UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________to______________ Commission File
Number 0-27410
INTERCARDIA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 56-1924222
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 14287
3200 East Highway 54
Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 919-558-8688
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value per share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the Common Stock on December
15, 1997, on the Nasdaq National Market was approximately $48,953,000 as of such
date. Shares of Common Stock held by each executive officer and director and by
each person who owns 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status may not be conclusive for other purposes.
As of December 15, 1997, the registrant had outstanding 6,770,062 shares of
Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1998 Annual Meeting
of Stockholders are incorporated herein by reference into Part III.
Statements in this Annual Report on Form 10-K that are not descriptions
of historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth herein and in
the Company's other SEC filings, and including, in particular, risks relating to
uncertainties relating to clinical trials, dependence on collaborative partners,
the early stage of products under development, dependence on one product,
governmental regulations, regulatory filings and competition.
PART I
Item 1. Business.
Intercardia, Inc. ("Intercardia") was incorporated in Delaware in March
1994. The "Company" refers collectively to Intercardia, Inc. and its
majority-owned subsidiaries, CPEC, Inc., a Nevada corporation ("CPEC"), Aeolus
Pharmaceuticals, Inc., a Delaware corporation ("Aeolus"), and Renaissance Cell
Technologies, Inc., a Delaware corporation ("Renaissance"). As of September 30,
1997, Intercardia owned 80.1% of the outstanding stock of CPEC, 65.8% of the
outstanding stock of Aeolus and 79.6% of the outstanding stock of Renaissance.
Intercardia is a majority-owned subsidiary of Interneuron Pharmaceuticals, Inc.
("Interneuron"). As of September 30, 1997, Interneuron owned 61.3% of the
outstanding capital stock of Intercardia and the 19.9% of outstanding capital
stock of CPEC not owned by Intercardia.
The Company's business is to discover, develop and add value to
therapeutic products and to enter into collaborations or licensing agreements
with corporate partners for commercialization, manufacturing and marketing. The
Company's most advanced product is BEXTRA(TM) (bucindolol), a drug currently in
Phase III clinical trials for congestive heart failure ("CHF" or "heart
failure"). The Company's other programs, which are in the early stages of
development, focus on catalytic antioxidant small molecules as therapeutics for
a variety of conditions (including neonatal respiratory distress syndrome and
resulting broncho-pulmonary dysplasia, cardiomyopathy and stroke), and on
hepatic stem cell research for treatment of liver disease.
CPEC has exclusive rights to bucindolol, a non-selective beta-blocker
with mild vasodilating properties, currently in clinical trials for the
treatment of CHF. Beta-blockers have been used to treat a variety of conditions,
including hypertension and angina. The Company believes that the use of
non-selective vasodilating beta-blockers represents a promising approach to the
treatment of CHF. Several placebo-controlled Phase II studies of bucindolol have
consistently shown improvement in myocardial function of patients with CHF who
were already receiving current optimal therapy. Bucindolol was chosen as the
only drug for evaluation in the Beta-blocker Evaluation of Survival Trial (the
"BEST Study"), a government-sponsored Phase III clinical trial that commenced in
June 1995. Bucindolol was chosen, according to the BEST Study protocol, because
bucindolol is a non-selective beta-blocker that has been well tolerated in CHF
patients and because there was extensive published clinical experience with it
in CHF patients.
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The BEST Study is being conducted by the National Heart, Lung and Blood
Institute, a division of the National Institutes of Health (the "NIH"), and by
the Department of Veterans Affairs (the "VA") and which is designed to enroll up
to 2,800 patients. As of December 12, 1997, the BEST Study had enrolled
approximately 2,082 patients.
In December 1995, the Company executed a Development and Marketing
Collaboration and License Agreement with Astra Merck Inc. ("Astra Merck") to
provide for the development, commercialization and marketing of a twice-daily
formulation of bucindolol for the treatment of CHF in the United States (the
"Astra Merck Collaboration"). The Astra Merck Collaboration requires Astra Merck
to make certain payments to the Company (including a $5,000,000 payment which
was made upon execution of the Astra Merck Collaboration). Astra Merck will pay
certain bucindolol development costs, and the Company will make certain payments
to Astra Merck, including a $10,000,000 payment in December 1997 (for which the
Company made an accrual as of September 30, 1997) and up to $11,000,000 to
reimburse Astra Merck for certain initial marketing costs of the product. Astra
Merck will pay all other commercialization costs in the United States and will
pay royalties to CPEC on net sales of the product in the United States. The
Company has retained U.S. rights to a once-daily formulation of bucindolol.
In December 1996, the Company executed an agreement (the "Knoll
Collaboration") with BASF Pharma/Knoll AG ("Knoll") to provide for the
development, manufacture and marketing of bucindolol for all countries with the
exception of the United States and Japan (the "Territory"). The Knoll
Collaboration requires Knoll to make certain payments to CPEC, including
$2,000,000 which was paid upon execution of the Knoll Collaboration and
$1,000,000 paid in January 1997. Knoll and the Company will share the
development and marketing costs of any formulation of bucindolol in the
Territory and Knoll will pay royalties to CPEC based on net profits, as defined
in the Knoll Collaboration, of bucindolol in the Territory.
On November 5, 1997, Intercardia executed a letter of intent ("Letter
of Intent") to purchase all of the outstanding stock of Transcell Technologies,
Inc. ("Transcell") and certain related technology owned by Interneuron in
exchange for Intercardia Common Stock with an aggregate market value as of
November 5, 1997 of approximately $15,000,000. In addition, Intercardia will
issue Intercardia stock options to Transcell employees and consultants with a
market value as of November 5, 1997 of approximately $3,000,000 to $4,000,000.
Transcell is a majority-owned subsidiary of Interneuron and is conducting
research and development utilizing carbohydrate-based combinatorial chemistry.
Under the terms of the Letter of Intent, owners of Transcell stock will receive
Intercardia Common Stock in three installments. The first installment,
representing approximately $6,000,000 as of November 5, 1997, will be made upon
closing the transaction, which is estimated to occur in the first calendar
quarter of 1998 (the "Closing"). The number of Intercardia shares to be received
by Transcell stockholders at the Closing will be determined by Intercardia's
stock price during the week prior to Closing. The minimum Intercardia stock
price to be used for determining the number of shares to be issued for the
initial installment will be $19.00 per share and the maximum will be $25.00 per
share. The second and third installments will each consist of approximately
$3,000,000 of Intercardia Common Stock, as valued at each date, and will be
issued 15 and 21 months after Closing. In exchange for certain license and
technology rights owned by Interneuron, and for Interneuron's continuing
guarantee
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of certain of Transcell's lease obligations, Intercardia will issue to
Interneuron $3,000,000 of Intercardia Common Stock (subject to the price range
described above) at Closing and will pay Interneuron a royalty on certain
products that may result from a research collaboration originally entered into
among Transcell, Interneuron and Merck & Co., Inc. ("Merck"). The acquisition is
subject to final due diligence and approval by Transcell and Intercardia
stockholders.
Transcell is engaged in developing new pharmaceutical products using
core technologies in the field of carbohydrate chemistry. Transcell's primary
core technology is directed toward drug discovery based on the chemical
synthesis of complex carbohydrate compounds known as oligosaccharides and
glycoconjugates. Transcell also has technology relating to the development of
new carrier compounds for transport and/or targeted delivery of a wide variety
of drugs, including gene-based therapeutics, directly into cells. Transcell has
exclusive, worldwide licenses to its core technologies from Princeton
University.
Business Strategy
The Company's strategy is to be a leader in the discovery, development
and commercialization of therapeutics for the treatment of cardiovascular,
pulmonary, infectious and other diseases. Key elements of this strategy include:
Focus Resources on Current Products. A significant majority of the
Company's efforts and expenditures over the next several years will be devoted
to bucindolol, including completing the BEST Study and, if its results are
favorable, compiling a New Drug Application ("NDA") for filing with the U.S.
Food and Drug Administration ("FDA"), followed by appropriate submissions to
European regulatory authorities. The Company also is developing a once-daily
formulation of bucindolol. In addition, the Company is advancing its catalytic
antioxidant small molecule program through research and into the preclinical
stage of development. The Company is also sponsoring research in the area of
hepatic stem cells.
Broaden Product Portfolio. The Company intends to continue to acquire
rights to products, such as bucindolol, and technologies, such as its catalytic
antioxidant small molecule technology, for which testing has demonstrated
therapeutic potential. The Company believes that acquisition or in-licensing of
such products and technologies will enable it to accelerate commercialization of
products. In November 1997, the Company announced the execution of a letter of
intent to acquire Transcell and related technology.
Leverage Resources Through Corporate Partnerships. The Company intends
to continue to establish collaborations with leading pharmaceutical companies,
such as Astra Merck and Knoll, to develop and commercialize products. In
particular, the Company's collaborative partners are expected to provide
marketing and manufacturing capabilities. The Company believes that establishing
and maintaining collaborations with corporate partners will enable the Company
to more effectively and economically leverage its resources to develop and
market products.
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Congestive Heart Failure
CHF is a syndrome of progressive degeneration of cardiac function and
is generally defined as the inability of the heart to pump sufficient volume of
blood for proper functioning of vital organs. Symptoms are reflected in
decreasing activity capacity and include fatigue, shortness of breath and fluid
retention. The Company believes that more than 4.0 million people in the United
States and 4.5 million people in Europe suffer from CHF, with the incidence
increasing annually. In the United States, patients with moderate or severe
symptoms (New York Hospital Association ("NYHA") Class III or IV) constitute
approximately 30% of these patients, and patients with mild symptoms (Class II)
constitute approximately 35% of these patients. In the United States, heart
failure has become the most common hospital discharge diagnosis for people over
the age of 65.
Heart failure is caused by a number of conditions that produce a
primary injury or stress to the heart muscle. These conditions include ischemic
heart diseases, which may include myocardial infarctions (heart attacks), poorly
controlled hypertension, inflammatory disorders, infections and toxins. Often
the underlying cause of heart failure in a patient is unknown. Regardless of the
cause of the primary damage, the body will activate compensatory mechanisms in
an attempt to maintain cardiac output. These compensatory mechanisms include
activation of the renin-angiotensin and the cardiac adrenergic systems.
Activation of the renin-angiotensin system causes expansion of blood
volume and, by constricting peripheral blood vessels (vasoconstriction),
redistributes blood to the heart and brain. Activation of the adrenergic system
increases heart contractility and heart rate, thus maintaining cardiac output.
However, chronic activation of these two systems may produce harmful effects,
including a reduction in blood flow to muscle and other tissues, increased fluid
retention, a direct cardiotoxic effect on the heart muscle and an increase in
the heart's need for oxygen. The harmful effects resulting from chronic
activation of these two systems are believed to contribute to the continual
worsening of cardiac function and high mortality which may occur even in the
absence of further damage from the original cause of the heart failure.
Current Treatments for Congestive Heart Failure
Current treatment goals for CHF are to improve cardiac function,
relieve symptoms and, if possible, improve survival. Three pharmacologic
treatments are routinely considered to achieve these treatment goals and are
often used concurrently. Digitalis preparations strengthen heart contractility.
Diuretics remove excess fluid. ACE inhibitors prevent vasoconstriction and fluid
retention by blocking activation of the renin-angiotensin system. Of these
treatments, only ACE inhibitors have been shown to improve mortality. Blocking
activation of the adrenergic system has been proposed as a treatment for CHF,
but until recently no therapeutic with this mechanism of action had been
approved for a CHF indication. In May 1997, carvedilol, a vasodilating
beta-adrenergic receptor blocker, was approved by the FDA for treatment of mild
to moderate CHF patients. See "-- Competition".
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Currently, the most effective way to treat severe CHF is heart
transplantation. Patients who receive a heart transplant in an experienced
program have a more than 80% five-year survival rate. Despite the proven benefit
of this form of treatment, heart transplantation is available only to a limited
number of patients, approximately 2,500 per year. The scarcity of organ donors,
high costs and the subsequent rigorous medical regimen required to control
rejection significantly limit the number of transplants.
Development of Beta-Blockers as a Treatment for Congestive Heart Failure
In heart failure, the adrenergic system is activated to release the
catecholamines, norepinephrine and epinephrine, which stimulate the heart to
beat faster and more powerfully. However, such stimulation may be harmful to the
failing heart, particularly when such stimulation is chronic. The harmful
effects of chronic activation of the adrenergic system include a direct
cardiotoxic effect on the heart muscle and an increase in the heart's need for
oxygen. Two forms of beta-adrenergic receptors, beta-1 and beta-2, transmit the
effects of adrenergic stimulation to the heart.
Drugs which block the effects of adrenergic stimulation (beta-blockers
or beta adrenergic receptor antagonists) have been available for almost 30 years
and have been used to treat hypertension or angina in millions of patients. For
years, physicians were taught that beta-blockers were best avoided in patients
with CHF because it was believed that the failing heart required the stimulation
of the adrenergic system. A non-selective beta-blocker (which blocks both beta-1
and beta-2 receptors) with vasoconstricting properties was administered to
patients with CHF in the early 1980's. While adrenergic stimulation of the heart
was reduced, the intense vasoconstriction caused by the drug resulted in rapid
worsening of heart failure, and development was discontinued. Drugs acting only
on the beta-1 receptor were studied as a treatment of CHF, with better results.
After two months of treatment, there were improvements in cardiac function and,
often, improved exercise tolerance. However, there was concern that a drug
acting only on the beta-1 receptor would leave the beta-2 receptor free to
stimulate heart rate and contractility and could, therefore, reduce the desired
benefit of this treatment on mortality. Moderate-sized clinical studies with
beta-1 selective agents did not show a statistically significant overall
reduction in mortality.
Non-Selective Beta-Blockers with Vasodilating Properties
More recently, two non-selective beta-blockers with vasodilating
properties, bucindolol, a non-selective beta-blocker with mild vasodilating
properties, and cavedilol, a non-selective beta-blocker with moderate
vasodilating properties, have been studied as treatments for CHF with promising
results. These drugs block both beta-1 and beta-2 receptors but do not have the
vasoconstrictive effect of previously studied non-selective beta-blockers. Both
drugs consistently produced improved cardiac function in Phase II studies and
both were well tolerated. The Company believes that the mild vasodilation of
bucindolol may be better tolerated than the moderate vasodilation of carvedilol
because mild vasodilation is less likely to cause sudden drops in blood
pressure.
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Carvedilol
Since 1991, carvedilol has been approved as a treatment for
hypertension in several European countries, and in September 1995 it was
approved by the FDA for marketing in the United States for hypertension. In
November 1995, SmithKline Beecham ("SKB") submitted data to the FDA to
supplement its hypertension NDA for carvedilol to cover a twice-daily
formulation of carvedilol for the treatment of CHF. In May 1996, the FDA
Cardiovascular and Renal Drug Advisory Committee met and discussed the use of
carvedilol for treatment of heart failure, but recommended against approval of
carvedilol as a treatment for CHF because of concern regarding the design of the
clinical trials and the lack of prospectively defined mortality endpoints. At a
subsequent FDA Advisory Committee meeting in February 1997, the Advisory
Committee voted to recommend approval of carvedilol for the treatment of CHF and
the product was approved by the FDA in May 1997. The Company is aware that
carvedilol is approved for the treatment of CHF in at least 15 countries,
including the United States, Canada, Mexico and a number of major European
countries. See " -- Competition".
Bucindolol
Phase II clinical studies of bucindolol, a non-selective beta-blocker
with mild vasodilating properties, have consistently demonstrated improved
cardiac function in patients with CHF. Bucindolol was chosen by the VA and the
NIH for the BEST Study, which commenced in June 1995. According to the BEST
Study protocol, bucindolol was chosen as the only beta-blocker being studied in
the trial because it is a non-selective beta-blocker, it has been well tolerated
in CHF patients and there was extensive published clinical experience with it in
CHF patients.
Bucindolol
Bucindolol was initially developed by Bristol-Myers Squibb Company
("Bristol-Myers") as a treatment for hypertension. In the 1980's over 1,200
hypertension patients and healthy subjects received bucindolol in over 50
clinical studies. While bucindolol was well tolerated, it was clear that the
compound would require at least twice-daily dosing for hypertension, which would
make it difficult to compete with once-daily beta-blockers equally effective
against hypertension. As a result, development for hypertension was not
completed. CPEC obtained an exclusive license to bucindolol for treatment of CHF
from Bristol-Myers in 1991. See " -- License Agreements -- Bucindolol License".
Phase II Studies in CHF
In addition to hypertension studies, beginning in the late 1980's
Bristol-Myers sponsored five Phase II studies for bucindolol in over 200
patients with CHF. The first three studies provided data demonstrating that
two-to three-month treatment with bucindolol resulted in improved cardiac
function, including beneficial effects on left ventricular ejection fraction,
cardiac output and pulmonary capillary wedge pressure (three common measures of
cardiac function). Invasive studies suggested that the improvements in left
ventricular function resulted from improved heart contractility. A chronic study
showed that improvement in cardiac function, as
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measured by left ventricular ejection fraction, continued during an average
follow-up of patients for 16 months. In addition, a 139-patient dose response
study at 12 U.S. and Canadian centers showed that bucindolol produced a
dose-related improvement in, and prevented deterioration of, left ventricular
function. Bucindolol was well tolerated in all these Phase II studies.
Ninety-eight percent of patients tolerated initial challenge doses.
The BEST Study
Bucindolol is the only beta-blocker being studied in the BEST Study,
which is testing whether the addition of beta-blockade to optimal current CHF
therapy will reduce mortality in patients with moderate to severe CHF. The BEST
Study is also assessing the effect of treatment on quality of life,
hospitalizations, overall treatment costs, left ventricular ejection fraction
and incidence of myocardial infarction. The BEST Study is sponsored by the NIH
and the VA, who have agreed to provide up to $15,750,000 to fund the study. The
Company is obligated to provide up to $2,000,000 of study costs ($1,750,000 of
which had been paid as of September 30, 1997), as well as drug supplies and
monitoring costs for the study, which are estimated to total an additional
$2,500,000.
Adults with ejection fractions of 0.35 or less and moderate to severe
symptoms (NYHA Classes III and IV) are participating in the BEST Study. In
addition to current optimal therapy, patients are being randomized to receive
either bucindolol or a placebo in a double-blind design that will be stratified
based upon cause of heart failure, gender, ejection fraction, race and treatment
hospital. Approximately 90 clinical centers in the United States and Canada have
been selected for study participation. The BEST Study commenced in June 1995 and
is designed to enroll up to 2,800 patients, at least 33% of whom are recommended
to be female, for up to three years. All patients are expected to receive a
follow-up of 18 months or more. An independent Data and Safety Monitoring Board
is periodically monitoring the progress, data, outcomes, toxicity, safety and
other confidential data. The BEST Study is designed so that in the event that
significant mortality improvement is evident to the Data and Safety Monitoring
Board at any time during the course of the study, the study could be stopped
early. As of December 12, 1997, approximately 2,082 patients had been
randomized.
The rate of completion of the BEST Study or any other Company clinical
trial is dependent upon, among other factors, the rate of patient enrollment.
Patient enrollment is a function of many factors, including the size of the
patient population, the nature of the protocol, the proximity of patients to
clinical sites, the eligibility criteria for the study, and the alternative
therapies and drug regimens (including other beta-blockers) available. In
particular, the Company believes current patient enrollment in the BEST Study
may have been and could continue to be adversely affected from the May 1997 FDA
approval of carvedilol as a treatment for CHF. See " -- Competition". Delays in
planned patient enrollment, including delays in enrolling a sufficient number of
female patients in the BEST Study, may result in increased study costs and
delays, which could have a material adverse effect on the Company. In addition,
the Company does not control the BEST Study, which is being conducted by the NIH
and the VA.
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The Company currently intends to file an NDA for bucindolol with the
FDA within one year after completion of the BEST Study, if its results are
favorable. This submission will be followed by equivalent submissions to
appropriate regulatory authorities in Europe. There can be no assurance that the
Company will meet this schedule, or that bucindolol or any of the Company's
other products in development will receive marketing approval in any country on
a timely basis, or at all. In addition to the BEST Study, the Company has
initiated several pharmacokinetic and drug interaction clinical trials with
bucindolol. If the Company were unable to complete clinical trials or
demonstrate the safety and efficacy of bucindolol, the Company would be
materially and adversely affected.
Bucindolol Collaborations
In December 1995, the Company executed the Astra Merck Collaboration
with Astra Merck to provide for the development, commercialization and marketing
of a twice-daily formulation of bucindolol for the treatment of CHF in the
United States. The Astra Merck Collaboration requires Astra Merck to make
certain payments to the Company (including a $5,000,000 payment which was made
upon execution of the Astra Merck Collaboration). Astra Merck will pay certain
bucindolol development costs, and the Company will make certain payments to
Astra Merck, including a $10,000,000 payment in December 1997 (for which the
Company made an accrual as of September 30, 1997) and up to $11,000,000 to
reimburse Astra Merck for certain initial marketing costs of the product. Astra
Merck will pay all other commercialization costs in the United States and will
pay royalties to the Company on net sales of the formulation in the United
States. The Company has retained U.S. rights to develop a once-daily formulation
of bucindolol. See " -- Collaborative Arrangements -- Astra Merck
Collaboration".
The Company is attempting to enhance its competitive position with
respect to bucindolol by developing a patent protected once-daily formulation of
bucindolol. In April 1996, the Company entered into an Agreement for Feasibility
Study ("Feasibility Study Agreement") and a License Agreement ("Jago License")
with Jago Pharma AG and its affiliates ("Jago"). The Company and Jago are
conducting studies designed to determine the feasibility of developing a
once-daily formulation of bucindolol. See " -- Collaborative Arrangements --
Additional Bucindolol Collaborations -- Once-Daily Formulation".
In December 1996, the Company executed the Knoll Collaboration with
Knoll to provide for the development, manufacture and marketing of bucindolol
for all countries with the exception of the United States and Japan. The Knoll
Collaboration requires Knoll to make certain payments to CPEC, which have
included a $2,000,000 payment upon execution of the Knoll Collaboration and a
$1,000,000 payment made in January 1997. Knoll and the Company will share the
development and marketing costs of bucindolol for the Territory and Knoll will
pay royalties to CPEC based on net profits, as defined in the Knoll
Collaboration, of bucindolol in the Territory. See " -- Collaborative
Arrangements -- Knoll Collaboration".
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Antioxidant Program
The Company's catalytic antioxidant small molecule research program is
conducted by Aeolus. The Company's initial target indication is the prevention
of broncho-pulmonary dysplasia in premature infants with neonatal respiratory
distress syndrome ("NRDS"). Approximately 60,000 to 70,000 infants each year in
the United States develop NRDS. NRDS develops as a result of having immature
lungs that are unable to remain sufficiently inflated during respiration.
Additional clinical targets with promising rationale for treatment with
catalytic antioxidants include cardiomyopathy and stroke. The Company believes
its catalytic antioxidant small molecules have the potential to address a broad
range of conditions beyond the initial clinical targets. All of these conditions
involve the toxicities associated with excess oxygen free radicals and the
regulation of nitric oxide levels.
Aeolus' compounds are small enough to enter cells and are inexpensive
to manufacture. In addition, they have multiple potent catalytic antioxidant
activities and a core chemical structure that allows development of multiple
unique molecular compounds with the potential for tissue or therapeutic
specificity and safety (i.e., lack of toxicity). Aeolus' early lead compounds
have been effective in bacterial and mammalian cellular models of activity of
catalase and superoxide dismutase (naturally occurring antioxidant enzymes), in
protecting neuronal cells in an animal model of damage associated with strokes
and in reducing lung damage in animal models of acute lung injury. Aeolus is
currently testing a series of compounds in preclinical models of oxygen
toxicity, stroke and cardiac reperfusion injury.
Hepatic Stem Cell Research
On September 4, 1997, Intercardia acquired 79.6% of the outstanding
capital stock of Renaissance for $500,000. Renaissance is an early stage company
conducting research in the area of hepatic stem cells. Renaissance has entered
into a Sponsored Research Agreement ("UNC Agreement") with the University of
North Carolina at Chapel Hill ("UNC") which grants Renaissance an option for an
exclusive worldwide license to products developed under the UNC Agreement. The
research is being conducted at the laboratories of Professor Lola M. Reid of the
UNC School of Medicine. Renaissance has agreed to reimburse UNC for costs
incurred by UNC in connection with the UNC Agreement in an amount not to exceed
$450,000 per year for a minimum of two years.
The liver, one of the largest and most complex organs in the body,
serves many critical metabolic functions. More than most other organs, the liver
has the ability to regenerate itself. Despite this protection, the liver can
fail as a result of disease or damage leading to morbidity and mortality. Liver
failure is a serious health problem with an estimated 350,000 hospitalizations
due to chronic and acute liver failures combined in the United States annually
involving 250,000 patients and 50,000 deaths.
The research being conducted for Renaissance by Dr. Reid seeks to
identify and isolate the stem cells from which other human liver cells are
derived. The ability to isolate and expand early human liver cells would advance
the development of a bioartificial liver which could be used
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in the treatment of acute liver failure. Hospital surveys have shown 85%
mortality rates for patients with acute liver failure not receiving a liver
transplant. Many physicians believe a bioartificial liver could bridge acute
liver failure patients until a suitable donor liver is available or until the
regenerative power of the liver allows liver function to be restored.
Disappointments in gene therapy clinical protocols have resulted from
an inability to obtain sustained expression of the target gene once introduced
into the body. Stem cells, because of their significantly greater expansion
potential, represent an ideal cell population for continued gene expression.
Indeed, several of the successes reported on human cell or gene therapy are
derived from studies and protocols using hemopoietic progenitor cells derived
from bone marrow. Renaissance's cell and gene therapy strategy will be to
research the utilization of liver stem cells as a vehicle for the delivery of
normal genes ordinarily expressed by the liver to patients whose liver cells are
not properly expressing the subject gene.
Collaborative Arrangements
The Company's strategy is to develop and add value to in-licensed
products and sponsored research programs and to enter into collaborations and
licensing agreements with corporate partners for product development,
manufacturing and marketing. The Company believes that it will be necessary to
enter into collaborative arrangements with other companies in the future to
develop, commercialize, manufacture and market additional products.
Astra Merck Collaboration
In December 1995, the Company entered into the Astra Merck
Collaboration with Astra Merck to provide for the development, commercialization
and marketing of a twice-daily formulation of bucindolol for the treatment of
CHF in the United States. Under the terms of the collaboration, Astra Merck made
an initial $5,000,000 collaborative development payment to CPEC, which was
recognized by the Company as contract and license fee revenue upon its receipt
in December 1995. In addition, Astra Merck agreed to fund up to $15,000,000 of
the U.S. development costs for the twice-daily bucindolol product, including any
future payments due under the BEST Study. As a part of its funding obligations
under the Astra Merck Collaboration, Astra Merck shall reimburse the Company for
expenses and expenditures incurred in connection with the development and
commercialization of the twice-daily formulation of bucindolol in the United
States.
Astra Merck must also pay CPEC $5,000,000 within 10 days of the grant
by the FDA of marketing approval for a twice-daily formulation of bucindolol,
unless such an approval has previously been granted for another beta-blocker
based upon a reduction in heart failure mortality claims. In addition, Astra
Merck must pay CPEC $10,000,000 upon the first achievement of net sales of the
twice-daily formulation of bucindolol in excess of $205 million in any 12-month
period (indexed for inflation). Finally, Astra Merck must pay the royalties due
to Bristol-Myers under its license of bucindolol to CPEC (see " -- License
Agreements -- Bucindolol License"), and must pay CPEC royalties of 15% on the
first $113 million of annual net sales (indexed for inflation), and 30% of
annual net sales in excess of such indexed amount, of the twice-daily
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formulation in the United States. Because a significant portion of the Company's
development, commercialization and marketing activities relating to the
twice-daily formulation of bucindolol in the United States will be funded by
Astra Merck under the Astra Merck Collaboration, the Company is substantially
dependent upon Astra Merck for the success of this formulation of bucindolol.
Under the terms of the Astra Merck Collaboration, the Company must pay
Astra Merck $10,000,000 in December 1997, or the royalties payable by Astra
Merck to CPEC will be reduced to 7% of net sales of the twice-daily formulation
in the United States. The Astra Merck Collaboration also provides that the
Company must reimburse Astra Merck for one-third of launch costs (as defined in
the Astra Merck Collaboration) beginning when the Company files an NDA for the
twice-daily formulation and continuing through the first 12 months subsequent to
the first commercial sale of the formulation, up to a total launch cost
reimbursement of $11,000,000, or the royalties payable by Astra Merck to CPEC
will be reduced to 7% of net sales of the twice-daily formulation in the United
States. The Company currently intends to make the $10,000,000 payment in
December 1997, and has accrued it as a liability at September 30, 1997. However,
in the event that the Company does not make either of these payments and, as a
result, the royalties payable by Astra Merck to the Company are significantly
reduced, the Company's results of operations would be materially adversely
affected.
During the fiscal years ended September 30, 1997 and 1996, the Company
recognized contract and license fee revenue of approximately $553,000 and
$5,000,000, respectively, from payments made by Astra Merck to the Company.
During the fiscal years ended September 30, 1997 and 1996, Astra Merck assumed
additional liabilities of approximately $5,505,000 and $4,301,000 on the
Company's behalf, respectively. These additional amounts did not flow through
the Company's Statement of Operations, as they were offset against related
expenses. As of September 30, 1997, the Company's Balance Sheet included
approximately $903,000 of accounts receivables due from Astra Merck and
approximately $813,000 of accrued expenses related to obligations assumed by
Astra Merck.
A steering committee composed of four representatives each from Astra
Merck and the Company ("Steering Committee") has been formed to manage the Astra
Merck Collaboration. The Steering Committee is responsible for management of all
aspects of the Astra Merck Collaboration, including, but not limited to,
approval of budgets and timetables for development and commercialization, and
selection of entities responsible for tasks required in connection with the
development, manufacture, sales, marketing and other aspects of
commercialization of the twice-daily formulation of bucindolol in the United
States. The Company has retained certain co-promotion rights in the United
States.
The Astra Merck Collaboration continues in effect until December 31,
2010, subject to Astra Merck's option to extend it for two additional five-year
periods. However, either party may terminate the Astra Merck Collaboration upon
90 days' notice of the other's material breach which remains uncured (30 days in
the event of overdue payments from Astra Merck to the Company). In addition,
Astra Merck may terminate the Astra Merck Collaboration at any time in order to
enter into a contract relating to or to launch a competing product if it first
makes a payment to the
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Company. If the termination occurs more than five years after FDA approval of an
NDA for bucindolol, no payment would be required.
Knoll Collaboration
In December 1996, the Company entered into the Knoll Collaboration with
Knoll to provide for the development, manufacture and marketing of bucindolol
for the Territory, which includes all countries with the exception of the United
States and Japan. The Knoll Collaboration includes both the twice-daily
bucindolol formulation and the once-daily bucindolol formulation currently under
development. Under the terms of the collaboration, Knoll is required to make
certain payments to CPEC, including a $2,000,000 payment made upon execution of
the Knoll Collaboration and a $1,000,000 payment made in January 1997. Knoll
must also pay to CPEC $10,000,000 upon bucindolol regulatory approval in a major
European Community member state and $10,000,000 upon the first attainment of
$200,000,000 of net sales in the Territory during any consecutive 12-month
period.
Knoll and the Company share the development and marketing costs of
bucindolol in the Territory. In general, Knoll pays approximately 60% of the
development and marketing costs prior to product launch and the Company pays
approximately 40% of such costs, subject to certain maximum dollar limitations.
Knoll also pays approximately 60% of once-daily development costs which relate
to development solely for the Territory and approximately 33% of once-daily
development costs which have a worldwide benefit. The Company is responsible for
the remainder of once-daily development costs.
Upon product launch, Knoll shall pay royalties to CPEC for the use of
the license and trademarks of bucindolol in the Territory. The royalty shall be
equal to 40% of net profits, as defined in the Knoll Collaboration. The Company
would be responsible for, and pay to Knoll, 40% of any net loss, as defined.
An advisory committee ("Advisory Committee") composed of not more than
four representatives each from Knoll and the Company discusses, reviews and
advises the parties regarding the development and clinical trials of bucindolol
in the Territory. The Knoll Collaboration continues in effect for 15 years after
the first commercial sale with respect to each country in the Territory, subject
to two additional five-year renewals at Knoll's option. Knoll has the right to
terminate the Knoll Collaboration at any time prior to the termination of the
BEST Study and within 60 days after the BEST Study's primary end-point results
are reported in writing to Knoll. Because a significant portion of the Company's
development, commercialization and marketing activities relating to bucindolol
in the Territory will be funded by Knoll under the Knoll Collaboration, the
Company is substantially dependent upon Knoll for the success of bucindolol in
the Territory.
Once-Daily Formulation
In April 1996, the Company entered into the Feasibility Study Agreement
and the Jago License with Jago. The studies covered by the Feasibility Study
Agreement are designed to
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determine the feasibility of developing a once-daily formulation of bucindolol.
The Feasibility Study Agreement expires the earlier of 60 days after receipt by
the Company of the Preliminary Pharmacokinetic Study from Jago, or immediately
upon a default or breach of confidentiality provisions or upon another breach or
default not cured within 30 days of notice thereof, upon bankruptcy of a party
or if the Company determines in its sole discretion not to proceed with the next
phase of the study. The Jago License has a perpetual term, but contains similar
breach and bankruptcy termination provisions as the Feasibility Study Agreement.
The Company will make additional payments to Jago if certain milestones are
achieved, and will pay royalties to Jago on net sales of the once-daily
formulation, if developed under these agreements, until the expiration of the
relevant patent on a country-by-country basis (or 15 years, if no patent is
issued in that country).
The rights to the once-daily formulation for the Territory have been
licensed to Knoll in conjunction with the Knoll Collaboration. For 90 days after
the Company develops a successful once-daily formulation of bucindolol, Astra
Merck has a right of first negotiation to license that formulation in the United
States.
Collaborative Partners
The Company believes that it will be necessary to enter into additional
collaborative arrangements in the future, with Astra Merck, Knoll, Jago or other
companies, to develop, commercialize, manufacture and market additional
products. There can be no assurance that the Company will be able to establish
additional collaborative arrangements, that Astra Merck, Knoll, Jago or the
Company's other collaborative partners will not terminate their collaborations
with the Company, or that these collaborations will be completed or be
successful. Should the Company and its collaborative partners fail to develop,
commercialize, manufacture or market products, the Company would be materially
adversely affected. In addition, there can be no assurance that any
collaborative partner will not be pursuing alternative technologies or
developing alternative compounds either on its own or in collaboration with
others, targeted at the same diseases as those involved in the collaborative
arrangements.
License Agreements
Bucindolol License
In December 1991, Bristol-Myers granted to CPEC a license to bucindolol
for pharmaceutical therapy for CHF and left ventricular dysfunction (as amended,
the "Bucindolol License"). The Bucindolol License is exclusive for all countries
in the world.
The Bucindolol License requires the Company to conduct all appropriate
and necessary clinical trials and to take all actions that are reasonably
necessary for the preparation and filing of an NDA and a comparable application
in at least one Western European country. The Company is obligated to pay
royalties on net product sales during the term of the Bucindolol License, and
must pay all or a portion of patent prosecution, maintenance and defense costs.
The Company may terminate the Bucindolol License on a country-by-country basis
by written notice to Bristol-
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Myers, and either party may terminate the Bucindolol License upon a breach by
the other party which remains uncured for 60 days after receipt of written
notice thereof. Unless so terminated, the Bucindolol License continues, with
respect to each country, until the patent on bucindolol issued in that country
expires or has been found invalid, or, if later, 15 years after first commercial
sale of bucindolol (subject to two five-year renewals at the Company's option).
