable, at the
option of Discovery, either in cash or shares of Discovery Common Stock valued
at the Fair Market Value thereof.
Liquidation Preference
Upon (i) the voluntary or involuntary liquidation, dissolution or winding up of
Discovery, (ii) the consolidation or merger of Discovery into or with any other
entity or entities or the consummation of any transactions which result in
either (a) the exchange by the holders of
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outstanding shares of Discovery of 50% or more of either (1) the then
outstanding shares of Discovery Common Stock or (2) the combined voting power of
Discovery's then outstanding securities entitled to vote generally in the
election of directors or other general matters, (b) the holders of outstanding
shares of Discovery immediately prior to the consummation of such transaction or
transactions holding less than 50% of the outstanding securities of the
resulting entity entitled to vote generally in the election of directors or
other general matters or (c) the sale or transfer by Discovery of all or
substantially all of its assets (any of (a) (b) or (c) being referred to as a
"Liquidation Event"), after payment or provision for payment of the debts and
other liabilities of the Company, the holders of the Discovery Series C
Preferred Stock then outstanding will be first entitled to receive, pro rata,
and in preference to the holders of any stock ranking junior to the Discovery
Series C Preferred Stock (including the Discovery Series B Preferred Stock and
the Discovery Common Stock), an amount per share equal to $1,000, subject to
adjustment, plus accrued but unpaid dividends.
Voting Rights
Except as required by applicable law, the holders of the Discovery Series C
Preferred Stock will vote together with the holders of Common Stock and the
Discovery Series B Preferred Stock on matters submitted to a vote of
stockholders of Discovery. Each holder of Discovery Series C Preferred Stock is
entitled to one vote for each share held of record.
Placement Agent Warrants
In connection with services rendered by Paramount Capital as placement agent in
the Unit Offering conducted by Old Discovery, Old Discovery issued to Paramount
Capital and/or its designees warrants to acquire approximately 220,026 newly
issued shares of Series A Convertible Preferred Stock of Old Discovery (the
"Preferred Placement Warrants"). The Preferred Placement Warrants were assumed
by Discovery in the 1997 Merger. Each Preferred Placement Warrant entitles the
registered holder thereof to purchase Series B Preferred Stock at a price of $11
per share, at any time until November 8, 2006. Old Discovery also issued to
Paramount Capital and/or its designees warrants to acquire shares of Old
Discovery Common Stock (the "Common Placement Warrants," and collectively with
the Preferred Placement Warrants, the "Placement Agent Warrants"). The Common
Placement Warrants were assumed by Discovery in the 1997 Merger. Each Common
Placement Warrant entitles the registered holder thereof to purchase Discovery
Common Stock at a price of $0.64 per share, at any time until November 8, 2006.
The Placement Agent Warrants may be exercised in whole or in part and may be
exercised on a "net exercise" basis pursuant to a provision that does not
require the payment of any cash to Discovery.
The Placement Agent Warrants contain provisions to protect the holders thereof
against dilution by adjusting the price at which the Placement Agent Warrants
are exercisable and the number of shares issuable upon exercise thereof upon the
occurrence of certain events, including the payment of stock dividends and
distributions, stock splits, recapitalization, reclassifications and
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reorganizations affecting Discovery's securities and issuances of shares at
below the then market price or the exercise prices of the Placement Agent
Warrants.
Discovery is not required to issue fractional shares of Discovery Common Stock
upon exercise of any such warrants. In lieu thereof, an amount of cash equal to
the same fraction of the then current market value of a share of Discovery
Common Stock will be paid. No adjustment as to dividends will be made upon any
exercise of any such warrants. The holder of any such warrant will not have any
rights as a holder of Discovery Common Stock unless and until the applicable
warrant is exercised for the Discovery Common Stock issuable upon such exercise.
Registration Rights
Pursuant to a registration rights agreement to be entered into among Discovery,
J&J and Scripps pursuant to the Merger Agreement, if at any time after the
consummation of the Merger (but no more than five years following such date) the
Company proposes to register any of its securities under the Securities Act of
1933, either for its own account or for the account of other security holders
exercising registration rights (i) J&J, the holder of 40,000 shares of ATI
Common Stock and the holder of 2,039 shares of ATI Series B Preferred Stock and
(ii) Scripps, the holder of 30,000 shares of ATI Common Stock (the shares of ATI
Common Stock held by Scripps and J&J are hereinafter referred to as the
"Registrable Securities"), are entitled to request inclusion of the Registrable
Securities (or any Common Stock issued upon conversion of the Series C Preferred
Stock) in such registration. These registration rights are subject to certain
conditions and limitations, including the right of the underwriters to restrict
the number of shares offered in a registration.
Pursuant to an investor rights agreement, RAQ, LLC, the holder of 1,001,739
shares of Discovery Common Stock has unlimited "piggyback" registration rights
and two demand Form S-3 registration rights per year. These registration rights
are subject to certain conditions and limitations, including a "lock-up"
provision applicable until November 25, 1998 and the right of the underwriters
to restrict the number of shares offered in a registration.
Transfer Agent
The Transfer Agent for the shares of Discovery Common Stock is Continental Stock
Transfer & Trust Company.
83
<PAGE>
FINANCIAL AND OTHER INFORMATION
See Index to Financial Statements on Page F-1.
AVAILABLE INFORMATION
DISCOVERY WILL PROVIDE, WITHOUT CHARGE TO EACH PERSON SOLICITED BY THIS PROXY
STATEMENT, ON THE WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF DISCOVERY'S
ANNUAL REPORT ON FORM 10-KSB FOR FISCAL 1997 (INCLUDING THE FINANCIAL
STATEMENTS, BUT EXCLUDING EXHIBITS). SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO
THE CORPORATE SECRETARY AT THE ADDRESS OF DISCOVERY APPEARING ON THE FIRST PAGE
OF THIS PROXY STATEMENT.
Your cooperation in giving this matter your immediate attention and returning
your Proxy is appreciated.
By Order of the Board of Directors,
/s/ Evan Myrianthopoulos
----------------------------
Secretary
May 6, 1998
84
<PAGE>
PROXY
DISCOVERY LABORATORIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Steve H. Kanzer and Robert J. Capetola, and each
of them, with power of substitution in each, proxies to appear and vote all
common stock and/or preferred stock of the undersigned in Discovery
Laboratories, Inc. at the Annual Meeting of Stockholders to be held on June 16,
1998, and at all postponements and adjournments thereof, upon the matters
described below, hereby revoking any proxy heretofore executed by the
undersigned to vote (i) as specified by the undersigned below and (ii) in the
discretion of any proxy upon such other business as may properly come before the
meeting.
The proxies are directed to vote as follows:
Proposal Number 1--Approval of Merger
[_] FOR [_] AGAINST [_] ABSTAIN
Proposal Number 2--Election Of Directors. In the event Proposals 1 and 3 are
approved by the stockholders and the Merger is consummated:
WITHHOLD
NAME VOTE FOR AUTHORITY TO VOTE
---- -------- -----------------
Steve H. Kanzer, C.P.A., Esq. [_] [_]
Robert J. Capetola, Ph.D. [_] [_]
Max Link, Ph.D. [_] [_]
Herbert McDade [_] [_]
David Naveh, Ph.D [_] [_]
Richard Sperber [_] [_]
Milton Packer, M.D. [_] [_]
Marvin Rosenthale, M.D. [_] [_]
Richard Power [_] [_]
Mark Rogers, M.D. [_] [_]
In the event the Merger is not consummated:
WITHHOLD
NAME VOTE FOR AUTHORITY TO VOTE
---- -------- -----------------
Steve H. Kanzer, C.P.A., Esq. [_] [_]
James S. Kuo, M.D. [_] [_]
Robert J. Capetola, Ph.D. [_] [_]
Max Link, Ph.D. [_] [_]
Herbert McDade [_] [_]
David Naveh, Ph.D. [_] [_]
85
<PAGE>
Richard Sperber [_] [_]
Juerg Geigy, Esq. [_] [_]
Evan Myrianthopoulos [_] [_]
Mark Rogers, M.D. [_] [_]
Proposal Number 3--Approval of 1998 Stock Incentive Plan
[_] FOR [_] AGAINST [_] ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER AS DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
The undersigned hereby
acknowledges receipt of the Notice
of Annual Meeting, Proxy Statement
and Annual Report of Discovery
Laboratories, Inc.
Dated: ___________________, 1998
Signature of Stockholder
Signature of Stockholder
PLEASE SIGN YOUR NAME EXACTLY AS
IT APPEARS HEREON. WHEN SIGNING AS
ATTORNEY-IN-FACT, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE ADD YOUR TITLE AS
SUCH. WHEN SIGNING AS JOINT
TENANTS, ALL PARTIES IN THE JOINT
TENANCY MUST SIGN. IF SIGNER IS A
CORPORATION, PLEASE SIGN IN FULL
CORPORATE NAME BY DULY AUTHORIZED
OFFICER OR OFFICERS AND AFFIX THE
CORPORATE SEAL.
86
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheet as of December 31, 1997 F-3
Statements of operations for the years ended
December 31, 1997 and 1996 and the period
May 18, 1993 (inception) through December 31, 1997 F-4
Statements of changes in stockholders' equity
for the period May 18, 1993 (inception) through
December 31, 1997 F-5
Statements of cash flows for the years ended
December 31, 1997 and 1996 and the period
May 18, 1993 (inception) through December 31, 1997 F-6
Notes to financial statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Discovery Laboratories, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Discovery
Laboratories, Inc. and subsidiary (a development stage company) as of December
31, 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the two years ended December 31, 1997,
and the period from May 18, 1993 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Discovery
Laboratories, Inc. and subsidiary as of December 31, 1997 and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the two-year period ended December 31, 1997, and the period from May
18, 1993 (inception) through December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
January 26, 1998
With respect to Note L
March 5, 1998
F-2
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheet
December 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 6,297,000
Investments 4,957,000
Prepaid expenses 190,000
------------
Total current assets 11,444,000
Furniture and equipment, net of deprecation 181,000
Security deposits 30,000
------------
$ 11,655,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 565,000
------------
Dividends payable on preferred stock 238,000
------------
Minority interest in preferred stock of subsidiary (Note H) 2,039,000
------------
Commitments (Notes D, F, H[2] and K)
Stockholders' Equity (Notes A, G and J):
Preferred stock, $.001 par value; 5,000,000 shares authorized;
2,200,256 shares issued and outstanding (liquidation
preference $29,703,000) 2,000
Common stock, $.001 par value; 20,000,000 authorized; 3,175,955
shares issued and outstanding 3,000
Additional paid-in capital 21,464,000
Deficit accumulated during the development stage (12,656,000)
------------
Total stockholders' equity 8,813,000
------------
$ 11,655,000
============
See notes to financial statements F-3
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
May 18, 1993
Year Ended (Inception)
December 31, Through
---------------------------- December 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income $ 713,000 $ 205,000 $ 918,000
------------ ------------ ------------
Expenses:
Write-off of acquired in-process research
and development and supplies 3,663,000 2,200,000(1) 5,863,000
Research and development 4,378,000 540,000(1) 4,918,000
General and administrative 1,836,000 692,000 2,546,000
Interest 11,000 11,000
------------ ------------ ------------
Total expenses 9,877,000 3,443,000 13,338,000
------------ ------------ ------------
(9,164,000) (3,238,000) (12,420,000)
Minority interest in net loss of subsidiary 2,000 2,000
------------ ------------ ------------
Net loss $ (9,164,000) $ (3,236,000) $(12,418,000)
============ ============ ============
Net loss per share - basic and diluted
(Note B[9]) $(3.42) $(1.96)
====== ======
Weighted average number of common shares
outstanding 2,678,803 1,647,923
============ ============
</TABLE>
(1) Reclassified to be comparative to current year presentation.
See notes to financial statements F-4
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Preferred Stock Stock Additional During the
------------------- ------------------- Subscriptions Paid-in Development
Shares Amount Shares Amount Receivable Capital Stage Total
--------- ------- --------- ------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common shares,
May 1993 440,720 $ 1,000 $(2,000) $ 1,000 $ 0
Net loss $ (1,000) (1,000)
Expenses paid on behalf of the
Company 1,000 1,000
--------- ------- ------- ----------- ------------ -----------
Balance - December 31, 1993 440,720 1,000 (1,000) 1,000 (1,000) 0
Net loss 0
--------- ------- ------- ----------- ------------ -----------
Balance - December 31, 1994 440,720 1,000 (1,000) 1,000 (1,000) 0
Issuance of common shares,
February 1995 143,016 (1,000) 1,000 0
Net loss (17,000) (17,000)
Payment on stock subscriptions 2,000 2,000
Expenses paid on behalf of the
Company 18,000 18,000
--------- ------- ------- ----------- ------------ -----------
Balance - December 31, 1995 583,736 1,000 0 20,000 (18,000) 3,000
Issuance of common shares,
March 1996 1,070,175 1,000 5,000 6,000
Issuance of private placement
units August, October and
November 1996 856,138 1,000 2,200,256 $ 2,000 18,933,000 18,936,000
Issuance of common shares for
cash and compensation,
September 1996 82,502 42,000 42,000
Exercise of stock options, July
and October 1996 19,458 7,000 7,000
Net loss (3,236,000) (3,236,000)
--------- ------- --------- ------- ------- ----------- ------------ -----------
Balance - December 31, 1996 2,612,009 3,000 2,200,256 2,000 0 19,007,000 (3,254,000) 15,758,000
Private placement expenses (11,000) (11,000)
Issuance of common shares
pursuant to merger 546,433 2,459,000 2,459,000
Exercise of stock options, July,
August and October 1997 17,513 9,000 9,000
Accumulated dividends on preferred
stock (238,000) (238,000)
Net loss (9,164,000) (9,164,000)
--------- ------- --------- ------- ------- ----------- ------------ -----------
Balance - December 31, 1997 3,175,955 $ 3,000 2,200,256 $ 2,000 $ 0 $21,464,000 $(12,656,000) $ 8,813,000
========= ======= ========= ======= ======= =========== ============ ===========
</TABLE>
See notes to financial statements F-5
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
May 18, 1993
Year Ended (Inception)
December 31, Through
------------------------------ December 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,164,000) $ (3,236,000) $(12,418,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-off of acquired in-process
research and development and supplies 3,663,000 2,200,000 5,863,000
Write-off of licenses 683,000 683,000
Depreciation and amortization 40,000 24,000 64,000
Changes in:
Prepaid expenses (141,000) (18,000) (159,000)
Accounts payable and accrued expenses 129,000 230,000 359,000
Other assets (30,000) (30,000)
Expenses paid on behalf of company 18,000
Employee stock compensation 42,000 42,000
Reduction of research and development
supplies (161,000) (161,000)
------------ ------------ ------------
Net cash used in operating activities (4,981,000) (758,000) (5,739,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of furniture and equipment (114,000) (83,000) (197,000)
Acquisition of licenses (711,000) (711,000)
Purchase of investments (7,539,000) (13,064,000) (20,603,000)
Proceeds from sale or maturity of investments 16,051,000 16,051,000
Net cash payments on merger (1,454,000) (1,454,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 6,944,000 (13,858,000) (6,914,000)
Cash flows from financing activities:
Proceeds on private placements of units, net
of expenses (11,000) 18,936,000 18,925,000
Collections on stock subscriptions and
proceeds on exercise of stock options 9,000 13,000 25,000
------------ ------------ ------------
Net cash (used in) provided by
financing activities (2,000) 18,949,000 18,950,000
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (1,961,000) 4,333,000 6,297,000
Cash and cash equivalents - beginning of period 4,336,000 3,000 0
------------ ------------ ------------
Cash and cash equivalents - end of period $ 6,297,000 $ 4,336,000 $ 6,297,000
============ ============ ============
Noncash transactions:
Accrued dividends on ATI preferred stock $ 238,000 $ 238,000
============ ============
</TABLE>
F-6
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Discovery Laboratories, Inc. (the "Company"), formerly known as Ansan
Pharmaceuticals, Inc. ("Ansan"), was incorporated in Delaware on November 6,
1992 and was a wholly owned subsidiary of Titan Pharmaceuticals, Inc. ("Titan").
The Company was formed to license and develop pharmaceutical products to treat a
variety of human diseases. In August 1995, Ansan issued its securities in an
initial public offering and ceased to be a subsidiary of Titan. In November
1997, Ansan merged (the "Merger") with Discovery Laboratories, Inc., a former
Delaware corporation ("Old Discovery"), and was the surviving corporate entity.
Subsequent to the Merger, Ansan changed its name to Discovery Laboratories, Inc.
Pursuant to the Merger, each outstanding share of Old Discovery's common stock
was converted into 1.167471 shares of the Company's common stock and each share
of Old Discovery's Series A convertible preferred stock was converted into one
share of the Company's Series B preferred stock (the "Exchange Ratios"). The
Company also assumed all outstanding options and warrants to purchase Old
Discovery's common stock and Series A preferred stock which became exercisable
for the Company's common stock and Series B preferred stock, respectively, based
on the Exchange Ratios. In connection with the Merger, the Company and Titan
entered into arrangements providing for the relinquishment by the Company of
rights to certain drug compounds and the transfer of such rights to Titan in
exchange for (i) a 2% net royalty payable by Titan to the Company from net sales
of such drug compounds (see Note F[3]), and (ii) the cancellation of all Ansan
common stock owned by Titan. On consummation of the merger, 13,000 shares of
Ansan Series A preferred stock held by Old Discovery were cancelled.
The Merger was accounted for as a reverse acquisition with Old Discovery as the
acquirer for financial reporting purposes since Old Discovery's stockholders
owned approximately 92% of the merged entity on a diluted basis. The
consolidated financial statements include the historical accounts of Old
Discovery and its majority owned subsidiary Acute Therapeutics, Inc. ("ATI") and
the accounts of Ansan from November 25, 1997 (the date of acquisition). The
assets and liabilities of Ansan acquired are recorded at fair value on the date
of the merger. The difference between the fair value of the net assets acquired
and value of the common stock issued plus merger related costs has been
attributed to in-process research and development and has been recorded as an
expense upon acquisition.
The following assets were acquired and the costs of the acquisition were as
follows:
Assets acquired:
Cash $ 281,000
Investments 400,000
Prepaid expenses 31,000
Furniture and equipment 25,000
In-process research and development 3,663,000
----------
$4,400,000
==========
Acquisition costs:
Assumption of accounts payable and
accrued expenses $ 206,000
Ansan Series A Preferred Stock (purchased
by Old Discovery in July 1997 and
cancelled upon completion of the Merger) 1,300,000
Common stock issued to Ansan
stockholders, 546,433 shares, at fair value 2,459,000
Transaction costs 435,000
----------
$4,400,000
==========
F-7
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE A - THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
The following pro forma unaudited financial information gives effect to the
Merger as if it had occurred at the beginning of the respective periods. A
nonrecurring charge of $3,663,000 for in-process research and development which
was recorded by the Company upon consummation of the merger has not been
considered in the pro forma results.
