As filed with the Securities and Exchange Commission on April 7, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Intercardia, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 8731 56-1924222
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
P.O. Box 14287
3200 East Highway 54
Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
(919) 558-8688
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
<TABLE>
<S> <C> <C>
Intercardia, Inc. RICHARD W. REICHOW
CLAYTON I. DUNCAN
P.O. Box 14287 Senior Vice President and
President and Chief Executive Officer
3200 East Highway 54 Chief Financial Officer
Cape Fear Building, Suite 300
Research Triangle Park,
North Carolina 27709
(919) 558-8688
</TABLE>
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
DONALD R. REYNOLDS, Esq.
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
(919) 781-4000
---------------
Approximate date of proposed sale to the public:
As soon as practicable after the registration statement becomes effective
and upon consummation of the transaction described herein. If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instructions, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier of effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each class Proposed maximum Proposed maximum Amount of
of securities to Amount to be offering price aggregate registration
be registered registered(1) per share(2) offering price(2) fee(3)
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share ...... 920,308 shares Not Applicable $8,511 $100
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Represents the maximum number of shares of Intercardia Common Stock
issuable in connection with the merger (the "Merger") of Transcell
Technologies, Inc., a Delaware corporation ("Transcell"), with and into
Intercardia, Inc. ("Intercardia") pursuant to the Agreement and Plan of
Merger dated March 2, 1998, including shares issuable upon the exercise of
replacement options and warrants issued in the Merger, and assuming the
market price of Intercardia Common Stock used for calculating the number
of shares to be registered for issuance in the three installments is
$20.29 per share, based upon the average of the high and low sales prices
of Intercardia Common Stock for the five most recent trading days in which
trading volume exceeds 1,500 shares ending two business days immediately
prior to the date hereof.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(2) based on $25,534, the aggregate par value
of the securities of Transcell to be received by Intercardia, assuming the
exercise of all outstanding options and warrants to purchase capital stock
of Transcell. Transcell has an accumulated capital deficit, and, in
accordance with Rule 457(f)(2), the proposed maximum aggregate offering
price was calculated by dividing the aggregate par value of the capital
stock of Transcell by three. In accordance with the rules of the
Securities and Exchange Commission (the "SEC"), the minimum registration
fee is $100.
(3) Previously paid upon the filing of the Registrant's preliminary proxy
materials in March 1998.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective
on such date as the SEC, acting pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Intercardia, Inc.
920,308 Shares
Common Stock, Par Value $.001 Per Share
PROSPECTUS
---------------
Intercardia, Inc. and
Transcell Technologies, Inc.
JOINT PROXY STATEMENT FOR
ANNUAL AND SPECIAL MEETINGS OF STOCKHOLDERS
Intercardia Annual Meeting To Be Held May 6, 1998
Transcell Special Meeting To Be Held May 6, 1998
This Joint Proxy Statement and Prospectus (the "Proxy
Statement/Prospectus") is being furnished to the stockholders of record as of
March 31, 1998 (the "Record Date") of Intercardia, Inc., a Delaware corporation
("Intercardia"), and to the stockholders of record as of the Record Date of
Transcell Technologies, Inc., a Delaware corporation ("Transcell"), in
connection with the solicitation of proxies by the Board of Directors of
Intercardia from holders of Intercardia's outstanding shares of Common Stock,
par value $.001 per share ("Intercardia Common Stock"), and the solicitation of
proxies by the Board of Directors of Transcell from holders of Transcell's
outstanding shares of capital stock (including shares of Class A Common Stock
and Class B Common Stock, each having a par value of $.001 per share, and
shares of Series A Preferred Stock and Series B Preferred Stock, each having a
par value of $.01 per share, which are referred to herein as "Transcell Capital
Stock"), for use at the Annual Meeting of Stockholders of Intercardia and a
Special Meeting of Stockholders of Transcell, respectively (together with any
adjournments and postponements thereof, the "Meetings"). At the Meetings, the
stockholders of Intercardia and Transcell will be asked to consider and vote
upon a proposal to approve and adopt that certain Agreement and Plan of Merger,
dated as of March 2, 1998 (as the same may be amended, supplemented or
modified) by and among Transcell, Intercardia and Interneuron Pharmaceuticals,
Inc., a Delaware corporation ("Interneuron"), the majority stockholder of both
Transcell and Intercardia (the "Merger Agreement"), providing for the proposed
merger of Transcell with and into Intercardia (the "Merger"). A copy of the
Merger Agreement (without exhibits or schedules) is attached hereto as Annex A
and incorporated herein by reference. The stockholders of Intercardia and
Transcell will also consider and vote upon such other matters as may properly
come before the Meetings, and any adjournments or postponements thereof. This
Proxy Statement/Prospectus is also being furnished for information purposes
only to holders of options and warrants to purchase shares of Transcell Capital
Stock.
This Proxy Statement/Prospectus has been filed with the Securities and
Exchange Commission as part of a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended, with respect to the registration of shares
of Intercardia Common Stock issuable pursuant to the Merger. This Proxy
Statement/Prospectus also constitutes the Prospectus of Intercardia filed as
part of such Registration Statement. See "Risk Factors" beginning on page 14
for a discussion of certain factors to be considered by stockholders in
connection with their vote.
Upon the closing of the Merger (the "Closing"), each share of Transcell
Capital Stock outstanding immediately prior to the Closing (excluding shares
held by dissenting stockholders who have asserted applicable appraisal rights,
if any, collectively "Dissenting Shares") will, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive in three installments (the initial installment at Closing (the
"Closing Installment"), the second installment on the 15-month anniversary of
Closing (the "Second Installment") and the third installment on the 21-month
(continued on following page)
---------------
NEITHER THE MERGER NOR THE SECURITIES COVERED BY THIS PROXY STATEMENT HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement is being first mailed to the stockholders of Intercardia
and Transcell, and for information purposes only to the holders of options and
warrants to purchase Transcell Capital Stock,
on or about April 8, 1998.
<PAGE>
anniversary of Closing (the "Third Installment")), that number of shares of
Intercardia Common Stock calculated in accordance with the exchange ratio
applicable for each installment for such class or series, based on the average
of the high and the low sales prices of Intercardia Common Stock for the five
most recent trading days in which trading volume exceeds 1,500 shares ending
two business days immediately prior to the date of determination (the
"Intercardia Stock Price").
The exchange ratios for each share of Transcell Series B Preferred Stock
will be determined by dividing: (i) $4.3750 by the Intercardia Stock Price at
Closing for the Closing Installment; (ii) $2.4609 by the Intercardia Stock
Price determined at the 15-month anniversary of Closing for the Second
Installment; and (iii) $2.5703 by the Intercardia Stock Price determined at the
21-month anniversary of Closing for the Third Installment. The exchange ratios
for each Common Equivalent Share (the aggregate number of "Common Equivalent
Shares" is calculated by adding the number of issued and outstanding shares of
Transcell Class A Common Stock to the number of shares of Transcell Class A
Common Stock issuable upon conversion of the Transcell Class B Common Stock and
Transcell Series A Preferred Stock as determined under the provisions of
Transcell's Amended and Restated Certificate of Incorporation) will be
determined by: (i) for the Closing Installment (the "Closing Common Exchange
Ratio"), dividing $1.40 by the Intercardia Stock Price at Closing and
multiplying the result by 50%; provided, however, that if the Intercardia Stock
Price at Closing is less than $15.00, then the Closing Common Exchange Ratio
will be 0.0467, and if the Intercardia Stock Price at Closing is greater than
$29.00, then the Closing Common Exchange Ratio will be 0.0241, and (ii) for
each of the Second and Third Installments (the "Future Installments"), dividing
$1.40 by (a) the Intercardia Stock Price determined on the 15-month anniversary
of the Closing with respect to the Second Installment and (b) the Intercardia
Stock Price determined on the 21-month anniversary of the Closing with respect
to the Third Installment, and in each case multiplying the result by 25%.
Each of the outstanding warrants to purchase shares of Series B Preferred
Stock (the "Transcell Warrants") will be converted into the right to receive a
replacement warrant ("Replacement Warrant") to purchase a number of shares of
Intercardia Common Stock (rounded to the nearest whole share) equal to the
number of shares of Series B Preferred Stock underlying such Transcell Warrant
multiplied by the Warrant Exchange Ratio. The "Warrant Exchange Ratio" will be
determined by dividing $8.75 by the Intercardia Stock Price at Closing. The
exercise price per share of Intercardia Common Stock (rounded to the nearest
cent) issuable upon exercise of each Replacement Warrant will equal the per
share exercise price of the corresponding Transcell Warrant ($6.875) divided by
the Warrant Exchange Ratio.
Intercardia will assume the existing Transcell 1992 Stock Option Plan, as
amended (the "1992 Plan"), and each of the outstanding options to purchase
shares of Class A Common Stock under the 1992 Plan (the "Transcell Options")
will be converted into the right to receive a replacement option to purchase
shares of Intercardia Common Stock ("Replacement Options"). Each Replacement
Option will represent the right to purchase a number of shares of Intercardia
Common Stock (rounded to the nearest whole share) equal to the number of shares
of Class A Common Stock issuable upon exercise of the corresponding Transcell
Option multiplied by the Closing Common Exchange Ratio multiplied by two. The
exercise price per share of Intercardia Common Stock (rounded to the nearest
cent) issuable upon exercise of each Replacement Option will equal the per
share exercise price of the corresponding Transcell Option divided by the
product of the Closing Common Exchange Ratio multiplied by two.
The shares of Common Stock of Intercardia are listed on the Nasdaq
National Market under the symbol "ITRC". As of November 4, 1997, the date
immediately prior to the announcement of execution of the Letter of Intent
relating to the Merger, the closing sales price of Intercardia's Common Stock
was $24.25. As of March 2, 1998, the date immediately prior to the date of the
announcement of execution of the Merger Agreement, the closing sales price of
Intercardia's Common Stock was $18.125. As of April 7, 1998, the Intercardia
Stock Price would have been $20.29. In the event that, as of immediately prior
to the Closing, it appears that the Intercardia Stock Price will be more than
$34.00 or less than $10.00, each of Intercardia, Transcell and Interneuron will
consider, in light of the circumstances at that time, whether or not to
exercise its respective right to terminate the Merger Agreement.
The following tables set forth (a) the total number and dollar value of
shares of Intercardia Common Stock to be issued to holders of Transcell Capital
Stock (assuming there are no Dissenting Shares) in all three installments, as
well as the shares of Intercardia Common Stock to be issued at Closing to
Interneuron (the "Technology/Guarantee Shares") in exchange for certain
Transcell-related technology rights and lease guarantees and (b) the percentage
of the outstanding Intercardia Common Stock to be held by the former holders of
Transcell Capital Stock, assuming no exercise of Replacement Warrants and
Replacement Options, at the selected Intercardia Stock Prices at Closing and at
each Future Installment set forth in the column entitled "Intercardia Stock
Price", and giving effect, in the column entitled "Effective Intercardia Stock
Price", to the adjustment to the Closing Common Exchange Ratio if the
Intercardia Stock Price at Closing is less than $15.00 or more than $29.00:
<PAGE>
<TABLE>
<CAPTION>
Intercardia Shares to be Technology/Guarantee
Issued in the Merger Shares to be Issued
for Transcell Capital Stock to Interneuron Totals
Intercardia Effective --------------------------- --------------------------- -----------------------------
Stock Intercardia Value Value Value
Price(1) Stock Price(2) Number (in millions) Number (in millions) Number (in millions)
- ------------- --------------- --------- --------------- --------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 34 $ 29 350,091 $ 11.9 103,448 $ 3.5 453,539 $ 15.4
$ 29 $ 29 386,860 $ 11.2 103,448 $ 3.0 490,308 $ 14.2
$ 25 $ 25 448,758 $ 11.2 120,000 $ 3.0 568,758 $ 14.2
$ 20 $ 20 560,947 $ 11.2 150,000 $ 3.0 710,947 $ 14.2
$ 15 $ 15 747,930 $ 11.2 200,000 $ 3.0 947,930 $ 14.2
$ 10 $ 15 989,625 $ 9.9 200,000 $ 2.0 1,189,625 $ 11.9
</TABLE>
<TABLE>
<CAPTION>
Percentage Ownership of Intercardia after the Merger(3)
Shares to be Issued in the
Merger to
Technology/ Total Shares
Transcell Guarantee To be Issued in
Intercardia Effective Stockholders Shares the Merger
Stock Intercardia other than to be Issued to plus Technology/
Price(1) Stock Price(2) Interneuron Interneuron(4) Interneuron(4) Guarantee Shares
- ------------- ---------------- -------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 34 $ 29 2.0% 2.9% 1.4% 6.3%
$ 29 $ 29 2.2% 3.1% 1.4% 6.7%
$ 25 $ 25 2.5% 3.6% 1.6% 7.7%
$ 20 $ 20 3.1% 4.4% 2.0% 9.5%
$ 15 $ 15 4.0% 5.7% 2.6% 12.3%
$ 10 $ 15 5.5% 6.9% 2.5% 14.9%
</TABLE>
- ---------
(1) Assumes the Intercardia Stock Price for each Future Installment is the
same as the Intercardia Stock Price at Closing.
(2) Sets forth the Effective Intercardia Stock Price used to calculate the
Closing Common Exchange Ratio.
(3) Assumes no additional issuances of Intercardia Common Stock after the
Closing other than the Future Installments.
(4) After the Merger and the issuance of the Technology/Guarantee Shares,
Interneuron's total percentage ownership of Intercardia would range between
61.4% and 61.9% at the Intercardia Stock Prices at Closing set forth in the
table. As of the Record Date, Interneuron's total percentage ownership of
Intercardia was 61.1%.
After careful consideration, the Board of Directors of Intercardia (with
Glenn L. Cooper, M.D., who is President, Chief Executive Officer and a director
of Interneuron and Chairman of the Board and acting President and Chief
Executive Officer of Transcell, abstaining) has unanimously determined that the
Merger is fair to and in the best interests of the stockholders of Intercardia
and recommends that they vote their Intercardia Common Stock FOR approval of
the Merger Agreement. After careful consideration, the Board of Directors of
Transcell (with Clayton I. Duncan, who is President, Chief Executive Officer
and a director of Intercardia, abstaining) has unanimously determined that the
Merger is fair to and in the best interests of the stockholders of Transcell,
and recommends that they vote their Transcell Capital Stock FOR approval of the
Merger Agreement.
Under Delaware law, stockholders of Transcell who object to the Merger may
under certain circumstances, and by following prescribed statutory procedures,
exercise appraisal rights. See "Appraisal Rights of Transcell Stockholders".
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INTERCARDIA, INC.
P.O. Box 14287
3200 East Highway 54
Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
----------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On May 6, 1998
----------------------------------------
DEAR STOCKHOLDERS OF INTERCARDIA, INC.:
You are cordially invited to attend the Annual Meeting of Stockholders of
Intercardia, Inc., a Delaware corporation ("Intercardia"), to be held at 9:00
a.m., local time, on May 6, 1998, at the North Carolina Biotechnology Center,
15 Alexander Drive, Research Triangle Park, North Carolina (the "Intercardia
Meeting"), to consider and vote upon: (i) the approval of an Agreement and Plan
of Merger (the "Merger Agreement"), dated as of March 2, 1998, by and among
Intercardia, Transcell Technologies, Inc., a Delaware corporation
("Transcell"), and Interneuron Pharmaceuticals, Inc., a Delaware corporation
("Interneuron"), the majority stockholder of Intercardia and Transcell,
pursuant to which, among other things, Intercardia would acquire Transcell
through a proposed merger of Transcell with and into Intercardia (the
"Merger"); (ii) the election of the Board of Directors of Intercardia; (iii)
the approval of amendments to Intercardia's 1994 Stock Option Plan to, among
other things, increase the number of shares of Common Stock reserved for
issuance thereunder from 1,500,000 to 2,500,000 shares; (iv) the ratification
of the appointment of Coopers & Lybrand L.L.P. as the independent auditors of
Intercardia for the fiscal year ending September 30, 1998; and (v) any other
matter as may properly come before the meeting or any adjournment thereof.
The aggregate purchase price of the Merger will be paid in shares of the
Common Stock, $.001 par value, of Intercardia ("Intercardia Common Stock").
Upon the closing of the Merger (the "Closing"), each outstanding share of
Transcell capital stock (including shares of Class A Common Stock and shares of
Class B Common Stock, each having a par value of $.001 per share, and shares of
Series A Preferred Stock and shares of Series B Preferred Stock, each having a
par value of $.01 per share, will be converted into the right to receive in
three installments (the initial installment at Closing (the "Closing
Installment"), the second installment on the 15-month anniversary of Closing
(the "Second Installment") and the third installment on the 21-month
anniversary of Closing (the "Third Installment")) that number of shares of
Intercardia Common Stock calculated in accordance with the exchange ratio
applicable for each installment for such class or series, based on the average
of the high and the low sales prices of Intercardia Common Stock for the five
most recent trading days in which trading volume exceeds 1,500 shares ending
two business days immediately prior to the date of determination (the
"Intercardia Stock Price").
The exchange ratios for each share of Transcell Series B Preferred Stock
will be determined by dividing: (i) $4.3750 by the Intercardia Stock Price at
Closing for the Closing Installment; (ii) $2.4609 by the Intercardia Stock
Price determined at the 15-month anniversary of Closing for the Second
Installment; and (iii) $2.5703 by the Intercardia Stock Price determined at the
21-month anniversary of Closing for the Third Installment. The exchange ratios
for each Common Equivalent Share (the aggregate number of "Common Equivalent
Shares" will be calculated by adding the number of issued and outstanding
shares of Transcell Class A Common Stock to the number of shares of Transcell
Class A Common Stock issuable upon conversion of the Transcell Class B Common
Stock and Transcell Series A Preferred Stock as determined under the provisions
of Transcell's Amended and Restated Certificate of Incorporation) will be
determined by: (i) for the Closing Installment (the "Closing Common Exchange
Ratio"), dividing $1.40 by the Intercardia Stock Price at Closing and
multiplying the result by 50%; provided, however, that if the Intercardia Stock
Price at Closing is less than $15.00, then the Closing Common Exchange Ratio
will be 0.0467, and if the Intercardia Stock Price at Closing is greater than
$29.00, then the Closing Common Exchange Ratio will be 0.0241; and (ii) for
each of the Second and Third Installments, dividing $1.40 by (a) the
Intercardia Stock Price determined on the 15-month anniversary of the Closing
with respect to the Second Installment and (b) the Intercardia Stock Price
determined on the 21-month anniversary of the Closing with respect to the Third
Installment, and in each case multiplying the result by 25%.
Each of the outstanding warrants to purchase shares of Series B Preferred
Stock (the "Transcell Warrants") will be converted into the right to receive a
replacement warrant ("Replacement Warrant") to purchase a number of shares of
Intercardia Common Stock (rounded to the nearest whole share) equal to the
number of shares of Series B Preferred Stock underlying such Transcell Warrant
multiplied by the Warrant Exchange Ratio. The "Warrant Exchange Ratio" will be
determined by dividing $8.75 by the Intercardia Stock Price at Closing. The
exercise price per share of Intercardia Common Stock (rounded
<PAGE>
to the nearest cent) issuable upon exercise of each Replacement Warrant will
equal the per share exercise price of the corresponding Transcell Warrant
($6.875) divided by the Warrant Exchange Ratio.
Intercardia will assume the existing Transcell 1992 Stock Option Plan, as
amended (the "1992 Plan"), and each of the outstanding options to purchase
shares of Class A Common Stock under the 1992 Plan (the "Transcell Options")
shall be converted into the right to receive a replacement option to purchase
shares of Intercardia Common Stock ("Replacement Options"). Each Replacement
Option will represent the right to purchase a number of shares of Intercardia
Common Stock (rounded to the nearest whole share) equal to the number of shares
of Class A Common Stock issuable upon exercise of the corresponding Transcell
Option multiplied by the Closing Common Exchange Ratio multiplied by two. The
exercise price per share of Intercardia Common Stock (rounded to the nearest
cent) issuable upon exercise of each Replacement Option will equal the per
share exercise price of the corresponding Transcell Option divided by the
product of the Closing Common Exchange Ratio multiplied by two.
Only stockholders of record as of the close of business on March 31, 1998
(the "Record Date") are entitled to notice of and to vote at the Intercardia
Meeting or any postponements or adjournments thereof. The stock transfer books
of Intercardia will not be closed.
The Board of Directors of Intercardia (with director Glenn L. Cooper,
M.D., who is President, Chief Executive Officer and a director of Interneuron
and Chairman of the Board and acting President and Chief Executive Officer of
Transcell, abstaining) has unanimously determined that the Merger is fair to
and in the best interests of the stockholders of Intercardia and recommends
that you vote FOR approval of the Merger Agreement. See "Intercardia and
Transcell Proposal No. 1 -- The Merger -- Recommendation of the Board of
Directors of Intercardia". The Merger will not be effected unless approved by
the holders of a majority of the outstanding Intercardia Common Stock. As of
the Record Date, Interneuron owned 4,145,029 shares of Intercardia Common Stock
(approximately 61.1% of Intercardia's outstanding Common Stock). As of the
Record Date, the directors and executive officers of Intercardia and their
affiliates (other than Interneuron) had the right to vote, in the aggregate, an
additional 20,566 shares of Intercardia Common Stock (approximately 0.3% of
Intercardia's outstanding Common Stock). Interneuron and Intercardia's
directors and executive officers have advised Intercardia that they intend to
vote their shares FOR approval of the Merger Agreement. Therefore, it is
probable that the Merger Agreement will be approved by the requisite
Intercardia stockholder vote. See "Voting and Proxy Information" and "Certain
Information Regarding the Company -- Principal Stockholders".
A copy of the Merger Agreement (without exhibits or schedules) is attached
to the accompanying Joint Proxy Statement and Prospectus as Annex A. The Joint
Proxy Statement and Prospectus forms a part of this Notice.
All Intercardia stockholders, whether or not they expect to attend the
Intercardia Meeting in person, are requested to complete, sign, date and return
the enclosed form of proxy in the accompanying envelope (which requires no
additional postage if mailed in the United States). Your proxy will be
revocable, either in writing or by voting in person at the Intercardia Meeting,
at any time prior to its exercise.
By Order of the Board of Directors of
Intercardia, Inc.
RICHARD W. REICHOW
Senior Vice President, Chief Financial
Officer,
Treasurer and Secretary
April 8, 1998
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
8 Cedar Brook Drive
Cranbury, New Jersey 08512
----------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On May 6, 1998
----------------------------------------
DEAR STOCKHOLDERS OF TRANSCELL TECHNOLOGIES, INC.:
You are cordially invited to attend a Special Meeting of Stockholders of
Transcell Technologies, Inc., a Delaware corporation ("Transcell"), to be held
at 8:30 a.m., local time, on May 6, 1998, at the North Carolina Biotechnology
Center, 15 Alexander Drive, Research Triangle Park, North Carolina (the
"Transcell Meeting"), to consider and vote upon the approval of an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of March 2, 1998, by and
among Intercardia, Inc., a Delaware corporation ("Intercardia"), Transcell and
their majority stockholder, Interneuron Pharmaceuticals, Inc., a Delaware
corporation ("Interneuron"), pursuant to which, among other things, Intercardia
would acquire Transcell through a proposed merger of Transcell with and into
Intercardia (the "Merger").
The aggregate purchase price of the Merger will be paid in shares of the
Common Stock, $.001 par value, of Intercardia ("Intercardia Common Stock").
Upon the closing of the Merger (the "Closing"), each outstanding share of
Transcell capital stock (including shares of Class A Common Stock and shares of
Class B Common Stock, each having a par value of $.001 per share, and shares of
Series A Preferred Stock and shares of Series B Preferred Stock, each having a
par value of $.01 per share, which collectively are referred to herein as
"Transcell Capital Stock", but excluding shares held by dissenting stockholders
who have asserted applicable appraisal rights, if any) will be converted into
the right to receive in three installments (the initial installment at Closing
(the "Closing Installment"), the second installment on the 15-month anniversary
of Closing (the "Second Installment") and the third installment on the 21-month
anniversary of Closing (the "Third Installment")) that number of shares of
Intercardia Common Stock calculated in accordance with the exchange ratio
applicable for each installment for such class or series, based on the average
of the high and the low sales prices of Intercardia Common Stock for the five
most recent trading days in which trading volume exceeds 1,500 shares ending
two business days immediately prior to the date of determination (the
"Intercardia Stock Price").
The exchange ratios for each share of Series B Preferred Stock will be
determined by dividing: (i) $4.3750 by the Intercardia Stock Price at Closing
for the Closing Installment; (ii) $2.4609 by the Intercardia Stock Price
determined at the 15-month anniversary of Closing for the Second Installment;
and (iii) $2.5703 by the Intercardia Stock Price determined at the 21-month
anniversary of Closing for the Third Installment. The exchange ratios for each
Common Equivalent Share (the aggregate number of "Common Equivalent Shares"
will be calculated by adding the number of issued and outstanding shares of
Transcell Class A Common Stock to the number of shares of Transcell Class A
Common Stock issuable upon conversion of the Transcell Class B Common Stock and
Transcell Series A Preferred Stock as determined under the provisions of
Transcell's Amended and Restated Certificate of Incorporation) will be
determined by: (i) for the Closing Installment (the "Closing Common Exchange
Ratio"), dividing $1.40 by the Intercardia Stock Price at Closing and
multiplying the result by 50%; provided, however, that if the Intercardia Stock
Price at Closing is less than $15.00, then the Closing Common Exchange Ratio
will be 0.0467 and if the Intercardia Stock Price at Closing is greater than
$29.00, then the Closing Common Exchange Ratio will be 0.0241; and (ii) for
each of the Second and Third Installments, dividing $1.40 by (a) the
Intercardia Stock Price determined on the 15-month anniversary of the Closing
with respect to the Second Installment and (b) the Intercardia Stock Price
determined on the 21-month anniversary of the Closing with respect to the Third
Installment, and in each case multiplying the result by 25%.
Each of the outstanding warrants to purchase shares of Series B Preferred
Stock (the "Transcell Warrants") will be converted into the right to receive a
replacement warrant ("Replacement Warrant") to purchase a number of shares of
Intercardia Common Stock (rounded to the nearest whole share) equal to the
number of shares of Series B Preferred Stock underlying such Transcell Warrant
multiplied by the Warrant Exchange Ratio. The "Warrant Exchange Ratio" will be
determined by dividing $8.75 by the Intercardia Stock Price at Closing. The
exercise price per share of Intercardia Common Stock (rounded to the nearest
cent) issuable upon exercise of each Replacement Warrant will equal the per
share exercise price of the corresponding Transcell Warrant ($6.875) divided by
the Warrant Exchange Ratio.
Intercardia will assume the existing Transcell 1992 Stock Option Plan, as
amended (the "1992 Plan"), and each of the outstanding options to purchase
shares of Class A Common Stock under the 1992 Plan (the "Transcell Options")
will be converted into the right to receive a replacement option to purchase
shares of Intercardia Common Stock ("Replacement
<PAGE>
Options"). Each Replacement Option will represent the right to purchase a
number of shares of Intercardia Common Stock (rounded to the nearest whole
share) equal to the number of shares of Class A Common Stock issuable upon
exercise of the corresponding Transcell Option multiplied by the Closing Common
Exchange Ratio multiplied by two. The exercise price per share of Intercardia
Common Stock (rounded to the nearest cent) issuable upon exercise of each
Replacement Option will equal the per share exercise price of the corresponding
Transcell Option divided by the product of the Closing Common Exchange Ratio
multiplied by two.
Only stockholders of record as of the close of business on March 31, 1998
(the "Record Date") are entitled to notice of and to vote at the Transcell
Meeting or any postponements or adjournments thereof.
The Board of Directors of Transcell (with director Clayton I. Duncan, who
is President, Chief Executive Officer and a director of Intercardia,
abstaining) has unanimously determined that the Merger is fair to and in the
best interests of the stockholders of Transcell and recommends that you vote
FOR approval and adoption of the Merger Agreement. See "Intercardia and
Transcell Proposal No. 1 -- The Merger -- Recommendation of the Board of
Directors of Transcell". The Merger will not be effected unless approved by the
holders of a majority of the outstanding shares of Transcell Capital Stock. As
of the Record Date, Interneuron owned 3,230,376 shares of Transcell Class A
Common Stock and 1,460,388 shares of Transcell Series A Preferred Stock
(representing approximately 77.9% of the outstanding voting power of the
Transcell Capital Stock calculated on an as converted to Class A Common Stock
basis). Pursuant to the Merger Agreement, Interneuron is obligated to vote its
Transcell stock FOR approval of the Merger Agreement. As of the Record Date,
the directors and executive officers of Transcell and their affiliates (other
than Interneuron) had the right to vote, in the aggregate, an additional
490,797 shares of Transcell Class A Common Stock (approximately 8.2% of the
outstanding voting power of the Transcell Capital Stock on an as converted to
Class A Common Stock basis). These Transcell directors and executive officers
have advised Transcell that they intend to vote their shares FOR approval of
the Merger Agreement. Therefore, it is probable that the Merger Agreement will
be approved by the requisite Transcell stockholder vote. See "Voting and Proxy
Information" and "Certain Information Regarding Transcell -- Principal
Stockholders".
Under Delaware law, stockholders of Transcell who object to the Merger may
under certain circumstances, and by following prescribed statutory procedures,
exercise appraisal rights. See "Appraisal Rights of Transcell Stockholders".
A copy of the Merger Agreement (without exhibits or schedules) is attached
to the accompanying Proxy Statement/
Prospectus as Annex A. The Proxy Statement/Prospectus forms a part of this
Notice.
Stockholders of Transcell will also consider and vote upon any other
matters that may properly come before the Transcell Meeting.
All Transcell stockholders, whether or not they expect to attend the
Transcell Meeting in person, are requested to complete, sign, date and return
the enclosed form of proxy in the accompanying envelope (which requires no
additional postage if mailed in the United States). Your proxy will be
revocable, either in writing or by voting in person at the Transcell Meeting,
at any time prior to its exercise.
By Order of the Board of Directors of
Transcell Technologies, Inc.
GLENN L. COOPER, M. D.
Chairman of the Board of Directors
April 8, 1998
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
AVAILABLE INFORMATION
Intercardia, Inc. ("Intercardia") has filed a Registration Statement on
Form S-4 (as amended, and together with all exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with the Securities and Exchange Commission (the "SEC") to register the
shares of Intercardia Common Stock to be issued by it in the Merger. This joint
Proxy Statement and Prospectus ("Proxy Statement/Prospectus") constitutes the
Prospectus of Intercardia that is filed as a part of the Registration
Statement. As permitted by the rules and regulations of the SEC, this Proxy
Statement/Prospectus omits certain information contained in the Registration
Statement, and reference is hereby made to the Registration Statement,
including the exhibits filed as part thereof, for further information with
respect to Intercardia, Intercardia Common Stock and related matters.
Intercardia is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements, and other
information with the SEC. The Registration Statement and the reports, proxy
statements and other information filed by Intercardia with the SEC pursuant to
the informational requirements of the Exchange Act may be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should
also be available for inspection and copying at the regional offices of the SEC
located at the 14th Floor, 75 Park Place, New York, New York 10007, and Room
3190, 230 South Dearborn Street, Chicago, Illinois 60604. Copies of such
material may also be obtained from the Public Reference Section of the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Reports, proxy statements and other information concerning Intercardia may also
be inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's web site is
http://www.sec.gov.
Transcell Technologies, Inc. ("Transcell") is not subject to the reporting
requirements of the Exchange Act.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the matters
described herein and, if given or made, such information or representation must
not be relied upon as having been authorized by Intercardia or Transcell.
Neither the delivery hereof nor any distribution of securities made hereunder
shall, under any circumstances, create an implication that there has been no
change in the facts herein set forth since the date hereof or that the
information in this Proxy Statement/Prospectus is correct as of any date
subsequent to the date hereof. This Proxy Statement/Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy the securities
offered by this Proxy Statement/Prospectus or a solicitation of a proxy in any
jurisdiction where, or to any person to whom, it is unlawful to make such an
offer or solicitation.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
AVAILABLE INFORMATION .................................................................... i
TABLE OF CONTENTS ........................................................................ ii
SUMMARY .................................................................................. 1
The Parties ............................................................................. 1
The Meetings; Purposes of the Meetings .................................................. 1
Effective Time of the Merger ............................................................ 3
Principal Terms of the Merger ........................................................... 3
Background of the Merger ................................................................ 6
Recommendation of Intercardia's Board of Directors ...................................... 6
Recommendation of Transcell's Board of Directors ........................................ 6
Opinions of Financial Advisors .......................................................... 7
Board of Directors and Management of Intercardia After the Merger ....................... 7
Interests of Certain Persons in the Merger .............................................. 7
Conditions to Consummation of the Merger ................................................ 7
Exchange of Share Certificates .......................................................... 8
Termination ............................................................................. 8
Certain Federal Income Tax Consequences ................................................. 8
Accounting Treatment .................................................................... 8
Regulatory Approvals .................................................................... 8
Appraisal Rights ........................................................................ 8
Market Prices and Dividend Policies ..................................................... 9
Selected Historical and Unaudited Pro Forma Combined Financial Data ..................... 9
NOTE REGARDING FORWARD-LOOKING STATEMENTS ................................................ 14
RISK FACTORS ............................................................................. 14
Risk Factors with Respect to the Company ................................................ 14
Risk Factors with Respect to Transcell .................................................. 23
Risk Factors with Respect to the Merger ................................................. 27
INTRODUCTION ............................................................................. 30
VOTING AND PROXY INFORMATION ............................................................. 30
Intercardia ............................................................................. 30
Transcell ............................................................................... 31
INTERCARDIA AND TRANSCELL PROPOSAL NO. 1 -- THE MERGER ................................... 33
General ................................................................................. 33
Background of the Merger ................................................................ 33
Recommendation of the Intercardia Board ................................................. 37
Recommendation of the Transcell Board ................................................... 38
Opinions of Financial Advisors .......................................................... 40
The Merger Agreement .................................................................... 44
Certain Federal Income Tax Consequences ................................................. 52
Accounting Treatment .................................................................... 53
Nasdaq Listing for Intercardia Common Stock ............................................. 53
Restrictions on Resales of Intercardia Common Stock ..................................... 53
Interests of Certain Persons in the Merger .............................................. 54
Regulatory and Other Legal Matters ...................................................... 56
APPRAISAL RIGHTS OF TRANSCELL STOCKHOLDERS ............................................... 57
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC. UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS ................................................. 58
CERTAIN INFORMATION REGARDING THE COMPANY ................................................ 65
Business ................................................................................ 65
Management's Discussion and Analysis of Financial Condition and Results of Operations ... 79
Management .............................................................................. 83
Compensation Committee Interlocks and Insider Participation ............................. 88
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Performance Graph ....................................................................... 88
Principal Stockholders .................................................................. 89
Certain Transactions .................................................................... 90
Section 16(a) Beneficial Ownership Reporting Compliance ................................. 91
Description of Capital Stock ............................................................ 91
SHARES ELIGIBLE FOR FUTURE SALE .......................................................... 94
CERTAIN INFORMATION REGARDING TRANSCELL .................................................. 96
Business ................................................................................ 96
Management's Discussion and Analysis of Financial Condition and Results of Operations ... 98
Principal Stockholders .................................................................. 102
COMPARISON OF THE RIGHTS OF HOLDERS OF INTERCARDIA COMMON STOCK AND
TRANSCELL CAPITAL STOCK ................................................................. 104
INTERCARDIA PROPOSAL NO. 2 -- ELECTION OF DIRECTORS ...................................... 106
INTERCARDIA PROPOSAL NO. 3 -- APPROVAL OF AMENDMENTS TO THE 1994 STOCK OPTION
PLAN .................................................................................... 107
INTERCARDIA PROPOSAL NO. 4 -- RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS .................................................................... 111
DEADLINE FOR STOCKHOLDER PROPOSALS ....................................................... 111
OTHER MATTERS ............................................................................ 111
LEGAL MATTERS ............................................................................ 111
EXPERTS .................................................................................. 111
</TABLE>
<TABLE>
<S> <C> <C>
INDEX TO FINANCIAL STATEMENTS ................ F-1
ANNEX A AGREEMENT AND PLAN OF MERGER .......... A-1
ANNEX B NMS FAIRNESS OPINION .................. B-1
ANNEX C HEMPSTEAD FAIRNESS OPINION ............ C-1
ANNEX D SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW ....................... D-1
</TABLE>
------------------------------
This Proxy Statement/Prospectus contains trademarks of Intercardia, Interneuron
and Transcell, as well as trademarks of other companies.
iii
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement/Prospectus. The summary is not intended to be
a complete statement of all material features of the Merger and related
transactions and is qualified in its entirety by reference to the more detailed
information contained elsewhere in this Proxy Statement/Prospectus and the
Annexes attached hereto, including the Merger Agreement, which is incorporated
by reference herein. Stockholders of each of Intercardia and Transcell should
read all such information in its entirety.
This Proxy Statement/Prospectus contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act which
represent the Company's and/or Transcell's expectations or beliefs. For this
purpose, any statements contained in this Proxy Statement/Prospectus that are
not statements of historical fact may be deemed to be forward-looking
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the control of the Company or Transcell, as applicable, and
actual results may differ materially depending on a variety of important
factors, including those described in "Risk Factors" below. All forward-looking
statements included in this Proxy Statement/ Prospectus are based on
information available to the Company or Transcell as the case may be, as of the
date hereof, and neither the Company nor Transcell assumes any obligation to
update any such forward-looking statements.
The Parties
Intercardia was incorporated in Delaware in March 1994 and completed its
initial public offering ("IPO") of Common Stock in February 1996. Unless the
context indicates otherwise, the "Company" refers collectively to 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"), and, in the
context of forward-looking statements, includes Transcell in the event that
Transcell Technologies, Inc., a Delaware corporation ("Transcell"), is merged
with and into Intercardia (the "Merger"). The Company develops products
intended for the treatment of, among other things, cardiovascular and pulmonary
diseases. 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. The Company's most
advanced product is BEXTRATM (bucindolol HCl), a drug 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. The principal executive office of
Intercardia is located at P.O. Box 14287, 3200 East Highway 54, Cape Fear
Building, Suite 300, Research Triangle Park, North Carolina 27709, and its
telephone number at that address is (919) 558-8688. See "Certain Information
Regarding the Company".
Transcell is a privately-held development stage company engaged in
developing drug discovery technologies in the field of carbohydrate chemistry.
The principal executive office of Transcell is located at 8 Cedar Brook Drive,
Cranbury, New Jersey 08512, and its telephone number at that address is (609)
655-6900. See "Certain Information Regarding Transcell".
Each of Intercardia and Transcell is a majority-owned subsidiary of
Interneuron Pharmaceuticals, Inc., a Delaware corporation ("Interneuron").
The Meetings; Purposes of the Meetings
Time, Date and Place of the Meetings
The Annual Meeting of Stockholders of Intercardia will be held at 9:30
a.m. (local time) on May 6, 1998 at the North Carolina Biotechnology Center, 15
Alexander Drive, Research Triangle Park, North Carolina (the "Intercardia
Meeting").
The Special Meeting of Stockholders of Transcell will be held at 9:00 a.m.
(local time) on May 6, 1998 at the North Carolina Biotechnology Center, 15
Alexander Drive, Research Triangle Park, North Carolina (the "Transcell
Meeting").
Purpose of the Meetings
The Intercardia Meeting will be held to permit the holders of shares of
Intercardia Common Stock to consider and vote upon proposals to: (i) approve
the Agreement and Plan of Merger dated March 2, 1998 by and among Intercardia,
Transcell and Interneuron (the "Merger Agreement"); (ii) elect the Board of
Directors of Intercardia (the "Intercardia Board"); (iii) approve amendments to
Intercardia's 1994 Stock Option Plan (the "Option Plan") to, among other
things, increase the number of shares of Intercardia Common Stock reserved for
issuance thereunder from 1,500,000 to 2,500,000 shares; (iv) ratify the
appointment of Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
independent auditors of Intercardia for the fiscal
1
<PAGE>
year ending September 30, 1998; and (v) act upon any other matter as may
properly come before the Intercardia Meeting or any adjournment thereof.
The Transcell Meeting will be held to permit the holders of shares of
Transcell Capital Stock to consider and vote upon a proposal to approve the
Merger Agreement and to act upon any other matter that may properly come before
the Transcell Meeting or any adjournment thereof.
Record Date and Outstanding Shares
Only holders of record of Intercardia's outstanding shares of Common
Stock, par value $.001 per share ("Intercardia Common Stock"), as of the close
of business on March 31, 1998 (the "Record Date") will be entitled to notice of
and to vote at the Intercardia Meeting. On the Record Date, 6,781,687 shares of
Intercardia Common Stock were outstanding. Intercardia stockholders of record
on the Record Date are entitled to one vote per share on any matter which may
properly come before the Intercardia Meeting.
Only holders of record of Transcell's outstanding shares of capital stock
(including shares of Class A Common Stock and shares of Class B Common Stock,
each having a par value of $.001 per share, and shares of Series A Preferred
Stock and shares of Series B Preferred Stock, each having a par value of $.01
per share, collectively referred to herein as "Transcell Capital Stock") as of
the close of the business on the Record Date will be entitled to notice of and
to vote at the Transcell Meeting. On the Record Date, there were outstanding
3,928,603 shares of Transcell Class A Common Stock, 199,488 shares of Class B
Common Stock (convertible at the Record Date into 279,696 shares of Class A
Common Stock), 1,460,388 shares of Series A Preferred Stock (convertible at the
Record Date into 1,460,388 shares of Class A Common Stock), and 349,000 shares
of Series B Preferred Stock (convertible at the Record Date into 349,000 shares
of Class A Common Stock). Holders of Transcell Class A Common Stock are
entitled to one vote per share and holders of Transcell Class B Common Stock,
Series A Preferred Stock and Series B Preferred Stock are entitled for each
such share to the number of votes equal to the number of shares of Transcell
Class A Common Stock into which such shares could be converted as of the Record
Date (without giving effect to the Merger). Accordingly, as of the Record Date
the aggregate number of votes held by holders of Transcell Capital Stock
("Transcell Voting Shares") is 6,017,687.
Vote Required
The affirmative vote of the holders of a majority of the shares of
Intercardia Common Stock entitled to vote, and present or represented by proxy
at the Intercardia Meeting is required to approve the Merger Agreement. As of
the Record Date, Interneuron owned 4,145,029 shares of Intercardia Common Stock
(approximately 61.1% of the outstanding Intercardia Common Stock). As of the
Record Date, the directors and executive officers of Intercardia and their
affiliates had the right to vote, in the aggregate, an additional 20,566 shares
of Intercardia Common Stock (approximately 0.3% of the outstanding Intercardia
Common Stock). Interneuron and these directors and executive officers of
Intercardia have advised Intercardia that they intend to vote their shares FOR
approval of the Merger Agreement. Therefore it is probable that the Merger
Agreement will be approved by the requisite Intercardia stockholder vote. See
"Voting and Proxy Information" and "Certain Information Regarding the Company
- -- Principal Stockholders".
The affirmative vote of the holders of a majority of the Transcell Voting
Shares, voting together as a single class, is required to approve the Merger
Agreement. As of the Record Date, Interneuron owned 3,230,376 shares of
Transcell Class A Common Stock and 1,460,388 shares of Transcell Series A
Preferred Stock (representing approximately 77.9% of the Transcell Voting
Shares). Pursuant to the Merger Agreement, Interneuron is obligated to vote its
Transcell Voting Shares FOR approval of the Merger Agreement. As of the Record
Date, the directors and executive officers of Transcell and their affiliates
had the right to vote, in the aggregate, an additional 490,797 shares of
Transcell Class A Common Stock (representing approximately 8.2% of the
Transcell Voting Shares). These Transcell directors and executive officers have
advised Transcell that they intend to vote their Transcell Voting Shares FOR
approval of the Merger Agreement. Therefore, it is probable that the Merger
Agreement will be approved by the requisite Transcell stockholder vote. See
"Voting and Proxy Information" and "Certain Information Regarding Transcell --
Principal Stockholders".
The obligations of Transcell and Intercardia to consummate the Merger are
subject, among other things, to the condition that such affirmative stockholder
votes shall have been obtained. See "The Merger -- The Merger Agreement --
Conditions to Consummation of the Merger" and " -- Amendments and Termination
of the Merger Agreement".
2
<PAGE>
Effective Time of the Merger
The Merger will become effective at such time as the Certificate of Merger
setting forth the principal terms of the Merger provided for in the Merger
Agreement is duly filed in accordance with Delaware law (the "Effective Time").
Under the Merger Agreement, the required filing is expected to be made as soon
as practicable after the satisfaction or waiver of all conditions to the
Merger, including the approval of the Merger Agreement by the stockholders of
Intercardia and the stockholders of Transcell. It is anticipated that if the
Merger Agreement is approved at the Meetings and all other conditions to the
Merger have been fulfilled or waived, the Effective Time will occur on the
later of the date of the Meetings or as soon as practicable thereafter. See
"Intercardia and Transcell Proposal No. 1 -- The Merger -- The Merger Agreement
- -- Effective Time of the Merger".
Principal Terms of the Merger
Exchange of Transcell Capital Stock
Under the terms of the Merger Agreement, at the Effective Time Transcell
will be merged with and into Intercardia and Transcell will cease to exist as a
separate legal entity. At the Effective Time, each share of Transcell Capital
Stock outstanding immediately prior to the Effective Time (other than shares
held by dissenting stockholders who have properly perfected appraisal rights,
if any, collectively "Dissenting Shares") will, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive in three installments (the first installment (the "Closing
Installment") at the closing of the Merger (the "Closing"), the second
installment on the 15-month anniversary of Closing (the "Second Installment")
and the third installment on the 21-month anniversary of Closing (the "Third
Installment", together with the Second Installment, the "Future Installments"))
that number of shares of Intercardia Common Stock calculated in accordance with
the exchange ratio applicable for each installment for such class or series as
follows:
Series B Exchange Ratios
The exchange ratios for each share of Series B Preferred Stock outstanding
as of the Effective Time (the "Series B Exchange Ratios") will be determined by
dividing:
(i) $4.3750 by the Intercardia Stock Price at Closing for the Closing
Installment;
(ii) $2.4609 by the Intercardia Stock Price determined at the 15-month
anniversary of Closing for the Second Installment; and
(iii) $2.5703 by the Intercardia Stock Price determined at the 21-month
anniversary of Closing for the Third Installment.
The total number of shares of Intercardia Common Stock issuable in
exchange for the outstanding Series B Preferred Stock, as determined by the
Series B Exchange Ratios, is referred to as the "Series B Purchase Price". The
"Intercardia Stock Price" shall mean the average of the high and low sales
prices of Intercardia Common Stock for the five most recent trading days in
which trading volume exceeds 1,500 shares ending two business days immediately
prior to the date of determination.
Common Exchange Ratios
The exchange ratios for each Common Equivalent Share (the aggregate number
of "Common Equivalent Shares" will be calculated by adding the number of issued
and outstanding shares of Transcell Class A Common Stock to the number of
shares of Transcell Class A Common Stock issuable upon conversion of the
Transcell Class B Common Stock and Transcell Series A Preferred Stock as
determined under the provisions of Transcell's Amended and Restated Certificate
of Incorporation (the "Transcell Charter")) will be determined by: (i) for the
Closing Installment (the "Closing Common Exchange Ratio"), dividing $1.40 by
the Intercardia Stock Price at Closing and multiplying the result by 50%;
provided, however, that if the Intercardia Stock Price at Closing is less than
$15.00, then the Closing Common Exchange Ratio will be 0.0467 and if the
Intercardia Stock Price at Closing is greater than $29.00, then the Closing
Common Exchange Ratio will be 0.0241; and (ii) for each of the Future
Installments (the "Installment Common Exchange Ratio(s)"), dividing $1.40 by
(a) the Intercardia Stock Price determined on the 15-month anniversary of the
Closing with respect to the Second Installment and (b) the Intercardia Stock
Price determined on the 21-month anniversary of the Closing with respect to the
Third Installment, and in each case multiplying the result by 25%.
If the Intercardia Stock Price at Closing is within the range of $15.00 to
$29.00 (the "Fixed Value Range"), then the "Effective Intercardia Stock Price"
shall be the Intercardia Stock Price at Closing; if the Intercardia Stock Price
at Closing
3
<PAGE>
is less than $15.00, the Effective Intercardia Stock Price shall be $15.00, and
if the Intercardia Stock Price at Closing is more than $29.00, the Effective
Intercardia Stock Price shall be $29.00. If the Intercardia Stock Price at
Closing is within the Fixed Value Range, the dollar amount of the shares of
Intercardia Common Stock to be issued in the three installments for each Common
Equivalent Share shall be $1.40. If the Intercardia Stock Price at Closing is
outside the Fixed Value Range, the Closing Common Exchange Ratio is fixed, and,
accordingly, the dollar amount of the shares of Intercardia Common Stock to be
issued at Closing for each Common Equivalent Share cannot be determined until
the Intercardia Stock Price at Closing has been determined.
The total number of shares of Intercardia Common Stock to be issued in
exchange for the Common Equivalent Shares, as determined by the Common Exchange
Ratios, is referred to herein as the "Common Purchase Price". The corresponding
per share dollar amount of the Intercardia Common Stock applicable to each
class or series to be received in three installments in the Merger is referred
to herein as the "Per Share Amount". Each of the respective classes and series
of Transcell Capital Stock will be converted into the right to receive the
applicable number of shares of Intercardia Common Stock calculated in
accordance with the applicable Exchange Ratio for such class or series.
The following table sets forth examples, for the Series B Preferred Stock
and the Common Equivalent Shares, of the Per Share Amount of Intercardia Common
Stock to be issued pursuant to the Merger in accordance with the applicable
Exchange Ratios in all three installments at the selected Intercardia Stock
Prices set forth in the column entitled "Intercardia Stock Price", and giving
effect, in the column entitled "Effective Intercardia Stock Price", to the
adjustment to the Closing Common Exchange Ratio if the Intercardia Stock Price
at Closing is outside the Fixed Value Range:
<TABLE>
<CAPTION>
Effective Second Third Total
Intercardia Intercardia Closing Installment Installment of the
Class or Series of Transcell Stock Stock Exchange Exchange Exchange Exchange Per Share
Capital Stock Price(1) Price(2) Ratio Ratio(1) Ratio(1) Ratios(1) Amount
- ------------------------------ ------------- ------------- ---------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Equivalent Shares $34 $29 .0241 .0103 .0103 .0447 $ 1.52
$29 $29 .0241 .0121 .0121 .0483 $ 1.40
$20 $20 .0350 .0175 .0175 .0700 $ 1.40
$15 $15 .0467 .0233 .0233 .0933 $ 1.40
$10 $15 .0467 .0350 .0350 .1167 $ 1.17
Series B Preferred Stock(3) $34 $34 .1287 .0724 .0756 .2767 $ 9.41
$29 $29 .1509 .0849 .0886 .3244 $ 9.41
$20 $20 .2188 .1230 .1285 .4703 $ 9.41
$15 $15 .2917 .1641 .1714 .6272 $ 9.41
$10 $10 .4375 .2461 .2570 .9406 $ 9.41
</TABLE>
- ---------
(1) Assumes the Intercardia Stock Price for each Future Installment is the same
as the Intercardia Stock Price at Closing.
(2) Sets forth the Effective Intercardia Stock Price used to calculate the
Closing Common Exchange Ratio.
(3) The Exchange Ratios for the Series B Preferred Stock give effect to the
minimum return adjustments to the conversion ratio of the Series B
Preferred Stock set forth in the Transcell Charter, adjusting for the
portion of the Series B Purchase Price payable in the Future Installments.
The Exchange Ratios and Per Share Amounts applicable to each class or
series of Transcell Capital Stock will depend upon the Intercardia Stock Price
at Closing and for each of the Future Installments. Accordingly, it is not
possible to determine the Exchange Ratios and Per Share Amounts that will apply
in the Merger.
Fractional shares of Intercardia Common Stock will not be issued in
connection with the Merger. A holder of Transcell Capital Stock otherwise
entitled to a fractional share of Intercardia Common Stock will be paid cash in
lieu of such fractional share in an amount equal to the product of such
fraction multiplied by the Intercardia Stock Price at Closing and the
applicable Intercardia Stock Price for each Future Installment.
Because the market price of Intercardia Common Stock following the Merger
is subject to fluctuation, the market value of the shares of Intercardia Common
Stock that holders of Transcell Capital Stock will receive in the Merger may
increase or decrease following the Merger.
Treatment of Transcell Options and Warrants
Each of the issued and outstanding Transcell Warrants to purchase an
aggregate of 34,901 shares of Series B Preferred Stock shall be converted into
the right to receive a replacement warrant ("Replacement Warrant") to purchase
a number of
4
<PAGE>
shares of Intercardia Common Stock (rounded to the nearest whole share) equal
to the number of shares of Transcell Series B Preferred Stock issuable upon
exercise of the corresponding Transcell Warrant multiplied by the Warrant
Exchange Ratio. The "Warrant Exchange Ratio" shall be determined by dividing
$8.75 by the Intercardia Stock Price at Closing. The exercise price per share
of Intercardia Common Stock (rounded to the nearest cent) issuable upon
exercise of each Replacement Warrant will equal the per share exercise price of
the corresponding Transcell Warrant ($6.875) divided by the Warrant Exchange
Ratio. The term of each Replacement Warrant will be the same as the remaining
term of the corresponding Transcell Warrant.
Intercardia shall assume the existing Transcell 1992 Stock Option Plan, as
amended (the "1992 Plan"), and each of the Transcell Options to purchase an
aggregate of 2,963,377 shares of Class A Common Stock under the 1992 Plan
outstanding as of the Effective Time will be converted into the right to
receive a replacement option ("Replacement Option") to purchase shares of
Intercardia Common Stock on terms as set forth below:
(A) Each Replacement Option will represent the right to purchase a number
of shares of Intercardia Common Stock (rounded to the nearest whole share)
equal to the number of shares of Class A Common Stock issuable upon
exercise of the corresponding Transcell Option multiplied by the Closing
Common Exchange Ratio multiplied by two.
(B) The exercise price per share of the Intercardia Common Stock (rounded
to the nearest cent) issuable upon exercise of each Replacement Option will
equal the per share exercise price of the corresponding Transcell Option
divided by the product of the Closing Common Exchange Ratio multiplied by
two.
(C) The term of each Replacement Option will be the same as the remaining
term of the corresponding Transcell Option.
(D) The vesting restrictions contained in each Replacement Option will be
the same as the vesting restrictions contained in the corresponding
Transcell Options, except as otherwise agreed.
Aggregate Purchase Price and Aggregate Merger Consideration
The aggregate purchase price (the "Aggregate Purchase Price") to be paid
in the Merger equals the Series B Purchase Price plus the Common Purchase
Price. The "Aggregate Merger Consideration" consists of the Aggregate Purchase
Price, the Replacement Warrants and the Replacement Options.
In connection with the Merger, Interneuron has agreed, simultaneously with
the Closing, to contribute to Transcell's equity, without additional
consideration, all of the then outstanding debt owed by Transcell to
Interneuron which, as of December 31, 1997, aggregated approximately
$14,296,000, including accrued interest (the "Debt Contribution") and to cancel
any warrants to purchase shares of Transcell Capital Stock to which it was
entitled in connection with the foregoing debt.
Stock Ownership Following the Merger
The following tables set forth (a) the total number and dollar value of
shares of Intercardia Common Stock to be issued to holders of Transcell Capital
Stock (assuming there are no Dissenting Shares) in all three installments, as
well as the shares of Intercardia Common Stock (the "Technology/Guarantee
Shares") to be issued at Closing to Interneuron in exchange for certain
Transcell-related technology rights and lease guarantees pursuant to an
agreement to be entered into between Intercardia and Interneuron at Closing
(the "Technology/Guarantee Agreement"), and (b) the percentage of the
outstanding Intercardia Common Stock to be held by the former holders of
Transcell Capital Stock, assuming no exercise of Replacement Warrants and
Replacement Options, at the selected Intercardia Stock Prices at Closing and at
each Future Installment set forth in the column entitled "Intercardia Stock
Price", and giving effect, in the column entitled "Effective Intercardia Stock
Price", to the adjustment to the Closing Common Exchange Ratios if the
Intercardia Stock Price at Closing is outside the Fixed Value Range:
5
<PAGE>
<TABLE>
<CAPTION>
Intercardia Shares to be Technology/Guarantee
Issued in the Merger Shares to be Issued to
for Transcell Capital Stock Interneuron Totals
Intercardia Effective --------------------------- --------------------------- -----------------------------
Stock Intercardia Value Value Value
Price(1) Stock Price(2) Number (in millions) Number (in millions) Number (in millions)
- ------------- --------------- --------- --------------- --------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 34 $ 29 350,091 $ 11.9 103,448 $ 3.5 453,539 $ 15.4
$ 29 $ 29 386,860 $ 11.2 103,448 $ 3.0 490,308 $ 14.2
$ 25 $ 25 448,758 $ 11.2 120,000 $ 3.0 568,758 $ 14.2
$ 20 $ 20 560,947 $ 11.2 150,000 $ 3.0 710,947 $ 14.2
$ 15 $ 15 747,930 $ 11.2 200,000 $ 3.0 947,930 $ 14.2
$ 10 $ 15 989,625 $ 9.9 200,000 $ 2.0 1,189,625 $ 11.9
</TABLE>
<TABLE>
<CAPTION>
Percentage Ownership of Intercardia after the Merger(3)
------------------------------------------------------------------------
Shares to be Issued in the Merger
to
--------------------------------- Technology/ Total Shares
Transcell Guarantee to be Issued
Intercardia Effective Stockholders Shares in the Merger
Stock Intercardia other than to be Issued to plus Technology/
Price(1) Stock Price(2) Interneuron Interneuron(4) Interneuron(4) Guarantee Shares
- ------------- ---------------- -------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 34 $29 2.0% 2.9% 1.4% 6.3%
$ 29 $29 2.2% 3.1% 1.4% 6.7%
$ 25 $25 2.5% 3.6% 1.6% 7.7%
$ 20 $20 3.1% 4.4% 2.0% 9.5%
$ 15 $15 4.0% 5.7% 2.6% 12.3%
$ 10 $15 5.5% 6.9% 2.5% 14.9%
</TABLE>
- ---------
(1) Assumes the Intercardia Stock Price for each Future Installment is the same
as the Intercardia Stock Price at Closing.
(2) Sets forth the Effective Intercardia Stock Price used to calculate the
Closing Common Exchange Ratio.
(3) Assumes (i) no additional issuances of Intercardia Common Stock after the
Closing other than the Future Installments and (ii) no prior ownership.
(4) After the Merger and the issuance of the Technology/Guarantee Shares,
Interneuron's total percentage ownership of Intercardia would range
between 61.4% and 61.9% at the Intercardia Stock Prices at Closing set
forth in the table. As of the Record Date, Interneuron's total percentage
ownership of Intercardia was 61.1%.
See "Intercardia and Transcell Proposal No. 1 -- The Merger -- The Merger
Agreement -- General".
Background of the Merger
On March 2, 1998, Intercardia, Transcell and Interneuron entered into the
Merger Agreement. The Merger Agreement provides for the merger of Transcell
with and into Intercardia. Upon consummation of the Merger, each outstanding
share of Transcell Capital Stock (other than Dissenting Shares) will be
converted into the right to receive shares of Intercardia Common Stock at the
applicable Exchange Ratios. See "Intercardia and Transcell Proposal No. 1 --
The Merger -- Background of the Merger".
Recommendation of Intercardia's Board of Directors
The Intercardia Board (with director Glenn L. Cooper, M.D., who is
President, Chief Executive Officer and a director of Interneuron and Chairman
of the Board, acting President and Chief Executive Officer of Transcell,
abstaining) has unanimously determined that the Merger is in the best interests
of and fair to the stockholders of Intercardia and approved the Merger
Agreement, and recommends that the Intercardia stockholders vote FOR approval
of the Merger Agreement. See "Intercardia and Transcell Proposal No. 1 -- The
Merger -- Recommendation of the Intercardia Board".
Recommendation of Transcell's Board of Directors
The Board of Directors (the "Transcell Board") of Transcell (with director
Clayton I. Duncan, who is President, Chief Executive Officer and a director of
Intercardia, abstaining) has unanimously determined that the Merger is in the
best interests of and fair to the stockholders of Transcell and approved the
Merger Agreement, and recommends that the Transcell stockholders vote FOR
approval of the Merger Agreement. See "Intercardia and Transcell Proposal No. 1
- -- The Merger -- Recommendation of the Transcell Board".
6
<PAGE>
Opinions of Financial Advisors
NationsBanc Montgomery Securities LLC ("NMS") delivered to the Intercardia
Board its oral opinion on December 1, 1997, as updated orally on February 12,
1998, and in writing on March 2, 1998, to the effect that the total
consideration to be paid by Intercardia in connection with the Merger,
including the Technology/Guarantee Shares to be paid to Interneuron, is fair,
from a financial point of view, to Intercardia as of the date of such opinion.
A copy of NMS's opinion is attached to this Proxy Statement/Prospectus as Annex
B and should be read carefully in its entirety. For certain financial advisory
services to Intercardia, including the rendering of its opinion, NMS will
receive from Intercardia fees of $50,000, plus reimbursement for out-of-pocket
expenses.
Hempstead & Company ("Hempstead") delivered to the Transcell Board its
oral opinion on February 12, 1998, as updated in writing on February 26, 1998,
to the effect that the consideration offered to the holders of Transcell
Capital Stock, Transcell Warrants and Transcell Options (other than
Interneuron) in the Merger was fair from a financial point of view. A copy of
Hempstead's opinion is attached to this Proxy Statement/Prospectus as Annex C
and should be read carefully in its entirety. For certain financial advisory
services to Transcell, including the rendering of its opinion, Transcell has
agreed to pay Hempstead a fee of $25,000, and has agreed to indemnify
Hempstead, its affiliates, and their directors, officers, agents, consultants,
employees and controlling persons against certain liabilities, including
liabilities under federal securities laws. Interneuron has also retained
Hempstead to provide an appraisal of the value of the stock of another
majority-owned subsidiary of Interneuron for a fee of $5,000. See "Intercardia
and Transcell Proposal No. 1 -- The Merger -- Opinions of Financial Advisors".
Board of Directors and Management of Intercardia After the Merger
At and after the Merger, the Intercardia Board shall consist of
Intercardia's Board as of immediately prior to the Merger. It is currently
expected that at and after the Merger, the executive officers of Intercardia
shall be the executive officers of Intercardia immediately prior to the
Effective Time with the addition of Michael J. Sofia, Ph.D., Transcell's Vice
President of Research and Director of Chemistry, as a new vice president of
Intercardia and such other additions as the Intercardia Board shall designate.
See "Intercardia and Transcell Proposal No. 1 -- The Merger -- The Merger
Agreement -- Board of Directors and Management of Intercardia After the
Merger".
Interests of Certain Persons in the Merger
As of the Record Date, Interneuron owned approximately 77.9% of the
Transcell Voting Shares and approximately 61.1% of the outstanding Intercardia
Common Stock. In addition, certain directors and executive officers of and
consultants to each of Intercardia and Transcell have certain interests in the
Merger that may be in addition to the interests of the stockholders of
Transcell generally and may create certain conflicts of interest. These
interests arise from, among other things, stock or option ownership in each
company, certain employee benefit plans, indemnification and insurance
arrangements among Intercardia, Transcell and certain directors and officers of
Transcell. These include arrangements providing for acceleration at the Closing
of certain options to purchase Transcell's Capital Stock, including those under
agreements providing for such acceleration in the event such directors are
terminated in connection with a change in control, including the Merger.
NMS, the financial advisor to Intercardia in connection with the Merger
and the underwriter of Intercardia's initial public offering in February 1996,
received fees from Transcell during 1996 in connection with a proposed
acquisition of Transcell which was not consummated, and from Interneuron in
connection with a public offering of Interneuron's securities in June 1996.