The fact that the Company's license for bucindolol provides that the Company's
royalty obligations may extend beyond the expiration date of the underlying
patent may materially adversely affect the Company's competitive position in the
event a generic version of bucindolol is introduced.
Duke License
In July 1995, Aeolus obtained an exclusive worldwide license (the "Duke
License") from Duke University ("Duke") to develop, make, have made, use and
sell products using certain technology and compounds developed by certain
scientists at Duke. These scientists provide research support and advice to
Aeolus in the field of free radical and antioxidant research. Further
discoveries in the field of antioxidant research from these scientists'
laboratories at Duke are also covered by the Duke License. The Duke License
requires Aeolus to use its best efforts to pursue development of products using
the licensed technology and compounds. Such efforts are to include the
manufacture or production of products for testing, development and sale. Aeolus
is also obligated to use its best efforts to have the licensed technology
cleared for marketing in the United States by the FDA and in other countries in
which Aeolus intends to sell products using the licensed technology. Aeolus will
pay royalties to Duke on net product sales during the term of the Duke License
and milestone payments upon the occurrence of certain events, including FDA
approval of the first product using the licensed technology. In addition, Aeolus
is obligated under the Duke License to pay all or a portion of patent
prosecution, maintenance and defense costs. Aeolus may terminate the Duke
License on a country-by-country basis upon 90 days' written notice to Duke, and
either party may terminate the Duke License for material breach of the other
party, which breach is not cured within 45 days after receipt of written notice
thereof in the case of the first two breaches by a party and immediately
thereafter upon written notice of a material breach by that party. Unless so
terminated, the Duke License continues until the expiration of the last to
expire issued patent on the licensed technology.
National Jewish Agreement
In September 1997, Aeolus executed a Sponsored Research Agreement (the
"National Jewish Agreement") with National Jewish Medical and Research Center
("National Jewish"). The National Jewish Agreement grants Aeolus an option to
negotiate a royalty-bearing exclusive license for certain technology, patents
and inventions resulting from research by certain individuals at National Jewish
within the field of antioxidant, nitrosylating and related areas. Aeolus has
agreed to support National Jewish's costs incurred in performance of the
research, which costs shall not exceed $400,000 during the first year of the
agreement.
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UNC Agreement
In September 1997, Renaissance executed the UNC Agreement, which covers
research at UNC by certain scientists in the area of hepatic stem cells and
grants Renaissance a first option to obtain an exclusive license to inventions
resulting from that research. Renaissance has agreed to reimburse UNC for
certain costs in connection with the research in an amount not to exceed
$450,000 per year for each of the first two years of the UNC Agreement. The UNC
Agreement remains in effect until terminated by mutual consent, or upon 12
months' notice by either party.
License Agreements
There can be no assurance that any of these license agreements will not
be terminated and, if terminated, that the Company will be able to enter into
similar license agreements on terms as favorable to the Company as those
contained in its existing license agreements. Furthermore, the Company's
strategy is to seek additional licenses in the future, and there can be no
assurance that the Company will be able to enter into similar license agreements
for additional products in the future on acceptable terms.
Research and Development
The Company currently does not have its own laboratory facilities. The
Company has funded and may from time to time fund research programs in
collaboration with academic and other institutions, primarily those with which
it has or will have established license agreements. Currently, the Company is
supporting research with respect to catalytic antioxidant small molecules at
Duke and National Jewish and research with respect to hepatic stem cells at UNC.
The Company also depends upon academic, research and non-profit institutions,
and some commercial service organizations, for chemical synthesis and analysis,
product formulation, assays and preclinical and clinical testing of its
products.
For the fiscal years ended September 30, 1997, 1996 and 1995, the
Company incurred expenses of approximately $14,264,000 (which includes the
$10,000,000 payment due to Astra Merck in December 1997), $2,318,000 and
$2,004,000, respectively, on research and development activities, in addition to
the purchase of in-process research and development of approximately $411,000 in
connection with the acquisition of Renaissance in September 1997 and
approximately $350,000 in connection with the acquisition of an additional 0.1%
of CPEC in September 1996.
Manufacturing and Marketing
The Company's manufacturing strategy is to contract with third-party
manufacturers, rather than incur the capital expense of establishing its own
manufacturing facility and capability. Likewise, the Company's marketing
strategy is to contract with third parties, rather than incur the expense and
overhead of establishing its own sales and marketing force, while retaining
co-promotion rights. The Company therefore will be dependent on third parties,
including its collaborative partners, for the manufacturing and marketing of any
products that it may develop.
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There can be no assurance that such parties will be able to meet the Company's
needs either with respect to timing, quantity or quality. If the Company is
unable to obtain or retain third-party manufacturing or marketing on acceptable
terms, it may be delayed in its ability to commercialize products. The Company's
dependence upon third parties, including its collaborative partners, for the
manufacturing and marketing of products may adversely affect the Company's
profit margins and its ability to develop, deliver and sell products on a timely
and competitive basis.
The Steering Committee under the Astra Merck Collaboration will select
third-party manufacturers for the twice-daily formulation of bucindolol. Under
the terms of the Astra Merck Collaboration, Astra Merck will conduct all U.S.
sales and marketing of the twice-daily formulation through its direct sales and
marketing staff, unless the Company exercises its right to co-promotion.
The Advisory Committee under the Knoll Collaboration shall advise Knoll
and the Company as to the recommended manufacturer of bucindolol for the
Territory. Knoll shall have the right to choose to manufacture the product for
the Territory as long as the price, capability and other terms are competitive
with third-party manufacturers. Under the terms of the Knoll Collaboration,
Knoll will conduct all sales and marketing of bucindolol in the Territory
through its direct sales and marketing staff.
The Company expects that it will continue to seek to enter into
collaborative arrangements with pharmaceutical and other companies for the
development, manufacturing and marketing of products requiring broad marketing
capabilities for domestic and international sales and distribution. These
collaborators are generally expected to be responsible for funding or
reimbursing all or a portion of the development costs, including the costs of
clinical testing necessary to obtain regulatory clearances and for commercial
scale manufacturing. These collaborators are expected to be granted exclusive or
semi-exclusive rights to sell specific products in particular geographic
territories in exchange for a royalty, joint venture, equity investments,
co-marketing or other financial interest. There can be no assurance that such
parties will be able to meet the Company's needs either with respect to timing,
quantity or quality. If the Company is unable to obtain or retain third-party
manufacturing or marketing on acceptable terms, it may be delayed in its ability
to commercialize products. The Company's dependence upon third parties,
including its collaborative partners, for the manufacturing and marketing of
products may adversely affect the Company's profit margins and its ability to
develop, deliver and sell products on a timely and competitive basis. In the
event the Company determines to establish its own manufacturing or marketing
capabilities, it will require substantial additional funds, manufacturing
facilities and equipment, and personnel.
Competition
Competition in the pharmaceutical industry is intense and is expected
to increase. The Company expects technological developments in its fields of
research and development to occur at a rapid rate and expects competition to
intensify as advances in these fields are made. Accordingly, the Company will be
required to continue to devote substantial resources and efforts to research and
development activities. The Company's most significant competitors are fully
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integrated pharmaceutical companies and more established biotechnology
companies, which have significant resources and expertise in research and
development, manufacturing, testing, obtaining regulatory approvals and
marketing. Smaller companies may also prove to be significant competitors,
especially through collaborative arrangements with large pharmaceutical
companies. Many of these competitors have significant cardiovascular, pulmonary
and other pharmaceutical products cleared for commercial marketing or under
development, and operate large, well funded research and development programs.
Furthermore, academic institutions, governmental agencies, and other public and
private research organizations continue to conduct research, and are becoming
more active in seeking patent protection and establishing collaborative
arrangements for research, development, manufacturing and marketing with respect
to technologies that they have developed, some of which may be competitive with
those of the Company. There can be no assurance that competitors will not
succeed in developing technologies and products that are preferred compared to,
or more effective than, those being developed by the Company or that would
render the Company's technology obsolete or noncompetitive.
The Company is aware of products in research or development by its
competitors that address the diseases being targeted by the Company. In
particular, carvedilol, a non-selective beta-blocker with moderate vasodilating
properties owned by Boehringer Mannheim GmbH and licensed in the United States
and certain other countries to SKB, has been launched by SKB following its
approval by the FDA in May 1997 with a claim "to reduce the progression of
disease as evidenced by cardiovascular death, cardiovascular hospitalization, or
the need to adjust other heart failure medications." Since 1991, carvedilol has
been approved as a treatment for hypertension in several European countries, and
in September 1995 it was approved by the FDA for commercial marketing in the
United States as a treatment for hypertension. In May 1996, the FDA
Cardiovascular and Renal Drug Advisory Committee met and discussed the use of
carvedilol for treatment of heart failure, but recommended against approval of
carvedilol as a treatment for CHF because of concern regarding the design of the
clinical trails and the lack of prospectively designed mortality endpoints. At a
subsequent FDA Advisory Committee meeting in February 1997, the Advisory
Committee voted to recommend carvedilol for approval as a treatment for CHF and
the product was approved by the FDA in May 1997. In June 1997, carvedilol was
launched in the United States by SKB as the product CoregTM for the treatment of
CHF. Carvedilol's approval for marketing as a treatment of CHF in the United
States prior to bucindolol, may have adversely affected the patient enrollment
rate of the BEST Study and could provide a marketing advantage to SKB. The
Company is aware that carvedilol is also approved for the treatment of CHF in at
least 15 countries, including the United States, Canada, Mexico and a number of
major European countries.
Additionally, it is anticipated that other pharmaceutical companies
that are selling, developing or manufacturing beta-blockers will attempt to
develop their beta-blockers as a treatment for CHF. In October 1995,
Germany-based Merck KGaA initiated the CBIS II trial to test bisoprolol as a
treatment in CHF patents in Europe. Bisoprolol is a beta-1 receptor selective
beta-blocker marketed in the United States by Lederle for hypertension. Although
the earlier, smaller CBIS I study of bisoprolol did not show significant
reduction of mortality in the patient population, CBIS II is designed to enroll
a larger patient population, up to 2,500 patients. In a similar manner, the
Company believes that Astra AB has initiated a large mortality study for the
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beta-1 receptor selective beta-blocker metoprolol ("MERIT"). Metoprolol failed
to show a reduction in mortality for CHF patients in a smaller trial, but MERIT
is designed to enroll up to 3,000 patients in multiple centers internationally.
Positive CBIS II or MERIT clinical trial results could adversely affect the
Company.
Several companies have explored the therapeutic potential of
antioxidant compounds in numerous indications. Historically, most of these
companies have focused on recombinant versions of naturally occurring
antioxidant enzymes, but with limited success. Antioxidant drug research
continues at a rapid pace despite earlier commercial setbacks. Several companies
have antioxidant compounds in clinical trials. Any catalytic antioxidant small
molecule product which the Company succeeds in developing and for which it gains
regulatory approval must then compete for market acceptance and market share.
Several companies have conducted research and development on a
bioartificial liver device which could be competitive with technology under a
development by Renaissance. In particular Circe Biomedical, a subsidiary of W.R.
Grace & Co., has conducted clinical trials with a bioartificial liver which
utilizes porcine hepatocytes (pig liver cells). Other corporations and academic
institutions are conducting research in the area of liver and other stem cells.
For certain of the Company's potential products, an important
competitive factor will be the timing of market introduction of competitive
products. Accordingly, the Company expects that important competitive factors in
its markets will be the relative speed with which companies can develop
products, complete the clinical testing and approval processes, and supply
commercial quantities of the product to the market. With respect to clinical
testing, competition may delay progress by limiting the number of clinical
investigators and patients available to test the Company's potential products.
In addition to the above factors, competition is based on product efficacy,
safety, the timing and scope of regulatory approvals, availability of
manufacturing, marketing and sales capabilities, reimbursement coverage, price
and patent position.
Patents and Proprietary Rights
The Company's policy is to seek, when appropriate, protection for
potential products and proprietary technology by filing patent applications in
the United States and other jurisdictions. In addition, the Company licenses or
has the right to license, generally on an exclusive basis, patents and patent
applications owned by others, such as Bristol-Myers and Duke. The Company is
obligated to pay royalties and other compensation under these agreements. See "
- -- License Agreements".
The Company's success will depend in part on its ability to obtain and
enforce patent protection for its products both in the United States and other
countries. There can be no assurance that any patents will issue on any of the
Company's patent applications or on patent applications licensed from third
parties. Even if such patents issue, there can be no assurance that the claims
allowed will be sufficiently broad to protect the Company's technology or that
the patents will provide protection against competitive products or otherwise be
commercially
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valuable. No assurance can be given that any patents issued to or licensed by
the Company will not be challenged, invalidated, infringed, circumvented or held
unenforceable.
Under the Bucindolol License, the Company has exclusive worldwide
rights to bucindolol for treatment of CHF. The composition of matter patent
expired in November 1997. As a result, assuming FDA approval can be obtained,
competitors, including generic drug manufacturers, may market bucindolol. The
Company intends to rely on the provisions of the Waxman-Hatch Act for five years
of marketing exclusivity in the United States, commencing on the date of the
FDA's approval of bucindolol for commercial marketing in the United States. The
Waxman-Hatch Act establishes a period of time from the date of FDA approval of
certain new drug applications during which the FDA may not accept or approve
short-form applications for generic versions of the drug from other sponsors,
although it may accept or approve long-form applications (that is, other
complete NDAs) for such drug. The applicable period is five years in the case of
drugs containing an active ingredient not previously approved. If approved,
bucindolol will be eligible for five years of exclusivity under the Waxman-Hatch
Act unless another company obtains approval, before the approval of bucindolol,
of a drug with the same active ingredient. The Company currently intends to
attempt to enhance its competitive position with respect to bucindolol beyond
any exclusivity period provided by the Waxman-Hatch Act by developing and
patenting a once-daily formulation of bucindolol. There can be no assurance,
however, that such a once- daily formulation will be successfully developed and,
if so, whether adequate patent coverage can be obtained.
In addition, the Company intends to seek marketing exclusivity in most
of Europe under Directives 65/65/EEC and 87/21/EEC, which marketing exclusivity,
if obtained, generally will run for 10 years from the date of marketing approval
on a country-by-country basis. Finally, similar Japanese law may provide the
Company with marketing exclusivity in that country for a period up to six years
following Japanese marketing approval. There can be no assurance that the
Waxman-Hatch Act or similar foreign laws will not be amended or repealed, or
that their benefits will be available to the Company.
Aeolus' catalytic antioxidant small molecule technology base is
described in two issued U.S. patents and two issued foreign patents, as well as
seven pending U.S. applications and eight pending foreign patent applications.
These patents and patent applications belong in whole or in part to Duke and are
licensed to the Company. See " -- License Agreements -- Duke License". These
patents and patent applications cover soluble manganic porphyrins as antioxidant
molecules as well as targeted compounds obtained by coupling such antioxidant
compounds with moieties that bind to specific extracellular elements.
In addition to patent protection, the Company also relies upon trade
secrets, proprietary know-how and technological advances which it seeks to
protect in part through confidentiality agreements with its collaborative
partners, employees and consultants. The Company's employees and consultants are
required to enter into agreements providing for confidentiality and the
assignment of rights to inventions made by them while affiliated with the
Company. The Company also has entered into non-disclosure agreements which are
intended to protect its confidential information delivered to third parties for
research and other purposes. However,
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there can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
The commercial success of the Company will also depend in part on its
ability to commercialize its products without infringing patents or other
proprietary rights of others or without breaching the licenses granted to the
Company. There can be no assurance that the Company will be able to obtain a
license to any third-party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require to commercialize its technologies or products would have a material
adverse effect on the Company.
Furthermore, as with any pharmaceutical company, the Company's patent
and other proprietary rights are subject to uncertainty. The Company's patent
rights related to its products might conflict with current or future patent and
other proprietary rights of others. For the same reasons, the products of others
could infringe the patent or other proprietary rights of the Company. Litigation
or patent interference proceedings, either of which could result in substantial
cost to the Company, may be necessary to enforce any patents or other
proprietary rights of or licensed to the Company or to determine the scope,
validity or enforceability of the proprietary rights of others. The defense and
prosecution of patent and intellectual property claims are both costly and time
consuming, even if the outcome is favorable to the Company. Any adverse outcome
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require the Company to
cease selling its products.
Government Regulation
The Company's research and development activities and the manufacturing
and marketing of the Company's future products are subject to regulation by
numerous governmental agencies in the United States and in other countries. The
FDA and comparable agencies in other countries impose mandatory procedures and
standards for the conduct of clinical trials and the production and marketing of
products for diagnostic and human therapeutic use. Before obtaining regulatory
approvals for the commercial sale of any of its products under development, the
Company must demonstrate through preclinical studies and clinical trials that
the product is safe and efficacious for use in each target indication. The
results from preclinical studies and early clinical trials may not be predictive
of results that will be obtained in large-scale testing, and there can be no
assurance that the Company's clinical trials, including the BEST Study, will
demonstrate the safety and efficacy of any products or will result in marketable
products. A number of companies in the biotechnology industry have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials.
The steps required by the FDA before new drug products may be marketed
in the United States include: (i) preclinical studies; (ii) the submission to
the FDA of a request for authorization to conduct clinical trials on an
investigational new drug, which must become effective before human clinical
trials may commence; (iii) adequate and well-controlled human clinical trials to
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establish the safety and efficacy of the drug for its intended use; (iv)
submission to the FDA of an NDA; and (v) review and approval of the NDA by the
FDA before the drug may be shipped or sold commercially. In addition to
obtaining FDA approval for each product, each manufacturing establishment must
be registered with the FDA and undergo an inspection prior to the approval of an
NDA. Each manufacturing facility, its quality control and manufacturing
procedures must also conform and adhere at all times to the FDA's good
manufacturing practice ("GMP") regulations. In addition to preapproval
inspections, the FDA and other government agencies regularly inspect
manufacturing facilities for compliance with these requirements. In complying
with standards set forth in these regulations, manufacturers must continue to
expend time, money and effort in the area of production and quality control to
ensure full technical compliance.
Preclinical testing includes both in vitro and in vivo laboratory
evaluation and characterization of the safety and efficacy of a drug and its
formulation. Preclinical testing results are submitted to the FDA as a part of
the Investigational New Drug application ("IND"), which must become effective
prior to authorization to commence human clinical trials. Every clinical trial
must be conducted under the review and oversight of an institutional review
board ("IRB") at each institution participating in the trial. The IRB evaluates,
among other things, ethical factors and the safety of human subjects. Clinical
trials are typically conducted in three sequential phases following submission
of an IND, although the phases may overlap. Phase I represents the initial
administration of the drug to a small group of humans, either patients or
healthy volunteers, typically to test for safety (adverse effects), dosage
tolerance, absorption, distribution, metabolism, excretion and clinical
pharmacology, and, if possible, to gain early evidence on effectiveness. Phase
II involves studies in a small sample of the actual intended patient population
to assess the efficacy of the drug for a specific indication, to determine dose
tolerance and the optimal dose range and to gather additional information
relating to safety and potential adverse effects. Once an investigational drug
is found to have some efficacy and an acceptable safety profile in the targeted
patient population, Phase III studies are initiated to further establish
clinical safety and efficacy of the drug in a broader sample of the general
patient population at geographically dispersed study sites, in order to
determine the overall risk-benefit ratio of the drug and to provide an adequate
basis for any physician labeling. During all clinical studies, the Company must
take care to adhere to good clinical practice ("GCP") standards. The results of
the research and product development, manufacturing, preclinical studies,
clinical studies and related information are submitted in an NDA to the FDA.
The process of completing clinical testing and obtaining FDA approval
for a new drug product is likely to take a number of years and require the
expenditure of substantial resources. If an application is submitted, there can
be no assurance that the FDA will review and approve the NDA in a timely manner,
or approve it at all. Even if initial FDA approval has been obtained, further
studies, including post-market studies, may be required to provide additional
data on safety and will be required to gain approval for the use of a product as
a treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-market reporting and may
require surveillance programs to monitor the side effects of the drug. Results
of post-marketing programs may limit or expand the further marketing of the
products. Further, if there are any modifications to the drug, including changes
in indication,
22
<PAGE>
manufacturing process, labeling or a change in manufacturing facility, an NDA
supplement may be required to be submitted to the FDA.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the size of the patient population, the
nature of the protocol, the availability of alternative therapies and drug
regimens (including similar mechanisms of action, such as other beta-blockers),
the proximity of patients to clinical sites and the eligibility criteria for the
study. Delays in planned patient enrollment may result in increased costs and
delays, which could have a material adverse effect on the Company.
The Company currently intends to file an NDA for bucindolol with the
FDA within one year after completion of the BEST Study, if its results are
favorable. This submission will be followed by equivalent submissions to
appropriate regulatory authorities in Europe. There can be no assurance that the
Company will meet this schedule, or that bucindolol or any of the Company's
other products in development will receive marketing approval in any country on
a timely basis, or at all. If the Company were unable to complete clinical
trials or demonstrate the safety and efficacy of bucindolol, the Company would
be materially and adversely affected.
Failure to comply with applicable FDA requirements may result in a
number of consequences that could materially and adversely affect the Company.
Failure to adhere to approved protocols, GCPs and FDA regulations governing
investigational drugs, in conducting clinical trials could cause the FDA to
place a clinical hold on one or more studies which would delay research and data
collection necessary for product approval. Such noncompliance could also have a
negative impact on FDA's evaluation of an NDA. Failure to adhere to GMPs and
other applicable requirements, including those relating to labeling,
advertising, record keeping and reporting of adverse events and other
information, could result in FDA enforcement action and in civil and criminal
sanctions, including but not limited to fines, injunctions, seizure of product,
refusal of the FDA to approve product approval applications, withdrawal of
approved applications, and criminal prosecution.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of marketing of the product in such countries. The requirements
governing the conduct of clinical trials and product approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country at this
time has its own procedures and requirements. There can be no assurance that any
foreign approvals will be obtained on a timely basis or at all.
In addition to the regulatory framework for product approvals, the
Company is and its collaborative partners may be subject to regulation under
state and federal laws, including requirements regarding occupational safety,
laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control, and may be
subject to other present and possible future local, state, federal and foreign
regulation. The
23
<PAGE>
impact of such regulation upon the Company cannot be predicted and could be
material and adverse.
Pharmaceutical Pricing and Reimbursement
The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
governmental and third-party payors to contain or reduce the cost of healthcare.
For example, in certain foreign markets pricing or profitability of prescription
pharmaceuticals is subject to government control. In the United States, there
have been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control. In
addition, an increasing emphasis on managed care in the United States has and
will continue to increase the pressure on pharmaceutical pricing. While the
Company cannot predict whether any such legislative or regulatory proposals will
be adopted or the effect such proposals or managed care efforts may have on its
business, the announcement or adoption of such proposals or efforts could have a
material adverse effect on the Company. Further, to the extent that such
proposals or efforts have a material adverse effect on companies that are
prospective collaborative partners of the Company, the Company's ability to
establish collaborative partnerships may be adversely affected. In addition, in
both the United States and elsewhere, sales of prescription pharmaceuticals are
dependent in part on the availability of reimbursement to the consumer from
third-party payors, such as government and private insurance plans. Third-party
payors are increasingly challenging the prices charged for medical products and
services. If the Company succeeds in bringing one or more products to the
market, there can be no assurance that these products will be considered
cost-effective and that reimbursement to the consumer will be available or will
be sufficient to allow the Company to sell its products on a competitive basis.
Product Liability Exposure and Insurance
The use of any of the Company's products in clinical trials, and the
sale of any of the Company's products, may expose the Company to liability
claims resulting from the use of its products. These claims might be made
directly by consumers, healthcare providers or by pharmaceutical companies or
others selling such products. Under the Astra Merck Collaboration, both the
Company and Astra Merck have agreed to maintain, through self-insurance or
otherwise, product liability insurance with the other party named as an
additional insured. The Company has obtained limited product liability insurance
coverage for its human clinical trials. However, insurance coverage is becoming
increasingly expensive, and no assurance can be given that the Company will be
able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability. There can also
be no assurance that the Company will be able to obtain commercially reasonable
product liability insurance for any products approved for marketing. A
successful product liability claim or series of claims brought against the
Company could have a material adverse effect on the Company.
Control of Company by, and Conflicts of Interest with, Interneuron
24
<PAGE>
As of September 30, 1997, Interneuron owned 61.3% of the outstanding
Common Stock of Intercardia. Accordingly, Interneuron has the ability to elect
all of the directors of the Company and control voting with respect to matters
submitted to stockholders, including extraordinary corporate transactions such
as a merger or sale of substantially all of the Company's assets. Pursuant to an
intercompany services agreement between Intercardia and Interneuron, Intercardia
has given Interneuron the right to purchase additional shares of Intercardia's
Common Stock at fair market value, if necessary to provide that Interneuron's
equity ownership in Intercardia does not fall below 51.0%. Interneuron's voting
control over the Company many have the effect of delaying or preventing sales of
additional securities of the Company or a sale of the Company or other change of
control supported by the other stockholders of the Company. In addition, the
Company may be subject to various risks arising from Interneuron's influence
over the Company, including conflicts of interest relating to new business
opportunities that could be pursued by the Company or by Interneuron and its
other affiliates, and significant corporate transactions for which stockholder
approval is required. In the event that all or part of the shares of Intercardia
Common Stock held by Interneuron are sold or otherwise transferred, the market
price per share of the Intercardia Common Stock could be adversely affected.
Employees
As of September 30, 1997, there were 19 employees at the Company, of
whom 11 were involved directly in scientific research and development
activities. None of the Company's employees is represented by a labor union. The
Company considers its employee relations to be good. The Company is highly
dependent on the principal members of its management and scientific staff. The
loss of certain key employees could have a material adverse effect on the
Company. In addition, the Company believes that its future success will depend
in large part upon its ability to attract and retain highly skilled scientific
and managerial personnel. The Company faces competition for such personnel from
other companies, research and academic institutions, government entities and
other organizations. There can be no assurance that the Company will be
successful in hiring or retaining the personnel it requires.
Item 2. Properties.
Intercardia currently leases 9,444 square feet of office space in
Research Triangle Park, North Carolina, which is leased through April 2001. The
Company believes that these leased facilities are adequate to meet the Company's
current needs and that additional facilities in the area are available for lease
to meet future needs.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
25
<PAGE>
No matters were submitted to a vote of security holders during the
fourth quarter ended September 30, 1997.
Executive Officers
As of September 30, 1997, the executive officers of the Company were as
follows:
Name Age Position
Clayton I. Duncan 48 President, Chief Executive Officer
and Director
Richard W. Reichow 47 Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary
David P. Ward, M.D. 51 Senior Vice President, Research and
Development
John P. Richert 47 Vice President, Market Development
W. Bennett Love 42 Vice President, Corporate Planning/
Communications
Clayton I. Duncan has been President, Chief Executive Officer and a
director of Intercardia since January 1995. From 1989 until December 1993, Mr.
Duncan was President and Chief Executive Officer of Sphinx Pharmaceuticals
Corporation ("Sphinx"), a biopharmaceutical company which was acquired by Eli
Lilly and Company ("Lilly") in September 1994. From December 1993 until
September 1994, he served as an independent consultant to Sphinx with regard to
the sale of Sphinx to Lilly. From 1987 to 1989, Mr. Duncan was a General Partner
of Intersouth Partners, a venture capital firm. From 1979 to 1987, he was an
executive with Carolina Securities Corporation, a regional investment banking
firm ("Carolina Securities"), serving as Executive Vice President and a director
from 1984 to 1987. Mr. Duncan was a founder and Chairman of the Board of CRX
Medical, Inc. ("CRX"), a medical products company that conducted research and
development in wound management, ophthalmic disorders and interventional
radiology. Mr. Duncan is also a director of Transcell. Mr. Duncan received an
M.B.A. from the University of North Carolina at Chapel Hill.
Richard W. Reichow has been Senior Vice President, Chief Financial
Officer and Treasurer of Intercardia since March 1995 and Secretary since
October 1995. Mr. Reichow was employed by Sphinx as President and Chief
Executive Officer from December 1993 to September 1994, as Vice President,
Finance & Administration from August 1991 to September 1994, and as Chief
Financial Officer and Treasurer from March 1990 to September 1994. Between
September 1994 and March 1995, he was an independent financial consultant. Mr.
Reichow was Vice President, Chief Financial Officer and Treasurer of CRX from
1987 to 1990. Mr. Reichow is a Certified Public Accountant.
David P. Ward, M.D. has been Senior Vice President, Research &
Development of Intercardia since March 1995. Dr. Ward was Group Vice President,
Medical, Regulatory Affairs
26
<PAGE>
and Clinical Operations of Quintiles Transnational Corporation, a contract
research organization, from October 1994 to March 1995. Dr. Ward was Vice
President of Clinical Development and Regulatory Affairs of Sphinx from January
1992 to September 1994. Prior to that time, Dr. Ward was employed by SmithKline
Beecham, a multinational pharmaceutical company, for more than six years,
serving as Vice President and Director, Therapeutic Unit from August 1989 to
January 1992, as Vice President and Medical Director, Clinical Investigation
Unit for SmithKline & French Laboratories, Ltd., a multinational pharmaceutical
company, from December 1988 to July 1989, as Vice President/ Medical Director of
Cardiovascular Products, International Medical Affairs in 1988, and as a Medical
Director of Cardiovascular Products, International Medical Affairs from 1985 to
1987. Dr. Ward received his M.D. from Case Western University Medical School.
John P. Richert has been Vice President, Market Development of
Intercardia since December 1996. From May 1995 until December 1996, he held the
position of Executive Director, Market Development with Intercardia. From
October 1994 until May 1995, Mr. Richert was President of PharmAliance, a
pharmaceutical and biotechnology business development consulting firm. Mr.
Richert served as Director, Market Development with Sphinx from February 1992
until September 1994. Prior to being employed by Sphinx, Mr. Richert was
employed by Schering-Plough Corporation, a major pharmaceutical manufacturer,
from 1981 where he held positions of increasing responsibility in marketing. He
holds a B.S. degree from Georgetown University and an M.B.A. in Pharmaceutical
Marketing from Fairleigh - Dickinson University.
W. Bennett Love has been Vice President, Corporate
Planning/Communications of Intercardia since June 1997. From October 1995 until
June 1997, he held the position of Executive Director, Corporate
Planning/Communications at Intercardia. From September 1994 to September 1995,
Mr. Love was the principal of Innovation Corporate Finance, a boutique
investment banking company for early-stage technology ventures. From 1990 to
1994, Mr. Love was employed at Sphinx as Director, Corporate
Planning/Communications. From 1983 to 1990, he was an investment banker with
Carolina Securities. Mr. Love received an M.B.A. from the University of North
Carolina at Chapel Hill.
27
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Price Range of Common Stock
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "ITRC". The following sets forth the quarterly high and low sales
prices from February 1, 1996 (the date trading commenced) through September 30,
1997 as reported by Nasdaq. These prices are based on quotations between
dealers, which do not reflect retail mark-up, markdown or commissions.
<TABLE>
<CAPTION>
High Low
Fiscal Year Ended September 30, 1996
<S> <C> <C>
February 1, 1996 through March 31, 1996.........27 17 1/2
April 1, 1996 through June 30, 1996.............35 3/4 20 3/4
July 1, 1996 through September 30, 1996.........29 1/2 18
Fiscal Year Ended September 30, 1997
October 1, 1996 through December 31, 1996.......29 17
January 1, 1997 through March 31, 1997..........27 1/4 16
April 1, 1997 through June 30, 1997.............23 3/8 17 1/4
July 1, 1997 through September 30, 1997.........24 3/4 18
</TABLE>
(b) Approximate Number of Equity Security Holders
As of October 31, 1997, the number of record holders of the Company's
Common Stock was 61 and the Company believes that the number of beneficial
owners was approximately 900.
(c) Dividends
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends.
Item 6. Selected Financial Data.
The selected financial data presented below summarizes certain
financial data and should be read in conjunction with the more detailed
financial statements of the Company and the notes thereto which have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report
thereon is included elsewhere in this Annual Report on Form 10-K along with said
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business".
28
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations Data:
Period from
Inception
(March 15, 1994)
to
Year Ended September 30, September 30,
------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------- ------------------- -------------------
Revenue:
<S> <C> <C>
Contract and license fee
revenue...................... $ 4,042,816 $ 5,009,000
Investment income.............. 2,110,269 1,342,088 $ 61,663
------------- --------------- ------------------
Total revenue............... 6,153,085 6,351,088 61,663
Costs and expenses:
Research and development....... 14,263,590 2,317,904 2,003,663 $ 106,344
Purchase of in-process
research and development..... 410,608 350,000 --- 1,852,000
General and administrative..... 2,125,696 1,895,251 582,912 ---
-------------- ---------------- ---------------- ---------------
Total costs and expenses.... 16,799,894 4,563,155 2,586,575 1,958,344
-------------- ---------------- ---------------- ---------------
Income (loss) before income
taxes and minority interest..... (10,646,809) 1,787,933 (2,524,912) (1,958,344)
Income taxes...................... --- (37,000) --- ---
Minority interest................. 568,068 (568,068) --- ---
--------------- -------------- ---------------- ----------------
Net income (loss)................. $ (10,078,741) $ 1,182,865 $ (2,524,912) $ (1,958,344)
=============== ============== =============== ================
Net income (loss) per common share $ (1.45) $ 0.20 $ (0.52) $ (0.40)
=============== ============== =============== ================
Weighted average common
shares outstanding.............. 6,941,804 6,041,025 4,874,447 4,874,447
=============== ============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
September 30,
------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------ ------------------- ----------------
<S> <C> <C> <C>
Cash and marketable securities.......... $ 37,018,279 $ 37,096,308 $ 1,121,624
Working capital......................... 24,362,793 35,035,852 (176,158) $ (1,958,343)
Total assets............................ 38,527,311 38,945,004 1,289,721 600
Long-term lease and debt
obligations........................... 248,786 118,113 115,269 ---
Total stockholders' equity (deficit).... 26,547,950 36,227,473 (131,848) (1,958,343)
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Introduction
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. All references to the Company include Intercardia, Inc. and its
majority-owned subsidiaries, CPEC, Inc., Aeolus Pharmaceuticals, Inc. and
Renaissance Cell Technologies, Inc. As of September 30, 1997, Intercardia owned
80.1% of the outstanding capital stock of CPEC, 65.8% of the outstanding capital
stock of Aeolus and 79.6% of the outstanding capital stock of Renaissance.
Intercardia is a majority-owned subsidiary of Interneuron. As of September 30,
1997, Interneuron owned 61.3% of the outstanding capital stock of Intercardia
and the 19.9% of outstanding capital stock of CPEC not owned by Intercardia.
The Company focuses on development of therapeutics for the treatment of
cardiovascular and pulmonary disease. The Company has directed the majority of
its efforts toward the development and clinical trials of bucindolol, a compound
currently in Phase III clinical trials for the treatment of CHF.