Year Ended
December 31,
--------------------------
1997 1996
----------- -----------
Interest income $ 811,000 $ 363,000
----------- -----------
Expenses:
Research and development 5,400,000 3,921,000
General and administrative 2,556,000 1,949,000
Interest 11,000
----------- -----------
Total expenses 7,956,000 5,881,000
Minority interest in net loss of subsidiary 2,000
----------- -----------
Net loss $(7,145,000) $(5,516,000)
=========== ===========
Net loss per common share - basic and diluted $(2.26) $(2.51)
====== ======
Weighted average number of common
shares outstanding 3,164,383 2,194,356
=========== ===========
The accompanying financial statements include the accounts of the Company and
its majority owned subsidiary, Acute Therapeutics, Inc. ("ATI"). All
intercompany balances and transactions have been eliminated. No allocation of
ATI's net loss for the year ended December 31, 1997, has been attributed to the
minority interest since the accumulated losses exceed the minority's common
equity interest.
Concurrently with the Merger, the Company's Board of Directors and stockholders
approved a 1 for 3 reverse stock split of its common stock, Class A and Class B
warrants and options to purchase shares of the Company's common stock (the
"Reverse Split").
All references to shares and per share amounts have been adjusted to reflect the
Exchange Ratios and the Reverse Split.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Cash and cash equivalents:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
F-8
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[2] Investments:
The investments are classified as available for sale, and are comprised of
United States government obligations and shares in a mutual fund which
invests in income producing securities. Investments are recorded at fair
value which approximates cost. Any appreciation/depreciation on these
investments is recordable as a separate component of stockholders equity
until realized.
[3] Furniture and equipment:
Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets (five to seven years).
[4] Licenses:
Through March 1997 licenses were capitalized and were being amortized on a
straight-line basis over their respective terms of 15 to 17 years. During
the quarter ended June 30, 1997, the Company determined that since they
will not pursue any alternative uses for the licenses, that all license
costs would be written off as research and development costs.
[5] Research and development:
Research and development costs are charged to operations as incurred.
[6] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
[7] Long-lived assets:
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company records impairment losses on
long-lived assets used in operations, including intangible assets, when
events and circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. No such losses have been
recorded.
[8] Stock-based compensation:
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The provisions of SFAS No. 123 allow companies to either expense
the estimated fair value of employee stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but
disclose the pro forma effects on net income (loss) had the fair value of
the options been expensed. The Company has elected to continue to apply
APB 25 in accounting for its employee stock option incentive plans. See
Note I to the financial statements for further information.
F-9
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[9] Net loss per share:
During the year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" which had no
effect on the previously reported net loss per share. Net loss per share
is computed based on the weighted average number of common shares
outstanding for the periods and common shares issuable for little or no
cash consideration, adjusted to reflect the Exchange Ratios and the
reverse stock split. Potential common shares not included in the
calculation of net loss per share for the year ended December 31, 1997 as
the effect would be anti-dilutive, are as follows (Notes G and I):
Number of
Potential
Common Shares
-------------
Series B convertible preferred stock 3,424,980
Placement agent's warrants to acquire Series B
convertible preferred stock 342,498
Stock options 371,993
[10] Recent accounting pronouncements:
Recently issued accounting pronouncements concerning disclosure of
information about capital structure, reporting comprehensive income and
disclosure about segments of an enterprise are not expected to have a
material effect on the presentation of the Company's financial statements.
NOTE C - FURNITURE AND EQUIPMENT
At December 31, 1997 furniture and equipment comprised of the following:
Furniture $ 59,000
Equipment 163,000
--------
222,000
Less accumulated depreciation 41,000
--------
$181,000
========
NOTE D - EMPLOYMENT AGREEMENTS
An employment agreement with the Company's President and CEO provides for an
annual salary of $175,000 through April 1999. An employment agreement with an
executive officer provides for an annual salary of approximately $141,000
through November 1999. The agreements include the issuance of options, bonuses
and salary increases, and contain renewal options.
The Company has also entered into two three year consulting agreements which
provide for aggregate annual fees of approximately $48,000 through March 1999.
F-10
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE E - INCOME TAXES
At December 31, 1997, the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $14,600,000 expiring through
2011, that may be used to offset future taxable income. As a result of the
ownership change pursuant to the Merger, Ansan's portion of the net operating
loss carryforward of approximately $9,500,000 through November 1997, is limited
in accordance with Section 382 of the Internal Revenue Code. Pursuant to Section
382 of the Internal Revenue Code, the utilization of these carryforwards may
become further limited if certain ownership changes occur. The Company has
research and development credit carryforwards of approximately $373,000 which
expire in 2011. Ansan's portion of these credits of approximately $179,000 are
also subject to a Section 382 limitation. There will be an annual amount
available to offset future taxable income.
The principal difference between the deficit accumulated during the development
stage for financial reporting purposes and the net operating loss carryforward
for tax purposes is primarily due to the write-off of the acquired in-process
research and development and supplies and certain research and development
expenses which are not currently deductible for tax purposes. The Company has
provided a valuation reserve against the full amount of the deferred tax asset
of $7,354,000. The components of the deferred tax assets are net operating loss
benefits of approximately $5,410,000, acquired in-process research and
development and supplies write-off of approximately $765,000 and research and
development costs not currently deducted and research credits of approximately
$1,179,000. The valuation reserve is required since the likelihood of
realization cannot be determined. The valuation reserve increased by
approximately $6,124,000 and $1,223,000 for the years ended December 31, 1997
and 1996, respectively. The difference between the statutory federal income tax
rate of 34% and the Company's effective tax rate of 0% is due to the increase in
the valuation reserve.
NOTE F - LICENSE AGREEMENTS
[1] In 1996, the Company entered into a license agreement with the
Charlotte-Mecklenburg Hospital Authority for the use of the active
compound in SuperVent, a therapy which the Company is clinically testing.
The Company paid a license issue fee of $86,400 and has agreed to pay
royalties on future sales and to pay future patent-related costs. The
license expires upon expiration of the underlying patents.
[2] In 1996, the Company entered into a license agreement with the Wisconsin
Alumni Research Foundation ("WARF") for the use of the patented compound
ST-630 in the treatment of post-menopausal osteoporosis. The Company paid
WARF an option fee of $25,000 in June 1996 and a license issue fee of
$400,000 in October 1996 and is obligated to make future milestones
payments aggregating $3,095,000 and pay royalties on future sales. The
license expires upon expiration of the underlying patents.
[3] In 1992, the Company entered into research (which expired in 1994) and
license agreements with Bar-Ilan Research and Development Company, Ltd.
("Bar-Ilan"), an entity located in Israel. Pursuant to the license
agreement, the Company received certain exclusive worldwide licenses to
inventions and confidential information related to the research program in
exchange for the research funding and specified royalties on future sales
and/or sublicensing arrangements. In November 1997, in connection with the
Merger, the Company and Bar-Ilan agreed to enter into a new license
agreement in order to permit certain of the Company's rights under the
original Bar-Ilan license agreement to be licensed to Titan (see Note A).
Pursuant to the new license agreement, the Company is obligated to pay
royalties to Bar-Ilan on any of its sales of licensed products. To
maintain license exclusivity, the Company is obligated to make minimum
royalty payments of $25,000 in 1998 and $60,000 in each calendar year
thereafter.
F-11
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE F - LICENSE AGREEMENTS (CONTINUED)
[3] (continued)
Bar-Ilan's agreement with Titan includes the obligation for making the
minimum royalty payments in 1998 and thereafter to maintain license
exclusively. In addition, the agreement includes future milestone payments
aggregating $200,000 (to be shared equally by the Company and Titan,
pursuant to a separate agreement between the Company and Titan, in the
event both companies achieve the milestone) and royalties on future sales.
In the event the agreement between Bar-Ilan and Titan is terminated,
Bar-Ilan has the right to require the Company to assume all rights and
obligations under the Titan agreement. The Company does not intend to
pursue development of the compounds under the license agreement and is
seeking to sublicense that technology.
[4] In May 1996, the Company signed a licensing agreement with Boehringer
Ingelheim GmbH ("Boehringer") to acquire the rights in the United States
and the European Union to develop a new intravenous formulation of the
drug Apafant(TM) for all clinical indications. Pursuant to the agreement,
the Company may be obligated to make future milestone and royalty payments
to Boehringer. However, under certain circumstances, Boehringer may
participate in further development and commercialization of Apafant(TM)
and, in such circumstances, would be obligated to make milestone and
royalty payments to the Company.
[5] See Note H[1] with respect to a sublicense agreement between ATI and
Johnson & Johnson, Inc.
NOTE G - STOCKHOLDERS' EQUITY
Private placement:
In 1996, pursuant to a private placement offering, Old Discovery sold
approximately 44 units (each unit consisting of securities converted in the
Merger into 50,000 shares of Series B convertible preferred stock and 19,458
shares of common stock of the Company). Preferred stockholders have voting
rights based upon the number of shares of common stock issuable upon conversion
of the preferred shares. Each share of preferred stock is convertible at the
option of the holders thereof into 1.556628 shares of common stock of the
Company. The conversion rate will be adjusted under certain circumstances based
on the future market price of the common stock. Net proceeds from the private
placement approximated $19,000,000.
The placement agent for the offering received approximately $2,860,000 in cash
plus warrants which, pursuant to the merger give the holders thereof the right
to acquire 220,026 shares of Series B preferred stock at a price of $11 per
share, through November 8, 2006 and to acquire 85,625 shares of common stock at
a price of $0.64 per share, through November 8, 2006. The warrants contain
certain anti-dilution provisions and may be exercised on a "net exercise" basis
pursuant to a provision that does not require the payment of any cash to the
Company.
Unit offering:
In August 1995, the Company issued an aggregate of 498,333 units (including
65,000 units pursuant to the underwriter's overallotment option) at $15.00 per
unit in an initial public offering (the "Offering"). Each unit consisted of one
share of common stock, one redeemable Class A warrant, and one Class B warrant.
Each Class A warrant entitles the holder to purchase one share of common stock
and one Class B warrant at an exercise price of $19.50 per share. Each Class B
warrant entitles the holder to purchase one share of common stock an exercise
price of $26.25 per share.
F-12
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
Unit offering: (continued)
In connection with the Offering, the holders of the Company's common stock and
options to purchase common stock placed, on a pro rata basis, 121,246 shares
(including 115,491 shares held by the Company pending cancellation pursuant to
the Merger (Note A)) and options to purchase 12,086 shares of common stock into
escrow (the "Escrow Shares" and "Escrow Options", respectively). The Escrow
Shares and Escrow Options are not transferable or assignable; however, the
Escrow Shares may be voted. Holders of Escrow Options may exercise their options
prior to their release from escrow; however, the shares issuable upon any such
exercise will continue to be held in escrow. The Escrow Shares and Escrow
Options will be released from escrow if, and only if, certain earnings or market
price criteria have been met. If the conditions are not met by March 31, 2000,
the Escrow Shares and Escrow Options will be cancelled and contributed to the
Company's capital.
The release of Escrow Shares and Escrow Options held by employees, officers,
directors, consultants and their relatives will be deemed compensatory.
Accordingly, the Company will recognize as compensation expense, during the
period in which the earnings or market price targets are met, a one-time charge
to reflect the then fair market value of the shares released from escrow. Such
charges could substantially reduce the Company's net income or increase the net
loss. The amount of compensation expense recognized by the Company will not
affect the total stockholders equity.
NOTE H - INVESTMENT IN ACUTE THERAPEUTICS, INC.
[1] Formation of Acute Therapeutics, Inc.:
On October 28, 1996, the Company invested $7.5 million in a newly formed
subsidiary, ATI, in exchange for 600,000 shares of Series A convertible
preferred stock of ATI, then representing 75% of the outstanding voting
securities of ATI following such transaction.
Concurrent with the Company's investment in ATI, Johnson & Johnson, Inc.
("J&J"), Ortho Pharmaceuticals, Inc. (a wholly owned subsidiary of J&J),
and ATI entered into an agreement (the "J&J License Agreement") granting
an exclusive license of Surfaxin(TM) technology to ATI in exchange for
certain license fees ($200,000 of which was paid in November 1996),
milestone payments aggregating $2,750,000, royalties and 40,000 shares of
ATI common stock. J&J contributed its Surfaxin(TM) raw material inventory
and manufacturing equipment to ATI in exchange for 2,200 shares of
nonvoting Series B preferred stock of ATI having a $2.2 million
liquidation preference and a $100 per share cumulative annual dividend.
Dividends of $238,000 have accrued to the benefit of J&J through December
31, 1997. However, such dividends are only required to be paid upon
liquidation of ATI or redemption of the preferred stock. The inventory and
equipment were valued at $2,200,000 (the value of the preferred shares
issued to J&J) and were charged to expense as their intended use is for
research and development activities. The Scripps Research Institute
("Scripps") received 40,000 shares of common stock of ATI in exchange for
its consent to the J&J License Agreement.
In 1997, ATI and J&J determined that certain of the raw material inventory
to be received pursuant to the J&J License Agreement was not available.
ATI negotiated with J&J a price adjustment and proportionate reduction of
the liquidation preference of the Series B preferred stock issued of
approximately $161,000 and a corresponding reduction of 161 Series B
preferred shares held by J&J. The price adjustment has been accounted as a
credit to research and development expense in 1997.
The co-founders (some of who are also consultants to ATI) of ATI purchased
an aggregate of 120,000 shares of ATI common stock for $.01 per share and
were granted options to purchase an aggregate of 44,800 shares of common
stock of ATI at an exercise price of $.01 per share vesting after a
five-year term, subject to acceleration and 40,000 shares of common stock
of ATI at an exercise price of $.32 per share vesting in April 1997.
F-13
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE H - INVESTMENT IN ACUTE THERAPEUTICS, INC. (CONTINUED)
[2] Commitments:
(a) In 1996, ATI entered into a four-year employment agreement with its
President, Chief Executive Officer and Chairman of the Board of
Directors providing for a base salary of $225,000 per year. The
agreement includes additional payments in the aggregate amount of
$150,000 on the completion of specified events and the issuance of
bonuses in each year of employment. In 1996 and 1997, ATI also
entered into three-year employment agreements with six employees
providing for aggregate annual salaries of $829,000. Certain of
these agreements provide for the issuance of bonuses at the
discretion of ATI's Chief Executive Officer and the issuance of
options to purchase ATI's common stock. The agreements expire on
various dates through May 2000.
ATI entered into various two-year consulting agreements providing
for aggregate annual fees of $300,000 plus royalties on net
commercial sales of licensed products sold by ATI or its
sublicensees and an 18-month consulting agreement providing for
monthly fees of $7,500.
(b) ATI entered into a research funding and option agreement with
Scripps to provide certain funding of research activities. The
agreement is for an initial term of two years with renewal
provisions for additional one year periods. The agreement provides
for Scripps to grant an option to ATI to acquire an exclusive
license for the application of technology developed from the
research program. Pursuant to the agreement, in 1997 ATI paid
Scripps $460,000, of which approximately $383,000 has been charged
to research and development expense in 1997 and the balance of which
will be charged to research and development expense in 1997.
(c) In November 1997, ATI entered into a one year exclusive agreement
with Lehman Brothers, Inc. ("Lehman") for financial advisory
services. The agreement provides for ATI to pay Lehman a retainer of
$100,000 of which $25,000 was paid through December 31, 1997.
(d) ATI leases its office and laboratory space pursuant to an operating
lease requiring aggregate annual payments of approximately $67,000
through November 2001.
[3] ATI stock option plan:
ATI adopted the 1996 Stock Option/Stock Issuance Plan (the "ATI Plan")
consisting of a Discretionary Option Grant program for employees and an
Automatic Option Grant Program under which option grants will
automatically be made at periodic intervals to eligible nonemployee
directors to purchase shares of common stock, in either case at an
exercise price equal to at least 85% of the fair market value of the
common stock on the grant date. Under the Discretionary Option Grant
program, options will be granted to employees either as incentive stock
options or nonstatutory options and will vest over a specified period of
time (generally three to five years) as determined by the ATI Board of
Directors. ATI has reserved 234,800 shares of common stock for issuance
under these plans.
In January 1998, ATI granted additional options to purchase 7,500 shares
of common stock to eligible employees and nonemployees at $0.75 per share
for a ten year term. ATI also granted a consultant an option to purchase
5,000 shares of common stock at $1.25 per share, which will vest on the
occurance of certain events.
F-14
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE I - STOCK OPTIONS
The Company's 1993 Stock Option Plan which was amended and restated (the "1993
Plan"), provided that incentive stock options may be granted to employees, and
nonstatutory stock options may be granted to employees, directors, consultants
and affiliates. No further options will be granted under the Company's 1993
Plan. In May 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Option Plan"). A total of 395,800 shares of common stock were reserved and
authorized for issuance under the 1995 Option Plan.
Options granted under the 1993 and 1995 Plans expire no later than ten years
from the date of grant, except when the grantee is a 10% shareholder of the
Company or an affiliate company, in which case the maximum term is five years
form the date of grant. The exercise price shall be at least 100%, 85% and 110%
of the fair value of the stock subject to the option on the grant date, as
determined by the board of directors, for incentive stock options, nonstatutory
stock options and options granted to 10% shareholders of the Company or
affiliate company, respectively. Options granted under the 1993 Option Plan are
exercisable immediately upon grant, however, the shares issuable upon exercise
of the options are subject to repurchase by the Company. Such repurchase rights
will lapse as the shares vest over a period of five years from the date of
grant.
On consummation of the Merger the Company assumed Old Discovery's outstanding
options which were exchanged at the Exchange Ratio for options to purchase the
Company's common stock (Note A). The pro forma effects of applying SFAS No. 123
and the stock options activity shown below are those of Old Discovery's 1996
Stock Option /Stock Issuance Plan (the "Discovery Plan") through the date of the
Merger and the Plans described above after the Merger as the Merger was
accounted for as a reverse acquisition.
The Company applies APB 25 in accounting for the Discovery Plan and the ATI Plan
and, accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the exercise price of the option
at the date of grant. The effect of applying SFAS No. 123 on pro forma net loss
is not necessarily representative of the effects on reported net income or loss
for future years due to, among other things, (i) the vesting period of the stock
options and (ii) the fair value of additional stock options in future years. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value of the options at the grant date of awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss for each of the years ended December 31, 1997 and 1996 would have been
approximately $9,219,000 or $3.44 per share and $3,246,000 or $1.97 per share,
respectively. The fair value of the options granted are estimated at $0.24 and
$0.28 per share for the Discovery Plan and the ATI Plan, respectively, for the
year ended December 31, 1997, and $0.16 and $0.11 per share for the Discovery
Plan and the ATI Plan, respectively, for the year ended December 31, 1996, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: dividend yield 0%, volatility of 0%,
risk-free interest rate of 6.53% for 1997 and 6.51% for 1996, and expected life
of ten years.