Interneuron has supported Transcell by, among other things, entering into
certain research and license agreements relating to technology under
development by Transcell when the other parties thereto were unable to enter
into them with Transcell directly. Pursuant to the Merger Agreement,
Interneuron has agreed to assign to Intercardia its rights and obligations
under these agreements and to continue to guarantee certain equipment and
facility lease obligations of Transcell. In exchange for the assignment of
those rights and continuing guaranties, Interneuron will receive the
Technology/ Guarantee Shares at Closing and certain royalties on net sales of
products subject to such agreements. See "Intercardia and Transcell Proposal
No. 1 -- The Merger -- Interests of Certain Persons in the Merger".
Conditions to Consummation of the Merger
Consummation of the Merger is subject to a number of conditions, including
the approval of the Merger Agreement by the requisite stockholders of each of
Intercardia and Transcell. Conditions to each party's obligations to consummate
the Merger may be waived by such party, subject to applicable law and certain
limitations imposed by the Merger Agreement. See "Intercardia and Transcell
Proposal No. 1 -- The Merger -- The Merger Agreement -- Conditions to
Consummation of the Merger" and " -- Amendment and Termination of the Merger
Agreement".
7
<PAGE>
Exchange of Share Certificates
Certificates nominally representing shares of Transcell Capital Stock,
other than any certificates representing Dissenting Shares, if any ("Transcell
Certificates"), shall, as of the Effective Time, for all purposes, be deemed to
evidence the number of shares of Intercardia Common Stock determined in
accordance with the applicable Exchange Ratio. As soon as practicable following
the Effective Time, notice of consummation of the Merger, together with a
Letter of Transmittal for use in surrendering Transcell Certificates in
exchange for certificates representing shares of Intercardia Common Stock, will
be mailed to holders of shares of Transcell Capital Stock. At the time of
issuance of certificates for such Intercardia Common Stock, cash will be paid
in lieu of issuing any fractional shares of Intercardia Common Stock. Holders
of Transcell Capital Stock are requested not to surrender their Transcell
Certificates until they receive such a Letter of Transmittal. See "Intercardia
and Transcell Proposal No. 1 -- The Merger -- The Merger Agreement -- Exchange
of Shares".
Termination
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, whether before or after approval by the
stockholders of Intercardia and the stockholders of Transcell under
circumstances specified in the Merger Agreement, including: (i) by the mutual
written consent of Intercardia, Transcell and Interneuron; (ii) by Intercardia,
Interneuron or Transcell if the Merger is not consummated on or prior to May
31, 1998; (iii) by Intercardia, Interneuron or Transcell if stockholder
approval shall not have been obtained at either of the Meetings; (iv) by
Intercardia, Interneuron or Transcell if any judgment, injunction or other
order of a court or other competent authority preventing consummation of the
Merger shall have become final and nonappealable; (v) by Intercardia,
Interneuron or Transcell in the event of a material breach by the other party
of any representation, warranty, covenant or agreement contained in the Merger
Agreement which has not been cured or waived as provided for therein; or (vi)
by Intercardia, Interneuron or Transcell, if the Intercardia Stock Price at
Closing is less than $10.00 or more than $34.00. See "Intercardia and Transcell
Proposal No. 1 -- The Merger -- The Merger Agreement -- Amendment and
Termination of the Merger Agreement".
Certain Federal Income Tax Consequences
In general, it is anticipated that no gain or loss will be recognized by
the holders of Transcell Capital Stock as a result of the Merger, except with
respect to: (i) the cash received in lieu of fractional shares of Intercardia
Common Stock; and (ii) that portion of the Aggregate Purchase Price received as
part of the Future Installments which may be deemed imputed interest income and
treated as taxable ordinary income. The holders of Transcell Options and
Transcell Warrants being exchanged for Replacement Options and Replacement
Warrants, respectively, in the Merger should not recognize taxable income as a
result of such exchange. However, Transcell Holders should consult with their
own tax advisers regarding the tax consequences of the Merger with respect to
their own particular circumstances, including the applicability of various
state and local tax laws. See "Intercardia and Transcell Proposal No. 1 -- The
Merger -- Certain Federal Income Tax Consequences".
Accounting Treatment
It is intended that a portion of the Merger will be treated in a manner
similar to a "pooling of interests", because of the common ownership by
Interneuron of Intercardia and Transcell, and a portion will be treated as a
"purchase" for financial accounting purposes, in accordance with generally
accepted accounting principles. See "Intercardia and Transcell Proposal No. 1
- -- The Merger -- Accounting Treatment".
Regulatory Approvals
No filings are required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations thereunder with respect
to the Merger. Intercardia and Transcell are aware of no other governmental or
regulatory approvals required for consummation of the Merger, other than
compliance with applicable "blue sky" laws of the various states. See
"Intercardia and Transcell Proposal No. 1 -- The Merger -- Regulatory and Other
Legal Matters".
Appraisal Rights
Holders of Transcell Capital Stock who comply with the conditions of
Section 262 of the Delaware General Corporation Law (the "DGCL") and who do not
vote in favor of the Merger will, if the Merger is consummated, be entitled to
assert the rights afforded dissenting stockholders pursuant to Section 262 of
the DGCL. Failure to follow the required procedure under the DGCL on a timely
basis in connection with the exercise of such rights may nullify such rights.
See "Appraisal
8
<PAGE>
Rights of Transcell Stockholders" and the full text of Section 262 of the DGCL,
which is attached hereto as Annex D. Holders of shares of Intercardia Common
Stock will have no appraisal or dissenters' rights in connection with the
Merger.
Market Prices and Dividend Policies
The shares of Intercardia Common Stock are listed and traded on Nasdaq
under the symbol "ITRC". Set forth below are the quarterly high and low sales
prices, as reported on Nasdaq, of shares of Intercardia Common Stock for the
fiscal quarters indicated from February 1, 1996 (the date trading commenced).
These prices are based on transactions between dealers, which do not reflect
retail mark-up, markdown or commissions.
<TABLE>
<CAPTION>
High Low
--------- -----------
<S> <C> <C>
Fiscal Year Ended September 30, 1996
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
Fiscal Year Ending September 30, 1998
October 1, 1997 through December 31, 1997 ......... 25 1/2 16 7/8
January 1, 1998 through March 31, 1998 ............ 21 1/4 15
April 1, 1998 through April 6, 1998 ............... 20 3/8 19 3/4
</TABLE>
On November 4, 1997, the last full trading day prior to the announcement
that Intercardia and Transcell had entered into the Letter of Intent relating
to the Merger, the reported closing sales price per share of Intercardia Common
Stock on Nasdaq was $24.25. On April 6, 1998, the second to last full trading
day prior to the date of this Proxy Statement/Prospectus, the reported closing
sales price per share of Intercardia Common Stock on Nasdaq was $19.75. As of
April 7, 1998, the Intercardia Stock Price would have been $20.29.
STOCKHOLDERS ARE ADVISED TO OBTAIN MARKET QUOTATIONS FOR THE INTERCARDIA
COMMON STOCK. No assurance can be given as to the market price of Intercardia
Common Stock at the Effective Time or at any other time.
Intercardia has never paid cash dividends on Intercardia Common Stock.
Intercardia intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
decision whether to pay dividends will be made by the Intercardia Board in
light of conditions then existing, including Intercardia's results of
operations, financial condition and requirements, business conditions and other
factors.
Transcell's stock is not publicly traded. Transcell has never paid any
cash dividends on Transcell Common Stock and, for the foreseeable future,
intends to retain all of its earnings, if any, for use in its business. The
declaration of any future dividends by Transcell is within the discretion of
the Transcell Board and is dependent upon the earnings, financial condition and
capital requirements of Transcell, as well as any other factors deemed relevant
by the Transcell Board.
Selected Historical and Unaudited Pro Forma Combined Financial Data
Selected Financial Data of the Company
The selected consolidated financial data presented below for each of the
fiscal years ended September 30, 1995 through September 30, 1997 and for the
period from inception (March 15, 1994) to September 30, 1994 have been derived
from, and are qualified by reference to, the consolidated financial statements
of the Company, which have been audited by Coopers & Lybrand, independent
public accountants. The selected financial data presented below for the three
months ended December 31, 1997 and 1996 have been derived from the Company's
unaudited financial statements and reflect all adjustments the Company's
management considers necessary for a fair and consistent presentation of the
financial position and results of operations for those periods. The operating
results for the three-month period ended December 31, 1997 are not necessarily
indicative of results that may be obtained for the fiscal year ending September
30, 1998 or any other period. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", ("SFAS
9
<PAGE>
No. 128") as of December 31, 1997. All prior period data relating to earnings
(loss) per share have been restated to conform to the provisions of SFAS No.
128 and SEC Staff Accounting Bulletin No. 98. The following selected financial
data are qualified by reference to, and should be read in conjunction with,
"Certain Information Regarding the Company -- Management's Discussion and
Analysis of Financial Condition and Results of Operations", the consolidated
financial statements of the Company, the notes thereto and the audit report
thereon included elsewhere in this Proxy Statement/Prospectus.
INTERCARDIA, INC.
SELECTED HISTORICAL FINANCIAL DATA
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended
December 31, Fiscal Year Ended September 30,
----------------------------- ----------------------------------------------
1997 1996 1997 1996 1995
--------------- ------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue ......... $ 216,934 $2,148,637 $ 4,042,816 $5,009,000
Investment income ........................ 509,280 515,877 2,110,269 1,342,088 $ 61,663
------------ ---------- ------------- ---------- ------------
Total revenue .......................... 726,214 2,664,514 6,153,085 6,351,088 61,663
------------ ---------- ------------- ---------- ------------
Costs and expenses:
Research and development ................. 1,314,973 522,637 14,263,590 2,317,904 2,003,663
Purchase of in-process research
and development ........................ -- -- 410,608 350,000 --
General and administrative ............... 619,141 530,865 2,125,696 1,895,251 582,912
------------ ---------- ------------- ---------- ------------
Total costs and expenses ............... 1,934,114 1,053,502 16,799,894 4,563,155 2,586,575
------------ ---------- ------------- ---------- ------------
Income (loss) before income taxes
and minority interest .................... (1,207,900) 1,611,012 (10,646,809) 1,787,933 (2,524,912)
Income taxes .............................. -- -- -- (37,000) --
Minority interest ......................... -- (388,912) 568,068 (568,068) --
------------ ---------- ------------- ---------- ------------
Net income (loss) ......................... $ (1,207,900) $1,222,100 $ (10,078,741) $1,182,865 $ (2,524,912)
============ ========== ============= ========== ============
Net income (loss) per common
share -- basic ........................... $ (0.18) $ 0.18 $ (1.49) $ 0.20 $ (0.60)
============ ========== ============= ========== ============
Net income (loss) per common
share -- diluted ......................... $ (0.18) $ 0.16 $ (1.49) $ 0.20 $ (0.60)
============ ========== ============= ========== ============
Weighted average common shares
outstanding -- basic ..................... 6,766,547 6,739,657 6,750,611 5,871,115 4,192,621
============ ========== ============= ========== ============
Weighted average common shares
outstanding -- diluted ................... 6,766,547 7,504,429 6,750,611 6,041,025 4,192,621
============ ========== ============= ========== ============
<CAPTION>
Period from Inception
(March 15, 1994) to
September 30,
1994
----------------------
<S> <C>
Revenue:
Contract and license fee revenue .........
Investment income ........................
Total revenue ..........................
Costs and expenses:
Research and development ................. $ 106,344
Purchase of in-process research
and development ........................ 1,852,000
General and administrative ............... --
------------
Total costs and expenses ............... 1,958,344
------------
Income (loss) before income taxes
and minority interest .................... (1,958,344)
Income taxes .............................. --
Minority interest ......................... --
------------
Net income (loss) ......................... $ (1,958,344)
============
Net income (loss) per common
share -- basic ........................... $ (0.47)
============
Net income (loss) per common
share -- diluted ......................... $ (0.47)
============
Weighted average common shares
outstanding -- basic ..................... 4,192,621
============
Weighted average common shares
outstanding -- diluted ................... 4,192,621
============
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30,
December 31, ----------------------------------------------------------------
1997 1997 1996 1995 1994
---------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash and marketable securities .......... $ 27,619,484 $ 37,018,279 $ 37,096,308 $ 1,121,624
Working capital (deficit) ............... 20,708,844 24,362,793 35,035,852 (176,158) $ (1,958,343)
Total assets ............................ 29,055,855 38,527,311 38,945,004 1,289,721 600
Due to Interneuron ...................... 1,253,784 -- -- 171,868 1,044,207
Long-term lease and debt obligations .... 148,603 160,938 118,113 115,269 --
Total liabilities ....................... 3,596,384 11,979,361 2,149,463 1,421,569 1,958,943
Accumulated deficit ..................... (14,590,531) (13,382,631) (3,303,890) (4,486,755) (1,961,843)
Total stockholders' equity (deficit) .... 25,459,471 26,547,950 36,227,473 (131,848) (1,958,343)
</TABLE>
10
<PAGE>
Selected Financial Data of Transcell
The selected financial data presented below for each of the fiscal years
ended September 30, 1993 through September 30, 1997 have been derived from the
financial statements of Transcell. The selected financial data presented below
for the three-month periods ended December 31, 1997 and 1996 and for the period
from October 21, 1991 (date of inception) to December 31, 1997 have been
derived from Transcell's financial statements and reflect all adjustments
Transcell's management considers necessary for a fair and consistent
presentation of the financial position and results of operations for those
periods. The results of operations for the three month period ended December
31, 1997 are not necessarily indicative of results of operations for the fiscal
year ending September 30, 1998 or any other period. The data presented below
are qualified by reference to, and should be read in conjunction with "Certain
Information Regarding Transcell -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with Transcell's financial
statements, the notes thereto and the audit report thereon, which includes a
qualification relating to Transcell's ability to continue as a going concern,
included elsewhere in this Proxy Statement/Prospectus.
TRANSCELL TECHNOLOGIES, INC.
SELECTED HISTORICAL FINANCIAL DATA
Statement of Operations Data:
<TABLE>
<CAPTION>
October 21, 1991
Three Months Ended December 31, (date of inception)
----------------------------------- to December 31,
1997 1996 1997
---------------- ---------------- --------------------
<S> <C> <C> <C>
Contract revenue ...................... $ 316,750 $ 2,276,481
Costs and expenses:
Research and development ........... 1,340,776 $ 923,812 19,093,091
General and administrative ......... 396,408 501,751 7,033,751
Interest expense, net .............. 357,226 238,327 3,308,642
------------ ------------ -------------
Total costs and expenses ......... 2,094,410 1,663,890 29,165,484
------------ ------------ -------------
Net loss .............................. $ (1,777,660) $ (1,663,890) $ (26,889,003)
============ ============ =============
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1997
------------------
<S> <C>
Cash and marketable securities ................ $ 106,645
Working capital deficit ....................... (16,569,626)
Total assets .................................. 3,857,468
Due to Interneuron ............................ 14,296,343
Long-term lease and debt obligations .......... 1,860,774
Total liabilities ............................. 18,705,270
Accumulated deficit ........................... (26,892,771)
Total stockholders' deficit ................... (14,847,802)
</TABLE>
11
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
SELECTED HISTORICAL FINANCIAL DATA
(Continued)
Statement of Operations Data:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Contract revenue .................. $ 1,316,750 $ 338,650 $ 304,331
Costs and expenses:
Research and development ....... 5,708,625 2,958,373 3,123,414 $ 3,491,348 $ 1,706,771
General and administrative ..... 2,079,813 1,533,304 1,481,381 1,151,797 361,010
Interest expense, net .......... 1,252,330 589,350 267,479 443,625 128,632
------------ ------------ ------------ ------------ ------------
Total costs and expenses ..... 9,040,768 5,081,027 4,872,274 5,086,770 2,196,413
------------ ------------ ------------ ------------ ------------
Net loss .......................... $ (7,724,018) $ (4,742,377) $ (4,567,943) $ (5,086,770) $ (2,196,413)
============ ============ ============ ============ ============
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash and marketable securities ........... $ 561,559 $ 294,715 $ 46,699 $ 48,800 $ 21,382
Working capital deficit .................. (14,508,306) (6,165,574) (1,220,673) (8,589,825) (3,316,657)
Total assets ............................. 4,095,898 1,704,614 805,747 1,094,342 372,165
Due to Interneuron ....................... 12,425,916 5,021,582 832,074 7,982,572 2,987,477
Long-term lease and debt obligations ..... 1,967,030 778,157 753,496 495,648 --
Total liabilities ........................ 17,188,009 7,251,658 2,041,659 9,141,680 3,361,864
Accumulated deficit ...................... (25,115,111) (17,391,093) (12,648,717) (8,080,773) (2,994,003)
Total stockholders' deficit .............. (13,092,111) (5,547,044) (1,235,911) (8,047,338) (2,989,699)
</TABLE>
12
<PAGE>
Selected Unaudited Pro Forma Condensed Combined Financial Data
The following unaudited pro forma condensed combined statements of
operations data have been prepared by combining the condensed statements of
operations of the Company and Transcell for the three months ended December 31,
1997 and for the fiscal years ended September 30, 1997, 1996 and 1995. The pro
forma combination has been accounted for using a partial "pooling of interests"
and a partial "purchase" method of accounting. The partial "purchase" method of
accounting has been used for the three months ended December 31, 1997 and for
the fiscal year ended September 30, 1997. The pro forma condensed combined
balance sheet data combines the condensed balance sheets of the Company and
Transcell as of December 31, 1997 and September 30, 1997 as adjusted to reflect
the acquisition by Intercardia of the current non-Interneuron ownership
interest in Transcell accounted for as a "purchase" as if the transaction
occurred on such dates. These data should be read in conjunction with the other
unaudited pro forma condensed combined financial statements, the accompanying
notes, and the historical financial statements of the respective companies and
the related notes thereto. The unaudited pro forma results are not necessarily
indicative of the operating results or financial position that would have been
achieved or existed had the transactions been in effect as of the dates assumed
and should not be construed as representative of future combined results or of
the Company's financial position for any future date.
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC.
SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Ended Fiscal Year Ended September 30,
December 31, ------------------------------------------------
1997 1997 1996 1995
Statement of Operations Data: --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue ........................... $ 533,684 $ 5,359,566 $ 5,347,650 $ 304,331
Investment income .......................................... 510,484 2,113,554 1,342,957 89,854
------------ ------------- ------------ ------------
Total revenue ............................................. 1,044,168 7,473,120 6,690,607 394,185
Costs and expenses:
Research and development ................................... 2,655,749 19,972,215 5,276,277 5,127,077
Purchase of in-process research and development ............ -- 410,608 350,000 --
General and administrative ................................. 1,004,477 4,178,636 3,395,552 2,063,363
Interest expense ........................................... 369,502 1,282,488 623,222 296,600
------------ ------------- ------------ ------------
Total costs and expenses .................................. 4,029,728 25,843,947 9,645,051 7,487,040
------------ ------------- ------------ ------------
Loss before minority interest ................................ (2,985,560) (18,370,827) (2,954,444) (7,092,855)
Income taxes ................................................. -- -- (37,000) --
Minority interest ............................................ -- 568,068 (568,068) --
------------ ------------- ------------ ------------
Net loss ..................................................... $ (2,985,560) $ (17,802,759) $ (3,559,512) $ (7,092,855)
============ ============= ============ ============
Net loss per common share -- basic (1) ....................... $ (0.40) $ (2.39) $ (0.56) $ (1.52)
============ ============= ============ ============
Net loss per common share -- diluted (1) ..................... $ (0.40) $ (2.39) $ (0.56) $ (1.52)
============ ============= ============ ============
Weighted average common shares outstanding -- basic (1) ...... 7,467,333 7,451,397 6,342,632 4,664,137
============ ============= ============ ============
Weighted average common shares outstanding -- diluted (1)..... 7,467,333 7,451,397 6,342,632 4,664,137
============ ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
Balance Sheet Data: ------------------- -------------------
<S> <C> <C>
Cash and marketable securities ............... $ 27,726,129 $ 37,579,838
Working capital .............................. 18,723,855 22,578,674
Total assets ................................. 32,913,323 42,623,209
Due to Interneuron ........................... 1,253,784 --
Long-term lease and debt obligations ......... 1,484,671 1,613,239
Total liabilities ............................ 7,192,311 15,928,454
Accumulated deficit .......................... (47,046,695) (44,061,135)
Total stockholders' equity ................... 25,971,012 26,944,755
</TABLE>
- ---------
(1) Calculated as set forth in Note C of Notes to Unaudited Pro Forma Condensed
Combined Financial Statements.
13
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act which
represent the Company's and/or Transcell's expectations or beliefs. For this
purpose, any statements contained in this Proxy Statement/Prospectus that are
not statements of historical fact may be deemed to be forward-looking
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors, including those
described in "Risk Factors" below. All forward-looking statements included in
this Proxy Statement/Prospectus are based on information available to
Intercardia or Transcell as the case may be, as of the date hereof, and neither
Intercardia nor Transcell assumes any obligation to update any such
forward-looking statements.
RISK FACTORS
Transcell Holders and Intercardia stockholders should consider carefully
the following factors, among others, in evaluating the Merger.
Risk Factors with Respect to the Company
History of Losses; Fluctuations in Operating Results; Future Charges to
Operations
The Company has incurred net losses in each of its fiscal years except the
fiscal year ended September 30, 1996, during which it received the initial
$5,000,000 payment from Astra Merck Inc. ("Astra Merck") under a collaboration
and license agreement for BEXTRA, the "twice-daily" formulation of bucindolol
under development in the United States (the "Astra Merck Collaboration"). The
Company has experienced, and may continue to experience significant
fluctuations in revenues and expenses as a result of the timing of payments
under collaborative and license agreements. As of December 31, 1997, the
Company had accumulated net losses of approximately $14,591,000. As of December
31, 1997, on a combined pro forma basis, the Company had an accumulated deficit
of approximately $47,381,000. The Company expects to incur operating losses at
least through the fiscal year ending September 30, 1999 as it contributes to
the funding of clinical trials of BEXTRA and as its product research and
development programs expand. Prior to the Merger, substantially all of
Transcell's net losses (approximately $1,778,000, $7,724,000 and $26,889,000
during the three-month period ended December 31, 1997, during the fiscal year
ended September 30, 1997 and since October 21, 1991 (date of inception),
respectively) were funded by Interneuron and the Company's expenses will
increase substantially as a result of the acquisition of Transcell. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, receive commercial marketing approvals for, manufacture, introduce and
market products. No assurance can be given that the Company will ever generate
significant revenue or achieve or sustain profitability.
Intercardia expects that, as of Closing, it will incur charges to
operations for the purchase of the non-Interneuron portion of in-process
research and development, estimated to be up to $8,000,000 (based on
Intercardia's stock price as of the date hereof). The actual charges could be
lesser or greater, depending in part on the Intercardia Stock Price at Closing.
The Company will incur additional future charges relating to certain
Replacement Options to be issued in connection with the Merger. In connection
with its acquisition of CPEC, the Company will also incur additional future
charges to operations when and if it makes milestone payments to the former
CPEC stockholders, with each additional payment being a minimum of $750,000 and
a maximum of $1,875,000. See "Certain Information Regarding the Company --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Future Capital Needs; Uncertainty of Additional Funding
While the Company believes it has sufficient cash available for currently
planned expenditures through the fiscal year ending September 30, 1999,
including expenses related to Transcell (but excluding any additional
bucindolol development costs the Company may assume in connection with the
Astra Merck Collaboration), there can be no assurance that additional equity or
debt financing will not be required prior to such time. Intercardia may require
additional financing to fund the Company's operations or to make payments to
its collaborative partners, including up to $11,000,000 in payments for U.S.
product launch expenses to Astra Merck under the Astra Merck Collaboration, any
additional costs incurred in connection with the Astra Merck Collaboration and
40% of development and marketing costs of bucindolol outside the United States,
Puerto Rico and Japan (the "Knoll Territory") pursuant to an agreement (the
"Knoll Collaboration") with BASF Pharma/Knoll AG ("Knoll"), as well as to fund
new business opportunities and fund growth. The Company's future capital
requirements will depend on many factors, including the progress of the
Company's research and development, the scope and results of preclinical
studies and clinical trials (including, in particular, the ongoing bucindolol
Phase III Beta-blocker
14
<PAGE>
Evaluation of Survival Trial (the "BEST Study")), the cost, timing and outcome
of regulatory reviews, the rate of technological advances, determinations as to
the commercial potential of the Company's products under development, the
market acceptance of any of the Company's products, administrative and legal
expenses, competitive products, the establishment of third-party manufacturing
and marketing arrangements and the establishment of collaborative relationships
with other companies. The Company's strategy is to seek additional
collaborative agreements with corporate partners, when appropriate for each of
its potential products. There can be no assurance, however, that any such
agreements will be entered into or that they will generate cash sufficient to
fund the Company's operations.
There can be no assurance that funds will be available on favorable terms,
if at all. Any additional equity financing may result in dilution to
Intercardia's stockholders. If adequate funds are not available, the Company
may be required to cut back or discontinue one or more of its product
development programs, or obtain funds through strategic alliances on terms less
favorable to the Company than might otherwise be obtained. See "Certain
Information Concerning the Company -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
Risks Relating to Astra Merck Collaboration
To date, a significant portion of the cost of the development activities
relating to BEXTRA in the United States have been funded by Astra Merck under
the Astra Merck Collaboration. The Company expects that the funding for a
significant portion of the remaining development activities, as well as the
commercialization and marketing activities of BEXTRA in the United States, will
be undertaken by Astra Merck under the Astra Merck Collaboration. Therefore,
the Company is substantially dependent upon Astra Merck for the success of this
formulation of the Company's first product, bucindolol.
The Astra Merck Collaboration provides that Astra Merck shall be
responsible for the Company's royalty obligation to Bristol-Meyers Squibb
Company ("BMS") and for the expenses incurred in development and
commercialization of the twice-daily formulation of bucindolol in the United
States, and Astra Merck has committed an amount up to $15,000,000 to be
expended in connection with such development. The Company expects that during
the fiscal year ending September 30, 1998 the cumulative total of such expenses
will exceed $15,000,000. The Company and Astra Merck are discussing Astra
Merck's contractual responsibility to fund such expenses above $15,000,000. The
Company believes that in the event Astra Merck does not fund such expenses,
Astra Merck would be in breach of the Astra Merck Collaboration. The Astra
Merck Collaboration provides for arbitration of any disputes, and there can be
no assurance as to the cost or results of any arbitration. In the event that
the Company funds such expenses, or a portion of such expenses, in excess of
$15,000,000, the Company's results of operations and financial position might
be materially adversely affected.
In addition, under the Astra Merck Collaboration, the Company must
reimburse Astra Merck for one-third of BEXTRA launch costs beginning when the
Company files a new drug application (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
significantly reduced. The Company currently intends to make such payments,
assuming sufficient funds are available. However, in the event that the Company
does not make these payments, the royalties payable by Astra Merck to CPEC will
be significantly reduced and the Company's results of operations would be
materially adversely affected.
Risks Relating to Knoll Collaboration
Under the Knoll Collaboration, Knoll and the Company share the development
and marketing costs of bucindolol in the Knoll 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 Knoll Territory
and approximately 33% of once-daily developments costs which have a worldwide
benefit. The Company is responsible for the remainder of once-daily development
costs.
Because a significant portion of the development, commercialization and
marketing activities relating to bucindolol in the Knoll Territory will be
funded by Knoll under the Knoll Collaboration, the Company is substantially
dependent upon Knoll for the success of bucindolol in the Knoll Territory.
Dependence on Other Collaborative Partners
The Company believes that it will be necessary to enter into additional
collaborative arrangements in the future 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 or the Company's other collaborative partners will not terminate their
collaborations with the Company, or that these collaborations will be completed
or successful.
15
<PAGE>
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. See "Certain Information Regarding the Company -- Business --
Collaborative Arrangements".
Dependence on One Product
A significant majority of the Company's efforts over the next few years
will be devoted to bucindolol. Accordingly, the Company's future prospects are
substantially dependent on favorable results of the BEST Study, approval of
BEXTRA by the U.S. Food and Drug Administration (the "FDA") and the successful
commercialization of BEXTRA. Even if the results of the BEST Study are
favorable and regulatory approval is obtained, the success of BEXTRA is subject
to a number of risks, including risks related to competition, with carvedilol
in particular (see " -- Competition"), the expiration in November 1997 of the
composition of matter patent on bucindolol, governmental regulation,
pharmaceutical pricing and reimbursement, market acceptance and product
liability. The Company licenses bucindolol from BMS. The Company has licensed
U.S. rights to a twice-daily formulation of bucindolol to Astra Merck and
rights to all formulations of bucindolol in the Knoll Territory to Knoll. The
Company must comply with the terms of its agreements with these parties, and is
dependent on Astra Merck and Knoll to comply with and perform their respective
obligations under such agreements as bucindolol is developed and marketed
commercially. Although the Merger involves the acquisition of additional
technologies, the Company will remain dependent on BEXTRA.
Competition
Due to the incidence and severity of cardiovascular and pulmonary
diseases, the market for therapeutic products that address such diseases is
large, and competition is intense and expected to increase. In particular,
carvedilol, a non-selective beta blocker with moderate vasodilating properties
owned by Boehringer Mannheim GmbH ("Boehringer") and licensed in the United
States and certain other countries to SmithKline Beecham ("SKB"), was launched
in June 1997 in the United States by SKB for the treatment of CHF and is being
co-promoted by Boehringer. Carvedilol's approval for marketing as a treatment
of CHF in the United States prior to BEXTRA may have adversely affected the
patient enrollment rate of the BEST Study and could provide a marketing
advantage for Coreg. The Company is also aware that carvedilol is approved for
the treatment of CHF in at least 15 other countries, including Canada, Mexico
and a number of major European countries. In addition, in March 1998,
Germany-based Merck KGaA announced early termination of the CBIS II trial to
test bisoprolol as a treatment in CHF patients in Europe. Merck KGaA reported
that in the trial, which enrolled 2,647 patients, those receiving bisoprolol
had a much higher survival rate than patients receiving customary treatment.
Bisoprolol is a beta-1 receptor selective beta-blocker marketed in the United
States by Lederle for hypertension. The Company is aware of other products in
research or development by its competitors that address the diseases being
targeted by the Company. In addition, other pharmaceutical companies that are
selling, developing or manufacturing beta-blockers may develop their beta-
blockers as a treatment for CHF. The Company's most significant competitors are
fully integrated pharmaceutical companies and established biotechnology
companies, all of 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,
particularly through collaborative arrangements with large pharmaceutical
companies. Many of these competitors have significant cardiovascular and
pulmonary products cleared for commercial marketing or under development, and
operate large, well-funded cardiovascular and pulmonary disease 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 those being developed
by the Company or that would render the Company's technology obsolete or
noncompetitive.
Several companies have explored the therapeutic potential of antioxidant
compounds in numerous indications. 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. ("Circe"), has conducted clinical trials with a bioartificial
liver which utilizes porcine hepatocytes (pig liver cells). Other corporations
and academic
16
<PAGE>
institutions are conducting research in the area of liver and other stem cells.
See "Certain Information Regarding the Company -- Business -- Competition".
Limited Operating History; Early Stage of Development
Intercardia was founded in March 1994 to acquire rights to bucindolol for
the treatment of congestive heart failure. The Company's activities to date
have been primarily limited to development of bucindolol. None of the Company's
products has received approval for commercial marketing. There can be no
assurance that the costs and time required to complete studies, including the
BEST Study, will not exceed current estimates, that the results of such studies
will be favorable, or that, even after such time and expenditures, FDA or any
other regulatory approval will be obtained for any Company product. No
assurance can be given that the Company's product development efforts will be
successfully completed, that required regulatory approvals will be obtained or
that any products, if introduced, will be successfully manufactured or marketed
or achieve customer acceptance. Even assuming successful completion of the BEST
Study and regulatory approval of BEXTRA, the Company does not expect that
BEXTRA will be commercially available before 2000. All of the Company's other
products and technologies are in the very early stages of development.
Moreover, any products developed by the Company, including those under
development by Transcell, may prove to have undesirable and unintended side
effects and, in some cases, may require complex delivery systems that may
prevent or limit their commercial use. The Company may also encounter problems
relating to research, development, manufacturing, distribution and marketing of
its products. The failure or inability to address such problems adequately
would have a material adverse effect on the Company. See "Certain Information
Regarding the Company -- Business".
Uncertainties Related to Clinical Trials
Before obtaining regulatory approval for the commercial sale of BEXTRA or
any of its other products under development, the Company must demonstrate that
the product is safe and efficacious for use in each target indication. The
results of 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 clinical trials of the Company's products, including the BEST
Study, will demonstrate the safety and efficacy of bucindolol or any other
products or will result in marketable products. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials.
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 by 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
National Institutes of Health ("NIH") and the Department of Veterans Affairs
("VA").
The Company currently intends to submit an NDA for BEXTRA to 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 BEXTRA 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 BEXTRA, the Company would be materially
and adversely affected. See "Certain Information Regarding the Company --
Business -- Bucindolol" and " -- Government Regulation".
Uncertainties Related to Development Stage of Products
Any future product in-licensed by the Company will likely be and all of
Transcell's technology is in the development stage, require significant further
research and development, as well as testing and regulatory approvals, and will
be subject to the risks of failure inherent in the development of products or
therapeutic procedures based on innovative technologies. These risks include
the possibilities that any or all of these proposed products or procedures are
found to be unsafe or ineffective, or otherwise fail to receive necessary
regulatory approvals; that the proposed products or procedures are uneconomical
to market or do not achieve broad market acceptance; that third parties hold
proprietary rights that preclude the Company from marketing them; or that third
parties market a superior or equivalent product. The Company is unable to
predict
17
<PAGE>
whether research and development activities will result in any commercially
viable products. Further, due to the extended testing and regulatory review
process required before marketing approval can be obtained, the time frames for
commercialization of any products are long and uncertain.
Uncertainty Regarding Patents and Proprietary Rights; Expiration of
Bucindolol Patent in November 1997
The Company's success will depend in part on its ability to obtain and
enforce patent and other intellectual property protection for its products both
in the United States and other countries. The U.S. composition of matter patent
covering bucindolol expired in November 1997. As a result, assuming FDA
approval can be obtained, competitors, including generic drug manufacturers,
may market bucindolol. Although the Company expects to seek the limited periods
of market exclusivity for bucindolol under the Waxman-Hatch Act and similar
foreign laws, there can be no assurance that any such exclusivity will be
granted or obtained. See " -- Uncertainty Regarding Waxman-Hatch Act and
Similar Foreign Laws". There can be no assurance that any other 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 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.
In addition to patent protection, the Company also relies on 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. 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 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 or
other proprietary rights related to its products might conflict with current or
future 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 issued to and
other proprietary rights of the Company or to determine the scope and validity
of other parties' proprietary rights. 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. See "Certain Information Concerning the Company -- Business --
Patents and Proprietary Rights".
Uncertainty Regarding Waxman-Hatch Act and Similar Non-U.S. Laws
Certain provisions of the Waxman-Hatch Act grant market exclusivity for
certain new drugs and dosage forms. The Waxman-Hatch Act establishes a period
of time from the date of FDA approval of certain NDAs 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. Because the U.S. composition of matter patent covering bucindolol
expired in November 1997, the Company intends to rely on the Waxman-Hatch Act
for up to 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. In addition, the Company intends to seek marketing exclusivity
under similar laws in effect in the European Community and Japan. There can be
no assurance that any of the benefits of the Waxman-Hatch Act or similar
foreign laws will be available to the Company or that such laws will not be
amended or repealed. 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 a patented 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 its
patent coverage will
18
<PAGE>
be adequate to provide the Company with a degree of market exclusivity. See
"Certain Information Regarding the Company -- Business -- Patents and
Proprietary Rights".
Control of Intercardia by, and Conflicts of Interest with, Interneuron
As of the Record Date, Interneuron owned approximately 61.1% of the
outstanding Common Stock of Intercardia. Accordingly, Interneuron has the
ability to elect all of the directors of Intercardia and control voting with
respect to other matters submitted to stockholders, including extraordinary
corporate transactions such as the Merger or a merger or sale of substantially
all of the Company's assets. Immediately following the Merger, Interneuron will
own approximately 61.5% to 61.9% of the outstanding Intercardia Common Stock
(assuming the Intercardia Stock at Closing and for each of the Future
Installments is in the Fixed Value Range). The actual ownership percentage of
Interneuron in Intercardia after the Merger will depend upon the Intercardia
Stock Price at Closing and for each of the Future Installments, which will
determine the number of shares of Intercardia Common Stock to be issued in the
Merger and under the Technology/Guarantee Agreement. In addition, under the
Technology/Guarantee Agreement, Interneuron is entitled to receive royalties
based on sales of certain products, payable in Intercardia Common Stock.
Interneuron also owns directly 19.9% of CPEC, Intercardia's 80.1% owned
subsidiary. Pursuant to an intercompany services agreement between Intercardia
and Interneuron, Interneuron has the right to purchase from Intercardia
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%.
Intercardia may be subject to various risks arising from Interneuron's
influence over Intercardia, including conflicts of interest relating to new
business opportunities that could be pursued by Intercardia 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 of the
Intercardia Common Stock could be adversely affected. See "Intercardia and
Transcell Proposal No. 1 -- The Merger -- Interests of Certain Persons in the
Merger" and "Certain Information Regarding the Company -- Principal
Stockholders".
Uncertainties Relating to Government Regulation
The Company's research and development activities and the manufacturing
and marketing of its products are subject to extensive and rigorous regulation
by numerous governmental agencies in the United States and other countries.
Clinical trials and the manufacturing and marketing of products will be subject
to the testing and approval processes of the FDA and foreign regulatory
authorities. The process of obtaining required regulatory approvals for
pharmaceuticals from the FDA and other regulatory authorities takes many years
and is expensive. As with any new drug, additional government regulations may
be promulgated which could delay regulatory approval of the Company's products.
Adverse governmental regulation which might arise from future legislative or
administrative action cannot be predicted. There can be no assurance that any
products developed by the Company alone or in collaboration with others will be
determined to be safe and efficacious in clinical trials or meet other
applicable regulatory standards to receive the necessary approvals for
manufacturing and marketing. Even if such approvals are obtained, post-market
evaluation of the products, if required, could result in suspension or
limitation of the approvals. Delays in obtaining United States or foreign
approvals could materially adversely affect the Company. In addition, delays in
regulatory approvals that may be encountered by Astra Merck, Knoll or any other
of the Company's collaborative partners, suppliers or manufacturers could
adversely affect the Company.
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, environmental protection and hazardous substance control, and may be
subject to other present and possible future local, state, federal and foreign
regulation. The impact of such regulation upon the Company cannot be predicted
and could be material and adverse. See "Certain Information Regarding the
Company -- Business -- Government Regulation".
Uncertainty Regarding 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,
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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 materially 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.
See "Certain Information Regarding the Company -- Business -- Pharmaceutical
Pricing and Reimbursement".
Risks Relating to Licenses
The Company has contractual rights to bucindolol for the treatment of CHF
through its license agreement with BMS, to catalytic antioxidant small molecule
technology through its exclusive worldwide license agreement ("Duke License")
with Duke University ("Duke") and its Sponsored Research Agreement (the
"National Jewish Agreement") with National Jewish Medical and Research Center
("National Jewish"), and to hepatic stem cell research through its Sponsored
Research Agreement with the University of North Carolina at Chapel Hill
("UNC"). The Company has royalty obligations for bucindolol even though the
underlying patent has expired, which may materially adversely affect the
Company's competitive position in the event a generic version of bucindolol is
introduced. The Company's licenses are terminable by the licensor for cause or
in the event the Company does not undertake efforts to develop the compounds
and technologies under license. The Company's sponsored research agreements
give it certain rights to obtain exclusive licenses to inventions in the
future, but do not guarantee that it will be able also to obtain such licenses
on favorable terms. There can be no assurance that any of these agreements will
not be so terminated and, if terminated, that the Company will be able to enter
into similar agreements on terms as favorable to the Company as those contained
in its existing 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 agreements for additional products
in the future on acceptable terms. See "Certain Information Regarding the
Company -- Business -- Business Strategy" and " -- License Agreements".
Lack of Manufacturing and Marketing Capabilities
The Company does not have the capability to manufacture or market any
products, and does not currently intend to develop such capabilities. 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. 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. See " -- Dependence on Other
Collaborative Partners" and "Certain Information Regarding the Company --
Business -- Manufacturing and Marketing".
Uncertainty of Market Acceptance
The commercial success of the Company's products, including bucindolol as
a treatment for CHF, will depend upon their acceptance by the medical community
and third-party payors as useful and cost-effective. Market acceptance will
depend upon several factors, including the establishment of the utility and
cost-effectiveness of the Company's products, the receipt of regulatory
approvals in the United States and elsewhere, and competitive products. In
particular, the Company believes that many physicians traditionally have
considered beta-blockers, such as bucindolol and carvedilol, primarily as
treatments for hypertension and angina, and not for CHF. The Company, Astra
Merck and Knoll may be required to engage in extensive advertising, educational
programs and other means to market bucindolol as an effective treatment for
CHF. Failure of any of the Company's products, particularly bucindolol, to
achieve market acceptance would have a material adverse effect on the Company.
See "Certain Information Concerning the Company -- Business -- Manufacturing
and Marketing".
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Dependence Upon Key Personnel
The Company has only 20 employees and is highly dependent on the principal
members of its management and scientific staff, including in particular Clayton
I. Duncan, Intercardia's President and Chief Executive Officer. The Company
will also be highly dependent on the principal members of the scientific and
management staff of Transcell, as well as consultants thereto, particularly
Daniel Kahne, Ph.D. and Suzanne Walker-Kahne, Ph.D. with respect to the
development of Transcell's technology. 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 for continued growth. See "Certain Information Regarding
the Company -- Business -- Employees" and " -- Management".
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 or 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. Under the Knoll Collaboration, both the Company and Knoll 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 sufficient product liability insurance on
commercially reasonable terms for any products approved for marketing. A
successful product liability or indemnification claim or series of claims
brought against the Company could have a material adverse effect on the
Company. See "Certain Information Regarding the Company -- Business -- Product
Liability Exposure and Insurance".
Antitakeover Considerations
The Intercardia Board has the authority to issue up to 3,000,000 shares of
Intercardia Preferred Stock in one or more series, and to determine the prices,
rights, preferences, privileges and restrictions, including voting rights, of
the shares within each series without any further vote or action by the
stockholders. Intercardia has no current plans to issue shares of Preferred
Stock. However, the rights of the holders of Intercardia Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate activities, could have the effect of making it more difficult
for a third party to acquire control of Intercardia. In addition, pursuant to
an intercompany services agreement between Intercardia and Interneuron,
Interneuron has the right to purchase from Intercardia 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%. In
addition, all outstanding options under Intercardia's Option Plan become fully
exercisable for 60 days following certain changes of control of Intercardia.
Further, certain provisions of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving Intercardia. While such
provisions are intended to enable the Intercardia Board to maximize stockholder
value, they may have the effect of discouraging takeovers which could be in the
best interest of certain stockholders. There can be no assurance that such
provisions will not have an adverse effect on the market value of Intercardia's
stock in the future. Intercardia is subject to the antitakeover provisions of
Section 203 of the DGCL. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Interneuron's voting
control over Intercardia may have the effect of delaying or preventing sales of
additional securities of Intercardia or a sale of Intercardia or other change
of control supported by the other stockholders of Intercardia. See "Certain
Information Regarding Intercardia -- Description of Capital Stock" and "Risk
Factors -- Risk Factors with Respect to the Company -- Control of Intercardia,
and Conflicts of Interest with, Interneuron".
Management of Growth; Risks Associated with Acquisitions
The Company has experienced rapid growth over the past three years and it
anticipates continued rapid growth in the future. The Company believes that
sustained growth places a strain on operations and on human and financial
resources. In
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order to manage its growth, the Company must continue to improve its operating
and administrative systems and attract and retain qualified management and
professional, scientific and technical personnel. Failure to manage growth
effectively could have a material adverse effect on the Company's business. The
Company reviews many acquisition candidates in the ordinary course of its
business. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and services of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent
assimilation of operations and products, the diversion of management's
attention from other business concerns, and the potential loss of key employees
of the acquired company. If the Company consummates any acquisitions in the
future, there can be no assurance that such acquisitions will be successfully
integrated into the Company's operations. See " -- Risk Factors with Respect to
the Merger -- Risks Associated with Integration of Companies".
Limited Historical Market; Volatility of Stock Price
Since Intercardia's IPO in February 1996, the public market for
Intercardia's Common Stock has been characterized by low and/or erratic trading
volume, often resulting in price volatility. The Intercardia Stock Price at
Closing and at each Future Installment may vary significantly from the price on
the date hereof. There can be no assurance that there will be an active public
market for Intercardia Common Stock after the Merger. The market price of
Intercardia's Common Stock could be subject to wide fluctuations in response to
results of testing and clinical trials, regulatory developments, variations in
operating results from quarter to quarter, changes in earnings estimates by
analysts, market conditions in the pharmaceutical and biotechnology industries,
future announcements concerning the Company or its competitors, including
technological innovations or commercial products, government regulations,
developments concerning proprietary rights or public concern as to the safety
or commercial value of the Company's products and general economic conditions.
Furthermore, the stock market has experienced significant price and volume
fluctuation unrelated to the operating performance of particular companies.
These market fluctuations may have an adverse effect on the market price of
Intercardia's Common Stock.
Shares Eligible for Future Sale; Possible Adverse Effect on Stock Price
As of immediately after the Merger, all shares of Intercardia Common Stock
outstanding will be freely tradable, except (i) the shares held by Interneuron
and directors and executive officers of Intercardia which will be eligible for
sale in the public market under Rule 144 or Rule 701 promulgated under the
Securities Act, and (ii) the shares issued in the Merger to Transcell
stockholders (other than Interneuron or directors or executive officers of
Intercardia) and the shares issuable under the Replacement Options and the
Replacement Warrants, all of which will be eligible for sale in the public
market pursuant to Rule 145. Pursuant to the terms of the Merger Agreement,
additional shares of Intercardia Common Stock will be issued to the former
holders of Transcell Capital Stock as of 15 months after the Closing and 21
months after the Closing. See "Intercardia and Transcell Proposal No. 1 -- The
Merger -- The Merger Agreement". These shares will become eligible for sale in
the public market in accordance with Rule 145. In addition, Intercardia has
reserved 2,500,000 shares for issuance pursuant to its Option Plan and as of
the Record Date, Intercardia also had 64,256 shares remaining available for
issuance pursuant to its Employee Stock Purchase Plan (the "ESPP"), and 49,033
shares underlying outstanding warrants (excluding the Replacement Warrants).
The shares of Intercardia Common Stock issuable under the Option Plan and the
ESPP have been or will be registered and will be eligible for sale in the
public market immediately upon issuance. The shares underlying the warrants
will become eligible for sale in the public market in accordance with Rule 144.
Future sales of shares or the availability of shares for future sale could
have an adverse effect on the market price of Intercardia Common Stock and
could make it more difficult for the Company to raise funds through equity
offerings in the future.
Holders of an aggregate of 49,033 shares of Intercardia Common Stock
issued or issuable upon exercise of warrants are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
Subject to certain exceptions and limitations, the holders of more than 50% of
such shares may require, on one occasion during the five-year period ending in
February 2002, that the Company use its best efforts to register such shares,
and these holders may also require the Company during such period (but not more
than twice in any calendar year) to register such shares on Form S-3. These
holders also are entitled to include their shares of Intercardia Common Stock
in a registered offering of securities by the Company for its own account
during such period subject to certain conditions and restrictions.
Holders of an aggregate of 349,000 shares of Transcell Series B Preferred
Stock (exchangeable for 161,793 shares of Intercardia Common Stock in the
Merger assuming an Intercardia Stock Price at Closing and at each Future
Installment of $20.29) are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Subject to certain
exceptions and limitations, the holders of more than 50% of such shares may
require, on one occasion during the four-year period commencing 12 months
following the Merger, that the Company use its best efforts to register such
shares, and
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the holders may also require the Company during such period (but not more than
twice in any calendar year) to register such shares on Form S-3. These holders
also are entitled to include their shares of Intercardia Common Stock in a
registered offering of securities of the Company for its own account during
such period subject to certain conditions and restrictions.
Holders of an aggregate of 34,901 shares of Transcell Series B Preferred
Stock issued or issuable upon exercise of warrants (exchangeable for
Replacement Warrants to purchase an aggregate of 15,051 shares of Intercardia
Common Stock in the Merger assuming the Intercardia Stock Price at Closing is
$20.29) are entitled to certain rights with respect to the registration of such
shares under the Securities Act. Subject to certain exceptions and limitations,
the holders of more than 50% of such shares may require, on one occasion during
the four-year period commencing 12 months following the Merger, that the
Company use its best efforts to register such shares, and the holders may also
require the Company during such period (but not more than twice in any calendar
year) to register such shares on Form S-3. These holders also are entitled to
include their shares of Intercardia Common Stock in a registered offering of
securities of the Company for its own account during such period subject to
certain conditions and restrictions. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."
Risk Associated With Use of Net Operating Loss Carryforwards
As of September 30, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,000,000 and Transcell had
net operating loss carryforwards for federal income tax purposes of
approximately $23,000,000, which expire at various dates from 2007 through
2012. The ability of the Company to utilize such net operating loss
carryforwards to offset future tax obligations, if any, may be limited by
changes in ownership. Any such limitation on the utilization of such net
operating loss carryforwards, to the extent it increases the amount of federal
income tax that the Company must actually pay, may have an adverse impact on
the Company's financial condition.
Risk Factors with Respect to Transcell
The following sets forth risk factors with respect to Transcell (certain
of which are applicable primarily in the event the Merger is not consummated).
In addition, the risk factors set forth above under the headings " -- Risk
Factors with Respect to the Company -- Uncertainties Relating to Government
Regulation" and " -- Uncertainties Regarding Pharmaceutical Pricing and
Reimbursement" are also relevant to Transcell.
Substantial Transcell Indebtedness to Interneuron; Future Capital Needs;
Uncertainty of Additional Funding
To date, Interneuron has funded substantially all of Transcell's
operations, primarily through advances and loans to Transcell, and has agreed
to continue to fund Transcell's operations at specified levels through
consummation of the Merger. However, Interneuron is not obligated to, and there
can be no assurance that Interneuron would continue to, provide additional
advances to Transcell to fund its operations if the Merger Agreement is
terminated. Accordingly, Transcell would be required to seek additional
corporate collaborations or other financing to fund research and development
and expand management and administrative capabilities and there is no assurance
it would be able to do so.
From inception through December 31, 1997, net borrowings from Interneuron
aggregated approximately $23,424,000, including accrued interest, of which
approximately $9,127,000 was converted into Series A Preferred Stock in
December 1994, and approximately $14,296,000 was outstanding at December 31,
1997. Interneuron has agreed, in connection with and simultaneously with the
Closing, to contribute to Transcell's capital all of the then indebtedness owed
by Transcell. However, if the Merger is not consummated, such indebtedness
could materially adversely affect the ability of Transcell to obtain equity
financings or enter into other corporate transactions. Interneuron requires
repayment of such indebtedness. In addition, Transcell is unlikely to generate
sufficient cash flow in the foreseeable future to pay such indebtedness or fund
its operations.
Transcell has not generated any revenues from operations other than a
license fee and research support payments under its only corporate
collaboration agreement, a Research Collaboration and License Agreement dated
effective as of June 30, 1997 by and among Transcell, Merck and Co., Inc.
("Merck") and Interneuron (the "Merck Agreement"). Although Transcell
management expects, based on the current status of the research, to achieve
certain early stage milestones under the Merck Agreement within the next 12
months, there can be no assurance this will be the case and in any event, any
related milestone payments, if received, will not be adequate to fund
Transcell's operations.
Transcell expects that it will be required to raise substantial additional
capital over a period of several years in order to conduct its operations.
There can be no assurance that additional funding, if necessary, will be
available on favorable terms, if at all. If adequate funds are not available,
Transcell will be required to curtail operations significantly.
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To the extent that additional capital is raised through the sale of equity
or debt securities, which may also require the issuance of stock options or
warrants, the issuance of such securities would result in dilution to
Transcell's existing stockholders. Transcell may also enter into arrangements
with collaborative partners or others that may require Transcell to relinquish
rights to certain of its technologies, product candidates, products or
potential markets that Transcell would not otherwise relinquish. See "Certain
Information Regarding Transcell -- Management's Discussion and Analysis of
Financial Condition and Results of Operations".
No Revenues from Operations; History of Operating Losses; Anticipation of
Future Losses
Transcell is a development stage company that has incurred net losses
since inception. As of December 31, 1997, Transcell had an accumulated deficit
of approximately $26,893,000. Assuming Transcell would be able to obtain
sufficient financing to fund ongoing operations, Transcell's research and
development activities are expected to result in significant expenses that are
unlikely to be offset by revenues and, accordingly, Transcell expects that it
would continue to incur losses for the foreseeable future. To date, Transcell
has derived only minimal revenues, substantially all of which have been from
upfront fees and research and development funding paid pursuant to the Merck
Agreement. Transcell expects that any revenues in the foreseeable future will
be dependent to a large extent upon achieving milestones under the Merck
Agreement. Although Transcell management expects, based on the current status
of the research, to achieve certain early stage milestones under its
collaboration with Merck within the next 12 months, there can be no assurance
this will be the case or that any future milestones will be achieved. Transcell
has not yet received any revenues from the achievement of milestones or
royalties from the discovery, development or sale of a commercial drug.
Transcell is unable to predict whether, or if, it will ever become profitable.
See "Certain Information Regarding Transcell -- Management's Discussion and
Analysis of Financial Condition and Results of Operations".
New and Uncertain Business and Technology
To date, Transcell has not developed or commercialized any products.
Transcell's approach to drug discovery relies upon an unproven technology and
represents a newly created business for which there is little financially
successful precedent. Transcell's strategy, which is unproven, is to use
carbohydrate combinatorial chemistry for the purposes of rapidly synthesizing,
identifying, optimizing and obtaining proprietary rights to lead compounds, and
of creating analogs of known drugs. Transcell's ability to commercialize this
technology depends to a significant extent on the efforts of Merck under the
Merck Agreement with respect to compounds covered by that Agreement and on
Transcell's ability to enter into additional collaborative and licensing
agreements with third parties for other compounds. The nature of the
combinatorial libraries under development by Transcell is such that there may
only be a limited number of pharmaceutical companies that are potential
collaborative partners and/or users of such libraries. Transcell's ability to
succeed is dependent upon the acceptance by potential collaborative partners of
Transcell's carbohydrate combinatorial chemistry as an effective tool in new
drug discovery. Historically, pharmaceutical companies have conducted lead
compound identification and optimization within their own research departments,
due to the highly proprietary nature of the activities being conducted, the
central importance of these activities to their drug discovery and development
efforts, and the desire to obtain maximum patent and other proprietary
protection on the results of their internal programs. In order to achieve its
business objectives, Transcell must convince these companies that Transcell's
technology and expertise justify the outsourcing of these programs to
Transcell. There can be no assurance that Transcell will be able to attract
additional collaborative partners on acceptable terms or develop a sustainable
profitable business. See "Certain Information Regarding Transcell -- Business".
Dependence on Merck and Potential Future Collaborators
Transcell's strategy for the development and commercialization of its
technology depends upon establishing collaborations and licensing arrangements
with third parties, principally pharmaceutical companies. To date, Transcell
has entered into only one such arrangement, the Merck Agreement. Transcell is
substantially dependent on Merck to develop and commercialize any products
resulting from the Merck collaboration and has little control over such
activities. Transcell will be dependent upon the expertise and dedication of
sufficient resources by Merck and any future corporate partners to develop and
commercialize products based on library compounds produced and lead compounds
optimized by Transcell. Should Merck or any other collaborative partner fail to
develop or commercialize a compound or product to which it has rights from
Transcell, Transcell may not receive any future milestone payments or royalties
associated with such compound or product. There can be no assurance that
Transcell will be able to establish additional collaborative or licensing
arrangements, that any such arrangements or licenses will be on terms favorable
to Transcell, or that current or future collaborative or licensing arrangements
will ultimately be successful. Further, Transcell's receipt of milestone
payments under the Merck Agreement is dependent primarily upon Merck's
participation in identifying lead compounds for further development,
determination to proceed with preclinical and clinical development, and on
regulatory submissions and approval of products developed,
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as well as on efforts of Transcell and Princeton University ("Princeton") in
lead compound identification. Transcell intends to rely on Merck and any other
corporate collaborators to conduct preclinical development and clinical
studies, prepare regulatory submissions and obtain regulatory approvals and
manufacture and market any resulting products. Further, there can be no
assurance that disputes will not arise over payment provisions relating to
milestones and royalties under the Merck Agreement. There can be no assurance
that current or future collaborative partners will not pursue alternative
technologies, or develop alternative products either on their own or in
collaboration with others, including Transcell's competitors, as a means for
developing treatments for the diseases targeted by collaborative arrangements
with Transcell. See "Certain Information Regarding Transcell -- Business".
Dependence on Patents and Proprietary Rights
Transcell's success will depend in large part on its ability, and the
ability of its licensees and its licensors, to obtain patents for its
technologies and the compounds and other products, if any, resulting from the
application of such technologies, defend patents once obtained and maintain
trade secrets, both in the United States and in foreign countries. The
commercial success of Transcell will also depend upon avoiding the infringement
of patents issued to competitors and upon maintaining the technology licenses
upon which certain of Transcell's current products are, or any future products
under development might be, based. Certain patent applications relating to
combinatorial libraries have been filed by others prior to Transcell's patent
applications. Uncertainties resulting from the initiation and continuation of
any patent or related litigation could have a material adverse effect on
Transcell's ability to compete in the marketplace pending resolution of the
disputed matters. Moreover, there can be no assurance that Transcell or its
collaborative partners will be able to obtain patent protection for lead
compounds or pharmaceutical products based upon Transcell's technology.
There can be no assurance that any patents issued to Transcell or its
collaborative partners, or for which Transcell has license rights, will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to Transcell. Litigation, which could
result in substantial cost to Transcell, may be necessary to enforce
Transcell's patent and license rights or to determine the scope and validity of
others' proprietary rights. If competitors of Transcell prepare and file patent
applications in the United States that claim technology also claimed by
Transcell, Transcell may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office (the "PTO") to determine the
priority of invention, which could result in substantial cost to Transcell,
even if the outcome is favorable to Transcell. An adverse outcome could subject
Transcell to significant liabilities to third parties and require Transcell to
license disputed rights from third parties or cease using the technology, which
licenses may not be available, if at all, at reasonable cost.
A number of pharmaceutical and biotechnology companies, and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to Transcell's
business. Some of these technologies, applications or patents may conflict with
Transcell's technologies or patent applications. Such conflicts could also
limit the scope of the patents, if any, that Transcell may be able to obtain,
or result in the denial of Transcell's patent applications. Transcell currently
has certain licenses from third parties and in the future may require
additional licenses from other parties to develop, manufacture and market
commercially viable products effectively. There can be no assurance that such
licenses will be obtainable on commercially reasonable terms, if at all, or
that the patents underlying such licenses will remain proprietary. Transcell
relies on certain proprietary trade secrets and know-how. Although Transcell
has taken steps to protect its unpatented trade secrets and know-how, in part
through the use of confidentiality agreements with its employees, consultants
and certain of its contractors, there can be no assurance that these agreements
will not be breached, Transcell would have adequate remedies for any breach, or
Transcell's trade secrets will not otherwise become known or be independently
developed or discovered by competitors. See "Certain Information Regarding
Transcell -- Business -- Patent Status."
Risks Associated with Agreements with Princeton
Substantially all of Transcell's technology is based on research
originating at Princeton in the laboratories of Daniel Kahne, Ph.D. and Suzanne
Walker-Kahne, Ph.D., consultants to Transcell. Transcell has a license
agreement with Princeton with respect to its carbohydrate chemistry technology.
Due to certain conflict of interest policies adopted at Princeton, Princeton
advised that Transcell would not be able to sponsor additional research at
Princeton after June 30, 1994. However, Interneuron agreed to sponsor certain
research relating to Transcell's technology and is currently sponsoring
research under two agreements with Princeton, both of which provide Interneuron
with an exclusive option to license any inventions derived under such sponsored
research agreements, and prohibit Interneuron from sublicensing such rights to
Transcell. Interneuron has an agreement to license from Princeton certain
intellectual property generated under one of the sponsored research agreements,
certain of which have been sublicensed by Interneuron to Merck under the Merck
Agreement. Under the Technology/
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Guarantee Agreement, Interneuron has agreed to assign to Intercardia its rights
and obligations under the Merck Agreement and the Princeton agreements to which
Interneuron is a party. However, in the event the Merger is not consummated,
Transcell would be dependent on Interneuron to continue to sponsor research at
Princeton in areas relating to Transcell's technology, to license inventions
resulting from such research, to comply with the terms of such licenses and to
sublicense such rights to corporate partners of Transcell, if any, seeking to
develop and commercialize products based on such rights. There can be no
assurance that Interneuron would continue to do so, which would impair
Transcell's ability to commercialize its technology or derive any benefit from
research sponsored by Interneuron at Princeton in areas relevant to Transcell's
technology. Transcell would also be required to reimburse Interneuron for any
payments Interneuron makes to Princeton under the Princeton license agreements
with Interneuron for areas relating to Transcell's technology. The Princeton
license agreements contain certain due diligence obligations by the licensee.
Transcell would be materially adversely affected in the event Princeton or
Interneuron terminated certain of the Princeton license agreements.
Competition and the Risk of Obsolescence of Technology
Competition in the pharmaceutical and biotechnology industry is intense.
Many organizations are actively attempting to identify, synthesize and optimize
compounds for potential pharmaceutical development. Transcell competes with the
research departments of pharmaceutical companies, biotechnology companies,
other combinatorial chemistry companies and research and academic institutions.
Many of these competitors have greater financial and human resources, and more
experience in research and development, than Transcell. Historically,
pharmaceutical companies have maintained close control over their research
activities, including the synthesis, screening and optimization of chemical
compounds. Many of these companies are developing combinatorial chemistry and
other methodologies to improve productivity, including major investments in
robotics technology to permit the automated parallel synthesis of compounds. In
addition, Transcell competes with companies that provide combinatorial
chemistry products and services to third parties using methodologies such as
parallel synthesis, molecule tag encoding, deconvolution and spatial
separation. Academic institutions, governmental agencies and other research
organizations are also conducting research in areas in which Transcell is
working, either on their own or through collaborative efforts. Transcell
anticipates that it will face increased competition in the future as new
companies enter the market and advanced technologies become available.
Transcell's processes may be rendered obsolete or uneconomical by technological
advances or entirely different approaches developed by one or more of
Transcell's competitors. The existing approaches of Transcell's competitors or
new approaches or technology developed by Transcell's competitors may be more
effective than those developed by Transcell.
Dependence Upon Third Party; Sole Source Supplier
Transcell currently relies on a single supplier to provide the microkans
and radiofrequency tags used in the solid phase chemical synthesis of its
compounds. Transcell is not aware of any other sources of these items.
Transcell does not have a long-term supply agreement with its supplier. No
assurance can be given that the microkans and radiofrequency tags used by
Transcell will remain available in commercial quantities at commercially
reasonable rates, if at all. Should Transcell be unable to obtain an adequate
supply of these or comparable microkans and radiofrequency tags at commercially
reasonable rates, its ability to continue to identify and optimize lead
compounds and development candidates would be materially and adversely
affected.
Dependence on Scale-Up and Management of Growth
Transcell's success will depend on the expansion of its operations and the
management of these expanded operations. Transcell must further automate its
processes, improve its technology generally and generate libraries of compounds
on a cost-effective basis. In addition, Transcell intends to seek to enter into
additional collaborative relationships and, if successful, will be required to
manage multiple relationships. There can be no assurance that Transcell will be
successful in adding technical personnel as needed to meet the staffing
requirements of additional collaborative relationships. In addition, there can
be no assurance that Transcell will be successful in its engineering efforts to
further automate its processes or its initiatives to develop new materials or
reactions for solid phase synthesis and therefore expand the potential range of
compounds it can produce. Furthermore, there can be no assurance that conflicts
will not arise as to proprietary rights to particular compounds in Transcell's
libraries. Failure to achieve any of these goals or the occurrence of conflicts
could have a material adverse effect on Transcell's business, financial
condition or results of operations. See "Certain Information Regarding
Transcell -- Business -- Employees".