On November 5, 1997, Intercardia executed the Letter of Intent to
purchase all of the outstanding stock of Transcell and certain related
technology owned by Interneuron in exchange for Intercardia Common Stock with an
aggregate market value as of November 5, 1997 of approximately $15,000,000. In
addition, Intercardia will issue Intercardia stock options to Transcell
employees and consultants with a market value as of November 5, 1997 of
approximately $3,000,000 to $4,000,000. Transcell is a majority-owned subsidiary
of Interneuron and is conducting research and development utilizing
carbohydrate-based combinatorial chemistry. Under the terms of the Letter of
Intent, owners of Transcell stock will receive Intercardia Common Stock in three
installments. The first installment, representing approximately $6,000,000 as of
November 5, 1997, will be made upon the Closing, which is estimated to occur in
the first calendar quarter of 1998. The number of Intercardia shares to be
received by Transcell stockholders at the Closing will be determined by
Intercardia's stock price during the week prior to Closing. The minimum
Intercardia stock price to be used for determining the number of shares to be
issued for the initial installment will be $19.00 per share and the maximum will
be $25.00 per share. The second and third installments will each consist of
approximately $3,000,000 of Intercardia Common Stock, as valued at each date,
and will be issued 15 and 21 months after Closing. In exchange for certain
license and technology rights owned by Interneuron, and for Interneuron's
continuing guarantee of certain of Transcell's lease obligations, Intercardia
will issue to Interneuron $3,000,000 of Intercardia Common Stock (subject to the
price range described above) at Closing and will pay Interneuron a royalty on
net sales of certain products that may result from a research collaboration
originally entered into among Transcell, Interneuron and Merck. At Closing, the
Company will incur charges to operations estimated to be $6,000,000 to
$8,000,000 as a result of the transaction. The acquisition is subject to final
due diligence and approval by Transcell and Intercardia stockholders. The
acquisition will be accounted for by using the purchase method of accounting.
30
<PAGE>
Results of Operations
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996:
The Company incurred a net loss of approximately $10,079,000 for the
fiscal year ended September 30, 1997 ("Fiscal 1997"), versus net income of
approximately $1,183,000 for the fiscal year ended September 30, 1996 ("Fiscal
1996"). The net loss for Fiscal 1997 was primarily the result of the accrual, in
September 1997, of a $10,000,000 contract payment due to Astra Merck in December
1997 in conjunction with the development of bucindolol.
Contract and license fee revenue of approximately $4,043,000 for Fiscal
1997 included contract payments totaling approximately $3,480,000 received from
Knoll pursuant to the Knoll Collaboration and approximately $553,000 from Astra
Merck pursuant to the Astra Merck Collaboration. Contract and license fee
revenue for Fiscal 1996 included a $5,000,000 one-time initial payment received
from Astra Merck in conjunction with the execution of the Astra Merck
Collaboration.
Investment income increased by approximately $768,000 (57%) to
approximately $2,110,000 in Fiscal 1997 from approximately $1,342,000 in Fiscal
1996. This was primarily due to the Company having use of the net proceeds of
approximately $34,990,000 from the Company's initial public offering ("IPO")
completed in February 1996 for all of Fiscal 1997, versus only part of Fiscal
1996.
Research and development ("R&D") expenses for the Company increased to
approximately $14,264,000 for Fiscal 1997 from approximately $2,318,000 for
Fiscal 1996, primarily due to the accrual of a $10,000,000 contract payment due
to Astra Merck in conjunction with the development of bucindolol. R&D expenses
incurred by Intercardia and CPEC, which primarily support the development of
bucindolol, increased to approximately $12,806,000 for Fiscal 1997 from
approximately $1,619,000 for Fiscal 1996. Other than the $10,000,000 contract
payment due to Astra Merck, increased costs resulted primarily from additional
personnel expenses and costs related to the development of bucindolol for
Europe.
Under the terms of the Astra Merck Collaboration, the Company has
agreed to pay Astra Merck $10,000,000 in December 1997, which amount was accrued
as a liability and expensed in Fiscal 1997, and up to $11,000,000 for one-third
of product launch costs incurred beginning when the Company files an NDA for the
twice-daily formulation of bucindolol and continuing through the first 12 months
subsequent to the first commercial sale of the twice-daily formulation, which
will be expensed as the charges are incurred. These amounts are payable at the
option of the Company, and in the event the Company elects not to make these
payments, the royalties payable by Astra Merck to CPEC will be substantially
reduced.
The Astra Merck Collaboration also requires Astra Merck to pay for
certain expenses related to the development of the twice-daily formulation of
bucindolol for the United States. Astra Merck assumed liabilities on the
Company's behalf of approximately $5,505,000 and
31
<PAGE>
$4,301,000 during Fiscal 1997 and Fiscal 1996, respectively. These additional
amounts did not flow through the Company's Statements of Operations, as they
were offset against related expenses. As of September 30, 1997, the Company's
Balance Sheet included approximately $903,000 of accounts receivable due from
Astra Merck and approximately $813,000 of accrued expenses related to
obligations assumed by Astra Merck.
R&D expenses for Aeolus increased by approximately $337,000 (31%) to
approximately $1,413,000 for Fiscal 1997 from approximately $1,076,000 for
Fiscal 1996, as Aeolus continued its antioxidant small molecule research
program.
The Company incurred a charge of approximately $411,000 for purchase of
in-process research and development during Fiscal 1997, as Intercardia acquired
approximately 79.6% of the outstanding capital stock of Renaissance. During
Fiscal 1996, the Company incurred a $350,000 charge for purchase of in-process
research and development when Intercardia acquired an additional 0.1% of the
capital stock of CPEC.
General and administrative ("G&A") expenses increased by approximately
$231,000 (12%) to approximately $2,126,000 for Fiscal 1997 from approximately
$1,895,000 for Fiscal 1996, due to general increases in operating expenses.
The minority interest in the September 30, 1996 Consolidated Balance
Sheet, and the Consolidated Statement of Operations for Fiscal 1996, related to
the 20% minority interest in net income earned by CPEC during Fiscal 1996,
offset by 20% of the previous cumulative deficit incurred by CPEC since its
acquisition by Intercardia. CPEC's net loss for Fiscal 1997 resulted in the
reversal of the minority interest balance.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September
30, 1995:
The Company's net income of approximately $1,183,000 for Fiscal 1996
resulted primarily from a $5,000,000 one-time initial payment received from
Astra Merck in conjunction with the execution of the Astra Merck Collaboration,
less operating expenses. The Company's net loss of approximately $2,525,000 for
the fiscal year ended September 30, 1995 ("Fiscal 1995") consisted primarily of
R&D expenses incurred in the development of bucindolol.
Revenue for Fiscal 1996 consisted primarily of a $5,000,000 initial
payment received in December 1995 under the Astra Merck Collaboration and
approximately $1,342,000 of investment income earned on proceeds received from
the Company's IPO completed in February 1996. The only revenue for Fiscal 1995
was approximately $62,000 of investment income.
R&D expenses for the Company increased approximately $314,000 (16%) to
approximately $2,318,000 for Fiscal 1996 from approximately $2,004,000 for
Fiscal 1995.
Bucindolol development activities and related costs were significantly
higher during Fiscal 1996 than Fiscal 1995. However, as the terms of the Astra
Merck Collaboration require Astra Merck to pay for certain expenses related to
bucindolol development, the net cost to Intercardia
32
<PAGE>
for bucindolol development expenses decreased by approximately $399,000 during
Fiscal 1996 as compared to Fiscal 1995. During Fiscal 1996, Astra Merck made
payments or assumed liabilities of approximately $4,301,000 on the Company's
behalf. These amounts did not flow through the Company's Consolidated Statement
of Operations, as they were offset against related expenses. Astra Merck had
paid approximately $2,857,000 of this amount by September 30, 1996 and
approximately $1,344,000 was included as offsetting accounts receivables and
accrued expenses on the Company's Consolidated Balance Sheet at September 30,
1996.
R&D expenses for Aeolus increased to approximately $1,076,000 for
Fiscal 1996 from approximately $363,000 for Fiscal 1995. Fiscal 1995 only
included partial year expenses, as Aeolus was acquired by Intercardia in July
1995.
The Company incurred a $350,000 charge for purchase of technology
rights in Fiscal 1996, as Intercardia acquired an additional 0.1% of the capital
stock of CPEC.
G&A expenses increased to approximately $1,895,000 for Fiscal 1996 from
approximately $583,000 for Fiscal 1995. This increase resulted from having a
management team in place for only part of Fiscal 1995. G&A payroll related costs
increased to approximately $1,064,000 in Fiscal 1996 from approximately $295,000
in Fiscal 1995.
The minority interest in the September 30, 1996 Consolidated Balance
Sheet and the Consolidated Statement of Operations for Fiscal 1996 reflected the
20% minority interest in net income earned by CPEC during Fiscal 1996, offset by
20% of the previous cumulative deficit incurred by CPEC since its acquisition by
Intercardia.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash, cash equivalents and
marketable securities of approximately $37,018,000, a decrease of approximately
$78,000 from September 30, 1996. This decrease resulted primarily from the
Company's fiscal 1997 net loss of approximately $10,079,000, offset by the
non-cash portion of the net loss resulting from the $10,000,000 accrual for a
payment due to Astra Merck in December 1997.
The Company's cash, cash equivalents and marketable securities balance
is expected to decrease significantly during the fiscal year ending September
30, 1998 ("Fiscal 1998"), due primarily to (1) the $10,000,000 payment due to
Astra Merck in December 1997, (2) a decrease in contract revenue for Fiscal
1998, as Fiscal 1997 included one-time payments of approximately $3,143,000 made
by Knoll pursuant to the Knoll Collaboration, (3) a decrease in investment
income due to lower cash, cash equivalent and marketable securities balances,
and (4) increased expenses due to expanded operations, including costs
associated with proposed clinical trials of bucindolol in Europe, the proposed
acquisition of Transcell and additional operating expenses of Transcell.
In connection with its acquisition of CPEC, the Company is committed to
provide certain support to the BEST Study. The Company is committed to provide
up to $2,000,000 during the
33
<PAGE>
course of the BEST Study, of which $1,750,000 had been paid as of September 30,
1997, as well as drug supplies and monitoring costs of the study expected to
aggregate an additional $2,500,000. The Astra Merck Collaboration provides Astra
Merck with U.S. marketing rights to a twice-daily formulation of bucindolol and
obligates Astra Merck to fund future U.S. development, marketing and
manufacturing costs and to assume the Company's funding obligation for the BEST
Study and royalty obligation to Bristol-Myers for sales in the United States.
CPEC will receive royalties based on net sales by Astra Merck. The
Company has agreed to pay Astra Merck $10,000,000 in December 1997 (for which
the Company made an accrual as of September 30, 1997) and up to $11,000,000 for
one-third of product launch costs incurred beginning when the Company files an
NDA for the twice-daily formulation and continuing through the first 12 months
subsequent to the first commercial sale of the formulation. In the event the
Company elects not to make these payments, the royalties payable by Astra Merck
to CPEC will be substantially reduced.
The Company will incur additional charges to operations relating to the
acquisition of CPEC in the event that certain milestones are achieved in the
development and commercialization of bucindolol. Two future issuances of
Interneuron's common stock of a maximum of 75,000 shares each, subject to
adjustment based on the price of Interneuron common stock at the time of
issuance, are required upon achieving the milestones of filing an NDA and
receiving an approval letter from the Food and Drug Administration to market
bucindolol. In exchange for Interneuron providing such shares, the Company will
pay Interneuron the value of such shares, in either cash or Intercardia Common
Stock, at Intercardia's option. Each additional payment would have a minimum and
maximum charge to the Company of $750,000 and $1,875,000, respectively.
Pursuant to the Knoll Collaboration, the Company is responsible for
approximately 40% of the development and marketing costs of bucindolol for the
Territory, subject to certain maximum dollar limitations. The Company's portion
of development and clinical trial costs of the twice-daily formulation of
bucindolol for the Territory is estimated to be up to $10,000,000 and the
Company's portion of marketing costs prior to product launch is estimated to be
up to $4,000,000. Upon product launch, the Company will be responsible for 40%
of the net loss in the Territory, if any, as defined. The Company is also
responsible for approximately 40% of the once-daily development costs incurred
for the Territory and approximately 67% of the once-daily development costs that
have a worldwide benefit.
The Company expects to incur substantial additional costs and losses
over the next few years. The Company's working capital and capital requirements
will depend upon numerous factors, including: the progress of the development
and clinical trials of bucindolol; the timing and cost of obtaining regulatory
approvals; the effect of competitive drugs on the BEST Study and on
commercialization of bucindolol; the proposed acquisition and operating costs of
Transcell; and the ability of the Company to establish additional collaborative
arrangements with other companies to provide research or development funding to
the Company and to conduct clinical trials, obtain regulatory approvals, and
manufacture and market certain of the Company's products. The Company is aware
of products in research or development by its competitors that address the
diseases being targeted by the Company. In particular, CoregTM (carvedilol), a
non-selective beta-blocker with moderate vasodilating properties, is owned by
Boehringer Mannheim
34
<PAGE>
and licensed in the United States and certain other countries to SKB. In May
1997, the FDA approved the use of carvedilol as a treatment for congestive heart
failure in the United States and SKB is currently marketing carvedilol in the
United States and a number of other countries. The Company may acquire other
products, technologies or businesses that complement the Company's existing and
planned products, although the Company currently has no understanding,
commitment or agreement with respect to any such acquisitions, other than the
proposed acquisition of Transcell. While the Company believes it has sufficient
cash available for currently planned expenditures for at least the next year,
including the proposed acquisition of Transcell, the Company may seek additional
funds through equity and/or debt financing and additional corporate
collaborations to provide financing and funding for new business opportunities
and future growth.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements on page F-1.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
Not applicable.
35
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement for its 1998
Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the
end of its fiscal year pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended, and the information included
therein is incorporated herein by reference to the extent provided below.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 of Form 10-K concerning the
Registrant's directors is incorporated by reference to the information under the
heading "Election of Intercardia Directors" in the Proxy Statement.
The information required by Item 10 of Form 10-K concerning the
Registrant's executive officers is set forth under the heading "Executive
Officers" located at the end of Part I of this Form 10-K.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
To the Company's knowledge, there were no reports required under
Section 16(a) of the Securities Exchange Act of 1934, as amended, which were not
timely filed during the fiscal year ended September 30, 1997.
Item 11. Executive Compensation.
The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Election of Intercardia
Directors -- Information Concerning the Board of Directors and Its Committees",
"Other Information Regarding Intercardia -- Compensation of Executive Officers",
" -- Compensation of Directors", " -- Report of the Compensation Committee on
Executive Compensation", " -- Compensation Committee Interlocks and Insider
Participation" and " -- Performance Graph" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information Regarding
Intercardia -- Principal Stockholders" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information Regarding
Intercardia -- Certain Transactions" in the Proxy Statement.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report or incorporated herein by reference:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
All financial statement schedules for which provision is made in
Regulation S-X are omitted because they are not required under the related
instructions, are inapplicable, or the required information is given in the
financial statements, including the notes thereto and, therefore, have been
omitted.
(3) Exhibits.
Exhibit No. Description
3.1 (a) Certificate of Incorporation, as currently in effect.
3.2 (a) Bylaws, as currently in effect.
4.1 (a) Form of Common Stock certificate
10.1 (a) Form of Intercardia, Inc. Investors' Rights
Agreement.
10.2 (a) Letter of Understanding between Cardiovascular
Pharmacology Engineering and Consultants, Inc. and
the VA Cooperative Studies Program, dated March 18,
1994; related Memorandum of Agreement for Conduct of
the Trial "Beta-Blocker Evaluation of Survival
Trial"; and related Agreement No. 1 Y01HC 402004-00,
dated September 8, 1994, as amended.
10.3 (a) Agreement between Bristol-Myers Squibb Company
and Cardiovascular Pharmacology Engineering and
Consultants, Inc., dated December 6, 1991, as
amended.
10.4 (a)* License Agreement between Duke University and
Aeolus Pharmaceuticals, Inc., dated July 21, 1995.
10.5 (a) Consulting Agreement between Myocor, Inc. and
Intercardia, Inc., dated October 1, 1994.
10.6 (a) Employment Agreement between Clayton I. Duncan
and Intercardia, Inc., dated
January 3, 1995, as amended.
10.7 (a) Acquisition Agreement relating to the acquisition
by Intercardia, Inc. of 80% of CPEC,
dated May 13, 1994, as amended.
10.8 Intercardia, Inc. 1994 Stock Option Plan, as amended.
10.9 (a) Office Lease between Highwoods/Forsyth Limited
Partnership and Intercardia, Inc., dated April 24,
1995.
37
<PAGE>
10.10 (a) Master Equipment Lease between Phoenix Leasing
Incorporated and Intercardia, Inc., dated June 12
1995, and related Sublease and Acknowledgment of
Assignment to Aeolus Pharmaceuticals, Inc.
10.11 (a)* Development and Marketing Collaboration and
License Agreement between Astra Merck Inc.,
Intercardia, Inc. and CPEC, Inc., dated December 4,
1995.
10.12 (b) Intercardia, Inc. 1995 Employee Stock Purchase Plan.
10.13 (a) Employment Agreement between David P. Ward, M.D.
and Intercardia, Inc., dated November 1, 1995.
10.14 (a) Employment Agreement between Richard W. Reichow
and Intercardia, Inc., dated November 1, 1995.
10.15 (a) Intercompany Services Agreement between
Interneuron Pharmaceuticals, Inc. and Intercardia,
Inc., dated December 4, 1995.
10.16 (a) Tax Allocation Agreement between Interneuron
Pharmaceuticals, Inc. and Intercardia, Inc., dated
December 4, 1995.
10.17 (a) Letter regarding Intercardia's right of first
refusal with respect to CPEC stock, dated January 18,
1996.
10.18 (b) Development Agreement between Global Pharm, Inc.,
Intercardia, Inc. and CPEC, Inc., dated January 26,
1996.
10.19 (b) Lease Amendment Number One, dated March 6, 1996,
to Office Lease between Highwoods/Forsyth Limited
Partnership and Intercardia, Inc.
10.20 (c)* Agreement for Feasibility Study, Amendment
Number One thereto, and related License Agreement,
each dated April 15, 1996, among Jago Pharma AG,
Jagotec AG, Intercardia, Inc. and CPEC, Inc.
10.21 (d)* Agreement among Intercardia, Inc., CPEC, Inc.
and Knoll AG dated December 19, 1996.
10.22 (e) Lease Amendment Number Two, dated March 14,
1997, to Office Lease between Highwoods/Forsyth
Limited Partnership and Intercardia, Inc.
10.23 Sponsored Research Agreement between The University
of North Carolina at Chapel Hill and Renaissance
Cell Technologies, Inc. dated September 4, 1997
10.24 Sponsored Research Agreement between National Jewish
Medical and Research Center and Aeolus
Pharmaceuticals, Inc., dated September 11, 1997.
10.25* Development, Manufacturing, Marketing and License
Agreement between Knoll AG, Intercardia, Inc. and
CPEC, Inc., effective as of December 19, 1996.
10.26 Employment Agreement between Clayton I. Duncan
and Intercardia, Inc., dated December 15, 1997.
11.1 Statement Re Computation of Earnings Per Share.
21.1 List of Subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
* Confidential treatment requested.
38
<PAGE>
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-08209).
(b) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995.
(c) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
(d) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996.
(e) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
39
<PAGE>
F-4
CORP-8744-39-71497-04
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets -- As of
September 30, 1997 and September 30,
1996.......................................................................F-3
Consolidated Statements of Operations -- For the fiscal
years ended September 30, 1997, 1996 and
1995.......................................................................F-4
Consolidated Statements of Stockholders' Equity -- For the
fiscal years ended September 30, 1997, 1996 and
1995.......................................................................F-5
Consolidated Statements of Cash Flows -- For the
fiscal years ended September 30, 1997, 1996
and 1995...................................................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERCARDIA, INC.
We have audited the accompanying consolidated balance sheets of
Intercardia, Inc. as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 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 referred to above present
fairly, in all material respects, the consolidated financial position of
Intercardia, Inc. as of September 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
October 24, 1997, except as to the
information presented in Note M,
for which the date is November 5, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
INTERCARDIA, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
---------------------------------------------
1997 1996
-------------------- ---------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 17,623,728 $ 21,440,700
Marketable securities 17,340,509 14,083,838
Accounts receivable 1,127,088 1,444,724
Prepaids and other current assets 89,891 97,940
-------------------- ---------------------
Total current assets 36,181,216 37,067,202
Marketable securities 2,054,042 1,571,770
Property and equipment, net 286,553 298,532
Other assets 5,500 7,500
-------------------- ---------------------
$ 38,527,311 $ 38,945,004
== ================= === =================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 365,084 $ 168,475
Accrued expenses 11,365,491 1,826,666
Current portion of capital lease obligations 43,936 36,209
Current portion of notes payable 43,912 ---
-- ----------------- --- -----------------
Total current liabilities 11,818,423 2,031,350
Long-term portion of capital lease obligations 64,716 108,651
Long-term notes payable 96,222 9,462
Minority interest --- 568,068
Stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares authorized, 6,765,162 and
6,738,603 shares issued and outstanding at
September 30, 1997 and 1996, respectively 6,765 6,739
Additional paid-in capital 40,054,316 39,709,124
Deferred compensation (130,500) (184,500)
Accumulated deficit (13,382,631) (3,303,890)
-- ----------------- --- -----------------
Total stockholders' equity 26,547,950 36,227,473
-- ----------------- --- -----------------
$ 38,527,311 $ 38,945,004
== ================= === =================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended September 30,
------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Revenue:
<S> <C> <C>
Contract and license fee revenue $ 4,042,816 $ 5,009,000
Investment income 2,110,269 1,342,088 $ 61,663
-- -------------------- --- ------------------- -- --------------------
Total revenue 6,153,085 6,351,088 61,663
-- -------------------- --- ------------------- -----------------------
Costs and expenses:
Research and development 14,263,590 2,317,904 2,003,663
Purchase of in-process research
and development 410,608 350,000 ---
General and administrative 2,125,696 1,895,251 582,912
-- -------------------- --- ------------------- -- --------------------
Total costs and expenses 16,799,894 4,563,155 2,586,575
-- -------------------- --- ------------------- -- --------------------
Income (loss) before income taxes
and minority interest (10,646,809) 1,787,933 (2,524,912)
Income taxes --- (37,000) ---
Minority interest 568,068 (568,068) ---
-- -------------------- --- ------------------- -- --------------------
Net income (loss) $ (10,078,741) $ 1,182,865 $ (2,524,912)
== ==================== === =================== == ====================
Net income (loss) per common share $ (1.45) $ 0.20 $ (0.52)
== ==================== === =================== == ====================
Weighted average common shares
outstanding 6,941,804 6,041,025 4,874,447
== ==================== === =================== == ====================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock
Par Additional
Number Value Number Par Value Paid-In Deferred
of Shares Amount of Shares Amount Capital Compensation
--------- ------ --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994................. 3,500,000 $ 3,500
Conversion of advances from Interneuron
into Series A Preferred Stock.......... -- -- 182,296 $ 1,823 $ 1,365,397
Proceeds from issuance of Series A
Preferred Stock at $7.50 per share, net
of issuance costs of $843,251.......... -- -- 510,325 5,103 2,979,084
Net loss for the fiscal year ended
September 30, 1995..................... -- -- -- -- --
-------- -------- -------- -------- --------
Balance at September 30, 1995................. 3,500,000 3,500 692,621 6,926 4,344,481
Exercise of common stock options.......... 4,000 4 -- -- 2,356
Grants of common stock options at below
fair value............................. -- -- -- -- 216,000 $ (216,000)
Conversion of Series A Preferred Stock to
common stock........................... 692,621 693 (692,621) (6,926) 6,233 --
Sale of common stock pursuant to initial
public offering, net of issuance costs
of $2,960,175.......................... 2,530,000 2,530 -- -- 34,987,295 --
Amortization of deferred compensation..... -- -- -- -- -- 31,500
Proceeds from offerings of Employee Stock
Purchase Plan.......................... 11,982 12 -- -- 152,759 --
Net income for the fiscal year ended
September 30, 1996..................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at September 30, 1996................. 6,738,603 6,739 -- -- 39,709,124 (184,500)
Exercise of common stock options.......... 8,500 8 -- -- 4,012 --
Stock based compensation.................. -- -- -- -- 20,937 --
Cashless exercise of stock warrant........ 1,156 1 -- -- (1) --
Amortization of deferred compensation..... -- -- -- -- -- 54,000
Proceeds from offerings of Employee Stock
Purchase Plan.......................... 16,903 17 -- -- 320,244 --
Net loss for the fiscal year ended
September 30, 1997..................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at September 30, 1997................. 6,765,162 $ 6,765 -- -- $ 40,054,316 $ (130,500)
========= ======== ======== ======== ============ ==============
<CAPTION>
Total
Stockholders'
Accumulated (Deficit)
Deficit Equity
------------ ---------
<S> <C> <C>
Balance at September 30, 1994................. $ (1,961,843) $ (1,958,343)
Conversion of advances from Interneuron
into Series A Preferred Stock.......... -- 1,367,220
Proceeds from issuance of Series A
Preferred Stock at $7.50 per share, net
of issuance costs of $843,251.......... -- 2,984,187
Net loss for the fiscal year ended
September 30, 1995..................... (2,524,912) (2,524,912)
------------- -------------
Balance at September 30, 1995................. (4,486,755) (131,848)
Exercise of common stock options.......... -- 2,360
Grants of common stock options at below
fair value............................. -- --
Conversion of Series A Preferred Stock to
common stock........................... -- --
Sale of common stock pursuant to initial
public offering, net of issuance costs
of $2,960,175.......................... -- 34,989,825
Amortization of deferred compensation..... -- 31,500
Proceeds from offerings of Employee Stock
Purchase Plan.......................... -- 152,771
Net income for the fiscal year ended
September 30, 1996..................... 1,182,865 1,182,865
------------ ------------
Balance at September 30, 1996................. (3,303,890) 36,227,473
Exercise of common stock options.......... -- 4,020
Stock based compensation.................. -- 20,937
Cashless exercise of stock warrant........ -- --
Amortization of deferred compensation..... -- 54,000
Proceeds from offerings of Employee Stock
Purchase Plan.......................... -- 320,261
Net loss for the fiscal year ended
September 30, 1997..................... (10,078,741) (10,078,741)
-------------- --------------
Balance at September 30, 1997................. $ (13,382,631) $ 26,547,950
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended September 30,
----------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss).................................... $ (10,078,741) $ 1,182,865 $ (2,524,912)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 152,454 89,393 5,860
Noncash compensation.............................. 74,937 31,500 ---
Minority interest in net income (loss) of
consolidated subsidiary..................... (568,068) 568,068 ---
Change in assets and liabilities:
Accounts receivable........................ 317,636 (1,444,724) ---
Prepaids and other assets................. 10,049 (89,422) (17,918)
Accounts payable and accrued expenses..... 9,735,434 884,264 196,141
---------------------- ---------------------- ------------------------
Net cash provided by (used in) operating activities (356,299) 1,221,944 (2,340,829)
---------------------- ---------------------- ------------------------
Cash flows from investing activities:
Proceeds from sales and maturities of marketable
securities............................................ 19,545,287 10,660,306 ---
Purchases of marketable securities................... (23,284,230) (26,315,914) ---
Purchases of property and equipment.................. (140,475) (199,082) (15,879)
-------------------- ---------------------- ------------------------
Net cash used in investing activities.............. (3,879,418) (15,854,690) (15,879)
---------------------- ---------------------- ------------------------
Cash flows from financing activities:
Net proceeds from issuance of stock and warrants 324,281 35,144,956 2,984,187
Proceeds fron notes payable....................... 155,535 9,462 ---
Principal payments on notes payable............... (24,863) --- ---
Principal payments on capital lease obligations......... (36,208) (30,728) (736)
Advances from (payments to) Interneuron, net............ --- (171,868) 494,881
---------------------- ------------------- ---------------------
Net cash provided by financing activities............... 418,745 34,951,822 3,478,332
---------------------- ------------------- ---------------------
Net increase (decrease) in cash and cash equivalents.... (3,816,972) 20,319,076 1,121,624
Cash and cash equivalents at beginning of period........ 21,440,700 1,121,624 ---
--------------------- ------------------ -----------------------
Cash and cash equivalents at end of period............. $ 17,623,728 $ 21,440,700 $ 1,121,624
====================== ====================== ========================
Supplemental disclosure of investing and financing
activities:
Cash payments for interest on capital leases........ $ 25,118 $ 32,541 $ 930
====================== ====================== =======================
Capital lease obligations incurred when the
Company acquired property and equipment...... --- $ 36,764 $ 139,560
======================= =================== == =======================
Conversion of advances from Interneuron into
preferred stock............................. --- --- $ 1,367,220
======================= =================== ========================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF THE BUSINESS
Intercardia, Inc. was incorporated in Delaware in March 1994. The
"Company" refers collectively to Intercardia, Inc. ("Intercardia") and its
majority-owned subsidiaries, CPEC, Inc., a Nevada corporation ("CPEC"), Aeolus
Pharmaceuticals, Inc., a Delaware corporation ("Aeolus"), and Renaissance Cell
Technologies, Inc., a Delaware corporation ("Renaissance"). As of September 30,
1997, Intercardia owned 80.1% of the outstanding stock of CPEC, 65.8% of the
outstanding stock of Aeolus and 79.6% of the outstanding stock of Renaissance.
The Company focuses on development of therapeutics for the treatment of
cardiovascular and pulmonary disease. The Company has directed the majority of
its efforts toward the development and clinical trials of bucindolol, a compound
currently in Phase III clinical trials for the treatment of congestive heart
failure. This clinical trial, which commenced in June 1995, is known as the
Beta-blocker Evaluation of Survival Trial (the "BEST Study") and is sponsored by
the National Institutes of Health (the "NIH") and the Department of Veterans
Affairs (the "VA").
Intercardia is a majority-owned subsidiary of Interneuron
Pharmaceuticals, Inc. ("Interneuron"). As of September 30, 1997, Interneuron
owned 61.3% of the outstanding capital stock of Intercardia and the 19.9% of the
outstanding stock of CPEC not owned by Intercardia.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include
the accounts of Intercardia and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
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 and disclosures of contingent 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.
Cash and Cash Equivalents: The Company invests available cash in
short-term bank deposits, money market funds, commercial paper and U.S.
Government securities. Cash and cash equivalents include investments with
maturities of three months or less at the date of purchase.
Marketable Securities: The Company considers its investment portfolio
available-for-sale as defined in Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Debt and equity securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of related income taxes. Premiums are
amortized and discounts accreted using the interest method over the remaining
terms of the related securities. Gains and losses on the sale of securities are
determined using the specific identification method.
F-7
<PAGE>
Property and Equipment: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method based
on estimated useful lives or, in the case of leasehold improvements and
equipment under capital leases, over the lesser of the estimated useful lives or
the lease terms. The estimated useful lives are two to three years for computers
and five years for equipment.
The Company evaluates impairment of its property and equipment based on
events and changes in circumstances that indicate that the carrying value may
not be recoverable. The identification of an impairment involves the comparison
of estimated future cash flows expected to result from the asset less the
related estimated future cash outflows.
Expenses for repairs and maintenance are charged to operations as
incurred. Upon retirement or sale, the cost of the assets disposed and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is credited or charged to operations.
Revenue Recognition: Revenue is recognized under agreements when
services are performed or when contractual obligations are met.
Research and Development: Research and development costs are expensed
in the period incurred. Payments related to the acquisition of in-process
research and development are expensed upon acquisition.
Income Taxes: Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Net Income (Loss) Per Share: The net loss per share for the periods
prior to Intercardia's initial public offering ("IPO") was computed by dividing
the net loss by the weighted average number of common shares and common share
equivalents (using the treasury stock method and the initial public offering
price of $15.00 per share) outstanding during the periods. The outstanding
shares of Series A Preferred Stock, which were automatically converted into
shares of Common Stock upon the closing of the IPO, were included as common
share equivalents. In addition, Common Stock options and Preferred Stock
warrants granted were included as common share equivalents. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, stock options and
stock warrants granted during the twelve months immediately preceding the
initial filing date of the IPO were included in the calculation as if they were
outstanding for all periods prior to the IPO.
Net income (loss) per share for the periods subsequent to the IPO was
computed using the weighted average number of common and common share
equivalents outstanding during each fiscal quarter. Common share equivalents
consist of stock options and warrants (using the treasury stock method). Common
share equivalents are excluded from the computation if their effect is
antidilutive for the fiscal quarter.
Accounting for Stock-Based Compensation: During the fiscal year ended
September 30, 1997, the Company adopted the disclosure requirements of SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which changes
measurement, recognition and disclosure standards for stock-based compensation.
However, as permitted by SFAS No. 123, the Company continues to measure
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25 ("APB Opinion
F-8
<PAGE>
No. 25"). As such, the adoption of SFAS No. 123 did not materially impact the
financial position or the results from operations of the Company.
Future Disclosure Requirements: The Company will adopt SFAS No. 128,
Earnings Per Share ("SFAS No. 128"), on December 31, 1997. SFAS No. 128 requires
the Company to change its method of computing, presenting and disclosing
earnings per share information. Upon adoption, all prior period data presented
will be restated to conform to the provisions of SFAS No. 128. Management has
not determined the effect of adopting SFAS No. 128.
The Company will adopt SFAS No. 130, Reporting Comprehensive Income
("SFAS No. 130"), for the fiscal year ending September 30, 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Management has
not determined the effect of adopting SFAS No. 130.
The Company will adopt SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS No. 131"), for the fiscal year ending
September 30, 1999. SFAS No. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information to
be disclosed. Management has not determined the effect of adopting SFAS No. 131.
C. MARKETABLE SECURITIES
The Company has classified all marketable securities as available for
sale. The amortized cost approximates market value, yielding no unrealized
holding gains or losses at September 30, 1997 and 1996. The amortized cost of
the marketable securities consisted of the following at September 30, 1997 and
1996:
1997 1996
---- ----
Government notes $ 1,014,443 $ 4,213,572
Corporation notes 18,380,108 11,442,036
------------ ------------
$19,394,551 $15,655,608
=========== ===========
The maturities of these securities as of September 30, 1997 and 1996
were as follows:
1997 1996
------ ----
Within one year $17,340,509 $14,083,838
After one year through two years 2,054,042 1,571,770
------------- -------------
$19,394,551 $15,655,608
=========== ===========
F-9
<PAGE>
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1997
and 1996:
1997 1996
---- ----
Office equipment..................... $302,947 $224,930
Laboratory equipment................. 184,867 140,962
Leasehold improvements............... 43,946 25,393
------- ----------
531,760 391,285
Less: accumulated depreciation
and amortization..... (245,207) (92,753)
---------- -----------
$286,553 $298,532
========== =========
Included in the above amounts is equipment under capital lease
obligations with a cost of approximately $176,000 at September 30, 1997 and
1996, and a net book value of approximately $70,000 and $122,000 at September
30, 1997 and 1996, respectively.
E. ACCRUED EXPENSES
At September 30, 1997 and 1996, accrued expenses consisted of the
following:
1997 1996
---- ----
Bucindolol contract payment due to Astra Merck....... $10,000,000
Bucindolol liabilities assumed by Astra Merck........ 812,693 $1,343,855
Payroll related liabilities.......................... 391,660 322,655
Franchise taxes...................................... 57,199 83,000
Income taxes.......................................... --- 37,000
Other................................................. 103,939 40,156
------------ -----------
$ 11,365,491 $1,826,666
============ ==========
F. COMMITMENTS
The Company leases office space under non-cancelable operating leases.
Rent expense under non-cancelable leases was approximately $147,000, $74,000 and
$16,000 for the fiscal years ended September 30, 1997, 1996 and 1995,
respectively. The Company also leases certain equipment under capital leases.