F-15
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE I - STOCK OPTIONS (CONTINUED)
Additional information with respect to Old Discovery stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Remaining
Price Exercise Contractual
Per Share Shares Price Life
----------- ------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996:
Options granted $0.26-$0.51 38,916 $0.32
Options exercised 0.26-0.51 (19,458) 0.39
-------
Outstanding December 31, 1996: 0.26-0.51 19,458 0.26 8.42 years
-------
Options granted 0.51 257,589 0.51
Options exercised 0.51 (17,514) 0.51
Options forfeited 0.51 (5,999) 0.51
Ansan options outstanding 0.18-4.50 118,459 4.19
-------
Options outstanding at December 31, 1997 0.18-4.50 371,993 1.67 6.61 years
=======
Options exercisable at December 31, 1997 0.18-4.50 252,912 1.80 6.49
=======
</TABLE>
Additional information with respect to the ATI Plan stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Remaining
Price Exercise Contractual
Per Share Shares Price Life
----------- ------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996:
Options granted $0.01-$0.32 144,800 $.22
-------
Outstanding at December 31, 1996: 0.01-0.32 144,800 .22 8.8 years
Options granted 0.32-0.75 52,000 .58
Options exercised 0.32 (2,000) .32
-------
Outstanding at December 31, 1997 0.01-0.75 194,800 .32 8.9 years
=======
Options exercisable at December 31, 1997 0.32-0.75 89,500 .50 9.0 years
=======
</TABLE>
F-16
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE J - STOCKHOLDERS' EQUITY
Common shares reserved for issuance:
The Company has reserved shares of common stock for issuance upon conversion of
preferred stock and exercise of options as follows:
(i) Preferred stock (Note G) 3,424,980
(ii) Stock option plan 395,800
(iii) Old Discovery stock options 253,534
(iv) Placement agent warrants (Note G):
Conversion of preferred stock 342,498
Common stock 85,625
(v) Class A warrants 735,833
(vi) Class B warrants 1,234,167
(vii) Underwriter's option 173,333
NOTE K - COMMITMENTS
[1] In December 1997, the Company entered into an agreement with a clinical
research institute for clinical studies to be performed on behalf of the
Company. The agreement specifies payments to be made by the Company on the
successful completion of certain phases of the study that aggregate to
approximately $394,000, $50,000 of which was paid and charged to expense
in 1997.
[2] In May 1997, the Company entered into an agreement to lease office space
for a period of three years. Future minimum lease payments (excluding
ATI's operating lease commitment (Note H[2])) are as follows:
Amount
--------
1998 $ 91,000
1999 93,000
2000 47,000
--------
$231,000
========
Total rent expense for the years ended December 31, 1997 and 1996 was
approximately $164,000 and $31,000, respectively.
NOTE L - SUBSEQUENT EVENTS
On March 5, 1998, the Company entered into an agreement and plan of
reorganization and merger with ATI and ATI Acquisition Corp. ("Acquisition
Sub"), a wholly owned subsidiary of the Company (the "ATI Merger Agreement").
Pursuant to the ATI Merger Agreement, subject to receipt of approval of the
stockholders of the Company and ATI and the fulfillment of other conditions,
Acquisition Sub will merge (the "ATI Merger") with and into ATI in a transaction
in which (i) ATI will be the surviving corporation, (ii) the existing holders of
ATI common stock will receive 3.91 shares of common stock for each share of ATI
common stock held by such holders and (iii) certain outstanding ATI options will
be assumed by Discovery and will become exercisable for 3.91 shares of common
stock per share of ATI common stock for which such options are presently
exercisable (the "ATI Transaction"). Pending the closing of the merger, the
Company will be managed by ATI's management team pursuant to a management
agreement entered into simultaneously with the execution of the ATI Merger
Agreement (the "Management Agreement"). The Company has agreed to pay to ATI 50%
of the salary expense attributable to the ATI management team during the period
from the execution of the ATI Merger Agreement
F-17
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 1997
NOTE L - SUBSEQUENT EVENTS (CONTINUED)
through the date of any termination or abandonment of the transactions
contemplated by the ATI Merger Agreement if the ATI Merger is not consummated
due to a breach of the ATI Merger Agreement by Discovery or its stockholders.
Members of ATI's management team (the "ATI Management Members") will be issued
options to purchase an aggregate of 338,500 shares of the Company's common stock
in connection with the ATI Merger and additional options to purchase an
aggregate of 335,000 shares subject to the achievement of certain corporate
milestones. Upon execution of the ATI Management Agreement, ATI Management
Members were granted options to purchase an aggregate of 126,500 shares of the
Company's common stock, which will vest on the earlier of the consummation of
the ATI Merger or on the termination of the ATI Management Agreement by the
Company in the absence of a material breach thereof by ATI, provided that in the
case of the ATI Management Members other than its President, such options shall
vest over a three-year period in the event the ATI Merger is completed. If the
ATI Merger has not occurred by July 15, 1998 due to action or inaction by the
Company, its management or its stockholders, all such options shall be
immediately vested in full.
Pro forma results of operations of the Company, giving effect to the ATI Merger
as if it had occurred at the beginning of 1997 would not differ from the
historical consolidated results of the Company as the operations of ATI have
been included in the consolidated results of the Company. A substantial
nonrecurring charge for in-process research and development which will be
recorded by the Company upon consummation of the ATI Merger.
F-18
<PAGE>
Annex A
AGREEMENT AND PLAN OF MERGER
among
DISCOVERY LABORATORIES, INC.
ATI ACQUISITION CORP.
AND
ACUTE THERAPEUTICS, INC.
March 5, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 THE MERGER........................................................ 2
Section 1.1 The Merger............................................. 2
Section 1.2 Closing and Effective Time............................. 2
Section 1.3 Directors and Officers of the Surviving Corporation.... 2
Section 1.4 Certificate of Incorporation........................... 2
Section 1.5 Bylaws................................................. 2
Section 1.6 Effect of the Merger................................... 2
ARTICLE 2 CONVERSION OR EXCHANGE OF SECURITIES.............................. 3
Section 2.1 Conversion of Capital Stock............................ 3
Section 2.3 Payment for Common Shares; Surrender of Certificates... 4
Section 2.4 Appraisal Rights....................................... 5
Section 2.5 Seller Option Plan..................................... 5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.......................... 6
Section 3.1 Organization........................................... 6
Section 3.2 Capitalization......................................... 6
Section 3.3 Authorization; Validity of Agreement; Necessary Action. 7
Section 3.4 Consents and Approvals; No Violations.................. 7
Section 3.5 [RESERVED]............................................. 8
Section 3.6 Absence of Certain Changes............................. 8
Section 3.7 No Undisclosed Liabilities............................. 9
Section 3.8 Litigation............................................. 9
Section 3.9 No Default; Compliance with Applicable Laws............ 9
Section 3.10 Intellectual Property.................................. 9
Section 3.11 Tax Returns and Payments............................... 10
Section 3.12 Certificate of Incorporation and Bylaws................ 10
Section 3.13 Title to Property...................................... 10
Section 3.14 Employee Benefits and Contracts........................ 11
Section 3.15 Employment; Labor Matters.............................. 12
Section 3.16 Brokers................................................ 12
Section 3.17 Environmental Laws..................................... 12
Section 3.18 Insurance.............................................. 13
Section 3.19 Contracts and Commitments.............................. 13
Section 3.20 Interests of Officers and Directors.................... 14
Section 3.21 Questionable Payments.................................. 14
Section 3.22 Certain Tax Matters.................................... 14
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER AND
ACQUISITION SUBSIDIARY........................................ 15
Section 4.1 Organization........................................... 15
i
<PAGE>
Section 4.2 Capitalization......................................... 15
Section 4.3 Authorization; Validity of Agreement; Necessary Action. 16
Section 4.4 Consents and Approvals; No Violations.................. 17
Section 4.5 SEC Reports and Financial Statements................... 17
Section 4.6 Absence of Certain Changes............................. 18
Section 4.7 No Undisclosed Liabilities............................. 19
Section 4.8 Litigation............................................. 19
Section 4.9 No Default; Compliance with Applicable Laws............ 19
Section 4.10 Intellectual Property.................................. 20
Section 4.11 Tax Returns and Payments............................... 20
Section 4.12 Certificate of Incorporation and Bylaws................ 21
Section 4.13 Title to Property...................................... 21
Section 4.14 Employee Benefits and Contracts........................ 21
Section 4.15 Employment; Labor Matters.............................. 22
Section 4.16 Brokers................................................ 23
Section 4.17 Environmental Laws..................................... 23
Section 4.18 Insurance.............................................. 23
Section 4.19 Contracts and Commitments.............................. 23
Section 4.20 Interests of Officers and Directors.................... 24
Section 4.21 Questionable Payments.................................. 24
Section 4.22 Certain Tax Matters.................................... 25
Section 4.23 No Prior Activities.................................... 25
ARTICLE 5 COVENANTS......................................................... 25
Section 5.1 Interim Operations of Seller and Buyer................. 25
Section 5.2 Access; Confidentiality................................ 27
Section 5.3 Additional Agreements.................................. 27
Section 5.4 Consents and Approvals; HSR Act........................ 28
Section 5.5 Exclusivity............................................ 28
Section 5.6 Publicity.............................................. 28
Section 5.7 Notification of Certain Matters........................ 28
Section 5.8 Indemnification........................................ 29
Section 5.9 Approval of Stockholders............................... 29
Section 5.10 Buyer Proxy Statement.................................. 30
Section 5.11 Seller Information Statement........................... 30
Section 5.12 Tax Treatment.......................................... 31
Section 5.13 Form S-8............................................... 31
Section 5.14 Reservation of Buyer Common Stock...................... 31
Section 5.15 Consolidation of Operations............................ 31
Section 5.16 Consolidation of Board of Directors.................... 32
Section 5.17 Incentive Bonus Payments............................... 32
ARTICLE 6 CONDITIONS........................................................ 32
Section 6.1 Conditions to Each Party's Obligation to
Effect the Merger...................................... 32
Section 6.2 Additional Conditions to Obligations of Seller......... 33
ii
<PAGE>
Section 6.3 Additional Conditions to Obligations of Buyer and
Acquisition Subsidiary................................. 34
ARTICLE 7 TERMINATION....................................................... 35
Section 7.1 Termination............................................ 35
Section 7.2 Effect of Termination.................................. 36
ARTICLE 8 MISCELLANEOUS..................................................... 36
Section 8.1 Fees and Expenses...................................... 36
Section 8.2 Amendment and Modification............................. 36
Section 8.3 Nonsurvival of Representations and Warranties.......... 36
Section 8.4 Notices................................................ 37
Section 8.5 Interpretation......................................... 38
Section 8.6 Counterparts........................................... 38
Section 8.7 Entire Agreement; No Third Party Beneficiaries; Rights
of Ownership........................................... 38
Section 8.8 Severability........................................... 38
Section 8.9 Governing Law.......................................... 38
Section 8.10 Assignment............................................. 39
Exhibit A - Form of Capetola Employment Agreement
Exhibit B - Form of Key Executive Employment Agreement
Exhibit C - Form of Option Agreement for 338,500 Shares
Exhibit D - Form of Option Agreement for 175,000 Shares
Exhibit E - Form of Option Agreement for 160,000 Shares
Exhibit F - Form of Registration Rights Agreement
Exhibit G - Form of Investment Agreement
Exhibit H - Form of Lock-up Agreement
Exhibit I - Form of Buyer 1998 Stock Option Plan
iii
<PAGE>
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated March 5, 1998, by and among Discovery
Laboratories, Inc., a Delaware corporation ("Buyer" or "Discovery"), ATI
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer
("Acquisition Subsidiary"), and Acute Therapeutics, Inc., a Delaware corporation
("Seller" or "Acute").
RECITALS:
WHEREAS, upon and subject to the terms and conditions of this Agreement,
Acquisition Subsidiary will merge with and into Seller (the "Merger") and Seller
will become a wholly-owned subsidiary of Buyer;
WHEREAS, the Boards of Directors of Seller and Buyer have each determined
that it is in the best interests of their respective stockholders for Buyer to
acquire Seller upon the terms and subject to the conditions set forth herein;
and
WHEREAS, also in furtherance of such acquisition, the Boards of Directors
of Seller and Buyer have each approved this Agreement and the Merger of
Acquisition Subsidiary with and into Seller in accordance with the Delaware
General Corporation Law ("DGCL"), and upon the terms and subject to the
conditions set forth herein; and
WHEREAS, the Board of Directors of Seller has resolved to recommend
approval of this Agreement and the Merger to the holders of shares of Seller's
Common Stock, $0.001 par value per share (the "Common Shares") and the holder of
shares of Seller's Series A Preferred Stock, $0.001 par value per share (the
"Series A Acute Preferred Shares");
WHEREAS, for federal income tax purposes it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the United
States Internal Revenue Code of 1986, as amended (the "Code"); and
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Seller, Buyer and Acquisition Subsidiary hereby agree as follows:
<PAGE>
ARTICLE 1
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2 hereof), Seller and
Acquisition Subsidiary shall consummate the Merger pursuant to which Acquisition
Subsidiary shall be merged with and into Seller in accordance with Section 251
of the DGCL, the separate corporate existence of Acquisition Subsidiary shall
cease, and Seller shall continue as the surviving corporation in the Merger
(Seller is sometimes referred to as the "Surviving Corporation").
Section 1.2 Closing and Effective Time . The closing of the Merger (the
"Closing") shall take place (i) at 10:00 a.m., New York time, on a date to be
specified by the parties, which shall be no later than the fifth business day
after satisfaction or waiver of all of the conditions set forth in Article 6
hereof, at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th
Floor, New York, NY 10019 or (ii) at such other time and place as Buyer and
Seller shall agree (the "Closing Date"). Immediately after completion of the
Closing, the parties shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") executed in accordance with
the relevant provisions of the DGCL and shall make all other filings or
recordings required under the DGCL. The Merger shall become effective at the
time when the Certificate of Merger has been duly filed with the Delaware
Secretary of State, or such time as is agreed upon by the parties and specified
in the Certificate of Merger, and such time is hereinafter referred to as the
"Effective Time." The date of the Effective Time is hereinafter referred to as
the "Effective Date."
Section 1.3 Directors and Officers of the Surviving Corporation. The
directors and officers of Seller at the Effective Time shall be the initial
directors and officers, respectively, of the Surviving Corporation.
Section 1.4 Certificate of Incorporation. The certificate of incorporation
of Acquisition Subsidiary in effect at the Effective Time shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with applicable law.
Section 1.5 Bylaws. The bylaws of Acquisition Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
Section 1.6 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the DGCL. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time all the property, rights, privileges, powers and franchises of Seller and
Acquisition Subsidiary shall vest in the Surviving Corporation, and all debts,
liabilities and duties of Seller and Acquisition Subsidiary shall become the
debts, liabilities and duties of the Surviving Corporation.
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ARTICLE 2
CONVERSION OR EXCHANGE OF SECURITIES
Section 2.1 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of Buyer, Acquisition
Subsidiary, Seller, or the holders of any Common Shares or Series A Acute
Preferred Shares or Series B Acute Preferred Shares (as herein defined) or any
shares of capital stock of Acquisition Subsidiary:
(a) Acquisition Subsidiary Capital Stock. Each issued and outstanding
share of capital stock of Acquisition Subsidiary shall be converted into and
become one fully paid and nonassessable share of common stock of the Surviving
Corporation.
(b) Cancellation of Treasury Stock and Series A Acute Preferred Shares.
All Common Shares that are owned by Seller and all Series A Acute Preferred
Shares that are owned by Buyer shall be cancelled and extinguished without any
conversion thereof and no consideration shall be delivered in exchange therefor.
(c) Conversion of Common Shares. Each issued and outstanding Common Share
(other than Common Shares to be canceled in accordance with Section 2.1(b) and
any dissenting Common Shares which are held by stockholders exercising appraisal
rights pursuant to the DGCL ("Dissenting Stockholders")) shall by virtue of the
Merger and without any action on the part of the holder thereof, be
automatically converted into the right to receive, upon surrender of the
certificate formerly representing such Common Share (the "Common Share
Certificate") in the manner provided in Section 2.3 below, 3.91 shares of Common
Stock, $.001 par value of Buyer ("Buyer Common Stock"). The number of shares of
Buyer Common Stock into which each Common Share will be automatically converted
is referred to as the "Conversion Ratio." All such Common Shares, when so
converted, shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such Common Shares shall cease to have any rights with respect
thereto, except the right to receive the merger consideration therefor upon the
surrender of such certificate in accordance with Section 2.3, or, in the case of
Dissenting Stockholders, the right, if any, to receive payment from the
Surviving Corporation of the fair value of such Common Shares as determined in
accordance with the DGCL. No fractional shares of Buyer Common Stock shall be
issued and, in lieu thereof, a cash payment shall be made pursuant to Section
2.3(c).
Section 2.2 Exchange of Series B Acute Preferred Shares. Each issued and
outstanding Share of Seller's Series B Preferred Stock, $0.001 par value per
share (the "Series B Acute Preferred Shares") shall, at the Closing, be
exchanged for one share of Series A Preferred Stock, $0.001 par value per share
of Buyer (the "Discovery Preferred Shares"), pursuant to an exchange agreement
between Buyer and Johnson & Johnson Development Corporation ("JJDC")(the
"Exchange Agreement") in form and substance reasonably acceptable to Buyer and
Seller.
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Section 2.3 Payment for Common Shares; Surrender of Certificates
(a) Letter of Transmittal. As soon as practicable after the Effective
Time, Buyer will send to each record holder of Common Shares at the Effective
Time a letter of transmittal and other appropriate materials for use in
surrendering Common Share Certificates to Buyer's transfer agent, who shall be
appointed exchange agent with respect to the Merger (the "Exchange Agent").
(b) Payment Procedures. Promptly after the Effective Time, Buyer shall
request that the Exchange Agent distribute to each former holder of Common
Shares, upon surrender to the Exchange Agent of one or more Common Share
Certificates for cancellation together with a duly executed and properly
completed letter of transmittal, the shares of Buyer Common Stock receivable by
such holder in accordance with the provisions of Section 2.1(c). If Buyer Common
Stock is to be delivered to a person other than the person in whose name a
Common Share Certificate is so registered, the Common Share Certificate is so
surrendered shall be properly endorsed, with signatures guaranteed, or otherwise
in proper form for transfer, and the person requesting such payment shall pay
any transfer or other taxes required by reason of the delivery to a person other
than the registered holder of such Common Share Certificate surrendered, or such
person shall establish to the satisfaction of Buyer that such tax has been paid
or is not applicable. No interest shall be paid on any consideration payable in
the Merger to former holders of Common Shares.