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Need to Recruit and Retain Management; Dependence on Key Employees and
Consultants
Transcell does not have any full-time executive officers other than
Michael J. Sofia, Ph.D., its Vice President -- Research and Development. Its
management and business functions are being performed primarily by Interneuron
and Intercardia management, including Glenn L. Cooper, M.D., the Chairman of
the Board and acting President and Chief Executive Officer of Transcell, as
well as by Clayton I. Duncan, the Vice Chairman of the Transcell Board. In the
event the Merger is not consummated, Transcell would be required to recruit and
retain additional management personnel and there can be no assurance it will be
able to recruit and retain qualified management personnel. Transcell is highly
dependent on certain scientific and management personnel, including Dr. Sofia,
and consultants, including Daniel Kahne, Ph.D., Transcell's scientific founder,
and Suzanne Walker-Kahne, Ph.D., who are only available to consult with
Transcell on a limited basis. Transcell's consulting agreement with Dr. Kahne
expires on December 31, 1999, and there can be no assurance such agreement
would be renewed on terms acceptable to Transcell or at all. Transcell does not
maintain key person life insurance on the life of any employee, but maintains a
$5,000,000 term life insurance policy on Dr. Kahne. Transcell's future success
also will depend in part on the continued service of its key scientific,
software, engineering and management personnel and its ability to identify,
hire and retain additional personnel. There is intense competition for such
qualified personnel in the areas of Transcell's activities, and there can be no
assurance that Transcell will be able to continue to hire and retain such
personnel necessary for the development of Transcell's business. Failure to
hire and retain key personnel could have a material adverse effect on
Transcell's business, financial condition and results of operations. See
"Certain Information Regarding Transcell -- Business -- Employees".
Control of Transcell by, and Conflicts of Interest with, Interneuron
As of the Record Date, Interneuron owned approximately 77.9% of the
Transcell Voting Shares. Accordingly, Interneuron has the ability to elect all
of the directors of Transcell and control voting with respect to matters
submitted to stockholders, including extraordinary corporate transactions such
as the Merger. In the event the Merger is not consummated, Interneuron's voting
control over Transcell may have the effect of delaying or preventing sales of
additional securities of Transcell or a sale of Transcell or other change of
control supported by the other stockholders of Transcell. In addition,
Transcell has substantial outstanding indebtedness owed to Interneuron. See "
- -- Substantial Transcell Indebtedness to Interneuron; Future Capital Needs;
Uncertainty of Additional Funding".
Transcell may also be subject to various risks arising from Interneuron's
influence over Transcell, including conflicts of interest relating to new
business opportunities that could be pursued by Transcell or by Interneuron and
its other affiliates, and significant corporate transactions for which
stockholder approval is required.
In addition, Interneuron is a party to certain agreements with Princeton
relating to technology under development at Princeton and Transcell and
sublicensed to Merck under the Merck Agreement. See " -- Risks Associated with
Agreements with Princeton".
In addition, in connection with the private placement of the Transcell
Series B Preferred Stock, the holders of Transcell Series B Preferred Stock
have certain "put protection rights" which, in the event the Merger is not
consummated, would give such stockholders the right, on July 7, 1998, to sell
their shares of Series B Preferred Stock to Interneuron in exchange for shares
of common stock of Interneuron having a fair market value on such date equal to
approximately $464,000 in the aggregate, or approximately $1.33 per share of
Series B Preferred Stock currently outstanding. Based on the closing sales
price of the common stock of Interneuron on April 1, 1998, if all of the
holders of Series B Preferred Stock exercised their put protection rights,
Interneuron would be required to issue an aggregate of approximately 38,000
shares of common stock of Interneuron. As a result of the Merger, the put
protection rights will terminate and, accordingly, Interneuron will not be
required to issue such shares of common stock.
In the event that all or part of the shares of Transcell Capital Stock
held by Interneuron are sold or otherwise transferred, the value per share of
the Transcell Capital Stock could be adversely affected. See "Intercardia and
Transcell Proposal No. 1 -- The Merger -- Interests of Certain Persons in the
Merger" and "Certain Information Regarding Transcell -- Principal
Stockholders".
Risk Factors with Respect to the Merger
Risks Associated With Integration of Companies
The Merger involves the integration of two companies that have previously
operated independently at different locations with separate work forces. There
can be no assurance that Intercardia will successfully integrate the operations
of Transcell, or that the benefits expected from the integration of Transcell,
including the addition of new research capabilities,
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equipment and technologies, will be achieved. The acquisition of Transcell also
involves a number of additional risks, including assimilation of new operations
and personnel; the diversion of resources from Intercardia's existing business;
coordination of geographically separated facilities and work forces; management
challenges associated with the integration of the companies, in addition to the
other requirements associated with growth of Transcell's scientific
infrastructure and research capabilities; assimilation of new management
personnel; and maintenance of standards, controls, procedures and policies. The
process of integrating Transcell's operations, including its personnel, could
cause interruption of, or loss of momentum in, the activities of Intercardia's
business and operations. Moreover, the costs of the Merger are anticipated to
be substantial. There can be no assurance that combining the two companies'
businesses, even in an efficient, effective and timely manner, will result in
combined results of operations and financial condition superior to what would
have been achieved by each company independently. See " -- Risk Factors with
Respect to the Company -- Management of Growth; Risks Associated with
Acquisitions".
Uncertainties Regarding the Merger
The obligation of each of Intercardia and Transcell to consummate the
Merger is subject to certain conditions, as set forth under "Intercardia and
Transcell Proposal No. 1 -- The Merger -- The Merger Agreement". In particular,
each of Interneuron, Transcell and Intercardia may terminate the Merger
Agreement if the Intercardia Stock Price at Closing is less than $10.00 or
greater than $34.00. In the event that, as of immediately prior to the Closing,
it appears that the Intercardia Stock Price will be more than $34.00 or less
than $10.00, each of Intercardia, Transcell and Interneuron will consider, in
light of the circumstances at that time, whether or not to exercise its
respective right to terminate the Merger Agreement. There can be no assurance
that any party will or will not terminate the Merger Agreement in circumstances
under which it would be in the best interests of stockholders of Transcell or
Intercardia. The public market for Intercardia's Common Stock has been
characterized by low and/or erratic trading volume, often resulting in price
volatility. See " -- Risk Factors with Respect to the Company -- Limited
Historical Market; Volatility of Stock Price".
Uncertainties Regarding the Exchange Ratios
As a result of the Merger, each outstanding share of Transcell Capital
Stock, and all Transcell Options and Transcell Warrants will be converted into
the right to receive a certain number of shares of Intercardia Common Stock, or
Replacement Options or Replacement Warrants, based on the Exchange Ratios for
the respective class and series of such shares of Transcell Capital Stock. The
Exchange Ratios for each installment of the Common Equivalent Shares are
dependent upon the Intercardia Stock Price, which cannot be determined until
the Effective Time or the applicable payment date of the Future Installments.
Accordingly, it is not possible to determine the Exchange Ratios for the Common
Equivalent Shares that will apply in the Merger. In addition, if the
Intercardia Stock Price at Closing is outside the Fixed Value Range, the
Closing Common Exchange Ratio is fixed, as if the Intercardia Stock Price at
Closing were $29.00 if above the Fixed Value Range and $15.00 if below the
Fixed Value Range. Therefore, the dollar amount of the aggregate number of
shares issued at Closing cannot be determined until the Intercardia Stock Price
at Closing has been determined.
Potential Adjustment in Common Purchase Price Amount
The Effective Intercardia Stock Price is capped at $29.00 and has a floor
of $15.00. As a result, in the event the Intercardia Stock Price at Closing is
less than $15.00, the holders of Common Equivalent Shares will receive the same
number of shares of Intercardia Common Stock in the Closing Installment as if
the Intercardia Stock Price equaled $15.00. Accordingly, the dollar amount of
the Intercardia Common Stock to be received in the Closing Installment could be
reduced from approximately $11.2 million (assuming the Intercardia Stock Price
is $15.00) to approximately $9.9 million (assuming the Intercardia Stock Price
is $10.00). In this event, a corresponding greater percentage of the Purchase
Price will be paid to those former holders of Transcell Capital Stock in the
Future Installments. Conversely, in the event the Intercardia Stock Price at
Closing is greater than $29.00, the holders of Common Equivalent Shares will
receive the same number of shares of Intercardia Common Stock in the Closing
Installment as if the Intercardia Stock Price equaled $29.00. In such event,
the dollar amount of the Intercardia Common Stock to be received in the Closing
Installment could be increased from approximately $11.2 million (assuming the
Intercardia Stock Price is $29.00) to approximately $11.9 million (assuming the
Intercardia Stock Price is $34.00). In this event, a corresponding smaller
percentage of the Purchase Price will be paid to the former holders of
Transcell Capital Stock in the Future Installments. The public market for
Intercardia Common Stock has been characterized by low and/or erratic trading
volume, often resulting in price volatility. See " -- Risk Factors with Respect
to the Company -- Limited Historical Market; Volatility of Stock Price" and
"Intercardia and Transcell Proposal No. 1 -- The Merger -- The Merger
Agreement".
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Potential Dilution to Intercardia Stockholders
In connection with the Merger and the issuance to Interneuron of
Technology/Guarantee Shares, Intercardia will issue shares of Intercardia
Common Stock. The number of shares to be issued in all three installments could
range from 453,539 shares or 6.3% of Intercardia's outstanding Common Stock
(assuming the Intercardia Stock Price at Closing is $34.00, and no additional
issuances of Intercardia Common Stock other than in connection with the Merger)
to 1,189,625 shares or 14.9% of Intercardia's outstanding Common Stock
(assuming the Intercardia Stock Price at Closing is $10.00, and no additional
issuances of Intercardia Common Stock other than in connection with the
Merger), in each case assuming that the Intercardia Stock Price for each Future
Installment is the same as the Intercardia Stock Price at Closing. However, the
Installment Common Exchange Ratios are not subject to the cap or floor of the
Fixed Value Range applicable to the Closing Common Exchange Ratio. Accordingly,
the number of shares of Intercardia Common Stock to be issued in each Future
Installment will be based on the Intercardia Stock Price determined on the
relevant date and may substantially exceed these numbers and percentages of
shares to be issued, which may result in substantial dilution to Intercardia's
existing stockholders.
Voting Control by Interneuron Assures Approval of Merger Agreement
Although each of Intercardia and Transcell are submitting the Merger
Agreement for approval of their respective stockholders, Interneuron is the
majority stockholder of each of Intercardia and Transcell. Interneuron has
agreed in the Merger Agreement to vote its Transcell Voting Shares to approve
the Merger Agreement. In addition, Interneuron has advised Intercardia that
Interneuron intends to vote its shares of Intercardia Common Stock for approval
of the Merger Agreement. Accordingly, the requisite stockholder approvals of
the Merger Agreement are probable regardless of the votes cast by the other
stockholders of Intercardia or Transcell.
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INTRODUCTION
This Proxy Statement/Prospectus is being furnished to the holders of
Intercardia Common Stock in connection with the solicitation of proxies by the
Intercardia Board for use at the Intercardia Meeting to be held on May 6, 1998,
at 9:30 a.m., local time, at the North Carolina Biotechnology Center, 15
Alexander Drive, Research Triangle Park, North Carolina, and all adjournments
and postponements thereof, and is being furnished to the holders of Transcell
Capital Stock in connection with the solicitation of proxies by the Transcell
Board for use at the Transcell Meeting to be held on May 6, 1998, at 9:00 a.m.,
local time, at the North Carolina Biotechnology Center, 15 Alexander Drive,
Research Triangle Park, North Carolina, and all adjournments and postponements
thereof. This Proxy Statement/Prospectus is also being furnished to holders of
Transcell Options and Transcell Warrants.
As set forth more fully below, at each of the Meetings, the holders of
Intercardia Common Stock and the holders of Transcell Voting Shares will be
asked to consider and vote upon a proposal to approve the Merger Agreement. A
copy of the Merger Agreement (without exhibits or schedules) is attached as
Annex A to this Proxy Statement/Prospectus. The Merger Agreement provides for,
among other things, upon satisfaction of certain conditions set forth therein,
(i) the merger of Transcell with and into Intercardia, and (ii) the conversion
of each share of Transcell Capital Stock, and all Transcell Options and
Transcell Warrants, outstanding immediately prior to the Closing (excluding
Dissenting Shares) into the right to receive a certain number of shares of
Intercardia Common Stock, or Replacement Options or Replacement Warrants to
purchase a certain number of shares of Intercardia Common Stock, based on the
Exchange Ratios for the respective class or series of such shares of Transcell
Capital Stock. Fractional shares of Intercardia Common Stock will not be issued
in connection with the Merger. A holder of Transcell Capital Stock otherwise
entitled to a fractional share of Intercardia Common Stock will be paid cash in
lieu of such fractional share in an amount equal to the product of such
fraction multiplied by the Effective Intercardia Stock Price for the Common
Equivalent Shares for the Closing Installment and the applicable Intercardia
Stock Price for the Series B Preferred Stock and for each Future Installment.
The stockholders of Intercardia are also being asked to consider and vote
upon the following matters (the "Annual Meeting Matters") to: (i) elect the
Board of Directors of Intercardia; (ii) approve and ratify amendments to
Intercardia's Option Plan to, among other things, increase the number of shares
of Intercardia Common Stock reserved for issuance thereunder from 1,500,000 to
2,500,000 shares; (iii) approve and ratify the appointment of Coopers & Lybrand
as the independent auditors of Intercardia for its fiscal year ending September
30, 1998; and (iv) act upon such other matter as may properly come before the
Intercardia Meeting or any adjournment thereof. The stockholders of Transcell
will also consider and vote upon such other matters as may properly come before
the Transcell Meeting, and any adjournments or postponements thereto.
VOTING AND PROXY INFORMATION
Intercardia
Proxies are being solicited from Intercardia's stockholders by and on
behalf of the Intercardia Board, and from Transcell's stockholders by and on
behalf of the Transcell Board. Each of Intercardia and Transcell will bear its
own expenses of the solicitation, including the costs of preparing and mailing
this Proxy Statement/Prospectus. In addition to solicitation by use of the
mail, proxies may be solicited by directors, officers and employees of
Intercardia and Transcell, respectively, in person or by telephone, telegram or
other means of communication. Such directors, officers and employees will not
be additionally compensated for such services but may be reimbursed for
out-of-pocket expenses incurred by them in connection with such solicitation.
Arrangement will also be made with custodians, nominees and fiduciaries for the
forwarding of proxy solicitation materials to beneficial owners of Intercardia
Common Stock and Transcell Capital Stock held of record by such persons.
The Intercardia Board has fixed the close of business on March 31, 1998 as
the Record Date for determining the holders of Intercardia Common Stock
entitled to receive notice of and to vote at the Intercardia Meeting. On the
Record Date, there were outstanding 6,781,687 shares of Intercardia Common
Stock entitled to vote on all matters. For each share of Intercardia Common
Stock held on the Record Date, a holder of Intercardia Common Stock is entitled
to one vote on all matters properly brought before the Intercardia Meeting. A
majority of the shares of Intercardia Common Stock outstanding, entitled to
vote on any matter and represented at the Intercardia Meeting in person or by
proxy, shall constitute a quorum. Assuming a quorum is present, the affirmative
vote of the holders of a majority of the 6,781,687 shares of Intercardia Common
Stock entitled to vote and present or represented by proxy at the Intercardia
Meeting will constitute approval of the Merger Agreement. Abstentions and
broker non-votes are counted for purposes of determining the presence or
absence of a quorum for the transaction of business. If a stockholder, present
in person or by proxy, abstains on any matter, the
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stockholder's shares will not be voted on such matter. Thus, an abstention from
voting on any matter has the same legal effect as a vote "against" the matter,
even though the stockholder may interpret such action differently. Except for
determining the presence or absence of a quorum for the transaction of
business, broker non-votes are not counted for any purpose in determining
whether a matter has been approved.
On the Record Date, Interneuron had the right to vote 4,145,029 or
approximately 61.1% of the outstanding shares of Intercardia Common Stock and
the directors and executive officers of Intercardia and their affiliates (other
than Interneuron) had the right to vote, in the aggregate, 20,589 or
approximately 0.3% of the outstanding shares of Intercardia Common Stock.
Interneuron and Intercardia's directors and executive officers have advised
Intercardia that they intend to vote their shares FOR approval of the Merger
Agreement. Therefore, it is probable that the Merger Agreement will be
approved. See "Certain Information Regarding the Company -- Principal
Stockholders".
All shares of Intercardia Common Stock that are represented at the
Intercardia Meeting by properly executed proxies received by Intercardia prior
to or at the Intercardia Meeting and not revoked will be voted at the
Intercardia Meeting in accordance with the instructions indicated in such
proxies. Unless instructions to the contrary are specified in the proxy, each
such proxy will be voted FOR the proposals to approve the Merger Agreement and
the Annual Meeting Matters. Any Intercardia proxy given pursuant to this
solicitation may be revoked by the person giving it at any time before it is
voted. Intercardia proxies may be revoked by filing with the Secretary of
Intercardia before the vote is taken at the Intercardia Meeting a written
notice of revocation bearing a date later than the date of the proxy, by duly
executing and delivering a subsequent proxy relating to the same shares, or by
attending the Intercardia Meeting and voting in person (although attendance at
the Intercardia Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice of revocation should be sent to: Corporate
Secretary, Intercardia, Inc., P. O. Box 14287, 3200 East Highway 54, Cape Fear
Building, Suite 300, Research Triangle Park, North Carolina 27709.
Transcell
The Transcell Board has fixed the close of business on March 31, 1998 as
the Record Date for determining the holders of Transcell Capital Stock entitled
to receive notice of and to vote at the Transcell Meeting. On the Record Date,
there were outstanding 6,017,687 Transcell Voting Shares entitled to vote on
all matters. Holders of each Transcell Voting Share outstanding (or deemed to
be outstanding) on the Record Date, are entitled to one vote per share on all
matters properly brought before the Transcell Meeting. Such votes may be cast
in person or by proxy. A majority of the Transcell Voting Shares outstanding
(or deemed to be outstanding), entitled to vote on any matter and represented
at the Transcell Meeting in person or by proxy, shall constitute a quorum.
Assuming a quorum is present, under Delaware law and the Transcell Charter, the
affirmative vote, either in person or by proxy, of the holders of a majority of
the Transcell Voting Shares is necessary to approve the Merger Agreement.
Abstentions and broker non-votes are counted for purposes of determining the
presence or absence of a quorum for the transaction of business. If a
stockholder, present in person or by proxy, abstains on any matter, the
stockholder's shares will not be voted on such matter. Thus, an abstention from
voting on any matter has the same legal effect as a vote "against" the matter,
even though the stockholder may interpret such action differently. Except for
determining the presence or absence of a quorum for the transaction of
business, broker non-votes are not counted for any purpose in determining
whether a matter has been approved.
As of the Record Date, Interneuron owned and had the right to vote
3,230,376 shares of Class A Common Stock and 1,460,388 shares of Transcell
Series A Preferred Stock (representing approximately 77.9% of the Transcell
Voting Shares). Pursuant to the Merger Agreement, Interneuron has agreed to
vote its Transcell Voting Shares FOR approval of the Merger Agreement. As of
the Record Date, the directors and executive officers of Transcell and their
affiliates (other than Interneuron) owned and had the right to vote, in the
aggregate, 490,797 shares of Transcell Class A Common Stock (representing
approximately 8.2% of the Transcell Voting Shares). These Transcell directors
and executive officers have advised Transcell that they intend to vote their
Transcell Voting Shares FOR approval of the Merger Agreement. Therefore, it is
probable that the Merger Agreement will be approved. See "Certain Information
Regarding Transcell -- Principal Stockholders".
All Transcell Voting Shares that are represented at the Transcell Meeting
by properly executed proxies received by Transcell prior to or at the Transcell
Meeting and not revoked will be voted at the Transcell Meeting in accordance
with the instructions indicated in such proxies. Unless instructions to the
contrary are specified in the proxy, each such proxy will be voted FOR the
proposal to approve the Merger Agreement. Any Transcell proxy given pursuant to
this solicitation may be revoked by the person giving it at any time before it
is voted. Transcell proxies may be revoked by (i) filing with the Secretary of
Transcell before the vote is taken at the Transcell Meeting a written notice of
revocation bearing a date later than the date of the proxy, (ii) duly executing
and delivering a subsequent proxy relating to the same shares, or (iii)
attending the Transcell Meeting and voting in person (although attendance at
the Transcell Meeting will not in and of itself constitute a
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revocation of a proxy). Any written notice of revocation should be sent to:
Corporate Secretary, Transcell Technologies, Inc., 8 Cedar Brook Drive,
Cranbury, New Jersey 08512.
Under certain circumstances, and upon following the appropriate
procedures, holders of Transcell Voting Shares are eligible for certain
appraisal rights under the DGCL in connection with the Merger. See "Appraisal
Rights of Transcell Stockholders".
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INTERCARDIA AND TRANSCELL
PROPOSAL NO. 1--THE MERGER
The following information with respect to the Merger, insofar as it
relates to matters contained in the Merger Agreement, is qualified in its
entirety by reference to the Merger Agreement, a copy of which is attached
hereto as Annex A and is incorporated herein by reference.
General
The Merger Agreement provides that Transcell will merge into Intercardia
following the satisfaction or, to the extent permitted, waiver of all
conditions to the Merger and the filing of a duly executed Certificate of
Merger conforming to the requirements of Delaware law setting forth the
principal terms of the Merger, as provided for in the Merger Agreement, with
the Secretary of State of the State of Delaware, or at such later time as the
parties to the Merger Agreement may agree. At the Effective Time, the separate
corporate existence of Transcell shall cease, and Intercardia will be the
surviving corporation. Upon the Closing, each share of Transcell Capital Stock
outstanding immediately prior to the Closing (excluding Dissenting Shares)
will, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into the right to receive in three installments (the
Closing Installment at Closing, the Second Installment on the 15-month
anniversary of Closing and the Third Installment on the 21-month anniversary of
Closing) that number of shares of Intercardia Common Stock calculated in
accordance with the exchange ratio applicable for each installment for such
class or series, based on the applicable Intercardia Stock Price.
The exchange ratios for each share of Series B Preferred Stock will be
determined by dividing: (i) $4.3750 by the Intercardia Stock Price at Closing
for the Closing Installment; (ii) $2.4609 by the Intercardia Stock Price
determined at the 15-month anniversary of Closing for the Second Installment;
and (iii) $2.5703 by the Intercardia Stock Price determined at the 21-month
anniversary of Closing for the Third Installment. The exchange ratios for each
Common Equivalent Share is determined by: (i) for the Closing Installment,
dividing $1.40 by the Effective Intercardia Stock Price at Closing and
multiplying the result by 50%; and (ii) for each of the Future Installments,
dividing $1.40 by (a) the Intercardia Stock Price determined on the 15-month
anniversary of the Closing with respect to the Second Installment and (b) the
Intercardia Stock Price determined on the 21-month anniversary of the Closing
with respect to the Third Installment, and in each case multiplying the result
by 25%.
Each of the Transcell Warrants will be converted into the right to receive
a Replacement Warrant to purchase a number of shares of Intercardia Common
Stock (rounded to the nearest whole share) equal to the number of shares of
Series B Preferred Stock underlying such Transcell Warrant multiplied by the
Warrant Exchange Ratio, determined by dividing $8.75 by the Intercardia Stock
Price at Closing. The exercise price per share of Intercardia Common Stock
(rounded to the nearest cent) issuable under each Replacement Warrant will
equal the per share exercise price of the corresponding Transcell Warrant
($6.875) divided by the Warrant Exchange Ratio.
Intercardia will assume the 1992 Plan and each of the Transcell Options
will be converted into the right to receive a Replacement Option. Each
Replacement Option will represent the right to purchase a number of shares of
Intercardia Common Stock (rounded to the nearest whole share) equal to the
number of shares of Class A Common Stock issuable upon exercise of the
corresponding Transcell Option multiplied by the Closing Common Exchange Ratio
multiplied by two. The exercise price per share of Intercardia Common Stock
(rounded to the nearest cent) issuable upon exercise of each Replacement Option
will equal the per share exercise price of the corresponding Transcell Option
divided by the product of the Closing Common Exchange Ratio multiplied by two.
Cash will be paid in lieu of the issuance of any fractional shares of
Intercardia Common Stock.
The Merger Agreement provides that the Certificate of Incorporation and
Bylaws of Intercardia, in each case as in effect at the Effective Time, will be
the Certificate of Incorporation and Bylaws of the surviving corporation. The
rights of Intercardia stockholders, including the former holders of Transcell
Capital Stock who will become holders of Intercardia Common Stock, will be
governed by the Certificate of Incorporation and Bylaws of Intercardia and the
laws of the State of Delaware. See "Comparison of the Rights of Holders of
Intercardia Common Stock and Transcell Capital Stock".
Background of the Merger
Transcell was founded in 1991 as a subsidiary of Interneuron to further
develop drug delivery technology resulting from research conducted by Daniel
Kahne, Ph.D. and Suzanne Walker-Kahne, Ph.D. at Princeton. Subsequently, the
second of Transcell's core proprietary technologies, consisting of a method to
construct oligosaccharides and glycoconjugates on the
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solid phase, was licensed from Princeton. During the past two years, Transcell
has focused its efforts and business strategy on developing a platform
capability in carbohydrate-based combinatorial technology and expanding the
drug discovery potential of oligosaccharides and glycoconjugates by generating
libraries that can be screened for therapeutic activity. See "Certain
Information Regarding Transcell -- Business".
Development stage biopharmaceutical companies such as Transcell generally
rely on equity funding and strategic research collaborations with larger, more
established pharmaceutical corporations to finance research and development
operations. To date, Transcell has met its financing needs primarily through
equity investments and loans from its majority stockholder, Interneuron. In
addition, Interneuron has, when required by other parties, entered into certain
sponsored research and corporate collaboration agreements relating to
technology under development by Transcell. Interneuron has indicated to
Transcell that, consistent with Interneuron's general strategy relating to
subsidiary funding, Interneuron intended its funding of Transcell as a
temporary measure. At various times, both at Transcell Board meetings and in
discussions between members of Interneuron and Transcell management,
Interneuron has indicated to Transcell its strategy of encouraging financial
independence of its subsidiaries and the desire that Transcell not be dependent
upon Interneuron to fund Transcell operations. To date, Transcell has completed
one equity financing with investors other than Interneuron in a private
placement resulting in net proceeds to Transcell of approximately $1.5 million
used to fund Transcell's operations.
Between December 1994 and July 1995, Transcell issued and sold an
aggregate of 349,000 shares of Series B Preferred Stock in a private placement.
The private placement was a sale of units for $6.25 each, each unit consisting
of one share of Series B Preferred Stock of Transcell, one share of preferred
stock of Progenitor, Inc. (then a majority-owned subsidiary of Interneuron,
"Progenitor"), a put protection right from Interneuron and a warrant to
purchase one share of Interneuron's common stock. Transcell also issued to
designees or affiliates of the placement agent for the private placement
warrants to purchase an aggregate of 47,715 shares of Series B Preferred Stock.
The put protection right provides that on July 7, 1998, holders of such Series
B Preferred Stock have the right to sell to Interneuron their Series B
Preferred Stock of Transcell at a purchase price equal to the purchase price of
the units in the private placement, less the market value of shares of
Progenitor Common Stock received by such investors as of the date of
Progenitor's initial public offering. The put protection right with respect to
Transcell's Series B Preferred Stock will expire upon the issuance of
Intercardia Common Stock to the holders of the Series B Preferred Stock at the
Closing. See "Risk Factors -- Risk Factors with Respect to Transcell -- Control
of Transcell by, and Conflicts of Interest with, Interneuron". In December
1994, upon the initial closing of the private placement, the aggregate amount
of Interneuron's outstanding advances to Transcell of $9,127,428, including
accrued interest, was converted by Interneuron into an aggregate of 1,460,388
shares of Series A Preferred Stock of Transcell at a conversion price of $6.25
per share. Of the approximately $4.4 million gross proceeds of the private
placement, Transcell received approximately $1.5 million, net of placement
agent fees and costs, and Interneuron received approximately $833,000 as its
consideration for the issuance of warrants to purchase common stock of
Interneuron and the put protection rights. Of this amount, Interneuron loaned
approximately $417,000 to Transcell in exchange for a convertible debenture
dated March 31, 1995, bearing interest at 1% over the prime rate. The
indebtedness evidenced by this debenture and accrued interest thereon
(approximately $525,000 as of December 31, 1997), will be contributed by
Interneuron to Transcell's capital simultaneously with the closing of the
Merger.
Under a support letter (the "Support Letter") between Interneuron and
Transcell, Interneuron agreed to advance to Transcell a limited monthly amount
to fund operations commencing in August 1995 and Transcell agreed to issue to
Interneuron warrants to purchase Transcell Capital Stock in connection with
such advances and to pay interest on such advances. Advances by Interneuron to
Transcell from and after August 1995 are evidenced by a promissory note dated
March 31, 1996, in the amount of approximately $2,242,000, as updated from time
to time, payable on the earlier of five years from the date of the note, the
closing of a public offering by Transcell or on demand, and bearing interest at
one percent over the prime rate. In March 1996, Dr. Cooper, Interneuron's Chief
Executive Officer, was appointed acting President and Chief Executive Officer
of Transcell to serve until a new President could be hired, and at that time,
Interneuron indicated that it would support Transcell's combinatorial chemistry
program for an additional 12 to 18 months. Interneuron has agreed to contribute
to Transcell's capital simultaneously with closing of the Merger the
outstanding indebtedness evidenced by this note (approximately $13,772,000 as
of December 31, 1997), and to cancel any rights it has to receive warrants to
purchase Transcell Capital Stock in connection with such indebtedness.
As an alternative to financing provided by Interneuron, at the direction
of the Transcell Board, management of Transcell has, over the past several
years, considered and pursued several other possible financing options,
including the possibility of selling shares of Transcell Capital Stock or other
securities in privately negotiated transactions. To this end, Transcell
management has had discussions with a number of investment banking firms,
venture capital firms and institutional investors relating to potential private
financings but was not successful in obtaining commitments from any such third
parties.
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Accordingly, the Transcell Board decided that it was in the best interests of
Transcell and its securityholders for management to target merger or strategic
alliance opportunities. The Board believed such opportunities would be more
likely to accomplish Transcell's strategic objectives, maximize value to
Transcell's stockholders and continue the development of Transcell's technology
without having to significantly reduce Transcell's existing experienced
scientific staff thereby delaying development of Transcell's technology.
Commencing in approximately August 1996, Transcell management began actively
pursuing a possible merger into another entity and met with representatives of
two public biopharmaceutical companies regarding their respective interest in
acquiring Transcell. Based on the proposals submitted by these entities,
extensive discussions and negotiations were held with one of such entities
through December 1996. The Transcell Board met, discussed these negotiations
and authorized a merger into such entity, subject to certain conditions. During
these negotiations NMS was engaged by the Transcell Board to render an opinion
that such transaction was fair, from a financial point of view, to the
stockholders of Transcell. The parties were unable to finalize terms of an
agreement and negotiations with this entity terminated in December 1996.
In April 1997, the Transcell Board approved a proposal by Interneuron to
restructure its investment in Transcell in order to position Transcell more
favorably for a future public or private financing, merger or other corporate
financing transaction. The proposal was intended to facilitate any such
transaction. As part of this restructuring, the Transcell Charter was amended
to eliminate the right to minimum return adjustments to the conversion ratio of
the Transcell Series A Preferred Stock held by Interneuron. The terms of the
Series A Preferred Stock were originally identical to the terms of the Series B
Preferred Stock in that they provided for minimum return adjustments to the
conversion ratio in the event of an IPO by Transcell or certain corporate
transactions such as a merger.
While members of management of Transcell pursued possible merger and other
strategic alliance opportunities, they also continued their ongoing efforts to
seek out strategic collaborations with pharmaceutical companies as a means to
fund development and commercialization of Transcell's proprietary technologies.
Transcell's business strategy has been to generate near-term revenues and
secure research funding by entering into collaborations with larger
pharmaceutical companies to generate libraries of compounds in specific
therapeutic areas as well as ones designed around specific biological leads.
Since March 1996, members of Transcell's management have focused on potential
collaborations and have held discussions with a number of biotechnology and
pharmaceutical companies. With the exception of the Merck Agreement, Transcell
has been unable to consummate any other corporate collaboration agreements. See
"Certain Information Regarding Transcell -- Business -- Merck Agreement".
Effective as of June 30, 1997, Transcell, Interneuron and Merck entered
into the Merck Agreement relating to the discovery, development and
commercialization of novel antibacterial agents. Interneuron agreed to be a
party to the Merck Agreement because rights relating to one class of the
antibacterial agents subject to the Merck Agreement were held by Interneuron
pursuant to a sponsored research agreement between Interneuron and Princeton.
Interneuron was a party to the sponsored research agreement with Princeton
because, due to conflict of interest policies implemented at Princeton,
Transcell was unable to sponsor further research at Princeton. Under the Merck
Agreement, Merck paid $2,500,000 to Transcell upon execution of the agreement
(one third of which was paid to Interneuron relating in part to the technology
Interneuron licensed to Merck), and is paying $750,000 per year for two years'
research support. Transcell may also receive additional payments based upon the
achievement of defined, mostly late-stage clinical development and regulatory
milestones for compounds and products generated from the research programs. As
part of the negotiation of the Merger, Interneuron agreed to assign to
Intercardia its rights and obligations under the Merck Agreement and the
related Princeton agreements and to continue to guarantee certain equipment and
facility lease obligations of Transcell. In exchange for the assignment of
those rights and continuing guarantees, Interneuron will receive the
Technology/Guarantee Shares at Closing and royalties on net sales of products
subject to such agreements. See " -- Interests of Certain Persons in the Merger
- -- Technology/Guarantee
Agreement."
Notwithstanding the execution of the Merck Agreement, Transcell recognized
that the possibility of a merger or sale of Transcell or other financing
alternative would need to be considered once again because the funding under
the Merck Agreement would not be sufficient to fund Transcell's operations.
In early July 1997, Dr. Cooper first approached Mr. Duncan, the President
and Chief Executive Officer of Intercardia, to discuss the possibility of
Intercardia acquiring Transcell. Prior to that time, Mr. Duncan had expressed
general interest in exploring the possibility of such a transaction. Mr. Duncan
has served as Vice Chairman of the Transcell Board since
February 1996. In addition, Mr. Duncan and other members of Intercardia's
management previously acquired and developed a small molecule combinatorial
chemistry program at Sphinx Pharmaceuticals Corporation (now a division of Eli
Lilly and Company) and integrated high throughput drug discovery screening with
the combinatorial chemistry program.
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On July 16 and 17, 1997, at a national healthcare financial conference,
representatives of Transcell, Interneuron and Intercardia met independently and
discussed Transcell's operations and the possibility of Intercardia acquiring
Transcell. Discussions included the impact of various valuation methods for the
acquisition of Transcell by Intercardia. Intercardia also met with
representatives of its financial advisor, NMS, to discuss the proposed
acquisition of Transcell by Intercardia.
During August 1997, the parties exchanged telephone calls and consulted
their legal advisors and independent public accountants to discuss the legal,
tax, accounting and financial implications of different potential transaction
structures. In the course of these discussions, the basic terms of the Merger
were proposed and discussed. As a part of these negotiations, Interneuron
agreed to recapitalize its investment in Transcell simultaneously with the
closing of the Merger such that Interneuron will contribute to Transcell's
capital all then outstanding indebtedness owed to Interneuron by Transcell
(approximately $14,296,000 as of December 31, 1997) and will waive any rights
Interneuron may have to receive warrants to purchase Transcell Capital Stock in
connection with that indebtedness.
On September 2, 1997, Mr. Duncan and Richard W. Reichow, Intercardia's
Senior Vice President and Chief Financial Officer, visited the offices of
Transcell and met with Dr. Kahne, Dr. Walker-Kahne and the officers of
Transcell to discuss, among other things, the status of Transcell's operations
and the Merger.
On September 9, 1997, the Intercardia Board met in Boston, Massachusetts
and discussed, among other things, the Merger. Mr. Duncan reported that
Intercardia had preliminary discussions with Interneuron regarding the Merger.
It was anticipated that the Merger would increase the Company's use of cash
over the next few years, however, a detailed review of Transcell's proposed
operating plan for those years had not yet been completed. The Intercardia
Board reviewed the merits, risks and preliminary proposed terms of the Merger
in some detail including the costs associated with the Merger, the payment of
the purchase price with Intercardia Common Stock and stock options and
warrants, and the payment to Interneuron in exchange for certain technology
rights and certain lease guarantees held by Interneuron of consideration
consisting of Intercardia Common Stock at Closing and in the future as
royalties.
During the remainder of September and early October 1997, the parties held
a number of meetings and conference calls, including with their legal and
accounting advisors, to negotiate and discuss further the Merger. These
discussions led to certain modifications to the terms and conditions of the
Merger.
On October 14, 1997, the Transcell Board met by telephone to discuss,
among other things, the Merger. The Transcell Board preliminarily approved the
Merger, subject to, among other factors, obtaining a fairness opinion from a
financial advisor and review and approval of the Merger Agreement.
In mid-October 1997, Intercardia retained NMS to provide a fairness
opinion, and Transcell retained Hempstead to provide a fairness opinion
relating to the Merger.
The first draft of the Letter of Intent outlining the financial terms of
the Merger, as prepared by Intercardia, was received by Transcell in
mid-October 1997. Throughout the end of that month, the parties discussed and
negotiated the terms of the Letter of Intent. On November 5, 1997, Transcell,
Intercardia and Interneuron executed the Letter of Intent and issued a joint
press release announcing the signing of the Letter of Intent.
On December 1, 1997, the Intercardia Board met in Boston, Massachusetts
and discussed, among other things, the status of the Merger. At that meeting,
NMS discussed its review of the Merger and verbally indicated that the Merger
was fair from a financial point of view to Intercardia. Following NMS's
presentation, the Intercardia Board, with Dr. Cooper abstaining, unanimously
approved the terms of the Merger, as set forth in the Letter of Intent, and
recommended that Intercardia's stockholders approve the Merger.
On December 15, 1997, Intercardia delivered the first draft of the Merger
Agreement to representatives of Transcell and Interneuron. During the period
between December 15, 1997 and March 2, 1998, representatives of the parties
discussed and negotiated the terms and conditions of the Merger Agreement.
On February 12, 1998, the Transcell Board met and discussed the Merger,
reviewed the proposed terms and conditions of the Merger and related agreements
and reviewed a draft of the Merger Agreement. A representative of Hempstead
summarized the bases of their conclusion as to the fairness from a financial
point of view of the consideration to be received in the Merger by the holders
of Transcell Capital Stock, other than Interneuron. After discussion, the
Transcell Board, with Mr. Duncan abstaining, unanimously determined to approve
the execution and delivery of the Merger Agreement, that the terms of the
Merger Agreement are fair to, and in the best interests of, Transcell and its
stockholders, and to submit the Merger to Transcell's stockholders for
approval. On February 26, 1998, the Transcell Board received the written
fairness opinion of Hempstead and approved the final Merger Agreement.
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<PAGE>
On February 12, 1998, the Intercardia Board met and discussed the Merger
and reviewed a draft of the Merger Agreement. Representatives of NMS summarized
the bases of their conclusion as to the fairness from a financial point of view
of the consideration to be given in connection with the Merger. After
discussion, the Intercardia Board, with Dr. Cooper abstaining, unanimously
reaffirmed their approval of the Merger.
The Merger Agreement was executed on March 2, 1998, after which the
parties jointly issued a press release publicly announcing the execution of the
Merger Agreement.
Recommendation of the Intercardia Board
THE INTERCARDIA BOARD (WITH DR. COOPER ABSTAINING) HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND
UNANIMOUSLY RECOMMENDS A VOTE BY THE STOCKHOLDERS OF INTERCARDIA FOR THE
PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT. THE INTERCARDIA BOARD
BELIEVES THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF INTERCARDIA
STOCKHOLDERS.
The Intercardia Board believes that the Merger is fair to and in the best
interests of the Intercardia stockholders for the following reasons, among
others:
(i) The technology under development at Transcell, including Transcell's
collaboration with Merck to discover and commercialize novel compounds as
antibacterial products, will provide Intercardia the capability to develop
a pipeline of additional products. Furthermore, Transcell offers
Intercardia the capability to establish internal drug discovery programs.
The ability to develop a number of additional products could provide
Intercardia with additional potential sources of revenue.
(ii) The addition of Transcell's carbohydrate combinatorial chemistry
platform could help diversify Intercardia's product development efforts,
reducing Intercardia's dependence on BEXTRA (which is currently in Phase
III clinical trials), and reducing Intercardia's dependence on a single
therapeutic area, congestive heart failure. The Company expects that the
Transcell platform technology will help it develop additional products
across multiple therapeutic areas.
(iii) Transcell is developing a carbohydrate combinatorial chemistry
program with broad applications in drug discovery. Combinatorial chemistry
is a set of technologies that results in rapid generation of large
libraries of compounds for drug discovery. Numerous development stage
companies and large pharmaceutical companies have added combinatorial
chemistry programs to synthesize libraries of peptides and traditional
small organic molecules for their drug discovery programs. Transcell's
combinatorial approach to create carbohydrate-based molecular diversity is
less established, but is believed to be a logical progression for the
creation of libraries of compounds for drug discovery.
(iv) Intercardia's senior management and senior scientists will have the
opportunity to apply their experience in corporate partnering and drug
discovery to Transcell's technology. In particular, the members of the
management team at Intercardia, led by Mr. Duncan, previously acquired and
developed a small molecule combinatorial chemistry program at Sphinx
Pharmaceuticals Corporation (now a division of Eli Lilly and Company) and
integrated high throughput drug discovery screening with the combinatorial
chemistry program. In addition, Intercardia management has experience in
identifying and selecting biological targets for drug discovery.
(v) Adding the medicinal chemistry expertise and resources of Transcell
to the Company could provide significant benefit to the chemistry efforts
associated with the research stage discovery programs at one of
Intercardia's subsidiaries, Aeolus.
(vi) The Merck Agreement would provide the Company with an additional
corporate collaboration with a large pharmaceutical company. The Company
believes that through this collaboration, Transcell will be able to
generate libraries of carbohydrate-derived compounds of distinct structural
classes for screening as anti-bacterial agents.
(vii) The Merger gives the Company the ability to leverage research and
development capabilities, and to realize economies of scale through
centralization of general management and administrative functions.
(viii) The oral opinion of NMS (subsequently confirmed in writing) to the
Intercardia Board states that as of March 2, 1998, and based upon and
subject to certain matters, the total consideration to be paid by
Intercardia in connection with the Merger, including the
Technology/Guarantee Shares to be paid to Interneuron, was fair, from a
financial point of view, to Intercardia.
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In the course of its deliberations, the Intercardia Board reviewed with
Intercardia's management a number of other factors relevant to the Merger. In
particular, the Intercardia Board considered, among other things: (i)
information concerning the Company's and Transcell's respective businesses,
prospects, historical and expected financial performances, financial condition
and operations; (ii) an analysis of the respective projected contributions of
each company to net revenues and operating results of the Company; (iii)
reports from management of Intercardia on its due diligence investigation of
Transcell; (iv) the business capabilities of the management of and consultants
to Transcell, the need for additional management at Transcell, as well as the
compatibility of the managements and corporate cultures of Intercardia and
Transcell; (v) cash requirements relating to the Merger and the Company; (vi) a
financial presentation by NMS, including the opinion of NMS to the effect that
the total consideration to be paid by Intercardia in connection with the
Merger, including the Technology/ Guarantee Shares to be paid to Interneuron,
is fair, from a financial point of view, to Intercardia; (vii) valuations for
publicly traded companies with businesses comparable to Transcell; (viii)
amounts paid in other merger and acquisition transactions in Transcell's
industry; and (ix) the fact that the Merger Agreement permits Intercardia,
Interneuron or Transcell to terminate the Merger Agreement if the Intercardia
Stock Price at Closing is less than $10.00 or greater than $34.00.
In its deliberations concerning the Merger, the Intercardia Board also
considered a variety of additional considerations and risk factors, including:
(i) the historical financial performance and cash requirements of Transcell;
(ii) the ownership dilution to Intercardia stockholders resulting from the
issuance to the Transcell stockholders of shares of Intercardia Common Stock
and options and warrants to purchase Intercardia Common Stock in the Merger;
(iii) the risk that the market price of Intercardia Common Stock might be
adversely affected by announcement of the Merger or by other associated
factors; (iv) the risk that other benefits sought to be obtained by the Merger
will not be obtained; (v) the charges to operations expected to result from the
Merger and the cost of integration of the operations of Intercardia and
Transcell and its impact on the combined results of the Company after the
Merger; (vi) the risks that Intercardia may need to raise additional capital
and the resulting dilution to Intercardia stockholders; and (vii) other risks
described under "Risk Factors".
The foregoing discussion of the information and factors considered by the
Intercardia Board is not intended to be exhaustive, but it does include all
material factors considered by the Intercardia Board. In view of the wide
variety of factors, both positive and negative, considered by the Intercardia
Board, the Intercardia Board did not find it practical to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered, and individual directors may have given differing weights to
different factors. After taking into consideration all of the factors set forth
above, the Intercardia Board determined that the Merger was in the best
interests of and fair to Intercardia and its stockholders and that Intercardia
should proceed with the Merger.
IN APPROVING THE MERGER AGREEMENT, CERTAIN MEMBERS OF THE INTERCARDIA
BOARD MAY BE DEEMED TO HAVE CERTAIN CONFLICTS OF INTEREST. SEE " -- INTERESTS
OF CERTAIN PERSONS IN THE MERGER".
Recommendation of the Transcell Board
THE TRANSCELL BOARD (WITH MR. DUNCAN ABSTAINING) HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND UNANIMOUSLY
RECOMMENDS THAT THE TRANSCELL STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT. THE TRANSCELL BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS OF TRANSCELL.
The Transcell Board believes that the Merger is fair and in the best
interests of the Transcell stockholders for the following reasons, among
others:
(i) Transcell's prospects as an independent company are not favorable.
The Merger would provide a greater likelihood of obtaining funding on
acceptable terms for development of Transcell's research programs within
the time frame of its capital requirements. Transcell has incurred
cumulative net losses of approximately $26,893,000 through December 31,
1997, and owed Interneuron approximately $14,296,000 as of that date.
Transcell has not been able to, and does not believe that it could, raise
the capital required to continue or to successfully develop its technology
without significant dilution to current stockholders, if at all.
(ii) Interneuron agreed in the Merger Agreement that at Closing it will
contribute to Transcell's capital all then outstanding indebtedness owed by
Transcell to Interneuron (approximately $14,296,000 as of December 31,
1997). Interneuron also agreed to terminate any rights it may have to
warrants to purchase Transcell Capital Stock in connection with such
indebtedness. There can be no assurance that Interneuron would make any
similar concessions in connection with any other merger or financing
proposal.
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(iii) The strategic fit of the businesses to be combined as a result of
the Merger. Transcell believes that Transcell's focus, capabilities and
expertise in the compound synthesis and biological screening components of
drug discovery complements the Company's focus, capabilities and expertise
in the selection of biological targets and the Company's capability in
preclinical and clinical drug development and regulatory affairs.
(iv) The Merger offers the holders of Transcell Capital Stock the
opportunity to participate in an enterprise with a broader product
portfolio, greater financial resources and increased likelihood of funding
future growth. Without the Merger, or a similar transaction, Transcell
would lack the financial resources and other characteristics necessary to
commercialize its research programs.
(v) The experience, strength and drug discovery expertise of
Intercardia's senior management, and in particular the ability of Mr.
Duncan, to lead the combined operations of Transcell and the Company.
Intercardia's senior management and senior scientists should benefit
Transcell by applying their experience in corporate partnering and drug
discovery. In particular, the management team at Intercardia, led by Mr.
Duncan, previously acquired and developed a small molecule combinatorial
chemistry program at Sphinx Pharmaceuticals Corporation (now a division of
Eli Lilly and Company) and integrated high throughput drug discovery
screening with the combinatorial chemistry program. Intercardia management
has experience in identifying and selecting biological targets for drug
discovery. Mr. Duncan has extensive experience in negotiating corporate
partnering agreements and in conducting corporate collaborations. As Vice
Chairman of Transcell, Mr. Duncan had a significant role in establishing
and negotiating Transcell's collaboration with Merck. Transcell does not
have its own experienced senior management necessary to develop Transcell's
business.
(vi) The preclinical and clinical drug development capabilities of the
Company could allow it (more than Transcell independently) to retain more
value from a drug candidate by having the ability to advance a drug
candidate further along the drug development pathway prior to entering into
a corporate collaboration. Typically, a drug candidate in a more advanced
stage of development commands higher value in an out-licensing arrangement
in terms of higher royalties and milestone payments from collaborators.
(vii) The Merger would provide Transcell stockholders with potential
liquidity as Intercardia Common Stock is listed on Nasdaq, and Transcell is
a private company with virtually no liquidity and no assurance of ever
becoming a public company.
(viii) The fact that the Merger is expected to be treated as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"). See " -- Certain Federal Income Tax Consequences".
(ix) The evaluation performed by Hempstead and the opinion delivered by
Hempstead to Transcell that the consideration to be received by holders of
Transcell Capital Stock, Transcell Options and Transcell Warrants in the
Merger is fair, from a financial point of view, to the holders of Transcell
Capital Stock, Transcell Options and Transcell Warrants (other than
Interneuron).
In the course of its deliberations, the Transcell Board reviewed a number
of other factors relevant to the Merger. In particular, the Transcell Board
considered, among other things: (i) information concerning the Company's and
Transcell's respective businesses, prospects, historical and expected financial
performances, financial condition and operations; (ii) analyses of the
respective projected contributions to net revenues, operating profits and net
incomes of each company; (iii) reports from management on Transcell's due
diligence investigation of Intercardia; (iv) the business capabilities of the
management of the Company, as well as the compatibility of the managements and
corporate cultures of the Company and Transcell; (v) a presentation by
Hempstead, including the opinion of Hempstead to the effect that the Aggregate
Merger Consideration is fair, from a financial point of view, to the holders of
Transcell Capital Stock, Transcell Options and Transcell Warrants (other than
Interneuron); and (vi) the fact that the Merger Agreement permits Transcell,
Interneuron or Intercardia to terminate the Merger Agreement if the Intercardia
Stock Price at Closing is less than $10.00 or greater than $34.00.
In its deliberations concerning the Merger, the Transcell Board also
considered a variety of additional considerations and risk factors, including:
(i) the historical financial performance and financial condition of
Intercardia; (ii) the fact that the public market for Intercardia's Common
Stock has been characterized by low and/or erratic trading volume, often
resulting in price volatility; (iii) the risk that other benefits sought to be
obtained by the Merger will not be obtained; (iv) the cost of integration of
the operations of the Company and Transcell and its impact on the combined
results of the Company after the Merger; and (v) other risks described under
"Risk Factors".
The foregoing discussion of the information and factors considered by the
Transcell Board is not intended to be exhaustive, but it does include all
material factors considered by the Transcell Board. In view of the wide variety
of factors, both
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<PAGE>
positive and negative, considered by the Transcell Board, the Transcell Board
did not find it practical to, and did not, quantify or otherwise assign
relative weights to the specific factors considered, and individual directors
may have given differing weights to different factors. After taking into
consideration all of the factors set forth above, the Transcell Board
determined that the Merger was in the best interests of Transcell and its
stockholders and that Transcell should proceed with the Merger.
IN APPROVING THE MERGER AGREEMENT, CERTAIN MEMBERS OF THE TRANSCELL BOARD
MAY BE DEEMED TO HAVE CERTAIN CONFLICTS OF INTEREST. SEE " -- INTERESTS OF
CERTAIN PERSONS IN THE MERGER".
Opinions of Financial Advisors
The following descriptions of the opinions and presentations of NMS and
Hempstead contain forward-looking information. Without limiting the generality
of the foregoing, the projections and forecasts furnished to the financial
advisors rendering the opinions described above were prepared by the respective
managements of the Company or Transcell. Neither Intercardia nor Transcell
publicly discloses internal management projections of the type provided to such
financial advisors in connection with such investment banks' analyses of the
Merger, and such projections were not prepared with a view toward public
disclosure. These projections were based on numerous variables and assumptions
that are inherently uncertain and may be beyond the control of management,
including, without limitation, factors related to general economic and
competitive conditions and prevailing interest rates. Accordingly, actual
results could vary significantly from those set forth in such projections.
Opinion of Financial Advisor to Intercardia
Pursuant to an engagement letter dated November 19, 1997 (the "NMS
Engagement Letter"), the Intercardia Board retained NMS to render a fairness
opinion in connection with its consideration of the Merger. NMS is an
internationally recognized firm and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. Pursuant to the NMS Engagement Letter, the Intercardia Board engaged
NMS to act as its financial advisor in connection with a possible acquisition
of Transcell. Intercardia has also agreed to pay NMS $50,000 upon rendering its
opinion to the Intercardia Board. Intercardia has also agreed to reimburse NMS
for reasonable out-of-pocket expenses. Pursuant to a separate letter agreement,
the Company has agreed to indemnify NMS, its affiliates, and their directors,
officers, agents, consultants, employees and controlling persons against
certain liabilities, including liabilities under federal securities laws.
In the ordinary course of business, NMS actively trades equity securities
of Intercardia and Interneuron for its own account and for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. NMS has also performed investment banking services for
Intercardia, Interneuron and Transcell. In February 1996, NMS acted as lead
manager of an underwritten IPO of Intercardia Common Stock. In June 1996, NMS
acted as lead manager of an underwritten offering of Interneuron Common Stock.
In November 1996, NMS rendered an oral opinion to the Transcell Board in
connection with its proposed merger with a publicly held biopharmaceutical
company, that the consideration to be received by the stockholders of Transcell
other than Interneuron was fair from a financial point of view as of the date
thereof.
Intercardia selected NMS as its financial advisor on the basis of its
experience and expertise in transactions similar to the Merger, its reputation
in the biotechnology and investment communities and its knowledge of and
familiarity with Intercardia resulting from the investment banking services it
has previously provided to Intercardia. NMS was not retained to, nor did it,
advise the Intercardia Board with respect to alternatives to the Merger or
Intercardia's underlying decision to proceed with or effect the Merger.
On each of December 1, 1997 and February 12, 1998, NMS rendered its oral
opinion to the Intercardia Board, subsequently confirmed in writing as of March
2, 1998, that the total consideration to be offered by Intercardia pursuant to
the terms of the Merger, including the Technology/Guarantee Shares to be paid
to Interneuron as set forth in the Merger Agreement, was fair to Intercardia
from a financial point of view, as of the date thereof. No limitations were
imposed by the Intercardia Board on the scope of NMS's investigation or the
procedures to be followed by NMS in rendering its opinion. NMS did not
determine the form of consideration to be offered by Intercardia in connection
with the Merger, which was agreed to as a result of arm's-length negotiations
between Intercardia and Transcell.
40
<PAGE>
The full text of NMS's written opinion to the Intercardia Board is
attached hereto as Annex B and is incorporated herein by reference. The
following summary of NMS's opinion is qualified in its entirety by reference to
the full text of such opinion. NMS's opinion is directed only to the fairness
of the consideration, from a financial point of view, being offered by
Intercardia in connection with the Merger, as set forth in the Merger
Agreement. NMS's opinion has been provided for the use of the Intercardia Board
in its evaluation of the Merger, and does not address any other aspect of the
Merger. NMS's opinion is addressed to the Intercardia Board and does not
constitute a recommendation to any stockholder of Intercardia as to how such
stockholder should vote with respect to the Merger.
In connection with its opinion, NMS has, among other things: (i) reviewed
certain publicly available financial and other data with respect to
Intercardia, including the consolidated financial statements of Intercardia for
recent years and interim periods to December 31, 1997 and certain other
relevant financial and operating data relating to Transcell and Intercardia
made available to NMS from published sources and from the internal records of
Transcell and Intercardia, including the financial statements of Transcell for
recent years and interim periods to September 30, 1997; (ii) reviewed the
financial terms and conditions of the Merger Agreement; (iii) compared
Intercardia from a financial point of view with certain other companies which
NMS deemed to be relevant; (iv) considered the financial terms, to the extent
publicly available, of selected recent business combinations of companies in
the biotechnology industry which NMS deemed to be comparable, in whole or in
part, to the Merger; (v) reviewed and discussed with representatives of the
management of Transcell and Intercardia certain information of a business and
financial nature regarding Transcell and Intercardia, furnished to NMS by them,
including financial forecasts and related assumptions of Transcell and
Intercardia; (vi) made inquiries regarding and discussed the Merger and the
Merger Agreement and other matters related thereto with Intercardia's
management; and (vii) performed such other analyses and examinations as NMS
deemed appropriate.
In connection with its review, NMS has not assumed any obligation
independently to verify the foregoing information and has relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Transcell and Intercardia provided to NMS by their respective
managements, upon their advice and with the consent of the Intercardia Board,
NMS has assumed for purposes of its opinion that the forecasts have been
reasonably prepared on bases reflecting the best available estimates and
judgments of their respective managements at the time of preparation as to the
future financial performance of Transcell and Intercardia and that they provide
a reasonable basis upon which NMS can form its opinion. NMS has also assumed
that there have been no material changes in Transcell's or Intercardia's
assets, financial condition, results of operations, business or prospects since
the respective dates of their last financial statements made available to NMS.
NMS has relied on advice of counsel and independent accountants to Intercardia
as to all legal and financial reporting matters with respect to Intercardia,
the Merger and the Merger Agreement. NMS has assumed that the Merger will be
consummated in accordance with the terms of the Merger Agreement and in a
manner that complies in all respects with the applicable provisions of the
Securities Act, the Exchange Act and all other applicable federal and state
statutes, rules and regulations. In addition, NMS has not assumed
responsibility for reviewing any individual credit files, or making an
independent evaluation, appraisal or physical inspection of any of the assets
or liabilities (contingent or otherwise) of Transcell or Intercardia, nor has
NMS been furnished with any such appraisals. Finally, NMS's opinion is based on
economic, monetary and market and other conditions as in effect on, and the
information made available to NMS as of, the date thereof. Accordingly,
although subsequent developments may affect its opinion, NMS has not assumed
any obligation to update, revise or reaffirm its opinion.
The following is a brief summary of the report presented to Intercardia's
Board by NMS in connection with its opinion.
Comparable Public Company Analysis. NMS compared the historical financial,
operating and stock market performances of certain publicly traded companies
that it considered relevant in evaluating the historical financial and
operating performance of Transcell. In particular, these companies were
analyzed with respect to their technology value (defined as market
capitalization plus debt minus cash and equivalents), significant corporate
collaborations and stage of development.
NMS examined the technology value of two separate indices. The first index
(the "Combinatorial Chemistry Index") was composed of companies primarily
engaged in combinatorial chemistry including ArQule, Inc., Pharmacopoeia, Inc.
and Trega Biosciences Inc. (formerly Houghten Pharmaceuticals, Inc.) As of
March 2, 1998, the average and median technology values of this index were
$150.9 million and $190.1 million, respectively. The second index (the "Drug
Discovery Index") was composed of certain early stage drug discovery companies
and included the companies from the Combinatorial Chemistry Index as well as
Ariad Pharmaceuticals, Inc., Arris Pharmaceuticals, Inc., Cadus Pharmaceuticals
Corp., Corixa, Inc., Cubist Pharmaceuticals, Inc., Megabios, Inc., Microcide
Pharmaceuticals, Inc., Neose Technologies, Inc., Onyx Pharmaceuticals, Inc.,
OSI Pharmaceuticals, Inc., Ribozyme Pharmaceuticals, Inc. and Vical, Inc. As of
March 2, 1998, the average and median technology values of this index were
$98.6 million and $52.8 million, respectively. NMS also made qualitative
41
<PAGE>
judgments with respect to the significant corporate collaborations and stage of
development of each of the companies included in the indices.
Based on the stage of development of Transcell and the limited nature of
its collaborations, NMS deemed this valuation methodology to have limited
importance.
Comparable Transaction Analysis. NMS examined selected pending and completed
business combinations in the biotechnology industry with a special emphasis on
combinatorial chemistry and closely related technologies. The combinations were
as follows (target / acquiror): Sequana Therapeutics, Inc. / Arris
Pharmaceutical Corp.; PharmaGenics, Inc. / Genzyme Corp.; Axiom
Biotechnologies, Inc. / Cadus Pharmaceutical Corp.; SARCO, Inc. /
Pharmaceutical Product Development, Inc.; Alanex Corp. / Agouron
Pharmaceuticals, Inc.; Aston Molecules, Ltd. / Oncogene Science, Inc.; Combion
Inc. / Incyte Pharmaceuticals, Inc.; ChromaXome Corp. / Houghten
Pharmaceuticals, Inc.; Affymax N.V. / Glaxo PLC; Khepri Pharmaceuticals, Inc. /
Arris Pharmaceutical Corp.; Selectide Corp. / Marion Merrell Dow, Inc.; Sphinx
Pharmaceuticals Corporation / Eli Lilly and Company; and Genesis
Pharmaceuticals Inc. / Sphinx Pharmaceuticals Corporation. The average and
median technology values for these transactions were $64.9 million and $20.6
million, respectively.
Based on the transaction structures, stage of development, core
technologies and significant corporate collaborations of the targets at the
time of acquisition, NMS deemed this valuation methodology to be most relevant.
Discounted Cash Flow Analysis. NMS examined the financial projections of
Transcell provided to NMS by Transcell's management and performed a limited
quantitative analysis of its cash flows. Due to the high unpredictability of
future revenues from existing or future collaborations or partnerships, NMS
determined that this analysis does not fully reflect the value of Transcell's
technology and intangible assets, such as intellectual property rights and
related expertise in combinatorial chemistry. Therefore, this analysis was
deemed to be not meaningful.
The summary set forth above does not purport to be a complete description
of the presentation by NMS to the Intercardia Board or the analyses performed
by NMS. The preparation of a fairness opinion is not necessarily susceptible to
partial analysis or summary description. NMS believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and of the factors considered, without considering all
the analyses and factors, would create an incomplete view of the process
underlying the analyses set forth in its presentation to the Intercardia Board.
In addition, NMS may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions so that the valuation figures resulting from any particular
analysis described above should not be taken to be NMS's view of the actual
value of Transcell. In arriving at its opinion, NMS did not ascribe a specific
range of values to Transcell, but rather made its determination as to the
fairness, from a financial point of view, of the consideration to be paid by
Intercardia in connection with the proposed Merger on the basis of the
financial and comparative analyses described above.
In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters. The analyses performed by NMS are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely
as part of NMS's analysis of the fairness of the consideration, from a
financial point of view, being offered by Intercardia in connection with the
Merger, as set forth in the Merger Agreement and were provided to Intercardia's
Board in connection with the delivery of NMS's opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. NMS used in its analyses various projections
of future performance prepared by the management of Transcell. The projections
are based on numerous variables and assumptions which are inherently
unpredictable and must be considered not certain of occurrence as projected.
Accordingly, actual results could vary significantly from those set forth in
such projections.
In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Transcell. The analyses
performed by NMS are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of NMS's
analysis of the fairness of the transaction to Intercardia contemplated by the
Merger Agreement and were provided to the Intercardia Board in connection with
the delivery of NMS's opinion. The analyses do not purport to be appraisals or
to reflect the prices at which a company might actually be sold or the prices
at which any securities may trade at the present time or at any time in the
future. NMS used in its analyses various projections of future performance
prepared by the management of Transcell. The projections are based on numerous
variables and assumptions which are inherently unpredictable and must be
considered not certain of occurrence as projected. Accordingly, actual results
could vary significantly from those set forth in such projections.