F-10
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1997, the Company's future minimum payments under
lease arrangements consisted of the following:
Operating Capital
Fiscal Year Ending September 30, Leases Leases
-------------------------------- --------- ---------
<S> <C> <C> <C>
1998........................................................... .$187,218 $ 61,327
1999............................................................ 184,916 69,622
2000............................................................ 190,265 ---
2001............................................................ 112,850 ---
--------- --------
Total minimum lease payments............................. $675,249 130,949
========
Less: amount representing interest........................ (22,297)
---------
Present value of future minimum lease payments $108,652
========
</TABLE>
The Company incurred interest expense of approximately $25,000, $33,000
and $1,000 related to the capital leases for the fiscal years ended September
30, 1997, 1996 and 1995, respectively.
G. NOTES PAYABLE
Notes payable at September 30, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Note payable to North Carolina Biotechnology
Center, including accrued interest at 8.75% ,
principal and interest due December 1, 2000 $ 20,703 $ 9,462
Note payable to minority stockholder of
Renaissance, payable in
semi-annual installments of $25,000,
including accrued interest at 5.79%,
to March 1, 2000 119,431 ---
---------------- -- -------------
Total notes payable 140,134 9,462
Less - current portion 43,912 ---
---------------- ----------------
Long-term notes payable $ 96,222 $ 9,462
================ ================
</TABLE>
Notes payable are unsecured. At September 30, 1997, future maturities
of notes payable are as follows:
Fiscal Year Ending September 30,
1998............................................................ $ 43,912
1999............................................................ 46,694
2000............................................................ 28,825
2001............................................................ 20,703
----------
$140,134
========
F-11
<PAGE>
H. STOCKHOLDERS' EQUITY
Common Stock: The Certificate of Incorporation of Intercardia
authorizes the issuance of up to 40,000,000 shares of Common Stock, at a par
value of $.001 per share.
In February 1996, Intercardia completed an IPO of 2,530,000 shares of
Intercardia Common Stock at $15.00 per share, resulting in net proceeds to
Intercardia of approximately $34,990,000. Interneuron purchased 333,333 of the
IPO shares at the IPO price for a total of $5,000,000.
Preferred Stock: The Certificate of Incorporation of Intercardia
authorizes the issuance of up to 3,000,000 shares of Preferred Stock, at a par
value of $.01 per share. The Board of Directors has the authority to issue
Preferred Stock in one or more series, to fix the designation and number of
shares of each such series, and to determine or change the designation, relative
rights, preferences, and limitations of any series of Preferred Stock, without
any further vote or action by the stockholders of the Company. No shares of
Preferred Stock were outstanding at September 30, 1997 and 1996.
In December 1994, Interneuron converted $1,367,220 of advances into
182,296 of shares of Series A Preferred Stock. During the fiscal year ended
September 30, 1995, the Company raised approximately $2,984,000, net of issuance
costs of approximately $843,000, in a private placement of 510,325 shares of its
Series A Preferred Stock at $7.50 per share. All shares of Series A Preferred
Stock were converted into Common Stock on a one-for-one basis upon completion of
Intercardia's IPO in February 1996. In connection with this private placement,
the Company also issued warrants to purchase 51,033 shares of Series A Preferred
Stock at an exercise price of $8.25 per share. Upon completion of Intercardia's
IPO, these warrants were converted into warrants to purchase Common Stock with
the same exercise price. During the year ended September 30, 1997, a warrant to
purchase 2,000 shares was exercised on a cashless basis, resulting in 1,156
shares being issued by Intercardia. As of September 30, 1997, warrants to
purchase 49,033 shares of Common Stock were outstanding, all of which are
exercisable until February 1, 2001.
Stock Option Plan: Under Intercardia's 1994 Stock Option Plan (the
"Plan"), incentive stock options ("ISOs") or non-qualified stock options to
purchase 1,500,000 shares of Intercardia's Common Stock may be granted to
employees, directors and consultants of the Company. The exercise price of the
ISOs granted under the Plan must not be less than the fair market value of the
Common Stock as determined on the date of the grant. The options may have a term
up to 10 years. All options which have been granted under the Plan vest at
various rates over periods from two to seven years following the date of the
grant.
<TABLE>
<CAPTION>
Stock option activity under the Plan was as follows:
Weighted Average
Shares Exercise Price
----- -----------------
<S> <C> <C>
Outstanding at September 30, 1994.................. --- ---
Granted.................................. 683,557 $ 0.54
--------
Outstanding at September 30, 1995................. 683,557 $ 0.54
Granted................................. 408,741 $ 20.68
Exercised............................... (4,000) $ 0.59
----------
Outstanding at September 30, 1996............... 1,088,298 $ 8.11
Granted................................ 231,000 $ 18.99
Exercised............................. (8,500) $ 0.47
Canceled.............................. (10,875) $ 22.09
-----------
Outstanding at September 30, 1997............. 1,299,923 $ 9.97
===========
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1997 and 1996, options for 449,727 and 199,594
shares, respectively, were vested.
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Exercise Remaining Number Exercise
Price Outstanding Price Contractual Life Exercisable Price
----- ----------- ----- ---------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$0.36 - $1.00 676,057 $0.55 7.5 years 381,205 $0.55
$9.00 - $15.00 74,975 $12.12 8.3 years 22,483 $12.60
$18.50 - $20.50 475,391 $19.64 9.1 years 46,039 $19.77
$32.00 73,500 $32.00 8.7 years --- ---
-------------- ---------------
1,299,923 $9.97 8.2 years 449,727 $3.12
=============== ===============
</TABLE>
Under the principles of APB Opinion No. 25, the Company does not
recognize compensation expense associated with the grant of stock options to
employees, except if an option is granted with an exercise price at less than
fair market value. SFAS No. 123 requires the use of option valuation models to
recognize as expense stock option grants to consultants and to provide
supplemental information regarding options granted to employees after September
30, 1995.
Pro forma information regarding net income (loss) shown below was
determined as if the Company had accounted for its employee stock options and
shares issued under its Employee Stock Purchase Plan ("ESPP") under the fair
value method of SFAS No. 123. The fair value of each option grant is estimated
on the date of the grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants:
1997 1996
---- ----
Dividend yield 0% 0%
Expected volatility 67.0% 67.0%
Risk-free interest rate 6.1%-6.9% 6.1% - 6.9%
Expected option life after shares are vested 2 years 2 years
For the fiscal year ended September 30, 1997, all options were issued
with an exercise price equal to fair market value and these assumptions resulted
in weighted average fair value of stock options granted of $11.46. The weighted
average fair value and exercise price of stock options granted during the fiscal
year ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
Weighted Average
--------------------------------------
Exercise
Fair Value Price
----------------- -----------------
<S> <C> <C> <C> <C> <C>
Options whose exercise price at the date of grant was:
Equal to estimated market value of stock $ 13.54 $ 21.81
Below estimated market value of stock $ 10.50 $ 9.00
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have characteristics significantly different from those of traded
options such as vesting restrictions and extremely limited transferability. In
addition,
F-13
<PAGE>
the assumptions used in option valuation models are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net income (loss) for the fiscal years ended September 30, 1997 and 1996 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to October 1, 1995. Pro forma information in future
years will reflect the amortization of a larger number of stock options granted
in several succeeding years. The Company's pro forma information is as follows
for the fiscal years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------- -----------------------------------------
As Reported Pro Forma As Reported Pro Forma
------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss) $(10,078,741) $(12,590,067) $1,182,865 $640,574
Net income (loss) per share $(1.45) $(1.81) $0.20 $0.11
</TABLE>
The pro forma effects of the options to purchase shares under the ESPP
on net income (loss) included in this table were approximately $160,000 and
$67,000 for the fiscal years ended September 30, 1997 and 1996, respectively.
Subsidiary Stock Option Plans: Intercardia's subsidiaries, Aeolus, CPEC
and Renaissance, also have stock option plans. The number of options authorized
for the Aeolus stock option plan is 50,000 shares. During the year ended
September 30, 1997, an option to purchase 30,000 shares of common stock was
granted. This option was outstanding at September 30, 1997. The number of
options authorized for the CPEC stock option plan is 11,000 shares. An option
for 572 shares was granted during the fiscal year ended September 30, 1995. This
option was purchased and exercised by Intercardia in September 1996. No options
were outstanding under the CPEC stock option plan at September 30, 1997. The
number of options authorized for the Renaissance stock option plan is 68,055
shares, with no options granted or outstanding at September 30, 1997.
Employee Stock Purchase Plan: In October 1995, Intercardia adopted an
Employee Stock Purchase Plan ("ESPP") covering an aggregate of 100,000 shares of
Common Stock. The first offering period began February 1, 1996 and ended on
September 30, 1996. The second offering period began October 1, 1996 and ended
September 30, 1997. Subsequent offerings will be for one year periods beginning
on October 1 of each year (an "Offering") and will be divided into two six-month
Purchase Periods (the "Purchase Periods"). Employees may contribute up to ten
percent (10%) of gross wages, with certain limitations, via payroll deduction,
to the ESPP. Stock will be purchased at the end of each Purchase Period with
employee contributions at the lower of 85% of the last sale price of
Intercardia's Common Stock on the first day of an Offering or the last day of
the related Purchase Period. Employees of Intercardia and Interneuron are
eligible to participate in the ESPP. As of September 30, 1997 and 1996, 28,885
and 11,982 shares, respectively, of Common Stock had been purchased pursuant to
the ESPP. The weighted average fair value of the options to purchase shares
under the ESPP were $9.90 and $5.62 for the fiscal years ended September 30,
1997 and 1996, respectively.
Minority Interest: The minority interest in the September 30, 1996
Consolidated Balance Sheet, and the Consolidated Statement of Operations for the
fiscal year ended September 30, 1996, related to the 20% minority interest in
net income earned by CPEC for the fiscal year ended September 30, 1996, offset
by 20% of the previous cumulative deficit incurred by CPEC since its acquisition
by Intercardia. As CPEC incurred a net loss in excess of this amount during the
fiscal year ended September 30, 1997, this minority interest balance was
reversed during the fiscal year ended September 30, 1997.
F-14
<PAGE>
I. INCOME TAXES
As of September 30, 1997 and 1996, the Company had federal net
operating loss carryforwards of approximately $986,000 and $805,000,
respectively, and state operating loss carryforwards of approximately $4,995,000
and $2,716,000, respectively. The use of these federal net operating loss
carryforwards may be subject to limitation under the change in the stock
ownership rules of the Internal Revenue Code. The federal net operating losses
will begin to expire in 2010. The state net operating losses will begin to
expire in 2001.
Significant components of the Company's deferred tax assets at
September 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 590,000 $ 412,000
Accrued contract liability 3,400,000 -----
AMT credit carryforwards 37,000 37,000
Accrued payroll related liabilities 131,000 123,000
Charitable contribution carryforwards 95,000 132,000
Other 122,000 60,000
----------- ----------
Total deferred tax assets 4,375,000 764,000
Valuation allowance for deferred assets (4,375,000) (764,000)
-------------- ---------------
Net deferred tax asset $ --- $ ---
================ ============
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, all of the deferred tax assets have been fully
offset by a valuation allowance.
The Company's expected regular income tax expense for the fiscal year
ended September 30, 1996 was offset by the utilization of $717,000 of the
valuation allowance previously established for deferred tax assets related to
net operating loss carryforwards from the period ended September 30, 1994 and
the fiscal year ended September 30, 1995. However, a Federal Alternative Minimum
Tax ("AMT") was recorded for the fiscal year ended September 30, 1996 due to
limitations on the use of net operating loss carryforwards for AMT purposes.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States Federal statutory rate $ (3,620,000) $ 608,000 $ (858,000)
State taxes (net of federal benefit) (110,000) (107,000) (65,000)
Change in valuation reserves 3,611,000 (522,000) 908,000
Other 119,000 58,000 15,000
------------------ ------------------- ------------------
Provision for income taxes $ --- $ 37,000 $ ---
=================== =================== ==================
Effective tax rate 0% 2% 0%
=================== =================== ==================
</TABLE>
F-15
<PAGE>
J. ACQUISITIONS
In September 1997, Intercardia acquired all of the newly issued Series
A Preferred Stock of Renaissance, which represented 79.6% of the total shares of
preferred and common stock of Renaissance. Renaissance is an early stage company
conducting research in the area of hepatic stem cells. The acquisition was
accounted for using the purchase method of accounting. The purchase price for
the Renaissance Preferred Stock was $500,000, of which approximately $411,000
was expensed as in-process research and development, because feasibility of the
in-process research has not yet been established and the technology has no
alternative future use. Because Intercardia controls the activities of
Renaissance through its majority ownership interest, the financial statements of
Renaissance are included in the consolidated financial statements of the
Company. Renaissance had limited activity prior to the acquisition.
In July 1995, Intercardia acquired all of the newly issued Series A
Preferred Stock of Aeolus, which represented 61.2% of the total shares of
preferred and common stock of Aeolus. Aeolus is conducting research and
development on catalytic antioxidant small molecules as therapeutics for a
variety of conditions, including neonatal respiratory distress syndrome and
resulting broncho-pulmonary dysplasia, stroke and asthma. The purchase price for
the newly issued Series A Preferred Stock was $375,000, which was paid in cash
to Aeolus (a consolidated subsidiary of the Company) and was not a payment to a
third party outside the Company's consolidated group. The acquisition was
accounted for using the purchase method of accounting. Because Intercardia
controls the activities of Aeolus through its majority ownership interest, the
financial statements of Aeolus are included in the consolidated financial
statements of the Company. Aeolus had no activity or operations prior to the
acquisition.
In September 1994, Intercardia acquired 80.0% of the outstanding common
stock of CPEC. CPEC has an exclusive worldwide license to bucindolol, a
non-selective beta-blocker currently under development for treatment of
congestive heart failure. CPEC had no other assets or operations at the time of
the acquisition. Bucindolol is in a Phase III clinical trial, the BEST Study,
for treatment of congestive heart failure sponsored by the NIH and the VA. The
NIH and VA have agreed to provide up to $15,750,000 during the course of the
BEST Study and CPEC was obligated to provide up to $2,000,000 of study costs, of
which $1,750,000 had been paid as of September 30, 1997, and to fund other costs
of the study including drug supply and monitoring costs.
The purchase price for the 80.0% of CPEC's outstanding common stock was
approximately $1,852,000 consisting of 170,000 shares of common stock of
Interneuron, and payments or assumed liabilities to stockholders of CPEC and
others of $1,093,000. The value of the 170,000 shares provided by Interneuron to
Intercardia to consummate the CPEC acquisition was deemed to be $759,000,
representing approximately 70% of the market price of the Interneuron common
stock at such date. The value was reduced to 70% due to restrictions on the sale
of the stock. Additionally, two future issuances of Interneuron's common stock
of a maximum of 75,000 shares each (subject to adjustment based on the market
price of Interneuron common stock at the time of issuance) are required upon
achieving the milestones of filing a New Drug Application ("NDA") and receiving
an approval letter from the Food and Drug Administration ("FDA") to market
bucindolol. Each additional payment would have a minimum and maximum charge to
the Company of $750,000 and $1,875,000, respectively. The value of these
additional shares has not been included in the purchase price because their
issuance is contingent upon achieving these milestones. In the event these
milestones are achieved, the Company will incur charges to operations equal to
the fair market value of the Interneuron common stock advanced to the Company to
make such payments. In exchange for Interneuron providing such shares,
Intercardia will pay Interneuron the value of such shares, either in cash or
Intercardia Common Stock, at Intercardia's option. The acquisition was accounted
for using the purchase
F-16
<PAGE>
method of accounting. The purchase price was allocated to the bucindolol
technology rights, and because bucindolol is not a currently commercializable
product and future benefits are dependent upon successful completion of clinical
trials and FDA approval, the Company recorded a charge to in-process research
and development of $1,852,000 for the costs associated with this transaction.
In September 1996, Intercardia acquired an additional 0.1% of the
outstanding common stock of CPEC for $350,000 and expensed the cost as
in-process research and development.
K. AGREEMENTS
Bucindolol License
CPEC has an exclusive license from Bristol-Myers Squibb Company
("Bristol-Myers") to make, have made, use and sell bucindolol for pharmaceutical
therapy for congestive heart failure (as amended, the "Bucindolol License"). The
Bucindolol License is exclusive for all countries in the world. The Bucindolol
License requires the Company to conduct all appropriate and necessary clinical
trials and to take all actions that are reasonably necessary for the preparation
and filing of an NDA and a comparable application in at least one Western
European country for bucindolol for pharmaceutical therapy for congestive heart
failure and left ventricular dysfunction. The Company is obligated to pay
royalties on net product sales during the term of the Bucindolol License, and
must pay all or a portion of patent prosecution, maintenance and defense costs.
Unless terminated, the Bucindolol License continues, with respect to each
country, until the patent on bucindolol issued in that country expires or has
been found invalid, or, if later, 15 years after first commercial sale of
bucindolol (subject to two five-year renewals at the Company's option).
Astra Merck Collaboration
In December 1995, the Company executed a Development and Marketing
Collaboration and License Agreement (the "Astra Merck Collaboration") with Astra
Merck Inc. ("Astra Merck") to provide for the development, commercialization and
marketing in the United States of a twice-daily formulation of bucindolol for
the treatment of congestive heart failure. Astra Merck made an initial
$5,000,000 payment to the Company and assumed responsibility for certain
liabilities owed by the Company. Astra Merck funds certain expenses and
expenditures incurred in connection with the development and commercialization
of the twice-daily formulation of bucindolol in the United States, including any
payments due under the BEST Study. Astra Merck will also pay royalties to the
Company on net sales of the twice-daily formulation in the United States and pay
the royalties due to Bristol-Myers under the Bucindolol License. In addition,
Astra Merck must also pay to CPEC $5,000,000 if bucindolol is the first beta-
blocker approved by the FDA for the treatment of congestive heart failure based
upon a reduction in heart failure mortality claims and $10,000,000 upon first
attainment of $206,000,000 of net sales in the United States during any
consecutive 12-month period (indexed for inflation). Under the terms of the
Astra Merck Collaboration, the Company has agreed to pay Astra Merck $10,000,000
in December 1997, which has been accrued as a liability at September 30, 1997,
and up to $11,000,000 for one-third of product launch costs incurred beginning
when the Company files an NDA for the twice-daily formulation and continuing
through the first 12 months subsequent to the first commercial sale of the
formulation, which will be expensed as the related charges are incurred. In the
event the Company elects not to make these payments, the royalties payable by
Astra Merck to the Company would be significantly reduced. The Astra Merck
Collaboration continues in effect until December 31, 2010, subject to Astra
Merck's option to extend it for two additional five-year periods. During the
fiscal years ended September 30, 1997 and 1996, the Company recognized contract
and license fee revenue of approximately $553,000 and $5,000,000, respectively,
from payments made by Astra Merck to the Company. During the fiscal years ended
F-17
<PAGE>
September 30, 1997 and 1996, Astra Merck assumed additional liabilities of
approximately $5,505,000 and $4,301,000, respectively, on the Company's behalf.
These additional amounts did not flow through the Company's Statement of
Operations, as they were offset against related expenses. As of September 30,
1997, the Company's Balance Sheet included approximately $903,000 of accounts
receivables due from Astra Merck and approximately $813,000 of accrued expenses
related to obligations assumed by Astra Merck.
Knoll AG Collaboration
In December 1996, the Company executed an agreement (the "Knoll
Collaboration") with BASF Pharma/Knoll AG ("Knoll") to provide for the
development, manufacture and marketing of bucindolol for all countries with the
exception of the United States and Japan (the "Territory"). The Knoll
Collaboration includes both the twice-daily bucindolol formulation and the
once-daily bucindolol formulation currently under development. Under the terms
of the collaboration, Knoll paid CPEC approximately $2,143,000 in December 1996
and $1,000,000 in January 1997. Knoll must also pay to CPEC $10,000,000 upon
bucindolol regulatory approval in a major European Community ("EC") member state
and $10,000,000 upon first attainment of $200,000,000 of net sales in the
Territory during any consecutive 12-month period. Upon product launch, Knoll
will pay royalties to CPEC for the use of the license and trademarks of
bucindolol in the Territory. The royalty will be equal to 40% of net profits, as
defined in the Knoll Collaboration. The Company would be responsible for, and
pay to Knoll, 40% of any net loss, as defined.
Knoll and the Company will share the development and marketing costs of
bucindolol in the Territory. In general, Knoll will pay approximately 60% of
certain development and marketing costs incurred prior to product launch and the
Company will pay approximately 40% of such costs, subject to certain maximum
dollar limitations. Knoll will also bear approximately 60% of once-daily
development costs that relate solely to the Territory and approximately
one-third of once-daily development costs that have a worldwide benefit. The
Company is responsible for the remainder of once-daily development costs.
The Knoll Collaboration continues in effect for 15 years after the
first commercial sale with respect to each country in the Territory, subject to
two additional five-year renewals at Knoll's option. Knoll has the right to
terminate the Knoll Collaboration at any time prior to the termination of the
BEST Study and within 60 days after the BEST Study's primary end-point results
are reported in writing to Knoll.
F-18
<PAGE>
JAGO Pharma Development Agreement
In April 1996, the Company entered into an Agreement for a Feasibility
Study ("Feasibility Study Agreement") and a License Agreement ("Jago License")
with Jago Pharma AG and its affiliates ("Jago"). The study contemplated by the
Feasibility Study Agreement is designed to determine the feasibility of
developing a once-daily formulation of bucindolol. The Company made an initial
payment of $390,000 upon signing the Feasibility Study Agreement. The
Feasibility Study Agreement expires 60 days after receipt by the Company of the
Preliminary Pharmacokinetic Study from Jago, or, if earlier, immediately upon a
default or breach of confidentiality provisions or upon another breach or
default not cured within 30 days of notice thereof, upon bankruptcy of a party
or if the Company determines in its sole discretion not to proceed with the next
phase of the study. The Jago License has a perpetual term, but contains similar
breach and bankruptcy termination provisions as the Feasibility Study Agreement.
The Company will make additional payments to Jago if certain milestones are
achieved, and will pay royalties to Jago on net sales of the once-daily
formulation, if developed under these agreements, until the expiration of the
relevant patent on a country-by-country basis, or 15 years, if no patent is
issued in that country.
Duke License
In July 1995, Aeolus obtained an exclusive worldwide license (the "Duke
License") from Duke University ("Duke") to develop, make, have made, use and
sell products using certain technology in the field of free radical and
antioxidant research, developed by certain scientists at Duke. Future
discoveries in the field of antioxidant research from these scientists'
laboratories at Duke are also covered by the Duke License. The Duke License
requires Aeolus to use its best efforts to pursue development of products using
the licensed technology and compounds. Such efforts are to include the
manufacture or production of products for testing, development and sale. Aeolus
is also obligated to use its best efforts to have the licensed technology
cleared for marketing in the United States by the FDA and in other countries in
which Aeolus intends to sell products using the licensed technology. Aeolus will
pay royalties to Duke on net product sales during the term of the Duke License
and milestone payments upon the occurrence of certain events, including FDA
approval of the first product using the licensed technology. In addition, Aeolus
is obligated under the Duke License to pay all or a portion of patent
prosecution, maintenance and defense costs. Unless earlier terminated, the Duke
License continues until the expiration of the last to expire issued patent on
the licensed technology.
National Jewish Medical Center
In September 1997, Aeolus executed a Sponsored Research Agreement (the
"National Jewish Agreement") with National Jewish Medical and Research Center
("National Jewish"). The National Jewish Agreement grants Aeolus an option to
negotiate a royalty-bearing exclusive license for certain technology, patents
and inventions resulting from research by certain individuals at National Jewish
within the field of antioxidant, nitrosylating and related areas. Aeolus has
agreed to support National Jewish's costs incurred in performance of the
research, which costs shall not exceed $400,000 during the first year of the
agreement. Aeolus paid National Jewish $200,000 pursuant to the National Jewish
Agreement during the fiscal year ended September 30, 1997. The National Jewish
Agreement remains in effect until terminated by mutual consent, or upon three
months notice by either party.
F-19
<PAGE>
University of North Carolina
In September 1997, Renaissance executed a Sponsored Research Agreement
(the "UNC Agreement") with the University of North Carolina at Chapel Hill
("UNC"). The UNC Agreement covers research at UNC by certain scientists in the
area of hepatic stem cells and grants Renaissance a first option to obtain an
exclusive license to inventions resulting from the UNC Agreement. Renaissance
has agreed to reimburse UNC for certain costs in connection with the research in
an amount not to exceed $450,000 per year for each of the first two years of the
UNC Agreement. Renaissance paid UNC approximately $113,000 pursuant to the UNC
Agreement during the fiscal year ended September 30, 1997. The UNC Agreement
remains in effect until terminated by mutual consent, or upon twelve months
notice by either party.
Intercompany Agreements
In December 1995, Intercardia and Interneuron entered into an
intercompany services agreement which provides, among other things, for
Intercardia to adopt certain policies and procedures and for Interneuron to
include Intercardia and its employees in certain programs administered by
Interneuron, at cost, such as insurance and health care plans, and to provide
research and development services to the Company upon request, on a cost plus
basis. Pursuant to the intercompany services agreement, Intercardia has agreed
to offer Interneuron the right to purchase shares of Common Stock at fair market
value, if necessary to provide that Interneuron's equity ownership in
Intercardia does not fall below 51.0%. Also in December 1995, the Company and
Interneuron entered into a tax allocation agreement to provide, among other
things, for the payment of tax liabilities and entitlement to tax refunds and
the allocation of responsibility and the providing of cooperation in the filing
of tax returns.
L. RELATED PARTY TRANSACTIONS
The Company has licensed certain patents and technologies from Duke
relating to research performed by a director and stockholder of Aeolus and his
associates. Duke is a minority stockholder of Aeolus. Aeolus is obligated to pay
to Duke royalties on net product sales and two milestone payments of $500,000
each upon regulatory approval of the first product using the licensed technology
and an annual sales level of $30,000,000. The Company was also obligated to pay
up to $80,000 in patent expenses which were accrued at September 30, 1995 and
paid during the fiscal year ended September 30, 1996. In addition, Aeolus made
unrestricted gifts to Duke of $125,000, $200,000 and $100,000 during the fiscal
years ended September 30, 1997, 1996 and 1995, respectively, and Aeolus paid
$45,000 to Duke during each of the fiscal years ended September 30, 1997 and
1996 for research support in conjunction with a collaborative research program.
The Company also made payments to Duke of approximately $27,000 for services and
equipment during the fiscal year ended September 30, 1997.
Under consulting agreements with several minority stockholders of
Aeolus to provide scientific advice and administrative services, Aeolus is
obligated to make monthly payments, generally for a one-year period subject to
annual renewal. Payments under these agreements were approximately $151,000 ,
$128,000 and $23,000 for the fiscal years ended September 30, 1997, 1996 and
1995, respectively. As of September 30, 1997, approximately $121,000 remains to
be paid under these agreements.
Prior to its acquisition by Intercardia, Renaissance issued a note
payable ("Note") in the amount of approximately $144,000 to a minority
stockholder for costs incurred on behalf of Renaissance. During the fiscal year
ended September 30, 1997, Renaissance made a $25,000 payment on the Note. The
balance due on the Note at September 30, 1997 was approximately $119,000.
F-20
<PAGE>
During the fiscal years ended September 30, 1996 and 1995, Interneuron
performed certain services for the Company for which the Company was charged
approximately $3,000 and $94,000, respectively. Interneuron also has paid for
certain Intercardia expenses which were reimbursed by Intercardia at cost.
Interneuron has guaranteed Intercardia's equipment leases.
The Company had a consulting agreement with Myocor, Inc. ("Myocor"),
which provided for consulting fees aggregating $300,000 over the three-year
period beginning in October 1994. During the fiscal years ended September 30,
1997, 1996 and 1995, the Company expensed $75,000, $100,000 and $125,000,
respectively, under this agreement. The Company also had a research agreement
with Myocor, under which the Company made payments of approximately $41,000
during the fiscal year ended September 30, 1996. No amounts remain to be paid
under either agreement. Stockholders of Myocor are former stockholders of CPEC.
The Company had a consulting agreement with Zascor, Inc. ("Zascor").
The Company made consulting and expense payments of approximately $6,000,
$32,000 and $27,000 during the fiscal years ended September 30, 1997, 1996 and
1995, respectively. The Company also had a technology option agreement with
Zascor, under which the Company made payments of approximately $23,000 and
$68,000 during the fiscal years ended September 30, 1996 and 1995, respectively.
No amounts remain to be paid under either agreement. Zascor is controlled by a
former stockholder of CPEC.
Interneuron's Chairman is the Chairman of Paramount Capital, Inc.
("Paramount Capital"), which acted as placement agent in the issuance of the
Series A Preferred Stock through a private placement during the fiscal year
ended September 30, 1995. This individual was a director of Intercardia at the
time of the private placement. Paramount Capital, together with its brokers,
received an 11% commission on the placement, equal to approximately $399,000 and
designees of Paramount Capital received warrants to purchase an aggregate of
46,767 shares of Series A Preferred Stock. Interneuron's Chairman received
warrants to purchase 30,092 of these shares. D.H. Blair & Co., Inc. ("Blair")
was a selected dealer in the private placement. Blair is substantially owned by
family members of a principal stockholder of Interneuron. Blair received fees
aggregating approximately $22,000 and designees of Blair received warrants to
purchase an aggregate of 4,266 shares of Series A Preferred Stock. All of these
warrants are exercisable for Common Stock at an exercise price of $8.25 per
share until February 1, 2001, and, pursuant to a cashless exercise provision,
may be exercised without the need to pay any cash. Intercardia also indemnified
Paramount and Blair against certain liabilities. Interneuron received
approximately $348,000 during the fiscal year ended September 30, 1995 for
providing put protection rights in connection with the Company's private
placements of Series A Preferred Stock. This amount was recorded by Intercardia
as stock issuance costs.
M. SUBSEQUENT EVENT
On November 5, 1997, Intercardia executed a letter of intent ("Letter
of Intent") to purchase all of the outstanding stock of Transcell Technologies,
Inc. ("Transcell") and certain related technology owned by Interneuron in
exchange for Intercardia Common Stock with an aggregate market value as of
November 5, 1997 of approximately $15,000,000. In addition, Intercardia will
issue Intercardia stock options to Transcell employees and consultants with a
market value as of November 5, 1997 of approximately $3,000,000 to $4,000,000.
The transaction is subject to final due diligence and approval by Transcell
Intercardia stockholders. Transcell is a majority-owned subsidiary of
Interneuron and is conducting research and development utilizing
carbohydrate-based combinatorial chemistry. The acquisition will be accounted
for by using the purchase method of accounting.
F-21
<PAGE>
Under the terms of the Letter of Intent, owners of Transcell stock will
receive Intercardia Common Stock in three installments. The first installment,
representing approximately $6,000,000 as of November 5, 1997, will be made upon
closing the transaction, which is estimated to occur in the first calendar
quarter of 1998 (the "Closing"). The number of Intercardia shares to be received
by Transcell stockholders at the Closing will be determined by Intercardia's
stock price during the week prior to Closing. The minimum Intercardia stock
price to be used for determining the number of shares to be issued for the
initial installment will be $19.00 per share and the maximum will be $25.00 per
share. The second and third installments will each consist of approximately
$3,000,000 of Intercardia Common Stock, as valued at each date, and will be
issued 15 and 21 months after Closing.
In exchange for certain license and technology rights owned by
Interneuron, and for Interneuron's continuing guarantee of certain of
Transcell's lease obligations, Intercardia will issue to Interneuron $3,000,000
of Intercardia Common Stock (subject to the price range described above) at
Closing and will pay Interneuron a royalty on net sales of certain products that
may result from a research collaboration originally entered into among
Transcell, Interneuron and Merck & Co., Inc.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INTERCARDIA, INC.
By:/s/ Clayton I. Duncan
-----------------------------------
President and Chief Executive Officer
Date: December 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/S/ Clayton I. Duncan Director, President and Chief Executive December 19, 1997
- ---------------------------------------- Officer (Principal Executive Officer)
Clayton I. Duncan
/S/ Richard W. Reichow Senior Vice President, Chief Financial December 19, 1997
- ---------------------------------------- Officer and Treasurer (Principal Financial
Richard W. Reichow and Accounting Officer)
/S/ Glenn L. Cooper, M.D. Director December 19, 1997
- ----------------------------------------
Glenn L. Cooper, M.D.
/S/ Joseph J. Ruvane, Jr. Director December 19, 1997
- ----------------------------------------
Joseph J. Ruvane, Jr.
/S/ David B. Sharrock Director December 19, 1997
- ----------------------------------------
David B. Sharrock
</TABLE>
<PAGE>
EXHIBIT 10.8
INTERCARDIA, INC.
1994 STOCK OPTION PLAN, AS AMENDED
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for INTERCARDIA, INC. (the
"Company") and its shareholders the benefits arising from capital stock
ownership by employees, officers and directors of, and consultants or advisors
to, the Company, the Company's parent, Interneuron Pharmaceuticals, Inc.
("Interneuron") and the Company's subsidiary corporations who are expected to
contribute to the Company's future growth and success. Those provisions of the
Plan which make express reference to Section 422 shall apply only to Incentive
Stock Options (as that term is defined in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) TYPES OF OPTIONS. Options granted pursuant to the Plan shall be authorized
by action of the Board of Directors of the Company (or a Committee designated by
the Board of Directors) and may be either incentive stock options ("Incentive
Stock Options") meeting the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended or replaced from time to time (the "Code") or
non-statutory options which are not intended to meet the requirements of Section
422 of the Code.
(b) ADMINISTRATION. The Plan will be administered by the Board of Directors or a
committee (the "Committee") appointed by the Board of Directors of the Company,
whose construction and interpretation of the terms and provisions of the Plan
shall be final and conclusive. The delegation of powers to the Committee shall
be consistent with applicable laws or regulations (including, without
limitation, applicable state law and Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule
16b-3")). The Committee may in its sole discretion grant options to purchase
shares of the Company's Common Stock, $.001 par value per share ("Common
Stock"), and issue shares upon exercise of such options as provided in the Plan.
The Committee shall have authority, subject to the express provisions of the
Plan, to construe the respective option agreements and the Plan, to prescribe,
amend and rescind rules and regulations relating to the Plan, to determine the
terms and provisions of the respective option agreements, which need not be
identical, and to make all other determinations in the judgment of the Committee
necessary or desirable for the administration of the Plan. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any option agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect and it shall be the sole and final judge
of such expediency. No director or person acting pursuant to authority delegated
by the Board of Directors shall be liable for any action or determination under
the Plan made in good faith. Subject to adjustment as provided in Section 15
below, the aggregate number of shares of
<PAGE>
Common Stock that may be subject to options granted to any person in a calendar
year shall not exceed 300,000 shares.
(c) APPLICABILITY OF RULE 16B-3. Those provisions of the Plan which make express
reference to Rule 16b-3 shall apply to the Company only at such time as the
Company's Common Stock is registered under the Exchange Act, subject to the last
sentence of Section 3(b), and then only to such persons as are required to file
reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) GENERAL. Options may be granted to persons who are, at the time of grant,
employees, officers or directors of, or consultants or advisors to, the Company,
Interneuron, or any subsidiaries of the Company as defined in Sections 424(e)
and 424(f) of the Code ("Participants") provided, that Incentive Stock Options
may only be granted to individuals who are employees of the Company (within the
meaning of Section 3401(c) of the Code). A person who has been granted an option
may, if he or she is otherwise eligible, be granted additional options if the
Committee shall so determine.