(c) No Fractional Shares.
(i) No fractional shares of Buyer Common Stock shall be issued as
a result of the Merger. In lieu of the issuance of fractional
shares, cash adjustments will be paid to the former holder of
Common Shares in respect of any fraction of a share of Buyer
Common Stock which would otherwise be issuable under this
Agreement. Such cash adjustment shall be equal to an amount
determined by multiplying (A) the fractional share of Buyer
Common Stock to which the holder of Seller Common Stock would
be otherwise entitled under Section 2.1(c) (after aggregating
all shares of Buyer Common Stock to which such holder is
entitled), by (B) the average closing price of shares of Buyer
Common Stock on The Nasdaq Small Cap Market for the twenty
trading days immediately preceding the Effective Date.
(ii) As soon as practicable after the determination of the amount
of cash, if any, to be paid to former holders of Common Shares
with respect to any fractional share interests of Buyer Common
Stock, the Exchange Agent shall promptly pay such amounts to
such former holders of Common Shares subject to and in
accordance with the terms of this Section 2.3. Buyer will make
available to the Exchange Agent the cash necessary for this
purpose.
Section 2.4 Appraisal Rights. Notwithstanding any other provision of this
Agreement to the contrary, including but without limitation Section 6.3(f),
Common Shares held by a holder who has not voted such Common Shares in favor of
the approval of this Agreement and the Merger or consented thereto in writing
and with respect to which appraisal rights shall have been demanded
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and perfected in accordance with Section 262 of the DGCL (the "Dissenting Common
Shares") and as of the Effective Time not withdrawn shall not be converted into
the right to receive the consideration payable pursuant to Section 2.1(c) at or
after the Effective Time, but such Common Shares shall become the right to
receive such consideration as may be determined to be due to holders of
Dissenting Common Shares pursuant to the laws of the State of Delaware unless
and until the holder of such Dissenting Common Shares withdraws his or her
demand for such appraisal or becomes ineligible for such appraisal. If a holder
of Dissenting Common Shares shall withdraw his or her demand for such appraisal
or shall become ineligible for such appraisal (through failure to perfect or
otherwise), then, as of the Effective Time or the occurrence of such event,
whichever last occurs, such holder's Dissenting Common Shares shall
automatically be converted into and represent the right to receive the merger
consideration as provided in Section 2.1(c). Seller shall give Buyer (i) prompt
written notice of any demands for appraisal of Common Shares received by Seller
and (ii) the opportunity to participate in and direct all negotiations and
proceedings with respect to any such demands. Seller shall not, without prior
written consent of Buyer, make any payment with respect to, or settle, offer to
settle or otherwise negotiate, any such demands.
Section 2.5 Seller Option Plan.
(a) Assumption of Options. Each outstanding option to purchase Common
Shares issued to employees, non-employee directors and consultants of Seller
pursuant to Seller's 1996 Stock Option/Stock Issuance Plan, as amended (the
"Seller Option Plan"), except for options to purchase 44,800 Common Shares
granted on October 10, 1996, as listed on Schedule 2.5 hereto which shall
terminate on the Closing, whether vested or unvested (each a "Stock Option"),
shall remain outstanding after the Effective Time and shall be assumed by Buyer.
The parties intend that Buyer's assumption of the Stock Options shall be treated
as "assuming a stock option in a transaction to which Section 424(a) applies"
within the meaning of Section 424 of the Code and this subsection (a) shall be
interpreted and applied consistent with such intent. Each Stock Option assumed
by Buyer shall be exercisable upon the same terms and conditions as under the
Seller Option Plan and applicable option agreement issued thereunder, except
that (i) such option shall be exercisable for that number of shares of Buyer
Common Stock equal to the number of Common Shares for which such option was
exercisable times the Conversion Ratio, and (ii) the exercise price of such
option shall be equal to the exercise price of such option divided by the
Conversion Ratio. The number of shares of Buyer Common Stock subject to an
option assumed by Buyer shall be rounded to the nearest whole number (with .5
rounded up) and the exercise price thereof shall be rounded up to the nearest
whole cent.
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(b) Notice. As soon as practicable after the Effective Time, Buyer shall
deliver to the holders of Stock Options appropriate notices setting forth such
holders' rights pursuant to the Buyer Option Plan (as defined in Section 4.2
hereof). The agreements evidencing the grants of such Stock Options shall
continue in effect on the same terms and conditions (subject to the adjustments
required by this Section 2.5 after giving effect to the Merger).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF SELLER
Seller represents and warrants to Buyer and Acquisition Subsidiary as
follows:
Section 3.1 Organization.
(a) Except as set forth in Section 3.1 of the disclosure schedule
delivered to Buyer on or before the date hereof (the "Seller Disclosure
Schedule"), Seller is a corporation duly organized, validly existing and in good
standing under the laws of Delaware and has the requisite corporate power and
authority and any necessary governmental authority to own, operate or lease the
properties that it purports to own, operate or lease and to carry on its
business as it is now being conducted, and, except as set forth in Section 3.1
of the Seller Disclosure Schedule, is duly qualified as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of its properties owned, operated or leased or the nature of its activities
makes such qualification necessary, except for such failure which, when taken
together with all other such failures, would not have a Seller Material Adverse
Effect (as defined below in Section 3.1(b)). Seller does not own or control any
subsidiary.
(b) The term "Seller Material Adverse Effect" means any individual
material adverse effect, or adverse effects which in the aggregate (whether or
not related and whether or not any individual effect is material) have a
material adverse effect, on the business, operations, properties (including
intangible properties), condition (financial or otherwise), assets or
liabilities of Seller or could reasonably be expected to prevent or materially
delay the consummation of the Merger.
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Section 3.2 Capitalization.
(a) Capitalization. The authorized capital stock of Seller consists of
2,000,000 Common Shares, par value $0.001 per share and 1,000,000 shares of
Preferred Stock, $0.001 par value per share, of which 600,000 shares are
designated Series A Acute Preferred Shares and 2,200 shares are designated
Series B Acute Preferred Shares. The outstanding Series A Acute Preferred Shares
are convertible into 600,000 shares of Common Shares at the conversion price in
effect with respect thereto. The Series B Acute Preferred Shares are not
convertible. As of December 31, 1997, (i) 202,000 Common Shares were issued and
outstanding, (ii) 600,000 Series A Acute Preferred Shares were issued and
outstanding and were convertible into 600,000 Common Shares, (iii) 2,039 Series
B Acute Preferred Shares were issued and outstanding and held by JJDC, (iv) no
shares of Common Stock were held in the treasury of Seller, and (v) 202,300
Common Shares were reserved for issuance upon exercise of outstanding options
under the Seller Option Plan. Section 3.2 of the Seller Disclosure Schedule sets
forth a true and correct list as of December 31, 1997 of all holders of options
to purchase Common Shares, the number of such options outstanding as of such
date and the exercise price per option. All of the outstanding shares of Common
Shares have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights. Except as set forth in this Section
3.2 and in Section 3.2 of the Seller Disclosure Schedule, there are no other
options, warrants or other rights, convertible debt, agreements, arrangements or
commitments of any character obligating Seller to issue or sell any shares of
capital stock of or other equity interests in Seller. Seller is not obligated to
redeem, repurchase or otherwise reacquire any of its capital stock or other
securities.
(b) Seller does not directly or indirectly own or have a right to acquire
an equity interest in any corporation, partnership, joint venture or other
business association or entity.
Section 3.3 Authorization; Validity of Agreement; Necessary Action. Seller
has full corporate power and authority to execute and deliver this Agreement,
all agreements to which Seller is or will be a party that are exhibits to this
Agreement and the Management Agreement of even date herewith between Buyer and
Seller (the "Management Agreement") and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Seller of this Agreement and such other agreements and the consummation of the
Merger and of the other transactions contemplated hereby and thereby, have been
duly authorized by the Board of Directors of Seller and no other corporate or
stockholder action on the part of Seller is necessary to authorize the execution
and delivery by Seller of this Agreement and such other agreements and the
consummation of the transactions contemplated hereby and thereby (other than the
approval of this Agreement and the Merger by the holders of a majority of the
outstanding shares of Seller capital stock entitled to vote with respect
thereto). This Agreement and such other agreements have been duly executed and
delivered by Seller and, assuming due and valid authorization, execution and
delivery hereof by the other parties thereto are valid and binding obligations
of Seller, enforceable against Seller in accordance with its terms.
Section 3.4 Consents and Approvals; No Violations. Except for the filings
or the consents, authorizations or approvals under the agreements set forth in
Section 3.4 of the Seller Disclosure Schedule and the filings, permits,
authorizations, consents and approvals as may be
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required under, and other applicable requirements of, the Securities Exchange
Act of 1934 (the "Exchange Act"), the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), state securities or blue sky laws, the
DGCL and the filing and recordation of a Certificate of Merger under the DGCL,
neither the execution, delivery or performance of this Agreement by Seller nor
the consummation by Seller of the transactions contemplated hereby nor
compliance by Seller with any of the provisions hereof will (i) conflict with or
result in any breach of any provision of the certificate of incorporation or the
bylaws of Seller, (ii) require any filing with, or permit, authorization,
consent or approval of any court, arbitration tribunal, administrative agency or
commission or other governmental or other regulatory authority or agency,
domestic or foreign (a "Governmental Entity") on the part of Seller, (iii)
require the consent of any person under, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, amendment, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which Seller is a party or by which Seller or any of its properties or assets
may be bound (the "Seller Specified Agreements"), the lack of which consent, or
which violation, breach or default, individually or in the aggregate, could
reasonably be expected to have a Seller Material Adverse Effect or (iv) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
Seller, any of its subsidiaries or any of their properties or assets.
Section 3.5 [RESERVED]
Section 3.6 Absence of Certain Changes. Since December 31, 1997, except as
contemplated by this Agreement, there has not been:
(a) any Seller Material Adverse Effect;
(b) any material damage, destruction or loss (whether or not covered by
insurance) with respect to any of the material assets of Seller;
(c) any issuance, redemption or acquisition of capital stock by Seller or
any declaration or payment of any dividend or other distribution in cash, stock
or property with respect to capital stock;
(d) any stock split, reverse stock split, combination, reclassification or
other similar action with respect to capital stock;
(e) any entry into any material commitment or transaction (including,
without limitation, any borrowing or capital expenditure) other than in the
ordinary course of business or as contemplated by this Agreement;
(f) any acquisition or disposition of rights (pursuant to license,
sublicense or otherwise) under or with respect to any patent, copyright,
trademark, tradename or other intellectual property right or registration
thereof or application therefor;
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(g) any mortgage, pledge, security interest or imposition of lien or other
encumbrance on any material asset of Seller; or
(h) any change by Seller in accounting principles or methods except
insofar as may have been required by a change in generally accepted accounting
principles and disclosed in the Buyer Financial Statements (as defined in
Section 4.5 below).
Except as set forth in Section 3.6 of the Seller Disclosure Schedule,
since December 31, 1997 Seller has conducted its business only in the ordinary
course and in a manner consistent with past practice and has not made any
material change in the conduct of its business or operations. Except as set
forth in Section 3.6 of the Seller Disclosure Schedule, no person has or will
have the right to receive any severance, bonus, other payment, increase or
change in benefits or vesting of stock options, shares or other benefits as a
result of any of the transactions contemplated by this Agreement.
Section 3.7 No Undisclosed Liabilities. Except as set forth in Section 3.7
of the Seller Disclosure Schedule, and except as reflected in the Buyer
Financial Statements, Seller has no liabilities of any nature (whether accrued,
absolute, contingent or otherwise), except those liabilities incurred in the
ordinary course of business which could not, individually or in the aggregate,
reasonably be expected to have a Seller Material Adverse Effect.
Section 3.8 Litigation. Except as disclosed in Section 3.8 of the Seller
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of Seller, threatened against Seller.
Except as disclosed in Section 3.8 of the Seller Disclosure Schedule, Seller is
not subject to any outstanding order, writ, injunction or decree.
Section 3.9 No Default; Compliance with Applicable Laws. The business of
Seller is not being conducted in default or violation of any term, condition or
provision of (i) its certificate of incorporation or bylaws, (ii) any Seller
Specified Agreement or (iii) any federal, state, local or foreign statute, law,
ordinance, rule, regulation, judgment, decree, order, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to Seller, excluding from the foregoing clauses (ii) and (iii),
defaults or violations which could not, individually or in the aggregate,
reasonably be expected to have a Seller Material Adverse Effect. As of the date
of this Agreement, no investigation or review by any Governmental Entity or
other entity with respect to Seller is pending or, to the knowledge of Seller,
threatened, nor has any Governmental Entity or other entity indicated an
intention to conduct the same. Seller has in effect all Federal, state, local
and foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Seller Permits") necessary
for it to own, lease or operate its properties and assets and to carry on its
business as now conducted, and there has occurred no default under any such
Seller Permit.
Section 3.10 Intellectual Property. Except as set forth in Section 3.10 of
the Seller Disclosure Schedule, or as could not reasonably be expected to have,
individually or in the aggregate, a Seller Material Adverse Effect, Seller owns
or possesses adequate licenses or other valid rights to use all patents,
trademarks, trade names, copyrights, service marks, trade secrets, know-how and
other proprietary rights and information used or held for use in connection with
the
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business of Seller as currently conducted, and Seller is unaware of any
assertion or claim challenging the validity of any of the foregoing. Section
3.10 of the Seller Disclosure Schedule lists all material licenses, sublicenses
and other agreements to which Seller is a party and pursuant to which (i) any
third party is authorized to use any intellectual property right of Seller and
(ii) Seller is authorized to use any intellectual property rights (other than
pursuant to shrink-wrap licenses and other software licenses) of a third party,
true and correct copies of which have been provided to Buyer and Acquisition
Subsidiary. The conduct of the business of Seller as currently conducted does
not conflict in any way with any patent, license, trademark, or copyright of any
third party. To the knowledge of Seller, there are no infringements of any
proprietary rights owned by or licensed by or to Seller that could reasonably be
expected to have, individually or in the aggregate, a Seller Material Adverse
Effect. Seller has taken reasonable security measures to protect the
confidentiality of its trade secrets. Except as set forth in Section 3.10 of the
Seller Disclosure Schedule, all current and past employees or consultants of
Seller, who, either alone or in concert with others, developed, invented,
discovered, derived, programmed or designed such trade secrets, or who have or
had access to information disclosing such trade secrets, have entered into
confidentiality and non-disclosure agreements with Seller (the "Seller Trade
Secret Agreements"). Any exception which has been taken to the Trade Secrets
Agreements (for example an employee or consultant excluding a prior invention)
is described in Section 3.10 of the Seller Disclosure Schedule, including the
exception taken and the employee taking such exception. To the knowledge of
Seller, neither Seller, nor its employees or its consultants have caused any of
Seller's trade secrets to become part of the public knowledge or literature, nor
has Seller, its employees or consultants permitted any such trade secrets to be
used, divulged or appropriated for the benefit of persons to the material
detriment of Seller.
Section 3.11 Tax Returns and Payments. Except as set forth in Section 3.11
of the Seller Disclosure Schedule, all tax returns and reports with respect to
Seller required by law to be filed under the laws of any jurisdiction, domestic
or foreign, have been duly and timely filed and all taxes, fees or other
governmental charges of any nature which were required to have been paid have
been paid or provided for. Seller has no knowledge of any unpaid taxes or any
actual or threatened assessment of deficiency or additional tax or other
governmental charge or a basis for such a claim against Seller. Seller has no
knowledge of any tax audit of Seller by any taxing or other authority in
connection with any of its fiscal years; Seller has no knowledge of any such
audit currently pending or threatened, and Seller has no knowledge of any tax
liens on any of the properties of Seller.
Section 3.12 Certificate of Incorporation and Bylaws. Seller has
heretofore furnished to Buyer and Acquisition Subsidiary a complete and correct
copy of the certificate of incorporation and the bylaws, each as amended to the
date hereof, of Seller. Such certificate of incorporation and bylaws are in full
force and effect. Seller is not in violation of any of the provisions of its
certificate of incorporation or bylaws.
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Section 3.13 Title to Property.
(a) Seller has good and marketable title, or valid leasehold rights in the
case of leased property, to all real property and all personal property
purported to be owned or leased by it, free and clear of all material liens,
security interests, claims, encumbrances and charges, excluding (i) immaterial
liens for fees, taxes, levies, imposts, duties or governmental tax of any kind
which are not yet delinquent or are being contested in good faith by appropriate
proceedings which suspend the collection thereof, (ii) immaterial liens for
mechanics, materialmen, laborers, employees, suppliers or other liens arising by
operation of law for sums which are not yet delinquent or are being contested in
good faith by appropriate proceedings, (iii) purchase money liens on office,
computer and related equipment and supplies incurred in the ordinary course of
business, and (iv) liens or defects in title or leasehold rights that,
individually or in the aggregate, could not reasonably be expected to have a
Seller Material Adverse Effect.
(b) Consummation of the Merger will not result in any breach of or
constitute a default (or an event with which notice or lapse of time or both
would constitute a default) under, or give to others any rights of termination
or cancellation of, or require the consent of others under, any lease in which
Seller is a lessee, except for breaches or defaults which, individually, or in
the aggregate, could not reasonably be expected to have a Seller Material
Adverse Effect.
Section 3.14 Employee Benefits and Contracts.
(a) Section 3.14 of the Seller Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) maintained by Seller. Each of
such employee benefit plans complies in all material respects with applicable
requirements of ERISA or the Code of 1986 and no "reportable event" or
"prohibited transaction" (as such terms are defined in ERISA) has occurred with
respect to any such plan, and no termination, if it has occurred or were to
occur before the Effective Date, would present a risk of liability to any
Governmental Entity or other persons that would have a Seller Material Adverse
Effect.
(b) Seller has never maintained an employee benefit plan subject to
Section 412 of the Code or Title IV of ERISA. Each employee benefit plan of
Seller intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service confirming such
qualification. Seller has never had an obligation to contribute to a
"multi-employer plan" as defined in Section 4001(a)(3) of ERISA. There are no
unfunded obligations under any employee benefit plan of Seller providing
benefits after termination of employment to any employee or former employee,
including but not limited to retiree health coverage and deferred compensation,
but excluding continuation of health coverage required to be continued under
Section 4980(B) of the Code. Each employee benefit plan of Seller may be amended
or terminated by Seller without the consent or approval of any other person.
There is no employee benefit plan, stock option plan, stock appreciation right
plan, restricted stock plan, stock purchase plan, or severance benefit plan of
Seller, any of the benefits of which will be increased or the vesting of the
benefits under which will be accelerated by the occurrence of any of the
transactions contemplated by this Agreement or the benefits under which will be
calculated on the basis of the transactions contemplated by this Agreement.