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<PAGE>
Opinion of Hempstead
Pursuant to an engagement letter dated October 29, 1997 (the "Hempstead
Engagement Letter"), the Transcell Board retained Hempstead to render a
fairness opinion in connection with the consideration to be received by holders
of Transcell Capital Stock other than Interneuron from Intercardia pursuant to
the terms of the proposed Merger. Hempstead is a corporate valuation and
financial consulting firm regularly engaged in the valuation of businesses in
connection with corporate transactions and related matters. Hempstead has also
performed certain other services for Transcell, including providing a valuation
of warrants Transcell had agreed to issue to Interneuron in connection with
advances provided by Interneuron to Transcell. Transcell selected Hempstead as
its financial advisor on the basis of its experience and expertise in
transactions similar to the proposed Merger, its reputation in the
biotechnology and investment communities and its knowledge of and familiarity
with Transcell resulting from the services it has previously provided to
Transcell. Hempstead was not retained to, nor did it, advise the Transcell
Board with respect to alternatives to the Merger or Transcell's underlying
decision to proceed with or effect the Merger.
On February 12, 1998, Hempstead rendered its oral opinion to the Transcell
Board, subsequently confirmed in writing as of February 26, 1998 that the
consideration to be received by the holders of Transcell Capital Stock,
Transcell Options and Transcell Warrants (other than Interneuron) pursuant to
the terms of the proposed Merger as set forth in the Merger Agreement was fair
from a financial point of view, as of the date thereof. No limitations were
imposed by the Transcell Board on the scope of Hempstead's investigation or the
procedures to be followed by Hempstead in rendering its opinion. Hempstead did
not determine the form of consideration to be offered by Intercardia in the
Merger, which was agreed to as a result of negotiations between Intercardia,
Transcell and their respective financial and legal advisors (excluding NMS and
Hempstead).
The full text of Hempstead's written opinion to the Transcell Board is
attached hereto as Annex C and is incorporated herein by reference. The
following summary of Hempstead's opinion is qualified in its entirety by
reference to the full text of such opinion. Hempstead's opinion is directed
only to the fairness from a financial point of view of the consideration to be
received by holders of Transcell Capital Stock, Transcell Options and Transcell
Warrants (other than Interneuron), and was provided to the Transcell Board in
its evaluation of the Merger, and does not address any other aspect of the
Merger. Hempstead's opinion is addressed to the Transcell Board and does not
constitute a recommendation to any stockholder of Transcell as to how such
stockholder should vote with respect to the Merger.
In connection with its opinion, Hempstead among other things: (i) reviewed
the Letter of Intent, dated November 5, 1997; (ii) reviewed the Merger
Agreement as of February 26, 1998; (iii) conferred recently with Daniel Kahne,
Ph.D., a scientific founder of Transcell, and Michael J. Sofia, Ph.D. regarding
the development, current status and potential of Transcell's business including
the current status of the Merck Agreement; (iv) reviewed certain unaudited
financial statement information for Transcell including income statement data
for the fiscal year ending September 30, 1997, and balance sheet data as of
September 30, 1997; (v) reviewed additional financial statement information as
of December 31, 1997; (vi) reviewed certain publicly available information,
including SEC filings and analyst's reports pertaining to Interneuron,
Transcell and Intercardia; and (vii) conducted such other financial studies,
analyses and investigations and reviewed such other factors as it deemed
appropriate for purposes of its opinion.
In connection with its review, Hempstead did not assume any obligation
independently to verify any information or data supplied to it and relied on
its being accurate and complete in all material respects. Hempstead assumed
that the Merger will be consummated on the terms and conditions described in
the Merger Agreement reviewed by it, and as described to it by the management
of Interneuron and Transcell. In addition, Hempstead did not assume
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
Transcell, nor was Hempstead furnished with any such appraisals. Finally,
Hempstead's opinion was based on economic, monetary and market and other
conditions as in effect on, and the information made available to Hempstead, as
of February 26, 1998. Accordingly, although subsequent developments may affect
this opinion, Hempstead has not assumed any obligation to update, revise or
affirm its opinion.
The following is a summary of the report presented by Hempstead on
February 26, 1998 in connection with its opinion.
Prior Investment Analysis. Hempstead reviewed both actual transactions in
Transcell Capital Stock (primarily equity investments) and proposed
transactions with non-affiliated parties (specifically, proposed equity
investments and a proposed merger of Transcell with an unaffiliated public
company). The most recent of these pricing indicia implied a value, on a debt
free basis, for Transcell of $23.3 million.
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<PAGE>
Based on the arm's-length nature of this pricing data, its proximity in
time to the current date, and the characteristics of the negotiation, Hempstead
considered this data to be significant to its analysis.
Comparable Public Company Analysis. Hempstead reviewed the market value of
capital (the "MVC", defined as the aggregate market value of equity capital
plus interest-bearing debt less cash) of certain publicly traded companies that
it considered relevant, including certain companies primarily engaged in
combinatorial chemistry, including ArQule, Pharmacopoeia and Trega, and certain
early stage drug discovery companies, including Ariad, Cubist, Microcide and
Neose.
As of January 31, 1998, the market values of capital of the guideline
group ranged from a low of $26.9 million to a high of $208 million. In
comparing Transcell to the group of public companies, Hempstead noted that
Transcell is still a private company at an earlier stage of technological and
product development, with fewer management personnel, and corporate
collaborations. Transcell also has less cash and a greater level of debt than
any of the companies in the guideline group. Consequently, Hempstead imputed an
estimate of the market value of capital for Transcell at or below the low end
of values indicated by the guideline group. Based on this valuation
methodology, Hempstead deemed it reasonable to impute an estimate of the MVC
for Transcell at or below the low end of values indicated by the group of
public companies.
Comparable Transaction Analysis. Hempstead examined select pending and
completed corporate transactions in the biotechnology industry, especially
transactions with companies engaged in combinatorial chemistry and closely
related technologies. The transactions were as follows (target/acquiror):
Sequana Therapeutics, Inc./Arris Pharmaceutical Corp.; PharmaGenics,
Inc./Genzyme Corp.; Axiom Biotechnologies, Inc./Cadus Pharmaceutical Corp.;
SARCO, Inc./Pharmaceutical Product Development, Inc.; Alanex Corp./Agouron
Pharmaceuticals, Inc.; Aston Molecules, Ltd./Oncogene Science, Inc.; Combion
Inc./ Incyte Pharmaceuticals, Inc.; ChromaXome Corp./Houghten Pharmaceuticals,
Inc.; Khepri Pharmaceuticals, Inc./Arris Pharmaceutical Corp.; Selectide
Corp./Marion Merrell Dow, Inc.; Sphinx Pharmaceuticals Corporation/Eli Lilly
and Company; and Genesis Pharmaceuticals Inc./Sphinx Pharmaceuticals
Corporation. The average and median values for these transactions were $34.2
million and $18.2 million, respectively.
Based on the transaction structures, stage of development, core
technologies and significant corporate collaborations of the targets at the
time of acquisition, Hempstead deemed this valuation methodology, when
considered in conjunction with the Comparable Public Company Analysis and the
Prior Investment Analysis, to be supportive of the valuation.
The summary set forth above does not purport to be a complete description
of the presentation by Hempstead to the Transcell Board or the analyses
performed by Hempstead. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description.
In performing its analyses, Hempstead made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Transcell. The analyses
performed by Hempstead are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, Hempstead may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions so that the valuation
figures resulting from any particular analysis described above should not be
taken to be Hempstead's view of the actual value of Transcell. Such analyses
were prepared solely as part of Hempstead's analysis of the fairness, from a
financial point of view, of the transaction to holders of Transcell Capital
Stock, Transcell Warrants and Transcell Options (other than Interneuron) of the
consideration which they would receive, as contemplated by the Merger Agreement
and were provided to the Transcell Board in connection with the delivery of
Hempstead's opinion. The analyses do not purport to be appraisals or to reflect
the prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future.
Pursuant to the Hempstead Engagement Letter, the Transcell Board engaged
Hempstead to act as its financial advisor in connection with a possible
acquisition of Transcell. Transcell has agreed to pay Hempstead $25,000 upon
rendering its opinion to the Transcell Board, and to indemnify Hempstead, its
affiliates, and their directors, officers, agents, consultants, employees and
controlling persons against certain liabilities, including liabilities under
federal securities laws. Interneuron has retained Hempstead to provide an
appraisal of the Common Stock of another majority-owned subsidiary of
Interneuron for a fee of $5,000.
The Merger Agreement
The following is a brief summary of the Merger Agreement, a copy of which
(without exhibits or schedules) is attached as Annex A to this Proxy
Statement/Prospectus and is incorporated herein by reference. Although the
material provisions of the Merger Agreement set forth in this Proxy
Statement/Prospectus have been summarized accurately, the statements made
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<PAGE>
herein concerning such document are not necessarily complete, and reference is
made to the full text of the Merger Agreement attached hereto as Annex A. Each
such statement is qualified in its entirety by such reference. Capitalized
terms that are not otherwise defined in this Proxy Statement/Prospectus have
the meanings set forth in the Merger Agreement.
General
The Merger Agreement provides that, subject to the approval and adoption
thereof by the stockholders of Intercardia and the stockholders of Transcell
and the satisfaction of the other conditions set forth therein, Transcell will
be merged with and into Intercardia and Transcell will cease to exist as a
separate legal entity.
At the Effective Time, each share of Transcell Capital Stock outstanding
immediately prior to the Effective Time (other than Dissenting Shares) will, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive in three installments (the Closing
Installment at Closing, the Second Installment on the 15-month anniversary of
Closing and the Third Installment on the 21-month anniversary of Closing) that
number of shares of Intercardia Common Stock calculated in accordance with the
exchange ratio applicable for each installment for such class or series as
follows:
Series B Exchange Ratios
Series B Exchange Ratios will be determined by dividing:
(i) $4.3750 by the Intercardia Stock Price at Closing for the Closing
Installment;
(ii) $2.4609 by the Intercardia Stock Price determined at the 15-month
anniversary of Closing for the Second Installment; and
(iii) $2.5703 by the Intercardia Stock Price determined at the 21-month
anniversary of Closing for the Third Installment.
Common Exchange Ratios
The exchange ratios for each Common Equivalent Share will be determined
by: (i) for the Closing Installment, dividing $1.40 by the Intercardia Stock
Price at Closing and multiplying the result by 50%; provided, however, that if
the Intercardia Stock Price at Closing is less than $15.00, then the Closing
Common Exchange Ratio will be 0.0467 and if the Intercardia Stock Price at
Closing is greater than $29.00, then the Closing Common Exchange Ratio will be
0.0241; and (ii) for each of the Future Installments, dividing $1.40 by (a) the
Intercardia Stock Price determined on the 15-month anniversary of the Closing
with respect to the Second Installment and (b) the Intercardia Stock Price
determined on the 21-month anniversary of the Closing with respect to the Third
Installment, and in each case multiplying the result by 25%.
If the Intercardia Stock Price at Closing is within the Fixed Value Range,
then the Effective Intercardia Stock Price shall be the Intercardia Stock Price
at Closing; if the Intercardia Stock Price at Closing is less than $15.00, the
Effective Intercardia Stock Price shall be $15.00, and if the Intercardia Stock
Price at Closing is more than $29.00, the Effective Intercardia Stock Price
shall be $29.00. If the Intercardia Stock Price at Closing is within the Fixed
Value Range, the dollar amount of the shares of Intercardia Common Stock to be
issued in the three installments for each Common Equivalent Share shall be
$1.40. If the Intercardia Stock Price at Closing is outside the Fixed Value
Range, the Closing Common Exchange Ratio is fixed, and, accordingly, the dollar
amount of the shares of Intercardia Common Stock to be issued at Closing for
each Common Equivalent Share cannot be determined until the Intercardia Stock
Price at Closing has been determined.
The total number of shares of Intercardia Common Stock to be issued in
exchange for the Common Equivalent Shares as determined by the Common Exchange
Ratios, is referred to herein as the "Common Purchase Price". The corresponding
per share dollar amount of the Intercardia Common Stock applicable to each such
class or series to be received in three installments in the Merger is referred
to herein as the "Per Share Amount". Each of the respective classes and series
of Transcell Capital Stock will be converted into the right to receive the
applicable number of shares of Intercardia Common Stock calculated in
accordance with the applicable Exchange Ratio for such class or series.
The following table sets forth examples, for the Series B Preferred Stock
and the Common Equivalent Shares, of the Per Share Amount of Intercardia Common
Stock issuable pursuant to the Merger in accordance with the applicable
Exchange Ratios in all three installments at the selected Intercardia Stock
Prices set forth in the column entitled "Intercardia Stock Price", and giving
effect, in the column entitled "Effective Intercardia Stock Price", to the
adjustment to the Closing Common Exchange Ratio if the Intercardia Stock Price
at Closing is outside the Fixed Value Range:
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<TABLE>
<CAPTION>
Effective Second Third Total
Intercardia Intercardia Closing Installment Installment of the
Class or Series of Transcell Stock Stock Exchange Exchange Exchange Exchange Per Share
Capital Stock Price(1) Price(2) Ratio Ratio(1) Ratio(1) Ratios(1) Amount
- -------------------------------- ------------- ------------- ---------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Equivalent Shares $34 $29 .0241 .0103 .0103 .0447 $ 1.52
$29 $29 .0241 .0121 .0121 .0483 $ 1.40
$20 $20 .0350 .0175 .0175 .0700 $ 1.40
$15 $15 .0467 .0233 .0233 .0933 $ 1.40
$10 $15 .0467 .0350 .0350 .1167 $ 1.17
Series B Preferred Stock(3) $34 $34 .1287 .0724 .0756 .2767 $ 9.41
$29 $29 .1509 .0849 .0886 .3244 $ 9.41
$20 $20 .2188 .1230 .1285 .4703 $ 9.41
$15 $15 .2917 .1641 .1714 .6272 $ 9.41
$10 $10 .4375 .2461 .2570 .9406 $ 9.41
</TABLE>
- ---------
(1) Assumes the Intercardia Stock Price for each Future Installment is the same
as the Intercardia Stock Price at Closing.
(2) Sets forth the Effective Intercardia Stock Price used to calculate the
Closing Common Exchange Ratio.
(3) The Exchange Ratios for the Series B Preferred Stock give effect to the
minimum return adjustments to the conversion ratio of the Series B
Preferred Stock set forth in the Transcell Charter, adjusting for the
portion of the Series B Purchase Price payable in the Future Installments.
The Exchange Ratios and Per Share Amounts applicable to each class or
series of Transcell Capital Stock will depend upon the Intercardia Stock Price
at Closing and for each of the Future Installments. Accordingly, it is not
possible to determine the Exchange Ratios and Per Share Amounts that will apply
in the Merger.
Fractional shares of Intercardia Common Stock will not be issued in
connection with the Merger. A holder of Transcell Capital Stock otherwise
entitled to a fractional share of Intercardia Common Stock will be paid cash in
lieu of such fractional share in an amount equal to the product of such
fraction multiplied by the Effective Intercardia Price for the Closing
Installment and the applicable Intercardia Stock Price for each Future
Installment.
Assuming the Intercardia Stock Price at Closing is within the Fixed Value
Range, the Closing Installment will represent 50% of the Common Purchase Price
and each of the Future Installments will represent 25% of the Common Purchase
Price. In the event the Intercardia Stock Price at Closing is less than $15.00,
the holders of Common Equivalent Shares will receive the same number of shares
of Intercardia Common Stock in the Closing Installment as if the Intercardia
Stock Price equaled $15.00. Accordingly, the dollar amount of the Intercardia
Common Stock to be received in the Closing Installment could be reduced from
approximately $11.2 million (assuming the Intercardia Stock Price is $15.00) to
approximately $9.9 million (assuming the Intercardia Stock Price is $10.00). In
this event, a corresponding greater percentage of the Common Purchase Price
will be paid to those Transcell stockholders in the Future Installments.
Conversely, in the event the Intercardia Stock Price at Closing is greater than
$29.00, the holders of Common Equivalent Shares will receive the same number of
shares of Intercardia Common Stock in the Closing Installment as if the
Intercardia Stock Price equaled $29.00. In such event the dollar amount of the
Intercardia Common Stock to be received in the Closing Installment could be
increased from approximately $11.2 million (assuming the Intercardia Stock
Price is $29.00) to approximately $11.9 million (assuming the Intercardia Stock
Price is $34.00) and the Purchase Price Value will be increased by the same
amount. In this event, a corresponding smaller percentage of the Common
Purchase Price will be paid to these Transcell stockholders in the Future
Installments. The public market for Intercardia Common Stock has been
characterized by low and/or erratic trading volume, often resulting in price
volatility. See "Risk Factors -- Risk Factors with Respect to the Company --
Limited Historical Market; Volatility of Stock Price".
Because the market price of Intercardia Common Stock following the Merger
is subject to fluctuation, the market value of the shares of Intercardia Common
Stock that holders of Transcell Capital Stock will receive in the Merger may
increase or decrease following the Merger.
Treatment of Transcell Options and Warrants
Each of the issued and outstanding Transcell Warrants to purchase an
aggregate of 34,901 shares of Series B Preferred Stock shall be converted into
the right to receive a Replacement Warrant to purchase a number of shares of
Intercardia Common Stock (rounded to the nearest whole share) equal to the
number of shares of Transcell Series B Preferred Stock issuable upon exercise
of the corresponding Transcell Warrant multiplied by the Warrant Exchange
Ratio, determined by
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<PAGE>
dividing $8.75 by the Intercardia Stock Price at Closing. The exercise price
per share of Intercardia Common Stock (rounded to the nearest cent) issuable
under each Replacement Warrant will equal the per share exercise price of the
corresponding Transcell Warrant ($6.875) divided by the Warrant Exchange Ratio.
The term of each Replacement Warrant will be the same as the remaining term of
the corresponding Transcell Warrant.
Intercardia shall assume the 1992 Plan and each of the Transcell Options
to purchase an aggregate of 2,963,377 shares of Class A Common Stock will be
converted into the right to receive a Replacement Option to purchase shares of
Intercardia Common Stock on terms as set forth below:
(A) Each Replacement Option will represent the right to purchase a number
of shares of Intercardia Common Stock (rounded to the nearest whole share)
equal to the number of shares of Class A Common Stock issuable upon
exercise of the corresponding Transcell Option multiplied by the Closing
Common Exchange Ratio multiplied by two.
(B) The exercise price per share of Intercardia Common Stock (rounded to
the nearest cent) issuable upon exercise of each Replacement Option will
equal the per share exercise price of the corresponding Transcell Option
divided by the product of the Closing Common Exchange Ratio multiplied by
two.
(C) The term of each Replacement Option will be the same as the remaining
term of the corresponding Transcell Option.
(D) The vesting restrictions contained in each Replacement Option will be
the same as the vesting restrictions contained in the corresponding
Transcell Options, except as otherwise agreed.
Aggregate Purchase Price and Aggregate Merger Consideration
The Aggregate Purchase Price to be paid in the Merger equals the Series B
Purchase Price plus the Common Purchase Price. The Aggregate Merger
Consideration consists of the Aggregate Purchase Price, the Replacement
Warrants and the Replacement Options.
In connection with the Merger, Interneuron has agreed, simultaneously with
the Closing, to contribute to Transcell's equity, without additional
consideration, all of the outstanding debt owed by Transcell to Interneuron
which, as of December 31, 1997, aggregated approximately $14,296,000, including
accrued interest, and to cancel any warrants to purchase shares of Transcell
Capital Stock to which Interneuron was entitled in connection with the
foregoing debt.
Stock Ownership Following the Merger
The following tables set forth (a) the total number and dollar value of
shares of Intercardia Common Stock to be issued to the holders of Transcell
Capital Stock (assuming there are no Dissenting Shares) in all three
installments, as well as the Technology/Guarantee Shares to be issued at
Closing to Interneuron pursuant to the Technology/Guarantee Agreement, and (b)
the percentage of the outstanding Intercardia Common Stock to be held by the
former holders of Transcell Capital Stock, assuming no exercise of Replacement
Warrants and Replacement Options, at the selected Intercardia Stock Prices at
Closing set forth in the column entitled "Intercardia Stock Price at Closing",
and giving effect, in the column entitled "Effective Intercardia Stock Price",
to the adjustment to the Closing Common Exchange Ratio if the Intercardia Stock
Price at Closing is outside the Fixed Value Range:
<TABLE>
<CAPTION>
Intercardia Shares to be Technology/Guarantee
Issued in the Merger Shares to be Issued
for Transcell Capital Stock to Interneuron Totals
Intercardia Effective --------------------------- --------------------------- -----------------------------
Stock Intercardia Value Value Value
Price(1) Stock Price(2) Number (in millions) Number (in millions) Number (in millions)
- ------------- --------------- --------- --------------- --------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 34 $ 29 350,091 $ 11.9 103,448 $ 3.5 453,539 $ 15.4
$ 29 $ 29 386,860 $ 11.2 103,448 $ 3.0 490,308 $ 14.2
$ 25 $ 25 448,758 $ 11.2 120,000 $ 3.0 568,758 $ 14.2
$ 20 $ 20 560,947 $ 11.2 150,000 $ 3.0 710,947 $ 14.2
$ 15 $ 15 747,930 $ 11.2 200,000 $ 3.0 947,930 $ 14.2
$ 10 $ 15 989,625 $ 9.9 200,000 $ 2.0 1,189,625 $ 11.9
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Percentage Ownership of Intercardia after the Merger(3)
Shares to be Issued in the
Merger to
Technology/ Total Shares
Transcell Guarantee to be Issued in
Intercardia Effective Stockholders Shares the Merger
Stock Intercardia other than to be Issued to plus Technology/
Price(1) Stock Price(2) Interneuron Interneuron(4) Interneuron(4) Guarantee Shares
- ------------- ---------------- -------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 34 $ 29 2.0% 2.9% 1.4% 6.3%
$ 29 $ 29 2.2% 3.1% 1.4% 6.7%
$ 25 $ 25 2.5% 3.6% 1.6% 7.7%
$ 20 $ 20 3.1% 4.4% 2.0% 9.5%
$ 15 $ 15 4.0% 5.7% 2.6% 12.3%
$ 10 $ 15 5.5% 6.9% 2.5% 14.9%
</TABLE>
- ---------
(1) Assumes the Intercardia Stock Price for each Future Installment is the same
as the Intercardia Stock Price at Closing.
(2) Sets forth the effective Intercardia Stock Price used to calculate the
Closing Common Exchange Ratio.
(3) Assumes no additional issuances of Intercardia Common Stock after the
Closing other than the Future Installments.
(4) After the Merger and the issuance of the Technology/Guarantee Shares,
Interneuron's total percentage ownership of Intercardia would range
between 61.4% and 61.9% at the Intercardia Stock Prices at Closing set
forth in the table. As of the Record Date, Interneuron's total percentage
ownership of Intercardia was 61.1%.
Effective Time of the Merger
It is the intention of the parties to consummate the Merger as soon as
possible following adoption and approval of the Merger Agreement by the
stockholders of Intercardia and Transcell and satisfaction of all conditions
(or, to the extent permitted, waiver thereof) to the parties' respective
obligations to consummate the Merger. The Merger will become effective when the
Certificate of Merger and any other necessary documents are filed with the
Secretary of State of the State of Delaware.
Exchange of Share Certificates
Certificates nominally representing shares of Transcell Capital Stock,
other than any certificates representing Dissenting Shares, if any ("Transcell
Certificates"), shall, as of the Effective Time, for all purposes, be deemed to
evidence the number of shares of Intercardia Common Stock determined in
accordance with the applicable Exchange Ratio. As soon as practicable following
the Effective Time, notice of consummation of the Merger, together with a
Letter of Transmittal for use in surrendering Transcell Certificates in
exchange for certificates representing shares of Intercardia Common Stock, will
be mailed to holders of shares of Transcell Capital Stock. At the time of
issuance of certificates for such Intercardia Common Stock, cash will be paid
in lieu of issuing any fractional shares of Intercardia Common Stock. Transcell
stockholders are requested not to surrender their Transcell Certificates until
they receive such a Letter of Transmittal.
At and after the Effective Time, there will be no transfers on the books
of Transcell of shares of Transcell Capital Stock that were outstanding
immediately prior to the Effective Time.
Representations and Warranties
The Merger Agreement contains certain representations and warranties of
Transcell relating to, among other things: (i) due organization, qualification,
power and standing; (ii) the authorization, execution, delivery and
enforceability of the Merger Agreement; (iii) compliance with laws; (iv)
capitalization; (v) absence of preemptive rights, repurchase obligations or
voting trusts; (vi) absence of subsidiaries; (vii) required governmental
consents and approvals and the absence of breaches, defaults or violations of
the Transcell Charter or its Bylaws, agreements and instruments, and law;
(viii) financial statements; (ix) the absence of litigation; (x) the absence of
certain changes; (xi) tax matters; (xii) employee benefit plans; (xiii) labor
and employment matters; (xiv) brokers; (xv) opinion of financial advisor; (xvi)
material contracts; (xvii) intellectual property matters; (xviii) investments;
(xix) insurance matters; (xx) absence of product liabilities, and (xxi)
governmental approval of products.
The Merger Agreement contains certain representations and warranties of
Intercardia relating to, among other things: (i) due organization,
qualification, power and standing of Intercardia and each of its subsidiaries;
(ii) the authorization, execution, delivery and enforceability of the Merger
Agreement; (iii) due authorization, valid issuance, full payment and
non-assessibility of the shares of Intercardia Common Stock to be issued in the
Merger and pursuant to the Technology/ Guarantee Agreement; (iv)
capitalization; (v) absence of preemptive rights; (vi) absence of other
subsidiaries; (vii) required governmental consents and approvals and the
absence of breaches, defaults or violations of its Certificate of Incorporation
48
<PAGE>
or Bylaws, agreements and instruments, and law; (viii) SEC reports and
financial statements; (ix) the absence of litigation; (x) the absence of
certain changes; (xi) brokers; and (xii) opinion of financial advisor.
THE PRECEDING PARAGRAPHS REPRESENT A SUMMARY OF CERTAIN REPRESENTATIONS
AND WARRANTIES MADE BY TRANSCELL IN THE MERGER AGREEMENT. THE TRANSCELL
STOCKHOLDERS SHOULD CAREFULLY REVIEW THE MERGER AGREEMENT SINCE THE
REPRESENTATION AND WARRANTIES CONTAINED THEREIN FORM THE BASIS FOR THE
INDEMNIFICATION PROVISIONS OF THE MERGER AGREEMENT. THE MERGER AGREEMENT IS
ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX A.
Certain Covenants
Prior to the Effective Time, Transcell is required by the Merger Agreement
to: (a) conduct its business only in the ordinary course consistent with past
practice; (b) use reasonable efforts to preserve intact their business
organizations and relationships with third parties and to keep the services of
their present officers and employees; (c) deliver monthly financial statements
to Intercardia; and (d) promptly notify Intercardia of any litigation
instituted against Transcell. In addition, Transcell has agreed that, without
the consent of Intercardia, prior to the Effective Time, among other actions it
will not: (i) amend the Transcell Charter or its Bylaws; (ii) issue, sell,
pledge or otherwise dispose of any shares of authorized Transcell Capital Stock
(other than issuances of authorized Transcell Capital Stock in respect of any
exercise of Transcell Options or Transcell Warrants or any conversion of Class
B Common Stock, Series A Preferred Stock or Series B Preferred Stock
outstanding on the date of and as disclosed in the Merger Agreement), or any
securities convertible into or exchangeable for any such shares, or any rights,
warrants or options to acquire or with respect to any such shares of capital
stock, or convertible or exchangeable securities, or accelerate any right to
convert or exchange or acquire any securities of Transcell for any such shares;
(iii) effect any stock split, reverse stock split, stock dividend, subdivision,
reclassification or similar transaction, or otherwise change its capitalization
as it existed on the date of the Merger Agreement; (iv) other than pursuant to
the Merger Agreement, grant, confer, award or amend any option, warrant,
convertible security or other right to acquire any shares of authorized
Transcell Capital Stock or take any action to cause to be exercisable any
otherwise unexercisable option under any stock option plan; (v) declare, set
aside or pay any dividend or make any other distribution or payment with
respect to any shares of outstanding Transcell Capital Stock; (vi) directly or
indirectly redeem, purchase or otherwise acquire any shares of outstanding
Transcell Capital Stock; (vii) sell, lease, assign, transfer or otherwise
dispose of (by merger or otherwise) any of its property, business or assets
(including, without limitation, any Intellectual Property) except in the
ordinary course of business; (viii) settle or compromise any pending or
threatened litigation without Intercardia's consent (which consent will not be
unreasonably withheld or delayed); (ix) make any loan, extension of credit or
capital contribution to, or purchase or acquire (by merger or otherwise) any
stock, bonds, notes, debentures or other securities of, or any assets
constituting a business unit of, or make any other investment in, any person,
firm or entity, except (A) loans, extensions of credit, capital contributions,
purchases, acquisitions or investments that are, individually and in the
aggregate, of de minimus value, (B) extensions of trade credit and endorsements
of negotiable instruments and other negotiable documents in the ordinary course
of business, (C) investments in cash and cash equivalents, and (D) investments
in wholly owned subsidiaries; (x) incur, assume or create any indebtedness for
borrowed money or the deferred purchase price for property or services or
pursuant to any capital lease or other financing, except indebtedness incurred
in the ordinary course of business for working capital purposes pursuant to
Transcell's existing credit facilities or amend in a manner materially adverse
to Transcell any of Transcell's existing credit facilities, (xi) assume,
guarantee or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person except for
obligations in the ordinary course of business consistent with the past
practice of Transcell; (xii) make any material tax election (unless required by
law or unless consistent with prior practice), settle or compromise any
material income tax liability or amend any tax return; (xiii) waive or amend
any term or condition of any confidentiality or "standstill" agreement to which
Transcell is a party and which relates to a business combination with Transcell
or the purchase of shares or assets of Transcell; (xiv) grant or amend any
share-related or performance awards; (xv) except with respect to agreements
which are terminable at will by Transcell without any material penalty to
Transcell, enter into or amend any legally binding employment, severance,
consulting or salary continuation agreements with any officers, directors or
employees or grant any increases in compensation or benefits to employees other
than increases to officers and employees in the ordinary course of business
consistent with the past practice of Transcell; (xvi) adopt, amend or terminate
any employee benefit plan or arrangement (except as expressly contemplated by
of the Merger Agreement); (xvii) change any accounting principles or practices
used by Transcell; (xviii) waive, relinquish, release or terminate any material
right or claim, including any such right or claim under any material contract
or permit any rights of material value to use any intellectual property to
lapse or be forfeited; or (xix) agree in writing or otherwise to take any of
the foregoing actions.
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<PAGE>
The Merger Agreement also provides that: (i) Transcell shall call a
meeting of its stockholders for the purpose of voting upon the Merger, hold
such meeting as soon as practicable following the date of the Merger Agreement
and, subject to its fiduciary duties and obtaining the requisite regulatory
approvals, recommend to its stockholders the approval of the Merger; (ii)
Transcell will prepare a proxy statement with respect to its stockholder
meeting and give Intercardia the opportunity to review and comment on such
statement prior to mailing, which mailing shall be effected as soon as
practicable following clearance from the SEC with respect thereto; (iii)
Intercardia shall call a meeting of its stockholders for the purpose of, among
other things, voting upon the Merger; (iv) Intercardia will, as soon as
practicable following the date of the Merger Agreement, prepare and file with
the SEC a registration statement, including a proxy statement and prospectus
(the "Statement") with respect to the registration of the Intercardia Common
Stock issuable in connection with the Merger; (v) Intercardia shall file
appropriate registration statements relating to the issuance and resale of
Intercardia Common Stock underlying Transcell Options (and, if required,
Transcell Warrants); (vi) Intercardia shall give Transcell and its counsel the
opportunity to review and comment on the Statement prior to mailing, which
mailing shall be effected as soon as practicable following clearance from the
SEC with respect thereto; (vii) Interneuron shall cause all outstanding shares
of Transcell Capital Stock owned by Interneuron to be voted in favor of the
Merger and, subject to the fiduciary duties of the Transcell Board, shall use
its reasonable best efforts to obtain approval of the Merger by the Transcell
stockholders; and (viii) subject to the fiduciary duties of the Intercardia
Board, Intercardia shall use its reasonable efforts to obtain approval of the
Merger by the Intercardia stockholders.
No Solicitation
Interneuron and Transcell have agreed, and have agreed to direct and use
reasonable efforts to cause their respective officers, directors, employees,
representatives and agents to, immediately cease any discussions or
negotiations with any parties other than Intercardia that may be ongoing with
respect to an Acquisition Proposal (as defined below). Transcell and
Interneuron have agreed not to, and have agreed not to authorize any of their
respective officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it to,
directly or indirectly, (i) solicit, initiate or encourage (including by way of
furnishing non-public information), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, an Acquisition Proposal or (ii) participate in any
discussions or negotiations regarding an Acquisition Proposal; provided,
however, that Interneuron and Transcell shall be entitled to respond to
unsolicited offers relating to an Acquisition Proposal in the exercise of the
fiduciary duties of the Transcell Board. "Acquisition Proposal" means any
proposal or offer from any person other than Intercardia relating to any direct
or indirect acquisition or purchase of any of the assets or any of the
securities of Transcell except (i) in the ordinary course of business of
Transcell consistent with the terms of this Agreement or (ii) an acquisition or
purchase that would not have a material adverse effect on Transcell.
Conditions to Consummation of the Merger
The obligations of Intercardia, Transcell and Interneuron to effect the
Merger are subject to the fulfillment or waiver of a number of conditions,
including the following conditions: (i) the holders of outstanding Transcell
Capital Stock shall have approved the Merger Agreement; (ii) the holders of
Intercardia Common Stock shall have approved the Merger Agreement; (iii) all
necessary permits, authorizations, regulatory approvals and consents necessary
for the consummation of the Merger shall have been received; and (iv) no order,
injunction or decree issued by any court or competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Merger shall
be in effect.
The obligation of Intercardia to effect the Merger is also subject to the
fulfillment or waiver of certain additional conditions, including the
following: (i) the material accuracy of the representations and warranties made
by Transcell and Interneuron in the Merger Agreement; (ii) the material
compliance by Transcell with all material covenants and agreements contained in
the Merger Agreement required to be performed by it prior to the Effective
Time; (iii) the absence of any burdensome condition arising in connection with
the grant of any regulatory approval relating to the Merger; (iv) the receipt
by Intercardia of certification that the Merger is exempt from the provisions
of Section 1445 of the Code; (v) the Intercardia Stock Price at Closing being
no less than $10.00 nor more than $34.00; (vi) Intercardia's receipt and
acceptance of the opinion of its financial advisor to the effect that the
consideration to be paid to the security holders of Transcell pursuant to the
Merger Agreement, is fair from a financial point of view to Intercardia; (vii)
Intercardia's receipt of a copy of the opinion of Transcell's financial advisor
and its satisfaction in its sole discretion with the contents thereof; (viii)
the completion of the license agreement currently being negotiated between
Interneuron and Princeton and the payment of all initial payments due
thereunder prior to Closing; (ix) as of Closing, the liabilities associated
with obligations related to Transcell's lease of its facilities and its
equipment obligations shall not exceed $491,000 and $1,509,000, respectively,
except in the ordinary course; (x) the SEC shall have declared effective
Intercardia's Registration Statement on Form S-4 for the registration of the
shares
50
<PAGE>
issuable in the Merger under the Securities Act and no stop order suspending
the effectiveness of Intercardia's Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose, and no similar
proceeding in respect of the Proxy Statement/Prospectus, shall have been
initiated or to the knowledge of Intercardia or Interneuron threatened by the
SEC; (xi) all necessary state securities and blue sky permits, approvals and
exemption orders required in connection with the transactions contemplated by
this Agreement shall have been obtained and the shares issuable in the Merger
shall have been listed with Nasdaq; and (xii) Intercardia's receipt at Closing
of an officers' certificate of Transcell to the effect that no material adverse
effect relating to Transcell shall have occurred or existed since the execution
of the Merger Agreement.
The obligations of Transcell and Interneuron to consummate the Merger are
also subject to the fulfillment or waiver of certain additional conditions,
including the following: (i) the material accuracy of the representations and
warranties made by Intercardia in the Merger Agreement; (ii) the material
compliance by Intercardia with all material covenants and agreements contained
in the Merger Agreement required to be performed by it prior to the Effective
Time; (iii) the Intercardia Stock Price at Closing being not less than $10.00
nor more than $34.00; (iv) Transcell's receipt of the opinion of its financial
advisor to the effect that the consideration to be paid to the stockholders of
Transcell pursuant to the Merger Agreement, is fair from a financial point of
view to stockholders of Transcell (other than Interneuron); (v) Transcell's
receipt of a copy of the opinion of Intercardia's financial advisor and its
satisfaction in its sole discretion with the contents thereof; (vi) the SEC
shall have declared effective Intercardia's Registration Statement on Form S-4
for the registration of the shares issuable in the Merger under the Securities
Act and no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for that
purpose, and no similar proceeding in respect of the Proxy
Statement/Prospectus, shall have been initiated or to the knowledge of
Intercardia or Interneuron threatened by the SEC; (vii) all necessary state
securities and blue sky permits approvals and exemption orders required in
connection with the transactions contemplated by this Agreement shall have been
obtained and the shares issuable in the Merger shall have been listed with
Nasdaq; (viii) Intercardia shall confirm to Transcell that neither Mr. Duncan
nor Mr. Reichow has, in connection with their due diligence relating to the
Merger, received or reviewed information which if omitted from the disclosures
made by Transcell in the Merger Agreement would cause such disclosures to be
incorrect or incomplete in any material respect; and (ix) Transcell's receipt
at Closing of an officers' certificate of Intercardia to the effect that no
material adverse effect relating to Intercardia shall have occurred or existed
since the execution of the Merger Agreement.
Amendment and Termination of the Merger Agreement
The Merger Agreement may be amended at any time, whether before or after
approval of the Merger Agreement by Intercardia stockholders and Transcell
stockholders, by Transcell, Interneuron and Intercardia; provided, however,
that, after any such approval, no amendment shall alter or change the amount or
kind of consideration to be exchanged for Transcell Capital Stock, or adversely
affect the rights of the Transcell stockholders.
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, whether before or after approval by the
stockholders of Intercardia and the stockholders of Transcell: (i) by the
mutual written consent of Intercardia, Interneuron and Transcell; (ii) by
Intercardia, Interneuron or Transcell if the Merger is not consummated by May
31, 1998 (unless such party's failure to fulfill an obligation under the Merger
Agreement results in failure of the Merger to be consummated by such time);
(iii) by Intercardia, Interneuron or Transcell if stockholder approval shall
not have been obtained at either of the Meetings; (iv) by Intercardia,
Interneuron or Transcell if any judgment, injunction or other order of a court
or other competent authority preventing consummation of the Merger shall have
become final and nonappealable; (v) by Intercardia, Interneuron or Transcell,
in the event of a material breach by the other party of any representation,
warranty, covenant or agreement contained in the Merger Agreement which cannot
be or has not been cured within 30 days of written notice thereof; (vi) by
Intercardia if Transcell, or any of its directors, employees, representatives
or agents, violates the non-solicitation covenants in the Merger Agreement; or
(vii) by Intercardia, Interneuron or Transcell, if the Intercardia Stock Price
at Closing is less than $10.00 or more than $34.00.
Board of Directors and Management of Intercardia After the Merger
The Merger Agreement provides that upon consummation of the Merger,
Intercardia's Board shall consist of the members of the Intercardia Board as of
immediately prior to consummation of the Merger. Intercardia currently has a
Board of Directors of four members: Glenn L. Cooper, M.D.; Clayton I. Duncan;
Joseph J. Ruvane, Jr.; and David B. Sharrock.
It is currently expected that the executive officers of Intercardia after
consummation of the Merger will be the executive officers of Intercardia as of
immediately prior to the Effective Time with the addition of Michael J. Sofia,
Ph.D., Transcell's Vice President of Research and Director of Chemistry, as a
new vice president of Intercardia and such other additions as Intercardia may
designate. Dr. Sofia has been Vice President of Research and Director of
Chemistry at Transcell
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<PAGE>
since March 1996. From August 1993 until March 1996, he held the position of
Director of Chemistry at Transcell. From January 1989 until August 1993, Dr.
Sofia was employed at Eli Lilly and Company, Lilly Research Labs, first as a
Senior Organic Chemist then as a Research Scientist in the Cardio-Pulmonary
research program. Dr. Sofia holds a B.A. from Cornell University and a Ph.D.
from the University of Illinois Urbana-Champaign and was a postdoctoral fellow
at Columbia University.
Expenses
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby (including, without limitation, the fees and expenses of its advisers,
accountants and legal counsel) shall be paid by the party incurring such
expense.
Related Agreements
Pursuant to the Technology/Guarantee Agreement to be entered into pursuant
to the Merger Agreement, Interneuron will agree to assign to Intercardia its
rights under the sponsored research agreements between Interneuron and
Princeton dated as of April 29, 1997 (the "Sponsored Research Agreements"), an
agreement to license between Interneuron and Princeton effective as of June 30,
1997 (the "Agreement to License"), any license agreement entered into under the
Agreement to License, and the Merck Agreement (collectively, the "Interneuron
Technology Agreements") and to continue to guarantee certain lease obligations
of Transcell. See " -- Interests of Certain Persons in the Merger --
Technology/Guarantee Agreement". Interneuron also agreed in the Merger
Agreement that at Closing it will contribute to Transcell's capital all then
outstanding indebtedness owed by Transcell to Interneuron (approximately
$14,296,000 as of December 31, 1997) and to terminate any rights it may have to
warrants to purchase Transcell Capital Stock in connection with such
indebtedness.
Certain Federal Income Tax Consequences
The following is a general discussion of the principal federal income tax
consequences of the Merger. This discussion does not purport to address all
aspects of federal income taxation that may be relevant to particular Transcell
stockholders and may not be applicable to Transcell stockholders who are not
citizens or residents of the United States, who exercise appraisal rights, or
who will acquire their Intercardia Common Stock pursuant to the exercise or
termination of employee stock options or otherwise as compensation, nor does
the discussion address the effect of any applicable foreign, state, local or
other tax laws. Taxpayers, such as charitable remainder or lead trusts, taxable
trusts, S Corporations, qualified plans and trusts under Section 401(a) of the
Code, Individual Retirement Plans under Section 408 of the Code, foreign
citizens, and private foundations, are specially cautioned to consult their tax
advisors prior to approving the Merger. Accordingly, Transcell stockholders and
holders of Transcell Warrants and Transcell Options are urged to consult their
own tax advisors as to the particular tax consequences to them of the Merger
under federal, state, local, foreign or other applicable law.
This discussion is based upon existing provisions of the Code, existing
Treasury Regulations, published interpretations and rulings of the Internal
Revenue Service (the "IRS"), and court decisions in effect as of the date of
this Proxy Statement/ Prospectus, all of which are subject to change,
retroactively or prospectively, or possibly differing interpretations.
Subject to the foregoing, Intercardia and Transcell believe that:
(i) no taxable gain or loss will be recognized by the Company or
Transcell as a result of the Merger;
(ii) no taxable gain or loss will be recognized by the holders of
Transcell Capital Stock upon their receipt of Intercardia Common Stock in
exchange for their Transcell Capital Stock, except with respect to: (A) the
cash received in lieu of fractional shares of Intercardia Common Stock; and
(B) that portion of the Purchase Price received in the form of Intercardia
Common Stock as part of the Future Installments which may be deemed imputed
interest income and treated as taxable ordinary income to the holders of
Transcell Capital Stock, such amount computed based on the applicable
Federal rate of interest at the Effective Time accruing for the period from
the Closing to the date of each respective Future Installment of the
Purchase Price (15 and 21 months).
(iii) the tax basis of the shares of Intercardia Common Stock received by
the holders of Transcell Capital Stock will be the same as the tax basis of
their Transcell Capital Stock (reduced by an amount allocable to fractional
share interests for which cash is received) exchanged therefor in the
Merger; and
52
<PAGE>
(iv) the holding period of Intercardia Common Stock in the hands of the
holders of Transcell Capital Stock will include the holding period of their
Transcell Capital Stock (provided that the Transcell stockholders held
their shares of Transcell Capital Stock as capital assets within the
meaning of Section 1221 of the Code immediately prior to the Effective
Time).
Pursuant to the Merger Agreement, Intercardia has agreed to assume certain
outstanding options and warrants for the purchase of Transcell Capital Stock.
Such options and warrants will be converted into options and warrants to
purchase Intercardia Common Stock by adjusting the number of shares to be
purchased and the exercise price in accordance with the applicable Exchange
Ratio. The other provisions of such Transcell options and warrants will be
unaffected by the conversion. The holders of these Transcell options and
warrants should not recognize taxable income as a result of the conversion of
such options and warrants into options and warrants to purchase Intercardia
Common Stock.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
IT DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. THE
DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. NO LEGAL OPINIONS OR RULINGS OF THE IRS WILL BE SOUGHT OR
OBTAINED. THERE IS NO ASSURANCE THAT THE IRS WILL AGREE WITH THE POSITIONS
DESCRIBED ABOVE. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE
COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. ANY SUCH CHANGE MAY OR
MAY NOT BE RETROACTIVE AND COULD AFFECT THE TAX CONSEQUENCES OF THE MERGER.
EACH HOLDER OF TRANSCELL STOCK, WARRANTS OR OPTIONS SHOULD CONSULT HIS/HER OWN
TAX ADVISOR WITH RESPECT TO THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS.
Accounting Treatment
It is intended that the acquisition of Interneuron's ownership interest in
Transcell will be treated in a manner similar to a "pooling of interests" for
financial accounting purposes in accordance with generally accepted accounting
principles ("GAAP") because Intercardia and Transcell are under common control.
It is intended that the acquisition of the non-Interneuron ownership interest
in Transcell will be treated as a "purchase" for financial accounting purposes
in accordance with GAAP. Accordingly, Intercardia will record the portion of
the assets and liabilities of Transcell owned by stockholders other than
Interneuron at their fair value as of the Effective Time. The Company expects
that, as of Closing, it will incur charges to operations for the
non-Interneuron portion of the Aggregate Merger Consideration allocated to
in-process research and development, which is estimated to be up to $8,000,000
(based on Intercardia's current stock price). The actual charges could be lower
or greater, depending in part on Intercardia's stock price at Closing. The
Company will incur additional future charges relating to certain Replacement
Options issued in connection with the Merger. The historical financial
statements of Intercardia will be restated to include the accounts and results
of operations of Transcell since Transcell's inception, October 21, 1991.
Nasdaq Listing for Intercardia Common Stock
A listing application will be filed with Nasdaq to list the shares of
Intercardia Common Stock to be issued to Transcell securityholders in
connection with the Merger. Although no assurance can be given that the shares
of Intercardia Common Stock so issued will be accepted for listing, Intercardia
anticipates that these shares will qualify for listing on Nasdaq, upon official
notice of issuance thereof.
Restrictions on Resales of Intercardia Common Stock
The shares of Intercardia Common Stock to be issued pursuant to the Merger
Agreement have been registered under the Securities Act. Persons who are not
affiliates of Transcell and who will not be affiliates of Intercardia following
the Effective Time may resell their shares of Intercardia Common Stock without
restriction. Under present law, any public reoffering or sale of such shares by
any person who is an "affiliate" of Transcell at the time the Merger Agreement
is submitted to a vote of Transcell's stockholders will require either (i) the
further registration of such shares under the Securities Act, (ii) compliance
with Rule 145 promulgated under the Securities Act, which permits sales under
certain conditions, as discussed below, or (iii) the availability of another
exemption from such further registration. In general, under Rule 145, assuming
that such a person is not, at any time, an affiliate of Intercardia, such a
person may publicly sell such stock if the person: (1) (a) sells during any
three-month period no more than the number of shares permitted under Rule
144(e) (which
53
<PAGE>
is generally the greater of (i) 1% of the total number of shares of Intercardia
Common Stock outstanding, or (ii) the average weekly volume of trading of
Intercardia Common Stock for the four calendar weeks prior to the sale); (b)
sells in a "brokers' transaction" (which means, generally, that the broker can
do no more than execute the order as agent for the seller, can receive no more
than the usual broker's commission, cannot solicit orders to buy in connection
with the transaction, and cannot believe that the seller is an underwriter of
the securities being sold); (c) does not solicit orders to buy in connection
with the transaction and does not make any payment in connection with such sale
to anyone other than the selling broker; and (d) sells at a time when there is
adequate current public information about Intercardia (which will be satisfied
so long as Intercardia's Common Stock remains registered under the Exchange Act
and Intercardia continues to file the necessary reports under such act); or (2)
(a) holds the shares for at least one year and (b) sells at a time where there
is adequate public information about Intercardia (as in 1(d) above); or (3)
holds the shares for at least two years.
Interests of Certain Persons in the Merger
Stock Ownership
At the Record Date, Interneuron owned approximately 77.9% of the Transcell
Voting Shares and approximately 61.1% of the outstanding Intercardia Common
Stock. In addition, certain directors and executive officers of and consultants
to each of Intercardia and Transcell have certain interests in the Merger that
may be in addition to the interests of the stockholders of Transcell generally
and create certain conflicts of interest. These interests arise from, among
other things, certain employee benefit plans, indemnification and insurance
arrangements among Intercardia, Transcell and certain directors and officers of
Transcell. These include arrangements providing for acceleration at the closing
of the Merger of the vesting of certain options to purchase Transcell's Capital
Stock, including those under agreements providing for such acceleration in the
event such directors are terminated in connection with a change in control,
including the Merger.
The following table sets forth the beneficial ownership of shares as of
the Record Date of common stock of each of Intercardia, Interneuron and
Transcell by the individuals listed below:
<TABLE>
<CAPTION>
Beneficial ownership(1)
of shares of:
--------------------------------------
Intercardia Interneuron Transcell
Common Common Voting
Name Positions Stock Stock Shares
- -------------------------- --------------------------------------------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Glenn L. Cooper, M.D.(2) President, CEO and a director of Interneuron; 1,433 1,142,206 70,000
Chairman of the Board and acting President and
CEO of Transcell; Chairman of the Board of
Intercardia
Clayton I. Duncan(3) President, CEO and a director of Intercardia; 281,155 27,000 70,000
Vice Chairman of the Board of Transcell
Daniel Kahne, Ph.D.(4) Director, founding scientist of and consultant to -- 10,000 738,599
Transcell; consultant to Intercardia
</TABLE>
- ---------
(1) Beneficial ownership is defined in accordance with the rules of the SEC and
generally means the power to vote and/or to dispose of the securities
regardless of any economic interest therein.
(2) Includes (A) for Intercardia (i) 739 shares, and (ii) 694 shares issuable
upon exercise of options exercisable within 60 days but excludes (i)
4,145,029 shares owned prior to the consummation of the Merger, and
4,658,284 shares to be owned after consummation of the Merger, by
Interneuron, and (ii) 4,306 shares issuable upon exercise of options not
exercisable within 60 days; (B) for Interneuron (i) 7,206 shares, (ii)
1,060,000 shares issuable upon exercise of options exercisable within 60
days, and (iii) 75,000 shares subject to restricted stock awards which may
vest within 60 days, but excludes (i) 760,000 shares issuable upon
exercise of options which are not exercisable within 60 days, (ii) 150,000
shares subject to restricted stock awards which do not vest within 60
days, and (iii) the following held by Dr. Cooper's wife, an employee of
Interneuron: (a) 70,000 shares issuable upon exercise of options and (b)
34,200 shares subject to restricted stock awards, as to all of which
shares Dr. Cooper disclaims beneficial ownership; and (C) for Transcell,
70,000 shares issuable upon exercise of options exercisable upon
completion of the Merger or within 60 days but excludes 4,690,764 shares
owned by Interneuron.
(3) Includes (A) for Intercardia, (i) 6,150 shares, and (ii) 275,005 shares
issuable upon exercise of options exercisable within 60 days but excludes
159,215 shares issuable upon exercise of options not exercisable within 60
days; (B) for Interneuron, (i) 2,000 shares and (ii) 25,000 shares
issuable upon exercise of options exercisable within 60 days; and (C) for
Transcell, 70,000 shares issuable upon exercise of options exercisable
upon completion of the Merger or within 60 days.
(4) (A) For Intercardia, excludes 40,000 shares issuable upon exercise of
options held by Dr. Kahne not exercisable within 60 days and 40,000 shares
issuable upon exercise of options held by Dr. Suzanne Walker-Kahne, Dr.
Kahne's wife and a consultant to Transcell, not exercisable within 60
days; (B) for Interneuron, includes (i) 5,000 shares issuable upon
exercise of options exercisable within 60 days, and (ii) 5,000 shares
issuable upon exercise of options exercisable within 60 days by Dr.
Walker-Kahne; and (C) for Transcell, includes (i) 480,797 shares, and (ii)
188,352 shares issuable upon exercise of options held by Dr. Kahne
exercisable upon completion of the Merger or within 60 days and 153,352
shares issuable upon exercise of options held by Dr. Walker-Kahne
exercisable upon
54
<PAGE>
completion of the Merger or within 60 days, but excludes 927,363 shares
issuable upon exercise of options held by Dr. Kahne not exercisable within
60 days and 712,363 shares issuable upon exercise of options held by Dr.
Walker-Kahne not exercisable within 60 days. Options to purchase 765,715
shares of Transcell Class A Common Stock granted to each of Dr. Kahne and
Dr. Walker-Kahne are cancelable by their terms in the event the Merger is
not consummated by February 12, 1999.
In addition, each of the directors of Transcell holds options to purchase
shares of Interneuron Common Stock. NMS, the financial advisor to Intercardia
in connection with the Merger and the underwriter of Intercardia's initial
public offering in February 1996, received fees from Transcell during 1996 in
connection with a proposed acquisition of Transcell which was not consummated,
and from Interneuron in connection with a public offering of Interneuron's
securities in June 1996.
Technology/Guarantee Agreement
Pursuant to the Technology/Guarantee Agreement to be entered into pursuant
to the Merger Agreement, Interneuron will agree to assign to Intercardia its
rights under the Sponsored Research Agreements, the Agreement to License (and
any license agreement entered into thereunder) and the Merck Agreement
(collectively, the "Interneuron Technology Agreements") and to continue to
guarantee certain lease obligations of Transcell (consisting at December 31,
1997 of (i) approximately $1,000,000 per year through 2007 under a facility
lease and (ii) approximately $1,322,000 principal amount of capital lease
obligations payable through 2001). Interneuron entered into the Sponsored
Research Agreements in order to obtain access to technology under development
at Princeton by Daniel Kahne, Ph.D. and Suzanne Walker-Kahne, Ph.D. because
Princeton had advised that, as a result of Dr. Kahne's ownership interest in
Transcell, certain conflicts of interests policies implemented at Princeton
would preclude Transcell from directly sponsoring such research at Princeton.
Pursuant to the Sponsored Research Agreements, Interneuron agreed to pay
Princeton for research an aggregate of $731,000 through June 30, 1998 and
obtained exclusive options to license exclusively inventions derived under the
Sponsored Research Agreements. Interneuron exercised such option under one
Sponsored Research Agreement and entered into the Agreement to License.
Interneuron sublicensed certain of these rights to Merck pursuant to the Merck
Agreement. In exchange for Interneuron's assignment to Intercardia of the
Interneuron Technology Agreements and its agreement to continue to guarantee
certain obligations of Transcell, Interneuron will receive the
Technology/Guarantee Shares and shares of Intercardia Common Stock as future
royalties resulting from the commercialization of compounds developed by
Transcell or Intercardia in connection with the Merck Agreement pursuant to the
Technology/Guarantee Agreement. No royalties are payable until cumulative net
sales of such compounds exceed $300,000,000. After cumulative net sales of such
compounds of $300,000,000, Intercardia will pay to Interneuron royalties equal
to 1% of the first $500,000,000 of annual net sales of such compounds and 1.5%
of annual net sales of such compounds exceeding $500,000,000 (the "Royalty").
Royalty payments due to Interneuron shall be paid to Interneuron in Intercardia
Common Stock, unless both Interneuron and Intercardia agree that the Royalty
will be paid in cash.
Stock Options
Options to purchase 439,623 shares of Transcell Class A Common Stock
granted to certain directors, officers and consultants under the 1992 Plan will
become fully vested at the Effective Time. The following table sets forth, for
each director and executive officer of Transcell holding any such options at
the Effective Time, the number of shares of Transcell Capital Stock the vesting
of which will be accelerated at the Effective Time, the date on which such
options would otherwise have become fully vested (the "Original Vesting Date"),
and the aggregate in-the-money value that such person will be entitled to
receive, as of the Effective Time, in exchange therefor:
55
<PAGE>
<TABLE>
<CAPTION>
Shares Original Value at
Name Transcell Title Accelerated Vesting Date Effective Time(1)
- --------------------------- ----------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Glenn L. Cooper, M.D. Chairman and acting President and 25,000 May 1998 $ 12,500
Chief Executive Officer 10,000 March 1999 11,400
Michael Sofia, Ph.D. Vice President, Research 58,750 May 1999 29,375
Daniel Kahne, Ph.D. Director, Consultant 176,704(2) February 1999(3) 185,538
Theodore F. Brophy, Esq. Director 4,000 May 1998 2,000
13,334 March 2000 15,201
Lloyd L. Derrickson, Esq. Director 4,000 May 1998 2,000
13,334 March 2000 15,201
Clayton I. Duncan Vice Chairman 24,000 May 1998 12,000
13,334 March 2000 15,201
Wayne L. Pines Director 4,000 May 1998 2,000
13,334 March 2000 15,201
John R. Price, Jr., Esq. Director 4,000 May 1998 2,000
13,334 March 2000 15,201
-------------- -------------
TOTALS 377,123 $334,818
============== =============
</TABLE>
- ---------
(1) Value based on the difference between the Per Share Amount of Intercardia
Common Stock to be received in the Merger by holders of Transcell Common
Equivalent Shares ($1.40), assuming the Intercardia Stock Price at Closing
is within the Fixed Value Range, less the exercise price of the options
accelerated.
(2) Includes 58,901 shares underlying options held by Dr. Kahne, and 58,901
shares underlying options held by his wife, Dr. Suzanne Walker-Kahne, also
a consultant to Transcell.
(3) These options vest over two years from the February 1998 date of grant, and
are cancelable by their terms in the event that the Merger is not
consummated by February 12, 1999.
Consulting Agreements
Dr. Daniel Kahne, a director and founding scientist of, and a consultant
to, Transcell, and his wife, Dr. Suzanne Walker-Kahne, each entered into a
Consulting Agreement with Intercardia effective as of December 1997. Pursuant
to these Consulting Agreements, Drs. Kahne and Walker-Kahne will provide an
unspecified amount of consulting services for cash payments to be determined.
No payments have been made pursuant to these Consulting Agreements.
Concurrently with the execution of these Consulting Agreements, Intercardia
granted options to purchase 40,000 shares of Intercardia Common Stock to each
of Dr. Kahne and Dr. Walker-Kahne. These options have an exercise price of
$23.00 per share and vest over four years in equal annual installments from the
date of grant.
Indemnification
Intercardia has agreed, that following the Effective Time, the officers
and directors of Transcell shall be entitled to be indemnified by the Company
in their capacities as officers or directors of Transcell prior to the
Effective Time to the extent provided by applicable law. Intercardia has agreed
to use reasonable efforts to maintain officers' and directors' liability
insurance with respect to such persons with limits of $5,000,000 for coverage
of acts and omissions prior to the Effective Time.
Regulatory and Other Legal Matters
Intercardia and Transcell are not aware of any material governmental or
regulatory requirements that must be complied with in connection with the
Merger, other than applicable securities and "blue sky" laws of the various
states and the filing of the Certificate of Merger, setting forth the principal
terms of the Merger Agreement, with the Secretary of State of the State of
Delaware.
56
<PAGE>
APPRAISAL RIGHTS OF TRANSCELL STOCKHOLDERS
Appraisal rights under the DGCL may be available in connection with the
Merger. Under Delaware law, stockholders who do not vote to approve a merger
and who follow certain procedures may, under certain circumstances, be entitled
to exercise appraisal rights and receive cash for the "fair value" of their
shares of an acquired company.
In the event that appraisal rights under the DGCL are available to
Transcell stockholders in the Merger, a summary of the relevant sections of the
DGCL is set forth below. However, Intercardia and Transcell reserve the right
to challenge the applicability of appraisal rights with respect to the Merger.
The following summary of the provisions of Section 262 of the DGCL
("Section 262") is not intended to be a complete statement of such provisions
and is qualified in its entirety by reference to the full text of Section 262,
a copy of which is attached to this Proxy Statement/Prospectus as Annex D and
incorporated herein by reference.
If a holder of Transcell Capital Stock exercises appraisal rights in
connection with the Merger under Section 262, any shares of Transcell Capital
Stock with respect to which such rights have been exercised and perfected will
not be converted into Intercardia Common Stock but, instead, will be converted
into the right to receive such consideration as may be determined by the
Delaware Court of Chancery (the "Delaware Court") to be due with respect to
such shares pursuant to the DGCL. A stockholder electing to exercise appraisal
rights must, prior to the vote concerning the Merger proposal at the Transcell
Meeting, perfect his, her or its appraisal rights by demanding in writing from
Transcell the appraisal of his, her or its shares of Transcell Capital Stock. A
vote against the Merger proposal will not constitute a demand for appraisal. A
stockholder electing to exercise appraisal rights also must not vote in favor
of the Merger (a vote in favor of the Merger will constitute a waiver of such
stockholder's appraisal rights). A holder who elects to exercise appraisal
rights should mail or deliver his, her or its written demand to Transcell. The
demand should specify the holder's name and mailing address and that such
holder is demanding appraisal of his, her or its shares. Only a holder of
record as of the demand date and continuing until the Effective Time of shares
of Transcell Capital Stock (or his, her or its duly appointed representative)
is entitled to assert appraisal rights for the shares registered in that
holder's name. This Proxy Statement/Prospectus is being sent by personal
delivery or by mail to all holders of record of Transcell Capital Stock as of
the Record Date and constitutes notice of the appraisal rights under Section
262.
Within 10 days after the Effective Time, the Surviving Corporation shall
notify stockholders who have perfected their appraisal rights of the date that
the Merger has become effective. Within 120 days after the Effective Time, any
stockholder who has made a valid written demand and who has not voted in favor
of approval of the Merger proposal may (i) file a petition in the Delaware
Court demanding a determination of the value of shares of Transcell Capital
Stock and (ii) upon written request, receive from the Surviving Corporation a
statement setting forth the aggregate number of shares of Transcell Capital
Stock not voted in favor of the Merger proposal and with respect to which
demands for appraisal have been received and the aggregate number of holders of
such shares.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Delaware Court is required to determine the holders of Dissenting
Shares entitled to appraisal rights and to determine the "fair value" of the
Dissenting Shares, taking into account all relevant factors, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any.
Any holder of Dissenting Shares who has demanded an appraisal under
Section 262 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or to receive payment of dividends or
other distributions on such Dissenting Shares (except dividends or other
distributions payable to stockholders of record as of a date prior to the
Effective Time).
The shares of any Transcell stockholder who demands appraisal under
Section 262 and subsequently withdraws or loses his, her or its right to
appraisal will be converted into a right to receive that number of shares of
Intercardia Common Stock as is determined in accordance with the Merger
Agreement. A Transcell stockholder will effectively lose his right to appraisal
if he, she or it votes in favor of the Merger proposal, if no petition for
appraisal is filed within 120 days after the Effective Time, or if the holder
withdraws such holder's demand for appraisal within 60 days after the Effective
Time. A holder of stock represented by certificates may also lose his, her or
its right to appraisal if he, she or it fails to comply with the Court's
direction to submit such certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings.
57
<PAGE>
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
assume the Merger is accounted for using a partial "pooling of interests" and a
partial "purchase" method of accounting as discussed below. The pro forma
condensed combined balance sheet combines the condensed balance sheets of the
Company and Transcell as of December 31, 1997 as adjusted to reflect the
acquisition by Intercardia of the current non-Interneuron ownership interest in
Transcell accounted for as a "purchase", as if the transaction occurred on
December 31, 1997. The pro forma condensed combined statements of operations
combine the historical condensed statements of operations of the Company and
Transcell for the fiscal years ended September 30, 1997, 1996 and 1995 and
reflect the combined results of the Company and Transcell as adjusted to
reflect the acquisition by Intercardia of the current non-Interneuron ownership
interest in Transcell as if it occurred on October 1, 1996.