(b) GRANT OF OPTIONS TO REPORTING PERSONS. The selection of a director or an
officer who is a Reporting Person (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors,
[provided all members thereof are "Non-Employee Directors" as hereinafter
defined] (ii) by a committee of the Board of Directors that is composed solely
of two or more Non-Employee Directors having full authority to act in the matter
or (iii) pursuant to provisions for automatic grants set forth in Section 3(c)
below. For the purposes of the Plan, a director shall be deemed to be a
"Non-Employee Director" only if such person is described in Rule 16b-3(b)(3) as
interpreted from time to time. [If at least two of the members of the Board of
Directors do not qualify as Non-Employee Directors within the meaning of Rule
16b-3, as such term is interpreted from time to time, then the granting of
options to officers and directors who are Reporting Persons under the Plan shall
not be determined in accordance with this Section 3(b) but shall be determined
in accordance with the other provisions of the Plan].
(c) DIRECTORS' OPTIONS. Directors of the Company who are not employees
("Eligible Directors") will receive an option ("Initial Director Option") to
purchase 5,000 shares of Common Stock on the date that such person first becomes
an Eligible Director. As long as an Eligible Director is a member of the Board
of Directors, such Eligible Director will automatically be granted a stock
option ("Automatic Grant") to purchase 3,000 shares of Common Stock on the day
of each annual meeting of stockholders, except for Eligible Directors who
received an Initial Director Option since the most recent Automatic Grant.
2
<PAGE>
The exercise price for each share subject to a Director Option shall be equal to
the fair market value of the Common Stock on the date of grant. Director Options
shall become exercisable in 36 equal monthly installments commencing one month
from the date the option is granted and will expire the earlier of 10 years
after the date of grant or 90 days after the termination of the director's
service on the Board.
4. STOCK SUBJECT TO PLAN.
The stock subject to options granted under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. Subject to adjustment as
provided in Section 15 below, the maximum number of shares of Common Stock of
the Company which may be issued and sold under the Plan is 2,500,000. If an
option granted under the Plan shall expire, terminate or is cancelled for any
reason without having been exercised in full, the unpurchased shares subject to
such option shall again be available for subsequent option grants under the
Plan.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient of an
option shall execute an option agreement in such form not inconsistent with the
Plan as may be approved by the Board of Directors. Such option agreements may
differ among recipients.
6. PURCHASE PRICE.
(a) GENERAL. The purchase price per share of stock deliverable upon the exercise
of an option shall be determined by the Board of Directors or the Committee at
the time of grant of such option; PROVIDED, HOWEVER, that in the case of an
Incentive Stock Option, the exercise price shall not be less than 100% of the
Fair Market Value (as hereinafter defined) of such stock, at the time of grant
of such option, or less than 110% of such Fair Market Value in the case of
options described in Section 11(b). "Fair Market Value" of a share of Common
Stock of the Company as of a specified date for the purposes of the Plan shall
mean the closing price of a share of the Common Stock on the principal
securities exchange (including the Nasdaq National Market) on which such shares
are traded on the day as of which Fair Market Value is being determined, or on
the next preceding date on which such shares are traded if no shares were traded
on such day, or if the shares are not traded on a securities exchange, Fair
Market Value shall be deemed to be the average of the high bid and low asked
prices
3
<PAGE>
of the shares in the over-the-counter market on the day immediately preceding
the date as of which Fair Market Value is being determined or on the next
preceding date on which such high bid and low asked prices were recorded. If the
shares are not publicly traded, Fair Market Value of a share of Common Stock
(including, in the case of any repurchase of shares, any distributions with
respect thereto which would be repurchased with the shares) shall be determined
in good faith by the Board of Directors. In no case shall Fair Market Value be
determined with regard to restrictions other than restrictions which, by their
terms, will never lapse.
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide for
the payment of the exercise price by delivery of cash or a check to the order of
the Company in an amount equal to the exercise price of such options, or by any
other means which the Board of Directors determines are consistent with the
purpose of the Plan and with applicable laws and regulations (including, without
limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the
Federal Reserve Board).
7. OPTION PERIOD.
Subject to earlier termination as provided in the Plan, each option and all
rights thereunder shall expire on such date as determined by the Board of
Directors or the Committee and set forth in the applicable option agreement,
PROVIDED, that such date shall not be later than (10) ten years after the date
on which the option is granted.
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full or in
installments at such time or times and during such period as shall be set forth
in the option agreement evidencing such option, subject to the provisions of the
Plan. No option granted to a Reporting Person for purposes of the Exchange Act,
however, shall be exercisable during the first six months after the date of
grant. Subject to the requirements in the immediately preceding sentence, if an
option is not at the time of grant immediately exercisable, the Board of
Directors may (i) in the agreement evidencing such option, provide for the
acceleration of the exercise date or dates of the subject option upon the
occurrence of specified events, and/or (ii) at any time prior to the complete
termination of an option, accelerate the exercise date or dates of such option.
9. TRANSFERABILITY OF OPTIONS.
(a) No Incentive Stock Option granted under this Plan shall be assignable or
otherwise transferable by the optionee except by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
in the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. An
4
<PAGE>
Incentive Stock Option may be exercised during the lifetime of the optionee only
by the optionee.
(b) Any option granted under the Plan other than an Incentive Stock Option shall
be transferable by the optionee to members of his or her family or otherwise by
will or by the laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder. For purposes of the
Plan, an optionee's "family members" shall be deemed to consist of his or her
spouse, parents, children, grandparents, grandchildren and any trusts created
for the benefit of such individuals. A family member to whom an option has been
transferred pursuant to this Section 9(b) shall be hereinafter referred to as a
"Permitted Transferee". An option shall be transferred to a Permitted Transferee
in accordance with the foregoing provisions by the optionee's execution of an
assignment in writing in such form approved by the Board of Directors or the
Committee. The Company shall not be required to recognize the rights of a
Permitted Transferee until such time as it receives a copy of the assignment
from the optionee.
(c) In the event an optionee dies during his employment by the Company or any of
its subsidiaries, or during the three-month period following the date of
termination of such employment, his options shall thereafter be exercisable,
during the period specified in the option agreement, by his executors,
administrators or Permitted Transferees to the full extent to which such options
were exercisable by the optionee at the time of his death during the periods set
forth in Section 10 or 11(d).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive Stock Options and
except as otherwise determined by the Committee at the date of grant of an
option, and subject to the provisions of the Plan, an optionee or his Permitted
Transferee may exercise an option at any time within three (3) months following
the termination of the optionee's employment or other relationship with the
Company or within one (1) year if such termination was due to the death or
disability of the optionee but, except in the case of the optionee's death, in
no event later than the expiration date of the option. If the termination of the
optionee's employment or other relationship with the Company is for cause or is
otherwise attributable to a breach by the optionee of an employment, consulting,
confidentiality or non-disclosure agreement, the option shall expire immediately
upon such termination. The Board or Directors shall have the power to determine
what constitutes a termination for cause or a breach of an employment,
consulting, confidentiality or non-disclosure agreement, whether an optionee has
been terminated for cause or has breached such an agreement, and the date upon
such termination for cause or breach occurs. Any such determinations shall be
final and conclusive and binding upon the optionee.
5
<PAGE>
11. INCENTIVE STOCK OPTIONS
Options granted under the Plan which are intended to be Incentive Stock Options
shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options.
(b) 10% STOCKHOLDER. If any employee to whom an Incentive Stock Option is to be
granted under the Plan is, at the time of the grant of such option, the owner of
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company (after taking into account the attribution of stock
ownership rules of Section 424(d) of the Code), then the following special
provisions shall be applicable to the Incentive Stock Option granted to such
individual:
(i) The purchase price per share of the Common Stock subject to such Incentive
Stock Option shall not be less than 110% of the Fair Market Value of one share
of Common Stock at the time of grant; and
(ii) the option exercise period shall not exceed five years from the date of
grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options granted
to any employee under the Plan (and any other incentive stock option plans of
the Company) which are intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such options, in the
aggregate, become exercisable for the first time in any one calendar year for
shares of Common Stock with an aggregate Fair Market Value, as of the respective
date or dates of grant, of more than $100,000.
(d) TERMINATION OF EMPLOYMENT. Death or Disability. No Incentive Stock Option
may be exercised unless, at the time of such exercise, the optionee is, and has
been continuously since the date of grant of his or her option, employed by the
Company, except that:
(i) an Incentive Stock Option may be exercised within the period of three months
after the date the optionee ceases to be an employee of the Company (or within
such lesser period as may be specified in the applicable option agreement),
provided, that the agreement with respect to such option may designate a longer
exercise period and that the exercise after such three-month period shall be
treated as the exercise of a non-statutory option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or within three
months after the optionee ceases to be such an employee, the Incentive Stock
Option may be exercised by the person to whom it is transferred by will or the
laws of descent and
6
<PAGE>
distribution within the period of one year after the date of death (or within
such lesser period as may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3)
of the Code or any successor provisions thereto) while in the employ of the
Company, the Incentive Stock Option may be exercised within the period of one
year after the date the optionee ceases to be such an employee because of such
disability (or within such lesser period as may be specified in the applicable
option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. ADDITIONAL PROVISIONS.
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors or the Committee may,
in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation
restrictions on transfer, repurchase rights, rights of first refusal,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors; PROVIDED, that such
additional provisions shall not be inconsistent with any other term or condition
of the Plan and such additional provisions shall not cause any Incentive Stock
Option granted under the Plan to fail to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Code.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised; PROVIDED, HOWEVER, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3 (if applicable).
13. GENERAL RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. The Company may require any person to whom an
option is granted, as a condition of exercising such option or award, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option or
award, for his or her own account for investment and not with any present
intention of selling or otherwise distributing the same, and to such other
effects as the Company deems necessary or appropriate in order to comply with
federal and applicable state securities laws, or with covenants or
representations made by the Company in connection with
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any public offering of its Common Stock, including any "lock-up" or other
restriction on transferability.
(b) COMPLIANCE WITH SECURITIES LAW. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
or award upon any securities exchange or automated quotation system or under any
state or federal law, or the consent or approval of any governmental or
regulatory body, or that the disclosure of non-public information or the
satisfaction of any other condition is necessary as a condition of, or in
connection with the issuance or purchase of shares thereunder, such option or
award may not be exercised, in whole or in part, unless such listing,
registration, qualification, consent or approval, or satisfaction of such
condition shall have been effected or obtained on conditions acceptable to the
Board of Directors or the Committee. Nothing herein shall be deemed to require
the Company to apply for or to obtain such listing, registration or
qualification, or to satisfy such condition.
14. RIGHTS AS A STOCKHOLDER.
The holder of an option shall have no rights as a stockholder with respect to
any shares covered by the option (including, without limitation, any rights to
receive dividends or non-cash distributions with respect to such shares) until
the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATIONS AND RELATED
TRANSACTIONS.
(a) RECAPITALIZATIONS AND RELATED TRANSACTIONS. If, through or as a result of
any recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, (i) the outstanding shares of Common
Stock are increased, decreased or exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other non-cash assets are distributed with respect to such
shares of Common Stock or other securities, an appropriate and proportionate
adjustment shall be made in (x) the maximum number and kind of shares reserved
for issuance under or otherwise referred to in the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment (i) would cause the Plan
to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would
be considered as the adoption of a new plan requiring stockholder approval.
(b) REORGANIZATION, MERGER AND RELATED TRANSACTIONS. All outstanding options
under the Plan shall become fully exercisable for a period of sixty
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(60) days following the occurrence of any Trigger Event, whether or not such
options are then exercisable under the provisions of the applicable agreements
relating thereto. For purposes of the Plan, a "Trigger Event" is any one of the
following events:
(i) the date on which shares of Common Stock are first purchased pursuant to a
tender offer or exchange offer (other than such an offer by the Company, any
Subsidiary, any employee benefit plan of the Company or of any Subsidiary or any
entity holding shares or other securities of the Company for or pursuant to the
terms of such plan), whether or not such offer is approved or opposed by the
Company and regardless of the number of shares purchased pursuant to such offer;
(ii) the date the Company acquires knowledge that any person or group deemed a
person under Section 13(d)-3 of the Exchange Act (other than the Company,
Interneuron, any Subsidiary, any employee benefit plan of the Company or of any
Subsidiary or any entity holding shares of Common Stock or other securities of
the Company for or pursuant to the terms of any such plan or any individual or
entity or group or affiliate thereof which acquired its beneficial ownership
interest prior to the date the Plan was adopted by the Board), in a transaction
or series of transactions, has become the beneficial owner, directly or
indirectly (with beneficial ownership determined as provided in Rule 13d-3, or
any successor rule, under the Exchange Act), of securities of the Company
entitling the person or group to 30% or more of all votes (without consideration
of the rights of any class or stock to elect directors by a separate class vote)
to which all stockholders of the Company would be entitled in the election of
the Board of Directors were an election held on such date;
(iii) the date, during any period of two consecutive years, when individuals who
at the beginning of such period constitute the Board of Directors of the Company
cease for any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the stockholders of the Company, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period; and
(iv) the date of approval by the stockholders of the Company of an agreement (a
"reorganization agreement") providing for:
(A) The merger or consolidation of the Company with another corporation where
the stockholders of the Company, immediately prior to the merger or
consolidation, do not beneficially own, immediately after the merger or
consolidation, shares of the corporation issuing cash or securities in the
merger or consolidation entitling such stockholders to 80% or more of all votes
(without consideration of the rights of any class of stock to elect directors by
a separate class vote) to which all stockholders of such corporation would be
entitled in the election of directors or where the members of the Board of
Directors of the Company, immediately prior to the merger or consolidation, do
not, immediately after the merger or consolidation, constitute a
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majority of the Board of Directors of the corporation issuing cash or securities
in the merger or consolidation; or
(B) The sale or other disposition of all or substantially all the assets of the
Company.
(C) Board Authority to Make Adjustments. Any adjustments under this Section 15
will be made by the Board of Directors or the Committee, whose determination as
to what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) GENERAL. In the event of any sale, merger, transfer or acquisition of the
Company or substantially all of the assets of the Company in which the Company
is not the surviving corporation, and provided that after the Company shall have
requested the acquiring or succeeding corporation (or an affiliate thereof),
that equivalent options shall be substituted and such successor corporation
shall have refused or failed to assume all options outstanding under the Plan or
issue substantially equivalent options, then any or all outstanding options
under the Plan shall accelerate and become exercisable in full immediately prior
to such event. The Committee will notify holders of options under the Plan that
any such options shall be fully exercisable for a period of fifteen (15) days
from the date of such notice, and the options will terminate upon expiration of
such notice.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, Interneuron, or a subsidiary of the Company,
Interneuron, as the result of a merger or consolidation of the employing
corporation with the Company or a subsidiary of the Company, Interneuron, or as
a result of the acquisition by the Company, Interneuron, or one of its
subsidiaries, of property or stock of the employing corporation. The Company may
direct that substitute options be granted on such terms and conditions as the
Board of Directors considers appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any optionee
any right with respect to the continuation of his or her employment by the
Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. OTHER EMPLOYEE BENEFITS.
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Except as to plans which by their terms include such amounts as compensation,
the amount of any compensation deemed to be received by an employee as a result
of the exercise of an option or the sale of shares received upon such exercise
will not constitute compensation with respect to which any other employee
benefits of such employee are determined, including, without limitation,
benefits under any bonus, pension, profit-sharing, life insurance or salary
continuation plan, except as otherwise specifically determined by the Board of
Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect; provided, however, that if at any time the
approval of the stockholders of the Company is required under Section 422 of the
Code or any successor provision with respect to Incentive Stock Options, or
under Rule 16b-3, the Board of Directors may not effect such modification or
amendment without such approval; and provided, further, that the provisions of
Section 3(c) hereof shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employer Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
(b) The modification or amendment of the Plan shall not, without the consent of
an optionee, affect his or her rights under an option previously granted to him
or her. With the consent of the optionee affected, the Board of Directors or the
Committee may amend outstanding option agreements in a manner not inconsistent
with the Plan. The Board of Directors shall have the right to amend or modify
(i) the terms and provisions of the Plan and of any outstanding Incentive Stock
Options granted under the Plan to the extent necessary to qualify any or all
such options for such favorable federal income tax treatment (including deferral
of taxation upon exercise) as may be afforded incentive stock options under
Section 422 of the Code and (ii) the terms and provisions of the Plan and of any
outstanding option to the extent necessary to ensure the qualification of the
Plan under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a Fair
Market Value equal to such withholding obligation as of the date that the amount
of tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his
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or her withholding obligation with shares of Common Stock which are not subject
to any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
(b) The acceptance of shares of Common Stock upon exercise of an Incentive Stock
Option shall constitute an agreement by the optionee (i) to notify the Company
if any or all of such shares are disposed of by the optionee within two years
from the date the option was granted or within one year from the date the shares
were issued to the optionee pursuant to the exercise of the option, and (ii) if
required by law, to remit to the Company, at the time of and in the case of any
such disposition, an amount sufficient to satisfy the Company's federal, state
and local withholding tax obligations with respect to such disposition, whether
or not, as to both (i) and (ii), the optionee is in the employ of the Company at
the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting Person whose
options have been granted in accordance with the provisions of Section 3(b)
herein, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors or the Committee shall have the authority to effect, at
any time and from time to time, with the consent of the affected optionees, (i)
the cancellation of any or all outstanding options under the Plan and the grant
in substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of
Directors, but no Incentive Stock Option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, no options previously
granted under the Plan shall be deemed to be Incentive Stock Options and no
Incentive Stock Options shall be granted thereafter. Amendments to the Plan not
requiring stockholder approval shall become effective when adopted by the Board
of Directors; amendments requiring stockholder approval (as provided in Section
19) shall become effective when adopted by the Board of Directors, but no
Incentive Stock Option granted after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was required to
enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
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Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with Section 16, the
Plan shall terminate upon the earlier of (i) the close of business on the day
next preceding the tenth anniversary of the date of its adoption by the Board of
Directors, or (ii) the date on which all shares available for issuance under the
Plan shall have been issued pursuant to the exercise or cancellation of options
granted under the Plan. If the date of termination is determined under (i)
above, then options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
23. GOVERNING LAW.
The provisions of this Plan shall be governed and construed in accordance with
the laws of the State of Delaware without regard to the principles of conflicts
of laws.
Adopted by the Board of Directors on October 31, 1994.
As amended by the Board of Directors through December 12, 1997.
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EXHIBIT 10.23
SPONSORED RESEARCH AGREEMENT
RESEARCH AGREEMENT, effective 1 July, 1997, by and between The
University of North Carolina at Chapel Hill, having an address at 308 Bynum
Hall, Chapel Hill, North Carolina (the "University"), and Renaissance Cell
Technologies, Inc., a corporation existing under the laws of the State of
Delaware, and having an address P.O. Box 14287, Research Triangle Park, North
Carolina 27709 (the "Sponsor").
WITNESSETH:
WHEREAS, in pursuit of its educational purposes, which include research
and training, the University undertakes scholarly research and experimental
activities in a variety of academic disciplines; and
WHEREAS, the Sponsor wishes to fund, and desires that the University
undertake, a research program in accordance with said research and training
mission, which research program is described more fully in Exhibit A, attached
hereto and made a part hereof (hereinafter, the "Research"); and
WHEREAS, in furtherance of its scholarly research and instructional
interests, the University is willing to undertake the Research upon the terms
and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. Scope of Research
During the term of this Agreement, the University shall use its best
efforts to perform the Research, as described in Exhibit A, attached
hereto and made a part hereof and will furnish the equipment and
facilities necessary to carry out such Research. Notwithstanding the
foregoing, the University makes no warranties or representations
regarding its ability to achieve, nor shall it be bound hereby to
accomplish, any particular research objective or results.
2. Personnel
The research shall be performed by, and under the supervision and
direction of, Dr. Lola M. Reid, who shall be designated the Principal
Investigator, together with such additional personnel as may be
assigned by the University. The University covenants that all personnel
and entities (including any other universities or other organizations)
performing research hereunder have an, and shall be notified in writing
of their, obligation to assign all of their rights, title and interest
to and in any invention resulting from the Research to the University.
If for any reason the Principal Investigator is unable to continue to
serve as Principal Investigator, and a successor acceptable to both the
University and the Sponsor is not available, this agreement may be
terminated as provided in Article 10(b).
<PAGE>
3. University Policies and Procedures
All research conducted hereunder shall be performed in accordance with
established University policies and procedures, including, but not
limited to, policies and procedures applicable to research involving
human subjects, laboratory animals, and hazardous agents and materials.
4. Reimbursement of Costs.
The Sponsor shall reimburse the University for all direct and indirect
costs incurred by the University in connection with the Research in an
amount not to exceed $450,000.00 per year for each of the first two (2)
years hereunder ($50,000 of which in each of the first two years shall
be for building upfit). After the first two years, the parties shall
agree to each following year's budget prior to commencement of such
year. Of such annual funding amount, excluding building upfit, not more
than twenty-five percent (25%) shall be applied to the University's
indirect costs. Provided, however, that the University may submit to
the Sponsor at any time, and the Sponsor may at its discretion approve
in writing, requests for additional funds. University shall keep
accurate financial records relating to the Research and shall make such
records reasonably available to Sponsor. However, the Sponsor is not
liable for any cost in excess of the amount specified herein, unless
this Agreement is modified to indicate such in writing by both parties.
All checks shall be made payable to The University of North Carolina at
Chapel Hill, shall include reference to the University Principal
Investigator and his department, and shall be sent to: S. Kent Walker,
440 W. Franklin St., CB#1350, UNC-CH, Chapel Hill, NC 27599-1350.
Payments shall be made in accordance with the following schedule:
one-quarter (1/4) of the annual budget on the date of signing of the
agreement, and equal quarterly payments thereafter for the term of the
agreement.
5. Research Reports
The University through the Principal Investigator shall prepare and
maintain records, including bound laboratory notebooks maintained in
accordance with generally accepted standard scientific procedures
containing all appropriate data reflecting results of the Research,
with each page containing at least two (2) signatures. The Principal
Investigator shall furnish to the Sponsor during the term of this
Agreement periodic informal written reports regarding the progress of
the Research. A final report setting forth the significant research
findings shall be prepared by the Principal Investigator and submitted
to the Sponsor within ninety (90) days following the expiration of the
term of this Agreement or the effective date of early termination, as
set forth in Article 10. In addition, the Principal Investigator will
make oral technical reports to Sponsor not less frequently than
quarterly relating to research activities conducted and results and
accomplishments achieved therefrom during the prior quarter in
connection with the Research. Sponsor will have the opportunity to
observe the work being carried on by the University in its laboratories
on a reasonable basis.
6. Publication
The University reserves, on behalf of the Principal Investigator and
other University employees and/or students, the right to disseminate
information, or to publish any material resulting from the Research;
provided, however, the University shall make no such disclosure unless
the University shall have provided the Sponsor with a copy of any
proposed publication forty-five (45) days in advance of the submission
by the University or any University author to a third party of any
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written materials intended for publication. If the Sponsor notifies the
University that proposed disclosure contains Sponsor's Confidential
Information, the University shall remove or cause the author to remove
such Sponsor Confidential Information prior to submission for
publication or other public disclosure. The Sponsor may request, and
the University shall agree to, a delay of such proposed publication for
an additional period, not to exceed forty-five (45) days, in order to
protect the potential patentability of any invention described therein
by having the University prepare and file a patent application. The
Sponsor, at its election, shall be entitled to receive in any such
publication an acknowledgment of its sponsorship of the Research. It is
specifically agreed that nothing contained in this agreement will
interfere with the publication or oral defense of research theses and
dissertations of graduate students.
7. Proprietary Information
All confidential information of either party disclosed to the other
party in connection with the Research hereunder ("Confidential
Information") will be treated by the receiving party as confidential
and restricted in its use to only those uses contemplated by the terms
of this Agreement. Any information which is to be treated as
confidential must be clearly marked as confidential prior to
transmittal to the other party. If such Confidential Information is
disclosed orally, it shall be identified as being confidential at the
time of disclosure, and shall thereafter be reduced to writing within
30 days, marked as confidential, and transmitted to the receiving
party. The Sponsor may submit Confidential Information only to the
Principal Investigator, who shall be free to refuse to accept such
Confidential Information. The obligations of this paragraph shall
survive and continue for five (5) years after termination of this
Agreement. Specifically excluded from such confidential treatment shall
be information which: (a) is or becomes part of the public domain,
through no fault of the receiving party; (b) is lawfully disclosed to
the receiving party by a third party who is not obligated to retain
such information in confidence; (c) is independently developed at the
receiving party by someone not privy to the confidential information;
(d) is required to be disclosed to comply with applicable laws or
governmental regulations, provided that the disclosing party receives
prior notice of such disclosure and that the receiving party takes all
reasonable and lawful actions to minimize the extent of such
disclosure, and if possible to avoid such disclosure; or (e) as of the
date of its disclosure and/or delivery is already known to the party
receiving such information, except in the case of disclosures of
information between Sponsor and the Principal Investigator.
Each party shall retain full ownership of all its Confidential
Information in the possession of the other party. At the termination of
this Agreement, each party shall secure the return of, or destroy, any
Confidential Information that is in its possession and that is in its
possession and that is owned by the other party, except that each party
may retain one copy of such Confidential Information for archival
purposes.
8. Results of the Research
(a) All rights in any inventions or discoveries, whether or not
patentable, that are developed, conceived or reduced to practice in the
course of the Research solely by University employees shall be property
of the University ("University Inventions"). All rights in any
inventions or discoveries whether or not patentable, that are
developed, conceived or reduced to practice jointly by University
employees and Sponsor employees in the course of the Research shall be
jointly owned by the University and the Sponsor ("Joint Inventions").
All rights in any inventions or discoveries whether or not patentable,
that are developed, conceived or reduced to practice in the course of
the
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Research solely by Sponsor employees shall be property of the Sponsor.
The University shall promptly report to the Sponsor any University
Inventions or Joint Inventions by University employees.
(b) The University hereby grants the Sponsor a first option to obtain
an exclusive license under any University Inventions or Joint
Inventions that are developed, conceived during the term of this
Agreement, or reduced to practice during the term of this Agreement or
during the one-year period following termination of this Agreement. The
University agrees to notify the Sponsor of any such inventions promptly
and in writing. This option for University Inventions or Joint
Inventions shall become effective when the Sponsor receives notice from
the University and shall remain open for ninety (90) days. During this
ninety (90) day period, the University will make available to the
Sponsor information that the Sponsor reasonably requests which would be
useful and necessary in evaluating such University Invention or Joint
Invention, subject to reasonable confidentiality requirements that may
be imposed by the University. The Sponsor shall indicate the exercise
of its option by written notification to the University. Upon receipt
of such notice, the University and Sponsor shall negotiate an exclusive
license under such University Invention or Joint Invention under the
terms of the attached Principles of License Agreement.
(c) If the Sponsor fails to exercise its exclusive license option to
any University Invention or Joint Invention within the applicable
option period, or if the Sponsor notifies the University in writing
that it will not exercise such option, then the University shall be
free to offer its rights in such University Invention to any third
party or to offer its rights in such Joint Invention to any third
parties, subject, for one year after Sponsor's failure to exercise its
exclusive option, to the requirement that the University not offer such
rights to any other party on terms and conditions more favorable to
such third party than those offered to Sponsor. The foregoing
notwithstanding, the Sponsor retains its rights in any Joint Invention.
(d) During any option period applicable to a University Invention, the
University agrees, if requested by the Sponsor, to cause U.S. or
foreign patent applications to be filed and prosecuted in its name at
the Sponsor's expense, using patent counsel reasonably acceptable to
the Sponsor. The University shall consult with the Sponsor regarding
the preparation, filing, prosecution, and maintenance or such patent
applications and shall furnish to the Sponsor copies of documents
relating thereto in sufficient time to enable the Sponsor to comment on
them prior to filing. If the Sponsor declines to license such
University Invention, then the University shall have no further
obligation to obtain patent protection for such University Invention
and the Sponsor shall have no further obligation to reimburse the
University for its expenses. If the Sponsor elects to license such
University Invention, then the responsibility for patenting such
University Invention and any associated expenses shall be governed by
the terms of the resulting license agreement. In the event that the
University desires to file a patent application with respect to a
University Invention, and the Sponsor does not agree to reimburse the
University's expenses by written confirmation made within sixty (60)
days after the receipt of written notification from the University of
its intent to file such patent application, the University may file and
prosecute such patent at its own expense and the Sponsor shall have no
further rights under this Agreement with respect to such University
Invention and University shall be free to license to third parties.
(e) During any option period applicable to a Joint Invention, the
Sponsor shall have the first right to cause patent applications to be
filed and prosecuted in the names of both parties at the Sponsor's
expense using patent counsel reasonably acceptable to the University.
The Sponsor shall consult with the University regarding preparation,
filing, prosecution, and maintenance of such
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patent applications and shall furnish to the University copies of
documents relating thereto in sufficient time to enable the University
to comment on them prior to filing. If the Sponsor elects to license
such Joint Invention pursuant to Section 8(b) hereof, then the
responsibility for patenting such Joint Invention and any associated
expenses shall be governed by the terms of the License Agreement. If
the Sponsor elects not to license such Joint Invention or not to seek
patent protection for such Joint Invention, then the University shall
be free to cause patent applications to be filed and prosecuted in the
names of both parties at the University's expense using patent counsel
reasonably acceptable to the Sponsor. The University shall consult with
the Sponsor regarding the preparation, filing, prosecution, maintenance
of such patent applications and shall furnish to the Sponsor copies of
documents relating thereto in sufficient time to enable the sponsor to
comment on them prior to filing.
9. Ownership Of Property
Title to any equipment purchased or manufactured by the University in
the performance of the work funded under this Agreement shall vest in
the University; provided, however, the Principal Investigator shall be
entitled at all times to designate the placement of and access to such
equipment in the Principal Investigator's laboratory or such other
location at the University as designated by the Principal Investigator
and approved by the Principal Investigator's Department Chair.
10. Term and Termination
(a) This Agreement shall commence on the date hereof and remain in
effect until terminated by mutual consent. In addition, either party
may terminate this Agreement upon twelve (12) months' prior written
notice to the other; provided, however, that no such notice may be
given prior to the first anniversary of the date hereof.
(b) Upon receipt of notice of termination, the University shall use its
best efforts promptly to limit or terminate any outstanding commitments
and to conclude the work. All costs associated with such termination
shall be reimbursable, including, without limitation, all
non-reimbursed costs and non-cancelable commitments incurred prior to
the receipt of the notice of termination, such reimbursement together
with other payments not to exceed the total estimated project cost
specified in Article 4.
(c) The provisions of paragraphs 5, 6, 7, 8, 9, 12, 14, 15 and 20 shall
survive such termination of this Agreement.
11. Notices
Any notices given under this Agreement shall be in writing and shall be
deemed delivered when sent by first-class mail, postage paid, addressed
to the parties as follows (or at such other addresses as the parties
may notify each other of in writing) :
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The University of North Carolina at Chapel Hill:
Dr. Robert P. Lowman
Associate Vice Provost for Research
Office of Research Services
The University of North Carolina at Chapel Hill
CB #4100, Bynum Hall
Chapel Hill, North Carolina 27599-4100
Sponsor:
Renaissance Cell Technologies, Inc.
P.O. Box 14287
Research Triangle Park, North Carolina 27709
Attention: W. Bennett Love
12. Use of University Name
Sponsor shall not employ or use the name of the University in any
promotional materials, advertising, or in any other manner without the
prior express written permission of the University, except that Sponsor
and its majority shareholder each may, during the term of this
Agreement, state that it is sponsoring the Research at the University
and to disclose the terms of this Agreement to prospective investors,
sublicensees, investment bankers, regulatory authorities, in connection
with its financing, regulatory, development and stockholder relations
activities or that it may deem to be required in any prospectus,
offering memorandum, or other document or filing prepared in connection
with Sponsor's compliance obligations under applicable securities laws
or other applicable law or regulation; provided, that Sponsor uses the
following language, or a reasonably approximation thereof: (1)
"...based upon inventions licensed from the University of North
Carolina at Chapel Hill;" or (2) "...based upon research conducted at
the University of North Carolina at Chapel Hill." Otherwise Sponsor
shall have given University at least five (5) days prior written notice
of the proposed text of any such identification or disclosure for the
purpose of giving University the opportunity to comment on such
proposed text. In no event shall the sponsoring of the Research be
considered to be an endorsement by the University of any commercial
product which may result, indirectly or directly, from the Research.
13. Relationship of the Parties
The University, for all purposes related to this Agreement, shall be
deemed an independent contractor of the Sponsor, and nothing in this
Agreement shall be deemed to create a relationship of employment or
agency or to constitute the parties as partners or joint venturers.
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<PAGE>
14. Indemnification
Each of the parties hereby agrees to indemnify, defend and hold
harmless the other, its directors, employees, students and agents from
and against any loss, claim, damage or liability of any kind arising
out of or in connection with the act(s) or failure(s) to act of the
indemnifying party's directors, employees, students or agents in
connection with the performance of this Agreement, and/or involving the
indemnifying party's use and/or possession of the results of the
Research and/or biological samples or other materials provided by the
indemnified party to the indemnifying party pursuant to the Research.
Notwithstanding any other provision of this section, University's
obligations hereunder shall be subject to the provisions of the North
Carolina Tort Claims Act, NCGS 143-291, et seq.
15. No Warranties
The University makes no warranties, either express or implied, as to
any matter, including, without limitation, the results of the research
or any inventions or product, tangible or intangible, conceived,
discovered or developed under this Agreement; or the merchantability or
fitness for a particular purpose of the research results of any such
invention or product. The University shall not be liable for any
direct, consequential or other damages suffered by the use of the
research results or any such invention or product. The University
represents that it has all requisite power and authority to enter into
this Agreement. Each party represents that this Agreement constitutes
the legal, valid and binding obligation of it enforceable against it in
accordance with its terms.
16. Force Majeure
The University shall not be liable for any failure to perform as
required by this Agreement, to the extent such failure to perform is
caused by any reason beyond the University's control, or by reason of
any of the following: labor disturbances or disputes of any kind,
accidents, failure of any required governmental approval, civil
disorders, acts of aggression, acts of God, energy or other
conservation measures, failure of utilities, mechanical breakdowns,
material shortage, disease, or similar occurrences.
17. Severability
In the event that a court of competent jurisdiction holds any provision
of this Agreement to be invalid, such holding shall have no effect on
the remaining provisions of this Agreement, and they shall continue in
full force and effect.
18. Entire Agreement; Amendments
This Agreement and the Exhibits hereto contain the entire agreement
between the parties. No amendments or modifications to this Agreement
shall be effective unless make in writing and signed by authorized
representatives of both parties.
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<PAGE>
19. Similar Research
Nothing in this Agreement shall be construed to limit the freedom of
the University or of its researchers who are participants under this
Agreement, from engaging in similar research made under other grants,
contracts or agreements with parties other than the Sponsor; provided,
that before such similar research is conducted by the Principal
Investigator or by investigators under the supervision of the Principal
Investigator, the University will offer to Sponsor the opportunity to
fund such research at the funding level and on similar terms proposed
by the University to the other party.
20. Governing Law
This Agreement shall be governed by and construed in accordance with
the law of North Carolina.
21. Counterparts
This Agreement may be executed in several counterparts, and each such
counterpart shall be deemed an original and all such counterparts,
taken together, shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers or representatives.
THE UNIVERSITY OF NORTH CAROLINA SPONSOR
AT CHAPEL HILL
By /s/ ROBERT P. LOWMAN By: /s/ RICHARD W. REICHOW
----------------------- ----------------------
Robert P. Lowman, Ph.D. Name: Richard W. Reichow
Associate Vice Provost, ------------------
Office of Research Services Title: Chief Financial Officer
-----------------------
Date 8/19/97 Date: September 4, 1997
-------------- -----------------------
Consented to by Principal Investigator:
By /s/ LOLA M. REID
-----------------
Title Professor
-----------------
Date July 1, 1997
-----------------
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<PAGE>
PRINCIPLES OF LICENSE AGREEMENT
between
THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
and
RENAISSANCE CELL TECHNOLOGIES, INC.