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(c) Seller is not obligated to make any parachute payment, as
defined in Section 280G(b)(2) of the Code, nor will any parachute payment be
deemed to have occurred as a result of or arising out of any of the transactions
contemplated by this Agreement. Seller has no contract, agreement, obligation or
arrangement with any employee or other person, any of the benefits of which will
be increased or the vesting of the benefits under which will be accelerated by
any change of control of Seller or the occurrence of any of the transactions
contemplated by this Agreement or the benefits under which will be calculated on
the basis of the transactions contemplated by this Agreement.
Section 3.15 Employment; Labor Matters.
(a) Seller has delivered to Buyer true, complete and correct copies of all
employment agreements and all consulting agreements to which Seller is a party.
(b) Except as set forth in Section 3.15 of the Seller Disclosure Schedule
(i) Seller is not a party to any outstanding employment agreements or contracts
with directors, officers, employees or consultants; (ii) Seller is not a party
to any agreement, policy or practice that requires it to pay termination or
severance pay to employees (other than as required by law); and (iii) Seller is
not a party to any collective bargaining agreement or other labor union contract
applicable to persons employed by Seller, nor does Seller know of any activities
or proceedings of any labor union to organize any such employees.
Section 3.16 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Seller.
Section 3.17 Environmental Laws. Except as could not reasonably be
expected to have, individually or in the aggregate, a Seller Material Adverse
Effect: (i) Seller is in compliance with all applicable Environmental Laws (as
defined below); (ii) all past noncompliance, if any, of Seller with
Environmental Laws or Environmental Permits (as defined below) has been resolved
without any pending, ongoing or future obligation, cost or liability; and (iii)
Seller has not released or transported a Hazardous Material (as defined below),
in violation of any Environmental Law.
For purposes of this Agreement:
(a) "Environmental Law" shall mean any law and any enforceable
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to pollution or
protection of the environment or natural resources, including, without
limitation, those relating to the use, handling, transportation, treatment,
storage, disposal, release or discharge of Hazardous Material, as in effect as
of the date hereof.
(b) "Environmental Permit" shall mean any permit, approval,
identification number, license or other authorization required under or issued
pursuant to any applicable Environmental Law.
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(c) "Hazardous Material" shall mean any hazardous or toxic
substance, material or waste which is or becomes regulated by any local
government authority, any state or the United State Government.
Section 3.18 Insurance. Section 3.18 of the Seller Disclosure
Schedule sets forth a true and complete list of all insurance policies in force
at the date hereof, with respect to the assets, properties or operations of
Seller. True and complete copies of all such insurance policies have been made
available to Buyer and Acquisition Subsidiary by Seller. Such policies are in
full force and effect.
Section 3.19 Contracts and Commitments.
(a) Except as disclosed in Section 3.10, 3.15 or 3.19 of the Seller
Disclosure Schedule, Seller is not a party or subject to:
(i) any plan, contract or arrangement, written or oral, which
requires aggregate payments by Seller in excess of $50,000 per year or
which provides for bonuses, pensions, deferred compensation, severance pay
or benefits, retirement payments, profit-sharing, or the like;
(ii) any joint marketing, joint development or joint venture
contract or arrangement or any other agreement which has involved or is
expected to involve a sharing of profits with other persons;
(iii) any lease for real or personal property in which the amount of
payments which Seller is required to make on an annual basis exceeds
$50,000;
(iv) any agreement, contract, mortgage, indenture, lease,
instrument, license, franchise, permit, concession, arrangement,
commitment or authorization which may be, by its terms, terminated or
breached by reason of the execution of this Agreement, the Merger, or the
consummation of the transactions contemplated hereby or thereby;
(v) except for trade indebtedness incurred in the ordinary course of
business, any instrument evidencing or related in any way to indebtedness
in excess of $50,000 incurred in the acquisition of companies or other
entities or indebtedness in excess of $50,000 for borrowed money by way of
direct loan, sale of debt securities, purchase money obligation,
conditional sale, guarantee, indemnification or otherwise;
(vi) any contract containing covenants purporting to limit Seller's
freedom to compete in any line of business or in any geographic area or
with any third party,
(vii) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $50,000; or
(viii) any other agreement, contract or commitment which is material
to Seller taken as a whole.
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(b) Except as disclosed in Section 3.19 of the Seller Disclosure Schedule,
each agreement, contract, mortgage, indenture, plan, lease, instrument, permit,
concession, franchise, arrangement, license and commitment listed in Section
3.19 of the Seller Disclosure Schedule is valid and binding on Seller and the
other party(ies) thereto, is in full force and effect, and neither Seller, nor
to the knowledge of Seller any other party thereto, has breached any material
provision of, or is in material default under the terms of, any such agreement,
contract, mortgage, indenture, plan, lease, instrument, permit, concession,
franchise, arrangement, license or commitment.
(c) There is no agreement, judgment, injunction, order or decree binding
upon Seller which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any current business practice of Seller, any
acquisition of property by Seller or the conduct of business by Seller as
currently conducted or as proposed to be conducted by Seller.
Section 3.20 Interests of Officers and Directors. To Seller's knowledge,
except as set forth in Section 3.20 of the Seller Disclosure Schedule, no
officer or director of Seller has had, either directly or indirectly, a material
interest in: (i) any person or entity which purchases from or sells, licenses or
furnishes to Seller any goods, property rights or services; (ii) except for the
employment or consulting contracts listed in Section 3.15 of the Seller
Disclosure Schedule, any contract or agreement to which Seller is a party or by
which it may be bound or affected; or (iii) any property, real or personal,
tangible or intangible, used in or pertaining to its business.
Section 3.21 Questionable Payments. Neither Seller nor to its knowledge
any director, officer, agent or other employee of Seller has: (i) made any
payments or provided services or other favors in the United States of America or
in any foreign country in order to obtain preferential treatment or
consideration by any Governmental Entity with respect to any aspect of the
business of Seller; or (ii) made any political contributions which would not be
lawful under the laws of the United States or the foreign country in which such
payments were made. Neither Seller nor to its knowledge any director, officer,
agent or other employee of Seller has been the subject of any inquiry or
investigation by any Governmental Entity in connection with payments or benefits
or other favors to or for the benefit of any governmental or armed services
official, agent, representative or employee with respect to any aspect of the
business of Seller or with respect to any political contribution.
Section 3.22 Certain Tax Matters. Neither Seller nor, to the knowledge of
Seller, any of its affiliates has taken or agreed to take any action that could
be expected to prevent the Merger from constituting a transaction qualifying
under Section 368 of the Code. Seller is not aware of any agreement, plan or
other circumstances that could reasonably be expected to prevent the Merger from
so qualifying under Section 368 of the Code.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF BUYER AND ACQUISITION SUBSIDIARY
Buyer and Acquisition Subsidiary represent and warrant to Seller as
follows:
Section 4.1 Organization.
(a) Except as set forth in Section 4.1 of the disclosure schedule
delivered to Seller on or before the date hereof (the "Buyer Disclosure
Schedule"), each of Buyer and Acquisition Subsidiary (which is the only
subsidiary of Buyer other than Seller) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority and any
necessary governmental authority to own, operate or lease the properties that it
purports to own, operate or lease and to carry on its business as it is now
being conducted, and, except as set forth in Section 4.1 of the Buyer Disclosure
Schedule, is duly qualified as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of its properties owned,
operated or leased or the nature of its activities makes such qualification
necessary, except for such failure which, when taken together with all other
such failures, would not have a Buyer Material Adverse Effect (as defined below
in Section 4.1(b)).
(b) The term "Buyer Material Adverse Effect" means any individual material
adverse effect, or adverse effects which in the aggregate (whether or not
related and whether or not any individual effect is material) have a material
adverse effect, on the business, operations, properties (including intangible
properties), condition (financial or otherwise), assets or liabilities of Buyer
and its subsidiaries taken as a whole or that could reasonably be expected to
prevent or materially delay the consummation of the Merger.
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(c) For purposes of this Article 4 and Article 5, Acute shall not be
considered to be a subsidiary of Buyer.
Section 4.2 Capitalization.
(a) Capitalization. The authorized capital stock of Buyer consists of
20,000,000 shares of Buyer Common Stock, par value $0.001 per share, and
5,000,000 shares of Preferred Stock, par value $0.001 per share, of which
2,420,282 are designated Series B Convertible Preferred Stock (the "Series B
Preferred Stock"). As of December 31, 1997, (i) 3,176,065 shares of Buyer Common
Stock were issued and outstanding, (ii) 2,200,256 shares of Series B Preferred
Stock were issued and outstanding and were convertible into 3,424,980 shares of
Buyer Common Stock, (iii) 115,491 shares of Buyer Common Stock were held in the
treasury of the Buyer, (iv) 253,535 shares of Buyer Common Stock were reserved
for issuance upon exercise of outstanding options issued under the 1996 Stock
Option Plan of Discovery Laboratories, Inc., a former Delaware corporation ("Old
Discovery") and outside such plan and assumed by Buyer, (v) an aggregate of
116,162 shares of Buyer Common Stock were reserved for issuance under stock
options granted pursuant to Buyer's 1993 and 1995 Stock Option Plans (the "Buyer
Option Plans"), (vi) an aggregate of 2,297 shares of Buyer Common Stock were
reserved for issuance under stock options granted by Buyer outside the Buyer
Option Plans, (vii) an aggregate of 2,055,624 shares of Buyer Common Stock were
reserved for issuance under outstanding warrants as more fully described in
Section 4.2 of the Buyer Disclosure Schedule, (viii) 342,499 shares of Buyer
Common Stock were reserved for issuance upon conversion of the 220,026 shares of
Series B Preferred Stock issuable upon the exercise of outstanding warrants, and
(ix) 173,333 shares of Buyer Common Stock were reserved for issuance upon
exercise of Buyer's outstanding unit purchase option (including warrants
issuable upon the exercise of such unit purchase option). Section 4.2 of the
Buyer Disclosure Schedule sets forth a true and correct list as of December 31,
1997 of all holders of options to purchase shares of Buyer Common Stock, the
number of such options outstanding as of such date and the exercise price per
option. All of the outstanding shares of Buyer Common Stock have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. Except as set forth in this Section 4.2 and Section 4.2 of
the Buyer Disclosure Schedule, there are no other options, warrants or other
rights, convertible debt, agreements, arrangements or commitments of any
character obligating Buyer or Acquisition Subsidiary to issue or sell any shares
of capital stock of or other equity interests in Buyer or Acquisition Subsidiary
other than Buyer's obligation to reset the conversion price applicable to the
Series B Preferred Stock under the circumstances described in Buyer's Restated
Certificate of Incorporation. Buyer is not obligated to redeem, repurchase or
otherwise reacquire any of its capital stock or other securities.
(b) Except as set forth in Section 4.2 of the Buyer Disclosure Schedule,
all of the outstanding shares of the capital stock of Acquisition Subsidiary are
beneficially owned by Buyer, directly or indirectly, and all such shares have
been duly authorized, validly issued and are fully paid and nonassessable and
are owned by either Buyer or one of its subsidiaries free and clear of all
liens, security interests, charges, claims or encumbrances of any nature
whatsoever. There are no existing options, calls or commitments of any character
relating to the issued or unissued capital stock or other securities of
Acquisition Subsidiary. Except as set forth in Section 4.2 of the Buyer
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Disclosure Schedule, Buyer does not directly or indirectly own or have a right
to acquire an equity interest in any corporation, partnership, joint venture or
other business association or entity.
Section 4.3 Authorization; Validity of Agreement; Necessary Action. Each
of Buyer and Acquisition Subsidiary has full corporate power and authority to
execute and deliver this Agreement and all agreements to which Buyer and
Acquisition Subsidiary is or will be a party that are exhibits to this
Agreement, including the Employment Agreements (as defined in Section 6.2
herein), and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance by Buyer and Acquisition Subsidiary of this
Agreement, and the consummation of the Merger and of the other transactions
contemplated hereby and thereby, have been duly authorized by the Boards of
Directors of Buyer and Acquisition Subsidiary, as the case may be, and no other
corporate or stockholder action on the part of Buyer and Acquisition Subsidiary
is necessary to authorize the execution and delivery by Buyer or Acquisition
Subsidiary of this Agreement and the consummation of the transactions
contemplated hereby and thereby (other than the approval of this Agreement and
the Merger by the holders of a majority of the outstanding shares (on an
as-converted basis) of Buyer capital stock entitled to vote with respect
thereto). This Agreement has been duly executed and delivered by Buyer and
Acquisition Subsidiary and assuming due and valid authorization, execution and
delivery hereof by Seller, is a valid and binding obligation of Buyer and
Acquisition Subsidiary, as the case may be, enforceable against Buyer and
Acquisition Subsidiary in accordance with their respective terms.
Section 4.4 Consents and Approvals; No Violations. Except for the filings
or the consents, authorizations or approvals under the agreements set forth in
Section 4.4 of the Buyer Disclosure Schedule and the filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Exchange Act, the HSR Act, state securities or
blue sky laws, the DGCL and the filing and recordation of a Certificate of
Merger under the DGCL, neither the execution, delivery or performance of this
Agreement by Buyer nor the consummation by Buyer of the transactions
contemplated hereby nor compliance by Buyer with any of the provisions hereof
will (i) conflict with or result in any breach of any provision of the
certificate of incorporation or the bylaws of Buyer or Acquisition Subsidiary,
(ii) require any filing with, or permit, authorization, consent or approval of,
a Governmental Entity, on the part of Buyer or Acquisition Subsidiary, (iii)
require the consent of any person under, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, amendment, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which Buyer or Acquisition Subsidiary is a party or by which any of them or
any of their properties or assets may be bound (the "Buyer Specified
Agreements"), the lack of which consent, or which violation, breach or default,
individually or in the aggregate, could reasonably be expected to have a Buyer
Material Adverse Effect, or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Buyer, Acquisition Subsidiary or any
of their properties or assets.
Section 4.5 SEC Reports and Financial Statements.
(a) Buyer has timely filed with the Securities and Exchange Commission
(the "SEC"), and has delivered to Seller, true and complete copies of, all
forms, reports, schedules, statements
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and other documents required to be filed by it since January 1, 1996, under the
Securities Act of 1933, as amended, or the Exchange Act (collectively, the "SEC
Documents"). Except as set forth in Section 4.5 of the Buyer Disclosure
Schedule, the SEC Documents (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be,
including without limitation the applicable accounting requirements thereunder
and the published rules and regulations of the SEC with respect thereto, (ii)
when filed, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, and (iii) taken as a whole, do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
Acquisition Subsidiary is not required to file any statements or reports with
the SEC pursuant to Sections 13(a) or 15(d) of the Exchange Act.
(b) Except as set forth in Section 4.5 of the Buyer Disclosure Schedule,
the consolidated financial statements of Buyer contained in the SEC Documents
(the "Buyer Financial Statements"), have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present the financial position and the results of operations
and cash flows (and changes in financial position, if any) of Buyer and
Acquisition Subsidiary as of the respective dates and for the respective periods
thereof, except that the unaudited interim quarterly financial statements were
or are subject to normal and recurring year-end adjustments which were or are
not expected to be material in amount and did not or may not have included
footnote disclosure that would otherwise be required by GAAP. Except as set
forth in Section 4.5 of the Buyer Disclosure Schedule, Buyer is not aware of any
facts or circumstances which would require Buyer to amend or restate any of the
SEC Documents, including without limitation the financial information included
therein.
Section 4.6 Absence of Certain Changes. Since December 31, 1997, except as
contemplated by this Agreement or set forth in Section 4.6 of the Buyer
Disclosure Schedule, there has not been:
(a) any Buyer Material Adverse Effect;
(b) any material damage, destruction or loss (whether or not covered by
insurance) with respect to any of the material assets of Buyer or Acquisition
Subsidiary;
(c) any issuance, redemption or acquisition of capital stock by Buyer or
Acquisition Subsidiary or any declaration or payment of any dividend or other
distribution in cash, stock or property with respect to capital stock;
(d) any stock split, reverse stock split, combination, reclassification or
other similar action with respect to capital stock;
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(e) any entry into any material commitment or transaction (including,
without limitation, any borrowing or capital expenditure) other than in the
ordinary course of business or as contemplated by this Agreement;
(f) any acquisition or disposition of rights (pursuant to license,
sublicense or otherwise) under or with respect to any patent, copyright,
trademark, tradename or other intellectual property right or registration
thereof or application therefor;
(g) any mortgage, pledge, security interest or imposition of lien or other
encumbrance on any material asset of Buyer or Acquisition Subsidiary; or
(h) any change by Buyer in accounting principles or methods except insofar
as may have been required by a change in generally accepted accounting
principles and disclosed in the SEC Documents.
Except as set forth in Section 4.6 of the Buyer Disclosure Schedule, since
December 31, 1997, Buyer and its subsidiaries have conducted their business only
in the ordinary course and in a manner consistent with past practice and have
not made any material change in the conduct of the business or operations of
Buyer and Acquisition Subsidiary taken as a whole. Except as set forth in
Section 4.14(b) of the Buyer Disclosure Schedule, no person has or will have the
right to receive any severance, bonus, other payment, increase or change in
benefits or vesting of stock options, shares or other benefits as a result of
any of the transactions contemplated by this Agreement.
Section 4.7 No Undisclosed Liabilities. Except as set forth in Section 4.7
of the Buyer Disclosure Schedule, and except as reflected in the Buyer Financial
Statements contained in the SEC Documents, Buyer and Acquisition Subsidiary have
no liabilities of any nature (whether accrued, absolute, contingent or
otherwise), except those liabilities incurred in the ordinary course of business
which could not, individually or in the aggregate, reasonably be expected to
have a Buyer Material Adverse Effect.
Section 4.8 Litigation. Except as disclosed in the SEC Documents or in
Section 4.8 of the Buyer Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation pending or, to the knowledge of Buyer, threatened
against Buyer. Except as disclosed in the SEC Documents or in Section 4.8 of the
Buyer Disclosure Schedule, neither Buyer nor Acquisition Subsidiary is subject
to any outstanding order, writ, injunction or decree.
Section 4.9 No Default; Compliance with Applicable Laws. Except as
disclosed in Section 4.9 of the Buyer Disclosure Schedule, the business of each
of Buyer and Acquisition Subsidiary is not being conducted in default or
violation of any term, condition or provision of (i) its certificate of
incorporation or bylaws, (ii) any Buyer Specified Agreement or (iii) any
federal, state, local or foreign statute, law, ordinance, rule, regulation,
judgment, decree, order, concession, grant, franchise, permit or license or
other governmental authorization or approval applicable to Buyer or Acquisition
Subsidiary, excluding from the foregoing clauses (ii) and (iii), defaults or
violations which could not, individually or in the aggregate, reasonably be
expected to have a Buyer Material Adverse Effect. Except as disclosed in Section
4.9 of the Buyer Disclosure Schedule, as of the date of this Agreement, no
investigation or review by any Governmental Entity
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or other entity with respect to Buyer or Acquisition Subsidiary is pending or,
to the knowledge of Buyer, threatened, nor has any Governmental Entity or other
entity indicated an intention to conduct the same. Each of Buyer and Acquisition
Subsidiary has in effect all Federal, state, local and foreign governmental
approvals, authorizations, certificates, filings, franchises, licenses, notices,
permits and rights ("Buyer Permits") necessary for it to own, lease or operate
its properties and assets and to carry on its business as now conducted, and
there has occurred no default under any such Buyer Permit.