It is intended that the acquisition of Interneuron's ownership interest in
Transcell will be treated in a manner similar to a "pooling of interests" for
financial accounting purposes in accordance with GAAP because Intercardia and
Transcell are under common control. In addition, it is intended that the
acquisition of the non-Interneuron ownership interest in Transcell will be
treated as a "purchase" for financial accounting purposes in accordance with
GAAP. Accordingly, Intercardia will record the portion of the assets and
liabilities of Transcell owned by stockholders other than Interneuron at their
fair value as of the Effective Time. The historical financial statements of
Intercardia will be restated to include the accounts and results of operations
of Transcell since Transcell's inception, October 21, 1991.
The unaudited pro forma condensed combined financial statements are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as representative of future combined
results.
The unaudited pro forma condensed combined financial statements for the
fiscal years ended September 30, 1997, 1996 and 1995 are based upon the
historical financial statements of the Company and Transcell included elsewhere
in this Proxy Statement/Prospectus and should be read in conjunction with those
consolidated financial statements and related notes thereto.
58
<PAGE>
INTERCARDIA, INC AND TRANSCELL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following unaudited pro forma condensed combined balance sheet has
been prepared by combining the condensed balance sheets of the Company and
Transcell as of December 31, 1997, using a partial "pooling of interests" and a
partial "purchase" method of accounting. This unaudited pro forma condensed
combined balance sheet should be read in conjunction with the other unaudited
pro forma condensed combined financial statements, the accompanying notes and
the historical financial statements of the respective companies and the related
notes thereto.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------
Pro Forma Pro Forma
Intercardia Transcell Adjustments Combined
--------------- ---------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ........................ $ 5,929,804 $ 106,645 $ -- $ 6,036,449
Marketable securities ............................ 17,074,942 -- 17,074,942
Accounts receivable .............................. 1,081,710 -- 1,081,710
Prepaids and other current assets ................ 70,169 168,225 238,394
------------- ------------- -------------
Total current assets ........................... 24,156,625 274,870 24,431,495
Marketable securities .............................. 4,614,738 -- 4,614,738
Property and equipment, net ........................ 279,492 3,499,424 3,778,916
Other assets ....................................... 5,000 83,174 88,174
------------- ------------- -------------
$ 29,055,855 $ 3,857,468 $ -- $ 32,913,323
============= ============= =============== =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable ................................. $ 572,557 $ 495,856 $ 1,068,413
Accrued expenses ................................. 1,529,302 1,769,267 $ (1,213,000) (b)
400,000 (e) 2,485,569
Current portion of capital lease obligations ..... 46,112 443,961 490,073
Current portion of notes payable ................. 46,027 30,274 76,301
Note payable to Interneuron ...................... 1,253,784 13,771,638 (13,771,638) (a) 1,253,784
Deferred revenue ................................. 333,500 333,500
------------- -------------
Total current liabilities ...................... 3,447,782 16,844,496 (14,584,638) 5,707,640
Long-term portion of capital lease obligations ..... 52,338 877,528 929,866
Long-term notes payable ............................ 96,264 458,541 554,805
Convertible debenture -- Interneuron ............... 524,705 (524,705) (a) --
Stockholders' equity (deficit)
Preferred stock .................................. -- 10,653,275 (10,653,275) (c) --
Common stock ..................................... 6,770 4,128 (4,128) (c)
553 (d)
148 (g) 7,471
Additional paid-in capital ....................... 40,160,232 1,531,743 14,296,343 (a)
1,213,000 (b)
10,657,403 (c)
5,162,840 (d)
1,824,000 (f)
(148) (g) 74,845,413
Deferred compensation ............................ (117,000) (144,177) (1,824,000) (f) (2,085,177)
Accumulated deficit .............................. (14,590,531) (26,892,771) (5,163,393) (d)
(400,000) (e) (47,046,695)
--------------- -------------
Total stockholders' equity (deficit) ........... 25,459,471 (14,847,802) 15,109,343 25,721,012
------------- ------------- --------------- -------------
$ 29,055,855 $ 3,857,468 $ -- $ 32,913,323
============= ============= =============== =============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
59
<PAGE>
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed combined statements of
operations have been prepared by combining the condensed statements of
operations of the Company and Transcell for the three months ended December 31,
1997 and for the fiscal years ended September 30, 1997, 1996 and 1995. The pro
forma combination has been accounted for using a partial "pooling of interests"
and a partial "purchase" method of accounting. The partial "purchase" method of
accounting has been used for three months ended December 31, 1997 and for the
fiscal year ended September 30, 1997. These statements should be read in
conjunction with the other unaudited pro forma condensed combined financial
statements, the accompanying notes, and the historical financial statements of
the respective companies and the related notes thereto. The unaudited pro forma
results are not necessarily indicative of the operating results that would have
been achieved had the transactions been in effect as of the beginning of the
periods presented and should not be construed as representative of future
combined results.
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997
-------------------------------------------------------------------------
Pro Forma Pro Forma
Intercardia Transcell Adjustments Combined
----------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue ............ $ 216,934 $ 316,750 $ -- $ 533,684
Investment income ........................... 509,280 1,204 510,484
------------- ------------- -------------
Total revenue .............................. 726,214 317,954 1,044,168
------------- ------------- -------------
Costs and expenses:
Research and development .................... 1,314,973 1,340,776 2,655,749
General and administrative .................. 608,069 396,408 1,004,477
Interest expense ............................ 11,072 358,430 369,502
------------- ------------- -------------
Total costs and expenses ................... 1,934,114 2,095,614 4,029,728
------------- ------------- -------------
Net loss ..................................... $ (1,207,900) $ (1,777,660) $ -- $ (2,985,560)
============= ============= ==== =============
Net loss per common share -- basic ........... $ (0.18) $ (0.40)
============= =============
Net loss per common share -- diluted ......... $ (0.18) $ (0.40)
============= =============
Weighted average common shares
outstanding -- basic ........................ 6,766,547 7,467,333
============= =============
Weighted average common shares
outstanding -- diluted ...................... 6,766,547 7,467,333
============= =============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
60
<PAGE>
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1997
---------------------------------------------------------------------------
Pro Forma Pro Forma
Intercardia Transcell Adjustments Combined
------------------ ----------------- ------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue ............ $ 4,042,816 $ 1,316,750 $ -- $ 5,359,566
Investment income ........................... 2,110,269 3,285 2,113,554
-------------- ------------- --------------
Total revenue .............................. 6,153,085 1,320,035 7,473,120
-------------- ------------- --------------
Costs and expenses:
Research and development .................... 14,263,590 5,708,625 19,972,215
Purchase of in-process research and
development ................................ 410,608 -- 410,608
General and administrative .................. 2,098,823 2,079,813 4,178,636
Interest expense ............................ 26,873 1,255,615 1,282,488
-------------- ------------- --------------
Total costs and expenses ................... 16,799,894 9,044,053 25,843,947
-------------- ------------- --------------
Loss before minority interest ................ (10,646,809) (7,724,018) (18,370,827)
Minority interest ............................ 568,068 -- 568,068
-------------- ------------- --------------
Net loss ..................................... $ (10,078,741) $ (7,724,018) $ -- $ (17,802,759)
============== ============= ==== ==============
Net loss per common share -- basic ........... $ (1.49) $ (2.39)
============== ==============
Net loss per common share -- diluted ......... $ (1.49) $ (2.39)
============== ==============
Weighted average common shares
outstanding -- basic ........................ 6,750,611 7,451,397
============== ==============
Weighted average common shares
outstanding -- diluted ...................... 6,750,611 7,451,397
============== ==============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
61
<PAGE>
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1996
-----------------------------------------------------------------
Pro Forma Pro Forma
Intercardia Transcell Adjustments Combined
--------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue ..................... $ 5,009,000 $ 338,650 $ --- $ 5,347,650
Investment income .................................... 1,342,088 869 1,342,957
----------- ------------- -------------
Total revenue ....................................... 6,351,088 339,519 6,690,607
----------- ------------- -------------
Costs and expenses:
Research and development ............................. 2,317,904 2,958,373 5,276,277
Purchase of in-process research and
development ......................................... 350,000 -- 350,000
General and administrative ........................... 1,862,248 1,533,304 3,395,552
Interest expense ..................................... 33,003 590,219 623,222
----------- ------------- -------------
Total costs and expenses ............................ 4,563,155 5,081,896 9,645,051
----------- ------------- -------------
Income (loss) before minority interest ................ 1,787,933 (4,742,377) (2,954,444)
Income taxes .......................................... (37,000) (37,000)
Minority interest ..................................... (568,068) (568,068)
----------- -------------
Net income (loss) ..................................... $ 1,182,865 $ (4,742,377) $ --- $ (3,559,512)
=========== ============= ===== =============
Net income (loss) per common share -- basic ........... $ 0.20 $ (0.56)
=========== =============
Net income (loss) per common share -- diluted ......... $ 0.20 $ (0.56)
=========== =============
Weighted average common shares
outstanding -- basic ................................. 5,871,115 6,342,632
=========== =============
Weighted average common shares
outstanding -- diluted ............................... 6,041,025 6,342,632
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1995
------------------------------------------------------------------------
Pro Forma Pro Forma
Intercardia Transcell Adjustments Combined
---------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue ............ $ 304,331 $ -- $ 304,331
Investment income ........................... $ 61,663 28,191 89,854
------------ ------------- -------------
Total revenue .............................. 61,663 332,522 394,185
------------ ------------- -------------
Costs and expenses:
Research and development .................... 2,003,663 3,123,414 5,127,077
General and administrative .................. 581,982 1,481,381 2,063,363
Interest expense ............................ 930 295,670 296,600
------------ ------------- -------------
Total costs and expenses ................... 2,586,575 4,900,465 7,487,040
------------ ------------- -------------
Net loss ..................................... $ (2,524,912) $ (4,567,943) $ -- $ (7,092,855)
============ ============= ==== =============
Net loss per common share -- basic ........... $ (0.60) $ (1.52)
============ =============
Net loss per common share -- diluted ......... $ (0.60) $ (1.52)
============ =============
Weighted average common shares
outstanding -- basic ........................ 4,192,621 4,664,137
============ =============
Weighted average common shares
outstanding -- diluted ...................... 4,192,621 4,664,137
============ =============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
62
<PAGE>
INTERCARDIA, INC. AND TRANSCELL TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
A. Accounting for the Merger
The acquisition of Interneuron's ownership interest in Transcell will be
recorded in a manner similar to a "pooling of interests" because Intercardia
and Transcell are under common control. The acquisition of the non-Interneuron
ownership interest in Transcell will be recorded using the "purchase" method of
accounting. Accordingly, Intercardia will record the portion of the assets and
liabilities of Transcell owned by Interneuron at their historical values.
Intercardia will record the portion of the assets and liabilities of Transcell
owned by stockholders other than Interneuron at their fair value as of the date
of the Merger. The historical financial statements of Intercardia will be
restated to include the accounts and results from operations of Transcell since
Transcell's inception, October 21, 1991.
B. Pro Forma Adjustments
The following pro forma adjustments are based on available information and
certain estimates and assumptions. Therefore, it is likely that the actual
adjustments will differ from the pro forma adjustments.
Balance Sheets
(a) Represents the contribution to Transcell's capital of debt owed by
Transcell to Interneuron, which was $14,296,343 as of December 31, 1997.
(b) Represents the assumption by Interneuron of certain Transcell accrued
expenses totaling $1,213,000 as of December 31, 1997.
(c) Represents the elimination of Transcell's common and preferred stock.
(d) Represents the estimated charge to operations for common stock to be
issued for purchase of in-process research and development from Transcell
stockholders other than Interneuron.
(e) Represents estimate of charges to operations for out-of-pocket costs
associated with the Merger after December 31, 1997.
(f) Represents value of stock options granted by Transcell to consultants
in February 1998. This adjustment is included as the option grants are
contingent upon the closing of the Merger. This amount will be charged to
operations as the options vest over the two years subsequent to the date of
grant.
(g) Represents the par value of the Technology/Guarantee Shares to be
issued at Closing to Interneuron.
Intercompany Transactions
For all periods presented, intercompany transactions between the Company
and Transcell were not material.
Purchase of In-Process Research and Development
The portion of the purchase price in excess of the fair value of the
tangible assets acquired related to the acquisition of the non-Interneuron
ownership interest of Transcell has been allocated to Transcell technology
rights. However, because feasibility of the technology has not yet been
established and the technology has no alternative future use, the amount
allocated to this technology will be charged to operations in the fiscal year
in which the Merger is completed.
<TABLE>
<S> <C>
Value of Intercardia common stock to be issued to
stockholders other than Interneuron ...................... $3,757,723
Value of replacement stock options and warrants
to be issued at Closing to stockholders other
than Interneuron ......................................... 1,954,974
----------
Total purchase price ............................. 5,712,697
Fair value of Transcell net assets acquired in the Merger. (549,304)
----------
In-process research and development .............. $5,163,393
==========
</TABLE>
The Intercardia Common Stock to be issued to Transcell stockholders other
than Interneuron was valued at $16.39, which was based on the price of
Intercardia's stock a few days before and a few days after the terms of the
Merger had been
63
<PAGE>
substantially negotiated. No value in excess of the carrying value of the
assets acquired related to the acquisition of the Interneuron ownership
interest has been assigned to the portion of the Merger Consideration paid to
Interneuron, as this portion of the transaction will be accounted for as a
pooling of interests, since the entities were under common control.
C. Pro Forma Net Loss Per Share
Pro forma net loss per share is computed by dividing the pro forma net
loss by the pro forma weighted average shares outstanding for the period
presented. The outstanding capital stock of Transcell was converted into
Intercardia Common Stock assuming the Intercardia Stock Price at Closing of
$20.29, but assuming the Intercardia Common Stock to be issued to Transcell
stockholders other than Interneuron was valued at $16.39, which was based on
the price of Intercardia's stock a few days before and a few days after the
terms of the Merger had been substantially negotiated. Stock options and
warrants are excluded from these computations if their effect is antidilutive.
The pro forma weighted average shares outstanding for the three months ended
December 31, 1997 and for the fiscal year ended September 30, 1997 include the
shares issued to both Interneuron and the non-Interneuron stockholders for
their respective ownership interests in Transcell as the three months ended
December 31, 1997 and the fiscal year ended September 30, 1997 include the pro
forma effect of the acquisition of the non-Interneuron stockholders accounted
for under the "purchase" method of accounting and the pro forma effect of the
acquisition of the Interneuron ownership interest accounted for under the
"pooling of interests" method of accounting. The pro forma weighted average
shares outstanding for the fiscal years ended September 30, 1996 and 1995
include only the shares issued to Interneuron for their ownership interest in
Transcell.
64
<PAGE>
CERTAIN INFORMATION REGARDING THE COMPANY
Business
Intercardia was incorporated in Delaware in March 1994. The "Company"
refers collectively to Intercardia and its majority-owned subsidiaries, CPEC,
Aeolus and Renaissance. As of the Record Date, 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. As of the Record Date, Interneuron owned
approximately 61.1% 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 (bucindolol HCl), a drug currently in
Phase III clinical trials for congestive 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. In addition, in March 1998, the
Company entered into a non-binding letter of intent to license an early-stage
compound for the treatment of inflammatory bowel 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 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. The BEST Study is being
conducted by the NIH and by the VA and is designed to enroll up to 2,800
patients. The BEST Study is being periodically monitored by an independent Data
and Safety Monitoring Board. In the event that significant mortality
improvement is evident to the independent Data and Safety Monitoring Board at
any time during the course of the BEST Study, the study could be stopped early.
As of March 27, 1998, the BEST Study had enrolled approximately 2,242 patients.
In December 1995, the Company entered into a Development and Marketing
Collaboration and License Agreement 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 pays certain bucindolol development costs,
and the Company agreed to make certain payments to Astra Merck, including a
$10,000,000 payment made 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 rights in the United States to a once-daily formulation of bucindolol.
See " -- Collaborative Arrangements -- Astra Merck Collaboration".
In December 1996, the Company entered into the Knoll Collaboration with
Knoll to provide for the development, manufacture and marketing of BEXTRA for
the Knoll Territory. The Knoll Collaboration requires Knoll to make certain
payments to CPEC, including approximately $3,480,000 paid during the fiscal
year ended September 30, 1997. Knoll and the Company will share the development
and marketing costs of any formulation of bucindolol in the Knoll Territory and
Knoll will pay royalties to CPEC based on net profits, as defined in the Knoll
Collaboration, of bucindolol in the Knoll Territory.
65
<PAGE>
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 BEXTRA, including completing the BEST Study and, if its results are
favorable, compiling an NDA for submission to the 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 BEXTRA, 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. The addition of Transcell's carbohydrate combinatorial chemistry
platform could help diversify Intercardia's product development efforts, and
the Company expects that the Transcell platform technology will help it develop
additional products across multiple therapeutic areas. In addition, in March
1998, the Company entered into a non-binding letter of intent to license an
early-stage compound for the treatment of inflammatory bowel disease.
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.
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,
66
<PAGE>
carvedilol, a vasodilating beta-adrenergic receptor blocker, was approved by
the FDA for treatment of mild to moderate CHF patients. See " -- Competition".
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 carvedilol, 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.
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, 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
and launched as Coreg in June 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
67
<PAGE>
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 BMS 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 BMS in 1991. See " -- License Agreements
- -- Bucindolol License".
The PTO has issued to Intercardia a Notice of Allowance for its BEXTRA
trademark application for bucindolol. In addition to such approval in the
United States, the trademark BEXTRA has been approved in Germany, France,
Switzerland and several other countries. Securing BEXTRA as a trademark in the
United States is part of the Company's global registration program involving
approximately 70 countries. Following regulatory approval, bucindolol is
intended to be marketed as a pharmaceutical on a worldwide basis with BEXTRA as
the worldwide trademark to present a consistent brand name and image.
Phase II Studies in CHF
In addition to hypertension studies, beginning in the late 1980's BMS
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 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 December 31, 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. 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 March 27, 1998, approximately 2,242 patients had been randomized.
The Company currently intends to submit 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. 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. See "Risk Factors -- Risk Factors With
Respect to the Company -- Uncertainties Related to Clinical Trials".
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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 made 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 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 the Company, including
approximately $3,480,000 paid during the fiscal year ended September 30, 1997.
Knoll and the Company will share the development and marketing costs of
bucindolol for the Knoll Territory and Knoll will pay royalties to CPEC based
on net profits, as defined in the Knoll Collaboration, of bucindolol in the
Knoll Territory. See " -- Collaborative Arrangements -- Knoll Collaboration".
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
In September 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 the UNC Agreement with the University of North Carolina at Chapel Hill
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, Ph.D., 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.
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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 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.
Inflammatory Bowel Disease Compound
In March 1998, the Company entered into a letter of intent to license
OP2000 for all countries, except Japan and South Korea, from OPOCRIN S.p.A. of
Modena, Italy. Intercardia intends to investigate the use of OP2000 as a drug
for the treatment of inflammatory bowel disease ("IBD"). The letter of intent
is non-binding and closing is subject to several conditions, including
negotiation of a definitive agreement and investigation by Intercardia
regarding the patent, manufacturing and supply conditions regarding OP2000.
OP2000 is an oligosaccaride product derived from heparin. OP2000 has
antithrombotic and anti-inflammatory properties. It has been studied by OPOCRIN
in patients for cardiovascular indications. Intercardia believes the
antithrombotic and anti-inflammatory properties, along with the pharmacokinetic
characteristics of OP2000, provide a rationale for benefit in patients
suffering from IBD.
The term inflammatory bowel disease describes a group of chronic
inflammatory disorders of the intestine of unknown etiology, often causing
recurrent flares of abdominal pain, cramps, diarrhea (with or without
bleeding), fever and fatigue. Two forms are Crohn's disease and ulcerative
colitis. Crohn's disease typically affects the full thickness of the intestinal
wall, most commonly in the lowest portion of the small intestine. Ulcerative
colitis results in the large intestine becoming inflamed with ulceration and
bleeding. Current treatments of IBD are designed to reduce inflammation and
relieve symptoms in addition to replacing lost fluids and nutrients. This
includes treatment with corticosteriods and aminosalicylates, but treatment
results are often unsatisfactory. In serious cases, surgery can be required.
With the prevalence of IBD increasing in recent years, the Company
believes there is a need for effective and safe treatments. The incidence is
estimated to total approximately 1.2 million patients in the United States and
Europe combined.
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. See "Risk Factors --
Risk Factors with Respect to the Company -- Dependence on Collaborative
Partners".
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. The Astra Merck Collaboration also provides that Astra Merck
shall be responsible for the expenses incurred in development and
commercialization of the twice-daily formulation of bucindolol, and that Astra
Merck has committed an amount up to $15,000,000 to be expended in connection
with such development. The Company expects that during the fiscal year ending
September 30, 1998 the cumulative total of such expenses will exceed
$15,000,000. The Company and Astra Merck are discussing Astra Merck's
contractual responsibility to fund such expenses above $15,000,000. The Company
believes that in the event Astra Merck does not fund such expenses, Astra Merck
would be in breach of the Astra Merck Collaboration. The Astra Merck
Collaboration provides for arbitration of any disputes, and there can be no
assurance as to the cost of results
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of any arbitration. In the event that the Company funds such expenses, or a
portion of such expenses, in excess of $15,000,000 its results of operations
and financial position might be materially adversely affected.
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 $208,000,000 in any 12-month
period (indexed for inflation). Finally, Astra Merck must pay the royalties due
to BMS under its license of bucindolol to CPEC (see " -- License Agreements --
Bucindolol License"), and must pay CPEC royalties of 15% on the first
$114,000,000 of annual net sales (indexed for inflation), and 30% of annual net
sales in excess of such indexed amount, of the twice-daily 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 in the United States of this formulation of
bucindolol.
Under the terms of the Astra Merck Collaboration, the Company paid Astra
Merck $10,000,000 in December 1997 (which was accrued as a liability and
expensed during the fiscal year ended September 30, 1997) and 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. In the
event that the Company does not make these payments and, as a result, the
royalties payable by Astra Merck to CPEC are significantly reduced, the
Company's results of operations would be materially adversely affected.
During the three months ended December 31, 1997 and the fiscal years ended
September 30, 1997 and 1996, the Company recognized contract and license fee
revenue of approximately $215,000, $553,000 and $5,000,000, respectively, from
payments made by Astra Merck to the Company. During the three months ended
December 31, 1997, Astra Merck assumed liabilities on the Company's behalf of
approximately $1,219,000. Since the inception of the Astra Merck Collaboration,
Astra Merck has assumed liabilities totaling approximately $11,578,000 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
December 31, 1997, the Company's Balance Sheet included approximately
$1,058,000 of accounts receivable due from Astra Merck and approximately
$900,000 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 Intercardia. 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 Knoll Territory, which includes all countries with the exception of the
United States and Japan. The Knoll Collaboration includes all bucindolol
formulations. The Knoll Collaboration requires Knoll to make certain payments
to CPEC, including approximately $3,480,000 paid during the fiscal year ended
September 30, 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 Knoll Territory
during any consecutive 12-month period.
Knoll and the Company share the development and marketing costs of
bucindolol in the Knoll Territory. In general, Knoll pays approximately 60% of
the development and marketing costs prior to product launch and the Company
pays
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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 Knoll 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 Knoll 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 Knoll Territory. The Knoll Collaboration continues in effect for 15
years after the first commercial sale with respect to each country in the Knoll
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 Knoll Territory will be
funded by Knoll under the Knoll Collaboration, the Company is substantially
dependent upon Knoll for the success of bucindolol in the Knoll 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 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 Knoll 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.
License Agreements
The Company's strategy involves in-licensing products and technologies,
which it can then develop and with respect to which it can enter into
collaborative arrangements. The Company's strategy is to enter into additional
license agreements in the future. See "Risk Factors -- Risk Factors With
Respect to the Company -- Risks Relating to License Agreements".
Bucindolol License
In December 1991, BMS 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 BMS, 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 continue even though the underlying
patent has expired may materially adversely affect the Company's competitive
position in the event a generic version of bucindolol is introduced.
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Duke License
In July 1995, Aeolus entered into the Duke License with 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 entered into the National Jewish Agreement with
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.
UNC Agreement
In September 1997, Renaissance entered into 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.
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 three months ended December 31, 1997 and the fiscal years ended
September 30, 1997, 1996 and 1995, the Company incurred expenses of
approximately $1,315,000, $14,264,000 (which included the accrual for the
$10,000,000 payment made to Astra Merck in December 1997), $2,318,000 and
$2,004,000, respectively, on research and development ("R&D") 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, while retaining co-promotion rights, is to contract with third
parties, rather than incur the expense and overhead of establishing its own
sales and marketing force. 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. 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
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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 Knoll
Territory. Knoll shall have the right to choose to manufacture the product for
the Knoll 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
Knoll 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. See "Risk Factors -- Risk Factors
With Respect to the Company -- Dependence on Collaborative Partners" and " --
Lack of Manufacturing and Marketing Capabilities".
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 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 offered or 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 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." In June 1997, carvedilol was launched in the
United States by SKB as the product Coreg for the treatment of CHF and is being
co-promoted by Boehringer. 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. In addition, in March 1998,
Germany-based Merck KGaA announced early termination of the CBIS II trial to
test bisoprolol as a treatment in CHF patients in Europe. Merck KGaA reported
that in the trial, which enrolled 2,647 patients, those receiving bisoprolol
had a much higher survival rate than the patients receiving customary
treatment. Bisoprolol is a beta-1 receptor selective beta-blocker marketed in
the United States by Lederle for hypertension.
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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. The Company believes that Astra AB
has initiated a large mortality study for the 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 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 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 BMS 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 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
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Act or similar foreign laws will not be amended or repealed, or that their
benefits will be available to the Company. See "Risk Factors -- Risk Factors
with Respect to the Company -- Uncertainty Regarding Waxman-Hatch Act and
Similar Foreign Laws".
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 Intercardia. 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. See "Risk Factors -- Risk Factors With Respect to
the Company -- Uncertainty Regarding Patents and Proprietary Rights; Expiration
of Bucindolol Patent in November 1997".
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 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
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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, Intercardia 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, 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 impact of such regulation upon the Company cannot be predicted and could be
material and adverse. See "Risk Factors -- Risk Factors With Respect to the
Company -- Government Regulation".
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 Intercardia 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
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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.
See "Risk Factors -- Risk Factors With Respect to the Company -- Uncertainties
Regarding Pharmaceutical Pricing and Reimbursement".
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. Under the Knoll Collaboration, both the Company and Knoll 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. See "Risk Factors -- Risk Factors With
Respect to the Company -- Product Liability Exposure and Insurance".
Employees
As of the Record Date, there were 20 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. See "Risk Factors -- Risk Factors
With Respect to the Company -- Dependence on Key Personnel" and "Certain
Information Regarding Transcell -- Business -- Employees".
Facilities and Property
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. See "Certain Information Regarding Transcell --
Business -- Properties".
Legal Proceedings
The Company is not a party to any legal proceedings.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. All references to the Company include Intercardia, and its
majority-owned subsidiaries, CPEC, Aeolus and Renaissance. As of the Record
Date, the Company 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. The Company is a majority-owned subsidiary of
Interneuron. As of the Record Date, Interneuron owned 61.1% of the outstanding
capital stock of the Company and the 19.9% of outstanding capital stock of CPEC
not owned by the Company.
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. 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.
Results of Operations
Three Months Ended December 31, 1997 Compared to Three Months Ended
December 31, 1996:
The Company incurred a net loss of $1,208,000 for the three months ended
December 31, 1997, versus net income of $1,222,000 for the three months ended
December 31, 1996. The net loss for the three months ended December 31, 1997
primarily resulted from expenses incurred for the development of bucindolol and
R&D costs incurred by Aeolus and Renaissance. The net income for the three
months ended December 31, 1996 resulted primarily from the payment received
from Knoll pursuant to the execution of the Knoll Collaboration.
Contract and license fee revenue of approximately $217,000 for the three
months ended December 31, 1997 included contract revenue payments from Astra
Merck pursuant to the Astra Merck Collaboration. Contract and license fee
revenue for the three months ended December 31, 1996 included approximately
$2,143,000 received from Knoll pursuant to the execution of the Knoll
Collaboration.
R&D expenses for the Company increased by $792,000 (151%) to $1,315,000
for the three months ended December 31, 1997 from $523,000 for the three months
ended December 31, 1996, primarily due to increased bucindolol and general
development expenses (approximately $339,000), increased Aeolus R&D expenses
(approximately $314,000) and increased Renaissance R&D expenses (approximately
$139,000).
The increase in bucindolol development expenses was primarily due to
additional personnel expenses (approximately $134,000), costs related to the
development of bucindolol for Europe (approximately $52,000), increased costs
for development of a once-daily formulation (approximately $45,000) and other
R&D costs.
Pursuant to the Astra Merck Collaboration, during the three months ended
December 31, 1997, Astra Merck assumed liabilities on the Company's behalf of
approximately $1,219,000. From the inception of the Astra Merck Collaboration
through December 31, 1997, Astra Merck has assumed liabilities totaling
approximately $11,578,000 on the Company's behalf. These additional amounts did
not flow through the Company's Statements of Operations, as they were offset
against related expenses. As of December 31, 1997, the Company's Balance Sheet
included approximately $1,058,000 of accounts receivable due from Astra Merck
and approximately $900,000 of accrued expenses related to obligations assumed
by Astra Merck. See "Certain Information Regarding the Company -- Business --
Collaborative Arrangements -- Astra Merck Collaboration" and " -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
Aeolus R&D expenses increased by approximately $314,000 (159%) to
approximately $511,000 for the three months ended December 31, 1997 from
approximately $197,000 for the three months ended December 31, 1996, as Aeolus
expanded its antioxidant small molecule research program. This increase was
primarily due to sponsored research at universities (approximately $125,000),
increased patent fees (approximately $60,000) and increased chemistry costs
(approximately $57,000).
Renaissance R&D expenses for the three months ended December 31, 1997 were
approximately $139,000 for its liver stem cell program. Intercardia acquired
79.6% of the outstanding capital stock of Renaissance in September 1997.
General and administrative ("G&A") expenses increased by approximately
$88,000 (17%) to approximately $619,000 for the three months ended December 31,
1997 from approximately $531,000 for the three months ended December 31, 1996,
primarily due to expenses related to the proposed acquisition of Transcell.
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The minority interest in the Consolidated Statement of Operations for the
three months ended December 31, 1996 related to the 19.9% minority interest in
the net income earned by CPEC for the three months ended December 31, 1996. The
net loss incurred by CPEC for the fiscal year ended September 30, 1997 resulted
in the reversal of all minority interest balances as of September 30, 1997.
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 Intercardia's IPO completed in February 1996 for
all of Fiscal 1997, versus only part of Fiscal 1996.
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.
Pursuant to the Astra Merck Collaboration, Astra Merck assumed liabilities
on the Company's behalf of approximately $5,505,000 and $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
outstanding capital stock of CPEC.
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
Intercardia's IPO completed in February 1996. The only revenue for Fiscal 1995
was approximately $62,000 of investment income.
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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 the Company 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 outstanding
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 December 31, 1997, the Company had cash, cash equivalents and
marketable securities of approximately $27,620,000.
The Company's cash, cash equivalents and marketable securities balance is
expected to continue to decrease during the remainder of the fiscal year ending
September 30, 1998 ("Fiscal 1998"), due primarily to (1) lower contract revenue
for Fiscal 1998 than Fiscal 1997, which included payments of approximately
$3,480,000 made by Knoll pursuant to the Knoll Collaboration, (2) a decrease in
investment income due to lower cash, cash equivalent and marketable securities
balances, and (3) increased expenses due to expanded operations, including
costs associated with proposed clinical trials of bucindolol in Europe, a full
year of operations for Renaissance, potential funding of a portion of
development costs in the United States for the twice-daily bucindolol product
and additional operating expenses of Transcell assuming completion of the
Merger.
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 course of the BEST Study, of which $1,750,000 has
been paid to December 31, 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. The Astra Merck Collaboration provides that Astra
Merck shall be responsible for the royalty obligation to BMS and for the
expenses incurred in development and commercialization of the twice-daily
formulation of bucindolol, and Astra Merck has committed an amount up to
$15,000,000 to be expended in connection with such development. The Company
expects that during Fiscal 1998 the cumulative total of such expenses will
exceed $15,000,000. The Company and Astra Merck are discussing Astra Merck's
contractual responsibility to fund such expenses above $15,000,000. The Company
believes that in the event Astra Merck does not fund such expenses, Astra Merck
would be in breach of the Astra Merck Collaboration. The Astra Merck
Collaboration provides for arbitration of any disputes, and there can be no
assurance as to the cost or results of any arbitration. In the event that the
Company funds such expenses, or a portion of such expenses, in excess of
$15,000,000 its results of operations and financial position may be materially
adversely affected. See "Certain Information Regarding the Company -- Business
- -- Collaborative Arrangements -- Astra Merck Collaboration".
Pursuant to the Astra Merck Collaboration, the Company paid Astra Merck
$10,000,000 in December 1997 (for which the Company made an accrual as of
September 30, 1997) and agreed to pay 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.
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The Company expects that, as of Closing, it will incur charges to
operations for the purchase of the non-Interneuron portion of in-process
research and development, estimated to be up to $8,000,000 (based on
Intercardia's current stock price). The actual charges could be lesser or
greater, depending in part on the Intercardia Stock Price at Closing. The
Company will incur additional future charges relating to certain Replacement
Options to be issued in connection with the Merger.
The Company will incur additional future 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 to former CPEC stockholders 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 at such time when an NDA with
respect to bucindolol has been accepted for filing by the FDA and upon receipt
of an approval letter from the FDA with respect to bucindolol. In exchange for
Interneuron providing such shares, Intercardia will pay Interneuron the value
of such shares, in either cash or Intercardia Common Stock, at the Company'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
Knoll 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 Knoll 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 Knoll Territory, if any, as defined. The Company
is also responsible for approximately 40% of the once-daily development costs
incurred for the Knoll Territory and approximately 67% of the once-daily
development costs that have a worldwide benefit.
The Company is aware of products available or in 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, is owned by Boehringer 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 and Boehringer are currently marketing carvedilol in the United States
and a number of other countries. The Company is unable to predict the impact of
this product on BEXTRA, if BEXTRA is approved by the FDA. Carvedilol's approval
for marketing as a treatment for congestive heart failure in the United States
prior to BEXTRA may have adversely affected the patient enrollment rate of the
BEST Study and could provide a marketing advantage for carvedilol.
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 carvedilol on the BEST Study and on commercialization
of bucindolol; the Merger 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 may acquire other
products, technologies or businesses that complement the Company's existing and
planned products, although the Company currently has no commitment or agreement
with respect to any such acquisitions, other than the Merger. While the Company
believes it has sufficient cash available for currently planned expenditures
through the fiscal year ending September 30, 1999, including expenses related
to Transcell (but excluding any additional bucindolol development costs the
Company may assume in connection with the Astra Merck Collaboration), there can
be no assurance that additional equity or debt financing will not be required
prior to such time. Intercardia may require additional financing to fund the
Company's operations or to make payments to its collaborative partners,
including up to $11,000,000 in payments for U.S. product launch expenses to
Astra Merck under the Astra Merck Collaboration, and any additional costs
incurred in connection with the Astra Merck Collaboration and 40% of
development and marketing costs of bucindolol in the Knoll Territory pursuant
to the Knoll Collaboration with Knoll, as well as to fund new business
opportunities and fund growth. See "Risk Factors -- Risk Factors With Respect
to the Company -- Future Capital Needs; Uncertainty of Additional Funding".
As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". SFAS No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
stock options and warrants. All earnings per share amounts for all periods have
been presented to conform to SFAS No. 128 requirements.
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income," 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.
82
<PAGE>
The Company will adopt SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", 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.
Management
Directors and Executive Officers
As of the Record Date, the directors and executive officers of Intercardia
were as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- ----- -------------------------------------------------------------
<S> <C> <C>
Clayton I. Duncan .............. 48 President, Chief Executive Officer and Director (since 1995)
David P. Ward, M.D. ............ 52 Senior Vice President, Research and Development
Richard W. Reichow ............. 47 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
John P. Richert ................ 47 Vice President, Market Development
W. Bennett Love ................ 42 Vice President, Corporate Planning/Communications
Glenn L. Cooper, M.D. .......... 45 Chairman of the Board of Directors (since 1994)
Joseph J. Ruvane, Jr. .......... 72 Director (since 1995)
David B. Sharrock .............. 61 Director (since 1995)
</TABLE>
None of the current Intercardia directors is related by blood, marriage or
adoption to any other director or any executive officer of Intercardia.
For biographical information regarding the nominees for election to the
Intercardia Board of Directors at the Intercardia Meeting, see "Intercardia
Proposal No. 2 -- Election of Directors -- Nominees".
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 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 Pharmaceuticals Corporation ("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 is a director of each of Aeolus and Renaissance. Dr.
Ward received his M.D. from Case Western University Medical School.
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, which was acquired by Eli Lilly and Company
("Lilly") in September 1994, 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 Medical, Inc. ("CRX"),
a medical products company that conducted research and development in wound
management, ophthalmic disorders and interventional radiology, from 1987 to
1990. Mr. Reichow is a director of each of CPEC, Aeolus and Renaissance. Mr.
Reichow is a Certified Public Accountant.
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.
83
<PAGE>
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 Corporation ("Carolina Securities"),
a regional investment banking firm. Mr. Love is a director of Renaissance. Mr.
Love received an M.B.A. from the University of North Carolina at Chapel Hill.
Information Concerning the Intercardia Board of Directors and Its
Committees
The business of Intercardia is under the general management of the
Intercardia Board as provided by the laws of Delaware and the Bylaws of
Intercardia. During Fiscal 1997, the Intercardia Board held four formal
meetings, excluding actions by unanimous written consent. Each member of the
Intercardia Board attended all of the Fiscal 1997 meetings of the Intercardia
Board and Board committees of which he was a member.
The Intercardia Board has established an Audit Committee and a
Compensation Committee. The Board has no Nominating Committee. The Audit
Committee currently consists of Mr. Ruvane and Mr. Sharrock. The Audit
Committee reviews the results and scope of the audit and other services
provided by Intercardia's independent public accountants. The Compensation
Committee currently consists of Dr. Cooper and Mr. Ruvane. During Fiscal 1997,
the Compensation Committee held two formal meetings, excluding actions by
unanimous written consent. The Compensation Committee makes recommendations to
the Intercardia Board regarding salaries and incentive compensation for
officers of Intercardia, and determines the amount and type of equity
incentives granted to participants in Intercardia's Option Plan.
Executive Compensation
Summary Compensation
The following table sets forth all compensation paid or accrued by the
Company for services rendered to it in all capacities for the fiscal years
ended September 30, 1997, 1996 and 1995, to Intercardia's Chief Executive
Officer and Intercardia's other executive officers who earned at least $100,000
in the respective fiscal year (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
------------------------
Annual Compensation Stock
Name and Fiscal ------------------------ Options Aeolus All Other
Principal Position Year Salary Bonus (Shares) Shares (1) Compensation (2)
- ----------------------------- -------- ----------- ---------- ---------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan, 1997 $275,600 $ 95,400 -- -- $3,345
President and Chief 1996 251,667 112,500 139,241 -- 1,555
Executive Officer (3) 1995 168,750 -- 251,557 7,353 1,258
David P. Ward, M.D., 1997 207,000 54,000 20,000 -- 3,134
Senior Vice President, 1996 193,750 37,000 20,000 -- 1,364
Research & Development (4) 1995 99,615 -- 120,000 -- 1,189
Richard W. Reichow, 1997 196,650 52,725 20,000 -- 3,192
Senior Vice President, 1996 173,333 30,000 20,000 -- 1,600
Chief Financial Officer,
Treasurer and Secretary
John P. Richert, 1997 107,083 17,280 10,000 -- 1,245
Vice President, Market
Development
W. Bennett Love, 1997 105,452 17,280 29,000 -- 1,708
Vice President, Corporate
Planning/Communications
</TABLE>
- ---------
(1) Shares of the Common Stock of Aeolus were issued to Mr. Duncan during the
fiscal year ended September 30, 1995 for $0.001 per share.
(2) Consists of life and long-term disability insurance premiums and health
club fees reimbursed or paid on behalf of the Named Officers.
(3) Compensation for the fiscal year ended September 30, 1995 covers the period
commencing upon Mr. Duncan joining Intercardia in January 1995. See
"Certain Information Regarding Transcell -- Principal Stockholders" for a
description of options to purchase shares of Transcell Capital Stock
granted to and held by Mr. Duncan.
(4) Compensation for the fiscal year ended September 30, 1995 covers the period
commencing upon Dr. Ward joining Intercardia in March 1995.
84
<PAGE>
Management Incentive Plan
The Compensation Committee and the Intercardia Board has approved a
Management Incentive Plan ("MIP") for the executive officers of Intercardia.
The MIP provides for cash payments to the executive officers upon the
achievement of certain corporate and individual objectives. The MIP is intended
to be an annual compensation program. For the calendar year ended December 31,
1996 ("Calendar 1996"), the corporate objectives related to the development and
commercialization of bucindolol, Intercardia's most advanced development
project. For the calendar year ended December 31, 1997 ("Calendar 1997"), the
corporate objectives related primarily to the development and commercialization
of bucindolol and the identification and advancement of other potential
products or programs. The corporate and individual objectives for Calendar 1997
were evaluated and measured during January 1998, and cash payments were made to
the executive officers in January 1998.
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values
The following table summarizes all option grants during the fiscal year
ended September 30, 1997 to the Named Officers:
Option Grants During Fiscal Year Ended September 30, 1997
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number Annual Rates of Stock
of Shares % of Total Exercise Price Appreciation for
Underlying Options Granted or Base Option Term (2)
Options to Employees in Price Per Expiration -------------------------
Name Granted Fiscal Year 1997 Share (1) Date 5% 10%
- --------------------- --------------- ------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David P. Ward, M.D. 20,000(3) 9.4% $ 19.00 2-19-2007 $234,908 $599,138
Richard W. Reichow 20,000(3) 9.4% 19.00 2-19-2007 234,908 599,138
John P. Richert 10,000(4) 4.7% 19.00 2-19-2007 117,454 299,569
W. Bennett Love 5,000(5) 2.3% 19.00 2-19-2007 58,727 149,784
12,000(6) 5.7% 19.00 2-19-2007 140,945 359,483
12,000(7) 5.7% 19.50 6-10-2007 147,161 372,936
</TABLE>
- ---------
(1) The exercise price may be paid in cash or a check to the order of
Intercardia, or by any other means determined by the Intercardia Board.
(2) The compounding assumes a 10-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall stock market conditions. The
amounts reflected in this table may not necessarily be achieved.
(3) These options were granted in February 1997 and are exercisable in equal
monthly installments over a 36-month period commencing in April 1999.
(4) These options were granted in February 1997 and are exercisable in equal
monthly installments over a 36-month period commencing in July 1999.
(5) These options were granted in February 1997 and are exercisable in equal
monthly installments over a 36-month period commencing in September 1999.
(6) These options were granted in February 1997 and are exercisable in equal
monthly installments over a 36-month period commencing in February 1997.
(7) These options were granted in June 1997 and are exercisable in equal
monthly installments over a 36-month period commencing in June 1997.
85
<PAGE>
The following table sets forth certain information concerning all stock
option exercises during the fiscal year ended September 30, 1997 by the Named
Officers, and the number and value of unexercised options held by the Named
Officers as of September 30, 1997:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at September 30, 1997 at September 30, 1997 (2)
Acquired Value ----------------------------- ----------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------- ------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan ....... -- -- 173,688 217,110 $3,733,409 $2,127,229
David P. Ward, M.D. ..... -- -- 60,000 100,000 1,322,000 1,392,000
Richard W. Reichow ...... 2,000 $37,030 57,000 100,000 1,255,580 1,392,000
John P. Richert ......... -- -- 25,333 49,667 407,666 461,334
W. Bennett Love ......... -- -- 21,333 48,667 398,166 471,334
</TABLE>
- ---------
(1) Market value of underlying securities on the date of exercise, minus the
exercise price.
(2) Value based on the difference between the fair market value of the shares
of Common Stock at September 30, 1997 ($22.50), as quoted on the Nasdaq
Stock Market, and the exercise price of the options.
Employment Agreements
In December 1997, Intercardia entered into a new three-year employment
agreement with Mr. Duncan, replacing the prior three-year employment agreement
that expired in January 1998. The agreement provides for an annual base salary
and annual bonuses based on the achievement of performance milestones to be
mutually agreed upon by the Intercardia Board or its Compensation Committee and
Mr. Duncan. The agreement with Mr. Duncan also provides that during the term of
the agreement and, unless Mr. Duncan terminates his employment for cause, for a
period of one year thereafter, Mr. Duncan will not compete with Intercardia,
directly or indirectly. In the event Mr. Duncan's employment is terminated by
the Intercardia Board without just cause, Intercardia shall continue to pay for
a period of one year Mr. Duncan's base salary plus a percentage of his salary
equal to the average annual bonus percentage earned for the two years prior to
the date of termination.
In November 1995, Intercardia entered into three-year employment
agreements with each of Dr. Ward and Mr. Reichow. The agreements provide for
base salaries and annual bonuses based upon the achievement of performance
milestones to be set by the Intercardia Board. The agreements also provide that
during their term and, unless the employee terminates his employment for cause,
for a period of six months thereafter, the employee will not compete with
Intercardia, directly or indirectly. In the event that the employment of Dr.
Ward or Mr. Reichow is terminated by the Intercardia Board without just cause,
Intercardia shall continue to pay Dr. Ward or Mr. Reichow, as the case may be,
his base salary plus the greater of prorated bonuses earned or prorated average
bonuses received while an employee for a period of six months.
Compensation of Directors
All directors are reimbursed for expenses incurred in connection with each
board or committee meeting attended. Each director who is not an employee of
Intercardia or Interneuron receives a fee of $2,000 per Board meeting attended
in person.
The Option Plan provides for the grant of nonstatutory options to
non-employee directors of Intercardia pursuant to the Automatic Grant Program,
as described above under the heading "Intercardia Proposal No. 3 -- Approval of
Amendments to the 1994 Stock Option Plan".
Report of the Compensation Committee on Executive Compensation
The Compensation Committee of the Intercardia Board (the "Compensation
Committee") is responsible for establishing compensation policy and
administering the compensation programs of Intercardia's executive officers.
The Compensation Committee met two times during Fiscal 1997 to review executive
compensation policies, compensation programs, and individual salaries and
awards for the executive officers. The purpose of this report is to inform
stockholders of Intercardia's compensation policies for executive officers and
the rationale for the compensation paid to executive officers in Fiscal 1997.
86
<PAGE>
Compensation Philosophy
Intercardia's compensation program is designed to motivate and reward the
executives responsible for the financial and strategic objectives essential to
Intercardia's long-term success and stockholder value. The financial goals for
compensation plans are reviewed and approved by the Compensation Committee.
Intercardia's total compensation philosophy is designed to support its
overall objective of creating value for its stockholders. Key objectives of
this philosophy are:
o To attract and retain key executives critical to the long-term success
of Intercardia;
o To support a performance-oriented environment that rewards performance
with respect to Intercardia's short-term and long-term financial goals;
o To encourage maximum performance through the use of appropriate
incentive programs; and
o To align the interests of executives with those of Intercardia's
stockholders by providing a significant portion of compensation in
Intercardia's Common Stock.
Base Salary
The Compensation Committee annually reviews the base salary of each
officer. In determining appropriate salary levels, the Compensation Committee
considers individual performance, experience, level of responsibility, internal
equity and external pay practices for the comparable positions.
Management Incentive Plan
Intercardia has established the MIP to reward participants for their
contributions to the achievement of Company-wide performance goals. Each year
the Intercardia Board will approve both the performance measures selected and
the specific financial targets used under the MIP. The Compensation Committee
believes these goals will drive the future success of the Company's business
and will enhance stockholder value. For Calendar 1996, Intercardia's corporate
objectives focused on the development and commercialization of BEXTRA,
Intercardia's most advanced product. For Calendar 1997, Intercardia's corporate
objectives focused primarily on the development and commercialization of BEXTRA
and the identification and advancement of other potential products or programs.
The amount individual executives may earn (target awards) is directly
dependent upon the individual's position, responsibility and ability to impact
the Company's financial success. Awarded amounts are directly related to
performance. Company and individual performance for the Calendar 1997 were
evaluated during January 1998, and cash payments were made to the executive
officers in January 1998. See " -- Executive Compensation -- Management
Incentive Plan".
Stock Options
The stock option plan offered by Intercardia has been established to
provide all employees of Intercardia with an opportunity to share, along with
stockholders of Intercardia, in the long-term performance of Intercardia. Stock
options only have value to the employee if the price of Intercardia's stock
appreciates in value from the date the stock options were granted. Stockholders
also benefit from such stock price appreciation.
Grants of stock options are generally made upon commencement of
employment, with additional grants being made annually to all eligible
employees, and, occasionally, following a significant change in job
responsibility, scope or title. Stock options granted under the various stock
plans have vesting schedules of up to seven years and expire ten years from the
date of grant. The exercise price of options granted under the stock plans are
usually 100% of fair market value of the Common Stock on the date of grant. See
" -- Executive Compensation -- Option Grants, Exercises and Holdings and Fiscal
Year-End Option Values".
CEO Compensation
Mr. Duncan's base salary and grants of stock options for Fiscal 1997 were
determined in accordance with the criteria described in the Base Salary and
Stock Options sections of this report. The annual base salary of Mr. Duncan was
set at $300,000 as of January 3, 1998. Mr. Duncan received a bonus of $95,400
pursuant to the MIP for Calendar 1996.
87
<PAGE>
Conclusion
The Compensation Committee believes that Intercardia's compensation
policies are structured to result in the highest level of performance from
Intercardia's executives. By providing a significant portion of each
executive's total potential compensation under the MIP and by providing each
executive with a significant number of stock options, the Compensation
Committee believes that it has closely aligned Intercardia executive's personal
interests with those of Intercardia and the stockholders. The Compensation
Committee intends to continue to review and analyze its policies in light of
the environment in which Intercardia competes for executives.
Neither the material in this report, nor the performance graph included in
this proxy statement under the heading
" -- Performance Graph" (the "Performance Graph"), is soliciting material, is
or will be deemed filed with the Securities and Exchange Commission or is or
will be incorporated by reference in any filing of Intercardia under the
Securities Act, or the Exchange Act, whether made before or after the date of
this proxy statement and irrespective of any general incorporation language in
such filing.
<TABLE>
<S> <C>
Submitted by: The Compensation Committee
GLENN L. COOPER, M.D., CHAIRMAN
JOSEPH J. RUVANE, JR.
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Dr. Cooper and Mr. Ruvane. Mr.
Ruvane was not at any time during the fiscal year ended September 30, 1997 or
at any other time an officer or employee of Intercardia. Dr. Cooper served as
President and Chief Executive Officer of Intercardia from March 1994 to January
1995. Mr. Duncan, President, Chief Executive Officer and a director of
Intercardia, is also Vice Chairman of the Board of Directors of Transcell, of
which Dr. Cooper, a member of Intercardia's Compensation Committee, is the
Chairman and the acting President and Chief Executive Officer. Although Dr.
Cooper has received options to purchase Transcell Capital Stock, he does not
receive cash compensation for his services as an executive officer of
Transcell. No other executive officer of Intercardia serves as a member of the
board of directors or compensation committee of any entity which has one or
more executive officers serving as a member of the Intercardia Board or the
Compensation Committee.
Performance Graph
The following graph shows a two-year(1) comparison of cumulative total
stockholder returns(2) for Intercardia, the CRSP Nasdaq Pharmaceuticals Stocks
Index and the CRSP Total Return Index of the Nasdaq Stock Market. (The "CRSP"
is the Center for Research in Securities Prices at the University of Chicago.)
The graph assumes that $100 was invested on February 1, 1996 (the date of
Intercardia's IPO) in each of Intercardia's Common Stock, the stocks in the
CRSP Nasdaq Pharmaceuticals Stocks Index and the stocks in the CRSP Total
Return Index of the Nasdaq Stock Market.
[Performance Graph appears here with the following plot points]
2/1/96 9/30/96 9/30/97
Pharmaceuticals 100 94 105
ITRC 100 165 150
NASDAQ 100 116 159
88
<PAGE>
- ---------
(1) Indicates comparison of total return for all of Fiscal 1997 and solely for
that period of Fiscal 1996 (February 1, 1996 - September 30, 1996) during
which Intercardia's Common Stock was registered under Section 12 of the
Exchange Act.
(2) Total return assumes reinvestment of dividends. Total returns for the
Nasdaq Stock Market and the Nasdaq Pharmaceuticals Stocks indices are
weighted based on market capitalization.
Principal Stockholders
The following table sets forth certain information regarding the ownership
of shares of Intercardia Common Stock as of the Record Date and as adjusted to
give effect to the Merger by (i) each person known by Intercardia to own
beneficially more than 5% of the outstanding shares of Intercardia Common
Stock, (ii) each director of Intercardia, (iii) each of Intercardia's Named
Officers as listed under " -- Executive Compensation -- Summary Compensation"
above, and (iv) all current directors and executive officers of Intercardia as
a group. Except as indicated in footnotes to this table, the persons named in
this table have sole voting and investment power with respect to all shares of
Common Stock indicated below. Share ownership in each case includes shares
issuable upon exercise of options that may be exercised within 60 days after
the Record Date for purposes of computing the percentage of Common Stock owned
by such person but not for purposes of computing the percentage owned by any
other person.
<TABLE>
<CAPTION>
Prior to the Merger After the Merger (1)
--------------------------- --------------------------
Shares Shares
Beneficially Percentage Beneficially Percentage
Name Owned Owned (2) Owned Owned (3)
- ------------------------------------------------------------------- -------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Interneuron Pharmaceuticals, Inc. ................................. 4,145,029 61.1% 4,658,284 61.7%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Glenn L. Cooper, M.D (4) .......................................... 4,146,462 61.1% 4,663,541 61.8%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Clayton I. Duncan (5) ............................................. 281,132 4.0% 285,962 3.7%
Joseph J. Ruvane, Jr. (6) ......................................... 15,250 * 15,250 *
David B. Sharrock (7) ............................................. 11,000 * 11,000 *
David P. Ward, M.D. (8) ........................................... 90,813 1.3% 90,813 1.2%
Richard W. Reichow (9) ............................................ 93,142 1.4% 93,142 1.2%
John P. Richert (10) .............................................. 31,731 * 31,731 *
W. Bennett Love (11) .............................................. 27,680 * 27,680 *
Tudor Investment Corporation ...................................... 359,400 5.3% 359,400 4.8%
One Liberty Plaza
New York, New York 10006
All directors and executive officers as a group (8 persons) (12) .. 4,697,210 64.2% 5,220,125 64.6%
</TABLE>
- ---------
* Less than one percent.
(1) Assumes: (i) consummation of the Merger; (ii) the issuance of the
Technology/Guarantee Shares at Closing; and (iii) the issuance of the
Future Installments, all based upon an assumed Intercardia Stock Price at
Closing and for the Future Installments of $20.29.
(2) As of the Record Date, Intercardia had 6,781,687 shares of Common Stock
outstanding.
(3) After giving effect to the transactions described in footnote (1),
Intercardia would have had 7,536,647 shares of Common Stock outstanding.
(4) Consists of the shares held by Interneuron, 739 shares held by Dr. Cooper
and 694 shares issuable upon exercise of options held by Dr. Cooper. After
the Merger, also includes 4,830 shares issuable upon exercise of
Replacement Options. Dr. Cooper is President, Chief Executive Officer and
a director of Interneuron. Dr. Cooper disclaims beneficial ownership of
the shares held by Interneuron.
(5) Includes 6,127 shares owned and 275,005 shares issuable upon exercise of
options held by Mr. Duncan. After the Merger, also includes 4,830 shares
issuable upon exercise of Replacement Options.
(6) Includes 3,000 shares owned and 12,250 shares issuable upon exercise of
options held by Mr. Ruvane.
89
<PAGE>
(7) Includes 1,000 shares owned and 10,000 shares issuable upon exercise of
options held by Mr. Sharrock.
(8) Includes 813 shares owned and 90,000 shares issuable upon exercise of
options held Dr. Ward.
(9) Includes 6,142 shares owned and 87,000 shares issuable upon exercise of
options held by Mr. Reichow.
(10) Includes 1,731 shares owned and 30,000 shares issuable upon exercise of
options held by Mr. Richert.
(11) Includes 1,014 shares owned and 26,666 shares issuable upon exercise of
options held by Mr. Love.
(12) Includes shares beneficially owned by the directors and Named Officers
listed above. See footnotes (4)-(11).
As of the Record Date, Interneuron owned approximately 61.1% of the
outstanding shares of Intercardia Common Stock. Accordingly, Interneuron is in
a position to influence the election of Intercardia's directors and the outcome
of corporate actions requiring stockholder approval, including the approval of
the Merger.
Certain Transactions
Formation of Intercardia and Acquisitions of CPEC Stock
Intercardia was organized in March 1994 as a wholly-owned subsidiary of
Interneuron, which acquired 3,500,000 shares of Intercardia's Common Stock for
nominal consideration. In September 1994, Intercardia completed the acquisition
of 80.0% of CPEC for a purchase price equal to 170,000 shares of Common Stock
of Interneuron and cash payments and reimbursement of expenses aggregating
approximately $1,852,000. The value of the 170,000 shares of Common Stock of
Interneuron to Intercardia to consummate the CPEC acquisition was deemed to be
approximately $759,000, representing approximately 70% of the market price of
the Common Stock of Interneuron at such date. This amount and approximately
$608,000 of other expenses incurred by Interneuron in connection with the
acquisition of CPEC and the funding of the BEST Study were deemed to be an
advance by Interneuron to Intercardia. In December 1994, upon the initial
closing of Intercardia's Series A private placement, the aggregate amount of
advances to Intercardia of approximately $1,367,000 was converted by
Interneuron into an aggregate of 182,296 shares of Series A Preferred Stock of
Intercardia at a conversion price equal to $7.50 per share.
Intercardia is required to make two additional purchase price payments to
the former CPEC stockholders, each equal to a maximum of 75,000 shares of
Common Stock of Interneuron (subject to adjustment based on the market price of
Common Stock of Interneuron at the time of issuance) when an NDA with respect
to bucindolol has been accepted for filing by the FDA and upon receipt of an
approval letter from the FDA with respect to bucindolol. In the event these
milestones are achieved, Intercardia will incur future charges to operations
equal to the fair market value of the Common Stock of Interneuron advanced to
Intercardia to make such payments. The minimum and maximum charges incurred in
connection with each additional payment would be $750,000 and $1,875,000,
respectively. In exchange for Interneuron providing such payments of Common
Stock of Interneuron, Intercardia will pay Interneuron an amount equal to the
fair market value of such Common Stock of Interneuron, payable in cash or in
shares of Intercardia Common Stock, at Intercardia's option.
In January 1996, Interneuron purchased the CPEC stock held by the former
minority stockholders in exchange for 342,792 shares of Common Stock of
Interneuron. The aggregate number of shares of Common Stock of Interneuron was
calculated by dividing $8,750,000 by $25.525, the then market price of Common
Stock of Interneuron. Fractional shares were paid in cash. As a result of this
transaction, Interneuron recorded a non-cash charge to operations during the
fiscal year ended September 30, 1996 of approximately $6.1 million. Intercardia
has a right of first refusal, expiring in September 1999, with respect to
certain sales (registered or not) of CPEC stock by Interneuron.
Other Agreements Between Intercardia and Interneuron
In December 1995, Intercardia 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. Also 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 provides for Interneuron to include Intercardia and
its employees in certain programs administered by Interneuron, at cost, such as
insurance, and to provide research and development services to Intercardia upon
request, on a cost plus basis. Pursuant to the intercompany services agreement
between Intercardia and Interneuron, Interneuron has the right to purchase
additional shares of Intercardia Common Stock at fair market value, if
necessary to provide that Interneuron's equity ownership in Intercardia does
not fall below 51.0%. Intercardia has adopted a policy that all transactions
between Intercardia and its executive officers, directors and other affiliates
must be approved by a majority of the members of the Intercardia Board and by a
majority of the disinterested members of the Intercardia Board, and must be on
terms no less favorable to Intercardia
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than could be obtained from unaffiliated third parties. In addition, this
policy requires that any loans by Intercardia to its executive officers,
directors or other affiliates be for bona fide business purposes only.
Transcell Private Placement
Paramount Capital, Inc. ("Paramount") acted as the placement agent for a
private placement which included securities of Transcell, Progenitor and
Interneuron, the final closing of which was held in June 1995, and D.H. Blair &
Co, Inc. ("Blair") was a selected dealer. Paramount is owned by Lindsay
Rosenwald, M.D., the Chairman of the Board and a principal stockholder of
Interneuron. Blair was, at the time of the private placement, owned
substantially by family members (including members of Dr. Rosenwald's family)
of a principal stockholder of Interneuron. In connection with the private
placement, certain designees or affiliates of Paramount or Blair received
warrants to purchase an aggregate of 47,715 shares of Series B Preferred Stock
of Transcell. These warrants are exercisable until June 30, 2005 at an exercise
price of $6.875 per share of Series B Preferred Stock, and pursuant to a
cashless exercise provision may be exercised without the need to pay any cash.
As a result of the Merger, holders of these warrants will receive warrants to
purchase shares of Intercardia Common Stock at the Warrant Exchange Ratio and
will have certain registration rights relating to the underlying shares of
Intercardia Common Stock. Transcell also agreed to indemnify Paramount and
Blair against certain liabilities, including liabilities under the Securities
Act in connection with the private placement.
Other Transactions Between Transcell and Interneuron
During Fiscal 1997, Interneuron paid for certain expenses of Transcell
that were reimbursed by Transcell at cost. In addition, Interneuron guarantees
Transcell's office lease and equipment lease and has agreed to remain on such
guarantees until such time as Intercardia is able to remove Interneuron as
guarantor. See "Intercardia and Transcell Proposal No. 1 -- The Merger --
Background of the Merger" and " -- Interests of Certain Persons in the Merger".
After the Merger, Interneuron will continue to have substantial influence
in the election of directors of Intercardia and 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. Interneuron's
ownership of a substantial block of Intercardia's voting stock could 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 Intercardia. 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.
See "Risk Factors -- Control of Company By, and Potential Conflicts of Interest
With, Interneuron".
Section 16(a) Beneficial Ownership Reporting Compliance
To Intercardia's knowledge, there were no reports required under Section
16(a) of the Exchange Act, which were not timely filed during the fiscal year
ended September 30, 1997.
Description of Capital Stock
The authorized capital stock of Intercardia consists of 40,000,000 shares
of Common Stock, par value $.001 per share, and 3,000,000 shares of Preferred
Stock, par value $.01 per share.
Common Stock
As of the Record Date, there were 6,781,687 shares of Intercardia Common
Stock outstanding and held of record by 56 individuals or entities, 1,521,345
shares of Intercardia Common Stock issuable upon the exercise of outstanding
stock options and 49,033 shares of Intercardia Common Stock issuable upon the
exercise of warrants.
Holders of shares of Intercardia Common Stock are entitled to one vote per
share on all matters to be voted upon by the stockholders and are not entitled
to cumulate votes for the election of directors. Subject to preferences that
may be applicable to any outstanding shares of Preferred Stock, holders of
shares of Intercardia Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Intercardia
Board out of funds legally available therefor. See "Dividend Policy". In the
event of liquidation, dissolution or winding up of Intercardia, the holders of
shares of Intercardia Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights
applicable to any outstanding shares of Preferred Stock. Shares of Intercardia
Common Stock have no preemptive, conversion or other subscription rights, and
there are no redemption or sinking fund provisions applicable to Intercardia
Common Stock.