The following are the basic terms under which the University and Sponsor agree
that University shall license to Sponsor all University rights to and in any
University Inventions and Joint Inventions (hereinafter, "Inventions") which are
subject to Article 8 of the foregoing Sponsored Research Agreement:
1. The University shall retain its ownership of any Inventions.
2. As to each Invention, University will grant an exclusive license
(except for any rights which may be held by the United States
Government resulting from any sponsorship by the Government of research
leading to an Invention) to practice the Invention(s). Each such
license will be world-wide and for a term expiring upon expiration of
the patent(s) covering the Invention(s).
3. There will be an issue fee (not to exceed $50,000 and, with respect to
the first license hereunder, 12,500 shares of Sponsor Common Stock) for
any license negotiated hereunder and such license will be
royalty-bearing. The royalty rate for such license will be 1% of the
first $50 million of annual net sales of a product or service; 1-1/2%
of annual net sales between $50 million and $100 million; and 2% of
annual net sales in excess of $100 million. In the event the Sponsor
sublicenses the Invention to a third party, the royalty paid to the
University will not exceed 25% of the royalty received by Sponsor;
subject to a minimum royalty paid to the University of 1% of annual net
sales.
4. Any such license will contain at least the following diligence requirements:
(a) Minimum annual royalties, which shall begin upon first
commercial sale; and
(b) Mutually acceptable milestones or minimum funding of research
according to which reasonable levels of commercialization of
the Invention(s) will be required. Such milestones or minimums
shall be usual and customary for the life sciences industry.
Payments to University upon achievement of such milestones or
minimums shall not exceed $50,000.00 ($100,000.00 in the event
that University is not issued Common Stock pursuant to Section
3 above). Sponsor's failure to achieve negotiated milestones
will result in termination of the license or its conversion to
a non-exclusive license, at University's sole option.
5. Sub-licensing will be permitted, subject to University approval, which
shall not be unreasonably withheld. University shall receive royalties
on sub-license net sales of licensed product as if those net sales were
made by Sponsor, subject to Section 3 above. University shall receive a
percentage of non-royalty consideration received by Sponsor from any
sub-licensee that is commensurate to University's appropriate royalty
set forth above. All sub-licenses will be assigned to University in the
event the Sponsor's license is terminated or converted to a
non-exclusive license.
<PAGE>
6. Sponsor will reimburse University for all reasonable out-of-pocket
expenses necessary to prosecute and maintain patents on the Invention
in the United States and in all mutually agreed-upon foreign countries.
In the event the University wishes to file patent applications in
non-U.S. countries for which the Sponsor is not willing to pay, the
University shall be free to proceed with such filing at its own expense
and the Sponsor shall have no license to the Invention in such
country(ies). Patent counsel shall be chosen by the University, subject
to the reasonable approval of Sponsor where Sponsor is reimbursing
patent expenses.
7. University will not warrant the validity of any patents included in the
license, or the usefulness, accuracy, or safety of Invention(s) and/or
associated know-how.
8. Each of the parties shall indemnify and hold harmless the other, its
directors, employees and students from loss and/or damages arising from
its use and/or possession of the Inventions or from the practice of any
license entered into hereunder. University's obligations hereunder
shall be subject to the North Carolina Tort Claims Act, NCGS 143-291,
et seq.
9. University will reserve the right to use any licensed technology for
its own research, educational and teaching purposes.
10. Additional conventional provisions concerning such things as
record-keeping, assignability, publicity, marking, construction, and
choice of laws will also be negotiated.
2
<PAGE>
EXHIBIT 10.24
SPONSORED RESEARCH AGREEMENT
RESEARCH AGREEMENT, effective July 1, 1997, by and between National
Jewish Medical and Research Center, having an address at 1400 Jackson Street,
Denver, Colorado 80206-2726 ("National Jewish"), and Aeolus Pharmaceuticals,
Inc., a Delaware corporation, and having an address P.O. Box 14287, Research
Triangle Park, North Carolina 27709 (the "Sponsor").
WITNESSETH:
WHEREAS, in pursuit of its research purposes, which include research
and treatment of respiratory, allergic, and immune system diseases, National
Jewish undertakes scholarly research and experimental activities in a variety of
academic disciplines; and
WHEREAS, the Sponsor wishes to fund, and desires that National Jewish
undertake, a research program in accordance with said research and training
mission, which research program is described more fully in Exhibit A, attached
hereto and made a part hereof (hereinafter, the "Research"); and
WHEREAS, in furtherance of its scholarly research and instructional
interests, National Jewish is willing to undertake the Research upon the terms
and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. Scope of Research
During the term of this Agreement, National Jewish shall use its best
efforts to perform the Research, as described in Exhibit A, attached hereto and
made a part hereof and will furnish the equipment and facilities necessary to
carry out such Research. Notwithstanding the foregoing, National Jewish makes no
warranties or representations regarding its ability to achieve, nor shall it be
bound hereby to accomplish, any particular research objective or results.
2. Personnel
The Research shall be performed by, and under the supervision and
direction of, James Crapo, M.D.("Crapo") who shall be designated the Principal
Investigator, together with such additional personnel as may be assigned by
National Jewish. National Jewish covenants that all personnel and entities
including any other organizations) performing research hereunder
<PAGE>
shall execute agreements assigning all of their rights, title and interest to
and in any invention resulting from the Research to National Jewish. If for any
reason the Principal Investigator is unable to continue to serve as Principal
Investigator, and a successor acceptable to both National Jewish and the Sponsor
is not available, this agreement may be terminated as provided in Article 10(a).
3. National Jewish Policies and Procedures
All research conducted hereunder shall be performed in accordance with
established National Jewish policies and procedures, including, but not limited
to, policies and procedures applicable to research involving human subjects,
laboratory animals, and hazardous agents and materials.
4. Payment of Costs
In consideration of National Jewish's performance hereunder, Sponsor
agrees to support National Jewish's costs incurred in performance of the
research in an amount not to exceed $400,000 for the first year, which amount
shall not be exceeded unless mutually agreed upon in writing by Sponsor and,
National Jewish. Sponsor shall make payments to National Jewish according to the
following schedule: Sponsor will pay $100,000 upon or before the execution of
this Research Agreement; and make additional payments of $100,000 on or before
September 30, 1997, December 31, 1997 and March 30, 1998. Notwithstanding the
foregoing, the amount of the payments may be changed upon mutual agreement by
Sponsor and National Jewish.
5. Research Reports
National Jewish through the Principal Investigator shall prepare and
maintain records, including bound laboratory notebooks maintained in accordance
with generally accepted standard scientific procedures for the industry,
containing all appropriate data reflecting results of the Research, with each
page containing at least two (2) signatures. The Principal Investigator shall
furnish to the Sponsor during the term of this Agreement periodic informal
written or oral reports regarding the progress of the Research. Sponsor will
have the opportunity to observe the work being carried on under this Agreement
as mutually agreed to and scheduled by both parties.
6. Publication
National Jewish reserves, on behalf of the Principal Investigator and
other National Jewish employees and/or students, the right to disseminate
information, or to publish any material resulting from the Research; provided,
however, National Jewish shall make no such disclosure unless National Jewish
shall have provided the Sponsor with a copy of any proposed publication
forty-five (45) days in advance of the submission by National Jewish or any
author to a third party of any written materials intended for publication. If
the proposed disclosure contains Sponsor's Confidential Information, National
Jewish shall remove or cause the author
2
<PAGE>
to remove such Sponsor Confidential Information prior to submission for
publication or other public disclosure. The Sponsor may request, and National
Jewish shall agree to, a delay of such proposed publication for an additional
period, not to exceed forty-five (45) days, in order to protect the potential
patentability of any invention described therein by having National Jewish or
Sponsor prepare and file a patent application. All publications resulting from
this Agreement will include an acknowledgement of the research support from the
Sponsor.
7. Proprietary Information
All confidential information of either party disclosed to the other
party in connection with the Research hereunder ("Confidential Information")
will be treated by the receiving party as confidential and restricted in its use
to only those uses contemplated by the terms of this Agreement. Any information
which is to be treated as confidential must be clearly marked as confidential
prior to transmittal to the other party. If such Confidential Information is
disclosed orally, it shall be identified as being confidential at the time of
disclosure, and shall thereafter be reduced to writing within 30 days, marked as
confidential, and transmitted to the receiving party. The Sponsor may submit
Confidential Information only to the Principal Investigator or Brian Day, Ph.D.
("Day"), who shall be free to refuse to accept such Confidential Information.
The obligations of this paragraph shall survive and continue for five (5) years
after termination of this Agreement. Specifically excluded from such
confidential treatment shall be information which: (a) is or becomes part of the
public domain, through no fault of the receiving party; (b) is lawfully
disclosed to the receiving party by a third party who is not obligated to retain
such information in confidence; (c) is independently developed at the receiving
party by someone not privy to the confidential information; (d) is required to
be disclosed to comply with applicable laws or governmental regulations,
provided that the disclosing party receives prior notice of such disclosure and
that the receiving party takes all reasonable and lawful actions to minimize the
extent of such disclosure, and if possible to avoid such disclosure; or (e) as
of the date of its disclosure and/or delivery is already known to the party
receiving such information, except in the case of disclosures of information
relating to the Research hereunder made between Sponsor or consultants of
Sponsor and the Principal Investigator or Day.
Each party shall retain full ownership of all its Confidential
Information in the possession of the other party. At the termination of this
Agreement, each party shall secure the return of, or destroy, any Confidential
Information that is in its possession and that is owned by the other party.
3
<PAGE>
8. Results of the Research
(a) All rights in any inventions or discoveries, whether or not
patentable, that are developed, conceived or reduced to practice in the course
of the Research or within the field of antioxidant compounds, nitrosylating
compounds or related discoveries from the research laboratories of Crapo or Day
solely by any persons, including Crapo or Day who work in their respective
laboratories under their supervision and are students, lab employees or
post-doctoral fellows ("National Jewish Employees") shall be property of
National Jewish ("National Jewish Inventions"). All rights in any inventions or
discoveries whether or not patentable, that are developed, conceived or reduced
to practice jointly by National Jewish Employees and Sponsor employees or
consultants in the course of the Research or within the field of antioxidant
compounds, nitrosylating compounds or related discoveries from the research
laboratories of Crapo or Day shall be jointly owned by National Jewish and the
Sponsor ("Joint Inventions"). Title to any Joint Inventions, developments or
discoveries resulting directly from the Research will be determined in
accordance with U.S. Patent law, Title 35 U.S.C., in effect at the time of the
invention, development or discovery. All rights in any inventions or discoveries
whether or not patentable, that are developed, conceived or reduced to practice
in the course of the Research solely by Sponsor employees or consultants and
without the use of any National Jewish resources or facilities shall be property
of the Sponsor. National Jewish shall promptly report to the Sponsor any
National Jewish Inventions. Both parties agree promptly to inform the other
party of any Joint Inventions. All license negotiation periods for any type of
invention hereunder shall be limited to between 90 and 120 days after the option
to license is exercised. For the purpose of this Section 8 only, any National
Jewish Employees may not be defined as a Sponsor consultant or employee.
(b) National Jewish grants to Sponsor an option to negotiate for a
royalty-bearing exclusive license to any patent application filed by National
Jewish on any National Jewish Invention or Joint Invention resulting from the
Research or within the field of antioxidant compounds, nitrosylating compounds
or related discoveries from the research laboratories of Crapo or Day by
National Jewish Employees and any patents granted thereon, for an initial option
period of ninety (90) days after a patent has been filed on such invention.
Sponsor may elect to extend such option for a period not to exceed one hundred
twenty (120) days, provided the Sponsor reimburses National Jewish for all costs
related to the filing, prosecution and maintenance of said patent(s) or patent
applications. National Jewish and Sponsor agree that the royalty rate and other
license terms to be negotiated in any such license agreement(s) shall be fair,
reasonable, and customary for the industry to which the invention applies. In
addition, the royalty shall reflect the relative contributions of National
Jewish and of Sponsor in making the invention. It is anticipated by the parties
that a reasonable royalty rate on small molecule antioxidant compounds will be
approximately one percent to two percent of ultimate net sales of any product
developed. Royalties on inventions not contemplated in the scope of this
Agreement may result in royalty rates higher than those payable in connection
with the license of small molecule antioxidant compounds. In the event that
National Jewish and Sponsor are not able to reach agreement regarding the terms
of a license agreement for a National Jewish or Joint Invention, National Jewish
shall be free to offer a license (which would be a non-exclusive license in the
case of a Joint Invention) on terms it deems appropriate to third
4
<PAGE>
parties; provided, however, National Jewish shall not offer a license to any
such third party on terms more favorable than those offered to Sponsor without
first offering Sponsor an opportunity to accept a license on the same terms as
National Jewish proposes to offer to such third party.
(c) During any option period applicable to a National Jewish Invention,
National Jewish agrees, if requested by the Sponsor, to cause U.S. or foreign
patent applications to be filed and prosecuted in its name at the Sponsor's
expense, using patent counsel reasonably acceptable to the Sponsor. National
Jewish shall consult with the Sponsor regarding the preparation, filing,
prosecution, and maintenance or such patent applications and shall furnish to
the Sponsor copies of documents relating thereto in sufficient time to enable
the Sponsor to comment on them prior to filing unless in the reasonable opinion
of patent counsel to National Jewish, the filing would be prejudiced in any
material respect by waiting for comments, then no comment period prior to filing
shall be permitted to Sponsor. If the Sponsor declines to license such National
Jewish Invention, then National Jewish shall have no further obligation to
obtain patent protection for such National Jewish Invention and the Sponsor
shall have no further obligation to reimburse National Jewish for its expenses.
If the Sponsor elects to license such National Jewish Invention, then the
responsibility for patenting such National Jewish Invention and any associated
expenses shall be governed by the terms of the resulting license agreement. The
Sponsor will be responsible for reimbursement of patent costs incurred by
National Jewish until National Jewish is notified in writing that the Sponsor
has decided not to license such National Jewish Inventions.
(d) During any option period applicable to a Joint Invention, the
Sponsor shall have the first right to cause patent applications to be filed and
prosecuted in the names of both parties at the Sponsor's expense using patent
counsel reasonably acceptable to National Jewish. The Sponsor shall consult with
National Jewish regarding preparation, filing, prosecution, and maintenance of
such patent applications and shall furnish to National Jewish copies of
documents relating thereto in sufficient time to enable National Jewish to
comment on them prior to filing unless in the reasonable opinion of patent
counsel to Sponsor, the filing would be prejudiced in any material respect by
waiting for comments, then no comment period prior to filing shall be permitted
to National Jewish. If the Sponsor elects to license such Joint Invention
pursuant to Section 8(b) hereof, then the responsibility for patenting such
Joint Invention and any associated expenses shall be governed by the terms of
the License Agreement. If the Sponsor elects not to license such Joint Invention
or not to seek patent protection for such Joint Invention, then National Jewish
shall be free to cause patent applications to be filed and prosecuted in the
names of both parties at National Jewish's expense using patent counsel
reasonably acceptable to the Sponsor. National Jewish shall consult with the
Sponsor regarding the preparation, filing, prosecution, maintenance of such
patent applications and shall furnish to the Sponsor copies of documents
relating thereto in sufficient time to enable the Sponsor to comment on them
prior to filing, unless in the reasonable opinion of patent counsel to National
Jewish, the filing would be prejudiced in any material respect by waiting for
comments, then no comment period prior to filing shall be permitted to Sponsor.
5
<PAGE>
9. Ownership Of Property
Title to any equipment purchased or manufactured by National Jewish in
the performance of the work funded under this Agreement shall vest in National
Jewish; provided, however, the Principal Investigator shall be entitled at all
times to designate the placement of and access to such equipment in the
Principal Investigator's laboratory or such other location at National Jewish as
designated by the Principal Investigator unless such designation conflicts with
National Jewish's property management practices or policies.
10. Term and Termination
(a) This Agreement shall commence on the date hereof and remain in
effect until terminated by mutual consent. In addition, either party may
terminate this Agreement upon three (3) months prior written notice to the
other; provided, however, that no such notice may be given prior to the first
anniversary of the date hereof. Notwithstanding the foregoing, either party may
terminate this Agreement at any time upon thirty (30) days notice to the other
party in the event the parties are unable to agree on an individual to be
designated as the Principal Investigator.
(b) Upon receipt of notice of termination, National Jewish shall use
its best efforts promptly to limit or terminate any outstanding commitments and
to conclude the work. All costs associated with such termination shall be
reimbursable, including, without limitation, all non-reimbursed costs and
non-cancelable commitments incurred prior to the receipt of the notice of
termination, such reimbursement together with other payments not to exceed the
total estimated project cost specified in Article 4.
(c) The provisions of paragraphs 5, 6, 7, 8, 9, 10, 13, 14, and 19
shall survive such termination of this Agreement.
11. Notices
Any notices given under this Agreement shall be in writing and shall be
deemed delivered when sent by first-class mail, postage paid, addressed to the
parties as follows (or at such other addresses as the parties may notify each
other of in writing) :
National Jewish Medical and Research Center:
Name: Judith A. Baskett
Title: Director of Research Administration
1400 Jackson Street
Denver, Colorado 80206-2726
6
<PAGE>
Sponsor:
Aeolus Pharmaceuticals, Inc.
P.O. Box 14287
Research Triangle Park, North Carolina 27709
Attention: Clayton I. Duncan
12. Relationship of the Parties
National Jewish, for all purposes related to this Agreement, shall be
deemed an independent contractor of the Sponsor, and nothing in this Agreement
shall be deemed to create a relationship of employment or agency or to
constitute the parties as partners or joint venturers.
13. Publicity and Use of Name. Both parties agree not to use the other party's
name in any public manner without the prior written approval of the other party
except as provided in Section 6; provided, however, no such restriction shall
apply with respect to disclosures made in connection with compliance by the
disclosing party under federal or state statutes or rules or regulations
promulgated by any regulatory authority.
14. Indemnification
Each of the parties hereby agrees to indemnify, defend and hold harmless the
other, its directors, employees, students and agents from and against any loss,
claim, damage or liability of any kind arising out of or in connection with the
act(s) or failure(s) to act of the indemnifying party's directors, employees or
agents in connection with the performance of this Agreement, and/or involving
the indemnifying party's use and/or possession of the results of the Research
and/or biological samples or other materials provided by the indemnified party
to the indemnifying party pursuant to the Research.
15. No Warranties
National Jewish makes no warranties, either express or implied, as to
any matter, including, without limitation, the results of the research or any
inventions or product, tangible or intangible, conceived, discovered or
developed under this Agreement; or the merchantability or fitness for a
particular purpose of the research results of any such invention or product.
National Jewish shall not be liable for any direct, consequential or other
damages suffered by the use of the research results or any such invention or
product. National Jewish represents that it has all requisite power and
authority to enter into this Agreement. Each party hereby represents that this
Agreement constitutes the legal, valid and binding obligation of such party
enforceable in accordance with its terms.
7
<PAGE>
16. Force Majeure
Each party shall not be liable for any failure to perform as required
by this Agreement, to the extent such failure to perform is caused by any reason
beyond such party's control, or by reason of any of the following: labor
disturbances or disputes of any kind; accidents; failure of any required
governmental approvals; civil disorders; acts of aggression; acts of God; energy
or other conservation measures; failure of utilities; mechanical breakdowns;
material shortages; diseases; or similar occurrences.
17. Severability
In the event that a court of competent jurisdiction holds any provision
of this Agreement to be invalid, such holding shall have no effect on the
remaining provisions of this Agreement, and they shall continue in full force
and effect.
18. Entire Agreement; Amendments
This Agreement and the Exhibits hereto contain the entire agreement
between the parties. No amendments or modifications to this Agreement shall be
effective unless made in writing and signed by authorized representatives of
both parties.
19. Similar Research
Nothing in this Agreement shall be construed to limit the freedom of
National Jewish or of its researchers who are participants under this Agreement,
from engaging in similar research made under other grants, contracts or
agreements with parties other than the Sponsor; provided, that before such
similar research is conducted by the Principal Investigator or by investigators
under the supervision of the Principal Investigator, National Jewish will offer
to Sponsor the opportunity, which shall be deemed rejected if not accepted
within 60 days of receipt, to fund such research at the funding level proposed
by National Jewish to the other party.
20. Governing Law
This Agreement shall be governed by and construed in accordance with
the law of North Carolina except that no conflicts-of-laws provision shall be
applied so as to invoke the application of the laws of any other jurisdiction.
21. Counterparts
This Agreement may be executed in several counterparts, and each such
counterpart shall be deemed an original and all such counterparts, taken
together, shall constitute one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers or representatives.
NATIONAL JEWISH MEDICAL AEOLUS PHARMACEUTICALS, INC.
AND RESEARCH CENTER
By: /s/ J.A. BASKETT By: /s/ CLAYTON I. DUNCAN
--------------------- -----------------------
Name: Judith A. Baskett Name: Clayton I. Duncan
-------------------- -----------------------
Title:Dir., Research Administration Title: President
----------------------------- ---------
Date: 9/3/97 Date: 9/3/97
----------- -----------
Consented to by Principal Investigator:
By: /s/ JAMES CRAPO
-----------------
Title: Principal Investigator
------------------------
Date: 9/2/97
---------
9
<PAGE>
EXHIBIT A
Toxic species derived from the oxygen we breath (termed "Reactive Oxygen
Species" or "ROS") have been shown to react with and inactivate cellular
proteins, nucleic acids and lipid membranes, resulting in a loss of cellular
function. These ROS have been implicated in a large number of human diseases,
including (but not limited to): stroke, heart failure, cardiac reperfusion
injury, bronchopulmonary dysplasia, asthma, pancreatitis, Alzheimer's disease,
Parkinson's disease and Huntington's disease. Antioxidant drugs by destroying
ROS, or preventing or reversing the damage done by ROS to cellular constituents,
are expected to have a beneficial effect in the treatment of these diseases.
The field of this Research Program is the testing of potential antioxidant
compounds in a battery of biochemical and cellular assays. Compounds will be
provided to Drs. James Crapo and Brian Day at National Jewish for testing.
Compounds that prove active in the biochemical and cellular assays will be
tested in animal models of oxidant toxicity and in animal models of disease. The
biochemical assays include superoxide dismutase activity, catalase activity and
lipid peroxidation. Cellular assays include paraquat toxicity to L2 cells,
hydrogen peroxide toxicity to HUVEC cells, and aerobic growth of SOD-null
E.coli. Animal models of oxidant toxicity include paraquat toxicity, bleomycin
toxicity and exposure of rodents to supranormal concentrations of oxygen.
Compounds active in these animal models will be tested in various animal models
of human disease. Pharmacokinetics and acute toxicity of active compounds will
also be assessed. In addition to the above, new models of antioxidant activity
will be developed over the course of this research as necessary.
<PAGE>
EXHIBIT 10.25
DEVELOPMENT, MANUFACTURING, MARKETING
AND LICENSE AGREEMENT
THIS DEVELOPMENT, MANUFACTURING, MARKETING AND LICENSE AGREEMENT
("Agreement") is effective as of December 19, 1996, and is by and among KNOLL
AG, a corporation organized and existing under the laws of the Federal Republic
of Germany ("KNOLL"), INTERCARDIA, INC. ("INTERCARDIA"), a corporation organized
and existing under the laws of Delaware and its subsidiary CPEC, Inc. ("CPEC"),
a corporation organized and existing under the laws of Nevada. INTERCARDIA and
CPEC are hereinafter collectively referred to as "COMPANY".
WITNESSETH:
WHEREAS, COMPANY has licensed certain rights to COMPANY Know-How (as
hereinafter defined) and has licensed (the "BMS License") certain rights to
Patent Rights (as hereinafter defined) pursuant to the terms and conditions of
an agreement dated December 6, 1991, between CPEC and Bristol-Myers Squibb
Company ("BMS");
WHEREAS, KNOLL, INTERCARDIA and CPEC entered into the Agreement Among
INTERCARDIA, INC., CPEC, and KNOLL AG dated December 19, 1996 (the "Initial
Agreement").
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE>
WHEREAS, KNOLL and COMPANY desire to enter into a definitive
development, manufacturing and marketing agreement to develop, manufacture and
market Licensed Product (as hereinafter defined) upon terms and conditions which
are more specifically set forth herein;
WHEREAS, KNOLL desires to obtain a license under the Patent Rights and
COMPANY Know-How, upon the terms and conditions set forth herein; and
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Unless specifically set forth to the contrary herein, the following
terms, whether used in the singular or plural, shall have the respective
meanings set forth below:
1.1 "Affiliate" means (i) any corporation or business entity of which
fifty (50%) percent or more of the securities or other ownership interests
representing the equity, the voting stock or general partnership interest are
owned, controlled or held, directly or indirectly, by KNOLL or COMPANY; (ii) any
corporation or business entity which, directly or indirectly, owns, controls or
holds fifty (50%) percent (or the maximum ownership interest permitted by law)
or more of the securities or other ownership interests representing the equity,
the voting stock or, if applicable, the general partnership interest, of KNOLL
or COMPANY; or (iii) any corporation or business entity which is under common
control by KNOLL and the COMPANY.
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1.2 "Calendar Quarter" means the respective periods of three (3)
consecutive calendar months ending on March 31, June 30, September 30 and
December 31.
1.3 "Calendar Year" means each successive period of twelve (12) months
commencing on January 1 and ending on December 31.
1.4 "Collaboration Information and Inventions" means COMPANY
Information and Inventions, KNOLL Information and Inventions and Joint
Information and Inventions as such terms are defined in Section 2.6.
1.5 "COMPANY Know-How" means any COMPANY information and materials,
including but not limited to, discoveries, Improvements, processes, formulas,
data, inventions, know-how and trade secrets, patentable or otherwise, which
during the term of this Agreement (i) are in COMPANY's possession or control,
(ii) are not generally known and (iii) which arise out of the this Agreement or
which relate to the development, manufacture, marketing, use or sale of Licensed
Product in the Territory in the Field.
1.6 "Compound" means the Compound Benzonitrile,
2-[2-hydroxy-3-[[2-(1H-indol-3-y1)-1,1-dimethylethyl]amino]propoxy]-,
monohydrochloride, also referred to in this Agreement as bucindolol, covered by
the patents listed on Exhibit A.
1.7 "EC" means the European Community member states which include the
countries of Germany, Belgium, France, Italy, Luxembourg, The Netherlands, The
Republic of Ireland, United Kingdom, Greece, Portugal, Spain, Austria, Finland,
Sweden, Norway and Denmark.
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1.8 "Field" means the use of beta-blockers as therapy for congestive
heart failure and left ventricular dysfunction; provided, however, that if the
COMPANY negotiates a more comprehensive field under the BMS License, the
definition of Field shall be expanded to include additional areas.
1.9 "First Commercial Sale" means, with respect to any Licensed
Product, the first sale for end use or consumption of such Licensed Product in a
country in the Territory after all Regulatory Approvals, if any, have been
granted by the applicable regulatory authority for such country.
1.10 "Improvement" means any enhancement in the manufacture,
formulation, ingredients, preparation, presentation, means of delivery, dosage
or packaging of Licensed Product and shall exclude Knoll's melt extrusion
technology.
1.11 "KNOLL Know-How" means any KNOLL information and materials,
including but not limited to, discoveries, Improvements, processes, formulas,
data, inventions, know-how and trade secrets, patentable or otherwise, which
during the term of this Agreement (i) are in KNOLL's possession, (ii) are not
generally known and (iii) which arise out of this Agreement or which relate to
the development, manufacture, marketing, use or sale of Licensed Product in the
Territory in the Field.
1.12 "Licensed Product(s)" means preparations which contain Compound in
final form for sale by prescription or over-the-counter for twice-a-day dosing
in the Field, and specifically excludes preparations which contain the Compound
designed as sustained release formulations in the Field for once-a-day dosing,
unless KNOLL has paid to the COMPANY
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the amounts reimbursable to the COMPANY which are described in Section 4.6, and
continues to share in the development costs of such preparations, in which case
such preparations are included in this Agreement.
1.13 "Major EC Member State" means Germany, France, Italy, United
Kingdom and Spain.
1.14 "Net Sales" shall mean Net Sales as that term is defined in
Section 6.1.
1.15 "Patent Rights" means any and all patents and patent applications
(which for the purposes of this Agreement shall be deemed to include
certificates of invention and applications for certificates of invention) which
during the term of this Agreement are owned by COMPANY or to which COMPANY
through license or otherwise acquires rights, including, but not limited to,
those listed on Exhibit A, which: (i) relate to Licensed Product in the Field;
or (ii) relate to Collaboration Information and Inventions (as defined in
Section 2.6); or (iii) are divisions, continuations, continuations-in-part,
reissues, renewals, extensions, supplementary protection certificates or the
like of any such patents and patent applications provided that such patents have
not expired, been cancelled or become abandoned and have not been declared
invalid by an unreversed or unappealable decision or judgment of a court of
competent jurisdiction.
1.16 "Project" means the activities to be conducted under the terms of
this Agreement.
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1.17 "Proprietary Information" means all Know-How, COMPANY Know-How,
KNOLL Know-How and within the Field, all other scientific, clinical, regulatory,
marketing, financial and commercial information or data, whether communicated in
writing or oral, electronically or by sensory detection, which is provided by
one party to the other party in connection with this Agreement.
1.18 "Regulatory Approval" means with respect to any country in the
Territory, each approval issued by a regulatory authority necessary or
appropriate to authorize and commence the manufacture, use or sale, including
pricing approval, of the Compound or Licensed Product in such country.
1.19 "Territory" means worldwide rights for all countries with the
exception of the United States of America, the District of Columbia, Puerto Rico
and Japan.
1.20 "Valid Patent Claim" means a claim of an issued and unexpired
patent included within the Patent Rights, which has not been revoked or held
unenforceable or invalid by a decision of a court or other governmental agency
of competent jurisdiction, unappealable or unappealed with the time allowed for
appeal, and which has not been disclaimed, denied or admitted to be invalid or
unenforceable through reissue or disclaimer or otherwise.
ARTICLE II
DEVELOPMENT, MANUFACTURING AND MARKETING AGREEMENT
2.1 General. COMPANY and KNOLL shall engage in this Agreement upon the
terms and conditions set forth in this Agreement. In the course of this
Agreement, each party shall (i) cooperate with the other party in good faith,
particularly with respect to unknowns or
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contingencies, in order to achieve the objectives of this Agreement; (ii)
furnish, maintain and preserve suitable and sufficient facilities and personnel
for the work to be accomplished by each party hereunder; (iii) perform its
obligations hereunder in good faith in a commercially reasonable, diligent and
workmanlike manner and in compliance in all material respects with the
standards, laws, rules and regulations of each and every regulatory authority
having jurisdiction over the material activities of each party in the Territory;
and (iv) work exclusively with one another in the Field and will not compete in
the Field with one another except as provided in Section 4.6.
2.2 Agreement Objectives. The parties desire to enter into this
Agreement which aligns technological innovation and organizational resources
including access to manufacturing, sales and marketing, distribution,
regulatory, service and support, management expertise, entrepreneurial acuteness
and capital for successful completion of development, manufacturing and
commercialization of Licensed Product, to maximize market penetration in the
Territory.
2.3 Advisory Committee. The parties hereby establish an advisory
committee (the "Advisory Committee") to facilitate this Agreement as follows:
2.3.1 Composition of the Advisory Committee. The Advisory Committee
shall be comprised of equal representation of not more than four (4) named
representatives of KNOLL and not more than four (4) named representatives of
COMPANY. The initial representatives for each party hereto shall be set forth on
Schedule 2.3.1. Each party shall appoint its respective representatives to the
Advisory Committee from time to time, and may substitute one or more of its
representatives, in its sole discretion, effective upon notice to the other
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<PAGE>
party of such change. It is anticipated that these representatives shall be
multi-disciplinary in their fields of expertise and shall have appropriate
technical credentials and knowledge together with an ongoing familiarity of the
objectives of this Agreement. Additional representatives or consultants may from
time to time, by mutual consent of the parties, be invited to attend Advisory
Committee meetings, subject to compliance with Section 5.1.
2.3.2 Advisory Committee Authority. The Advisory Committee shall not
have responsibility or authority to manage the development, manufacturing or
marketing of the Licensed Products in the Territory.
2.3.3 Meetings. The Advisory Committee shall meet at least twice each
Calendar Year, with the location for such meetings alternating between COMPANY
and KNOLL locations (or such other locations as is determined by the Advisory
Committee). Alternatively, the Advisory Committee may meet by means of
conference call or other similar communications equipment. Each party shall be
responsible for its own time and travel expenses incurred in conjunction with
the Advisory Committee.
2.3.4 Advisory Committee Role. The Advisory Committee shall discuss,
review and advise the parties on this Agreement, including review of all budgets
and timetables for clinical trials and for the development and manufacturing of
the Licensed Products. The first meeting of the Advisory Committee was held on
February 4, 1997.
2.3.5 Termination of Advisory Committee. The Advisory Committee shall
be dissolved upon the later to occur of the following: (i) one year after the
Licensed Product is
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<PAGE>
approved in an EC member state, (ii) upon the approval of the last product
improvement in process; or (iii) upon discontinuance of all product improvement
efforts.
2.3.6 Worldwide Committee. COMPANY will establish a worldwide
development and scientific marketing information exchange committee of which
COMPANY, Astra Merck, Inc. ("Astra Merck"), its U.S. partner, and KNOLL will be
members ("Worldwide Committee").
The Worldwide Committee will exchange information regarding
the worldwide scientific coordination of bucindolol activities. The Worldwide
Committee shall not have any responsibility or authority to manage operations.
Each party shall be responsible for its own time and travel expenses incurred in
conjunction with the Worldwide Committee. The Worldwide Committee shall meet not
less than once a year.
2.4 Exchange of Information. During the term of this Agreement, COMPANY
shall promptly disclose to KNOLL in English and in writing on an ongoing basis
all COMPANY Know-How and other useful information developed in connection with
this Agreement. During the term of this Agreement, KNOLL shall promptly disclose
to COMPANY in English and in writing all KNOLL Know-How and other useful
information developed in connection with this Agreement.
2.5 Records and Reports.
2.5.1 Records. COMPANY and KNOLL shall each maintain records, in
sufficient accounting detail and in good scientific manner appropriate for
patent and regulatory purposes,
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<PAGE>
which shall be complete and accurate and shall fully and properly reflect all
work done and results achieved in the performance of this Agreement.
2.5.2 Copies and Inspection of Records. Each of KNOLL and COMPANY shall
have the right, during normal business hours and upon reasonable notice, to
inspect and copy all such records of the COMPANY or KNOLL referred to in Section
2.5.1. The COMPANY and KNOLL shall each maintain such records and the
information disclosed therein in confidence in accordance with Section 5.1. Each
party hereto shall have the right to arrange for its employees and outside
consultants involved in this Agreement to visit COMPANY or KNOLL at its
respective offices and laboratories during normal business hours and upon
reasonable notice not more frequently than once a Calendar Quarter, and to
discuss the work under this Agreement and its results in detail with the
technical personnel and consultants of COMPANY or KNOLL, as the case may be.
2.5.3 Quarterly Progress Reports. Within thirty (30) days following the
end of each Calendar Quarter during the term of this Agreement, KNOLL shall
provide to the COMPANY a brief written progress report which shall summarize the
work performed to date on this Agreement, the results of any clinical
development or other studies in progress, any regulatory submissions regarding
the Licensed Products, the status of any regulatory action and such other
information reasonably requested by the COMPANY relating to the progress of the
goals or performance of this Agreement.