Section 4.10 Intellectual Property. Except as set forth in Section 4.10 of
the Buyer Disclosure Schedule, or as could not reasonably be expected to have,
individually or in the aggregate, a Buyer Material Adverse Effect, Buyer and its
subsidiaries own or possess adequate licenses or other valid rights to use all
patents, trademarks, trade names, copyrights, service marks, trade secrets,
know-how and other proprietary rights and information used or held for use in
connection with the business of Buyer and its subsidiaries as currently
conducted, and Buyer is unaware of any assertion or claim challenging the
validity of any of the foregoing. Section 4.10 of the Buyer Disclosure Schedule
lists all material licenses, sublicenses and other agreements to which the Buyer
or Acquisition Subsidiary is a party and pursuant to which (i) any third party
is authorized to use any intellectual property right of the Buyer or Acquisition
Subsidiary and (ii) Buyer or its subsidiaries are authorized to use any
intellectual property rights (other than pursuant to shrink-wrap licenses and
other software licenses) of a third party, true and correct copies of which have
been provided to Seller. Except as set forth in Section 4.10 of the Buyer
Disclosure Schedule, the conduct of the business of Buyer and its subsidiaries
as currently conducted does not conflict in any way with any patent, license or
copyright of any third party. To the knowledge of Buyer, except as set forth in
Section 4.10 of the Buyer Disclosure Schedule, there are no infringements of any
proprietary rights owned by or licensed by or to Buyer or Acquisition Subsidiary
that could reasonably be expected to have, individually or in the aggregate, a
Buyer Material Adverse Effect. Buyer has taken reasonable security measures to
protect the confidentiality of its trade secrets. All current and past employees
or consultants of Buyer, who, either alone or in concert with others, developed,
invented, discovered, derived, programmed or designed such trade secrets, or who
have or had access to information disclosing such trade secrets, have entered
into confidentiality and non-disclosure agreements with Buyer (the "Buyer Trade
Secret Agreements"). Any exception which has been taken to the Buyer Trade
Secrets Agreements (for example an employee or consultant excluding a prior
invention) is described in Section 4.10 of the Buyer Disclosure Schedule,
including the exception taken and the employee taking such exception. To the
knowledge of Buyer, neither Buyer, nor its employees or its consultants have
caused any of Buyer's trade secrets to become part of the public knowledge or
literature, nor has Buyer, its employees or consultants permitted any such trade
secrets to be used, divulged or appropriated for the benefit of persons to the
material detriment of Buyer.
Section 4.11 Tax Returns and Payments. All tax returns and reports with
respect to Buyer or Acquisition Subsidiary required by law to be filed under the
laws of any jurisdiction, domestic or foreign, have been duly and timely filed
and all taxes, fees or other governmental charges of any nature which were
required to have been paid have been paid or provided for. Buyer and Acquisition
Subsidiary have no knowledge of any unpaid taxes or any actual or threatened
assessment of deficiency or additional tax or other governmental charge or a
basis for such a claim against Buyer or Acquisition Subsidiary. Buyer and
Acquisition Subsidiary have no knowledge of
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any tax audit of Buyer or Acquisition Subsidiary by any taxing or other
authority in connection with any of its fiscal years; Buyer and Acquisition
Subsidiary have no knowledge of any such audit currently pending or threatened,
and Buyer and Acquisition Subsidiary have no knowledge of any tax liens on any
of the properties of Buyer or Acquisition Subsidiary.
Section 4.12 Certificate of Incorporation and Bylaws. Buyer and
Acquisition Subsidiary have heretofore furnished to Seller a complete and
correct copy of the certificate of incorporation and the bylaws, each as amended
to the date hereof, of Buyer and Acquisition Subsidiary. Such certificate of
incorporation and bylaws are in full force and effect. Neither Buyer nor
Acquisition Subsidiary is in violation of any of the provisions of its
certificate of incorporation.
Section 4.13 Title to Property.
(a) Except as disclosed in Section 4.13 to the Buyer Disclosure Schedule,
Buyer and Acquisition Subsidiary has good and marketable title, or valid
leasehold rights in the case of leased property, to all real property and all
personal property purported to be owned or leased by them, free and clear of all
material liens, security interests, claims, encumbrances and charges, excluding
(i) immaterial liens for fees, taxes, levies, imposts, duties or governmental
tax of any kind which are not yet delinquent or are being contested in good
faith by appropriate proceedings which suspend the collection thereof, (ii)
immaterial liens for mechanics, materialmen, laborers, employees, suppliers or
other liens arising by operation of law for sums which are not yet delinquent or
are being contested in good faith by appropriate proceedings, (iii) purchase
money liens on office, computer and related equipment and supplies incurred in
the ordinary course of business, and (iv) liens or defects in title or leasehold
rights that, individually or in the aggregate, could not reasonably be expected
to have a Buyer Material Adverse Effect.
(b) Except as set forth in Section 4.13(b) of the Buyer Disclosure
Schedule, consummation of the Merger will not result in any breach of or
constitute a default (or an event with which notice or lapse of time or both
would constitute a default) under, or give to others any rights of termination
or cancellation of, or require the consent of others under, any lease in which
Buyer or Acquisition Subsidiary is a lessee, except for breaches or defaults
which, individually or in the aggregate, could not reasonably be expected to
have a Buyer Material Adverse Effect.
Section 4.14 Employee Benefits and Contracts.
(a) Section 4.14 of the Buyer Disclosure Schedule lists all employee
benefit plans (as defined in Section 3(3) of the ERISA) maintained by Buyer and
Acquisition Subsidiary. Each of such employee benefit plans complies in all
material respects with applicable requirements of ERISA or the Internal Revenue
Code of 1986, as amended (the "Code") and no "reportable event" or "prohibited
transaction" (as such terms are defined in ERISA) has occurred with respect to
any such plan, and no termination, if it has occurred or were to occur before
the Effective Date, would present a risk of liability to any Governmental Entity
or other persons that would have a Buyer Material Adverse Effect.
(b) Buyer and Acquisition Subsidiary has never maintained an
employee benefit plan subject to Section 412 of the Code or Title IV of ERISA.
Each employee benefit plan of
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Buyer or Acquisition Subsidiary intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the Internal Revenue
Service confirming such qualification. Neither Buyer nor Acquisition Subsidiary
has ever had an obligation to contribute to a "multi-employer plan" as defined
in Section 4001(a)(3) of ERISA. There are no unfunded obligations under any
employee benefit plan of Buyer or Acquisition Subsidiary providing benefits
after termination of employment to any employee or former employee, including
but not limited to retiree health coverage and deferred compensation, but
excluding continuation of health coverage required to be continued under Section
4980(B) of the Code. Each employee benefit plan of Buyer or Acquisition
Subsidiary may be amended or terminated by Buyer or Acquisition Subsidiary
without the consent or approval of any other person. There is no employee
benefit plan, stock option plan, stock appreciation right plan, restricted stock
plan, stock purchase plan, or severance benefit plan of Buyer or Acquisition
Subsidiary, any of the benefits of which will be increased or the vesting of the
benefits under which will be accelerated by the occurrence of any of the
transactions contemplated by this Agreement or the benefits under which will be
calculated on the basis of the transactions contemplated by this Agreement,
except as set forth in Section 4.14(b) of the Buyer Disclosure Schedule.
(c) Neither Buyer nor Acquisition Subsidiary is obligated to make
any parachute payment, as defined in Section 280G(b)(2) of the Code, nor will
any parachute payment be deemed to have occurred as a result of or arising out
of any of the transactions contemplated by this Agreement. Neither Buyer nor
Acquisition Subsidiary has any contract, agreement, obligation or arrangement
with any employee or other person, any of the benefits of which will be
increased or the vesting of the benefits under which will be accelerated by any
change of control of Buyer or Acquisition Subsidiary or the occurrence of any of
the transactions contemplated by this Agreement or the benefits under which will
be calculated on the basis of the transactions contemplated by this Agreement
except as set forth in Section 4.14(b) of the Buyer Disclosure Schedule.
Section 4.15 Employment; Labor Matters.
(a) Buyer has delivered to Seller true, complete and correct copies of all
employment agreements and all consulting agreements to which Buyer or
Acquisition Subsidiary is a party.
(b) Except as set forth in Section 4.15 of the Buyer Disclosure Schedule
(i) neither Buyer nor Acquisition Subsidiary is a party to any outstanding
employment agreements or contracts with directors, officers, employees or
consultants; (ii) neither Buyer nor Acquisition Subsidiary is a party to any
agreement, policy or practice that requires it to pay termination or severance
pay to employees (other than as required by law); and (iii) neither Buyer nor
Acquisition Subsidiary is a party to any collective bargaining agreement or
other labor union contract applicable to persons employed by Buyer or
Acquisition Subsidiary, nor does Buyer or Acquisition Subsidiary know of any
activities or proceedings of any labor union to organize any such employees.
Section 4.16 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by and
on behalf of Buyer or Acquisition Subsidiary.
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Section 4.17 Environmental Laws. Except as disclosed in Section 4.17 of
the Buyer Disclosure Schedule or as could not reasonably be expected to have,
individually or in the aggregate, a Buyer Material Adverse Effect: (i) Buyer and
Acquisition Subsidiary is in compliance with all applicable Environmental Laws;
(ii) all past noncompliance, if any, of Buyer or Acquisition Subsidiary with
Environmental Laws or Environmental Permits has been resolved without any
pending, ongoing or future obligation, cost or liability; and (iii) neither
Buyer nor Acquisition Subsidiary has released or transported a Hazardous
Material, in violation of any Environmental Law.
Section 4.18 Insurance. Section 4.18 of the Buyer Disclosure
Schedule sets forth a true and complete list of all insurance policies in force
at the date hereof, with respect to the assets, properties or operations of each
of Buyer and Acquisition Subsidiary. True and complete copies of all such
insurance policies have been made available to Seller by Buyer. Such policies
will not be terminated as a result of the Merger, subject to payment of
applicable premiums. Such policies also are in full force and effect.
Section 4.19 Contracts and Commitments.
(a) Except as disclosed in Section 4.10, 4.15 or 4.19 of the Buyer
Disclosure Schedule, neither Buyer nor Acquisition Subsidiary is a party or
subject to:
(i) any plan, contract or arrangement, written or oral, which
requires aggregate payments by Buyer or Acquisition Subsidiary in excess
of $50,000 per year or which provides for bonuses, pensions, deferred
compensation, severance pay or benefits, retirement payments,
profit-sharing, or the like;
(ii) any joint marketing, joint development or joint venture
contract or arrangement or any other agreement which has involved or is
expected to involve a sharing of profits with other persons;
(iii) any lease for real or personal property in which the amount of
payments which Buyer or Acquisition Subsidiary is required to make on an
annual basis exceeds $50,000;
(iv) any agreement, contract, mortgage, indenture, lease,
instrument, license, franchise, permit, concession, arrangement,
commitment or authorization which may be, by its terms, terminated or
breached by reason of the execution of this Agreement, the Merger, or the
consummation of the transactions contemplated hereby or thereby;
(v) except for trade indebtedness incurred in the ordinary course of
business, any instrument evidencing or related in any way to indebtedness
in excess of $50,000 incurred in the acquisition of companies or other
entities or indebtedness in excess of $50,000 for borrowed money by way of
direct loan, sale of debt securities, purchase money obligation,
conditional sale, guarantee, indemnification or otherwise;
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(vi) any contract containing covenants purporting to limit Buyer's
or Acquisition Subsidiary's freedom to compete in any line of business or
in any geographic area or with any third party,
(vii) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $50,000; or
(viii) any other agreement, contract or commitment which is material
to Buyer and Acquisition Subsidiary taken as a whole.
(b) Except as disclosed in Section 4.19 of the Buyer Disclosure Schedule,
each agreement, contract, mortgage, indenture, plan, lease, instrument, permit,
concession, franchise, arrangement, license and commitment listed in Section
4.19 of the Buyer Disclosure Schedule is valid and binding on Buyer or
Acquisition Subsidiary and the other party(ies) thereto, as applicable, and
assuming due and valid authorization, execution and delivery by all counter
parties, is in full force and effect, and neither Buyer, Acquisition Subsidiary,
nor to the knowledge of Buyer any other party thereto, has breached any material
provision of, or is in material default under the terms of, any such agreement,
contract, mortgage, indenture, plan, lease, instrument, permit, concession,
franchise, arrangement, license or commitment.
(c) There is no agreement, judgment, injunction, order or decree binding
upon the Buyer or Acquisition Subsidiary which has or could reasonably be
expected to have the effect of prohibiting or materially impairing any current
business practice of Buyer or Acquisition Subsidiary, any acquisition of
property by Buyer or Acquisition Subsidiary or the conduct of business by Buyer
or Acquisition Subsidiary as currently conducted or as proposed to be conducted
by Buyer or Acquisition Subsidiary.
Section 4.20 Interests of Officers and Directors. To Buyer's knowledge,
except as set forth in Section 4.20 of the Buyer Disclosure Schedule, no officer
or director of Buyer or Acquisition Subsidiary has had, either directly or
indirectly, a material interest in: (i) any person or entity which purchases
from or sells, licenses or furnishes to Buyer or Acquisition Subsidiary any
goods, property rights or services; (ii) except for the contracts listed in
Section 4.15 of the Buyer Disclosure Schedule, any contract or agreement to
which Buyer or Acquisition Subsidiary is a party or by which it may be bound or
affected; or (iii) any property, real or personal, tangible or intangible, used
in or pertaining to its business or that of Acquisition Subsidiary.
Section 4.21 Questionable Payments. Neither Buyer nor Acquisition
Subsidiary nor to its knowledge any director, officer, agent or other employee
of Buyer or Acquisition Subsidiary has: (i) made any payments or provided
services or other favors in the United States of America or in any foreign
country in order to obtain preferential treatment or consideration by any
Governmental Entity with respect to any aspect of the business of Buyer or
Acquisition Subsidiary; or (ii) made any political contributions which would not
be lawful under the laws of the United States or the foreign country in which
such payments were made. Neither Buyer nor Acquisition Subsidiary nor to its
knowledge any director, officer, agent or other employee of Buyer or Acquisition
Subsidiary has been the subject of any inquiry or investigation by any
Governmental Entity in connection with payments or benefits or other favors to
or for the benefit of any governmental or armed services
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official, agent, representative or employee with respect to any aspect of the
business of Buyer or Acquisition Subsidiary or with respect to any political
contribution.
Section 4.22 Certain Tax Matters. Except as disclosed in Section 4.22 of
the Buyer Disclosure Schedule, neither Buyer nor, to the knowledge of Buyer, any
of its affiliates has taken or agreed to take any action that could be expected
to prevent the Merger from constituting a transaction qualifying under Section
368 of the Code. Buyer is not aware of any agreement, plan or other
circumstances that could reasonably be expected to prevent the Merger from so
qualifying under Section 368 of the Code.
Section 4.23 No Prior Activities. Except for obligations or liabilities
incurred in connection with its incorporation or organization or the negotiation
and consummation of this Agreement and the transactions contemplated hereby
(including any financing), Acquisition Subsidiary has not incurred any
obligations or liabilities, and has not engaged in any business or activities of
any type or kind whatsoever or entered into any agreements or arrangements with
any person or entity. Acquisition Subsidiary is a wholly-owned subsidiary of
Buyer.
ARTICLE 5
COVENANTS
Section 5.1 Interim Operations of Seller and Buyer. Seller and Buyer each
hereby covenants and agrees with the other that, except (i) as expressly
contemplated by this Agreement, (ii) as set forth in Section 5.1 of the Seller
Disclosure Schedule, (iii) as set forth in Section 5.1 of the Buyer Disclosure
Schedule or (iv) as agreed in writing by Seller and Buyer, after the execution
and delivery of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time:
(a) the business of such party and its subsidiaries shall be conducted
only in the ordinary and usual course and, to the extent consistent therewith,
each party and its subsidiaries shall use its reasonable commercial efforts to
preserve its business organization intact and maintain its existing relations
with customers, suppliers, employees, creditors and business partners;
(b) each such party shall not, directly or indirectly, amend its or any of
its subsidiaries' certificate of incorporation or bylaws or similar
organizational documents;
(c) each such party shall not, and it shall not permit its subsidiaries
to: (i)(A) declare, set aside or pay any dividend or other distribution payable
in cash, stock or property with respect to such party's capital stock or that of
its subsidiaries, or (B) redeem, purchase or otherwise acquire directly or
indirectly any of such party's capital stock (or options, warrants, calls,
commitments or rights of any kind to acquire any shares of capital stock) or
that of its subsidiaries; (ii) issue, sell, pledge, dispose of or encumber any
additional shares of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire, capital
stock of any class of such party or its subsidiaries, other than Common Shares
or Buyer Common Stock issuable upon the exercise of options and warrants
outstanding on the date hereof and described in Section 3.2 of this Agreement or
the Seller Disclosure Schedule or Section 4.2 of this
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Agreement or the Buyer Disclosure Schedule; (iii) split, combine or reclassify
the outstanding capital stock of such party or of its subsidiaries; or (iv)
amend or otherwise modify the terms of any rights, warrants or options with
respect to such party or of its subsidiary's capital stock;
(d) each such party shall not, and it shall not permit its subsidiaries
to, acquire or agree to acquire, or dispose of or agree to dispose of, any
material assets, either by purchase, merger, consolidation, sale of shares in
any of its subsidiaries or otherwise, other than in the ordinary course of
business;
(e) each such party shall not, and it shall not permit its subsidiaries
to, transfer, lease, license, sell, mortgage, pledge or encumber any assets;
(f) except as contemplated by Section 4.14(b), neither such party nor its
subsidiaries shall: (i) grant any increase in the compensation payable to any of
its officers, directors or key employees; or (ii)(A) adopt any new, or (B)
except as contemplated by Section 2.5, amend or otherwise increase, or
accelerate the payment or vesting of the amounts payable or to become payable
under any existing, bonus, incentive compensation, deferred compensation,
severance, profit sharing, stock option, stock purchase, insurance, pension,
retirement or other employee benefit plan, agreement or arrangement; or (iii)
enter into or modify or amend any employment or severance agreement with or,
except as required by applicable law, grant any severance or termination pay to
any officer, director or employee of Seller or any of its subsidiaries; or (iv)
enter into any collective bargaining agreement;
(g) neither such party nor any of its subsidiaries shall, without the
other party's prior written consent, which consent shall not be unreasonably
withheld, modify, amend or terminate any of its contracts or waive, release or
assign any rights or claims;
(h) neither such party nor any of its subsidiaries shall: (i) incur or
assume any indebtedness for money borrowed; (ii) modify any such indebtedness or
other liability; (iii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person, other than immaterial amounts in the ordinary course of
business consistent with past practice and other than for any subsidiary; (iv)
make any loans, advances or capital contributions to, or investments in, any
other person (other than to wholly-owned subsidiaries of such party); (v) change
any of its methods of reporting income or deductions for federal income tax
purposes from those employed in the preparation of the federal income tax
returns for the year ended December 31, 1997, or (vi) enter into any material
commitment or transaction except as contemplated by this Agreement;
(i) neither such party nor any of its subsidiaries shall change any of the
accounting methods, practices or policies used by it unless required by a change
in GAAP;
(j) such party shall not, and it shall not permit its subsidiaries to,
make or agree to make any new capital expenditures in excess of $10,000 in the
aggregate;
(k) such party shall not, and it shall not permit its subsidiaries to,
make any tax election (unless required by law) or settle or compromise any
income tax liability; and
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(l) neither party nor any of its subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing, or to
authorize, recommend, propose or announce an intention to do any of the
foregoing.