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Preferred Stock
Intercardia has the authority to issue up to 3,000,000 shares of Preferred
Stock. The Intercardia Board has the authority to issue preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions,
including the dividend, conversion, voting, redemption (including sinking fund
provisions), and other rights, liquidation preferences, and the number of
shares constituting any series and the designations of such series, without any
further vote or action by the stockholders of Intercardia. Because the terms of
the Preferred Stock may be fixed by the Intercardia Board without stockholder
action, the Preferred Stock could be issued quickly with terms calculated to
defeat a proposed take-over of Intercardia or to make the removal of management
of Intercardia more difficult. Under certain circumstances this could have the
effect of decreasing the market price of Intercardia Common Stock. Management
of Intercardia is not aware of any threatened transaction to obtain control of
Intercardia.
Warrants
As of the Record Date, there were eight warrants outstanding to purchase
an aggregate of 49,033 shares of Intercardia Common Stock at an exercise price
of $8.25 per share. All such warrants were issued in connection with
Intercardia's private placement of Preferred Stock. The warrants expire in
February 2001. Each warrant contains provisions for the adjustment of the
exercise price relating thereto under certain circumstances, including sales of
stock at less than exercise price, stock dividends, stock splits,
reorganizations, reclassifications or mergers.
Registration Rights
The holders of 49,033 shares of Intercardia Common Stock issuable upon
exercise of outstanding warrants are entitled to certain registration rights
pursuant to the terms of the warrants. During the five-year period commencing
February 1, 1997, the holders of at least 50% of such shares may require, on
one occasion, that Intercardia use its best efforts to register such shares for
public resale on Form S-3. Also during this period, Intercardia is required to
notify, and subject to certain marketing and other limitations, is required to
include such shares in any registration of Intercardia Common Stock Intercardia
undertakes either for its own account or for the account of any other
stockholders. All registration expenses are to be borne by Intercardia and all
selling expenses relating to the shares issuable upon exercise of the warrants
are to be borne by the holders of the shares being registered.
Holders of an aggregate of 349,000 shares of Transcell Series B Preferred
Stock (convertible into 161,793 shares of Intercardia Common Stock in the
Merger assuming an Intercardia Stock Price at Closing and at each Future
Installment of $20.29) are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Subject to certain
exceptions and limitations, the holders of more than 50% of such shares may
require, on one occasion during the four-year period commencing 12 months
following the Merger, that the Company use its best efforts to register such
shares, and the holders may also require the Company during such period (but
not more than twice in any calendar year) to register such shares on Form S-3.
These holders also are entitled to include their shares of Intercardia Common
Stock in a registered offering of securities of the Company for its own account
during such period subject to certain conditions and restrictions.
Holders of an aggregate of 34,901 shares of Transcell Series B Preferred
Stock issued or issuable upon exercise of warrants (convertible into warrants
to purchase an aggregate of 15,051 shares of Intercardia Common Stock in the
Merger assuming the Intercardia Stock Price at Closing is $20.29) are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. Subject to certain exceptions and limitations, the holders of
more than 50% of such shares may require, on one occasion during the four-year
period commencing 12 months following the Merger, that the Company use its best
efforts to register such shares, and the holders may also require the Company
during such period (but not more than twice in any calendar year) to register
such shares on Form S-3. These holders also are entitled to include their
shares of Intercardia Common Stock in a registered offering of securities of
the Company for its own account during such period subject to certain
conditions and restrictions.
Section 203 of the Delaware Corporation Law
Section 203 of the DGCL prevents an "interested stockholder" (defined in
Section 203 of the DGCL, generally, as a person owning 15% or more of a
corporation's outstanding voting stock), from engaging in a "business
combination" (as defined in Section 203 of the DGCL) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder, unless: (i) before such person became an interested
stockholder, the board of directors of the corporation approved the transaction
in which the interested stockholder became an interested stockholder or
approved the business combination; (ii) upon consummation of the transaction
that resulted in the interested stockholder's
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becoming an interested stockholder, the interested stockholder owns at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. The statute could prohibit or delay a merger,
takeover or other change in control of Intercardia and therefore could
discourage attempts to acquire Intercardia.
Limitation of Liability
Section 145 ("Section 145") of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors against
liabilities and expenses arising out of legal proceedings brought against them
by reason of their being or having been directors or officers. Section 145
generally provides that a director or officer of a corporation (i) shall be
indemnified by the corporation for all expenses of such legal proceedings when
he is successful on the merits, (ii) may be indemnified by the corporation for
the expenses, judgments, fines and amounts paid in settlement of such
proceedings (other than a derivative suit), even if he is not successful on the
merits, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful, and (iii) may be indemnified by the corporation for the
expenses of a derivative suit (a suit by a stockholder alleging a breach by a
director or officer of a duty owed to the corporation), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. No indemnification may be made under clause (iii) above, however,
if the director or officer is adjudged liable for negligence or misconduct in
the performance of his duties to the corporation, unless a corporation
determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of
disinterested directors, independent legal counsel, the stockholders or a court
of competent jurisdiction.
Article Seventh of Intercardia's Certificate of Incorporation provides in
substance that, to the fullest extent permitted by the DGCL as it now exists or
as amended, each director and officer shall be indemnified against reasonable
costs and expenses, including attorney's fees, and any liabilities which he may
incur in connection with any action to which he may be made a party by reason
of his being or having been a director or officer of the Registrant. The
indemnification provided by Intercardia's Certificate of Incorporation is not
deemed exclusive of or intended in any way to limit any other rights to which
any person seeking indemnification may be entitled.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
Article Ninth of the Company's Certificate of Incorporation provides for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The Company maintains liability insurance insuring the Company's officers
and directors against liabilities that they may incur in such capacities.
The Investors' Agreements provide for cross-indemnification of
stockholders of the Company whose shares with registration rights are included
in a registration under the Act, and of the Company, its officers and directors
for certain liabilities arising in connection with such registration.
Transfer Agent and Registrar
The transfer agent and registrar for the Intercardia Common Stock is
American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
As of immediately after the Merger, all shares of Intercardia Common Stock
outstanding will be freely tradable, except (i) the shares held by Interneuron
and directors and executive officers of Intercardia which will be eligible for
sale in the public market under Rule 144 or Rule 701 promulgated under the
Securities Act, and (ii) the shares issued in the Merger to Transcell
stockholders (other than Interneuron or directors or executive officers of
Intercardia) and the shares issuable under the Replacement Options and the
Replacement Warrants, all of which will be eligible for sale in the public
market pursuant to Rule 145. Pursuant to the terms of the Merger Agreement,
additional shares of Intercardia Common Stock will be issued to the former
Transcell stockholders as of 15 months after the Closing and 21 months after
the Closing. See "Intercardia and Transcell Proposal No. 1 -- The Merger -- The
Merger Agreement". These shares will become eligible for sale in the public
market in accordance with Rule 145. In addition, Intercardia has reserved
2,500,000 shares of Intercardia Common Stock for issuance pursuant to its
Option Plan, and as of the Record Date, Intercardia had 64,256 shares remaining
available for issuance pursuant to its ESPP, and 49,033 shares underlying
outstanding warrants (excluding the Replacement Warrants). The shares of
Intercardia Common Stock issuable under the Option Plan and the ESPP have been
registered and will be eligible for sale in the public market immediately upon
issuance. The shares of Intercardia Common Stock underlying the warrants will
become eligible for sale in the public market in accordance with Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including any person who may be deemed an
"affiliate" of the Company, who has beneficially owned restricted shares for at
least one year would be entitled to sell within any three-month period a number
of restricted shares that does not exceed the greater of 1% of the then
outstanding shares of Intercardia Common Stock or the average weekly trading
volume in the over-the-counter market during the four calendar weeks preceding
such sale, provided the seller files a Form 144 with respect to such sale, and
complies with certain requirements concerning availability of public
information and manner of sale. In addition, under Rule 144(k), a person who is
not an affiliate of the Company, and who has not been an affiliate of the
Company at any time during the 90 days preceding any sale, would be entitled to
sell such shares without regard to the limitations described above, provided
the restricted shares have been beneficially owned for at least two years.
In general, under Rule 145, a person who is not, at any time, an affiliate
of Intercardia, such a person may publicly sell such stock if the person: (1)
(a) sells during any three-month period no more than the number of shares
permitted under Rule 144(e) (which is generally the greater of (i) 1% of the
total number of shares of Intercardia Common Stock outstanding, or (ii) the
average weekly volume of trading of Intercardia Common Stock for the four
calendar weeks prior to the sale); (b) sells in a "brokers' transaction" (which
means, generally, that the broker can do no more than execute the order as
agent for the seller, can receive no more than the usual broker's commission,
cannot solicit orders to buy in connection with the transaction, and cannot
believe that the seller is an underwriter of the securities being sold); (c)
does not solicit orders to buy in connection with the transaction and does not
make any payment in connection with such sale to anyone other than the selling
broker; and (d) sells at a time when there is adequate current public
information about Intercardia (which will be satisfied so long as Intercardia's
Common Stock remains registered under the Exchange Act and Intercardia
continues to file the necessary reports under such act); or (2) (a) holds the
shares for at least one year and (b) sells at a time where there is adequate
public information about Intercardia (as in 1(d) above); or (3) holds the
shares for at least two years.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to February 1, 1996 (the date of
Intercardia's IPO) pursuant to written compensatory benefit plans (such as the
Option Plan and the ESPP) or written contracts relating to the compensation of
such persons. Rule 701 is also available for sales of shares acquired by such
persons pursuant to the exercise of options granted prior to February 1, 1996,
regardless of whether the option exercise occurs before or after such date.
Securities issued in reliance on Rule 701 are restricted shares and may be sold
by persons other than affiliates of the Company subject only to the manner of
sale provisions of Rule 144 and by affiliates under Rule 144 without compliance
with its one-year minimum holding period requirements.
Future sales of shares by existing stockholders under Rules 144, 145 or
701 or the issuance and subsequent sale of shares upon the exercise of
outstanding options, warrants or otherwise could have an adverse effect on the
market price of Intercardia Common Stock and could make it more difficult for
the Company to raise funds through equity offerings in the future. The Company
is unable to estimate the number of shares which may be sold under Rules 144,
145 or 701 since this will depend upon the market price for Intercardia Common
Stock, the individual circumstances of the sellers and other factors.
Holders of an aggregate of 49,033 shares of Intercardia Common Stock
issued or issuable upon exercise of warrants are entitled to certain rights
with respect to the registration of such shares under the Act. Subject to
certain exceptions and
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limitations, the holders of more than 50% of such shares may require, on one
occasion during the five-year period ending in February 2002, that the Company
use its best efforts to register such shares, and these holders may also
require the Company during such period (but not more than twice in any calendar
year) to register such shares on Form S-3. These holders also are entitled to
include their shares of Intercardia Common Stock in a registered offering of
securities by the Company for its own account during such period subject to
certain conditions and restrictions. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale".
Holders of an aggregate of 349,000 shares of Transcell Series B Preferred
Stock (exchangeable for 161,793 shares of Intercardia Common Stock in the
Merger assuming an Intercardia Stock Price at Closing and at each Future
Installment of $20.29) are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Subject to certain
exceptions and limitations, the holders of more than 50% of such shares may
require, on one occasion during the four-year period commencing 12 months
following the Merger, that the Company use its best efforts to register such
shares, and the holders may also require the Company during such period (but
not more than twice in any calendar year) to register such shares on Form S-3.
These holders also are entitled to include their shares of Intercardia Common
Stock in a registered offering of securities of the Company for its own account
during such period subject to certain conditions and restrictions.
Holders of an aggregate of 34,901 shares of Transcell Series B Preferred
Stock issued or issuable upon exercise of warrants (exchangeable for
Replacement Warrants to purchase an aggregate of 15,051 shares of Intercardia
Common Stock in the Merger assuming the Intercardia Stock Price at Closing is
$20.29) are entitled to certain rights with respect to the registration of such
shares under the Securities Act. Subject to certain exceptions and limitations,
the holders of more than 50% of such shares may require, on one occasion during
the four-year period commencing 12 months following the Merger, that the
Company use its best efforts to register such shares, and the holders may also
require the Company during such period (but not more than twice in any calendar
year) to register such shares on Form S-3. These holders also are entitled to
include their shares of Intercardia Common Stock in a registered offering of
securities of the Company for its own account during such period subject to
certain conditions and restrictions. See "Description of Capital Stock --
Registration Rights".
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CERTAIN INFORMATION REGARDING TRANSCELL
Business
Transcell was founded in 1991 and established as a subsidiary of
Interneuron. Transcell was initially established to develop glycosteroid drug
delivery technology discovered at Princeton in the laboratories of Daniel
Kahne, Ph.D. and Suzanne Walker-Kahne, Ph.D. Subsequently, the second of
Transcell's core proprietary technologies, consisting of a method to construct
oligosaccharides and glycoconjugates on solid phase supports, was licensed from
Princeton. Transcell believes that combinatorial library products generated
using the solid phase synthesis technology have potential as therapeutics.
Since 1995, Transcell has focused its efforts on developing a platform
capability in carbohydrate-based combinatorial technology and expanding the
drug discovery potential of oligosaccharides and glycoconjugates by generating
libraries that can be screened for therapeutic activity.
Drug Discovery
Screening of large numbers of compounds to find those that bind tightly to
their intended target has historically been the most successful method for
identifying potential drugs throughout the pharmaceutical industry. The advent
of robot-assisted, high throughput biological screening methods has made
possible the evaluation of hundreds of thousands of compounds each year,
outpacing the ability to generate compounds for screening. Therefore, new
compound availability has become the limiting step in many drug discovery
programs.
Over the past few years combinatorial chemistry has emerged to meet the
needs of high throughput screening and has become an integral part of the
modern drug discovery process. Combinatorial chemistry is a set of technologies
that rapidly generates large "libraries" of individual compounds by
simultaneously performing common steps in the synthesis of multiple compounds.
The resulting libraries contain thousands of compounds to be screened for
biological activity in drug discovery programs. Relative to the previous
approach where medicinal chemists identified the structure activity
relationship of a screening hit one compound at a time, combinatorial
chemistry, in conjunction with high throughput screening, has reduced the time
needed to identify and optimize a compound for clinical development.
Transcell's Carbohydrate Combinatorial Chemistry
The success of combinatorial chemistry in creating libraries for use in
drug discovery resulted from the development of engineered solid and solution
phase chemistries for the rapid generation of large numbers of peptide,
oligonucleotide and small heterocyclic compounds. However, despite these
developments and their associated successes, combinatorial chemistry has been
able to explore only portions of the vast realm of molecular diversity. An area
of significant importance which expands the dimensions of molecular diversity
available for drug discovery is the area of carbohydrates. Although
carbohydrates play fundamental roles in many biological processes and are found
as structural units in many drugs, combinatorial approaches to broadly explore
carbohydrate-based molecular diversity for identifying novel therapeutics have
not been well investigated. Transcell believes that carbohydrates provide
significant potential in discovering novel small molecule therapeutics.
Transcell's platform technology for the generation of carbohydrate-based
libraries includes solid phase chemistry, robotics systems for library
generation, informatic technologies for data storage and analysis and
analytical technologies for solid phase chemistry and library analysis. Of
particular importance, Transcell has a proprietary patent position in the area
of solid phase synthesis of carbohydrate-based systems. This patent position
includes novel glycosylation technology developed at Princeton in the
laboratories of Professor Daniel Kahne. In addition, Transcell has developed
many solid phase chemistries for modifying carbohydrate systems along with
proprietary carbohydrate building blocks and carbohydrate-based molecular
scaffold systems.
Transcell is exploiting its technology position in the area of
anti-infective drug discovery. Transcell's antibacterial discovery strategy is
directed at the development of inhibitors of bacterial cell wall biosynthesis.
Both gram-positive and gram-negative bacteria are surrounded by cell walls, and
it is known that inhibition of cell wall biosynthesis results in cell death,
thus providing a logical target for the development of antibacterial agents. To
identify novel and clinically relevant antibacterial agents, Transcell is
constructing libraries around known carbohydrate containing antibiotics. The
generated libraries are then screened at Transcell using several
robotics-assisted high throughput enzyme and whole cell assays.
To explore carbohydrate molecular diversity for broad screening
applications, Transcell has developed carbohydrate-based universal
pharmacophore mapping libraries. These libraries use carbohydrate scaffold
systems as a platform for combinatorially displaying chemical substituents in
3-dimensional space. This program is designed to enable the identification of
structurally novel molecules for development against a wide range of clinically
relevant biological targets.
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Patent Status
Three patents have issued related to the methods useful for constructing
carbohydrate libraries. A patent has issued covering a method of forming
multiple glycosidic linkages in a single step. A second patent has issued
covering the formation of glycosidic linkages on the solid phase. A third
patent has issued covering certain intermediates useful in the construction of
libraries. Additional U.S. patent applications have been filed, along with
foreign counterparts.
Five patents have been issued for technology pertaining to transporting
compounds across biological membranes. Ten additional U.S. patent applications
have been filed, along with foreign counterparts relating to this technology.
Carbohydrates as Pharmaceuticals
Carbohydrates play many important roles in biological processing including
involvement in the processes of cellular trafficking, cellular differentiation,
cell-cell adhesion, hormone-cell recognition and viral-host cell and
bacterial-host cell attachment. Consequently, their involvement is implicated
in many diseases, such as microbial infections, inflammatory disorders,
cardiovascular diseases and cancer. Saccharides (simple carbohydrates) have
long been known to be important constituents of medicinally important agents
such as the antitumor antibiotics, antibacterial agents, cardiac glycosides,
and gangliosides. For example, the oligosaccaride moieties of the antitumor
antibiotics ciclamycin and calicheamicin are important in the DNA recognition
process critical for the activity of the compounds.
Access to the molecular diversity of carbohydrates would be expected to be
valuable for drug discovery in the areas of biologically significant
oligosaccharides and analogs, glycoconjugates and analogs and
neoglycoconjugates.
Strategy
Transcell's strategy is to enter into collaborations with larger
pharmaceutical companies to generate libraries of compounds in specific
therapeutic areas and for specific biological leads. The collaborations will
grant the pharmaceutical partner the right to develop and commercialize
resulting lead compounds. This strategy is designed to provide milestone
payments and generate royalties as lead compounds are identified and developed
as drugs. Transcell also intends to identify its own lead compounds from
internally generated libraries in internal drug discovery screening programs.
Merck Agreement
In July 1997, Transcell and Interneuron entered into the Merck Agreement
to discover and commercialize certain novel antibacterial agents. Merck has an
option to extend the field of the collaboration and license to include all
antibacterial pharmaceutical products. Transcell will utilize its combinatorial
technologies to prepare libraries of carbohydrate derivative analogues of
antibacterial compounds of two distinct structural classes for biological
evaluation. Merck has an option to license any products arising out of the two
research programs.
Merck made payments totaling $2,500,000 to Transcell upon execution of the
Merck Agreement, one-third of which was paid to Interneuron relating in part to
the technology Interneuron licensed to Merck. Under the Merck Agreement, Merck
agreed to provide research support for the first two years of the agreement and
to make additional payments based upon the achievement of defined clinical
development and regulatory milestones for each program. Although there can be
no assurance, Transcell expects to achieve one early stage milestone under one
of the research programs within the next 12 months. Any such revenues are not
expected to cover costs of operations. In addition, Merck will pay royalties
based on net sales of any products that may be developed resulting from the
collaboration. Certain of the rights licensed to Merck are based on exclusive
licenses or rights held by Transcell and Interneuron from Princeton, which has
received and will be entitled to varying payments based on amounts received
from Merck. Interneuron agreed to be a party to the Merck Agreement because
rights relating to one class of the antibacterial agents subject to the Merck
Agreement were held by Interneuron pursuant to a sponsored research agreement
between Interneuron and Princeton. Interneuron was a party to the sponsored
research agreement with Princeton because, due to conflict of interest policies
implemented at Princeton relating to Dr. Kahne's equity ownership in Transcell,
Transcell was unable to sponsor further research at Princeton.
Princeton Licenses
Transcell's oligosaccharide technology is based primarily upon
technologies licensed from Princeton in October 1993 based on research
conducted by Transcell's scientific founders, Daniel Kahne, Ph.D. and Suzanne
Walker-Kahne, Ph.D. The license covers, among other things, a patented method
for synthesizing novel oligosaccharides efficiently and rapidly and provides
for royalties to Princeton based on net sales. In addition, effective June 30,
1997, Interneuron and Princeton entered into an agreement to license inventions
derived under the Sponsored Research Agreements between Interneuron and
Princeton relating to technologies sublicensed to Merck. Interneuron and
Princeton are currently finalizing a license agreement under
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this agreement to license. The license is expected to provide for license fees,
milestone payments and royalties on net sales payable to Princeton. This
agreement will be assigned by Interneuron to Intercardia pursuant to the
Technology/Guarantee Agreement.
Employees
As of the Record Data, there were 31 employees at Transcell, of whom 26
were involved directly in scientific research and development activities. None
of Transcell's employees is represented by a labor union. Transcell considers
its employee relations to be good. Transcell is highly dependent on the
principal members of its management and scientific staff as well as
consultants. The loss of certain key employees could have a material adverse
effect on Transcell upon its ability to attract and retain highly skilled
scientific and managerial personnel. Transcell faces competition for such
personnel from other companies, research and academic institutions, government
entities and other organizations. There can be no assurance that Transcell will
be successful in hiring or retaining the personnel it requires.
Consultants
On June 30, 1997, Transcell entered into consulting agreements, effective
as of March 11, 1996, with each of Daniel Kahne, Ph.D. and Suzanne
Walker-Kahne, Ph.D. for terms expiring December 31, 1999 (the "Consulting
Agreements"). The Consulting Agreements provide for annual consulting fees of
$100,000 and $70,000 to Dr. Kahne and Dr. Walker-Kahne, respectively. Dr.
Kahne's consulting fee increased to $150,000 per annum as a result of the
execution of the Merck Agreement. Under the Consulting Agreements, Drs. Kahne
and Walker-Kahne received options to purchase 350,000 and 50,000 shares,
respectively, of Transcell Class A Common Stock at an exercise price of $0.90
per share. The Consulting Agreements will be assumed by Intercardia in
connection with the Merger. Interneuron guaranteed the performance of
Transcell's obligations under the Consulting Agreements which guarantee will
terminate, in accordance with its terms, upon the closing of the Merger.
In connection with a previous consulting agreement, Dr. Kahne was issued
an aggregate of 480,797 shares of Transcell Class A Common Stock. In addition,
in May 1996 Dr. Walker-Kahne received an option to purchase 50,000 shares of
Transcell Class A Common Stock at an exercise price of $0.90 per share. In
February 1998, Transcell granted to each of Dr. Kahne and Dr. Walker-Kahne
options to purchase 765,715 shares of Transcell Class A Common Stock,
exercisable at $0.35 per share. Dr. Kahne and Dr. Walker-Kahne have advised
that in accordance with Princeton policy each of them may be entitled to
receive from Princeton a percentage of royalties and other payments received by
Princeton in connection with Princeton's licenses of technologies of which they
are an inventor.
Properties
Transcell currently leases approximately 32,000 square feet of laboratory
and office space in Cranbury, New Jersey, pursuant to a lease expiring in June,
2007 providing for annual rental of approximately $1,000,000. Interneuron
guaranteed performance of Transcell's obligations under this lease. Transcell
believes that these leased facilities are adequate to meet the Transcell's
current needs and it has an option to lease adjacent space to meet future
needs.
Transcell Stock Option Plan/Options
The 1992 Plan covers 3,300,000 shares of Transcell Class A Common Stock
and expires in December 2002.
As of the Record Date, there were 2,963,377 options outstanding under the
1992 Plan, exercisable at a weighted average exercise price of $0.54 per share.
In accordance with the terms of the 1992 Plan, options to purchase an aggregate
of 439,623 shares of Transcell Class A Common Stock which were not exercisable
as of the Record Date will become immediately exercisable in connection with
the Merger. Of these options, 318,373 are held by directors of Transcell.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of the results of operations and
financial condition of Transcell should be read in conjunction with Transcell's
Financial Statements and Notes thereto appearing elsewhere herein.
Overview
Transcell is a development stage company incorporated in October 1991.
Transcell has devoted all of its activities since inception to research and
development, has not received any revenues from operations other than license
fees and research funding under a corporate collaboration agreement and has
generated substantial losses from operations. Payments from collaborators and
license fees, if any, are expected to be Transcell's only sources of revenue
for the foreseeable future. Transcell
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has only one corporate collaboration agreement, the Merck Agreement, and
substantially all potential future payments under the Merck Agreement are
contingent upon the achievement of milestones. Although Transcell believes it
may achieve an early stage milestone under the Merck Agreement within the next
12 months, there can be no assurance this will be the case. Accordingly,
payments under the Merck Agreement or other collaboration agreements, if any,
will be subject to significant fluctuation in both timing and amount and
Transcell's results of operations for any period may not be comparable to the
results of operations for any other period. As of December 31, 1997, Transcell
had a total stockholders' deficit of approximately $14,848,000, and an
accumulated deficit of approximately $26,893,000.
Significant discovery, research and development efforts will be required
prior to the time any of Transcell's proprietary technologies may lead to
product candidates or result in products that may be brought to the market, if
at all. Products, if any, resulting from Transcell's research and development
programs are not expected to be commercially available for a number of years,
if at all, even if any are successfully developed and proven safe and
effective. Significant additional research and development efforts and
extensive preclinical studies and clinical trials will be required prior to
submission of any regulatory application for commercial use.
Liquidity and Capital Resources
Since inception, Interneuron has funded substantially all of Transcell's
operations, primarily through advances made by Interneuron to Transcell as
described below, and Transcell has been dependent upon Interneuron to continue
to do so. Interneuron has agreed to continue to fund Transcell's operations at
specified levels through consummation of the Merger. However, Interneuron would
be under no obligation to continue to provide any funding to Transcell if the
Merger Agreement was terminated.
In December 1994, upon the initial closing of the private placement
referred to below, the aggregate amount then outstanding of Interneuron's
advances to Transcell of $9,127,428, including accrued interest, was converted
by Interneuron into an aggregate of 1,460,388 shares of Series A Preferred
Stock of Transcell at a conversion price of $6.25 per share, the per share
private placement purchase price.
Between December 1994 and July 1995, Transcell issued and sold an
aggregate of 349,000 shares of Series B Preferred Stock in a private placement.
The private placement was a sale of units, each unit consisting of shares of
Series B Preferred Stock of Transcell, shares of preferred stock of Progenitor,
a put protection right from Interneuron and warrants to purchase shares of
Common Stock of Interneuron. Of the approximately $4.4 million gross proceeds
of the private placement, Transcell received approximately $1.5 million, net of
placement costs, and Interneuron received approximately $833,000 as its
consideration for the issuance of warrants to purchase Common Stock of
Interneuron and the put protection rights. Of this amount, Interneuron loaned
approximately $417,000 to Transcell in exchange for a convertible debenture
dated March 31, 1995, bearing interest at 1% over the prime rate. The
outstanding indebtedness evidenced by this debenture, together with accrued
interest thereon, was approximately $525,000 as of December 31, 1997.
Since August 1995 Interneuron has continued to provide advances to
Transcell pursuant to a support letter entered into in November 1995. These
advances are evidenced by a promissory note dated March 31, 1996, payable on
the earlier of five years from the date of the note or the closing of a public
offering by Transcell. The outstanding indebtedness evidenced by of this note,
together with accrued interest thereon was approximately $13,772,000 as of
December 31, 1997. If Interneuron demanded payment of the debenture and the
promissory note, Transcell could be forced to cease operations. However, in the
Merger Agreement, Interneuron has agreed to contribute to Transcell's capital
simultaneously with closing of the Merger the then outstanding indebtedness,
including all accrued interest, evidenced by the debenture and the note and to
cancel any rights to receive warrants to purchase Transcell Capital Stock
issuable to Interneuron in connection with advances Interneuron made to
Transcell pursuant to the Support Letter.
In April 1997, the Transcell Board approved a proposal by Interneuron to
restructure its investment in Transcell in order to position Transcell more
favorably for a future public offering, merger or other corporate financing
transaction. As part of this restructuring, the Transcell Charter was amended
to eliminate the right to minimum return adjustments to the conversion ratio of
the Series A Preferred Stock of Transcell held by Interneuron.
Interneuron pays for certain expenses of Transcell that are included in
the note amount due to Interneuron. In addition, Interneuron guarantees
Transcell's office lease arrangements and equipment leases and in connection
with the Merger, will enter into the Technology/Guarantee Agreement pursuant to
which Interneuron will agree to remain on such guarantees under certain
conditions.
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Net cash used by operating activities of approximately $4,775,000 in
Fiscal 1997 was funded primarily through approximately $6,253,000 in net
borrowings from Interneuron, which was also used to fund capital expenditures
of approximately $2,104,000, net of approximately $1,341,000 of proceeds from
sale and leasebacks of fixed assets, and payments on capital lease obligations.
Net cash used by operating and investing activities of $23,988,000 from October
21, 1991 (date of inception) to December 31, 1997 was funded primarily through
$21,262,000 in net borrowings from Interneuron, $2,406,000 of proceeds from
sale/leasebacks of equipment and $1,526,000 of proceeds from the issuance of
preferred stock.
Included in Transcell's total liabilities of approximately $18,705,000 at
December 31, 1997 is approximately $14,296,000 due to Interneuron, of which
approximately $13,772,000 is due under a promissory note and approximately
$525,000 is due pursuant to a convertible debenture.
In July 1997, Transcell received $2,500,000 from Merck upon execution of
the Merck Agreement, which also provided for Merck to make payments of $750,000
per year for two years' research support and additional payments in the event
development and regulatory milestones are achieved. Transcell believes it may
achieve one of the early milestones over the next 12 months, although there is
no assurance this will be the case. A portion of the upfront payments were paid
by Transcell to Interneuron under an intercompany agreement between Transcell
and Interneuron, reflecting the rights licensed by Interneuron to Merck based
on rights held by Interneuron from Princeton.
Deferred revenue of $334,500 at December 31, 1997 relates to the option
payment received from Merck pursuant to the Merck Agreement and is being
amortized over the term of the option which commenced in July 1997 and ends in
June 1998.
Transcell will require substantial additional funds to continue research
and development, conduct preclinical studies and clinical trials, conduct
activities relating to commercialization of rights it has retained in
collaborative or license agreements, if any, and expand administrative
capabilities. Transcell's future funding requirements will depend on many
factors, including any expansion or acceleration of Transcell's research and
development programs; the results of research and development, preclinical
studies and clinical trials conducted by Transcell or its collaborative
partners or licensees, if any; the acquisition and licensing of products and
technologies or businesses, if any; Transcell's ability to establish and
maintain corporate relationships and academic collaborations; Transcell's
ability to manage growth; competing technological and market developments; the
time and costs involved in filing, prosecuting, defending and enforcing patent
and intellectual property claims; the receipt of licensing or milestone fees
from any current or future collaborative and licensing arrangements, if
established; the timing of regulatory approvals, if any; and other factors. To
the extent undertaken by Transcell, the time and costs involved in conducting
preclinical studies and clinical trials, seeking regulatory approvals, and
scaling-up manufacturing and commercialization activities also would increase
Transcell's funding requirements.
Pursuant to the Merger Agreement, Interneuron has committed to continue
funding Transcell operations at specified levels until the closing of the
proposed Merger. There is no assurance the proposed Merger will occur or that
Interneuron will continue funding Transcell's operations if the proposed Merger
does not occur. In the event the Merger is consummated, Intercardia would
assume funding of Transcell's operations and research and product development.
Transcell expects negative cash flow from operations to continue for the
foreseeable future. If the proposed Merger by Intercardia is not consummated,
Transcell may attempt to seek funding through public or private equity or debt
financing and collaborative arrangements. Transcell has not been able to obtain
any significant financing from these sources in the past and there can be no
assurance that such financing will be available, or that, if available, will be
on terms acceptable to Transcell. If additional funds are obtained through
collaborative or license arrangements, such arrangements may require Transcell
to relinquish rights to certain of its technologies or potential products at an
earlier stage of development. If additional funds are obtained through equity
or convertible debt, dilution to existing stockholders will result. If
additional outside funding or financing is not available or Interneuron
discontinues funding of Transcell operations, Transcell may be required to
cease operations. The auditor's report on the financial statements of Transcell
for the fiscal year ended September 30, 1997 contains a qualification relating
to Transcell's ability to continue as a going concern.
Results of Operations
Three Months Ended December 31, 1997 Compared to Three Months Ended
December 31, 1996
Contract revenue of approximately $317,000 in the three month period ended
December 31, 1997 reflects technology option fees and research support received
pursuant to the Merck Agreement. Transcell had no contract and license fee
revenue in the three month period ended December 31, 1996.
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R&D expenses increased approximately $417,000, or 45%, to approximately
$1,341,000 in the three month period ended December 31, 1997 from $924,000 in
the three month period ended December 31, 1996. This increase is primarily due
to increased lease and utility costs and amortization of leasehold improvements
associated with Transcell's move into a new and expanded facility and increased
personnel and related laboratory operations costs due to an increase in R&D
employees to enhance Transcell's efforts on its carbohydrate-based technology.
G&A expenses decreased approximately $106,000, or 21%, to approximately
$396,000 in the three month period ended December 31, 1997 from approximately
$502,000 in the three month period ended December 31, 1996. This decrease is
primarily due to legal and consulting fees related to a potential sale of
Transcell in the three month period ended December 31, 1996 which were
partially offset by severance and other increased personnel costs incurred in
the three month period ended December 31, 1997.
Interest expense due to Interneuron increased approximately $87,000, or
39%, to approximately $311,000 in the three month period ended December 31,
1997 from approximately $224,000 in the three month period ended December 31,
1996 primarily due to increased borrowings from Interneuron used to fund
operations.
Other interest expense increased approximately $31,000, or 194%, to
approximately $47,000 in the three month period ended December 31, 1997 from
approximately $16,000 in the three month period ended December 31, 1996
primarily due to increased property and equipment acquired under capital lease
and note arrangements.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996
Contract revenue increased approximately $978,000 to approximately
$1,317,000 in Fiscal 1997 from approximately $339,000 in Fiscal 1996. Fiscal
1997 contract revenue is primarily attributable to commitment and technology
option fees and research support pursuant to the Merck Agreement. See Note 7 of
the Notes to Transcell's Financial Statements. Fiscal 1996 revenue included
payments received pursuant to a Small Business Innovative Research ("SBIR")
grant supporting one of Transcell's programs and several technology evaluation
agreements. Transcell may continue to experience significant fluctuations in
revenues from the timing of license fees and contract and milestone payments.
R&D expenses increased approximately $2,751,000, or 93%, to approximately
$5,709,000 in Fiscal 1997 from approximately $2,958,000 in Fiscal 1996. The
increase was the result of enhanced research efforts relating to Transcell's
carbohydrate chemistry technology and included increased payroll, benefit and
hiring costs from staffing increases and increased laboratory-related costs,
increased consultant-related expenses, license fees to Princeton and increased
facilities costs relating to Transcell's new and expanded facilities.
G&A expenses increased by approximately $547,000, or 36%, to approximately
$2,080,000 in Fiscal 1997 from $1,533,000 in Fiscal 1996. This increase is
primarily due to legal and consulting fees related to a potential sale of
Transcell which was not consummated and the execution of the Merck Agreement in
Fiscal 1997 and increased facilities costs relating to Transcell's new and
expanded facilities which are allocated between R&D and G&A expenses. A
restructuring charge incurred in Fiscal 1996 relating to management changes was
largely offset in Fiscal 1997 by management additions and other severance-
related expenses.
Interest expense related to the debt to Interneuron increased $617,000, or
115%, to approximately $1,152,000 in Fiscal 1997 from approximately $535,000 in
Fiscal 1996. This increase was attributable to increased borrowings under the
Promissory Note to Interneuron as the primary source of funding for Transcell's
operations. Included in interest expense -- Interneuron in Fiscal 1997 and
Fiscal 1996 are interest accretion charges relating to a warrant issuable to
Interneuron in connection with advances made by Interneuron to Transcell
pursuant to a Support Letter. The increase in interest expense -- other was due
to increased capital lease obligations used to fund property and equipment
acquisitions.
Primarily as a result of increased R&D, G&A and interest expenses, the net
loss increased to approximately $7,724,000 in Fiscal 1997 from approximately
$4,742,000 in Fiscal 1996.
Transcell from time to time explores various technology, product or
company acquisitions and/or business combinations or financing opportunities
which may involve the issuance of shares of Transcell Capital Stock or other
securities and/or financial commitments for licensing fees and/or to fund
product development, either of which may adversely affect Transcell's financial
condition or results of operations.
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Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended September
30, 1995
Contract revenue of approximately $339,000 in Fiscal 1996 was essentially
unchanged from contract revenue of approximately $304,000 in Fiscal 1995.
Contract revenue consists primarily of product evaluation agreements and Fiscal
1996 also included revenue from an SBIR grant supporting one of Transcell's
novel anti-sense DNA conjugate programs.
R&D expenses decreased slightly to approximately $2,958,000 in Fiscal 1996
from approximately $3,123,000 in Fiscal 1995. Increased payroll, benefit and
recruiting costs and related increased laboratory costs pertaining to late
Fiscal 1996 staffing additions for the purpose of enhancing the development of
Transcell's carbohydrate chemistry technology was offset by decreased outside
service expenses relating to process development activity.
Total G&A expenses increased slightly to approximately $1,533,000 in
Fiscal 1996 from approximately $1,481,000 in Fiscal 1995. A restructuring
charge in Fiscal 1996 relating to management and personnel changes was
essentially offset by decreased payroll and related costs primarily resulting
from such management changes and Fiscal 1995 charges relating to anti-dilution
provisions of certain Transcell stock held by an officer of Transcell.
Interest expense due to Interneuron increased approximately $309,000, or
137%, to approximately $535,000 in Fiscal 1996 from approximately $226,000 in
Fiscal 1995. This increase was attributable to increased borrowings under the
Promissory Note to Interneuron as the primary source of funding for Transcell's
operations and interest accretion charges relating to a warrant issued to
Interneuron in connection with advances made to Transcell pursuant to the
Support Letter.
Primarily as a result of increased interest expense by Interneuron,
Transcell's net loss increased to approximately $4,742,000 in Fiscal 1996 from
approximately $4,568,000 in Fiscal 1995.
Principal Stockholders
The following table sets forth certain information regarding the
beneficial ownership of shares of Transcell Capital Stock as of the Record Date
by (i) each person known by Transcell to own beneficially more than 5% of the
outstanding shares of Transcell Class A or Class B Common Stock and Transcell
Preferred Stock, (ii) each director of Transcell, and (iii) all current
directors and executive officers of Transcell as a group. Share ownership in
the case of Common Stock includes (i) outstanding shares of Class A Common
Stock, (ii) outstanding shares of Class B Common Stock as converted to Class A
Common Stock, (iii) shares issuable upon conversion of Preferred Stock into
Class A Common Stock, and (iv) shares issuable upon exercise of options to
purchase Class A Common Stock that may be exercised within 60 days after the
Record Date for purposes of computing the percentage of Common Stock owned by
such person but not for purposes of computing the percentage owned by any other
person.
<TABLE>
<CAPTION>
Common Stock (2) Preferred Stock (2)
------------------------ ------------------------ Percentage (3)
Number Percent Number Percent Total Voting
Name (1) of Shares of Class of Shares of Class Power
- ----------------------------------------- ----------- ---------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Interneuron Pharmaceuticals, Inc. 4,690,764 82.7% 1,460,388 80.7% 77.9%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Glenn L. Cooper, M.D. (4) 4,750,764 82.9% 1,460,388 80.7% 78.2%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Daniel Kahne, Ph.D. (5) 645,797 14.8% -- -- 10.4%
148 Poe Road
Princeton, New York 08540
Clayton I. Duncan (6) 56,666 1.3% -- -- *
Theodore F. Brophy (6) 22,666 * -- -- *
Lloyd L. Derrickson (6) 22,666 * -- -- *
Wayne Pines (6) 22,666 * -- -- *
John R. Price (6) 22,666 * -- -- *
All directors and executive officers as 5,624,141 92.0% 1,460,388 80.7% 87.1%
a group (8 persons) (7)
</TABLE>
- ---------
* Less than one percent
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(1) Except as indicated in footnotes to this table, the persons named in this
table have sole voting and investment power with respect to all shares
indicated below.
(2) As of the Record Date, Transcell had outstanding (i) 3,925,603 shares of
Class A Common Stock and 199,488 shares of Class B Common Stock (all of
which is held by a former executive officer and director of Transcell and
is convertible into 279,696 shares of Class A Common Stock) and (ii)
1,460,388 shares of Series A Preferred Stock (convertible into 1,460,388
shares of Class A Common Stock) and 349,000 shares of Series B Preferred
Stock (convertible into 349,000 shares of Class A Common Stock). Percent
of Class for the Common Stock combines the Class A and Class B Common
Stock, on an as converted basis, and Percent of Class for the Preferred
Stock combines the Series A and Series B Preferred Stock, on an as
converted basis.
(3) Percentage voting power is calculated on an as converted basis, assuming
conversion of the Class B Common Stock, Series A Preferred Stock and
Series B Preferred Stock into Class A Common Stock at the conversion rates
in effect as of the Record Date.
(4) Includes 3,230,376 shares of Class A Common Stock and 1,460,388 shares of
Series A Preferred Stock held by Interneuron and 60,000 shares of Class A
Common Stock issuable upon exercise of options held by Dr. Cooper which
are exercisable within 60 days. Dr. Cooper is President, Chief Executive
Officer and a director of Interneuron. Dr. Cooper disclaims beneficial
ownership of the shares held by Interneuron.
(5) Includes 480,797 shares owned by Dr. Kahne, 100,000 shares issuable upon
exercise of options which are exercisable within 60 days held by Dr. Kahne
directly and 65,000 shares of Class A Common Stock issuable upon exercise
of options held by Suzanne Walker-Kahne, Ph.D., a consultant to Transcell
and the wife of Dr. Kahne, which are exercisable within 60 days. Excludes
1,015,715 and 800,715 shares of Class A Common Stock issuable upon
exercise of options held by Dr. Kahne and Dr. Walker-Kahne, respectively,
which are not exercisable within 60 days.
(6) Consists of shares of Class A Common Stock issuable upon exercise of
options which are exercisable within 60 days.
(7) Includes shares beneficially owned by the directors and officers listed
above. See footnotes (4) - (6).
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COMPARISON OF THE RIGHTS OF HOLDERS OF INTERCARDIA COMMON
STOCK AND TRANSCELL COMMON STOCK
If the Merger is consummated, holders of Transcell Capital Stock will
become stockholders of Intercardia, and the rights of such stockholders will be
governed by the Certificate of Incorporation and Bylaws of Intercardia in
addition to applicable Delaware law, including the DGCL. Although it is not
practical to compare each and every difference between the Transcell and
Intercardia charter documents, the following is a summary of certain of those
differences that may significantly affect the rights of holders of Transcell
Capital Stock. See also the matters discussed under the heading "Certain
Information Regarding Intercardia -- Description of Capital Stock."
In addition, upon completion of the Merger, the percentage ownership of
Intercardia by each former holder of Transcell Capital Stock (other than
Interneuron) will be substantially less than his, her or its current percentage
ownership of Transcell. Accordingly, former holders of Transcell Capital Stock
(other than Interneuron) will have a significantly smaller voting influence
over the affairs of Intercardia than they currently have over the affairs of
Transcell.
Preferred Stock of Transcell
As of the Effective Time, holders of Transcell Preferred Stock will become
entitled to receive shares of Intercardia Common Stock, as described above. At
that time, they will no longer be entitled to the rights and privileges
provided to holders of Transcell Preferred Stock under the Transcell Charter. A
brief summary of some of those rights and privileges is set forth below.
Dividends. Holders of Transcell Preferred Stock are entitled under the
Transcell Charter to dividends when, as and if declared by the Transcell Board
in its discretion; provided, however, that no dividends shall be declared or
paid on Transcell Common Stock unless the Transcell Board shall have declared
and set aside for payment a dividend on Transcell Preferred Stock.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of Transcell ("Liquidation Transaction"), the holders
of Transcell Preferred Stock have the option under the Transcell Charter to
either (i) convert their shares into Transcell Common Stock immediately prior
to the Liquidation Transaction, or (ii) be entitled to be paid out of the
assets of Transcell available for distribution to its stockholders, or out of
the proceeds thereof, prior and in preference to any distribution of any assets
of Transcell to the holders of Transcell Common Stock, an amount of cash equal
to $6.25 per share plus any accrued and unpaid dividends on such stock. After
the holders of Transcell Preferred Stock have received the full amount of their
liquidation preferences, the holders of Transcell Common Stock and Preferred
Stock are entitled to receive the remaining assets of Transcell available for
distribution pro rata on a per share basis. UNDER THE TRANSCELL CHARTER, THE
LIQUIDATION RIGHTS DESCRIBED IN THIS PARAGRAPH DO NOT APPLY WITH RESPECT TO THE
MERGER, AND INSTEAD IN THE MERGER EACH SERIES OF TRANSCELL PREFERRED STOCK
WOULD BE ENTITLED ONLY TO THE PORTION OF THE AGGREGATE PURCHASE PRICE PROVIDED
IN THE MERGER AGREEMENT.
Conversion. Each share of Transcell Preferred Stock is convertible under
the Transcell Charter into shares of Transcell Common Stock pursuant to
specified formulas that, for the Transcell Series B Stock, take into account
minimum return and/or anti-dilution adjustment provisions. Each share of
Transcell Preferred Stock is convertible into such number of shares of
Transcell Common Stock at the conversion price applicable to such series of
Transcell Preferred Stock at the time in effect for such shares (initially
$6.25 for both the Series A Preferred Stock and the Series B Preferred Stock of
Transcell). The exchange ratio for the Series B Preferred Stock gives effect to
the minimum return adjustments set forth in the Transcell Charter.
Voting. Holders of each series of Transcell Preferred Stock are entitled
to vote on all matters submitted to a vote of the holders of Transcell Common
Stock generally. Unless otherwise required by law, the holders of each series
of Transcell Preferred Stock vote together with the holders of Transcell Common
Stock as though part of that class and shall have the right to that number of
votes equal to the number of shares of Transcell Common Stock into which the
shares of Transcell Preferred Stock are convertible on the applicable record
date. So long as any shares of Transcell Preferred Stock are outstanding
Transcell is prohibited, without obtaining the approval of the holders of at
least a majority of the then outstanding shares of the applicable series of
Transcell Preferred Stock, voting separately as a class, from (i) changing the
rights, preferences or privileges of the shares of such series of Preferred
Stock so as to affect adversely the shares, or (ii) increasing the authorized
number of shares of Preferred Stock.
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Removal of Members of the Board of Directors
The Bylaws of Transcell provide that any member of the Transcell Board may
be removed with or without cause by a majority vote of the stockholders, or for
cause by a majority vote of the Transcell Board. Intercardia's Bylaws provide
that a director may be removed with or without cause by a majority vote of the
stockholders or by a majority vote of the Intercardia Board. The DGCL provides
that any director may be removed, with or without cause, by a majority vote of
stockholders, but does not address removal of directors by the Board. Delaware
case law has addressed removal of board members by vote of the Board of
Directors and appears to support the position that a mere Bylaw provision
granting such power to the Board of Directors would not likely be upheld.
Moreover, Delaware courts have found that granting the power to the board to
remove a member without cause may violate stockholders' rights. Nonetheless, if
the provision in the Intercardia Bylaws allowing removal of board members with
or without cause by a majority vote of the Board of Directors were applied and
upheld, the Intercardia Board would have more control over its own make-up than
does the Transcell Board.
Power to Call Special Meetings of the Board of Directors
Special meetings of the Transcell Board may be called by one or more
directors or by the President or Treasurer of Transcell. Intercardia's Bylaws,
on the other hand, provide that special meetings of the Intercardia Board may
be called by two or more directors or by the Chairman of the Board or the Chief
Executive Officer, or in the absence of a Chief Executive Officer, by the
President of the corporation.
Power to Call Special Stockholder Meetings
The Bylaws of Transcell provide that special meetings of the stockholders
may be called at any time by the President or by the Transcell Board.
Intercardia's Bylaws give the power to call special stockholder meetings to the
Intercardia Board, the Chairman of the Board or the Chief Executive Officer, or
in the absence of a Chief Executive Officer, to the President. In addition, the
Intercardia Board is required to call a special stockholder meeting when
requested in writing to do so by stockholders holding not less than 20% of the
outstanding stock of the corporation.
Power of Interested Parties to Contract with the Corporation
The Bylaws of Transcell provide that directors and officers of the
corporation may enter into contracts between the corporation and themselves or
between the corporation and any firm or corporation in which such director may
be interested, whether such individual thus derives personal or corporate
profits or benefits; provided, that the material facts of such interest are
disclosed to the Transcell Board or the stockholders who are entitled to vote
on the contract, or that the agreement is fair to the corporation as of the
time it is approved. The Bylaws of Intercardia do not address transactions
relating to officers, but do provide that no contract or other transaction
between Intercardia and any director or between Intercardia and any corporation
in which any director has an interest, will be affected and invalidated by the
fact that the director may have an interest. Although the Intercardia Bylaws do
not address required disclosure to the Intercardia Board or stockholders or of
fairness to the corporation, the DGCL provides that no contract or transaction
between the corporation and any director or officer or between the corporation
and any entity in which such director or officer has an interest shall be void
or voidable solely for that reason and requires the material facts to be
disclosed to the Board or stockholders entitled to approve the transaction or
the contract, or the transaction must be fair to the corporation as of the time
approved.
Ratification of Acts Which Are the Subject of a Stockholder Derivative Suit
The Intercardia Bylaws provide that any transaction which is questioned in
a stockholder's derivative suit on the grounds of lack of authority, defective
or irregular execution, adverse interest of a director, officer or stockholder,
nondisclosure, miscomputation, or the application of improper principles or
practices of accounting may be ratified before or after judgment by the
Intercardia Board, or by the stockholders if less than a quorum of the
Intercardia Board is qualified. If the transaction is so ratified, it will be
treated as having been originally duly authorized and the ratification will be
binding on the corporation and its stockholders and will constitute a bar to
any claim or execution of any judgment in respect of such transaction. The
Transcell Bylaws contain no comparable provision, nor does the DGCL.
Power to Amend Bylaws
The DGCL provides that the power to amend the Bylaws of a corporation is
held by the stockholders, but that the Certificate of Incorporation may confer
such power on the Board of Directors. Transcell's Bylaws give the Transcell
Board the power to adopt, amend or repeal the corporation's Bylaws; provided,
however, any amendment to provide for staggered
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terms of directors may only be by amendment to the Transcell Charter or in a
Bylaw adopted by stockholders. The Bylaws of Transcell provide that, although
the Transcell Board has the power to amend the Bylaws, it may not amend them in
a manner which changes stockholder voting requirements, changes any
preferential rights applicable to a class of stock with shares already
outstanding, alters the provisions on amending the Bylaws or permits the
Transcell Board to take any action which is otherwise required to be taken by
the stockholders. Both the Certificate of Incorporation and Bylaws of
Intercardia provide that the Intercardia Board has the power to make, alter,
amend or repeal the Bylaws of the corporation. There are no limitations
provided. Thus, the power to amend Intercardia's Bylaws is less restricted than
it is with Transcell's Bylaws. However, in either case, the stockholders retain
the right to amend the Bylaws, including those Bylaws adopted or amended by the
Board of Directors.
Indemnification
The DGCL permits indemnification of officers, directors, employees or
agents for costs involved in suits brought by third parties against such
persons, unless the party seeking indemnification did not act in good faith and
in a manner that he believed to be in or not opposed to the best interests of
the corporation. As to suits brought by or in the right of the corporation
(such as stockholder derivative suits), indemnification is permitted to a
lesser extent under the same conditions, unless the party seeking
indemnification is adjudged liable to the corporation. However, even in the
latter situation, the Court of Chancery may allow limited relief. The DGCL
provides for mandatory indemnification to the extent any officer, director,
employee or agent of the corporation is successful on the merits or otherwise.
The corporation is authorized to advance expenses to a party seeking
indemnification. In addition, the DGCL provides that the indemnification rights
permitted thereunder are not exclusive, but may be expanded through the Bylaws
or by vote of stockholders or disinterested directors.
The Bylaws of Transcell provide that the corporation may indemnify and may
advance expenses to directors and officers as provided in the Bylaws and to the
fullest extent provided by applicable law. As to employees or agent of the
corporation, the corporation may indemnify and advance expenses to such parties
to the extent authorized by the Transcell Board. The limitations on
indemnification are the same as those in the statute, except that Transcell's
Bylaws specifically state that the officer or director must not have derived
any improper personal benefit from the occurrence which is the subject of the
claim. To the extent a director or officer is successful, such person shall be
indemnified to the fullest extent provided by law. The Transcell Charter states
that the corporation may indemnify any and all persons whom it has the power to
indemnify under Delaware law, and that the indemnification provided for in the
certificate is not exclusive of indemnification rights in the corporation's
Bylaws, by vote of stockholders or directors or otherwise.
Both the Intercardia Certificate of Incorporation and Bylaws provide that
Intercardia shall indemnify officers and directors to the fullest extent
permitted by the laws of Delaware. Thus, the indemnification protections
afforded under Delaware law will apply to its fullest extent to the officers,
directors, employees and agents of Intercardia and will be mandatory, rather
than permissive.
INTERCARDIA
PROPOSAL NO. 2--ELECTION OF DIRECTORS
Intercardia's Bylaws provide that the number of directors constituting the
Board of Directors shall be no less than one nor greater then seven. The number
of directors currently is four. Therefore, that number of directors are to be
elected to serve for one year, until the election and qualification of their
successors, and it is intended that proxies, not limited to the contrary, will
be voted FOR all of the nominees named below. If any nominee is unable or
declines to serve as a director at the time of the Meeting, the individuals
named in the enclosed proxy may exercise their discretion to vote for any
substitute proposed by the Board of Directors. It is not anticipated that any
nominee listed below will be unable or will decline to serve as a director.
None of the nominees is related by blood, marriage or adoption to any other
nominee or any executive officer of Intercardia.
<TABLE>
<CAPTION>
Name of Nominee Age Director Since
- --------------------------- ----- ---------------
<S> <C> <C>
Clayton I. Duncan 48 1995
Glenn L. Cooper, M.D. 45 1994
Joseph J. Ruvane, Jr. 72 1995
David B. Sharrock 61 1995
</TABLE>
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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, a biopharmaceutical
company which was acquired by 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, serving as Executive Vice President
and a director from 1984 to 1987. Mr. Duncan was founder and Chairman of the
Board of 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, Aeolus, CPEC and
Renaissance. Mr. Duncan received an M.B.A. from the University of North
Carolina at Chapel Hill.
GLENN L. COOPER, M.D. has been Chairman of the Board of Directors of
Intercardia since March 1994. He was President and Chief Executive Officer of
Intercardia from March 1994 to January 1995. Dr. Cooper has been President,
Chief Executive Officer and a director of Interneuron since May 1993. Dr.
Cooper is the Chairman of the Board of Directors, and has been the acting
President and Chief Executive Officer, of Transcell since March 1996. He was
President and Chief Executive Officer of Progenitor, now a minority-owned
subsidiary of Interneuron, from September 1992 to June 1994. Dr. Cooper was
Executive Vice President and Chief Operating Officer of Sphinx from 1990 to
1992. He was associated with Lilly since 1985, most recently from 1987 to 1990
as Director, Clinical Research, Europe, of Lilly Research Center Limited, and
from 1986 to 1987 as International Medical Advisor, International Research
Coordination of Lilly Research Laboratories, and from 1985 to 1986 as Medical
Advisor, Regulatory Affairs, Chemotherapy Division at Lilly Research
Laboratories. Dr. Cooper is a director of each of Genta Incorporated, a
biotechnology company, Aeolus, Transcell, Progenitor and InterNutria, Inc., a
majority-owned subsidiary of Interneuron. Dr. Cooper received his M.D. from
Tufts University School of Medicine, performed his postdoctoral training in
Internal Medicine and Infectious Diseases at the New England Deaconess Hospital
and Massachusetts General Hospital and received his A.B. from Harvard College.
JOSEPH J. RUVANE, JR. has been director of Intercardia since May 1995. Mr.
Ruvane was a director of Sphinx from 1989 to 1994, serving as its Chairman of
the Board from 1990 to 1994. From 1988 to 1990, Mr. Ruvane served as Vice
Chairman of the Board of Directors of Glaxo Inc. ("Glaxo"), a multinational
pharmaceutical company. From 1981 to 1988 he served as President and Chief
Executive Officer of Glaxo. Mr. Ruvane also serves as a director of Connetics
Corporation, a biotechnology company, and Southern Research Institute, a
non-profit contract research organization.
DAVID B. SHARROCK has been a director of Intercardia since October 1995.
Mr. Sharrock was associated with Marion Merrell Dow Inc., a multinational
pharmaceutical company, and its predecessor companies for over 35 years until
his retirement in December 1993. Most recently, since December 1989, he served
as Executive Vice President, Chief Operating Officer and a director, and in
1988, he was named President and Chief Operating Officer of Merrell Dow
Pharmaceutical Inc. Mr. Sharrock is also a director of Interneuron, Progenitor,
Unitog Co. and Cincinnati Bell Inc.
The four nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted at the Intercardia
Meeting shall be elected as directors of Intercardia. Votes withheld from any
director will be counted for purposes of determining the presence or absence of
a quorum for the transaction of business, but have no other effect under
Delaware law. While there is no definitive statutory or case law authority in
Delaware as to the proper treatment of abstentions in the election of
directors, Intercardia believes that abstentions should be counted for purposes
of determining whether a quorum is present at the Intercardia Meeting. In the
absence of controlling precedent to the contrary, Intercardia intends to treat
abstentions with respect to the election of directors in this manner. However,
because directors are elected by a plurality vote, abstentions in the election
of directors have no effect once a quorum exists. In a 1988 case, Berlin v.
Emerald Partners, the Delaware Supreme Court held that broker non-votes may be
counted as present or represented for purposes of determining the presence or
absence of a quorum for the transaction of business. Accordingly, Intercardia
intends to treat broker non-votes with respect to the election of directors in
this manner.
The Intercardia Board has unanimously approved and recommends that
stockholders vote "FOR" the election of the nominees listed above.
INTERCARDIA
PROPOSAL NO. 3--APPROVAL OF
AMENDMENTS TO THE 1994 STOCK OPTION PLAN
Intercardia's Option Plan was adopted and approved by the Intercardia
Board and by the stockholders of Intercardia in October 1994. A total of
2,500,000 shares of Intercardia Common Stock have been reserved for issuance
under the Option Plan, 1,000,000 of which are subject to stockholder approval
at the Intercardia Meeting. As of the Record Date, options to
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purchase 22,166 shares had been exercised under the Option Plan, options for
1,521,345 shares were outstanding thereunder at a weighted average exercise
price of approximately $11.40 per share, and options for 956,489 shares were
available for grant (including the 1,000,000 shares subject to stockholder
approval at the Intercardia Meeting).
The Option Plan provides for the grant of "incentive stock options" within
the meaning of Section 422 of the Code, solely to employees, and nonstatutory
stock options to employees, officers and directors of, and consultants or
advisors to, Intercardia. As of the Record Date, approximately 22 employees,
officers and directors of Intercardia were eligible to receive grants under the
Option Plan. The Option Plan is administered by the Compensation Committee of
the Intercardia Board. Subject to the restrictions of the Option Plan, the
Compensation Committee determines who is granted options, the terms of options
granted, including exercise price, the number of shares subject to the option
and the option's exercisability. The current members of the Compensation
Committee are Dr. Cooper and Mr. Ruvane.
The exercise price of options granted under the Option Plan is determined
on the date of grant, and in the case of incentive stock options, must be at
least 100% of the fair market value per share at the time of grant. The
exercise price of any option granted to an optionee who owns stock possessing
more than 10% of the voting power of Intercardia's outstanding capital stock
must equal at least 110% of the fair market value of the common stock on the
date of grant. Payment of the exercise price may be made by delivery of cash or
a check to the order of Intercardia, or by any other means determined by the
Intercardia Board.
Options granted to employees under the Option Plan generally become
exercisable in increments, based on the optionee's continued employment with
Intercardia, over a period of up to seven years. The term of an incentive stock
option may not exceed 10 years. The form of option agreement generally provides
that options granted under the Option Plan, whether incentive stock options or
nonstatutory options, expire 10 years from the date of grant. Incentive stock
options granted pursuant to the Option Plan are not transferable by the
optionee, other than by will or the laws of descent and distribution, and are
exercisable during the optionee's lifetime only by the optionee. Nonstatutory
options granted under the Option Plan are transferable to the optionee's family
members. All outstanding options under the Option Plan become fully exercisable
for a period of 60 days following the occurrence of any of the following
events: (i) a tender offer or exchange offer (other than by Intercardia or any
employee benefit plan of Intercardia); (ii) the acquisition by any person or
group, as defined under Rule 13d-3 promulgated under the Exchange Act (other
than Intercardia or any employee benefit plan of Intercardia) of beneficial
ownership of stock possessing 30% or more of the voting power of Intercardia's
outstanding capital stock; (iii) the approval of an agreement providing for the
merger or consolidation of Intercardia with another corporation where the
stockholders of Intercardia, after the merger or consolidation, will own stock
possessing less than 80% of the voting power of the corporation issuing cash or
securities in the merger or consolidation; (iv) the approval of an agreement
providing for the sale or other disposition of all or substantially all of
Intercardia's assets; and (v) the date during any period of two consecutive
years when individuals who at the beginning of such period constitute the
Intercardia Board cease for any reason to constitute a majority thereof, unless
the election or nomination of each new director was approved by at least
two-thirds of the directors still in office who were directors at the beginning
of such period. In the event of a merger of Intercardia with or into another
corporation, Intercardia shall request the successor corporation to assume all
options outstanding under the Option Plan. If such successor corporation fails
or refuses to assume the options or to issue substantially equivalent options,
then the outstanding options under the Option Plan shall accelerate and become
fully exercisable.
The Option Plan provides for the grant of nonstatutory options to
non-employee directors of Intercardia pursuant to a non-discretionary,
automatic grant mechanism (the "Automatic Grant Program"). Each non-employee
director of Intercardia ("Eligible Director") will be granted a stock option to
purchase 5,000 shares of Intercardia Common Stock on the date each such person
first becomes an Eligible Director. Each Eligible Director shall thereafter be
granted automatically each year (except in the year his or her initial director
stock option is granted) an option to purchase 3,000 shares of Intercardia
Common Stock, as long as such director is a member of the Intercardia Board.
The exercise price of options granted under the Automatic Grant Program is the
fair market value of Intercardia's Common Stock on the date of grant. Such
options become exercisable ratably over 36 months commencing one month from the
date of grant and will expire the earlier of 10 years after the date of grant
or 90 days after termination of the director's service on the Intercardia
Board. See " -- Proposed Amendments".
The Intercardia Board may amend the Option Plan at any time or from time
to time or may terminate the Option Plan without the approval of the
stockholders, provided that stockholder approval is required for any amendment
to the Option Plan requiring stockholder approval under applicable law as in
effect at the time, and provided further that amendments with respect to
options granted to persons subject to Section 16 of the Exchange Act cannot be
made more frequently than once every six months. However, no action by the
Intercardia Board or stockholders may alter or impair any option previously
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granted under the Option Plan. The Intercardia Board may accelerate the
exercisability of any option or waive any condition or restriction pertaining
to such option at any time. The Option Plan will terminate in November 2004,
unless terminated sooner by the Intercardia Board.
Tax Consequences of Options
An optionee who is granted an incentive stock option will generally not
recognize taxable income either at the time the option is granted or upon its
exercise, although the exercise may subject the optionee to the alternative
minimum tax. Upon the sale or exchange of the shares more than two years after
grant of the option and one year after exercising the option, any gain or loss
will be treated as capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of
the fair market value of the shares at the date of the option exercise or the
sale price of the shares. A different rule for measuring ordinary income upon
such a premature disposition may apply if the optionee is also an officer,
director or holder of more than 10% of the outstanding Intercardia Common
Stock. Intercardia will be entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Any gain or loss recognized on such
a premature disposition of the shares in excess of the amount treated as
ordinary income will be characterized as long-term, mid-term or short-term
capital gain or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. Generally, an optionee will not recognize
any taxable income at the time he or she is granted a non-statutory option.