2.6 Information and Inventions. The entire right, title and interest in
all discoveries, Improvements, processes, formulas, data, inventions, know-how
and trade secrets, patentable
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or otherwise, in the Field, arising from this Agreement (all being
"Collaboration Information and Inventions") developed or invented:
(a) solely by employees of COMPANY shall be owned solely by COMPANY
("COMPANY Information and Inventions");
(b) solely by employees of KNOLL shall be owned solely by KNOLL ("KNOLL
Information and Inventions"); and
(c) jointly by employees of COMPANY and KNOLL shall be owned jointly by
COMPANY and KNOLL ("Joint Information and Inventions").
Each party shall promptly disclose to the other parties hereto the development,
making, conception or reduction to practice of Collaboration Information and
Inventions and thereafter each party hereto shall be entitled to a
non-exclusive, royalty free, perpetual license in the Territory with respect to
KNOLL and worldwide with respect to COMPANY, subject to Knoll's rights in the
Territory during the term of this License, relating to such Collaboration
Information and Inventions.
2.7 Regulatory Matters. KNOLL shall own, control and shall retain
primary legal responsibility for the preparation, filing and prosecution of all
filings and applications required to obtain all Regulatory Approvals to
commercially sell and use Licensed Products in the Territory in the Field. KNOLL
shall supply the COMPANY with materials prepared in connection with the
promotion, packaging, manufacture, adverse event experience or other
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<PAGE>
activities related to Licensed Products in order to prosecute, complete or
maintain any and all Regulatory Approvals, filings or submissions required by
any regulatory authority.
(a) Upon Regulatory Approval in the Territory by each country's
regulatory authority, KNOLL shall take all actions necessary to maintain each
such Regulatory Approval and shall bear primary legal and financial
responsibility for all aspects of on-going maintenance of each such Regulatory
Approval, including but not limited to any subsequent filings, submissions,
amendments or other related matters during the term hereof.
(b) During the term hereof each party shall promptly furnish to the
other party all information concerning serious side effects, life threatening
effects or unexpected consequences attributable to bucindolol. Each party shall
report to the other party any other side effects on an annual basis at mutually
agreeable times.
(c) Each party shall promptly provide to the other copies of all
correspondence with, and all documents and applications filed with or submitted
by any regulatory authority either within or outside of the Territory with
respect to the Licensed Products, including but not limited to copies of all
label statements, expert summaries and any information not previously included
in any applications for Regulatory Approvals.
(d) The COMPANY shall provide to KNOLL all data and documents to which
the COMPANY has access in order to support the compilation of registration
dossiers and subsequent Regulatory Approvals.
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2.8 Phase III(b) and Phase IV Clinical Trials. The overall clinical
program (Phase III(b) and Phase IV) in the Territory will be conducted and
controlled by KNOLL. As soon as possible after the first meeting of the Advisory
Committee, KNOLL will present a clinical trial plan to COMPANY, which shall be
updated and revised at least on an annual basis. KNOLL will diligently proceed
to conduct clinical trials in the Territory in accordance with this Agreement.
KNOLL shall report to the Advisory Committee on the progress of the clinical
studies not less than twice annually.
All clinical study protocols shall be forwarded by KNOLL to COMPANY
for information at least thirty (30) days before the start of such studies. It
is agreed that COMPANY shall within three (3) weeks notify KNOLL if it has
substantial concerns regarding the study protocols. In such case the parties
shall discuss the concerns. It is acknowledged that COMPANY and KNOLL must agree
on all studies performed in the Territory which have an impact on worldwide
positioning of bucindolol, the safe use of bucindolol and the achievement or
maintenance of optimal worldwide labeling of bucindolol. Final decision
authority over clinical trials and other studies which could reasonably be
determined to affect international Regulatory Approvals shall be made by
COMPANY. COMPANY shall not, however, be entitled to block Regulatory Approval
studies which may be required by a regulatory authority in the Territory.
2.9 Trademark. Licensed Products shall be sold by KNOLL in the
Territory and by the COMPANY outside the Territory under a trademark owned and
maintained by the COMPANY. KNOLL shall include a notation acknowledging the
COMPANY's rights and ownership of the Licensed Products in all packaging and
documentation for the Licensed
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Products as well as in all sales, marketing and promotional materials and other
literature prepared by KNOLL in connection with the commercialization, sales and
marketing of the Licensed Products.
KNOLL hereby grants to the COMPANY a paid-up, royalty-free perpetual,
non-exclusive license outside the Territory to use the trademarks and copyrights
developed by KNOLL relative to Licensed Product and used in connection with this
Agreement; provided, however, that subsequent to the expiration or other
termination of this Agreement, the COMPANY shall have no rights to the use of
the name KNOLL.
KNOLL shall bear one-third (1/3) of the trademark costs and related
expenses for activities which have worldwide benefit. For example, KNOLL shall
bear one-third (1/3) of the costs of generating and market testing trademark
candidates incurred by the COMPANY prior or subsequent to the execution of this
Agreement. KNOLL shall bear sixty (60%) percent and the COMPANY shall bear forty
(40%) percent of trademark costs and related expenses which are incurred solely
for the benefit of the Territory. For example, trademark registration and
maintenance costs and related expenses shall be paid sixty (60%) percent by
KNOLL and forty (40%) percent by the COMPANY in the Territory and one hundred
(100%) percent by the COMPANY outside the Territory. KNOLL shall reimburse the
COMPANY within thirty (30) days of receipt of invoices documenting any such
trademark costs or related expenses.
In the event that the COMPANY begins marketing a sustained release
formulation pursuant to the provisions of Section 4.6, the COMPANY shall market
such formulation under
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a different trademark from that used by KNOLL in the Territory or under a
derivative trademark where the mark is sufficiently distinct from KNOLL's mark
so as to avoid confusion. KNOLL shall consent to any such derivative mark, such
consent not to be unreasonably withheld.
2.10 Manufacturing. The Advisory Committee shall advise the parties as
to the recommended manufacturer of Compound and Licensed Product for the
Territory. KNOLL shall have the right to choose to manufacture the Compound and
the Licensed Product for sale in the Territory, or to choose a third party
outside manufacturer as long as the price, capability and other terms are
competitive with other third party manufacturers. Additionally, the COMPANY and
its U.S. partner intend to out-source manufacturing and would consider KNOLL as
a possible additional manufacturer for the U.S. market.
If KNOLL elects to manufacture the Compound or the Licensed Product for
either the Territory or for the U.S. market, KNOLL shall be responsible and pay
for 100% of all costs incurred which are directly or indirectly related to the
manufacture of the Compound or Licensed Product by KNOLL ("KNOLL Manufacturing
Costs") and KNOLL shall reimburse the COMPANY for 100% of costs and time
incurred by the COMPANY in conjunction with KNOLL Manufacturing Costs. KNOLL
Manufacturing Costs shall include, but not be limited to, the galenical
development of the tablet or capsule; the development and testing of
manufacturing methods and processes; stability studies; scale-up of
manufacturing; capital equipment and facilities used for manufacturing;
administrative or overhead costs; materials, supplies and labor used in
manufacturing; and regulatory costs or requirements associated with
manufacturing. Bioavailability and bioequivalence studies undertaken by the
COMPANY or
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KNOLL in connection with the tablet/capsule development activities are to be
accounted for as development costs and are not to be considered as part of KNOLL
Manufacturing Costs, and therefore, in accordance with Section 3.2, KNOLL shall
reimburse the COMPANY for 60% of the cost incurred by the COMPANY for these
studies and the COMPANY shall reimburse KNOLL for 40% of the cost incurred by
KNOLL for these studies.
In accordance with Section 6.1 and Schedule 6.1, KNOLL shall include in
the quarterly royalty calculation a charge for bucindolol manufacturing costs
which shall be based on mutually agreed market prices for the Compound or
Licensed Products. The market price must be competitive with other third party
FDA approved manufacturers, or other manufacturers with approvals by appropriate
European regulatory agencies, of similar products. No other KNOLL Manufacturing
Costs shall be charged to or paid by the COMPANY.
ARTICLE III
FUNDING
3.1 Funding Responsibility. KNOLL and the COMPANY shall be responsible
for the expenses incurred in development, manufacturing and commercialization of
the Licensed Products based upon the terms, conditions and agreements set forth
in this Agreement and the exhibits and schedules attached hereto.
3.2 Certain Costs.
The parties have agreed to budgets relating to certain costs incurred
by the parties (i) prior to the First Commercial Sale of bucindolol in three
Major EC Member States (the
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"Launch") and (ii) for the period ending twelve full calendar months subsequent
to the Launch of bucindolol in three Major EC Member States (the "Launch Year").
The parties agree that the budget for expenses incurred through the end of the
Launch Year in connection with development activities (costs, other than
manufacturing and marketing costs, incurred to obtain regulatory approval of
Licensed Product) and Phase III(b) and Phase IV clinical studies, which are
anticipated to begin in 1997 and to continue through [ ], is estimated to be
up to $25,000,000. KNOLL shall bear sixty (60%) percent of such actual expenses
and CPEC shall bear forty (40%) percent of such actual expenses (but CPEC's
share of expenses shall not exceed $10,000,000). In addition, the parties agree
that the budget for sales and marketing expenses incurred prior to Launch, which
are anticipated to be expended during [ ] and [ ], is estimated to be up to
$10,000,000. KNOLL shall bear sixty (60%) percent of such actual expenses and
CPEC shall bear forty (40%) percent of such actual expenses (but CPEC's share of
expenses shall not exceed $4,000,000). Finally, the parties agree that the
budget for sales and marketing expenses incurred during the Launch Year,
anticipated to be the year [ ], is estimated to be up to $20,000,000. KNOLL
shall bear sixty (60%) percent of such actual expenses and CPEC shall bear forty
(40%) percent of such actual expenses (but CPEC's share of expenses shall not
exceed $8,000,000). If actual expenses for any of the budgets exceeds the amount
stated in this paragraph, KNOLL shall bear one hundred (100%) percent of such
actual additional expenses.
If additional minor clinical or preclinical trial expenses are required
in order to complete a Regulatory Approval in the Territory, such expenses shall
be borne under the development activities and Phase III(b) and Phase IV clinical
trial budget previously
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
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referenced. For all periods subsequent to the Launch Year, all revenues and
expenses shall be accounted for under the terms and conditions set forth in
Article VI Royalties and Reports.
Costs for development and clinical trial studies incurred prior to the
end of the Launch Year shall include actual external/outside and internal costs,
directly related to the conduct of such clinical trials, but excluding general
administrative, corporate and affiliate overhead or reserves, in accordance with
a jointly approved budget, which initial budget shall be prepared by KNOLL and
presented to the COMPANY as soon as practicable after the first meeting of the
Advisory Committee which was held February 4, 1997.
It is expected that both parties will incur expenses approved in the
budget. At the end of each Calendar Quarter, each party will total all such
expenses incurred by it during the quarter and submit a detailed report to the
other party within twenty (20) calendar days after the end of the quarter
itemizing such expenses and providing such document support as is reasonably
requested. All amounts will be converted to U.S. dollars using the exchange rate
published in the Wall Street Journal for the last day of the Calendar Quarter.
The net amount owed will be paid to the other party in U.S. dollars within
thirty (30) calendar days after the end of the Calendar Quarter.
3.3 Sales and Marketing.
KNOLL shall be responsible for all sales and marketing activities and
expenses in the Territory. All sales and marketing charges will be based on
actual costs incurred and shall not include general administrative, corporate or
affiliate overhead or reserves.
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Subsequent to the Launch, KNOLL shall update COMPANY on the progress
and status of Licensed Product sales activities in the Territory, including an
analysis of sales and expenses, at meetings to be held not less than twice per
year. KNOLL shall submit an annual budget including the planned sales force
allocation and costs, to COMPANY for review and comment prior to the beginning
of each Calendar Year.
3.4 Certain KNOLL Payments. In addition to the funding responsibilities
set forth in this Article and other funding contemplated by this Agreement,
KNOLL has paid or shall pay to CPEC the following amounts:
(a) Two Million ($2,000,000) Dollars was paid to CPEC in December 1996
upon the execution of the Initial Agreement; and
(b) One Million ($1,000,000) Dollars was paid to CPEC in January 1997;
and
(c) Ten Million ($10,000,000) Dollars shall be paid within ten (10)
days of the date of the grant of approval by the applicable Regulatory
Authority, for Licensed Products, including pricing approval where required, in
a Major EC Member State; and
(d) A one-time payment in the amount of Ten Million ($10,000,000)
Dollars shall be paid within ten (10) days of the issuance of a monthly sales
report demonstrating that annual Net Sales in the Territory for Licensed
Products exceeded at any time Two Hundred Million ($200,000,000) Dollars on a
rolling twelve (12) month basis.
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(e) No payment made by KNOLL under this Section 3.4 shall be considered
an expense of this Agreement for purposes of calculating royalties due to CPEC,
but shall be borne exclusively by KNOLL.
ARTICLE IV
LICENSE; EXCHANGE OF INFORMATION; DEVELOPMENT,
MANUFACTURING AND COMMERCIALIZATION
4.1 License Grant.
(a) Upon the terms and subject to the conditions and limitations set
forth herein, COMPANY hereby grants to KNOLL an exclusive license in the
Territory, (i) to practice under Patent Rights and (ii) to use COMPANY Know-How
to develop, make, have made, use and sell Licensed Product(s) in the Field. The
COMPANY shall use its best efforts to [
]
(b) KNOLL shall have the right to sublicense Licensed Products in the
Territory, provided however, all sublicensing arrangements shall be arms-length
transactions (arms-length transactions being defined as an agreement entered
into by parties having equal bargaining power with no compulsion either to buy
or to sell where the agreement contains terms reflective of the fair value of
the contributions of each party) and shall reflect the fair market value of such
Licensed Products in the respective country of the Territory. In case KNOLL
intends to grant a sublicense which includes a provision contemplating a quid
pro quo, the parties will meet to determine equitable compensation in favor of
CPEC. In addition,
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
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royalties, down payments and other remuneration paid in connection with any
sublicense shall be taken into account in the calculation of CPEC royalties
hereunder. Any sublicense arrangement will terminate simultaneously with any
early termination of the License Agreement.
(c) COMPANY shall retain all rights to the Patent Rights and COMPANY
Know-How in connection with this Agreement and in connection with its business
and sales outside of the Territory, and COMPANY shall have the right to make,
have made and use the Patent Rights and COMPANY Know-How in the Territory in
connection with its development, commercialization and sale of the Licensed
Product outside the Territory.
4.2 Non-Exclusive License Grant. In the event the development, making,
having made, use or sale by KNOLL of Licensed Product(s) would infringe during
the term of this Agreement a claim of issued letters patent which COMPANY owns
or has the rights to license and which patents are not covered by the grant in
Section 4.1, COMPANY hereby grants to KNOLL, to the extent COMPANY is legally
able to do so, a non-exclusive, royalty-free license in the Territory under such
issued letters patent solely for KNOLL to develop, make, have made use and sell
Licensed Product(s) in the Territory.
4.3 Reversion of Rights. If KNOLL elects not to, or fails to actively
pursue, (e.g. terminates substantially all of its activities with regard to) the
development or marketing or sub-licensing of bucindolol in major markets of the
Territory, unless to avoid commercial damages, the license granted under this
Agreement and all rights to bucindolol in any such major market shall terminate
and shall revert to COMPANY. The parties agree that major
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markets of the Territory are the European Community, Canada, Australia, New
Zealand, South Africa, Mexico, Columbia, Brazil and Argentina.
4.4 Exchange of Information. In addition to the obligations set forth
in Section 2.4, during the term of this Agreement, COMPANY and KNOLL shall
promptly disclose to the other party in English and in writing on an ongoing
basis all COMPANY Know-How or KNOLL Know-How and other useful information not
previously disclosed.
4.5 Development and Commercialization. KNOLL and the COMPANY shall each
use its best efforts to pursue the commercialization and marketing of Licensed
Products.
4.6 Product Improvements. COMPANY grants KNOLL, the exclusive right for
sales in the Territory of Licensed Product Improvements (e.g., sustained release
formulation, improved or new indications not included in the Field, formulations
and strengths), contingent upon KNOLL reimbursing COMPANY for sixty (60%)
percent of costs relating to clinical trials and other tests conducted primarily
for benefit of the Territory and 1/3 of all other development costs which have a
worldwide benefit, including any previous Licensed Product Improvement
development costs incurred by COMPANY. For example, with respect to costs
relating to clinical trials and other tests conducted and incurred primarily for
the benefit of the Territory, KNOLL would reimburse COMPANY for sixty (60%)
percent of such costs incurred by COMPANY, and COMPANY would reimburse KNOLL for
forty (40%) percent of costs incurred by KNOLL. Where the benefits of the trials
and costs are worldwide, KNOLL would pay 1/3 of such trials and costs incurred
by COMPANY and COMPANY would reimburse KNOLL for 2/3 of costs incurred by KNOLL.
However, KNOLL would not
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reimburse COMPANY for any costs where the trials and costs were conducted and
incurred exclusively for the benefit of the United States, Puerto Rico or Japan.
The overall development of Licensed Product Improvements will be conducted and
controlled by COMPANY. In December 1996, KNOLL reimbursed CPEC $143,136.67 for
one third of previous sustained release development costs (which totaled
$429,500.00) and KNOLL will pay its share of future costs on a quarterly basis.
In case KNOLL has no interest in a Licensed Product Improvement, COMPANY shall
have no right to market such improved product in the Territory during the term
of this Agreement unless hereinafter provided otherwise
In case COMPANY has no interest in utilizing a Licensed Product
Improvement outside of the Territory, KNOLL shall bear 60% of such development
costs and COMPANY shall bear 40% of such development costs and COMPANY shall
have no right to market such improved product outside the Territory during the
term of this Agreement.
COMPANY and KNOLL agree that a sustained release formulation is a
Licensed Product Improvement which should be pursued. COMPANY has contracted
with Jago Pharma AG, a Swiss corporation ("Jago") for the development of a
sustained release formulation utilizing Jago's proprietary Geomatrix technology.
COMPANY will grant KNOLL the opportunity to present a proposal regarding the
feasibility of utilizing KNOLL's melt extrusion technology for the development
of a sustained release formulation of bucindolol ("Melt/Bucindolol"). As soon as
practicable after the COMPANY receives sustained release feasibility information
from Jago, the COMPANY and KNOLL shall determine whether to pursue Jago's or
KNOLL's sustained release formulation technology. If KNOLL's technology is
selected, the parties shall agree upon a binding development plan for the KNOLL
technology
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which shall include an agreement as to reimbursement of certain development
costs incurred by KNOLL which are directly related to Melt/Bucindolol. If
Melt/Bucindolol is selected, KNOLL shall grant COMPANY a license relating to
such KNOLL technology in order to permit COMPANY to use, sell, sublicense and
otherwise market bucindolol using the KNOLL technology outside the Territory,
provided, however, KNOLL shall retain the right to manufacture Melt/Bucindolol
for COMPANY and its licensees under a separate supply contract, which shall be
on such price and terms as are reasonable and customary for similar supply
contracts. All costs and penalties related to [ ] of the [ ] contract
and all costs not previously reimbursed by KNOLL to COMPANY shall be allocated
and paid by KNOLL and by COMPANY in accordance with the provisions of this
Section 4.6.
If KNOLL decides not to participate in further development of the Jago
technology (beyond the preceding paragraph), and COMPANY decides not to
participate in the development of Melt/Bucindolol, KNOLL shall have the right to
pursue development of Melt/Bucindolol at its own expense. KNOLL shall accumulate
the costs directly associated with the development of Melt/Bucindolol and such
development costs shall become a deductible item in calculating the royalties
due to COMPANY for sales resulting from Melt/Bucindolol. Such deductions shall
be limited to [ ] ([ ]%) percent of the cumulative development costs of
Melt/Bucindolol and shall not exceed [ ] ([ ]) percent of the royalty due to
COMPANY for Melt/Bucindolol sales, prior to such deduction for any royalty
period. For example, if the total development cost of Melt/Bucindolol is $[ ]
million, KNOLL will be entitled to recover $[ ] million ([ ]% of $[ ] million)
of this cost from future royalties due on sales of Melt/Bucindolol. The maximum
which shall be recoverable by KNOLL in any
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
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period (e.g. a quarter) will be limited to [ ] ([ ]%) percent of the royalty
which would have been payable to COMPANY prior to this deduction. For example,
if COMPANY's royalty for the first period of Melt/Bucindolol sales is $[ ]
million prior to this deduction, KNOLL will recover $[ ] million of
Melt/Bucindolol development costs ([ ]% of $[ ] million) and $[ ] million
($[ ] million less $[ ] million) will be paid to COMPANY, leaving $[ ]
million of the $[ ] million due to KNOLL. If COMPANY's royalty for the second
period of Melt/Bucindolol sales is $[ ] million prior to this deduction, KNOLL
will recover $[ ] million ($[ ] million less the $[ ] million already paid)
and COMPANY's royalty will be $[ ] million ($[ ] million less $[ ] million).
No deduction for Melt/Bucindolol costs will be made from any royalty from any
sales that are not derived from Melt/Bucindolol technology.
If KNOLL decides not to participate in further development of the Jago
technology, and COMPANY develops a sustained release formulation with Jago,
COMPANY shall be entitled to sell directly or through a third party its
sustained release formulation in KNOLL's Territory at such time as the first
generic sustained release formulation is approved in an EC member state subject
to compliance with Section 2.9. At such time after KNOLL has met its obligations
under this Section 4.6, and after KNOLL notifies COMPANY in writing that it does
not intend to sell directly or through a third party or to develop a sustained
release formulation, KNOLL's right to sustained release formulations shall
terminate and KNOLL's obligation to reimburse COMPANY for additional sustained
release development costs shall terminate.
COMPANY and KNOLL shall mutually agree to any other line extensions to
be included under the License Agreement, if any.
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
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ARTICLE V
CONFIDENTIALITY AND PUBLICATION
5.1 Nondisclosure Obligation. All Proprietary Information shall be
maintained in confidence and shall not be disclosed to any other person, or any
corporation or other business entity, or any government or any agency or
political subdivision thereof without the prior written consent of the other
party, except to the extent that such Proprietary Information:
(a) is known by recipient at the time of its receipt, and not through a
prior disclosure by the disclosing party, as documented by business records;
(b) is properly in the public domain;
(c) is subsequently disclosed to a receiving party by a third party who
may lawfully do so and is not under an obligation of confidentiality to the
disclosing party;
(d) is developed by the receiving party independently of Proprietary
Information received from the other party;
(e) is disclosed to governmental or other regulatory agencies in order
to obtain patents or to gain approval to conduct clinical trials or to market
Licensed Product, but such disclosure may be only to the extent reasonably
necessary to obtain patents or authorizations;
(f) is necessary to be disclosed to sublicensees, agents, consultants,
Affiliates and/or other third parties for the research and development,
manufacturing and/or marketing of the Compound or the Licensed Product (or for
such parties to determine their interest in performing such activities including
but not limited to any activities of the COMPANY outside
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<PAGE>
the Territory) in accordance with this Agreement on the condition that such
third parties agree to be bound by the confidentiality obligations contained in
this Agreement; provided, however, the term of confidentiality for such third
parties shall be no less than five (5) years; or
(g) is required to be disclosed by law or court order, provided that
notice is promptly delivered to the other party in order to provide an
opportunity to challenge or limit the disclosure obligations; provided, however,
without limiting any of the foregoing provisions of Section 5.1, it is
understood that (i) either party hereto, including any Affiliate, may make
reasonable disclosure of this Agreement, at its own discretion, and the
financial and other terms hereof in any filings required by the Securities and
Exchange Commission (the "SEC"), in connection with and subsequent to any
offering of either party's securities to the public, on Form S-1 (or other
applicable initial registration form), Form 10-K, Form 10-Q, Form 8-K or other
applicable SEC form, and in the footnotes to any financial statements; (ii)
either party may file this Agreement as an exhibit to any Form S-1, Form 10-K,
Form 10-Q, Form 8-K or other applicable SEC form; (iii) either party may
describe this Agreement including the expense sharing and royalty provisions in
the "Management's Discussions and Analysis of Financial Conditions and Results
of Operations" section of any filings with the SEC; and (iv) either party may
distribute any such filing made to the SEC (other than matters for which
Confidential Treatment have been requested) in the ordinary course of its
business (e.g. to financial analysts and to stockholders). Any press release
regarding the other party proposed by KNOLL or the COMPANY shall be submitted to
the other party as designated from time to time by each party for review and
comment prior to release thereof, except as permitted in this Section 5.1(g).
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5.2 Use of Proprietary Information. Each of COMPANY and KNOLL agrees
that the Proprietary Information shall only be used in connection with its
obligations under this Agreement, or by COMPANY in connection with its business,
licensing, manufacturing and sale of the Compound under the provisions of
Section 4.1(c), and further agrees to keep all COMPANY Know-How and/or KNOLL
Know-How confidential subject to exceptions (b), (e), (f) or (g) in Section 5.1
above.
5.3. Publication. During the term of this Agreement, KNOLL and COMPANY
each acknowledge the other party's interest in publishing its results related to
the Licensed Product to obtain recognition within the scientific community and
to advance the state of scientific knowledge. Each party also recognizes the
mutual interest in obtaining valid patent protection and in protecting business
interests and trade secret information. Consequently, either party, its
employees or consultants wishing to make a publication shall deliver to the
other party a copy of the proposed written publication or an outline of an oral
disclosure at least thirty (30) days prior to submission for publication or
presentation. The non-publishing party shall have the right (a) to propose
modifications to the publication for scientific reason, patent reasons, trade
secret reasons or business reasons or (b) to request a reasonable delay in
publication or presentation in order to protect patentable information. If the
non-publishing party requests a delay, the publishing party shall delay
submission or presentation for a period of thirty (30) days to enable patent
applications protecting each party's rights in such information to be filed in
accordance with Article VII below. Upon expiration of such thirty (30) days, the
publishing party shall be free to proceed with the publication or presentation.
If the non-publishing party requests modifications to the publication, the
publishing party shall edit such publication to
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prevent disclosure of trade secret or proprietary business information prior to
submission of the publication or presentation. Notwithstanding anything to the
contrary contained in this Section 5.3, Knoll shall not be responsible for
compliance with this section to the extent that any person desiring to make a
publication is not under the control of Knoll.
ARTICLE VI
ROYALTIES AND REPORTS
6.1 Royalties. KNOLL shall pay to CPEC a royalty for the use of the
license and trademarks of bucindolol in the Territory. The royalty for all
periods subsequent to the end of the Launch Year shall be equal to forty (40%)
percent of the net result of (1) Net Sales and other collaborative revenue
(e.g., a payment by a sublicensee or royalties received from agents or from
third parties ("Other Collaborative Revenue")) less (2) cost of goods sold,
sales and marketing expenses (including costs for samples not previously
deducted as an expense, mutually agreed upon sales force allocation, and other
bucindolol related promotional and educational expenditures), post-launch
clinical trials, third party royalties (including any royalty payable to BMS or
Jago Pharma AG) and distribution costs (including freight, insurance and
packaging material for shipment of bucindolol). If the royalty calculation, as
set forth in the preceding sentence, results in a negative amount for any
period, then CPEC shall pay to KNOLL such amount within 30 days after the end of
the Calendar Quarter, and KNOLL shall not owe CPEC a royalty payment for such
period.
The royalty payable by KNOLL to CPEC during the Launch Year shall be
equal to forty (40%) percent of the net result of (1) Net Sales and Other
Collaborative Revenue less (2) cost of goods sold, third party royalties and
distribution costs.
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Net Sales shall mean the total amount invoiced by KNOLL or its
affiliates or sublicensees, for sales of Licensed Product less commission,
discounts, returns and return allowances, sales, use or value-added taxes,
duties and other credits or allowances shown on the invoices; provided, however,
Net Sales shall with respect to unaffiliated third parties include the sales
amount to such unaffiliated third parties or agents (and not the value of
resales by such third parties or agents) and royalties payable to third parties
in connection with sales by unaffiliated third parties or agents shall be a
deductible expense. Expenses shall be based on actual costs incurred and shall
not include general administrative, corporate or affiliate overhead or reserves.
Each party shall be responsible for its own taxes on income. The royalty payable
to CPEC for the Net Sales of each Calendar Quarter will be converted to U.S.
dollars using the exchange rate published in the Wall Street Journal for the
last day of such Calendar Quarter and shall be paid in U.S. dollars within
thirty (30) days after the end of the Calendar Quarter. Taxes and other duties
which are mandatorily payable by CPEC in the Federal Republic of Germany and
which must be remitted by KNOLL for CPEC's account and for which KNOLL is
legally liable shall be withheld and remitted by KNOLL on behalf of CPEC. In
such cases, KNOLL shall send CPEC the receipts for such payments. All payments
to CPEC shall be net of withholding taxes, if applicable. As long as legally
permitted, value added tax shall not be invoiced as a separate item.
Schedule 6.1 illustrates the calculation of royalties payable to CPEC
under this Agreement.
6.2 Reports. During the term of this Agreement, KNOLL will maintain
accounting systems which will report Net Sales and Project expenses and which
are capable of accurately
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<PAGE>
calculating the royalties due to CPEC pursuant to this Agreement on a
country-by-country basis. KNOLL represents that its Executive Information System
("EIS") currently collects all information necessary to accurately calculate the
royalty. KNOLL shall keep the Chief Financial Officers of INTERCARDIA and CPEC
informed of any significant changes to the EIS or other accounting system used
to track the royalty information.
Within fifteen (15) working days after the end of each month, KNOLL
shall report to the COMPANY monthly Net Sales amounts and units on a
country-by-country basis.
Within thirty (30) calendar days after the end of each Calendar
Quarter, KNOLL shall send the COMPANY a report detailing the results of such
Calendar Quarter. This report shall detail the calculation of the royalty
payment, with an analysis of Net Sales and deductible expenses on a
country-by-country basis. This quarterly report shall be certified as true and
correct by KNOLL's Chief Financial Officer.
Within sixty (60) working days after the end of each Calendar Year,
KNOLL shall issue a full report to the COMPANY detailing the calculation of the
royalty payments for the past year, including an analysis for the calculation on
a country-by-country basis. Any changes from the previously submitted quarterly
reports shall be explained in detail. This annual report shall be certified as
true and correct by KNOLL's Chief Financial Officer.
Upon reasonable advance notice, the COMPANY shall be entitled to audit
KNOLL's accounting systems, Project expenses and components of KNOLL's royalty
calculation on an aggregated Territory or on a country-by-country basis. KNOLL
will cooperate and assist in such audits as appropriate. If the results of such
audit indicate that KNOLL has underpaid its
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royalty obligation by five (5%) percent or more for any twelve (12) month period
examined, KNOLL shall bear the expenses of such audit. Upon completion of the
audit, if the audit reveals an underpayment or overpayment of royalties, such
underpayment or overpayment shall be paid to the party owed such amount within
thirty (30) days of such audit. Any such underpayments or overpayments shall
accrue interest as of the date due, calculated at the prime interest rate quoted
in the Wall Street Journal for such period plus three (3%) percent.
6.3 Payments. All payments to be made (i) by KNOLL to COMPANY or CPEC
or (ii) by COMPANY or CPEC to KNOLL under this Agreement shall be made in United
States Dollars and shall be paid by bank wire transfer or by automated
clearinghouse (electronic funds transfer) in immediately available funds to such
bank account designated in writing by COMPANY or KNOLL from time to time.
6.4 Late Payments. Each party shall pay interest to the other party on
the aggregate amount of undisputed payments due that are not paid on or before
the date such payments are due under this Agreement at a rate per annum equal to
the Prime Rate as reported from time to time in the Wall Street Journal plus
three (3%) percent.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES; PATENTS
7.1 Representation and Warranty of the COMPANY. COMPANY represents and
warrants to KNOLL that as of the date of this Agreement it has the full right,
power and authority to enter into this Agreement, to perform this Agreement;
that it is a duly organized and validly existing corporation under the laws of
its jurisdiction of incorporation, and has
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taken all required corporate action to authorize the execution, delivery and
performance of this Agreement; it has the full right, power and authority to
enter into this Agreement and perform all of its obligations hereunder; the
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein do not violate, conflict with, or constitute a
default under its charter or similar organization document, its by-laws or the
terms or provisions of any material agreement or other instrument to which it is
a party or by which it is bound, or any order, award, judgment or decree to
which it is a party or by which it is bound; and upon execution and delivery,
this Agreement will constitute the legal, valid and binding obligation of it.
7.2 Representation and Warranty of KNOLL. KNOLL represents and warrants
that it is a duly organized and validly existing corporation under the laws of
its jurisdiction of incorporation, and has taken all required corporate action
to authorize the execution, delivery and performance of this Agreement; it has
the full right, power and authority to enter into this Agreement and perform all
of its obligations hereunder; the execution and delivery of this Agreement and
the consummation of the transactions contemplated herein do not violate,
conflict with, or constitute a default under its charter or similar organization
document, its by-laws or the terms or provisions of any material agreement or
other instrument to which it is a party or by which it is bound, or any order,
award, judgment or decree to which it is a party or by which it is bound; and
upon execution and delivery, this Agreement will constitute the legal, valid and
binding obligation of it.
7.3 Limitation of Liability. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN
THIS AGREEMENT, THE COMPANY MAKES NO REPRESENTATIONS
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AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED INCLUDING BUT
NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
AND VALIDITY OF PATENT RIGHTS OR PATENT CLAIMS, ISSUED OR PENDING OR AS TO THE
COMMERCIAL VIABILITY OF THE COMPOUND OR THE LICENSED PRODUCTS. EXCEPT AS
OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT THE COMPANY SHALL HAVE NO
LIABILITY FOR SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES, LOST
PROFITS, LOSS OF GOODWILL, OR OTHER ECONOMIC LOSS (WHETHER IN TORT, CONTRACT OR
OTHERWISE) IN CONNECTION WITH THIS AGREEMENT OR WITH RESPECT TO THE PATENT
RIGHTS OR COMPANY KNOW-HOW OR AS TO THE COMMERCIAL VIABILITY OF THE COMPOUND OR
THE LICENSED PRODUCTS.
7.4 Filing, Prosecution and Maintenance of Patents. COMPANY agrees to
file, prosecute and maintain in the Territory, or cause such actions to be
taken, upon appropriate consultation with KNOLL, the Patent Rights and COMPANY
Know-How licensed in whole or in part by COMPANY and sublicensed to KNOLL under
this Agreement. The COMPANY shall have the first right to file the patent
application for all Joint Information and Inventions. COMPANY may elect not to
file and if so KNOLL shall have the right to file the patent application for
Joint Information and Investigations. In each case, the filing party shall give
the non-filing party an opportunity to review the text of the application before
filing, shall consult with the non-filing party with respect thereto, and shall
supply the non-filing party with a copy of the application as filed, together
with notice of its filing date and serial number.
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COMPANY shall keep KNOLL advised of the status of the actual and prospective
patent filings and upon the request of KNOLL, provide advance copies of any
papers related to the filing, prosecution and maintenance of such patent
filings.
7.5 Option of KNOLL to Prosecute and Maintain Patents. COMPANY shall
give notice to KNOLL of any desire to cease prosecution and/or maintenance of
Patent Rights and, in such case, shall permit KNOLL, at its sole discretion, to
continue prosecution or maintenance at its own expense. If KNOLL elects to
continue prosecution or maintenance, COMPANY shall execute such documents and
perform such acts at COMPANY's expense as may be reasonably necessary for KNOLL
to perform such prosecution or maintenance.