Section 5.2 Access; Confidentiality. Each of Seller and Buyer shall (and
Buyer shall cause each of its subsidiaries to) (a) afford to the officers,
employees, accountants, counsel and other representatives of Seller and Buyer,
as the case may be, reasonable access to and the right to inspect and observe,
during normal business hours during the period prior to the Effective Time, its
personnel, accountants, representatives, properties, books, contracts, insurance
policies, commitments and records, offices, plants and other facilities, (b)
make available promptly to Seller or Buyer, as the case may be (i) a copy of
each report, schedule, registration statement and other document filed or
received by it during such period pursuant to the requirements of federal
securities laws, if applicable and (ii) all other information concerning its
business, properties and personnel as Seller or Buyer may reasonably request.
Each party will treat any such information in accordance with the provisions of
the letter agreement dated the date hereof between Seller and Buyer (the
"Confidentiality Agreement"). No investigation conducted by Seller or Buyer
shall impact any representation or warranty given by Seller to Buyer hereunder.
Section 5.3 Additional Agreements. Subject to the terms and conditions
herein provided, each of the parties hereto shall use all reasonable commercial
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations, or to remove any injunctions or other impediments or delays, legal
or otherwise, to consummate and make effective the Merger and the other
transactions contemplated by this Agreement. Buyer also agrees to timely file
all filings required to be made with the SEC with respect to such transactions.
Section 5.4 Consents and Approvals; HSR Act. Each of Seller, Buyer and
Acquisition Subsidiary will take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on it with respect to
this Agreement and the transactions contemplated hereby (which actions shall
include, without limitation, furnishing all information required under the HSR
Act and in connection with approvals of or filings with any other Governmental
Entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon any of them or any of
their subsidiaries in connection with this and the transactions contemplated
hereby. Each of Seller, Buyer and Acquisition Subsidiary will, and will cause
its subsidiaries to, take all reasonable actions necessary to obtain (and will
cooperate with each other in obtaining) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity or other public or
private third party required to be obtained or made by Buyer, Acquisition
Subsidiary, Seller or any of their subsidiaries in connection with the Merger or
the taking of any action contemplated thereby or by this Agreement. Each party
shall promptly inform the other party of any communication with, and any
proposed understanding, undertaking, or agreement with, any Governmental Entity
regarding any such filings or any such transaction.
Section 5.5 Exclusivity. From the date hereof until the earlier of
termination of this Agreement or consummation of the Merger, neither Seller nor
Buyer nor any of their officers,
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directors, employees, representatives (including any investment banker, attorney
or accountant retained by them), agents or affiliates shall directly or
indirectly encourage, solicit, initiate, facilitate or conduct discussions or
negotiations with, provide any information to, or enter into any agreement with,
any corporation, partnership, person or other entity or group concerning or
expressing an interest in or proposing any merger, consolidation,
reorganization, share exchange, business combination, liquidation, dissolution
sale of all or other significant assets or securities or other similar
transaction involving such party, except to the extent required by their
fiduciary duties as determined by the Board of Directors of such party after
discussion with their counsel.
Section 5.6 Publicity. So long as this Agreement is in effect, neither
Seller, Buyer nor any of their respective affiliates shall issue or cause the
publication of any press release or other public announcement with respect to
the Merger, this Agreement or the other transactions between the parties
contemplated hereby without the prior consultation of the other party, except as
may be required by law or by any listing agreement with a national securities
exchange or trading market.
Section 5.7 Notification of Certain Matters. Seller shall give prompt
notice to Buyer and Acquisition Subsidiary, and Buyer and Acquisition Subsidiary
shall give prompt notice to Seller, of (i) the occurrence or non-occurrence of
any event the occurrence or non-occurrence of which would cause any
representation or warranty made by such party or parties in this Agreement to be
untrue or inaccurate in any material respect at or prior to the Effective Time
and (ii) any failure of Seller, Buyer or Acquisition Subsidiary, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 5.7 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice. Seller also
shall give prompt notice to Buyer, and Buyer or Acquisition Subsidiary shall
give prompt notice to Seller, of:
(i) any notice or other communication from any person alleging that
the consent of such person is or may be required in connection with the
transactions contemplated by this Agreement (unless the requirement for
such consent is set forth in Section 3.4 of the Seller Disclosure Schedule
or Section 4.4 of the Buyer Disclosure Schedule);
(ii) any notice or other communication from any Governmental Entity
in connection with the transactions contemplated by this Agreement;
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to or
involving or otherwise affecting it or any of its subsidiaries or which
relate to the consummation of the transactions contemplated by this
Agreement; and
(iv) any occurrence of any event having, or which could reasonably
be expected to have, a Seller Material Adverse Effect or Buyer Material
Adverse Effect.
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Section 5.8 Indemnification. Notwithstanding Section 8.7 hereof, Buyer
agrees that all rights to indemnification existing in favor of directors,
officers or employees of Seller as provided in Seller's certificate of
incorporation or bylaws, with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect. If
the Surviving Corporation or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers all or substantially all of its properties and assets to any person,
then and in each such case, proper provision shall be made so that the
successors and assigns of the Surviving Corporation assume the obligations set
forth in this Section 5.8.
Section 5.9 Approval of Stockholders.
(a) Buyer shall, promptly after the date of this Agreement, take all
actions necessary in accordance with the requirements of the bylaws of the
National Association of Securities Dealers, Inc. ("NASD"), DGCL and its
certificate of incorporation and bylaws to convene a meeting of Buyer's
stockholders to act on this Agreement (the "Buyer Stockholders' Meeting") and
Buyer shall consult with Seller in connection therewith.
(b) Unless Seller's Board of Directors in the good faith exercise of its
fiduciary duties, after receiving advice from outside legal counsel, determines
not to recommend, or to withdraw its recommendation that such matters be
approved by Seller's stockholders, Seller shall, promptly after the date of this
Agreement, take all actions necessary in accordance with DGCL and its
certificate of incorporation and bylaws to obtain the unanimous written consent
of Seller's stockholders to act on this Agreement, and Seller shall consult with
Buyer in connection therewith.
Section 5.10 Buyer Proxy Statement. Unless the Board of Directors of Buyer
in the good faith exercise of its fiduciary duties determines not to recommend
the Merger and this Agreement to its stockholders (or to withdraw such
recommendation), Buyer, acting through its Board of Directors, shall, in
accordance with applicable law:
(i) after consultation with Seller and its legal counsel, diligently
prepare and file with the SEC as soon as reasonably practicable after the
date of this Agreement (but in no event later than 30 days after the date
hereof), a preliminary proxy or information statement relating to the
Merger and this Agreement and use commercially reasonable efforts (x) to
obtain and furnish the information required to be included by the SEC in
the Buyer Proxy Statement (as hereinafter defined) and, after consultation
with Seller and its counsel, to respond promptly to any comments made by
the SEC with respect to the preliminary proxy or information statement and
cause a definitive proxy or information statement, including any amendment
or supplement thereto (the "Buyer Proxy Statement") to be mailed to its
stockholders, provided that no amendment or supplement to the Buyer Proxy
Statement will be made by Buyer without consultation with Seller and its
counsel and (y) to obtain the necessary approvals of the Merger and this
Agreement by its stockholders;
(ii) prepare the preliminary proxy statement and prepare and revise
the Buyer Proxy Statement so that at the date mailed to Buyer's
stockholders and at the time of the
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meeting of Buyer's stockholders to be held in connection with the Merger,
the Buyer Proxy Statement will (x) not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order that the statements made therein, in light
of the circumstances under which they are made, not misleading (except
that Buyer shall not be responsible under this clause (ii) with respect to
statements made therein based on information supplied by Seller expressly
for inclusion in the Buyer Proxy Statement), and (y) comply in all
material respects with the provisions of the Exchange Act and the rules
and regulations thereunder; and
(iii) make at the Buyer's Stockholder's Meeting, and include in the
Proxy Statement, the recommendation of the Board that stockholders of
Buyer vote in favor of the approval of the Merger and the authorization
and adoption of this Agreement.
Section 5.11 Seller Information Statement.
(a) Seller shall afford Buyer and its legal counsel a reasonable
opportunity to review and comment on any solicitation materials, including
solicitation of action by written consent, that Seller distributes to its
stockholders in connection with the Merger, which shall be diligently prepared
and distributed to Seller's stockholders as soon as reasonably practicable after
the date of this Agreement and, at such date, such solicitation materials will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order that the
statements made therein, in light of the circumstances under which they are
made, not misleading (except that Seller shall not be responsible under this
Section 5.11(a) with respect to statements made therein based on information
supplied by Buyer expressly for inclusion in such solicitation materials). To
the greatest extent practicable, information required to be disclosed in both
the Buyer Proxy Statement and any such solicitation materials shall be disclosed
in an identical manner.
(b) Seller shall furnish to Buyer, and revise, written information
concerning itself expressly for inclusion in the Buyer Proxy Statement,
including without limitation by reviewing and commenting (with respect to
information concerning Seller) on drafts of the Buyer Proxy Statement and the
preliminary proxy statement to be prepared pursuant to Section 5.10. Seller
shall inform Buyer of any change regarding such information so that such
Seller-furnished information will not, at both the date mailed to Buyer
stockholders and at the time of the meeting of Buyer stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated in Seller furnished
information or necessary in order to make the statements made in
Seller-furnished information, in light of the circumstances under which they are
made, not misleading.
Section 5.12 Tax Treatment. Each party hereto shall use all reasonable
efforts to cause the Merger to qualify and shall not take, and shall use all
reasonable efforts to prevent any affiliate of such party from taking, any
actions which could prevent the Merger from qualifying as a reorganization under
the provisions of Section 368(a) of the Code.
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Section 5.13 Form S-8. With respect to the Seller Option Plan, Buyer shall
take all corporate action necessary or appropriate to, as soon as practicable
after the Effective Time, file a registration statement on Form S-8 (or any
successor or other appropriate form) with respect to the shares of Buyer Common
Stock which will be subject to options outstanding under such plan as of the
Closing to the extent such registration statement is required under applicable
law in order for such shares of Buyer Common Stock to be sold without
restriction, and Buyer shall use reasonable efforts to maintain the
effectiveness of such registration statements (and maintain the current status
of the prospectuses contained therein) for so long as such options under such
plan remain outstanding.
Section 5.14 Reservation of Buyer Common Stock. Buyer shall reserve from
its authorized but unissued shares of Buyer Common Stock that number of shares
of Buyer Common Stock issuable upon exercise of the Seller Stock Options assumed
by Buyer.
Section 5.15 Consolidation of Operations. Buyer and Seller shall cooperate
with one another with a view toward consolidating the operations of Buyer and
Seller at Seller's principal executive offices and eliminating duplicative
staffing and overhead as soon as reasonably possible.
Section 5.16 Consolidation of Board of Directors. Buyer will utilize good
faith efforts to decrease the membership of the Board of Directors of Buyer to a
total of seven (7) members by the first anniversary of the date of this
Agreement. It is agreed and understood that this Section 5.16 shall not require
(i) Buyer to amend its organizational documents or (ii) Buyer's directors to
take any actions inconsistent with their fiduciary duties.
Section 5.17 Incentive Bonus Payments. Buyer and Seller agree that the
incentive bonus payments to be made to Robert J. Capetola, pursuant to Section
4.e. of the Capetola Employment Agreement attached as Exhibit A hereto, and to
each of Harry G. Brittain, Cynthia Davis, Laurence B. Katz, Lisa Mastroianni,
Christopher Schaber, Huei Tsai and Thomas Wiswell, pursuant to Section 4.d. of
the employment agreements to be entered into with such individuals in the form
of Exhibit B hereto, shall be determined for each of the above-named individuals
by Buyer's Compensation Committee, shall be paid in either cash or equity as
determined by such Compensation Committee, shall be in the following aggregate
amounts and shall be paid upon the achievement of each of the following
milestones (which are set forth in the aforementioned agreements): (a) $150,000
upon the successful completion of Phase II studies for any compound under
development in Discovery's portfolio (each a "Portfolio Compound"); (b) $500,000
upon the successful completion of Phase II studies for any Portfolio Compound;
and (c) $1,000,000 upon receipt of marketing approval in the United States for
any Portfolio Compound. The aforementioned bonuses shall be paid only once for
each of the milestones.
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ARTICLE 6
CONDITIONS
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger shall be subject to
the satisfaction on or prior to the Effective Time of each of the following
conditions, any and all of which may be waived in whole or in part by Seller,
Buyer or Acquisition Subsidiary, as the case may be, to the extent permitted by
applicable law:
(a) Stockholder Approval. This Agreement shall have been approved by
the requisite vote of the stockholders of Seller, Buyer and Acquisition
Subsidiary;
(b) Statutes. No statute, rule, order, decree or regulation shall
have been enacted or promulgated by any Governmental Entity which prohibits the
consummation of the Merger;
(c) Injunctions. There shall be no order or injunction of a court or
other governmental authority of competent jurisdiction in effect precluding,
restraining, enjoining or prohibiting consummation of the Merger;
(d) Tax Opinions. Buyer shall have received from Roberts, Sheridan &
Kotel, P.C., counsel to Buyer, a written opinion dated as of the Closing Date to
the effect that the Merger, when effected in accordance with this Agreement,
will qualify as a reorganization under Section 368(a) of the Code; Seller shall
have received from Brobeck, Phleger & Harrison LLP, counsel to Seller, a written
opinion dated as of the Closing Date to the effect that the Merger, when
effected in accordance with this Agreement, will qualify as a reorganization
under Section 368(a) of the Code;
(e) Capetola Employment Agreement. Robert J. Capetola shall have
entered into an employment agreement with Buyer, in the form attached as Exhibit
A hereto;
(f) Key Executive Employment Agreements. Buyer and each of Harry G.
Brittain, Cynthia Davis, Laurence B. Katz, Lisa Mastroianni, Christopher
Schaber, Huei Tsai and Thomas Wiswell shall have entered into employment
agreements as mutually agreed to by Buyer and Seller, substantially in the form
attached as Exhibit B hereto (the "Key Executive Employment Agreements");
(g) Exchange Agreement. Buyer shall have entered into the Exchange
Agreement with JJDC.
(h) Board of Directors. On the Effective Date, the Board of
Directors of Buyer shall consist of Robert J. Capetola, Steve Kanzer, Max Link,
Herbert McDade, David Naveh, Milton Packer, Richard Power, Mark Rogers, Marvin
Rosenthale, and Richard Sperber.
(i) No Litigation. After the date hereof, there shall not be
threatened, or instituted and continuing, any action, suit or proceeding against
Seller, Buyer or Acquisition Subsidiary, by any Governmental Entity or any other
person directly or indirectly relating to the
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Merger or any other transactions contemplated by this Agreement which
individually or in the aggregate could reasonably be expected to have a Seller
Material Adverse Effect or Buyer Material Adverse Effect.
Section 6.2 Additional Conditions to Obligations of Seller. The obligation
of Seller to effect the Merger is also subject to the fulfillment of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of Buyer and Acquisition Subsidiary contained in this Agreement shall
be true and correct on the date hereof and shall also be true and correct on and
as of the Effective Time, with the same force and effect as if made on and as of
the Effective Time, unless the failure of such representations and warranties to
be true and correct could not reasonably be expected to cause, individually or
in the aggregate, a Buyer Material Adverse Effect (as applied to such dates);
(b) Agreements, Conditions and Covenants. Buyer and Acquisition Subsidiary shall
have performed or complied in all material respects with all agreements,
conditions and covenants required by this Agreement to be performed or complied
with by them on or before the Effective Time;
(c) Certificate of Chairman of the Board. Seller shall have received
a certificate of the Chairman of the Board of Directors of Buyer to the effect
that each of the conditions specified in clauses (a) and (b) of this Section 6.2
have been satisfied;
(d) Stock Option Agreements. In addition to the Stock Options
assumed by Buyer under Section 2.4, Buyer shall have granted stock options
pursuant to Buyer Stock Option Plan in the forms of option agreements attached
hereto as Exhibit C, Exhibit D and Exhibit E, to certain of Seller's employees
as set forth on Schedule 6.2(d), for an aggregate of 338,500, 175,000 and
160,000 shares of Common Stock, respectively.
(e) Opinion. Seller shall have received an opinion dated as of the
Closing Date from Roberts, Sheridan & Kotel P.C., counsel to Buyer and
Acquisition Subsidiary, covering the matters set forth in Schedule 6.2(e).
(f) Registration Rights Agreement. Buyer shall have entered into a
Registration Rights Agreement with JJDC and The Scripps Research Institute,
substantially in the form attached hereto as Exhibit F.
Section 6.3 Additional Conditions to Obligations of Buyer and Acquisition
Subsidiary. The obligations of Buyer and Acquisition Subsidiary to effect the
Merger are also subject to the following conditions:
(a) Representations and Warranties. The representations and
warranties of Seller contained in this Agreement shall be true and correct on
the date hereof and shall also be true and correct on and as of the Effective
Time, with the same force and effect as if made on and as of the Effective Time,
unless the failure of such representations and warranties to be true and correct
as of such dates could not reasonably be expected to cause, individually or in
the aggregate, a Seller Material Adverse Effect (as applied to such dates);
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(b) Agreements, Conditions and Covenants. Seller shall have
performed or complied in all material respects with all agreements, conditions
and covenants required by this Agreement to be performed or complied with by it
on or before the Effective Time;
(c) Officer's Certificate. Buyer shall have received a certificate
of the Chief Executive Officer of Seller to the effect that each of the
conditions specified in clauses (a) and (b) of this Section 6.3. have been
satisfied.