However, upon its exercise, the optionee will recognize taxable income
generally measured as the excess of the then fair market value of the shares
purchased over the purchase price. Any taxable income recognized in connection
with an option exercise by an optionee who is also an employee of Intercardia
will be subject to tax withholding by Intercardia. Intercardia will be entitled
to a tax deduction in the same amount as the ordinary income recognized by the
optionee with respect to shares acquired upon exercise of a nonstatutory
option. Upon resale of such shares by the optionee, any difference between the
sales price and the optionee's purchase price, to the extent not recognized as
taxable income as described above, will be treated as long-term, mid-term or
short-term capital gain or loss, depending on the holding period.
The foregoing is only a summary, based on the Code as currently in effect,
of the effect of federal income taxation upon the optionee and Intercardia with
respect to the grant and exercise of options under the Option Plan, does not
purport to be complete, and does not discuss the tax consequences of the
optionee's death or the income tax laws of any municipality, state or foreign
country in which an optionee may reside.
Proposed Amendments
In December 1997, the Intercardia Board adopted an amendment to the Option
Plan to increase the number of shares of Intercardia Common Stock reserved for
issuance thereunder from 1,500,000 shares to 2,500,000 shares (the "Share
Amount Amendment"). Without giving effect to the Share Amount Amendment, as of
the Record Date no shares remained available for the Replacement Options or for
future grant under the Option Plan, which would not allow Intercardia to meet
its anticipated needs with respect to the issuance of additional options to
employees and consultants of the Company.
The following table sets forth the number of shares underlying options
granted in February 1998 (43,511 shares of which are a part of the 1,000,000
shares subject to stockholder approval at the Intercardia Meeting) to each of
the Named Officers, all executive officers as a group, all non-employee
directors and all employees as a group (excluding executive officers). No other
benefits or amounts that will be received by or allocated to any such persons
are currently determinable, other than grants under the Automatic Grant
Program.
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<TABLE>
<CAPTION>
Name and Position Number of Shares
- --------------------------------------------------------------- ------------------
<S> <C>
Clayton I. Duncan,
President and Chief Executive Officer ........................ 43,422 (1)
David P. Ward, M.D.,
Senior Vice President, Research and Development .............. 20,000 (2)
Richard W. Reichow,
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary .................................... 20,000 (3)
John P. Richert,
Vice President, Market Development ........................... 10,000 (4)
W. Bennett Love,
Vice President, Corporate Planning/Communications ............ 10,000 (5)
All non-employee directors as a group (3 persons) ............. --
All executive officers as a group (5 persons) ................. 103,422
All employees as a group (excluding executive officers) ....... 54,000
</TABLE>
- ---------
(1) Ten-year option exercisable at $16.875 per share (the market price as of
the date of grant) and vesting in 36 equal monthly installments commencing
January 3, 2001, based upon continued consulting or employment with the
Company.
(2) Ten-year option exercisable at $16.875 per share (the market price as of
the date of grant) and vesting in 36 equal monthly installments commencing
March 20, 1999, based upon continued consulting or employment with the
Company.
(3) Ten-year option exercisable at $16.875 per share (the market price as of
the date of grant) and vesting in 36 equal monthly installments commencing
March 1, 1999, based upon continued consulting or employment with the
Company.
(4) Ten-year option exercisable at $16.875 per share (the market price as of
the date of grant) and vesting in 36 equal monthly installments commencing
June 5, 1999, based upon continued consulting or employment with the
Company.
(5) Ten-year option exercisable at $16.875 per share (the market price as of
the date of grant) and vesting in 36 equal monthly installments commencing
August 7, 1999, based upon continued consulting or employment with the
Company.
In December 1997, the Intercardia Board also adopted an amendment to the
Option Plan to change the definition of Eligible Director for purposes of the
Automatic Grant Program (the "Eligible Director Amendment"). Prior to adoption
of the Eligible Director Amendment, a director of Intercardia who beneficially
owned at least 10% of the voting power of Intercardia's securities was not an
Eligible Director. The Eligible Director Amendment eliminates this exclusion,
which had the effect of making Dr. Cooper an Eligible Director. The Intercardia
Board approved the Eligible Director Amendment because they believe that the
10% beneficial ownership exclusion is not appropriate, particularly in the case
of Dr. Cooper, who is deemed to beneficially own the shares of Intercardia
Common Stock held by Interneuron, of which he is President, Chief Executive
Officer and a director, although he has no pecuniary interest in those shares.
At the Intercardia Meeting, the stockholders are being asked to approve
the above-described amendments to the Option Plan.
Vote Required
The affirmative vote of the holders of a majority of the shares of
Intercardia's Common Stock present or represented and voting on this proposal
at the Intercardia Meeting will be required to approve the amendments described
above. Votes withheld on this proposal will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
and will be treated as shares represented and voting on this proposal at the
Intercardia Meeting. While there is no definitive statutory or case law
authority in Delaware as to the proper treatment of abstentions, Intercardia
believes that abstentions should be counted for purposes of determining both
whether a quorum is present at the Intercardia Meeting and the total number of
shares represented and voting on this proposal at the Intercardia Meeting. In
the absence of controlling precedent to the contrary, Intercardia intends to
treat abstentions in this manner. In a 1988 case, Berlin v. Emerald Partners,
the Delaware Supreme Court held that, while broker non-votes may be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, broker non-votes should not be counted for purposes of determining
the number of shares represented and voting with respect to the particular
proposal on which the broker has expressly not voted. Broker non-votes with
respect to this proposal will therefore not be considered represented and
voting and, accordingly, will not affect the determination as to whether the
requisite vote has been obtained to approve this proposal.
The Intercardia Board has unanimously approved and recommends a vote "FOR"
the proposed amendments to the Option Plan.
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INTERCARDIA
PROPOSAL NO. 4--RATIFICATION OF
SELECTION OF INDEPENDENT AUDITORS
The Intercardia Board has appointed the firm of Coopers & Lybrand,
Raleigh, North Carolina, to serve as the independent auditors of Intercardia
for the fiscal year ending September 30, 1998, and recommends that the
stockholders ratify such action. Coopers & Lybrand has audited the accounts of
Intercardia since Intercardia's inception in March 1994 and has advised
Intercardia that it does not have, and has not had, any direct or indirect
financial interest in Intercardia or its subsidiaries in any capacity other
than that of serving as independent auditors. Representatives of Coopers &
Lybrand are expected to attend the Intercardia Meeting. They will have an
opportunity to make a statement, if they desire to do so, and will also be
available to respond to appropriate questions.
The affirmative vote of the holders of a majority of the shares of
Intercardia's Common Stock present or represented and voting on this proposal
at the Intercardia Meeting shall constitute ratification of the appointment of
Coopers & Lybrand. If the appointment of Coopers & Lybrand is not ratified by
the stockholders, the Intercardia Board will reconsider its selection.
The Intercardia Board has unanimously approved and recommends a vote "FOR"
the ratification of the appointment of Coopers & Lybrand as independent
auditors of Intercardia for the fiscal year ending September 30, 1998.
DEADLINE FOR STOCKHOLDER PROPOSALS
Stockholders having proposals that they desire to present at next year's
annual meeting of stockholders of Intercardia should, if they desire that such
proposals be included in Intercardia's Proxy Statement/Prospectus relating to
such meeting, submit such proposals in time to be received by Intercardia not
later than December 9, 1998. To be so included, all such submissions must
comply with the requirements of Rule 14a-8 promulgated under the Exchange Act
and the Intercardia Board directs the close attention of interested
stockholders to that Rule. Proposals may be mailed to Richard W. Reichow,
Corporate Secretary, Intercardia, Inc., P.O. Box 14287, Research Triangle Park,
North Carolina 27709.
OTHER MATTERS
The Intercardia Board knows of no other business to be brought before the
Intercardia Meeting, but it is intended that, as to any such other business,
the shares will be voted pursuant to the proxy in accordance with the best
judgment of the person or persons acting thereunder.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock of
Intercardia offered hereby will be passed upon for Intercardia by Wyrick
Robbins Yates & Ponton LLP, Raleigh, North Carolina.
EXPERTS
The consolidated financial statements of Intercardia as of September 30,
1997, and 1996 and for each of the three years in the period ended September
30, 1997, and 1996 included in this Proxy Statement/Prospectus have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The financial statements of Transcell Technologies, Inc. (a Development
Stage Company) as of September 30, 1997 and 1996, and for each of the three
years in the period ended September 30, 1997, and for the period from October
21, 1991 (date of inception) to September 30, 1997, included in this Proxy
Statement/Prospectus have been included herein in reliance on the reports of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
111
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
INTERCARDIA, INC. AND SUBSIDIARIES
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, F-4
1996 and 1995
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, F-6
1996 and 1995
Notes to Consolidated Financial Statements ............................................... F-7
Consolidated Balance Sheets -- As of December 31, 1997 (unaudited) and September 30, 1997 F-19
Consolidated Statements of Operations -- For the three months ended
December 31, 1997 and 1996 (unaudited) .................................................. F-20
Consolidated Statements of Cash Flows -- For the three months ended
December 31, 1997 and 1996 (unaudited) .................................................. F-21
Notes to Unaudited Consolidated Financial Statements ..................................... F-22
TRANSCELL TECHNOLOGIES, INC.
Report of Independent Accountants ........................................................ F-24
Balance Sheets -- As of September 30, 1997 and 1996 ...................................... F-25
Statements of Operations -- For the years ended September 30, 1997, 1996 and 1995 and for
the period
October 21, 1991 (date of inception) to September 30, 1997 .............................. F-26
Statements of Stockholders' Deficit -- For the years ended September 30, 1997, 1996 and
1995 and for the period
October 21, 1991 (date of inception) to September 30, 1997 .............................. F-27
Statements of Cash Flows -- For the years ended September 30, 1997, 1996 and 1995 and for
the period
October 21, 1991 (date of inception) to September 30, 1997 .............................. F-28
Notes to Financial Statements ............................................................ F-29
Balance Sheets -- As of December 31, 1997 (unaudited) and September 30, 1997 ............. F-37
Statements of Operations -- For the three months ended December 31, 1997 and 1996 F-38
(unaudited)
Statements of Cash Flows -- For the three months ended December 31, 1997 and 1996 F-39
(unaudited)
Notes to Unaudited Financial Statements .................................................. F-40
</TABLE>
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>
INTERCARDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
ASSETS
Current assets:
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
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
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>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------------
1997 1996 1995
---------------- ------------- ---------------
<S> <C> <C> <C>
Revenue:
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 -- basic ............ $ (1.49) $ 0.20 $ (0.60)
============= ========== ============
Net income (loss) per common share -- diluted .......... $ (1.49) $ 0.20 $ (0.60)
============= ========== ============
Weighted average common shares outstanding -- basic .... 6,750,611 5,871,115 4,192,621
============= ========== ============
Weighted average common shares outstanding -- diluted .. 6,750,611 6,041,025 4,192,621
============= ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- -------------------------
Par Par
Number Value Number Value
of Shares Amount of Shares Amount
----------- -------- ------------- -----------
<S> <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
Proceeds from issuance of Series A
Preferred Stock at $7.50 per
share, net of issuance costs of
$843,251............................... -- -- 510,325 5,103
Net loss for the fiscal year ended
September 30, 1995 .................... -- -- -- --
--------- ------ ------- ---------
Balance at September 30, 1995 ........... 3,500,000 3,500 692,621 6,926
Exercise of common stock options ....... 4,000 4 -- --
Grants of common stock options at
below fair value ...................... -- -- -- --
Conversion of Series A Preferred
Stock to common stock ................. 692,621 693 (692,621) (6,926)
Sale of common stock pursuant to
initial public offering, net of
issuance costs of $2,960,175........... 2,530,000 2,530 -- --
Amortization of deferred
compensation .......................... -- -- -- --
Proceeds from offerings of
Employee Stock Purchase Plan .......... 11,982 12 -- --
Net income for the fiscal year ended
September 30, 1996 .................... -- -- -- --
--------- ------ -------- ---------
Balance at September 30, 1996 ........... 6,738,603 6,739 -- --
Exercise of common stock options ....... 8,500 8 -- --
Stock-based compensation ............... -- -- -- --
Cashless exercise of stock warrant ..... 1,156 1 -- --
Amortization of deferred
compensation .......................... -- -- -- --
Proceeds from offerings of
Employee Stock Purchase Plan .......... 16,903 17 -- --
Net loss for the fiscal year ended
September 30, 1997 .................... -- -- -- --
--------- ------ -------- ---------
Balance at September 30, 1997 ........... 6,765,162 $6,765 -- --
========= ====== ======== =========
<CAPTION>
Total
Additional Stockholders'
Paid-In Deferred Accumulated (Deficit)
Capital Compensation Deficit Equity
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 ........... $ (1,961,843) $ (1,958,343)
Conversion of advances from
Interneuron into Series A
Preferred Stock ....................... $1,365,397 -- 1,367,220
Proceeds from issuance of Series A
Preferred Stock at $7.50 per
share, net of issuance costs of
$843,251............................... 2,979,084 -- 2,984,187
Net loss for the fiscal year ended
September 30, 1995 .................... -- (2,524,912) (2,524,912)
---------- ------------- -------------
Balance at September 30, 1995 ........... 4,344,481 (4,486,755) (131,848)
Exercise of common stock options ....... 2,356 -- 2,360
Grants of common stock options at
below fair value ...................... 216,000 $ (216,000) -- --
Conversion of Series A Preferred
Stock to common stock ................. 6,233 -- -- --
Sale of common stock pursuant to
initial public offering, net of
issuance costs of $2,960,175........... 34,987,295 -- -- 34,989,825
Amortization of deferred
compensation .......................... -- 31,500 -- 31,500
Proceeds from offerings of
Employee Stock Purchase Plan .......... 152,759 -- -- 152,771
Net income for the fiscal year ended
September 30, 1996 .................... -- -- 1,182,865 1,182,865
---------- ---------- ------------- -------------
Balance at September 30, 1996 ........... 39,709,124 (184,500) (3,303,890) 36,227,473
Exercise of common stock options ....... 4,012 -- -- 4,020
Stock-based compensation ............... 20,937 -- -- 20,937
Cashless exercise of stock warrant ..... (1) -- -- --
Amortization of deferred
compensation .......................... -- 54,000 -- 54,000
Proceeds from offerings of
Employee Stock Purchase Plan .......... 320,244 -- -- 320,261
Net loss for the fiscal year ended
September 30, 1997 .................... -- -- (10,078,741) (10,078,741)
------------ ---------- ------------- -------------
Balance at September 30, 1997 ........... $40,054,316 $ (130,500) $ (13,382,631) $ 26,547,950
============ ========== ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------------------
1997 1996 1995
----------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
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 from 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.
F-6
<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 capital stock of CPEC, 65.8%
of the outstanding capital stock of Aeolus and 79.6% of the outstanding capital
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
capital 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.
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.
F-7
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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: As of December 31, 1997, the Company adopted
SFAS No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of stock options and warrants. In
February 1998, the Securities and Exchange Commission released Staff Accounting
Bulletin No. 98 ("SAB No. 98"), which gave further guidance on accounting for
nominal stock issuances in connection with an initial public offering ("IPO").
All prior period data relating to earnings (loss) per share included in these
financial statements has been restated to conform to the provisions of SFAS No.
128 and SAB No. 98.
Net income (loss) per share has been computed using the weighted average
number of shares outstanding during each fiscal quarter. Common share
equivalents are excluded from the computations if their effect is antidilutive
for the fiscal quarter. 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 for both basic and
diluted earnings per share.
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 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. 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:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Government notes ........... $ 1,014,443 $ 4,213,572
Corporation notes .......... 18,380,108 11,442,036
----------- -----------
$19,394,551 $15,655,608
=========== ===========
</TABLE>
The maturities of these securities as of September 30, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-8
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
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
========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
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
=========== ==========
</TABLE>
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.
At September 30, 1997, the Company's future minimum payments under lease
arrangements consisted of the following:
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Ending September 30, Leases Leases
- ---------------------------------------------------------- ----------- ------------
<S> <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.
F-9
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30,
- ----------------------------------
<S> <C>
1998 ....................... $ 43,912
1999 ....................... 46,694
2000 ....................... 28,825
2001 ....................... 20,703
--------
$140,134
========
</TABLE>
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.
F-10
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
H. STOCKHOLDERS' EQUITY -- Continued
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.
Stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
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>
As of September 30, 1997 and 1996, options for 449,727 and 199,594 shares,
respectively, were vested.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Price Outstanding Price Life Exercisable Price
- -------------------------- ------------- ---------- ------------- ------------- -----------
<S> <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:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
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
</TABLE>
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:
F-11
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
H. STOCKHOLDERS' EQUITY -- Continued
<TABLE>
<CAPTION>
Weighted Average
----------------------------
Fair Value Exercise Price
------------ ---------------
<S> <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, 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--basic ....... $ (1.49) $ (1.87) $ 0.20 $ 0.11
Net income (loss) per share--diluted ..... $ (1.49) $ (1.87) $ 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 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 in
October 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
F-12
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
H. STOCKHOLDERS' EQUITY -- Continued
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.
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>
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
F-13
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
J. ACQUISITIONS -- Continued
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 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 ("BMS") 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
F-14
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
K. AGREEMENTS -- Continued
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 CPEC on net sales of the twice-daily in the United
States and pay the royalties due to BMS 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 CPEC elects not to make these payments, the
royalties payable by Astra Merck to CPEC 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 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 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 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.
F-15
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
K. AGREEMENTS -- Continued
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.
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.
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
F-16
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
K. AGREEMENTS -- Continued
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
(the "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.
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,
F-17
<PAGE>
INTERCARDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
L. RELATED PARTY TRANSACTIONS -- Continued
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 of
approximately $14,000,000 to $15,000,000. In addition, Intercardia will issue
Intercardia replacement stock options with a value of approximately $3,000,000
to $4,000,000 to Transcell employees and consultants. The transaction is
subject to final due diligence and approval by Transcell and Intercardia
stockholders. Transcell is a majority-owned subsidiary of Interneuron and is
conducting research and development utilizing carbohydrate-based combinatorial
chemistry. The acquisition of Interneuron's ownership interest in Transcell
will be treated in a manner similar to a "pooling of interests" and the
acquisition of the remaining ownership interest will be accounted for by using
the "purchase" method of accounting.
Under the terms of the Letter of Intent, owners of Transcell stock will
receive Intercardia Common Stock in three installments. The first installment
of approximately $6,000,000 will be made upon closing the transaction (the
"Closing"). 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 approximately $3,000,000 of Intercardia Common Stock
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. The actual market value of the
Intercardia Common Stock to be issued in the transaction may be decreased or
increased based upon the market price of Intercardia's stock at Closing.
F-18
<PAGE>
INTERCARDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 5,929,804 $ 17,623,728
Marketable securities .............................................................. 17,074,942 17,340,509
Accounts receivable ................................................................ 1,081,710 1,127,088
Prepaids and other current assets .................................................. 70,169 89,891
------------- -------------
Total current assets ............................................................. 24,156,625 36,181,216
Marketable securities ............................................................... 4,614,738 2,054,042
Property and equipment, net ......................................................... 279,492 286,553
Other assets ........................................................................ 5,000 5,500
------------- -------------
$ 29,055,855 $ 38,527,311
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 1,826,340 $ 365,084
Accrued expenses ................................................................... 1,529,302 11,365,491
Current portion of capital lease obligations ....................................... 46,112 43,936
Current portion of notes payable ................................................... 46,027 43,912
------------- -------------
Total current liabilities ........................................................ 3,447,781 11,818,423
Long-term portion of capital lease obligations ...................................... 52,339 64,716
Long-term notes payable ............................................................. 96,264 96,222
Stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares authorized, 6,770,062 and
6,765,162 shares issued and outstanding at December 31, 1997 and September 30,
1997, respectively ............................................................... 6,770 6,765
Additional paid-in capital ......................................................... 40,160,232 40,054,316
Deferred compensation .............................................................. (117,000) (130,500)
Accumulated deficit ................................................................ (14,590,531) (13,382,631)
------------- -------------
Total stockholders' equity ....................................................... 25,459,471 26,547,950
------------- -------------
$ 29,055,855 $ 38,527,311
============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-19
<PAGE>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Revenue:
Contract and license fee revenue ......................... $ 216,934 $2,148,637
Investment income ........................................ 509,280 515,877
------------ ----------
Total revenue .......................................... 726,214 2,664,514
------------ ----------
Costs and expenses:
Research and development ................................. 1,314,973 522,637
General and administrative ............................... 619,141 530,865
------------ ----------
Total costs and expenses ............................... 1,934,114 1,053,502
------------ ----------
Income (loss) from operations ............................. (1,207,900) 1,611,012
Minority interest ......................................... -- (388,912)
------------ ----------
Net income (loss) ......................................... $ (1,207,900) $1,222,100
------------ ----------
Net income (loss) per common share -- basic ............... $ (0.18) $ 0.18
============ ==========
Net income (loss) per common share -- diluted ............. $ (0.18) $ 0.16
============ ==========
Weighted average common shares outstanding -- basic ....... 6,766,547 6,739,657
============ ==========
Weighted average common shares outstanding -- diluted ..... 6,766,547 7,504,429
============ ==========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-20
<PAGE>
INTERCARDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................... $ (1,207,900) $ 1,222,100
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization ..................................................... 46,734 33,748
Noncash compensation .............................................................. 67,615 13,500
Minority interest in net income of consolidated subsidiary ........................ -- 388,912
Change in assets and liabilities:
Accounts receivable .............................................................. 45,378 27,781
Other assets ..................................................................... 20,222 61,752
Accounts payable ................................................................. 1,461,256 (17,369)
Accrued expenses ................................................................. (9,836,187) 60,488
------------- -----------
Net cash provided by (used in) operating activities .................................. (9,402,882) 1,790,912
------------- -----------
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities ......................... 7,915,305 2,111,720
Purchases of marketable securities .................................................. (10,210,434) --
Purchases of property and equipment ................................................. (39,674) (6,422)
------------- -----------
Net cash provided by (used in) investing activities .................................. (2,334,803) 2,105,298
------------- -----------
Cash flows from financing activities:
Proceeds from long-term notes payable ............................................... 2,157 5,713
Net proceeds from issuance of stock ................................................. 51,805 960
Principal payments on capital lease obligations ..................................... (10,201) (8,407)
------------- -----------
Net cash provided by (used in) financing activities .................................. 43,761 (1,734)
------------- -----------
Net increase (decrease) in cash and cash equivalents ................................. (11,693,924) 3,894,476
Cash and cash equivalents at beginning of period ..................................... 17,623,728 21,440,700
------------- -----------
Cash and cash equivalents at end of period ........................................... $ 5,929,804 $25,335,176
============= ===========
</TABLE>
The accompanying notes are integral part of these unaudited consolidated
financial statements.
F-21
<PAGE>
INTERCARDIA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
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 December 31,
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 December 31, 1997, Interneuron owned 61.2% of the
outstanding capital stock of Intercardia and the 19.9% of the outstanding stock
of CPEC not owned by Intercardia.
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. To date, the Company has directed the
majority of its efforts toward the development and clinical trials of BEXTRATM
(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 and the
Department of Veterans Affairs.
The consolidated financial statements include the accounts of Intercardia
and its subsidiaries, CPEC, Aeolus and Renaissance. All significant
intercompany activity has been eliminated. The consolidated financial
statements included herein have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company. The
unaudited consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997. Results for the interim period are not
necessarily indicative of the results for any other interim period or for the
full fiscal year.
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of stock options and
warrants. All earnings per share amounts for all periods have been presented to
conform to SFAS No. 128 requirements. There was no effect on the earnings per
share disclosures as a result of adopting SFAS No. 128 for the three months
ended December 31, 1997. For the three months ended December 31, 1996, the
basic earnings per share was $0.18 and the diluted earnings per share was
$0.16.
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income", 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", 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.
B. ACQUISITION
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 of
approximately $14,000,000 to $15,000,000. In addition, Intercardia will issue
Intercardia replacement stock options with a value of approximately $3,000,000
to $4,000,000 to Transcell employees and consultants. Transcell is a
majority-owned subsidiary of Interneuron and is conducting research and
development utilizing carbohydrate-based combinatorial chemistry. The
acquisition of Interneuron's ownership interest in Transcell will be treated in
a manner similar to a "pooling-of-interests" and the acquisition of the
non-Interneuron ownership interest will be
F-22
<PAGE>
INTERCARDIA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
B. ACQUISITION -- Continued
accounted for by using the "purchase" method of accounting. The transaction is
subject to final due diligence and approval by Transcell and Intercardia
stockholders.
Under the terms of the Letter of Intent, Transcell stockholders will
receive Intercardia Common Stock in three installments. The first installment,
of approximately $6,000,000, will be made upon closing the transaction (the
"Closing"). The second and third installments will each consist of
approximately $3,000,000 of Intercardia Common Stock, as valued at each
issuance 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 additional shares of Intercardia Common
Stock at Closing of approximately $3,000,000 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. The
actual market value of the Intercardia Common Stock to be issued in the
transaction may be decreased or increased based upon the market price of
Intercardia's stock at Closing.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
TRANSCELL TECHNOLOGIES, INC.
We have audited the accompanying balance sheets of Transcell Technologies,
Inc. (a Development Stage Company) ("Transcell") as of September 30, 1997 and
1996 and the related statements of operations, stockholders' deficit, and cash
flows for the years ended September 30, 1997, 1996 and 1995, and for the period
from October 21, 1991 (date of inception) to September 30, 1997. These
financial statements are the responsibility of Transcell'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 financial position of Transcell Technologies,
Inc. (a Development Stage Company) as of September 30, 1997 and 1996, and the
results of its operations and its cash flows for the years ended September 30,
1997, 1996 and 1995, and for the period from October 21, 1991 (date of
inception) to September 30, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
Transcell will continue as a going concern. As discussed in Note 1(b) to the
financial statements, Transcell is in the development stage. Transcell's lack
of revenue and its need for additional financing to fund its operations raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1(b).
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 23, 1997 (except for Note 10,
which is as of February 12, 1998)
F-24
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
---------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 561,559 $ 294,715
Prepaid expenses ....................................................................... 151,114 13,212
------------- -------------
Total current assets ................................................................. 712,673 307,927
Property and equipment, net ............................................................. 3,307,556 1,364,445
Other assets ............................................................................ 75,669 32,242
------------- -------------
Total assets ......................................................................... $ 4,095,898 $ 1,704,614
============= =============
LIABILITIES
Current liabilities:
Accounts payable ....................................................................... $ 542,446 $ 846,627
Accrued expenses ....................................................................... 1,723,488 777,908
Current portion of capital lease obligations ........................................... 514,188 303,137
Note payable to Interneuron ............................................................ 11,911,187 4,545,829
Current portion of note payable ........................................................ 29,420 --
Deferred revenue ....................................................................... 500,250 --
------------- -------------
Total current liabilities ............................................................ 15,220,979 6,473,501
Long-term portion of capital lease obligations .......................................... 993,128 302,404
Convertible debenture -- Interneuron .................................................... 514,729 475,753
Note payable ............................................................................ 459,173 --
------------- -------------
Total liabilities .................................................................... 17,188,009 7,251,658
------------- -------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Preferred stock; $.01 par value, 5,000,000 shares authorized:
Series A, 1,460,388 shares issued and outstanding as of September 30, 1997 and 1996,
respectively ......................................................................... 9,127,428 9,127,428
Series B, 349,000 shares issued and outstanding as of September 30, 1997 and 1996,
respectively ......................................................................... 1,525,847 1,525,847
Common stock; $.001 par value, 50,500,000 shares authorized:
Class A, 3,927,956 and 3,924,956 shares issued and outstanding at September 30, 1997
and 1996, respectively ............................................................... 3,928 3,925
Class B, 199,488 shares issued and outstanding at September 30, 1997 and 1996,
respectively ......................................................................... 199 199
Additional paid-in capital .............................................................. 1,531,161 1,464,339
Deficit accumulated during development stage ............................................ (25,115,111) (17,391,093)
Unearned compensation ................................................................... (165,563) (277,689)
------------- -------------
Total stockholders' deficit ............................................................ (13,092,111) (5,547,044)
------------- -------------
Total liabilities and stockholders' deficit ............................................ $ 4,095,898 $ 1,704,614
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
October 21,
1991 (date of
Years Ended September 30, inception) to
----------------------------------------------------- September 30,
1997 1996 1995 1997
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Contract revenue ..................... $ 1,316,750 $ 338,650 $ 304,331 $ 1,959,731
Operating expenses:
Research and development ............ 5,708,625 2,958,373 3,123,414 17,752,315
General and administration .......... 2,079,813 1,533,304 1,481,381 6,637,343
------------- ------------- ------------- --------------
Total operating expenses ........... 7,788,438 4,491,677 4,604,795 24,389,658
------------- ------------- ------------- --------------
Operating loss ....................... (6,471,688) (4,153,027) (4,300,464) (22,429,927)
Interest income (expense):
Interest income ..................... 3,285 869 28,191 32,345
Interest expense -- Interneuron ..... (1,151,794) (535,456) (225,653) (2,342,086)
Interest expense -- other ........... (103,821) (54,763) (70,017) (371,675)
------------- ------------- ------------- --------------
Net loss ............................. $ (7,724,018) $ (4,742,377) $ (4,567,943) $ (25,111,343)
============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' DEFICIT
From October 21, 1991 (date of inception) to September 30, 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Class A Class B
Series A Series B
Amount Amount Shares Amount Shares Amount
------------ ------------ ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 21, 1991
(date of inception) ............. $ -- $ -- -- $ -- -- $ --
Issuance of Class A Common
Stock .......................... -- -- 3,778,214 3,778 -- --
Cumulative net loss
(October 21, 1991 through
September 30, 1992) ............ -- -- -- -- -- --
---------- ---------- --------- ------- -- ----
Balance at September 30, 1992..... -- -- 3,778,214 3,778 -- --
Issuance of Class B Common
Stock .......................... -- -- -- -- 199,488 199
Issuance of Class A Common
Stock under anti-dilution
provisions ..................... -- -- 22,292 23 -- --
Issuance of Class A Common
Stock .......................... -- -- 30,000 30 -- --
Net loss ........................ -- -- -- -- -- --
---------- ---------- --------- ------- ------- ----
Balance at September 30, 1993..... -- -- 3,830,506 3,831 199,488 199
Issuance of Class A Common
Stock .......................... -- -- 17,000 17 -- --
Amortization of unearned
compensation ................... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
---------- ---------- --------- ------- ------- ----
Balance at September 30, 1994..... -- -- 3,847,506 3,848 199,488 199
Issuance of 349,000 shares of
Series B Preferred Stock,
net of offering costs of
$65,000......................... -- 1,525,847 -- -- -- --
Issuance of 1,460,388 shares
of Series A Preferred Stock
upon conversion of note
payable to Interneuron ......... 9,127,428 -- -- -- -- --
Issuance of Class A Common
Stock under anti-dilution
provisions ..................... -- -- 83,450 83 -- --
Change in conversion factor
of Class B Common Stock......... -- -- -- -- -- --
Amortization of unearned
compensation ................... -- -- -- -- -- --
Issuance of warrants in
conjunction with advances
from Interneuron ............... -- -- -- -- -- --
Net Loss ........................ -- -- -- -- -- --
---------- ---------- --------- ------- ------- ----
Balance at September 30, 1995..... 9,127,428 1,525,847 3,930,956 3,931 199,488 199
Repurchase of restricted
stock .......................... -- -- (6,000) (6) -- --
Issuance of warrants in
conjunction with advances
from Intereuron ................ -- -- -- -- -- --
Issuance of Class A Common
Stock options ..................
Amortization of unearned
compensation ................... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
---------- ---------- --------- ------- ------- ----
Balance at September 30, 1996..... 9,127,428 1,525,847 3,924,956 3,925 199,488 199
Proceeds from excercise of
stock options .................. -- -- 3,000 3 -- --
Amortization of unearned
compensation ................... -- -- -- -- -- --
Noncash compensation ............ -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
---------- ---------- --------- ------- ------- ----
Balance at September 30,1997 ..... $9,127,428 $1,525,847 3,927,956 $3,928 199,488 $199
========== ========== ========= ======= ======= ====
<CAPTION>
Deficit
accumulated
Additional during the
paid-in development Unearned
capital stage compensation Total
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance at October 21, 1991
(date of inception) ............. $ -- $ -- $ -- $ --
Issuance of Class A Common
Stock .......................... -- (3,768) -- 10
Cumulative net loss
(October 21, 1991 through
September 30, 1992) ............ -- (793,822) -- (793,822)
---------- ------------- ---------- -------------
Balance at September 30, 1992..... -- (797,590) -- (793,812)
Issuance of Class B Common
Stock .......................... 304 -- -- 503
Issuance of Class A Common
Stock under anti-dilution
provisions ..................... -- -- -- 23
Issuance of Class A Common
Stock .......................... 74,820 -- (74,850) --
Net loss ........................ -- (2,196,413) -- (2,196,413)
---------- ------------- ---------- -------------
Balance at September 30, 1993..... 75,124 (2,994,003) (74,850) (2,989,699)
Issuance of Class A Common
Stock .......................... 72,633 -- (72,355) 295
Amortization of unearned
compensation ................... -- -- 28,836 28,836
Net loss ........................ -- (5,086,770) -- (5,086,770)
---------- ------------- ---------- -------------
Balance at September 30, 1994..... 147,757 (8,080,773) (118,369) (8,047,338)
Issuance of 349,000 shares of
Series B Preferred Stock,
net of offering costs of
$65,000......................... -- -- -- 1,525,847
Issuance of 1,460,388 shares
of Series A Preferred Stock
upon conversion of note
payable to Interneuron ......... -- -- -- 9,127,428
Issuance of Class A Common
Stock under anti-dilution
provisions ..................... 199,152 -- (199,152) 83
Change in conversion factor
of Class B Common Stock......... 240,539 -- -- 240,539
Amortization of unearned
compensation ................... -- -- 235,956 235,956
Issuance of warrants in
conjunction with advances
from Interneuron ............... 249,517 -- -- 249,517
Net Loss ........................ -- (4,567,943) -- (4,567,943)
---------- ------------- ---------- -------------
Balance at September 30, 1995..... 836,965 (12,648,716) (81,565) (1,235,911)
Repurchase of restricted
stock .......................... (54) -- -- (60)
Issuance of warrants in
conjunction with advances
from Intereuron ................ 370,788 -- -- 370,788
Issuance of Class A Common
Stock options .................. 256,640 (256,640) --
Amortization of unearned
compensation ................... -- -- 60,516 60,516
Net loss ........................ -- (4,742,377) -- (4,742,377)
---------- ------------- ---------- -------------
Balance at September 30, 1996..... 1,464,339 (17,391,093) (277,689) (5,547,044)
Proceeds from excercise of
stock options .................. 2,697 -- -- 2,700
Amortization of unearned
compensation ................... -- -- 112,126 112,126
Noncash compensation ............ 64,125 -- -- 64,125
Net loss ........................ -- (7,724,018) -- (7,724,018)
---------- ------------- ---------- -------------
Balance at September 30,1997 ..... $1,531,161 $ (25,115,111) $ (165,563) $ (13,092,111)
========== ============= ========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (7,724,018) $ (4,742,377) $ (4,567,943)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ....................... 660,423 349,630 290,419
Noncash compensation ................................ 176,251 60,516 476,578
Interest to Interneuron ............................. 1,151,794 535,456 225,654
Changes in operating assets and liabilities:
Prepaid expenses ....................................... (137,902) 7,579 (13,384)
Other assets ........................................... (43,427) 37,500 95,485
Accounts payable ....................................... (304,181) 671,741 12,351
Accrued expenses ....................................... 945,580 290,792 169,547
Deferred revenue ....................................... 500,250 (16,668) 16,668
------------- ------------- -------------
Net cash (used) by operating activities .................. (4,775,230) (2,805,831) (3,294,625)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures .................................... (2,103,534) (1,045,560) (86,026)
------------- ------------- -------------
Net cash (used) by investing activities .................. (2,103,534) (1,045,560) (86,026)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings from Interneuron ............................. 8,940,040 4,024,780 2,000,794
Repayment of borrowings from Interneuron ................ (2,687,500) -- --
Proceeds from issuance of common stock .................. 2,700 -- --
Proceeds from issuance of preferred stock ............... -- -- 1,525,847
Proceeds from sale/leaseback transactions ............... 1,340,908 315,886 39,380
Principal payments on note payable ...................... (11,407) -- --
Principal payments on capital lease obligations ......... (439,133) (241,259) (187,471)
------------- ------------- -------------
Net cash provided by financing activities ................ 7,145,608 4,099,407 3,378,550
------------- ------------- -------------
Net change in cash and cash equivalents .................. 266,844 248,016 (2,101)
Cash and cash equivalents at beginning of period ......... 294,715 46,699 48,800
------------- ------------- -------------
Cash and cash equivalents at end of period ............... $ 561,559 $ 294,715 $ 46,699
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest .................................. $ 103,821 $ 51,763 $ 70,928
============= ============= =============
Property and equipment obtained through financing
arrangement ............................................ $ 500,000 $ -- $ --
============= ============= =============
Conversion of note payable and accrued interest to
common stock ........................................... $ -- $ -- $ 9,127,428
============= ============= =============
<CAPTION>
October 21,
1991 (date of
inception) to
September 30,
1997
------------------
<S> <C>
Cash flows from operating activities:
Net loss ................................................ $ (25,111,343)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ....................... 1,451,962
Noncash compensation ................................ 742,181
Interest to Interneuron ............................. 2,470,719
Changes in operating assets and liabilities:
Prepaid expenses ....................................... (151,114)
Other assets ........................................... (75,669)
Accounts payable ....................................... 542,446
Accrued expenses ....................................... 1,723,487
Deferred revenue ....................................... 500,250
--------------
Net cash (used) by operating activities .................. (17,907,081)
--------------
Cash flows from investing activities:
Capital expenditures .................................... (4,259,518)
--------------
Net cash (used) by investing activities .................. (4,259,518)
--------------
Cash flows from financing activities:
Borrowings from Interneuron ............................. 22,390,371
Repayment of borrowings from Interneuron ................ (2,687,500)
Proceeds from issuance of common stock .................. 3,531
Proceeds from issuance of preferred stock ............... 1,525,847
Proceeds from sale/leaseback transactions ............... 2,406,142
Principal payments on note payable ...................... (11,407)
Principal payments on capital lease obligations ......... (898,826)
--------------
Net cash provided by financing activities ................ 22,728,158
--------------
Net change in cash and cash equivalents .................. 561,559
Cash and cash equivalents at beginning of period ......... --
--------------
Cash and cash equivalents at end of period ............... $ 561,559
==============
Supplemental disclosure of cash flow information:
Cash paid for interest .................................. $ 235,032
==============
Property and equipment obtained through financing
arrangement ............................................ $ 500,000
==============
Conversion of note payable and accrued interest to
common stock ........................................... $ 9,127,428
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Organization: Transcell Technologies, Inc. ("Transcell"), a Delaware
Corporation, was organized in October 1991 and is engaged in the research and
development of human therapeutic health care products based on proprietary
technologies in carbohydrate drugs and drug transport systems. Transcell is an
approximately 79% owned subsidiary of Interneuron Pharmaceuticals, Inc.
("Interneuron").
b. Basis of Presentation: The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should Transcell be
unable to continue as a going concern.
During the fiscal year ended September 30, 1997, Transcell arranged for
the financing of its operating activities by borrowing approximately $8,940,000
from Interneuron and receiving approximately $1,317,000 in contract and
licensing fees. Significant additional research and development activities,
clinical testing and regulatory approvals must be completed before commercial
sales, if any, will commence. Transcell is actively pursuing research and
development grants and collaborations to fund its research and development
activities. Transcell is dependent upon Interneuron for funding current
operations, and there are no guarantees of continued funding from Interneuron.
c. Property and Equipment: Property and equipment are stated at cost.
Transcell provides for depreciation using the straight-line method based upon
the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment .......... 2 to 3 years
Office equipment ............ 5 years
Laboratory equipment ........ 5 years
Leasehold improvements ...... Shorter of lease term or estimated useful life
</TABLE>
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, respectively, to operations.
d. Revenue Recognition: Transcell recognizes contract revenue under
strategic alliances as certain agreed upon milestones are achieved or license
fees are earned. Cash received in advance of revenue recognition is recorded as
deferred revenue.
e. Research and Development Costs: Research and development costs are
expensed in the period incurred.
f. Cash and Cash Equivalents: Cash and cash equivalents consist of cash in
banks, highly liquid debt instruments purchased with maturities of three months
or less and money market funds.
g. Income Taxes: Deferred tax liabilities and assets are recognized based
on temporary differences between the financial statement basis and tax basis of
assets and liabilities using current statutory tax rates. A valuation allowance
against net deferred tax assets is established if, based on the available
evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized. (See Note 4.)
h. 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 disclosure 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.
i. Accounting for Stock-Based Compensation: During the fiscal year ended
September 30, 1997, Transcell adopted the disclosure requirements of the
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation", ("SFAS No. 123"), which changes measurement, recognition and
disclosure standards for stock-based compensation. Transcell measures
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25 ("APB Opinion No. 25"). As such, the adoption of SFAS No. 123 did not
impact the financial position or the results from operations of Transcell.
F-29
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: -- Continued
j. Uncertainties: Transcell is subject to risks common to companies in the
biotechnology industry, including, but not limited to, litigation, product
liability, development by Transcell or its competitors of new technological
innovations, dependence on key personnel, protection of proprietary technology,
and compliance with FDA government regulations.
k. Recent Accounting Pronouncements: Transcell will adopt SFAS No. 130,
"Reporting Comprehensive Income", ("SFAS No. 130") in the fiscal year ended
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.
Transcell will adopt SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", ("SFAS No. 131") in 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.
NOTE 2 -- PROPERTY AND EQUIPMENT:
At September 30, 1997 and 1996, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Computer equipment ........................... $ 501,939 $ 384,772
Office equipment ............................. 226,772 13,760
Lab equipment ................................ 1,796,789 1,434,579
Leasehold improvements ....................... 1,841,076 193,458
------------ ----------
4,366,576 2,026,569
Less: accumulated depreciation and amortization (1,059,020) (662,124)
------------ ----------
$ 3,307,556 $1,364,445
============ ==========
</TABLE>
Included in the above amounts is property and equipment under capital
lease obligations of approximately $2,248,000 and $964,000 at September 30,
1997 and 1996, respectively, and related accumulated depreciation of
approximately $931,000 and $493,000 at September 30, 1997 and 1996,
respectively. Leased assets consist of laboratory, office and computer
equipment. Transcell paid approximately $80,000 and $52,000 in interest expense
during the years ended September 30, 1997 and 1996, respectively, related to
these capital lease obligations.
NOTE 3 -- ACCRUED EXPENSES:
At September 30, 1997 and 1996, accrued expenses consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Employee, compensation and benefits $ 1,660,730 $ 750,250
Other .............................. 62,758 27,658
----------- ---------
$ 1,723,488 $ 777,908
=========== =========
</TABLE>
F-30
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 4 -- INCOME TAXES:
At September 30, 1997 and 1996, the significant components of Transcell's
deferred tax asset consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------------- --------------
<S> <C> <C>
Federal and state net operating loss
carryforwards ................................. $ 9,200,000 $ 6,500,000
Federal and state tax credit carryforwards ..... 200,000 --
Accrued expenses ............................... 600,000 100,000
------------- ------------
Total deferred tax asset before valuation
allowance ..................................... 10,000,000 6,600,000
Valuation allowance against total deferred
tax asset ..................................... (10,000,000) (6,600,000)
------------- ------------
Net deferred tax asset ......................... $ -- $ --
============= ============
</TABLE>
At September 30, 1997, Transcell had net operating loss carryforwards
available for federal income tax purposes of approximately $23,000,000 which
expire at various dates from 2007 to 2012. In addition, at September 30, 1997,
Transcell had approximately $200,000 of tax credit carryforwards for federal
income tax purposes expiring at various dates through 2012. Transcell's ability
to use the carryforwards may be subject to limitations resulting from ownership
changes as defined in the U.S. Internal Revenue Code.
Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, all of the deferred tax assets have been
fully offset by a valuation allowance.
NOTE 5 -- COMMITMENTS:
Transcell leases its facilities, as well as certain furniture, fixtures
and equipment, under non-cancelable leases. Rent expense under these leases was
approximately $762,000, $405,000, and $363,000 for the years ended 1997, 1996,
and 1995, respectively, and $1,968,000 for the period October 21, 1991 (date of
inception) through September 30, 1997.
In September 1996, Transcell entered into a ten-year lease (which
commenced in June 1997) for laboratory and administrative space which includes
an option to expand the currently occupied space and is guaranteed by
Interneuron. Prior to this agreement, Transcell leased its facilities under a
non-cancelable operating sublease.
At September 30, 1997, Transcell's future minimum payments under
non-cancelable lease arrangements are as follows:
<TABLE>
<CAPTION>
Capital Lease
Years Ending September 30, Operating Leases Obligations
- ---------------------------------------------------------------- ------------------ --------------
<S> <C> <C>
1998 ................................................. $1,054,034 $ 611,308
1999 ................................................. 1,030,479 537,408
2000 ................................................. 980,828 462,253
2001 ................................................. 977,318 97,170
2002 ................................................. 1,277,932 --
Thereafter ........................................... 4,606,115 --
---------- ----------
Total lease payments ................................. $9,926,706 1,708,139
==========
Less: amount representing interest ................... (200,823)
----------
Present value of future lease payments ............... 1,507,316
Less: current portion ................................ (514,188)
----------
Non-current portion of capital lease obligations ..... $ 993,128
==========
</TABLE>
At September 30, 1997, Transcell's note obligation consisted of
approximately $489,000 in a note payable agreement. The Note requires monthly
payments, accrues interest at an annual rate of 11.5% and expires in June 2002.
At September 30, 1997, approximately $29,000 of the note has been classified as
current.
F-31
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 6 -- RELATED-PARTY TRANSACTIONS:
Under consulting agreements with a director and a party related to a
director to provide scientific advice and administrative services, Transcell is
obligated to make monthly payments through December 31, 1999 subject to annual
renewals. Payments to these consultants made during fiscal 1997, 1996, and 1995
totaled approximately $219,000, $108,000 and $104,000, respectively, and
$752,000 for the period October 21, 1991 (date of inception) through September
30, 1997. Total future minimum obligations under these agreements totaled
$495,000 as of September 30, 1997.
NOTE 7 -- LICENSE AND RESEARCH AGREEMENTS:
Transcell entered into a license agreement with Princeton University in
January 1992, certain terms of which were amended in February 1997. The license
agreement grants Transcell an exclusive worldwide license to any patents
relating to certain cell permeation technology in exchange for annual license
fees and royalties.
In October 1993, Transcell entered into an additional license agreement
with Princeton University in which Transcell was granted exclusive worldwide
rights to a process for the rapid synthesis of oligosaccharides and any
compounds resulting therefrom in exchange for license fees and royalties.
In July 1997, Transcell and Interneuron entered into a Research
Collaboration and Licensing Agreement with Merck & Co., Inc. ("Merck") (the
"Merck Agreement") to discover and commercialize certain novel antibacterial
agents. Merck has an option to extend the field of the collaboration and
license to include all antibacterial pharmaceutical products. The agreement
provided for Merck to make initial payments totaling $2,500,000 which included
a non-refundable commitment fee of $1,500,000 and a non-refundable option
payment of $1,000,000 (which is being recorded as revenue over the one year
option period) plus research support during the first two years of the
agreement. Based upon estimated relative value of such licenses and rights, the
commitment fee and option payment will be shared two-thirds by Transcell and
one-third by Interneuron. Transcell's share of revenue in conjunction with this
agreement was approximately $1,317,000 for the year ended September 30, 1997.
Additionally, Merck is required to make payments based upon achievement of
certain defined clinical development and regulatory milestones and pay
royalties based upon net sales of products resulting from the collaboration.
Certain of the rights licensed to Merck are based on exclusive licenses or
rights held by Transcell and Interneuron from Princeton University.
NOTE 8 -- EQUITY:
Preferred Stock:
The Certificate of Incorporation of Transcell (the "Certificate")
authorizes the issuance of 5,000,000 shares of Preferred Stock. Transcell's
Board of Directors (the "Transcell Board") has the authority to issue preferred
stock in one or more series and to fix or alter the rights, preferences,
privileges and restrictions, including the dividend, conversion, voting,
redemption (including sinking fund provisions), and other rights, liquidation
preferences, and the number of shares constituting any series and the
designation of such series, without any further vote or action by the
stockholders of Transcell. The preferred shares may be convertible into shares
of Class A Common Stock and have preferential rights in terms of dividends and
liquidation over Common Stock. Shares of Preferred Stock have voting rights
equal to the number of shares of their common stock equivalent.
Series A:
In fiscal 1995, Transcell issued 1,460,388 shares of Series A Preferred
Stock to Interneuron upon conversion of a note payable. Shares of Series A
Preferred Stock are convertible at any time at the option of the holder into
shares of Class A Common Stock. The initial conversion ratio is based on a
Series A price of $6.25, subject to adjustment based upon several factors. Upon
an offering of Transcell securities, as described in the Certificate (an
"Offering"), the conversion ratio will be adjusted so that the holders receive
a minimum return of 35% annually, commencing on July 7, 1995. The minimum
return is applied on a quarterly basis.
F-32
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 8 -- EQUITY: -- Continued
In fiscal 1997, the Transcell Board amended the Certificate to change the
conversion rights of the Series A Preferred Stock to eliminate the minimum
return described above. This amendment of the Certificate was approved by the
Series A preferred stockholder. Series A preferred shares are automatically
converted upon an Offering or in the event that a majority of Series A
preferred stockholders elect to convert their shares.
Series B:
Transcell has issued 349,000 shares of Series B Preferred Stock in
connection with private placements. These private placements consisted of the
sale of units, each unit consisting of shares of Preferred Stock of Transcell,
shares of preferred stock of another subsidiary of Interneuron, Progenitor,
Inc., and a put protection right and warrants from Interneuron. The put
protection right provides that on the third anniversary of the final closing of
the private placement, the owner has the right to sell to Interneuron a
percentage of the Preferred Stock of Transcell that is deemed to be illiquid,
as defined in the agreement. Transcell received approximately $1,526,000, net
of offering costs, as its share of the proceeds from the private placement.
Shares of Series B Preferred Stock are convertible, at any time at the option
of the holder, into shares of Class A Common Stock. The initial conversion
ratio is based upon a Series B price of $6.25, subject to adjustment based upon
several factors. Upon an Offering, the conversion ratio will be adjusted so
that the holders receive a minimum return of 35% annually, commencing on July
7, 1995. The minimum return is applied on a quarterly basis. Series B preferred
shares are automatically converted upon an Offering.
In connection with the private placement, Transcell issued to designees of
the placement agent, an affiliate of Interneuron, warrants to purchase a total
of 34,901 shares of Series B Preferred Stock. These warrants are exercisable at
a price of $6.88 per share and expire five years from an Offering of
Transcell's Common Stock, or June 2005, whichever is earlier.
Shares of authorized Class A Common Stock have been reserved for the
conversion of all convertible Preferred Stock outstanding.
Common Stock:
Transcell is authorized to issue two classes of shares of Common Stock
designated Class A and Class B. Shares of Transcell's Class B Common Stock are
convertible, at any time at the option of the holder, into shares of Class A
Common Stock. The conversion ratio is subject to adjustment based on certain
factors, primarily the issuance of additional shares to Interneuron. At
September 30, 1997, a total of 279,696 shares of Class A stock are reserved for
issuance upon the conversion of the outstanding Class B Common Stock. Holders
of Class B Common Stock are entitled to pro rata dividend, liquidation, and
voting rights based on the number of Class A shares into which such Class B
shares are convertible.
In February 1994, the Transcell Board authorized a 2-for-1 stock split of
Common Stock. All references to Class A Common Stock, underlying stock options,
warrants and per share data have been restated to reflect the stock split.
Stock Options:
In March 1997, the Transcell Board approved an increase in the number of
shares of Transcell's Common Stock authorized for issuance under Transcell's
1992 Stock Option Plan (the "Plan") from 1,200,000 shares to 1,800,000 shares.
Under the Plan, incentive or non-qualified options to purchase 1,800,000
shares of Transcell's Common Stock may be granted to employees, and directors
and consultants may be granted non-qualified options. Under the provisions of
the Plan, the term of each grant cannot exceed ten years.
F-33
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 8 -- EQUITY: -- Continued
Stock option activity under the Plan was as follows:
<TABLE>
<CAPTION>
Stock Options
-------------------------------
Weighted Average
Shares Exercise Price
------------- -----------------
<S> <C> <C>
Outstanding at September 30, 1994 113,758 $ 3.05
Granted ......................... 25,750 $ 7.00
Exercised ....................... -- --
Canceled ........................ (4,200) $ 3.33
-------
Outstanding at September 30, 1995 135,308 $ 3.80
Granted ......................... 1,081,808 $ 1.02
Exercised ....................... -- --
Canceled ........................ (135,608) $ 4.50
---------
Outstanding at September 30, 1996 1,081,508 $ 0.93
Granted ......................... 560,214 $ 0.26
Exercised ....................... (3,000) $ 0.90
Canceled ........................ (207,503) $ 0.47
---------
Outstanding at September 30, 1997 1,431,219 $ 0.73
=========
</TABLE>
As of September 30, 1997, stock options were exercisable as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------- ---------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Exercise Remaining Exercise
Price Number Price Contractual Life Number Price
- ---------------------- ------------ ---------- ------------------ --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.26 408,464 $ 0.26 9.49 years 187,500 $ 0.26
$ 0.90 1,007,755 $ 0.90 8.77 years 436,079 $ 0.90
$ 2.50 15,000 $ 2.50 5.25 years 15,000 $ 2.50
--------- -------
$ 0.26-$2.50 1,431,219 $ 0.73 8.94 years 638,579 $ 0.75
========= =======
</TABLE>
All outstanding options vest at various rates over periods up to five
years and expire at various dates from April 27, 2003 to July 24, 2007. At
September 30, 1996, 104,783 options were exercisable at a weighted average
exercise price of $1.17.
Pro forma Net Income Information:
Pro forma information regarding net loss shown below was determined as if
Transcell had accounted for employee stock options 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 a Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Dividend yield .................................... 0% 0%
Expected volatility ............................... 70% 70%
Risk-free interest rate ........................... 6.0% - 6.8% 6.4% - 6.6%
Expected option life after shares are granted ..... 5 years 5 years
Weighted average grant date fair value ............ $ 0.26 $ 1.02
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. Transcell's employee stock options
have characteristics significantly different from those of traded options such
as vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models are highly subjective,
F-34
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 8 -- EQUITY: -- Continued
particularly the assumption of expected stock price volatility of the
underlying stock. Changes in these subjective assumptions can materially affect
the fair value estimate.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The below pro forma net
loss and net loss per share amounts only include option grants within the last
two years. The pro forma effect on net loss for the fiscal years ended
September 30, 1997 and 1996 may not be representative of the pro forma effect
on net income or loss in future years. Transcell'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 loss ......... $7,724,018 $7,972,241 $4,742,377 $ 4,818,678
========== ========== ========== ===========
</TABLE>
NOTE 9 -- NOTES PAYABLE TO INTERNEURON:
Convertible Debenture -- Interneuron:
In March 1995, Transcell entered into a Convertible Debenture (the
"Debenture") with Interneuron. The Debenture accrues interest on the
outstanding principal balance at an annual rate equal to 1% over the prime
lending rate. The Debenture, together with accrued interest thereon, is due and
payable on the earlier of March 31, 2000 or the closing of an initial public
offering of Transcell's securities. The Debenture is payable, at Transcell's
option, in cash or in shares of Transcell's Class A Common Stock. Also, the
Debenture is convertible, at any time at the option of Interneuron, into shares
of Transcell's Class A Common Stock. The conversion price is equal to the fair
market value of the Class A Common Stock at the time of conversion. At
September 30, 1997 and 1996, advances under the Debenture, including accrued
interest thereon, were approximately $515,000 and $476,000, respectively.
Note Payable to Interneuron:
In March 1996, Transcell entered into a Promissory Note (the "Note") with
Interneuron covering operating advances made to Transcell through March 1996
pursuant to a support letter and subsequent advances by Interneuron. The Note
accrues interest at a rate equal to 1% over the prime lending rate. Pursuant to
the terms of the support letter, for each dollar advanced thereunder, Transcell
issued a warrant to Interneuron for one quarter of one share of Series B
Preferred Stock at an exercise price of $5.06 per share. A total of 465,144
warrants were issued which expire in May 1999. The Note, together with accrued
interest thereon, is due and payable on the earlier of March 31, 2001 or the
closing of an initial public offering of Transcell's securities or on demand.
At September 30, 1997 and 1996, advances under the Note, including accrued
interest thereon, totaled approximately $11,911,000 and $4,546,000,
respectively.
NOTE 10 -- SUBSEQUENT EVENTS:
In November 1997, Transcell announced the signing of a letter of intent
for the proposed acquisition by Intercardia, Inc. ("Intercardia"), a
majority-owned subsidiary of Interneuron, of Transcell and related technology
owned by Transcell and Interneuron in exchange for Intercardia common stock
with an aggregate value of approximately $14,000,000 to $15,000,000, of which
$3,000,000 is payment to Interneuron for its technology rights and continued
guarantee of certain Transcell leases (the "Proposed Acquisition"). In
addition, Intercardia will issue Intercardia stock options to Transcell
employees and consultants with a market value of approximately $3,000,000 to
$4,000,000. The transaction is subject to final due diligence by Intercardia
and Interneuron and approval by Transcell's and Intercardia's stockholders.
F-35
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS -- Continued
NOTE 10 -- SUBSEQUENT EVENTS: -- Continued
Under the terms of the letter of intent, Transcell's stockholders will
receive Intercardia common stock in three installments with an aggregate value
of approximately $11,000,000 to $12,000,000. The first installment,
representing approximately $5,500,000 to $6,000,000, will be made upon the
closing of the transaction, currently estimated to occur in the second calendar
quarter of 1998 (the "Closing"). The second and third installments will each
consist of approximately $2,750,000 to $3,000,000 of Intercardia common stock,
as valued at each date, and will occur 15 and 21 months, respectively, after
the first 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 at the first closing and will pay Interneuron a
royalty on certain products that may result from the Merck Agreement.
In addition, Interneuron, at the closing, will cancel warrants it holds to
purchase Transcell Series B Preferred Stock and will also contribute all
outstanding principal and interest balances due under the Debenture and the
Note to Transcell's capital.
At a February 1998 meeting of the Transcell Board, Transcell issued
options to purchase an aggregate of 1,531,430 shares of Transcell's Common
Stock to a director and a party related to a director. These options vest as
follows: (a) 50% vest on the first anniversary of the date of grant; provided
that, if the Proposed Acquisition closes prior to the one year anniversary of
the date of grant, a pro rata portion of the 50% will vest, equal to the number
of four week periods completed at the Closing divided by thirteen, with the
remaining unvested portion of the first 50% to vest in equal installments every
four weeks; (b) the remaining 50% vest in thirteen equal installments every
four weeks over the twelve month period commencing one year following the grant
date. The options granted are subject to cancellation in the event that the
Proposed Acquisition does not close within one year following the date of
grant. In connection with the issuance of these options, Transcell will incur
noncash compensation expense recognized ratably from the date of grant over the
vesting period of the options. The charges relating to the options are expected
to aggregate approximately $1,824,000 of which approximately $570,000 is
expected to be incurred in the fiscal year ending September 30, 1998, and the
remainder through the final vesting periods in fiscal 2000.
The Transcell Board also approved an increase in the number of shares of
Transcell's Common Stock authorized for issuance under the Plan from 1,800,000
shares to 3,300,000 shares.
F-36
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 106,645 $ 561,559
Prepaid expenses ...................................................................... 168,225 151,114
------------- -------------
Total current assets ................................................................. 274,870 712,673
Property and equipment, net ............................................................. 3,499,424 3,307,556
Other assets ............................................................................ 83,174 75,669
------------- -------------
Total assets ......................................................................... $ 3,857,468 $ 4,095,898
============= =============
LIABILITIES
Current liabilities:
Accounts payable ...................................................................... $ 495,856 $ 542,446
Accrued expenses ...................................................................... 1,769,267 1,723,488
Current portion of capital lease obligations .......................................... 443,961 514,188
Note payable to Interneuron ........................................................... 13,771,638 11,911,187
Current portion of note payable ....................................................... 30,274 29,420
Deferred revenue ...................................................................... 333,500 500,250
------------- -------------
Total current liabilities ............................................................ 16,844,496 15,220,979
Long-term portion of capital lease obligations .......................................... 877,528 993,128
Convertible debenture -- Interneuron .................................................... 524,705 514,729
Note payable ............................................................................ 458,541 459,173
------------- -------------
Total liabilities .................................................................... 18,705,270 17,188,009
------------- -------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Preferred stock; $.01 par value, 5,000,000 shares authorized:
Series A, 1,460,388 shares issued and outstanding as of December 31, 1997 and
September 30, 1997, respectively ..................................................... 9,127,428 9,127,428
Series B, 349,000 shares issued and outstanding as of December 31, 1997 and
September 30, 1997, respectively ..................................................... 1,525,847 1,525,847
Common stock; $.001 par value, 50,500,000 shares authorized:
Class A, 3,928,603 and 3,927,956 shares issued and outstanding at December 31, 1997
and September 30, 1997, respectively ................................................. 3,929 3,928
Class B, 199,488 shares issued and outstanding at December 31, 1997 and September
30, 1997, respectively ............................................................... 199 199
Additional paid-in capital .............................................................. 1,531,743 1,531,161
Deficit accumulated during development stage ............................................ (26,892,771) (25,115,111)
Unearned compensation ................................................................... (144,177) (165,563)
------------- -------------
Total stockholders' deficit .......................................................... (14,847,802) (13,092,111)
------------- -------------
Total liabilities and stockholders' deficit .......................................... $ 3,857,468 $ 4,095,898
============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
F-37
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended October 21, 1991
December 31, (date of inception)
------------------------------- to December 31,
1997 1996 1997
--------------- --------------- --------------------
<S> <C> <C> <C>
Contract and license fee revenue ......... $ 316,750 $ 2,276,481
Costs and expenses:
Research and development ................ 1,340,776 $ 923,812 19,093,091
General and administration .............. 396,408 501,751 7,033,751
------------ ------------ -------------
Total operating expenses .............. 1,737,184 1,425,563 26,126,842
------------ ------------ -------------
Net loss from operations ................. (1,420,434) (1,425,563) (23,850,361)
Interest income (expense):
Interest income ......................... 1,204 1,663 33,549
Interest expense -- Interneuron ......... (311,203) (223,980) (2,653,289)
Interest expense -- other ............... (47,227) (16,010) (418,902)
------------ ------------ -------------
Net loss ................................. $ (1,777,660) $ (1,663,890) $ (26,889,003)
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
F-38
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
---------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (1,777,660) $ (1,663,890)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization ............................................... 217,301 134,197
Noncash compensation ........................................................ 21,386 28,226
Interest to Interneuron ..................................................... 311,202 223,980
Changes in operating assets and liabilities:
Prepaid expenses ............................................................ (17,111) 7,622
Other assets ................................................................. (7,505) 3,413
Accounts payable ............................................................ (39,258) (401,597)
Accrued expenses ............................................................ 45,779 211,094
Deferred revenue ............................................................ (166,750) --
------------ ------------
Net cash (used) by operating activities ........................................ (1,412,616) (1,456,955)
------------ ------------
Cash flows from investing activities:
Capital expenditures ........................................................ (409,169) (237,837)
------------ ------------
Net cash (used) by investing activities ........................................ (409,169) (237,837)
------------ ------------
Cash flows from financing activities:
Borrowings from Interneuron ................................................... 1,559,225 1,703,526
Repayment of borrowings from Interneuron ...................................... -- --
Proceeds from issuance of common stock ........................................ 583 --
Proceeds from issuance of preferred stock ..................................... -- --
Proceeds from sale/leaseback transactions ..................................... -- --
Principal payments on note payable ............................................ (7,110) --
Principal payments on capital lease obligations ............................... (185,827) (80,592)
------------ ------------
Net cash provided by financing activities ...................................... 1,366,871 1,622,934
------------ ------------
Net change in cash and cash equivalents ........................................ (454,914) (71,858)
Cash and cash equivalents at beginning of period ............................... 561,559 294,715
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 106,645 $ 222,857
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................ $ 47,227 $ 16,010
============ ============
Property and equipment obtained through financing arrangement ................. $ -- $ --
============ ============
Conversion of note payable and accrued interest into stock .................... $ -- $ --
============ ============
<CAPTION>
October 21, 1991
(date of inception)
to December 31,
1997
--------------------
<S> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (26,889,003)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization ............................................... 1,669,263
Noncash compensation ........................................................ 763,567
Interest to Interneuron ..................................................... 2,781,921
Changes in operating assets and liabilities:
Prepaid expenses ............................................................ (168,225)
Other assets ................................................................. (83,174)
Accounts payable ............................................................ 503,188
Accrued expenses ............................................................ 1,769,266
Deferred revenue ............................................................ 333,500
-------------
Net cash (used) by operating activities ........................................ (19,319,697)
-------------
Cash flows from investing activities:
Capital expenditures ........................................................ (4,668,687)
-------------
Net cash (used) by investing activities ........................................ (4,668,687)
-------------
Cash flows from financing activities:
Borrowings from Interneuron ................................................... 23,949,596
Repayment of borrowings from Interneuron ...................................... (2,687,500)
Proceeds from issuance of common stock ........................................ 4,114
Proceeds from issuance of preferred stock ..................................... 1,525,847
Proceeds from sale/leaseback transactions ..................................... 2,406,142
Principal payments on note payable ............................................ (18,517)
Principal payments on capital lease obligations ............................... (1,084,653)
-------------
Net cash provided by financing activities ...................................... 24,095,029
-------------
Net change in cash and cash equivalents ........................................ 106,645
Cash and cash equivalents at beginning of period ............................... --
-------------
Cash and cash equivalents at end of period ..................................... $ 106,645
=============
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................ $ 282,259
=============
Property and equipment obtained through financing arrangement ................. $ 500,000
=============
Conversion of note payable and accrued interest into stock .................... $ 9,127,428
=============
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
F-39
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
Transcell Technologies, Inc. ("Transcell"), a Delaware corporation, was
organized in October 1991. Transcell is engaged in the research and development
of human therapeutic health care products based on proprietary technologies in
carbohydrate-based combinatorial chemistry. As of December 31, 1997,
Interneuron Pharmaceuticals, Inc. ("Interneuron") owned approximately 79% of
the outstanding capital stock of Transcell.