7.6 Enforcement. COMPANY shall enforce and/or protect, where it
reasonably determines that it is commercially advisable to do so after
consultation with KNOLL, the Patent Rights and COMPANY Know-How licensed to
KNOLL under this Agreement against any third party who infringes the COMPANY
Patent Rights or wrongfully uses the COMPANY Know-How. The COMPANY shall have
the first right to initiate litigation in the event of a third party claim of
patent infringement pertaining to a Licensed Product.
7.7 Infringement Action. In the event COMPANY institutes an action at
its expense against third party infringers with respect to Licensed Product or
takes appropriate action to defend the Patent Rights or COMPANY Know-How, KNOLL
hereby agrees to reasonably cooperate with COMPANY and to fund, at its option,
up to sixty (60%) percent of the expenses incurred in connection with any such
action. Any recovery obtained by COMPANY as a result of such proceeding or other
actions, whether obtained by settlement or
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otherwise, shall be retained by the COMPANY and KNOLL in proportion to the
respective percentage of costs borne by each party in any such suit or action.
7.8 Option to Prosecute Infringement. If within sixty (60) days of
becoming aware of the infringement of the Patent Rights for which KNOLL retains
a license under this Agreement or unauthorized use of the COMPANY Know-How,
COMPANY decides not to institute an infringement suit or take other reasonable
action to protect the Patent Rights and COMPANY Know-How, KNOLL shall have the
right to institute such suit or take other appropriate action at its own expense
in the name of COMPANY or KNOLL or both. COMPANY shall cooperate fully with
KNOLL and shall fund, at its option, up to forty (40%) percent of the expenses
incurred in connection with any such actions, in its efforts to protect the
Patent Rights, COMPANY Know-How and License Product. Any recovery obtained by
KNOLL as a result of such proceeding, by settlement or otherwise, shall be
retained by KNOLL and the COMPANY in proportion to the respective percentage of
costs borne by each party in any such suit or action.
7.9 Abandonment. COMPANY shall promptly give notice to KNOLL of the
grant, lapse, revocation, surrender, invalidation or abandonment of any Patent
Rights licensed to KNOLL for which COMPANY is responsible for the filing,
prosecution and maintenance.
7.10 Patent Term Restoration. The parties hereto shall cooperate with
each other in obtaining patent term restoration or supplemental protection
certificates or their equivalents in the Territory where applicable to Patent
Rights. In the event that elections with respect to
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obtaining such patent term restoration are to be made, the COMPANY shall have
the right to make the election and KNOLL agrees to abide by such election.
7.11 Notices. All notices, inquiries and communications in connection
with this Article VII shall be sent in accordance with Section 10.4.
ARTICLE VIII
TERM AND TERMINATION
8.1 Term and Expiration. The term of this Agreement will be from
December 19, 1996 until fifteen (15) years after the First Commercial Sale with
respect to each country in the Territory, subject to two additional five (5)
year renewals at KNOLL's option. If KNOLL elects to renew this Agreement, Knoll
shall provide written notice to the COMPANY twelve (12) months prior to the
expirations of the initial term and the first renewal term. At the termination
of the second five year renewal period with respect to each country in the
Territory, KNOLL shall retain the rights to Regulatory Approvals and KNOLL Know
How. The COMPANY shall retain ownership of all trademarks. At the termination of
the second five (5) year renewal term, the COMPANY shall license to KNOLL the
COMPANY trademarks which are the subject of this Agreement for a [ ] ( %)
percent royalty on Net Sales.
If KNOLL declines to license the COMPANY trademarks which are the
subject of this Agreement, KNOLL shall transfer to the COMPANY ownership of all
the exclusive rights to its Regulatory Approvals, trade secrets and KNOLL
Know-How relating to bucindolol, and the COMPANY shall pay to KNOLL a [ ]%
royalty on Net Sales. During the term of this
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
Agreement, which shall include the renewal option periods, whether or not
exercised, KNOLL shall not sell bucindolol except under the terms of this
Agreement.
8.2 Termination.
8.2.1 Termination for Cause. This Agreement may be terminated by notice
delivered to either party at any time during the term of this Agreement:
(a) by either party, if the other party is in breach of its material
obligations hereunder, including but not limited to the maintenance by KNOLL of
the Licensed Product Regulatory Approvals, other than a breach for failure to
pay royalties or advance funds covered in Section 8.2.1(b) below, by causes and
reasons within its control and has not cured such breach within ninety (90) days
after written notice requesting cure of the breach; provided, however, that if
the breach is not capable of being cured within ninety (90) days of such written
notice, this Agreement may not be terminated so long as the breaching party
commences and diligently prosecutes all commercially reasonable actions to cure
such breach as promptly as practicable; or
(b) by COMPANY if KNOLL fails to pay COMPANY any amounts due and
payable to COMPANY, including the failure to advance any amounts due pursuant to
any KNOLL funding obligation under this Agreement, COMPANY shall give KNOLL
written notice of such overdue payment. If such overdue payments are not made by
KNOLL within thirty (30) days after receipt of such notice, COMPANY shall have
the right (i) to terminate this Agreement immediately and institute an action to
collect such overdue amounts and to pursue any other rights or remedies COMPANY
may have at law or in equity; or (ii) institute
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an action to collect such amounts or to specifically enforce the funding
obligation of KNOLL without in either case terminating this Agreement; provided,
however, that if KNOLL in good faith disputes any portion of the overdue
payment, KNOLL shall pay the non-disputed amounts to the COMPANY and shall
submit the disputed amounts in question to the dispute resolution officers for
settlement of the payment obligation related to any such amounts; or
(c) by either party, if the other party files or institutes bankruptcy,
reorganization, liquidation or receivership proceedings, or if the other party
assigns a substantial portion of its assets for the benefit of creditors;
provided, however, in the case of any involuntary bankruptcy proceeding such
right to terminate shall only become effective if the party consents to the
involuntary bankruptcy or such proceeding is not dismissed within ninety (90)
days after the filing thereof.
8.2.2 Effect of Termination for Cause on License. In the event KNOLL
terminates this Agreement under Section 8.2.1(c), all rights and licenses
granted under or pursuant to this Agreement by COMPANY to KNOLL are, and shall
otherwise be deemed to be, for purposes of Section 365(n) of the Bankruptcy
Code, licenses of rights to "intellectual property" as defined under Section
101(52) of the Bankruptcy Code. The parties agree that KNOLL, as a licensee of
such rights under this Agreement, shall retain and may fully exercise all of its
rights and elections under the Bankruptcy Code. The parties further agree that,
in the event of the commencement of a bankruptcy proceeding by or against
COMPANY under the Bankruptcy Code, KNOLL shall be entitled to a complete
duplicate of (or complete access to, as appropriate) any such intellectual
property and all embodiments of such intellectual property upon written request
therefore by KNOLL. Such intellectual property and all embodiments
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thereof shall be promptly delivered to KNOLL (i) upon any such commencement of a
bankruptcy proceeding upon written request therefore by KNOLL, unless COMPANY
elects to continue to perform all of its obligations under this Agreement or
(ii) if not delivered under (i) above, upon the rejection of this Agreement by
or on behalf of COMPANY upon written request therefore by KNOLL.
8.3 Effect of Termination. Expiration or termination of the Agreement
shall not relieve the parties of any obligation accruing prior to such
expiration or termination, and the provisions of Article V shall survive the
expiration or termination of the Agreement. Any expiration or early termination
of this Agreement shall be without prejudice to the rights of either party
against the other accrued or accruing under this Agreement prior to termination,
including the obligation to pay royalties for Licensed Products sold prior to
such termination.
8.4 Certain Covenants at Expiration or Early Termination. Upon the
expiration of this Agreement, or upon early termination of this Agreement where
such termination is without fault on the part of the COMPANY, KNOLL shall (i)
promptly return to COMPANY all written confidential information and all copies
thereof except such records as may be required by federal or state regulatory
agency, (ii) assign to the COMPANY any Regulatory Approvals and transfer to the
COMPANY all materials necessary or helpful to the maintenance of such Regulatory
Approvals, and (iii) notify the applicable regulatory authorities of any such
assignment.
8.5 Early Termination. KNOLL shall have the right to terminate this
Agreement at any time prior to the termination of the Beta-blocker Evaluation of
Survival Trial (the "BEST
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Study") and within sixty (60) days after the BEST Study's primary end-point
results are reported in writing to KNOLL. KNOLL shall not receive any refund of
milestone or development payments previously made to the COMPANY. KNOLL will
cooperate in transferring all on-going clinical trials, ownership of any
materials and applications filed with any regulatory authorities and other
information to the COMPANY, and the COMPANY will assume ownership of all such
information and materials relating to bucindolol.
ARTICLE IX
INDEMNITY
9.1 General. For purposes of this Article IX "Indemnified Parties"
refers to KNOLL, its Affiliates and the officers, directors, employees, and
agents of KNOLL and its Affiliates when the COMPANY is the indemnitor, and
"Indemnified Parties" refers to the COMPANY, its Affiliates and officers,
directors, employees, and agents of the COMPANY and its Affiliates when KNOLL is
the indemnitor.
9.1.1 COMPANY Indemnity. The COMPANY, as indemnitor on behalf of itself
and its officers, directors, employees, agents and representatives shall
indemnify and hold harmless the KNOLL Indemnified Parties and each of them from
any and all liability arising out of any suit, action, legal proceeding, claim
or demand of whatever kind or character based upon:
(a) a claim or occurrence arising from any acts, whether of omission or
commission, by said officers, directors, employees, agents or representatives in
connection with any aspect of this Agreement undertaken by the COMPANY; or
41
<PAGE>
(b) any breach of any representation, warranty or agreement made by the
COMPANY hereunder; or
(c) the failure by the COMPANY in performing its obligations under this
Agreement; or
(d) a claim or occurrence arising out of or relating to the Licensed
Product.
9.1.2 KNOLL Indemnity. KNOLL, as indemnitor on behalf of itself and its
officers, directors, employees, agents and representatives shall indemnify and
hold harmless the COMPANY Indemnified Parties and each of them from any and all
liability arising out of any suit, action, legal proceeding, claim or demand of
whatever kind or character based upon
(a) a claim or occurrence arising from any acts, whether of omission or
commission, by said officers, directors, employees, agents or representatives in
connection with any aspect of this Agreement undertaken by KNOLL; or
(b) any breach of any representation, warranty or agreement made by
KNOLL hereunder; or
(c) the failure by KNOLL in performing its obligations under this
Agreement; or
(d) a claim or occurrence arising out of or relating to the Licensed
Product.
9.1.3 Negligence or Willful Misconduct. Anything to the contrary in
this Article IX notwithstanding, neither party shall be obligated to indemnify
an Indemnified Party for such
42
<PAGE>
Indemnified Party's own acts of negligence or willful misconduct or for any
violation of any warranty, representation or agreement made by such Indemnified
Party hereunder.
9.2 Scope of Indemnification.
9.2.1 Nature of Damages. The agreement to indemnify and hold harmless
from liability set forth herein shall include, subject to the limitation of
liability contained in Section 7.3, all damages of every kind, reasonable
attorney fees, all costs and expenses which may be levied against and out of
pocket costs incurred by the Indemnified Parties in connection with any suit,
action, legal proceeding, claim or demand.
9.2.2 Survival. Each party acknowledges and hereby agrees that the
obligations set forth in this Article IX shall survive the termination or
expiration of this Agreement until the expiration of any applicable statute of
limitations.
9.2.3 Cooperation of the Parties. The Indemnified Parties will
cooperate with the indemnitor at the indemnitor's expense in the defense of any
suit. Neither party shall be liable for any costs resulting from any settlement
made by a party prior to using its reasonable efforts to obtain the consent of
the other party to such settlement.
9.2.4 Certain Exclusions. Neither party shall be liable to the other
for any claim arising from or based upon (i) the combination or use of the
Compound or the Licensed Products with other items or products in a manner not
agreed to by both parties or (ii) any alteration or modification by the other
party of the Compound or the Licensed Products.
43
<PAGE>
9.3 Insurance. KNOLL and the COMPANY each shall maintain, through
self-insurance or otherwise, product liability insurance with respect to
development, manufacture and sales of Licensed Products in such amount as KNOLL
or the COMPANY, respectively, customarily maintains with respect to sales of its
other products. If KNOLL or the COMPANY obtain product liability insurance from
a third party insurance company, the other party shall if possible, under its
insurance policy be named as an additional insured on any such external policy.
Each party shall provide the other party coverage against product liability
claims arising in connection with the sale of the Licensed Product as if the
other party were an additional insured under the self-insurance program assuming
no retention of liability for costs, expenses, claims or damages by KNOLL or the
COMPANY. Each party shall upon request, provide the other party with a
certificate of insurance to the extent that it obtains product liability
coverage from any external insurance company.
ARTICLE X
MISCELLANEOUS
10.1 Force Majeure. Neither party shall be held liable or responsible
to the other party nor be deemed to have defaulted under or breached the
Agreement for failure or delay in fulfilling or performing any term of the
Agreement when such failure or delay is caused by or results from causes beyond
the reasonable control of the affected party including, but not limited to,
fire, floods, embargoes, war, acts of war (whether war be declared or not),
insurrections, riots, civil commotions, strikes, lockouts or other labor
disturbances, acts of God or acts, omissions or delays in acting by any
governmental authority or the other party. The affected party shall notify the
other party of such force majeure circumstances as soon as
44
<PAGE>
reasonably practical.
10.2 Assignment. The Agreement may not be assigned or otherwise
transferred, nor, except as expressly provided hereunder, may any right or
obligations hereunder be assigned or transferred, by either party without the
consent of the other party; provided, however, that either party may, without
such consent, assign the Agreement and its rights and obligations hereunder to
an Affiliate or in connection with the transfer or sale of all or substantially
all of its assets related to Licensed Product or the business, or in the event
of its merger or consolidation or change in control or similar transaction. Any
permitted assignee shall assume all obligations of its assignor under the
Agreement, and such assignor shall remain responsible for compliance with all of
its obligations under this Agreement for the term hereof.
10.3 Severability. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby, unless the absence of the invalidated provision(s) adversely affect the
substantive rights of the parties. The parties shall in such an instance use
their best efforts to replace the invalid, illegal or unenforceable provision(s)
with valid, legal and enforceable provision(s) which, insofar as practical,
implement the purposes of this Agreement.
10.4 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally,
sent by telecopier (and promptly confirmed by personal delivery, registered or
certified mail or overnight courier),
45
<PAGE>
sent by nationally-recognized overnight courier or sent by registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
if to COMPANY, to: Intercardia, Inc.
3200 Chapel Hill/Nelson Highway
Cape Fear Building, Suite 300
P.O. Box 14287
Research Triangle Park,
North Carolina 27709-4287
Telecopier No.: 919-558-8686
ATTN: President
with a non- Wyrick, Robbins, Yates & Ponton
mandatory copy L.L.P.
to: Suite 300
4101 Lake Boone Trail
Raleigh, North Carolina 27607
ATTN: Larry E. Robbins
Telecopier No.: (919) 781-4865
if to KNOLL, to: KNOLL AG
P. O. Box 210805
67008 Ludwigshafen
KNOLLstraBe
67061 Ludwigshafen
Germany
ATTN: President
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such
communication shall be deemed to have been given when delivered if personally
delivered or sent by telecopier on a business day, on the business day after
dispatch if sent by nationally-recognized overnight courier and on the third
business day following the date of mailing if sent by mail.
46
<PAGE>
10.5 Applicable Law. The Agreement shall be governed by and construed
in accordance with the laws of the State of North Carolina without reference to
any rules of conflict of laws.
10.6 Arbitration. Any disputes other than the failure to make a payment
required under this Agreement of an undisputed amount arising between the
parties relating to, arising out of or in any way connected with this Agreement
or any term or condition hereof, or the performance by either party of its
obligations hereunder, whether before or after termination of the Agreement, may
be resolved by binding arbitration upon mutual agreement of the parties.
Whenever a party shall decide to institute arbitration proceedings, it shall
give written notice to that effect to the other party. The party giving such
notice shall refrain from instituting the arbitration proceedings for a period
of sixty (60) days following such notice. During such period, the parties shall
make good faith efforts to amicably resolve the dispute without arbitration. Any
arbitration hereunder shall be conducted under the rules of the American
Arbitration Association. Each such arbitration shall be conducted by a panel of
three arbitrators: one arbitrator shall be appointed by each of KNOLL and the
COMPANY and the third shall be appointed by the two arbitrators; provided,
however, if no mutually acceptable arbitrator can be agreed to by the parties, a
third shall be appointed by the American Arbitration Association. Any such
arbitration initiated by KNOLL shall be held in the United States. Any such
arbitration initiated by COMPANY shall be held in the Federal Republic of
Germany. The arbitrators shall have the authority to direct the parties as to
the manner in which the parties shall resolve the disputed issues, to render a
final decision with respect to such disputed issues, or to grant specific
performance with respect to any such disputed issue.
47
<PAGE>
Judgment upon the award so rendered may be entered in any court having
jurisdiction or application may be made to such court for judicial acceptance of
any award and an order of enforcement, as the case may be. Nothing in this
Section shall be construed to preclude either party from seeking provisional
remedies, including but not limited to, temporary restraining orders and
preliminary injunctions, from any court of competent jurisdiction, in order to
protect its rights pending arbitration, but such preliminary relief shall not be
sought as a means of avoiding arbitration. In no event shall a demand for
arbitration be made after the date when institution of a legal or equitable
proceeding based on such claim, dispute or other matter in question would be
barred by the applicable statute of limitations. The prevailing party in any
legal or arbitration action shall be entitled, in addition to any other rights
and remedies it may have, to reimbursement for its expenses incurred thereby,
including but not limited to court costs and reasonable attorney's fees.
10.7 Entire Agreement. The Agreement contains the entire understanding
of the parties with respect to the subject matter hereof. This Agreement
replaces and supersedes in its entirety the Initial Agreement. All express or
implied agreements and understandings, either oral or written, heretofore made
are expressly merged in and made a part of the Agreement. The Agreement may be
amended, or any term hereof modified, only by a written instrument duly executed
by both parties hereto.
10.8 Headings. The captions to the several Articles and Sections hereof
are not a part of the Agreement, but are merely guides or labels to assist in
locating and reading the several Articles and Sections hereof.
48
<PAGE>
10.9 Independent Contractors. It is expressly agreed that COMPANY and
KNOLL shall be independent contractors and that the relationship between the
parties shall not constitute a partnership, joint venture or agency. Neither
COMPANY nor KNOLL shall have the authority to make any statements,
representations or commitments of any kind, or to take any action, which shall
be binding on the other, without the prior consent of the party to do so.
10.10 Waiver. The waiver by either party hereto of any right hereunder
or of the failure to perform or of a breach by the other party shall not be
deemed a waiver of any other right hereunder or of any other breach or failure
by said other party whether of a similar nature or otherwise.
10.11 Expenses. COMPANY and KNOLL shall bear their respective legal,
accounting, and other expenses associated with this Agreement.
10.12 Counterparts. The Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of December 19, 1996.
INTERCARDIA, INC. KNOLL AG
By: ______________________ By: __________________________
Clayton I. Duncan Printed Name: ________________
President and Title: _______________________
Chief Executive Officer
49
<PAGE>
CPEC, INC.
By: ______________________
Clayton I. Duncan
President and
Chief Executive Officer
50
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is dated December 15, 1997 by
and between Intercardia, Inc., a Delaware corporation having a place of business
at 3200 East Highway 54, Cape Fear Building, Suite 300, Post Office Box 14287,
Research Triangle Park, North Carolina, 27709 (the "Corporation"), and Clayton
I. Duncan, an individual residing at 12465 Creedmoor Road, Raleigh, North
Carolina, 27614 ("Employee").
W I T N E S S E T H:
WHEREAS, the Corporation has employed and desires to continue to employ
the Employee as President, Chief Executive Officer and Director, and the
Employee desires to continue to be employed by the Corporation as President and
Chief Executive Officer and Director, all pursuant to the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants herein contained and other good and valuable
consideration the receipt of which is hereby acknowledged, the parties agree as
follows:
1. EMPLOYMENT; DUTIES
(A) The Corporation engages and employs the Employee, and the Employee
hereby accepts engagement and employment, as President and Chief Executive
Officer, to direct, supervise and have responsibility for the daily operations
of the Corporation, including, but not limited to: (i) directing and supervising
the business and research and development efforts of the Corporation and its
subsidiaries; (ii) managing the other executives and personnel of the
Corporation and any subsidiaries of the Corporation including acting as
president and chief executive officer of such subsidiaries; (iii) evaluating,
negotiating, structuring and implementing business transactions with the
Corporation's and its subsidiaries, licensees, customers and suppliers; (iv)
attending meetings of the Board of Directors of the Corporation; (v) raising or
assisting in raising capital for the Corporation and its subsidiaries; and
performing such other services and duties as the Board of Directors of the
Corporation shall determine. The Corporation agrees to continue to nominate
Employee, during the term of this Agreement, as a Director of the Corporation.
(B) The Employee shall perform his duties hereunder from the
Corporation's executive offices in North Carolina, provided, however, that the
Employee acknowledges and agrees that the performance by the Employee of his
duties hereunder may require significant domestic and international travel by
the Employee.
(C) The Employee shall devote such of his time and efforts as shall be
necessary to the proper discharge of his duties and responsibilities under this
Agreement.
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 2
2. TERM
The Employee's employment hereunder shall be for a term of three years
commencing on January 3, 1998 and continuing through the third anniversary of
such date.
3. COMPENSATION
(A) As compensation for the performance of his duties under this
Agreement, the Employee shall be compensated as follows:
(i) The Employee shall be granted options to purchase shares
of Common Stock of the Corporation as deemed appropriate by the Board of
Directors or its Compensation Committee. To the maximum extent permitted by law,
the stock options shall be incentive stock options.
(ii) The Corporation shall pay the Employee an annual base
salary ("Base Salary") of Three Hundred Thousand Dollars ($300,000), payable in
accordance with the usual payroll period of the Corporation. Base Salary will be
subject to an annual review in the sole discretion of the Board of Directors or
its Compensation Committee, provided that the Base Salary may not be adjusted
downward;
(iii) The Corporation shall pay the Employee bonuses, the
amount of which shall be in the discretion of the Corporation, upon the
achievement of substantial milestones to be mutually agreed upon from time to
time by the Board of Directors or its Compensation Committee and the Employee.
The Corporation shall withhold all applicable federal, state
and local taxes, social security and workers' compensation contributions and
such other amounts as may be required by law and any additional amounts agreed
upon by the parties with respect to the compensation payable to the Employee
pursuant to section 3(A) hereof.
(B) The Corporation shall reimburse the Employee for all normal, usual
and necessary expenses incurred by the Employee in furtherance of the business
and affairs of the Corporation, including reasonable travel and entertainment,
against receipt by the Corporation of appropriate vouchers or other proof of the
Employee's expenditures and otherwise in accordance with such Expense
Reimbursement Policy as may from time to time be adopted by the Board of
Directors of the Corporation.
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 3
(C) The Employee shall be, during the term of this Agreement, entitled
to vacation time of four (4) weeks per year.
(D) The Corporation shall make available to the Employee and his
dependents, such medical, disability, life insurance and such other health
benefits as the Corporation makes available to its senior officers and
directors.
4. REPRESENTATIONS AND WARRANTIES BY THE EMPLOYEE AND CORPORATION
The Employee hereby represents and warrants to the Corporation as
follows:
(A) Neither the execution and delivery of this Agreement nor the
performance by the Employee of his duties and other obligations hereunder
violate or will violate any statute, law, determination or award, or conflict
with or constitute a default under (whether immediately, upon the giving of
notice or lapse of time or both) any prior employment agreement, contract, or
other instrument to which the Employee is a party or by which he is bound.
(B) The Employee has the full right, power and legal capacity to enter
and deliver this Agreement and to perform his duties and other obligations
hereunder. This Agreement constitutes the legal, valid and binding obligation of
the Employee enforceable against him in accordance with its terms. No approvals
or consents of any persons or entities are required for the Employee to execute
and deliver this Agreement or perform his duties and other obligations
hereunder.
(C) The Employee understands that some or all of the stock issuable
upon exercise of the Options received by the Employee pursuant to section 3(A)
hereof may not be registered under the Securities Act of 1933 (the "1933 Act"),
and acknowledges that he may be obligated to agree, as a condition to the
issuance thereof, that he will acquire such stock for his own account for
investment and not with a view to, or for resale in connection with a
distribution thereof, and will bear the economic risk of his investment in such
stock for an indefinite period of time.
The Corporation hereby represents and warrants to the Employee as
follows:
(i) The Corporation is duly organized, validly existing and in
good standing under the laws of the State of Delaware, with all requisite
corporate power and authority to own its properties and conduct its business in
the manner presently contemplated.
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 4
(ii) The Corporation has full power and authority to enter
into this Agreement and to incur and perform its obligations hereunder.
(iii) The execution, delivery and performance by the
Corporation of this Agreement does not conflict with or result in a breach or
violation of or constitute a default under (whether immediately, upon the giving
of notice or lapse of time or both) the certificate of incorporation or by-laws
of the Corporation, or any agreement or instrument to which the Corporation is a
party or by which the Corporation or any of its properties may be bound or
affected.
5. NON-COMPETITION
(A) The Employee understands and recognizes that his services to the
Corporation are special and unique and agrees that, during the term of this
Agreement and, unless such termination is by the Employee pursuant to
7(A)(iii)(a) below, for a period of one (1) year from the date of termination of
his employment hereunder, he shall not in any manner, directly or indirectly, on
behalf of himself or any person, firm, partnership, joint venture, corporation
or other business entity ("Person"), enter into or engage in any business
engaged in the development or commercialization of products directly competitive
with products of the Corporation, including products under development by the
Corporation, either as an individual for his own account, or as a partner, joint
venturer, executive, agent, consultant, salesperson, officer, director or
shareholder of a Person operating or intending to operate in the areas of
therapeutics for congestive heart failure or the treatment of diseases by drugs
which act through the modulation of superoxide dismutase or Corporation's future
business, proposed business or future research activities or any additional
areas of business as shall be updated from time to time by the parties to take
into account additional areas of business in which the Corporation may become
engaged), within the geographic area of the Corporation's business.
(B) During the term of this Agreement and for one (1) year thereafter,
Employee shall not, directly or indirectly, without the prior written consent of
the Corporation solicit or induce any employee of the Corporation or any
affiliate to leave the employ of the Corporation or any affiliate or hire for
any purpose any employee of the Corporation or any affiliate or any employee who
has left the employment of the Corporation or any affiliate within six months of
the termination of said employee's employment with the Corporation; or
(C) In the event that the Employee breaches any provisions of this
Section 5 or there is a threatened breach, then, in addition to any other rights
which the Corporation may have, the Corporation shall be entitled, without the
posting of a bond or other security, to injunctive relief to enforce the
restrictions contained herein. In the event that an actual proceeding is brought
in
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 5
equity to enforce the provisions of this Section 5, the Employee shall not urge
as a defense that there is an adequate remedy at law nor shall the Corporation
be prevented from seeking any other remedies which may be available.
6. CONFIDENTIAL INFORMATION
The Employee agrees that during the course of his employment or at any
time after termination, he will not disclose or make accessible to any other
person, the Corporation's products, services and technology, both current and
under development, promotion and marketing programs, lists, trade secrets and
other confidential and proprietary business information of the Corporation or
any of its clients. The Employee agrees: (i) not to use any such information for
himself or others; and (ii) not to take any such material or reproductions
thereof for the corporations facilities at any time during his employment by the
Corporation, except as required in the Employee's duties to the Corporation. The
Employee agrees immediately to return all such material and reproductions
thereof in his possession to the Corporation upon request and in any event upon
termination of employment.
(A) Except with prior written authorization by the Corporation, the
Employee agrees not to disclose or publish any of the confidential, technical or
business information or material of the Corporation, its clients or any other
party to whom the Corporation owes an obligation of confidence, at any time
during or after his employment with the Corporation.
(B) Employee hereby assigns to the Corporation all right, title and
interest he may have or acquire in all inventions (including patent rights)
developed by the Employee during the term of this Agreement ("Inventions") and
agrees that all Inventions shall be the sole property of the Corporation and its
assigns, and the Corporation and its assigns shall be the sole owner of all
patents, copyrights and other rights in connection therewith. Employee further
agrees to assist the Corporation in every proper way (but at the Corporation's
expense) to obtain and from time to time enforce patents, copyrights or other
rights on said Inventions in any and all countries.
7. TERMINATION
(A) The Employee's employment pursuant to this Agreement shall begin as
of January 3, 1998 and shall continue for the period set forth in Section 2
hereof unless sooner terminated upon the first to occur of the following events:
(i) The death of the Employee;
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 6
(ii) Termination by the Board of Directors of the Corporation
for just cause. Any of the following actions by the Employee shall constitute
just cause:
(a) Material breach by the Employee of Section 5 or
Section 6 of this Agreement;
(b) Material breach by the Employee of any provision
of this Agreement other than Section 5 or Section 6 or the willful or reckless
failure by Employee to perform his duties hereunder which breach or failure is
not cured by the Employee within fifteen (15) days notice thereof from the
Corporation; or
(c) The commission by the Employee of an act of fraud
or theft against the Company or any of its subsidiaries, or the conviction of
Employee of any criminal act;
(iii) Termination by the Employee for just cause. Any of the
following actions or omissions by the Corporation shall constitute just cause:
(a) Material breach by the Corporation of any
provision of this Agreement which is not cured by the Corporation within fifteen
(15) days notice thereof from the Employee; or
(b) Any action by the Corporation to intentionally
harm the Employee;
(iv) Termination by the Board of Directors of the Corporation
without just cause.
(B) Upon termination, Employee will be entitled to the following:
(i) Upon termination by the Board without just cause pursuant
to Section 7(A)(iv) or by Employee for just cause pursuant to Section 7(A)(v) or
upon termination resulting from Employee's death pursuant to Section 7(A)(i) or
from Employee's disability pursuant to Section 7(A)(ii), Employee (or his estate
in the event of a termination pursuant to Section 7(A)(i)) will be entitled to
the following:
(a) all vested compensation then due and owing;
(b) as of the date of the termination, the
Corporation will pay either in a lump sum or in equal monthly payments over a
period of twelve (12) months, at the option of the Corporation, the total sum of
the Base Salary for a period of twelve (12) months and a bonus
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 7
equal to a percentage of the annual Base Salary, which percentage is equal to
the average of the actual annual bonus percentage for the two (2) years
immediately prior to the date of the termination ("Average Annual Bonus");
(c) Corporation will continue to pay for his, or his
heirs', COBRA premiums and the premium for his executive disability insurance
coverage, if applicable, for a period of eighteen (18) months commencing as of
the date of termination; and
(d) any options to acquire the common stock of the
Corporation in which Employee has not yet fully vested as of the date of
termination will be deemed to vest and be exercisable on the termination date to
the extent they would have vested as if he had continued to be employed by the
Corporation, for one (1) additional year after the date of termination.
8. NOTICES
Any notice or other communication under this Agreement shall be in
writing and shall be deemed to have been given: when delivered personally
against receipt therefor; one (1) day after being sent by Federal Express or
similar overnight delivery; or three (3) days after being mailed registered or
certified mail, postage prepaid, return receipt requested, to either party at
the address set forth above, or to such other address as such party shall give
by notice hereunder to the other party.
9. RENEWAL OF AGREEMENT
Upon expiration of the term of this Agreement, this agreement may be
renewed for additional one (1) year periods by the parties by mutual written
agreement.
10. SEVERABILITY OF PROVISIONS
If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced in
whole or in part, such provision shall be interpreted so as to remain
enforceable to the maximum extent permissible consistent with applicable law and
the remaining conditions and provisions or portions thereof shall nevertheless
remain in full force and effect and enforceable to the extent they are valid,
legal and enforceable, and no provision shall be deemed dependent upon any other
covenant or provision unless so expressed herein.
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 8
11. ENTIRE AGREEMENT MODIFICATION
This Agreement contains the entire agreement of the parties relating to
the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
which are not set forth herein. No modification of this Agreement shall be valid
unless made in writing and signed by the parties hereto.
12. BINDING EFFECT
The rights, benefits, duties and obligations under this Agreement shall
inure to, and be binding upon, the Corporation, its successors and assigns, and
upon the Employee and his legal representatives. This Agreement constitutes a
personal service agreement, and the performance of the Employee's obligations
hereunder may not be transferred or assigned by the Employee.
13. NON-WAIVER
The failure of either party to insist upon the strict performance of
any of the terms, conditions and provisions of this Agreement shall not be
construed as a waiver or relinquishment of future compliance therewith, and said
terms, conditions and provisions shall remain in full force and effect. No
waiver of any term or condition shall be effective for any purpose whatsoever
unless such waiver is in writing and signed by such party.
14. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Delaware without regard to principles
of conflict of laws.
15. HEADINGS
The headings of paragraphs are inserted for convenience and shall not
affect an interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written.
<PAGE>
Employee Agreement
Clayton I. Duncan
December 15, 1997
Page 9
INTERCARDIA, INC.
By:
----------------------
Name: Glenn L. Cooper
Title: Chairman
-------------------------
CLAYTON I. DUNCAN
Date:
----------------------
<PAGE>
<PAGE>
EXHIBIT 11.1
INTERCARDIA, INC.
STATEMENT RE COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended September 30
----------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) per Consolidated Statements of
Operations $ (10,078,741) $ 1,182,865 $ (2,524,912)
============ ========= ===========
Calculation of weighted average
number of common shares and common share
equivalents:
Common Stock 6,750,611 5,637,070 3,500,000
Series A Preferred Stock
-- 234,045(1) 692,621(1)
Stock options and warrants 191,193 169,910(2) 681,826(2)
------------ --------------- ------------------
6,941,804 6,041,025 4,874,447
============= =============== ==================
Net income (loss) per common share $ (1.45) $ 0.20 $ (0.52)
============= ================ ===================
</TABLE>
(1) All of the Series A Preferred shares were issued within one year of the
initial filing date of Intercardia's initial public offering and are
therefore treated as outstanding in accordance with Staff Accounting
Bulletin Topic 4-D.
(2) Includes stock options and warrants granted within one year of the initial
filing date of Intercardia's initial public offering, which are treated as
outstanding in accordance with Staff Accounting Bulletin Topic 4-D. The
amount is net of 60,882 shares that would be repurchased under the
treasury stock method.
<PAGE>
EXHIBIT 21.1
INTERCARDIA, INC.
LIST OF SUBSIDIARIES
Aeolus Pharmaceuticals, Inc., a Delaware corporation
CPEC, Inc., a Nevada corporation
Renaissance Cell Technologies, Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Intercardia, Inc. on Form S-8 (File No. 333-12923) of our report dated October
24, 1997, except as to the information presented in Note M, for which the date
is November 5, 1997, on our audits of the consolidated financial statements of
Intercardia, Inc. as of September 30, 1997 and September 30, 1996 and for each
of the three years in the period ended September 30, 1997, which report is
included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Raleigh, North Carolina
December 18, 1997
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<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet and statement of operations and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,623,728
<SECURITIES> 19,394,551
<RECEIVABLES> 1,127,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,181,216
<PP&E> 531,760
<DEPRECIATION> (245,207)
<TOTAL-ASSETS> 38,527,311
<CURRENT-LIABILITIES> 11,818,423
<BONDS> 160,938
0
0
<COMMON> 6,765
<OTHER-SE> 26,541,185
<TOTAL-LIABILITY-AND-EQUITY> 38,527,311
<SALES> 0
<TOTAL-REVENUES> 6,153,085
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,078,741)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,078,741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,078,741)
<EPS-PRIMARY> (1.45)
<EPS-DILUTED> (1.45)
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