(d) Investment Agreement. Each holder of Common Shares shall have
executed and delivered to Buyer the form of Investment Agreement attached as
Exhibit G hereto.
(e) Opinion. Buyer shall have received an opinion dated as of the
Closing Date from Brobeck, Phleger & Harrison LLP, counsel to Seller, covering
the matters set forth in Schedule 6.3(e).
(f) Dissenting Common Shares. The aggregate number of Common Shares
held by Dissenting Stockholders shall not be equal to or exceed five percent
(5%) of the outstanding Common Shares immediately prior to the Effective Time.
(g) Contractual Lock-up Agreements. Each common stockholder and
optionholder of Seller shall have entered into an agreement with Buyer
substantially in the form of Exhibit H attached hereto.
(h) Buyer Stock Option Plan. The 1998 stock option plan of Buyer
(the "1998 Stock Option Plan") in the form attached as Exhibit I hereto, shall
have been approved by the requisite vote of the stockholders of Buyer.
(i) Termination Agreement. Seller shall enter into a letter
agreement terminating the Co-Sale Agreement dated as of October 28, 1996 by and
between Seller and the stockholders listed on Schedule A thereto.
ARTICLE 7
TERMINATION
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the terms of
this Agreement by the stockholders of Buyer or Seller:
(a) by mutual written consent of the Boards of Directors of
Buyer and Seller;
(b) by either Buyer or Seller if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting consummation of the Merger and
such order, decree or ruling or other action shall have become final and
nonappealable;
34
<PAGE>
(c) by either Buyer or Seller, if the Merger shall not have been
consummated by July 15, 1998; provided, however, that the right to terminate
this Agreement pursuant to this Section 7.1(c) shall not be available to any
party whose failure (or the failure of the affiliates of which) to perform any
of its obligations under this Agreement has been the cause of, or resulted in,
the failure of the Merger to occur on or before such date; provided, further,
that for this purpose, Buyer and Seller shall not be deemed to be affiliates of
each other; directors, officers and employees of Seller shall be deemed to act
only on behalf of such Seller; and directors, officers and employees of Buyer or
Acquisition Subsidiary shall be deemed to act only on behalf of Buyer and/or
Acquisition Subsidiary; and provided further that an individual holding
positions on the boards of both Seller, on the one hand, and Buyer or
Acquisition Subsidiary, on the other hand, shall be deemed to act only on behalf
of Buyer and/or Acquisition Subsidiary unless such interpretation would be
manifestly unreasonable;
(d) by Buyer or Acquisition Subsidiary, in the event of a breach by
Seller of any representation, warranty, covenant or other agreement contained in
this Agreement which cannot be or has not been cured within thirty (30) days
after the giving of written notice to Seller and which, individually or in the
aggregate, has had or could reasonably be expected to have, a Seller Material
Adverse Effect; or
(e) by Seller, in the event of a breach by Buyer or Acquisition
Subsidiary of any of their respective representations, warranties, covenants or
other agreements contained in this Agreement, which cannot be or has not been
cured within thirty (30) days after the giving of written notice to Buyer or
Acquisition Subsidiary, and which, individually or in the aggregate, has had or
could reasonably be expected to have, a Buyer Material Adverse Effect.
Section 7.2 Effect of Termination. In the event of a termination of this
Agreement by either Seller or Buyer as provided in Section 7.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of Buyer, Acquisition Subsidiary or Seller or their respective officers or
directors, except with respect to Sections 3.16, 4.16, 5.2, this Section 7.2 and
Article 8; provided, however, that nothing herein shall relieve any party of
liability for any breach this Agreement.
ARTICLE 8
MISCELLANEOUS
Section 8.1 Fees and Expenses. All fees and expenses incurred in
connection with the Merger, this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.
Section 8.2 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the stockholders of Seller or Buyer
contemplated hereby, by written agreement of the parties hereto, at any time
prior to the Closing Date with respect to any of the terms contained
35
<PAGE>
herein; provided, however, that after the approval of this Agreement by the
stockholders of Seller or Buyer, no such amendment, modification or supplement
shall reduce the amount or change the form of the consideration to be received
by Seller stockholders in the Merger.
Section 8.3 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
Section 8.4 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given upon receipt, and shall be given to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
36
<PAGE>
(a) if to Buyer or Acquisition Subsidiary, to:
Discovery Laboratories, Inc.
509 Madison Avenue
Suite 1406
New York, NY 10022
Telephone: (212) 223-9504
Facsimile: (212) 688-7978
Attention: Steve H. Kanzer, Esq.
with copies to:
Roberts, Sheridan & Kotel, P.C.
Tower Forty-Nine
12 East 49th Street
New York, NY 10017
Telephone: (212) 299-8600
Facsimile: (212) 299-8686
Attention: Kenneth G. Alberstadt, Esq.
(b) if to Seller, to:
Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, PA 18901
Telephone: (215) 794-3064
Facsimile: (215) 794-3239
Attention: Robert J. Capetola, Ph. D.
with copies to:
Brobeck, Phleger & Harrison LLP
1633 Broadway
47th Floor
New York, NY 10019
Telephone: (212) 581-1600
Facsimile: (212) 586-7878
Attention: Ellen B. Corenswet, Esq.
Section 8.5 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the
37
<PAGE>
words "include", "includes" or "including" are used in this Agreement they shall
be deemed to be followed by the words "without limitation". As used in this
Agreement, the term "affiliate(s)" shall have the meaning set forth in Rule
12b-2 of the Exchange Act. As used in this Agreement, a "subsidiary" of any
entity shall mean all corporations or other entities in which such entity owns a
majority of the issued and outstanding capital stock or equity or similar
interests.
Section 8.6 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 8.7 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement and the Confidentiality Agreement (including the
documents and the instruments referred to herein and therein): (a) constitute
the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and (b) other than the provisions of Section 5.8 hereof, nothing expressed or
implied in this Agreement is intended or will be construed to confer upon or
give to any person, firm or corporation other than the parties hereto any rights
or remedies under or by reason of this Agreement or any transaction contemplated
hereby.
Section 8.8 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 8.9 Governing Law. This Agreement and the legal relations between
the parties hereto will be governed by and construed in accordance with the laws
of the State of Delaware, without giving effect to the choice of law principles
thereof.
Section 8.10 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Acquisition Subsidiary may assign, in
its sole discretion, any or all of its rights, interests and obligations
hereunder to Buyer or to any direct or indirect wholly owned subsidiary of
Buyer. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
38
<PAGE>
IN WITNESS WHEREOF, Buyer, Acquisition Subsidiary and Seller have caused
this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
Buyer
By: /s/ James S. Kuo
-------------------------------------
Name: James S. Kuo, M.D.
-------------------------------------
Title: President
-------------------------------------
Acquisition Subsidiary
By: /s/ James S. Kuo
-------------------------------------
Name: James S. Kuo, M.D.
-------------------------------------
Title: President
-------------------------------------
Seller
By: /s/ Robert J. Capetola
-------------------------------------
Name: Robert J. Capetola, Ph.D.
-------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
39
<PAGE>
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER, dated as of
May 1, 1998 ("Amendment No. 1"), by and among Discovery Laboratories, Inc., a
Delaware corporation ("Buyer" or "Discovery"), ATI Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Buyer ("Acquisition Subsidiary"),
and Acute Therapeutics, Inc., a Delaware corporation ("Seller" or "Acute").
RECITALS:
WHEREAS, the parties hereto entered into an Agreement and Plan of
Merger, dated March 5, 1998 (the "Merger Agreement"), pursuant to which
Acquisition Subsidiary will merge with and into Seller (the "Merger") and Seller
will become a wholly-owned subsidiary of Buyer; and
WHEREAS, the parties wish to enter into this Amendment No. 1 in
connection with certain clarifications and corrections to the Merger
Agreement;
NOW, THEREFORE, for good and valuable consideration and the mutual
covenants and agreements contained in this Amendment No. 1 and in the Merger
Agreement, and intending to be legally bound hereby and thereby, Seller, Buyer
and Acquisition Subsidiary hereby agree as follows:
1. Unless otherwise defined in this Amendment No. 1, all capitalized
terms used herein shall have the meanings given to them in the Merger Agreement.
2. Section 2.1 of the Merger Agreement is hereby amended to replace
the number "3.91" in the first sentence thereof with the number "3.90."
3. Section 2.2 of the Merger Agreement is hereby amended to replace
the phrase "Series A Preferred Stock" with the phrase "Series C Preferred
Stock."
4. Section 2.5(a) of the Merger Agreement is hereby amended to
delete the phrase ", except for options to purchase 44,800 Common Shares granted
on October 10, 1996, as listed on Schedule 2.5 hereto which shall terminate on
the closing."
5. Section 2.5(a) of the Merger Agreement is hereby further amended
to delete the word "and" between clauses (i) and (ii) of the third sentence of
such section and to add at the end of clause (ii) after the words "Conversion
Ratio" the following: "and (iii) the vesting of the options to purchase 44,800
Common Shares granted on October 10, 1996, as listed on Schedule 2.5 hereto
shall be accelerated in full immediately prior to the Effective Time."
<PAGE>
6. Except as set forth in this Amendment No. 1, the Merger Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, Buyer, Acquisition Subsidiary and Seller have
caused this Amendment No. 1 to be signed by their respective officers thereunto
duly authorized as of the date first written above.
BUYER
By: /s/ Robert J. Capetola
-----------------------------------------
Name: Robert J. Capetola
Title: Acting Chief Executive Officer
ACQUISITION SUBSIDIARY
By: /s/ Evan Myrianthopoulos
-----------------------------------------
Name: Evan Myrianthopoulos
Title: Vice President
SELLER
By: /s/ Robert J. Capetola
-----------------------------------------
Name: Robert J. Capetola
Title: President and Chief Executive
Officer
2
<PAGE>
Annex B
DISCOVERY LABORATORIES, INC
1998 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1998 Stock Incentive Plan (the "Plan") is intended to promote
the interests of Discovery Laboratories, Inc., a Delaware corporation, by
providing eligible persons with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.
The Plan shall serve as the successor to the Corporation's 1995
Stock Option Plan and 1993 Stock Option Plan (the "Predecessor Plans"), and no
further option grants shall be made under the Predecessor Plans after the date
on which the Plan is approved by the Corporation's stockholders (the
"Stockholder Approval Date"). All options outstanding under the Predecessor
Plans on the Stockholder Approval Date shall be incorporated into the Plan at
that time and shall be treated as outstanding options under the Plan. However,
each outstanding option so incorporated shall continue to be governed solely by
the terms of the documents evidencing such option, and no provision of the Plan
shall be deemed to affect or otherwise modify the rights or obligations of the
holders of such incorporated options with respect to their acquisition of shares
of Common Stock.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary), and
(iii) the Automatic Option Grant Program under which eligible
non-employee board members shall automatically receive option grants at periodic
intervals to
<PAGE>
purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The Board shall have authority to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders but
may delegate such authority to the Primary Committee. Administration of the
Discretionary Option Grant and Stock Issuance Programs with respect to all other
persons eligible to participate in those programs may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee, or the
Board may retain the power to administer those programs with respect to all such
persons.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
<PAGE>
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. Only non-employee members of the Board shall be eligible to
participate in the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
1,002,862 shares. Such authorized share reserve is comprised of (i) the number
of shares which remain available for issuance, as of the Stockholder Approval
Date, under the Predecessor Plans as last approved by the Corporation's
stockholders, comprised of the shares subject to the outstanding options to be
incorporated into the Plan as of the Stockholder Approval Date and the
additional shares which would otherwise be available for future grant under the
Predecessor Plans (estimated to be 398,097 shares in the aggregate as of March
1, 1998), plus (ii) an additional increase of 1,002,862 shares authorized by the
Board on March 24, 1998, subject to approval by the Corporation's stockholders
at the 1998 Annual Meeting.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 250,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1998 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
<PAGE>
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted options, separately exercisable stock appreciation rights and direct
stock issuances under this Plan per calendar year, (iii) the number and/or class
of securities for which grants are subsequently to be made under the Automatic
Option Grant Program to new and continuing non-employee Board members, (iv) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan and (v) the number and/or class of
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written instructions
to (a) a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required
to be withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
<PAGE>
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date of
the Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
(vi) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional
<PAGE>
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
<PAGE>
C. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
shall not so accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
those option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options upon the occurrence of a Corporate Transaction, whether or
not those options are to be assumed or replaced in the Corporate Transaction.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
<PAGE>
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.
E. Notwithstanding Section III.A. of this Article Two, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed or replaced in the
Corporate Transaction. In addition, the Plan Administrator may provide that one
or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Corporate Transaction shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full, even in the event the options are to be
assumed.
F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service terminates by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
or replaced and do not otherwise accelerate. Any options so accelerated shall
remain exercisable for fully-vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may provide that one or more of the Corporation's
outstanding repurchase rights with respect to shares held by the Optionee at the
time of such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.
G. The Plan Administrator shall have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program upon (i) a
Change in Control or (ii) the termination of the Optionee's Service by reason of
an Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of such Change in Control. Each option
so accelerated shall remain exercisable for fully-vested shares until the
earlier of (i) the expiration of the option term or (ii) the expiration of the
one (1)-year period measured from the effective date of the Optionee's cessation
of Service. In addition, the Plan Administrator may provide that one or more of
the Corporation's outstanding repurchase rights with respect to shares held by
the Optionee at the time of such Change in Control or Involuntary Termination
shall immediately terminate, and the shares subject to those terminated
repurchase rights shall accordingly vest in full.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
<PAGE>
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution therefor new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price payable
for such shares.
(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time
prior to the later of (a) five (5) business days after the receipt of the
rejection notice or (b) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents
<PAGE>
evidencing such option, but in no event may such rights be exercised more
than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from
the Corporation in an amount equal to the excess of (A) the Take-Over
Price of the shares of Common Stock which are at the time vested under
each surrendered option (or surrendered portion thereof) over (B) the
aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the option surrender date.
(iii) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
<PAGE>
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
B. The Plan Administrator shall have the discretion, exercisable
either at the time the unvested shares are issued or at any time while the
Corporation's repurchase right remains outstanding, to provide for the automatic
termination of one or more of those outstanding rights and the immediate vesting
of the shares of Common Stock subject to such rights upon the occurrence of a
Corporate Transaction.
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Corporate Transaction
in which those repurchase rights are assigned to the successor corporation (or
parent thereof).
D. The Plan Administrator shall have the discretionary authority,
exercisable
<PAGE>
either at the time the unvested shares are issued or any time while the
Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest upon (i) a Change in Control or (ii) the termination of the
Participant's Service by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of such Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
<PAGE>
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Plan Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been a director of or in the employ of the
Corporation or any Parent or Subsidiary.
2. On the date of the 1998 Annual Meeting (the Stockholder
Approval Date) and on the date of each Annual Stockholders Meeting held after
such date, each individual who is to continue to serve as an Eligible Director,
whether or not that individual is standing for re-election to the Board at that
particular Annual Meeting, shall automatically be granted a Non-Statutory Option
to purchase 10,000 shares of Common Stock, provided, that with respect to each
Annual Stockholders' Meeting held after the 1998 Annual Meeting, such individual
has served as a non-employee board member for at least six (6) months. There
shall be no limit on the number of such 10,000-share option grants any one
Eligible Director may receive over his or her period of Board Service, and
non-employee board members who have previously been a director of or in the
employ of the Corporation (or any Parent or Subsidiary) shall be eligible to
receive one or more such annual option grants over their period of continued
Board Service.
B. Exercise Price.
1. The exercise price per share shall be equal to sixty
percent (60%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board Service
prior to vesting in those shares. Each option grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) successive
equal annual installments upon the Optionee's completion of each year of Board
Service over the four (4)-year
<PAGE>
period commencing six (6) months following the option grant date, with the first
such installment to vest eighteen (18) month after the option grant date.
E. Termination of Board Service. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of the Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
Service in which to exercise each such option.
(ii) During the twelve (12)-month post-service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board Service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board Service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve
(12)-month post-service exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Board Service for any reason other than death or Permanent
Disability, terminate and cease to be outstanding to the extent the option
is not otherwise at that time exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the
<PAGE>
successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
<PAGE>
ARTICLE FIVE
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant or
Automatic Option Grant Program at any time on or after the Plan Effective Date.
However, no options granted under the Plan may be exercised, and no shares shall
be issued under the Plan, until the Stockholder Approval Date. If the
Stockholder Approval Date does not occur within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan on the Stockholder Approval Date which do not otherwise
contain such provisions.
C. The Plan shall terminate upon the earliest of (i) March 24, 2008
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such plan
termination, all outstanding option grants and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Programs and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be
<PAGE>
automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service or Board Service for any period of
specific duration or interfere with or otherwise restrict in any way the rights
of the Corporation (or any Parent or Subsidiary employing or retaining such
person) or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person's Service or Board Service at any
time for any reason, with or without cause.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
B. Board shall mean the Corporation's Board of Directors.
C. Board Service shall mean the performance of services for the
Corporation by a person in the capacity of a non-employee member of the board of
directors.
D. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board does
not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
E. Code shall mean the Internal Revenue Code of 1986, as amended.
F. Common Stock shall mean the Corporation's common stock.
G. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
<PAGE>
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
H. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation, and its successors.
I. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.
J. Eligible Director shall mean a non-employee Board member who is not a
10% Stockholder.
K. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
SmallCap Market or Nasdaq National Market, then the Fair Market Value
shall be deemed equal to the closing selling price per share of Common
Stock on the date in question, as such price is reported on such market or
any successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be deemed equal to the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
N. Hostile Take-Over shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
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fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.
P. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) Optionee's voluntary resignation following (A) a change in
Optionee's position with the Corporation (or Parent or Subsidiary
employing Optionee) which materially reduces Optionee's duties and
responsibilities or the level of management to which Optionee reports, (B)
a reduction in Optionee's level of compensation (including base salary,
fringe benefits and target bonus under any corporate performance-based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of Optionee's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee's consent.
Q. Misconduct shall mean, unless otherwise determined by the Plan
Administrator and recorded in the agreements evidencing the option grant or
stock issuance, the commission of any act of fraud, embezzlement or dishonesty
by the Optionee or Participant, any unauthorized use or disclosure by such
person of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by such person
adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
S. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.
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U. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
X. Plan shall mean the Corporation's 1998 Stock Incentive Plan, as set
forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean March 24, 1998, the date on which the
Plan was adopted by the Board.
AA. Predecessor Plans shall mean the Corporation's 1995 Stock Option Plan
and 1993 Stock Option Plan as in effect immediately prior to the Plan Effective
Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
CC. Secondary Committee shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
DD. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
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EE. Service shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance
FF. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
GG. Stockholder Approval Date shall mean the date on which the Plan is
approved by the Corporation's stockholders.
HH. Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
II. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.
JJ. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
KK. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
MM. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