The financial statements included herein have been prepared by the Company
without audit. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows of Transcell. The unaudited financial statements
included herein should be read in conjunction with the audited financial
statements and the notes thereto included in this Registration Statement for
the fiscal year ended September 30, 1997. Results for the interim period are
not necessarily indicative of the results for any other interim period or for
the full fiscal year.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should Transcell be unable to continue as a
going concern.
During the three months ended December 31, 1997, Transcell arranged for
the financing of its operations by borrowing approximately $1,559,000 from
Interneuron and using approximately $455,000 of cash and cash equivalents on
hand at September 30, 1997. Significant additional research and development
activities, clinical testing and regulatory approvals must be completed before
commercial sales, if any, will commence. Transcell is actively pursuing
research and development grants and collaborations to fund its research and
development activities. Transcell is dependent upon Interneuron for funding
current operations, and there are no guarantees of continued funding from
Interneuron.
Transcell will adopt SFAS No. 130, "Reporting Comprehensive Income", 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.
Transcell will adopt SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", 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.
B. PROPOSED ACQUISITION
In November 1997, Transcell announced the signing of a letter of intent
for the proposed acquisition by Intercardia, Inc. ("Intercardia"), a
majority-owned subsidiary of Interneuron, of Transcell and related technology
owned by Transcell and Interneuron in exchange for Intercardia Common Stock
with an aggregate value of approximately $14,000,000 to $15,000,000, of which
$3,000,000 is payment to Interneuron for its technology rights and continued
guarantee of certain Transcell leases (the "Proposed Acquisition"). In
addition, Intercardia will issue Intercardia stock options to Transcell
employees and consultants with a market value of approximately $3,000,000 to
$4,000,000. The transaction is subject to final due diligence by Intercardia
and Interneuron and approval by Transcell's and Intercardia's stockholders.
Under the terms of the letter of intent, Transcell's stockholders will
receive Intercardia common stock in three installments with an aggregate value
of approximately $11,000,000 to $12,000,000. The first installment,
representing approximately $5,500,000 to $6,000,000, will be made upon the
closing of the transaction, currently estimated to occur in the second calendar
quarter of 1998 (the "Closing"). The second and third installments will each
consist of approximately $2,750,000 to $3,000,000 of Intercardia common stock,
as valued at each date, and will occur 15 and 21 months, respectively, after
the first closing.
F-40
<PAGE>
TRANSCELL TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- Continued
B. PROPOSED ACQUISITION -- Continued
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 at the first 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.
The actual market value of the Intercardia common stock to be issued in
the Proposed Acquisition may be increased or decreased based upon the market
price of Intercardia's stock at Closing.
In addition, Interneuron, at the Closing, will cancel warrants it holds to
purchase Transcell Series B Preferred Stock and will also contribute to
Transcell's capital all outstanding principal and interest balances due under
obligations payable to Interneuron.
F-41
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
between
INTERCARDIA, INC.,
TRANSCELL TECHNOLOGIES, INC.
and
INTERNEURON PHARMACEUTICALS, INC.
MARCH 2, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ARTICLE 1 The Merger ............................................................... A-1
1.1 The Merger .................................................................. A-1
1.2 Effective Time .............................................................. A-1
ARTICLE 2 Certificate of Incorporation and Bylaws of the Surviving Corporation ..... A-1
2.1 Certificate of Incorporation ................................................ A-1
2.2 Bylaws ...................................................................... A-1
ARTICLE 3 Directors and Officers of the Surviving Corporation ...................... A-1
3.1 Directors ................................................................... A-2
3.2 Officers .................................................................... A-2
ARTICLE 4 Consideration and Closing ................................................ A-2
4.1 Purchase Price; Exchange Ratios ............................................. A-2
4.2 Exchange of Certificates Representing Capital Stock ......................... A-4
4.3 Adjustment of Merger Consideration .......................................... A-4
4.4 Dissenting Transcell Shareholders ........................................... A-4
4.5 The Closing ................................................................. A-5
ARTICLE 5 Representations and Warranties of Transcell .............................. A-5
5.1 Existence; Good Standing; Corporate Authority ............................... A-5
5.2 Authorization, Validity and Effect of Agreement ............................. A-5
5.3 Compliance with Laws ........................................................ A-5
5.4 Capitalization .............................................................. A-5
5.5 Subsidiaries ................................................................ A-6
5.6 No Violation ................................................................ A-6
5.7 Financial Statements ........................................................ A-6
5.8 Litigation .................................................................. A-7
5.9 Absence of Certain Changes .................................................. A-7
5.10 Taxes ....................................................................... A-7
5.11 Employee Benefit Plans ...................................................... A-7
5.12 Labor and Employment Matters ................................................ A-8
5.13 Brokers and Finders ......................................................... A-8
5.14 Opinion of Financial Advisor ................................................ A-8
5.15 Material Contracts .......................................................... A-8
5.16 Intellectual Property: Technology ........................................... A-9
5.17 Investments ................................................................. A-9
5.18 Insurance ................................................................... A-9
5.19 Product Liability ........................................................... A-10
5.20 Governmental Approvals ...................................................... A-10
ARTICLE 6 Representations and Warranties of Intercardia ............................ A-10
6.1 Existence; Good Standing; Corporate Authority ............................... A-10
6.2 Subsidiaries ................................................................ A-10
6.3 Authorization; Validity and Effect of Agreements ............................ A-10
6.4 Litigation .................................................................. A-10
6.5 No Violation ................................................................ A-10
6.6 Capital Stock of Intercardia ................................................ A-11
6.7 SEC Reports; Financial Statements ........................................... A-11
6.8 Brokers and Finders ......................................................... A-11
6.9 Opinion of Financial Advisor ................................................ A-11
ARTICLE 7 Covenants ................................................................ A-12
7.1 No Solicitation ............................................................. A-12
7.2 Interim Operations .......................................................... A-12
7.3 Stockholder Approvals; Information Statement ................................ A-13
7.4 Filings; Other Action ....................................................... A-14
7.5 Access to Information ....................................................... A-15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7.6 Publicity ...................................................... A-15
7.7 Further Action ................................................. A-15
7.8 Insurance; Indemnity ........................................... A-15
7.9 Employees and Employee Benefit Plans ........................... A-15
7.10 Reasonable Efforts ............................................. A-16
7.11 Certain Notification ........................................... A-16
7.12 Interneuron Obligations ........................................ A-16
7.13 Interneuron Royalty ............................................ A-16
7.14 SEC Filings and Transaction Costs .............................. A-16
7.15 Authorization for Trading; Reporting Status .................... A-16
7.16 Intercardia Approval ........................................... A-16
7.17 Tax Covenant ................................................... A-17
ARTICLE 8 Conditions .................................................. A-17
8.1 Conditions to Each Party's Obligation to Effect the Merger ..... A-17
8.2 Conditions to Obligations of Intercardia ....................... A-17
8.3 Conditions to Obligations of Transcell and Interneuron ......... A-18
ARTICLE 9 Termination; Amendment; Waiver .............................. A-19
9.1 Termination .................................................... A-19
9.2 Effect of Termination .......................................... A-20
9.3 Amendment ...................................................... A-20
9.4 Extension; Waiver .............................................. A-20
ARTICLE 10 Indemnification ............................................ A-20
10.1 Indemnification of Intercardia ................................. A-20
10.2 Indemnification of Exchanging Stockholders ..................... A-21
10.3 Procedures Relating to Indemnification of Tax Claims. .......... A-21
10.4 Remedies ....................................................... A-22
10.5 Survival ....................................................... A-22
10.6 Limitation on Liability ........................................ A-22
10.7 Calculation of Indemnification ................................. A-23
ARTICLE 11 General Provisions ......................................... A-23
11.1 Survival of Representations and Warranties ..................... A-23
11.2 Notices ........................................................ A-23
11.3 Assignment; Binding Effect; Third Party Beneficiaries .......... A-23
11.4 Entire Agreement ............................................... A-24
11.5 Governing Law .................................................. A-24
11.6 Headings ....................................................... A-24
11.7 Interpretation; Certain Definitions ............................ A-24
11.8 Investigations ................................................. A-24
11.9 Severability ................................................... A-24
11.10 Enforcement of Agreement ...................................... A-24
11.11 Counterparts .................................................. A-24
11.12 Knowledge ..................................................... A-24
11.13 Further Action ................................................ A-25
11.14 Arbitration ................................................... A-25
11.15 Invalidity, Etc ............................................... A-25
</TABLE>
Schedules and Exhibits:
<TABLE>
<S> <C>
Exhibit 4.1 Schedule of Outstanding Capital Stock, Transcell Options and Transcell Warrants
Exhibit 7.6 Form of Press Release relating to this Agreement
Exhibit 7.13 Form of Assignment and Assumption and Royalty Agreement to be entered into between Intercardia
and Interneuron
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of March 2, 1998, by and among Intercardia, Inc., a Delaware
corporation ("Intercardia"); Transcell Technologies, Inc. a Delaware
corporation ("Transcell"); and Interneuron Pharmaceuticals, Inc., a Delaware
corporation ("Interneuron").
WITNESSETH:
WHEREAS, Transcell is a Delaware corporation with authorized capital stock
of 50,000,000 shares of Transcell Class A Common Stock, $.001 par value ("Class
A Common Stock"), 500,000 shares of Transcell Class B Common Stock, $.001 par
value ("Class B Common Stock"), 2,000,000 shares of Transcell Series A
Preferred Stock, $.01 par value ("Series A Preferred Stock"), 880,000 shares of
Transcell Series B Preferred Stock, $.01 par value ("Series B Preferred Stock")
and 2,120,000 shares of Transcell additional Preferred Stock, $.01 par value
("Additional Preferred Stock"); the authorized Class A Common Stock, Class B
Common Stock, Series A Preferred Stock, Series B Preferred Stock and Additional
Preferred Stock are hereinafter sometimes collectively referred to as
"Authorized Capital Stock";
NOW, THEREFORE, in reliance upon the premises, representations, warranties
and covenants made herein and in consideration of the mutual agreements herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE 1
The Merger
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (defined terms used herein not previously defined having the
meanings as hereinafter defined), Transcell shall be merged with and into
Intercardia in accordance with the Delaware General Corporation Law ("DGCL")
and this Agreement, and the separate corporate existence of Transcell shall
thereupon cease (the "Merger"). Intercardia shall be the surviving corporation
in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation"). The Merger shall have the effects specified in Section 259 of
the DGCL.
1.2 Effective Time. If all the conditions to the Merger set forth in
Article 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 9, the parties
hereto shall cause a Certificate of Merger meeting the requirements of Section
251 of the DGCL to be properly executed and duly filed on the Closing Date. The
Merger shall become effective at the time of filing of a Certificate of Merger
with the Secretary of State of Delaware or at such later time which the parties
hereto shall have agreed upon and designated in such filing as the effective
time of the Merger (the "Effective Time"). At the Effective Time, the effect of
the Merger shall be as provided in Section 259 of the DGCL. Without limiting
the generality of the foregoing, and subject to Section 259 of the DGCL, at the
Effective Time, all of the property, rights, privileges, powers and franchises
of Transcell shall vest in the Surviving Corporation and, except as otherwise
provided herein, all debts, liabilities and duties of Transcell shall become
the debts, liabilities and duties of the Surviving Corporation.
ARTICLE 2
Certificate of Incorporation and Bylaws of the Surviving Corporation
2.1 Certificate of Incorporation. The Certificate of Incorporation of
Intercardia in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, until duly amended
in accordance with applicable law.
2.2 Bylaws. The Bylaws of Intercardia in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with the terms thereof and applicable law.
ARTICLE 3
Directors and Officers of the Surviving Corporation
3.1 Directors. The directors of Intercardia immediately prior to the
Effective Time shall be the directors of the Surviving Corporation as of the
Effective Time and shall hold office until their respective successors are duly
appointed or elected
A-1
<PAGE>
and qualified or until their earlier death, resignation or removal, in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation, or as otherwise provided by applicable law.
3.2 Officers. The officers of Intercardia immediately prior to the
Effective Time, together with such additions thereto as Intercardia shall
designate, shall be the initial officers of the Surviving Corporation as of the
Effective Time and shall hold office from the Effective Time until their
successors are duly appointed or elected in accordance with applicable law.
ARTICLE 4
Consideration and Closing
4.1 Purchase Price; Exchange Ratios.
(a) At the Effective Time, each share of Authorized Capital Stock that is
issued and outstanding ("Outstanding Capital Stock") immediately prior to the
Effective Time (other than shares owned or held by Transcell, all of which
shall be canceled as provided in Section 4.1(c), and other than shares of
Dissenting Capital Stock) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive in
three installments (the first at Closing, as defined in Section 4.5 hereof (the
"First Installment"), the second on the 15-month anniversary of Closing (the
"Second Installment") and the third on the 21-month anniversary of Closing (the
"Third Installment," together with the Second Installment the "Future
Installments")) that number of shares of Intercardia Common Stock calculated in
accordance with the exchange ratio applicable for each installment for such
class or series as follows:
(i)(A) The exchange ratios for each share of Series B Preferred Stock
outstanding as of the Effective Time (the "Series B Exchange Ratios") shall
be determined by dividing:
(I) $4.3750 by the Initial Market Price (as defined in Section
4.1(a)(iv) hereof) for the First Installment;
(II) $2.4609 by the Intercardia Stock Price (as defined in Section
4.1(a)(iv) hereof) determined at the 15-month anniversary of Closing for
the Second Installment; and
(III) $2.5703 by the Intercardia Stock Price determined at the
21-month anniversary of Closing for the Third Installment.
The total number of shares of Intercardia Common Stock issuable in
exchange for the outstanding Series B Preferred Stock, as determined by the
Series B Exchange Ratios, is sometimes referred to herein as the "Series B
Purchase Price". Exhibit 4.1 sets forth the number of shares of Series B
Preferred Stock outstanding as of the date hereof.
(B) The exchange ratios for each Class A Common Equivalent Share (the
aggregate number of "Class A Common Equivalent Shares" shall be calculated
by adding to the number of issued and outstanding shares of Class A Common
Stock the number of shares of Class A Common Stock issuable upon conversion
of the Class B Common Stock and Series A Preferred Stock as determined
under the provisions of the Transcell Certificate of Incorporation)
outstanding (or deemed to be outstanding) as of the Effective Time (the
"Class A Exchange Ratios") shall be determined by dividing:
(I) for the Initial Installment (the "Closing Class A Exchange
Ratio"), $1.40 by the Initial Market Price multiplied by 50%; provided,
however, that if the Initial Market Price is less than $15, then the
Closing Class A Exchange Ratio shall be 0.0467 ($1.40 divided by $15
multiplied by 50%) and if the Initial Market Price is greater than $29,
then the Closing A Exchange Ratio shall be 0.0241 ($1.40 divided by $29
multiplied by 50%); and
(II) for each of the Future Installments (the "Installment Class A
Exchange Ratio(s)"), $1.40 by (a) the Intercardia Stock Price determined
on the fifteen (15) month anniversary of the Closing with respect to the
Second Installment and (b) the Intercardia Stock Price determined on the
twenty-one (21) month anniversary of the Closing with respect to the
Third Installment, in each case multiplied by 25%.
The total number of shares of Intercardia Common Stock issuable in
exchange for the Class A Common Equivalent Shares outstanding (or deemed to
be outstanding), as determined by the Class A Exchange Ratios, is sometimes
referred to herein as the "Class A Purchase Price". Exhibit 4.1 sets forth
the number of Class A Common Equivalent Shares outstanding (or deemed to be
outstanding) as of the date hereof.
(ii) Each of the outstanding warrants to purchase shares of Series B
Preferred Stock (the "Transcell Warrants") as of the Effective Time shall
be converted into the right to receive a replacement warrant to purchase a
number of shares of Intercardia Common Stock ("Replacement Warrant") equal
to the number of shares of Series B Preferred Stock underlying such
Transcell Warrant multiplied by the Warrant Exchange Ratio. The "Warrant
Exchange Ratio" shall be
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determined by dividing $8.75 by the Initial Market Price. The exercise
price per share of Intercardia Common Stock (rounded down to the nearest
cent) issuable under each Replacement Warrant will equal the per share
exercise price of the corresponding Transcell Warrant divided by the
Warrant Exchange Ratio.
Exhibit 4.1 sets forth, with respect to Transcell Warrants as of the date
hereof, the number of underlying shares of Series B Preferred Stock and the
exercise price thereof.
(iii) Intercardia shall assume the existing Transcell 1992 Stock Option
Plan as amended (the "1992 Plan") and each of the outstanding options to
purchase shares of Class A Common Stock under the 1992 Plan (the "Transcell
Options") as of the Effective Time shall be converted into the right to
receive a replacement option to purchase shares of Intercardia Common Stock
("Replacement Options") on terms as set forth below:
(A) Each Replacement Option will represent the right to purchase a
number of shares of Intercardia Common Stock (rounded to the nearest
whole share) equal to the number of shares of Class A Common Stock
issuable upon exercise of the corresponding Transcell Option multiplied
by the Closing Class A Exchange Ratio multiplied by two (2).
(B) The exercise price per share of Intercardia Common Stock (rounded
to the nearest cent) of each Replacement Option will equal the per share
exercise price of the corresponding Transcell Option divided by the
Closing Class A Exchange Ratio multiplied by two (2).
(C) The term of each Replacement Option will be the same as the
remaining term of the corresponding Transcell Option.
(D) The vesting restrictions contained in each Replacement Option will
be the same as the vesting restrictions contained in the corresponding
Transcell Options, except as otherwise agreed.
Exhibit 4.1 sets forth, with respect to Transcell Options as of the
date hereof, the number of underlying shares of Class A Common Stock and
the exercise price thereof.
(iv) The Series B Purchase Price and the Class A Purchase Price are
sometimes collectively referred to herein as the "Aggregate Purchase
Price".
The Aggregate Purchase Price, the Replacement Warrants and the
Replacement Options are sometimes collectively referred to herein as the
"Aggregate Merger Consideration".
The "Initial Market Price" shall mean the Intercardia Stock Price
determined as of the Closing.
The "Intercardia Stock Price" shall mean the average of the high and the
low sales prices of Intercardia Common Stock for the five (5) most recent
trading days in which trading volume exceeds 1500 shares ending two (2)
business days immediately prior to the date of determination. In lieu of
issuing any fractional shares, Intercardia shall pay the holders of
Outstanding Capital Stock an amount in cash equal to such fraction
multiplied by the applicable Intercardia Stock Price.
All exchange ratios hereunder shall be calculated to four decimal places,
rounding up from 0.00005.
(b) As a result of the Merger and without any action on the part of the
holders thereof, at the Effective Time, all shares of Outstanding Capital Stock
shall cease to be outstanding and shall be automatically canceled and retired
and shall cease to exist, and each holder of shares of Outstanding Capital
Stock (other than Transcell) shall thereafter cease to have any rights with
respect to such shares of Outstanding Capital Stock, except the right to
receive, without interest, the number of shares of Intercardia Common Stock
determined by the applicable exchange ratio in accordance with Section 4.1 upon
the surrender of a certificate or certificates (a "Certificate") representing
such shares of Outstanding Capital Stock or, with respect to shares of
Dissenting Capital Stock, payment of the appraised value of shares of
Dissenting Capital Stock in accordance with Section 4.4.
(c) Each share of Outstanding Capital Stock owned or held by Transcell
immediately prior to the Effective Time shall, by virtue of the Merger, cease
to be outstanding and shall be automatically canceled and retired without
payment of any consideration therefor.
(d) Each Transcell Option or Transcell Warrant, whether or not then
exercisable, outstanding on the Effective Time, upon presentation to
Intercardia of the option or warrant agreement or certificate representing such
Transcell Option or Transcell Warrant, shall be exchangeable only as stated in
this Agreement and, upon presentation to Intercardia, shall be cancelled and
shall cease to exist.
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(e) If, prior to the date of either the Second or Third Installment,
Intercardia enters into an agreement relating to the consolidation or merger of
Intercardia or sale of all or substantially all of Intercardia's assets, the
due date of any outstanding installment shall be accelerated to the time
immediately prior to the specified effective date of any such transaction and
the consideration payable in connection with such transaction shall be payable
at the specified effective date to the persons entitled to receive the
installment payments based upon the values stated in this Agreement with the
Intercardia Stock Price determined as of the effective date of the closing of
any such transaction.
4.2 Exchange of Certificates Representing Outstanding Capital Stock.
(a) Prior to the Effective Time, Intercardia shall appoint a Transfer
Agent hereunder for payment of the Merger Consideration upon surrender of
Certificates (the "Transfer Agent"). Intercardia shall provide the Transfer
Agent with Intercardia Common Stock in amounts necessary to pay for all the
shares of Outstanding Capital Stock pursuant to Section 4.1(a).
(b) Promptly after the Effective Time, Intercardia shall cause the
Transfer Agent to mail to each holder of record of shares of Outstanding
Capital Stock immediately prior to the Effective Time (i) a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to such Certificates shall pass, only upon delivery of the
Certificates to the Transfer Agent and which letter shall be in customary form
and have such other provisions as Intercardia may reasonably specify and (ii)
instructions for effecting the surrender of such Certificates in exchange for
the Merger Consideration applicable thereto. Upon surrender of a Certificate to
the Transfer Agent together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, and such other documents
as may reasonably be required by the Transfer Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor the amount of the
shares of Intercardia Common Stock into which shares of Outstanding Capital
Stock theretofore represented by such Certificate shall have been converted
pursuant to Section 4.1, and at the installment dates set forth in Section 4.1,
and the shares represented by the Certificate so surrendered shall forthwith be
canceled. No interest will be paid or will accrue on the shares of Intercardia
Common Stock payable upon surrender of any Certificate. In the event of a
transfer of ownership of Outstanding Capital Stock which is not registered in
the transfer records of Transcell, payment may be made with respect to such
Outstanding Capital Stock to such a transferee if the Certificate representing
such shares of Outstanding Capital Stock is presented to the Transfer Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid.
(c) At and after the Effective Time, there shall be no transfers on the
share transfer books of Transcell of the shares of Outstanding Capital Stock as
of immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged as provided in this Article 4.
(d) None of Intercardia, Transcell, the Transfer Agent or any other person
shall be liable to any former holder of shares of Outstanding Capital Stock for
any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(e) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving Corporation or
the Transfer Agent, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation or the Transfer Agent may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Transfer Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration payable in respect thereof
pursuant to this Agreement.
4.3 Adjustment of Merger Consideration. If, subsequent to the date of this
Agreement but prior to the Effective Time, the Outstanding Capital Stock shall
have been changed into a different number of shares or a different class as a
result of a stock split, reverse stock split, stock dividend, subdivision,
reclassification, split, combination, exchange, recapitalization or other
similar transaction, the applicable Exchange Ratios shall be appropriately
adjusted.
4.4 Dissenting Transcell Stockholders. Notwithstanding any provision of
this Agreement to the contrary, if required by the DGCL but only to the extent
required thereby, shares of Outstanding Capital Stock as of immediately prior
to the Effective Time and which are held by holders of such shares who have not
voted in favor of the Merger and have properly exercised their rights of
appraisal with respect thereto (the "Dissenting Capital Stock") in accordance
with Section 262 of the DGCL will not be converted into the right to receive
the number of shares of Intercardia Common Stock determined in accordance with
the applicable exchange ratio for their Outstanding Capital Stock unless and
until such holders fail to perfect or effectively withdraw or lose their rights
to appraisal and payment under the DGCL. If, after the Effective Time, any such
holder fails to perfect or effectively withdraws or loses such right, such
shares of Dissenting Capital Stock will thereupon be treated as if they had
been converted into, at the Effective Time, the right to receive the number of
shares of
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Intercardia Common Stock determined in accordance with the applicable exchange
ratio for their Outstanding Capital Stock, without any interest thereon.
Notwithstanding anything to the contrary contained in this Section 4.4, if (a)
the Merger is rescinded or abandoned or (b) the stockholders of Transcell or
Intercardia revoke the authority to effect the Merger, then the right of any
stockholder pursuant to Section 262 of the DCGL shall cease. Transcell will
give Intercardia prompt notice of any demands and withdrawals of such demands
received by Transcell for appraisals of shares of Dissenting Capital Stock.
Transcell shall not, except with the written consent of Intercardia, make any
payment with respect to any demands for appraisal or otherwise offer to settle
or settle any such demands.
4.5 The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Wyrick Robbins Yates & Ponton LLP, at 10:00 a.m., local time, as soon as
practicable (but in no event more than three business days) following the
satisfaction (or waiver if permissible) of the conditions set forth in Article
8 or at such other time, date or place as Intercardia, Transcell and
Interneuron may agree. The date on which the Closing occurs is hereinafter
referred to as the "Closing Date".
ARTICLE 5
Representations and Warranties of Transcell
Except as set forth in the writing from Transcell to Intercardia that is
dated the date of this Agreement and that is identified by Transcell as the
disclosure letter to this Agreement (the "Transcell Disclosure Letter"), as of
the date hereof and as of the Effective Time, Transcell hereby represents and
warrants to Intercardia as follows:
5.1 Existence; Good Standing; Corporate Authority. Transcell is (a) a
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware and (b) duly licensed or qualified to do business as a foreign
corporation and is in good standing under the laws of any other jurisdiction in
which the character of the properties owned or leased by it or in which the
transaction of its business makes such licensure, qualification or good
standing necessary, except where the failure to be so in good standing or to be
so licensed or qualified, individually or in the aggregate, would not have a
material adverse effect on the business, operations, results of operations,
assets, financial condition or prospects of Transcell (excluding any material
adverse effect resulting from actions taken by Intercardia) (a "Transcell
Material Adverse Effect"). Transcell has the requisite corporate power and
authority to own, operate and lease its properties and carry on its business as
now conducted. Transcell has heretofore delivered to Intercardia true and
correct copies of the Certificate of Incorporation and Bylaws of Transcell as
currently in effect.
5.2 Authorization, Validity and Effect of Agreement. Transcell has the
requisite corporate power and authority to execute and deliver this Agreement
and, subject to Transcell stockholder approval, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation by Transcell of the transactions contemplated hereby have been
duly and validly authorized by the Transcell Board of Directors, and no other
corporate proceedings on the part of Transcell (other than Transcell
stockholder approval) are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Transcell, and (assuming this Agreement
constitutes the valid and binding obligation of Intercardia) constitutes the
valid and binding obligation of Transcell, enforceable against Transcell in
accordance with its terms, except as the same may be limited by (a) applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, (b) laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies, and (c) the extent to which the enforceability of the indemnification
provisions contained in this Agreement may be limited by applicable laws.
5.3 Compliance with Laws. Transcell is not in violation in any material
respect of any federal, state, local or foreign law, statute, ordinance, rule,
regulation, order, judgment, ruling or decree ("Laws") of any federal, state,
local or foreign judicial, legislative, execution, administrative or regulatory
body or authority or any court, arbitration, board or tribunal (each such
entity, a "Governmental Entity") applicable to Transcell or any of its
properties or assets, except for violations which, individually or in the
aggregate, would not prevent or materially delay the consummation of the
transactions. No action, demand, requirement or investigation by any
governmental entity with respect to Transcell is pending or, to the knowledge
of Transcell, threatened, with respect to any of the foregoing.
5.4 Capitalization. The authorized capital stock of Transcell consists of
55,500,000 shares of Authorized Capital Stock of which 50,000,000 shares are
designated as Class A Common Stock, 500,000 shares are designated as Class B
Common Stock, 2,000,000 shares are designated as Series A Preferred Stock,
880,000 shares are designated as Series B Preferred Stock and 2,120,000 are
designated as Additional Preferred Stock. As of the date hereof, the following
shares of Authorized
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<PAGE>
Capital Stock were issued and outstanding (the "Outstanding Capital Stock") (a)
3,928,603 shares of Class A Common Stock; (b) 199,488 shares of Class B Common
Stock (which are convertible into 279,696 shares of Class A Common Stock); (c)
1,460,388 shares of Series A Preferred Stock; and (d) 349,000 shares of Series
B Preferred Stock. In addition, as of the date hereof, Transcell has
outstanding (i) Transcell Options to purchase an aggregate of 2,963,377 shares
of Class A Common Stock, (ii) Transcell Warrants to purchase an aggregate of
34,901 shares of Series B Preferred Stock, and (iii) promissory notes and
convertible debentures payable to Interneuron (collectively "Intercompany
Notes") in the aggregate amount of $14,296,343, including principal and accrued
interest, as of December 31, 1997, the then outstanding amount of which will be
contributed to the capital of Transcell at Closing. Transcell has reserved
adequate shares of Authorized Capital Stock for issuance upon the exercise of
outstanding Transcell Options and Transcell Warrants, and there were no stock
appreciation rights or limited stock appreciation rights outstanding. Except
for the Outstanding Capital Stock, Transcell Options, Transcell Warrants and
Intercompany Notes, Transcell has no outstanding bonds, debentures, notes or
other obligations or securities entitling the holders thereof to vote (or which
are convertible into or exercisable for securities having the right to vote)
with the stockholders of Transcell on any matter except an agreement to issue
warrants to Interneuron which rights will be waived by Interneuron immediately
prior to the Effective Time. All of the Outstanding Capital Stock is duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in this Section 5.4 or in the Transcell Disclosure
Letter, there are no preemptive or similar rights on the part of any holders of
any class of securities of Transcell, and there are no other shares of capital
stock of Transcell, no securities of Transcell convertible or exchangeable for
shares of capital stock or voting securities of Transcell, and no existing
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements or commitments which obligate Transcell to issue, transfer
or sell any shares of capital stock of, or equity interests in, Transcell.
There are no outstanding obligations of Transcell to repurchase, redeem or
otherwise acquire any shares of capital stock of Transcell. There are no voting
trusts or other agreements or understandings to which Transcell is a party with
respect to the voting of Outstanding Capital Stock.
5.5 Subsidiaries. Transcell owns no subsidiaries.
5.6 No Violation. Neither the execution and delivery by Transcell of this
Agreement nor the consummation by Transcell of the transactions contemplated
hereby will: (a) violate any provisions of the Certificate of Incorporation or
Bylaws of Transcell; (b) violate or conflict in any material respect with,
result in a breach of any material provision of, constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, result in the termination or in a right of termination of, accelerate
the performance required by or benefit obtainable under, result in the vesting,
triggering or acceleration of any material payment or other material
obligations pursuant to, result in the creation of any material encumbrance
upon any of the properties of Transcell under, or result in there being
declared void, voidable, subject to withdrawal, or without further binding
effect, any of the material terms, conditions or provisions of any material
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
lease, contract, agreement or other material instrument, commitment or
obligation to which Transcell is a party, by which Transcell or any of its
properties is bound (each of the foregoing, to the extent the same have any
continuing force or effect, a "Transcell Contract" and collectively, "Transcell
Contracts") except where such violation would not have a Transcell Material
Adverse Effect; (c) other than the filings provided for in Section 1.2, any
filings under the Securities Act of 1933, as amended (the "1933 Act"), or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the filings
as may be required to be made pursuant to applicable federal or state
securities laws or with the Nasdaq National Market on which the Intercardia
Common Stock is listed, or filings in connection with the maintenance of
qualification to do business in other jurisdictions (the filings disclosed in
the Transcell Disclosure Letter in response to this clause (c), the other
filings referred to in this clause (c) and consents required or permitted to be
made or obtained, collectively, the "Regulatory Filings"), require any consent,
approval or authorization of, or declaration, filing or registration with, any
governmental entity, except for those consents, approvals, authorizations,
declarations, filings or registrations the failure of which to obtain or make
individually or in the aggregate would not have a Transcell Material Adverse
Effect; or (d) violate in any material respect any laws applicable to Transcell
or any of its assets except for such violations which would not have a
Transcell Material Adverse Effect.
5.7 Financial Statements. Transcell has made available to Intercardia a
balance sheet of Transcell at September 30, 1996 and 1997, and statements of
operations, changes in stockholders' deficit and cash flows for the years then
ended, certified by Coopers & Lybrand LLP, independent public accountants, and
a balance sheet of Transcell at December 31, 1997 (the "1997 Balance Sheet")
and statements of operations and cash flows for the three months then ended.
Said financial statements (the "Financial Statements") have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied
consistently during the periods covered thereby, are complete and correct in
all material respects and present fairly in all material respects the financial
condition of Transcell at the 1997 Balance Sheet date and the results of its
operations for the periods covered by the Financial Statements. As of the date
of the 1997 Balance Sheet, Transcell had no liabilities or obligations,
contingent or otherwise, except liabilities and obligations (i) in the
respective amounts reflected
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on or reserved against in the 1997 Balance Sheet, (ii) not required by GAAP to
be included in the 1997 Balance Sheet and (iii) incurred in the ordinary course
of business since the 1997 Balance Sheet date and (iv) less than $50,000
individually and $150,000 in the aggregate.
5.8 Litigation. There are no claims, actions, suits, proceedings,
arbitrations, investigations or audits (collectively, "Litigation") by a third
party (including a governmental entity) which have been filed and served on
Transcell and are pending or, to the knowledge of Transcell, threatened against
Transcell, at law or in equity.
5.9 Absence of Certain Changes. Except as set forth in the Transcell
Disclosure Letter, since December 31, 1997, Transcell has conducted its
business only in the ordinary course of such business consistent with past
practices, and there has not been (a) any Transcell Material Adverse Effect
suffered by Transcell; (b) any declaration, setting aside or payment of any
dividend or other distribution with respect to the Outstanding Capital Stock
or, except as required by Transcell's benefit plans, any repurchase, redemption
or any other acquisition by Transcell of any Outstanding Capital Stock or other
securities of, or other ownership interests in, Transcell; (c) any material
change in accounting principles, practices or methods; (d) any increase or
commitment to increase the remuneration (including salary, incentive
compensation or benefits) of any director or employee of or consultant to
Transcell, whether directly or indirectly (including by amendment,
implementation or the entering into of any employment or employee benefit or
compensation agreement, plan or arrangement), by a material amount (or, in the
case of any executive officer of Transcell, by any amount) other than any
changes required by the terms of any existing plan or agreement, customary
changes consistent with past practices or pursuant to this Agreement; (e) any
revaluation by Transcell of any of its assets other than normal recurring
adjustments made in the ordinary course of business, including, without
limitation, write-downs of inventory or write-offs of accounts receivable; or
(f) any transaction or commitment made by Transcell to buy or sell any assets
that are material to Transcell's business.
5.10 Taxes.
(a) Transcell has (or will have by the Effective Time) timely filed or
received timely extensions for the filing of all material tax returns required
to be filed by Transcell. All such tax returns are correct and complete in all
material respects. All material taxes of Transcell which are (i) shown as due
on such tax returns, or (ii) to Transcell's knowledge, otherwise due and
payable, have been paid, except for those taxes being contested in good faith
and for which adequate reserves have been established as of the 1997 Balance
Sheet date in accordance with GAAP. Transcell is not now, nor will it be in the
future, required to pay any additional Taxes due for any period ending prior to
the Effective Time. Transcell has either withheld and paid over to the relevant
taxing authority or set aside in accounts an amount equal to all material taxes
required to have been withheld and paid in connection with payments made by
Transcell to employees, independent contractors, creditors or stockholders of
Transcell ("Payment Taxes").
(b) Except as set forth in the Transcell Disclosure Letter, (i) there are
no material liens for taxes upon the assets of Transcell except liens for taxes
not yet due; (ii) there are no material outstanding deficiencies for any taxes
threatened, proposed, asserted or assessed against Transcell which are not
provided for in the Financial Statements; (iii) there are no federal, state,
local or foreign audits or other administrative proceedings or judicial
proceedings presently pending with regard to any material taxes or tax returns
required to be filed by or with respect to Transcell; (iv) Transcell has filed
a tax return for federal income tax purposes on behalf of itself and not as a
member of an "affiliated group" (within the meaning of Section 1504(a) of the
Internal Revenue Code of 1986, as amended ( the "Code")); (v) to Transcell's
knowledge, the Internal Revenue Service has not examined any of the federal
income tax returns filed by or with respect to Transcell for all periods
through and including September 30, 1996; (vi) Transcell has not been a member
of an "affiliated group" (as defined above) since March 31, 1996, or any
similar affiliated, combined or consolidated group for state, local or foreign
tax purposes nor has any liability for the taxes of any person (other than
Transcell) under Treasury Regulation section 1.1502-6 or any similar provision
of state, local or foreign law or as a transferee, successor, by contract or
otherwise; and (vii) Transcell is not a party to any tax sharing, tax indemnity
or other agreement or arrangement with respect to taxes.
(c) Transcell is not a "U.S. real property holding company" as defined in
Section 897 of the Code.
(d) For purposes of this Agreement, (i) "tax" means any federal, state,
local or foreign income, gross receipts, property, sales, use, license, excise,
franchise, employment, payroll, premium, withholding, alternative or added
minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or penalty, imposed on Transcell by any governmental
entity, and (ii) "tax return" means any return, report or similar statement
required to be filed by Transcell with respect to any tax (including any
attached schedules), including, without limitation, any information return,
claim for refund, amended return or declaration of estimated tax.
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5.11 Employee Benefit Plans. The Disclosure Letter sets forth a complete
and correct list of each "employee benefit plan" (within the meaning of Section
3(3) of the Employment Retirement Income Security Act of 1974, as amended
("ERISA")) and each other bonus, incentive or deferred compensation, severance,
retention, change in control, fringe benefit, employment or other employment
compensation or benefit agreement, plan or arrangement to which Transcell is a
party or is bound or in respect of which Transcell may have any material
liability (collectively, the "Plans"). True and complete copies of each Plan
and all documents related thereto or the funding thereof have been made
available to Intercardia. Each Plan intended to be qualified under Section
401(a) of the Code, and the trust (if any) forming a part thereof, has received
a favorable determination letter from the Internal Revenue Service or is an
adoption of a prototype or volume submitter plan whose sponsor has received a
favorable determination letter as to its qualifications under the Code and to
the effect that each such trust is exempt from taxation under Section 501(a) of
the Code, and, to the knowledge of Transcell, no event has occurred since the
date of such determination letter that could reasonably be expected to
materially and adversely affect such qualifications or tax-exempt status. No
Plan is subject to Section 412 of the Code or Section 301 or Title IV of ERISA
and, except as set forth in the Transcell Disclosure Letter, no Plan is a
multiemployer plan, within the meaning of Section 4001(a)(3) of ERISA. No
material liability has been incurred by, and no event, transaction or condition
has occurred or exists that would result in any material liability of,
Transcell (either directly or indirectly, including as a result of an
indemnification obligation or any joint and several liability obligations)
under or pursuant to Title I or IV of ERISA or the penalty, excise tax or joint
and several liability provisions of the Code relating to employee benefit
plans. Each of the Plans has been operated and administered in all respects in
compliance with all applicable Laws, except for any failure so to comply that,
individually or together with all other such failures, has not resulted in, and
will not have or result in, a Transcell Material Adverse Effect. There are no
material pending or, to the knowledge of Transcell, threatened claims by or on
behalf of any of the Plans, by any government entity, by any current or former
employee of Transcell (collectively, the "Employees") or otherwise involving
any such Plan or the assets of any Plan (other than routine claims for
benefits). All material contributions, premiums and expenses payable to or in
respect of any Plan or the operation or administration thereof relating to any
period on or prior to the date hereof have been paid, adequately accrued in the
Financial Statements or incurred and relate to services rendered after the date
of such Financial Statements in the ordinary course of business consistent with
prior practice and in accordance with the terms of this Agreement. Except as
set forth in the Transcell Disclosure Letter, (i) the execution of, and
performance of the transactions contemplated in, this Agreement will not
constitute an event under any Plan that has resulted or may result in any
material payment (whether of severance pay or otherwise), acceleration other
than vesting of certain options, forgiveness of indebtedness, vesting,
distribution or increase in any compensation or benefits of any Employees or
any obligation of Transcell to fund any compensation or benefits in respect of
any Employee; and (ii) no payment or benefit which has been or may be made by
Transcell in respect of any Employee will constitute an "excess parachute
payment" within the meaning of Section 280G(b)(1) of the Code.
5.12 Labor and Employment Matters. Except as set forth in the Transcell
Disclosure Letter, (a) Transcell is not a party to, or bound by, any collective
bargaining agreement or other contracts or understanding with a labor union or
labor organization; and (b) there is no material (i) unfair labor practice,
labor dispute (other than routine individual grievances) or labor arbitration
proceeding pending or, to the knowledge of Transcell, threatened against
Transcell, (ii) activity or proceeding by a labor union or representative
thereof to organize any employees of Transcell, or (iii) lockouts, strikes,
slowdowns, work stoppages or similar labor activities or threats thereof by or
with respect to any such employees. Transcell is in compliance in all material
respects with all laws regarding employment, employment practices, terms and
conditions of employment and wages.
5.13 Brokers and Finders. No broker, dealer or financial advisor (other
than Hempstead & Co. ("Hempstead")) is entitled to receive from Transcell any
broker's, finder's or investment banking or other fee in connection with this
Agreement or the transactions contemplated hereby.
5.14 Opinion of Financial Advisor. Transcell has received the verbal
opinion of Hempstead to the effect that, as of the date of this Agreement, the
proposed terms and conditions of the Merger (assuming the Initial Market Price
is not less than $10.00 per share or more than $34.00 per share) are fair from
a financial point of view to the holders of the Outstanding Capital Stock other
than Interneuron.
5.15 Material Contracts. The Transcell Disclosure Letter sets forth a list
as of the date hereof of all of the following contracts which are in effect as
of the date hereof: (a) contracts for borrowed money or guarantees thereof
other than contracts entered into in the ordinary course of business consistent
with the past practice of Transcell, (b) contracts containing covenants by
Transcell restricting its ability to engage in any line of business, (c)
contracts involving a "strategic alliance" or similar relationship, (d)
contracts involving or related to acquisitions, mergers, sales or dispositions,
and (e) other contracts under which the obligation of Transcell is $10,000 or
more (all contracts described in each of the categories (a) through
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(e) above, "Material Contracts"). All Material Contracts are, with respect to
Transcell, valid and binding, in full force and effect and enforceable against
Transcell, in accordance with their respective terms except as the same may be
limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors' rights,
(b) laws relating to the availability of specific performance, injunctive
relief or other equitable remedies, and (c) the extent to which the
enforceability of the indemnification provisions contained in this Agreement
and the Royalty Agreement may be limited by applicable laws. There is not,
under any such contract, any existing default, or event, which after notice or
lapse of time, or both, would constitute a default, by Transcell, or to
Transcell's knowledge, any other party, other than any such defaults or events
which, individually or in the aggregate, would not have a Transcell Material
Adverse Effect.
5.16 Intellectual Property: Technology. (a) The Transcell Disclosure
Letter sets forth a complete and correct list of all patents and patent
applications that (i) are owned or licensed to Transcell or (ii) are used or
held for use, in each case, by Transcell in connection with, or that are
material to, the business currently conducted or proposed to be conducted by
Transcell (the "Intellectual Property"), except that the Disclosure Letter does
not need to set forth inventions, processes, formulae, trade secrets, know-how
or confidential information that are not disclosed in the Intellectual Property
or that are not susceptible to legal protection by any statutory filing or
registration with any governmental entity.
(a) Subject to agreements with licensors and licensees of the Intellectual
Property and to the Intellectual Property Agreements, Interneuron's rights to
which will be assigned to Intercardia pursuant to the Royalty Agreement,
Transcell owns, or has the valid right and license to use, and the Surviving
Corporation will, immediately after the Closing, own or have the valid right
and license to use, all of the Intellectual Property material to the conduct of
the business of Transcell as currently conducted. Subject to agreements with
licensors and licensees of the Intellectual Property, Transcell owns all of its
rights in and to the Intellectual Property, free and clear of any material
liens.
(b) To the knowledge of Transcell, the conduct of the business of
Transcell does not infringe the patent rights of any Person and none of the
Intellectual Property is being infringed, misappropriated or otherwise used or
available for use by any Person without written authority from or under written
agreement with Transcell.
(c) No claim or demand of any Person has been made or, to the knowledge of
Transcell, threatened, nor is there any litigation that is pending or, to the
knowledge of Transcell, threatened, that (i) challenges the rights of Transcell
in respect of any Intellectual Property, or (ii) asserts that Transcell is
infringing or otherwise in conflict with, or is required to pay any material
royalty, license fee, charge or other material amount with regard to, the
conduct of the business of Transcell. To Transcell's knowledge, none of the
Intellectual Property is subject to any material outstanding order, ruling,
decree, judgment or stipulation by or with any court, tribunal, arbitrator or
other governmental entity.
(d) The Transcell Disclosure Letter sets forth a complete list of
Intellectual Property that is registered with, filed in or issued by, as the
case may be, the United States Patent and Trademark Office, the United States
Copyright Office or other filing offices, domestic or foreign, and such
registrations, filings, issuances and other actions remain in full force and
effect.
(e) To the knowledge of Transcell, Transcell has valid licenses to all
copies of all software that is utilized by it in connection with the conduct of
its business and that it does not own ("Commercial Software"), and the use by
Transcell of such Commercial Software, including without limitation all
modifications and enhancements thereto (whether created by Transcell or by a
third party) is in material compliance with the terms and provisions of such
licenses. True and correct copies of all material licenses and arrangements
(including amendments, supplements, waivers and other modifications) for any
and all Intellectual Property that is not owned by Transcell (including but not
limited to any and all material Commercial Software) have been delivered to
Intercardia. All royalties, license fees, charges and other amounts payable by,
or on behalf of, to or for the account of Transcell in respect of any
Intellectual Property are reflected in the Financial Statements.
5.17 Investments. Except as disclosed in the Transcell Disclosure Letter,
Transcell does not own any shares of capital stock or other securities or
interest in any other Person.
5.18 Insurance. The Transcell Disclosure Letter contains a complete and
correct list and summary description of all insurance policies maintained
(including Directors' and Officers' insurance) by or on behalf of Transcell.
Transcell has delivered to Intercardia complete and correct copies of all such
policies together with all riders and amendments thereto. Such policies are in
full force and effect, and all premiums due thereon have been paid. Transcell
has complied in all material respects with the terms and provisions of such
policies.
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5.19 Product Liability. Except as set forth in the Transcell Disclosure
Letter, there are no liabilities of Transcell, fixed or contingent, asserted
(a) with respect to any product liability or any similar claim that relates to
any product sold or manufactured by Transcell, or (b) with respect to any claim
for the breach of an express or implied product warranty or any other similar
claim with respect to any products of Transcell.
5.20 Governmental Approvals. There are no products now being manufactured,
sold or distributed by Transcell which at the date hereof would require any
approval of the United States Food and Drug Administration (the "FDA") or any
other governmental body, whether Federal, state, local or foreign for the
purpose for which they are being manufactured, sold or distributed, for which
such approval has not been obtained.
ARTICLE 6
Representations and Warranties of Intercardia
As of the Effective Time, Intercardia hereby represents and warrants to
Transcell as follows:
6.1 Existence; Good Standing; Corporate Authority. Intercardia is (a) a
corporation duly incorporated, validly existing and in good standing under the
laws of Delaware and (b) duly licensed or qualified to do business as a foreign
corporation and is in good standing under the laws of any other jurisdiction in
which the character of the properties owned or leased by it or in which the
transaction of its business makes such licensure, qualification or good
standing necessary, except where the failure to be so in good standing or to be
so licensed or qualified, individually or in the aggregate, would not have an
Intercardia Material Adverse Effect. Intercardia has the requisite corporate
power and authority to own, operate and lease its properties and carry on its
business as now conducted. Intercardia has heretofore delivered to Transcell
true and correct copies of the Certificate of Incorporation and Bylaws of
Intercardia as currently in effect.
6.2 Subsidiaries. Intercardia has no subsidiaries other than Aeolus
Pharmaceuticals, Inc., a Delaware corporation ("Aeolus"), Renaissance Cell
Technologies, Inc., a Delaware corporation ("Renaissance"), and CPEC, Inc., a
Nevada corporation ("CPEC") (collectively, the "Subsidiaries"). Unless the
context indicates otherwise, all references to Intercardia include the
Subsidiaries. Each of the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and is duly licensed or qualified to do business, and is in good
standing, in all jurisdiction of incorporation and is duly licensed or
qualified to do business, and is in good standing, in all jurisdictions wherein
the character of the properties owned or leased by it or in which the
transaction of its business makes such licensure, qualification or good
standing necessary. Each Subsidiary has the requisite corporate power and
authority to own, operate and lease its properties and carry on its business as
now conducted. Intercardia has heretofore made available to Transcell true and
correct copies of the Certificate of Incorporation and Bylaws of each of its
Subsidiaries as such are currently in effect. Intercardia owns approximately
80.1% of the issued and outstanding capital stock of CPEC, approximately 65.8%
of the issued and outstanding capital stock of Aeolus, and approximately 79.6%
of the issued and outstanding stock of Renaissance, free and clear of any
security interests, liens, encumbrances, claims or charges.
6.3 Authorization; Validity and Effect of Agreements. Intercardia has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the consummation by Intercardia of
the transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Intercardia, and no other corporate proceedings on
the part of Intercardia are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby other than Intercardia
Stockholder Approval. This Agreement has been duly and validly executed and
delivered by Intercardia, and (assuming this Agreement constitutes the valid
and binding obligation of Transcell) constitutes valid and binding obligations
of Intercardia, enforceable against Intercardia in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency or reorganization
laws relating to or affecting the availability of the remedy of specific
performance or equitable principles of general application.
6.4 Litigation. There is no judgment, decree or order pending or, to the
knowledge of Intercardia or any of its directors or officers, threatened
against Intercardia that would have an Intercardia Material Adverse Effect.
6.5 No Violation. Neither the execution and delivery of this Agreement by
Intercardia nor the consummation by Intercardia of the transactions
contemplated hereby will (a) violate, conflict with or result in any breach of
any provision of the Certificate of Incorporation or Bylaws of Intercardia; (b)
violate or conflict in any material respect with, result in a breach of any
material provision of, constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, result in the
termination or in a right of termination of, accelerate the performance
required by
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or benefit obtainable under, result in the vesting, triggering or acceleration
of any material payment or other material obligations pursuant to, result in
the creation of any material encumbrance upon any of the properties of
Intercardia under, or result in there being declared void, voidable, subject to
withdrawal, or without further binding effect, any of the material terms,
conditions or provisions of any material note, bond, mortgage, indenture, deed
of trust, license, franchise, permit, lease, contract, agreement or other
material instrument, commitment or obligation to which Intercardia is a party,
by which Intercardia or any of its properties is bound (each of the foregoing,
to the extent the same have any continuing force or effect, an "Intercardia
Contract" and collectively, "Intercardia Contracts") except where such
violation would not have an Intercardia Material Adverse Effect; (c) other than
the Regulatory Filings, require any consent, approval or authorization of, or
declaration, filing or registration with, any governmental entity, the lack of
which individually or in the aggregate would adversely affect the ability of
Intercardia to consummate the transactions contemplated hereby or (d) violate
any laws applicable to Intercardia or any of its respective assets, except for
such violations which individually or in the aggregate would not adversely
affect the ability of Intercardia to consummate the transactions contemplated
hereby.
6.6 Capital Stock of Intercardia. The authorized capital stock of
Intercardia consists of (i) 40,000,000 shares of common stock, $.001 per share,
of which 6,765,162 shares were duly and validly issued and outstanding, fully
paid and non-assessable as of September 30, 1997; and (ii) 3,000,000 shares of
preferred stock, $.01 per share, of which no shares are issued and outstanding.
Except for options to purchase up to 1,299,923 shares of Intercardia Common
Stock which were granted under Intercardia's Stock Option Plan and warrants to
purchase 49,033 shares of Intercardia Common Stock, all of which are
outstanding as of September 30, 1997, there are no outstanding options,
warrants, rights, commitments, preemptive rights or agreements of any kind for
the issuance or sale of, or outstanding securities convertible into, any
additional shares of capital stock of any class of Intercardia. Intercardia has
reserved a sufficient number of shares of authorized Intercardia Common Stock
for issuance in the First Installment. The shares of Intercardia Common Stock
issuable at Closing pursuant to the Agreement and the Royalty Agreement have
been duly authorized and, when issued and paid for at the Closing, will be
validly issued, fully paid and non-assessable and free of any preemptive rights
and of all restrictions on transfer except under applicable federal and state
securities laws. The Intercardia Common Stock is authorized for trading on the
Nasdaq National Market and no suspension of trading in the Intercardia Common
Stock is in effect. Except as disclosed in the Intercardia SEC Reports and as
contemplated by this Agreement, no holder of Intercardia Common Stock or any
security convertible into or exchangeable for Intercardia Common Stock has any
registration rights with respect to such securities.
6.7 SEC Reports; Financial Statements. Since February 1996, Intercardia
has filed (x) all forms, reports, statements and other documents required to be
filed with (i) the Securities and Exchange Commission ("SEC") and Nasdaq
including, without limitation, (A) all Annual Reports on Form 10-K, (B) all
Quarterly Reports on Form 10-Q, (C) all proxy statements relating to meetings
of stockholders (whether annual or special), (D) all required Current Reports
on Form 8-K, (E) all other reports or registration statements required under
the Securities Act, or the Exchange Act, and (F) all amendments and supplements
to all such reports and registration statements (collectively, the "Intercardia
SEC Reports") and (ii) any applicable state securities and authorities; and (y)
all forms, reports, statements and other documents required to be filed with
any other applicable federal or state regulatory authorities (all such forms,
reports, statements and other documents in clauses (x) and (y) of this Section
6.7 being collectively referred to as the "Intercardia Reports"). The
Intercardia Reports, including all Intercardia Reports filed after the date of
this Agreement and prior to the Effective Time, (i) were or will be prepared in
all material respects in accordance with the requirements of applicable law
(including, with respect to the Intercardia SEC Reports, the 1933 Act and the
Exchange Act, as the case may be), (ii) accurately describe, in all material
respects, as of their respective dates, the business then conducted by
Intercardia and its Subsidiaries, and (iii) did not at the time they were
filed, or will not at the time they are filed, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were or will be made, not misleading. There is
no fact known to Intercardia which has not been set forth in this Agreement or
the Intercardia Reports which may have a material adverse effect on the assets,
properties, results of operations or financial condition of Intercardia and its
Subsidiaries (an "Intercardia Material Adverse Effect").
6.8 Brokers and Finders. No broker, dealer or financial advisor (other
than NationsBanc Montgomery Securities, Inc. ("NMSI")) is entitled to receive
from Intercardia any broker's, finder's or investment banking or other fee in
connection with this Agreement or the transactions contemplated hereby.
6.9 Opinion of Financial Advisor. Intercardia has received the verbal
opinion of NMSI to the effect that, as of the date of this Agreement, the
proposed terms and conditions of the Merger (assuming the Initial Market Price
is not less than $10.00 per share or more than $34.00 per share) are fair from
a financial point of view to the holders of the Intercardia Common Stock.
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ARTICLE 7
Covenants
7.1 No Solicitation. (a) Interneuron and Transcell shall, and shall direct
and use reasonable efforts to cause their respective officers, directors,
employees, representatives and agents to, immediately cease any discussions or
negotiations with any parties other than Intercardia that may be ongoing with
respect to an Acquisition Proposal. Transcell and Interneuron shall not, and
shall not authorize any of their respective officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative retained by it to, directly or indirectly, (i) solicit, initiate
or encourage (including by way of furnishing non-public information), or take
any other action to facilitate, any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, an Acquisition
Proposal or (ii) participate in any discussions or negotiations regarding an
Acquisition Proposal; provided, however, that Interneuron and Transcell shall
be entitled to respond to unsolicited offers relating to an Acquisition
Proposal in the exercise of the fiduciary duties of the Board of Directors of
Transcell. For purposes of this Agreement, "Acquisition Proposal" means any
proposal or offer from any person other than Intercardia relating to any direct
or indirect acquisition or purchase of any of the assets or securities of
Transcell except (x) in the ordinary course of business of Transcell consistent
with the terms of this Agreement or (y) an acquisition or purchase that would
not have a Transcell Material Adverse Effect.
From the date of this Agreement until the Effective Time or, if the Merger
is not consummated, for a period of two years following the date of this
Agreement, and except as otherwise provided by the terms of this Agreement,
Intercardia shall not solicit or encourage any officer, employee or consultant
of Transcell to leave its employ or terminate any consulting relationship, for
employment at, consultation with or any other role associated with the
operations of Intercardia, or hire or offer employment to, or retain as a
consultant any person whom Transcell employs, or retains as a consultant,
provided, however, Intercardia shall be permitted to retain Dr. Daniel Kahne as
a consultant for up to four (4) days per year so long as such consultation does
not interfere with Dr. Kahne's consulting obligations to Transcell.
7.2 Interim Operations.
(a) From the date of this Agreement to the Effective Time, except as
required pursuant to this Agreement, unless Intercardia has consented in
writing thereto, Transcell shall:
(i) conduct its operations according to its usual, regular and ordinary
course of business consistent with past practice;
(ii) use its reasonable efforts to preserve intact its business
organizations and goodwill, to maintain in effect all existing
qualifications, licenses, permits, approvals and other authorizations, to
keep available the services of their officers and employees and to maintain
satisfactory relationships with suppliers and all other persons having
business relationships with them except where the failure to do so would
not have a Material Adverse Effect;
(iii) deliver, within fifteen (15) business days after the end of each
accounting month, monthly financial accounts prepared internally by
Transcell's management, in the same format as heretofore furnished to
Intercardia, for Transcell for and as of the end of each such month; and
(iv) promptly notify Intercardia of any Litigation instituted or
threatened against Transcell;
(b) From the date of this Agreement to the Effective Time, unless
Intercardia has consented in writing thereto, Transcell shall not:
(i) amend its Certificate of Incorporation or Bylaws;
(ii) issue, sell, pledge or otherwise dispose of any shares of its
Authorized Capital Stock (other than issuances of Authorized Capital Stock
in respect of any exercise of Transcell Options or Transcell Warrants or
any conversion of Class B Common Stock, Series A Preferred Stock or Series
B Preferred Stock outstanding on the date hereof), or any securities
convertible into or exchangeable for any such shares, or any rights,
warrants or options to acquire or with respect to any such shares of
Authorized Capital Stock, or convertible or exchangeable securities; or
accelerate any right to convert or exchange or acquire any securities of
Transcell for any such shares;
(iii) effect any stock split, reverse stock split, stock dividend,
subdivision, reclassification or similar transaction, or otherwise change
its capitalization as it exists on the date hereof;
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(iv) other than pursuant to this Agreement, grant, confer, award or amend
any option, warrant, convertible security or other right to acquire any
shares of its Authorized Capital Stock or take any action to cause to be
exercisable any otherwise unexercisable option under any stock option plan;
(v) declare, set aside or pay any dividend or make any other distribution
or payment with respect to any shares of its Outstanding Capital Stock;
(vi) directly or indirectly redeem, purchase or otherwise acquire any
shares of its Outstanding Capital Stock;
(vii) sell, lease, assign, transfer or otherwise dispose of (by merger or
otherwise) any of its property, business or assets (including, without
limitation, any Intellectual Property) except in the ordinary course of
business;
(viii) settle or compromise any pending or threatened Litigation without
Intercardia's consent (which consent will not be unreasonably withheld or
delayed);
(ix) make any loan, extension of credit or capital contribution to, or
purchase to acquire (by merger or otherwise) any stock, bonds, notes,
debentures or other securities of, or any assets constituting a business
unit of, or make any other investment in, any person, firm or entity,
except (v) loans, extensions of credit, capital contributions, purchases,
acquisitions or investments that are, individually and in the aggregate, of
de minimis value, (w) extensions of trade credit and endorsements of
negotiable instruments and other negotiable documents in the ordinary
course of business (x) investments in cash and cash equivalents, (y)
investments in wholly owned subsidiaries;
(x) incur, assume or create any indebtedness for borrowed money or the
deferred purchase price for property or services or pursuant to any capital
lease or other financing, except indebtedness owed to Interneuron or
incurred in the ordinary course of business for equipment financing or
working capital purposes pursuant to Transcell's existing credit
facilities; or amend in a manner materially adverse to Transcell any of
Transcell's existing credit facilities;
(xi) assume, guarantee or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person except for obligations in the ordinary course of business consistent
with the past practice of Transcell;
(xii) make any material tax election (unless required by law or unless
consistent with prior practice), settle or compromise any material income
tax liability or amend any tax return;
(xiii) waive or amend any term or condition of any confidentiality or
"standstill" agreement to which Transcell is a party and which relates to a
business combination with Transcell or the purchase of shares or assets of
Transcell;
(xiv) grant or amend any share-related or performance awards;
(xv) except with respect to agreements which are terminable at will by
Transcell without any material penalty to Transcell, enter into or amend
any legally binding employment, severance, consulting or salary
continuation agreements with any officers, directors or employees or grant
any increases in compensation or benefits to employees other than increases
to officers and employees in the ordinary course of business consistent
with the past practice of Transcell;
(xvi) adopt, amend or terminate any employee benefit plan or arrangement
(except as expressly contemplated by this Agreement);
(xvii) change any accounting principles or practices used by Transcell;
(xviii) waive, relinquish, release or terminate any material right or
claim, including any such right or claim under any Material Contract or
permit any rights of material value to use any Intellectual Property to
lapse or be forfeited; or
(xix) agree in writing or otherwise to take any of the foregoing actions.
7.3 Stockholder Approvals; Information Statement.
(a) Transcell shall (i) call a meeting of its stockholders (the "Transcell
Stockholder Meeting") for the purpose of voting upon the Merger, (ii) hold the
Transcell Stockholder Meeting as soon as practicable following the date of this
Agreement, and (iii) subject to its fiduciary duties and to the provisions of
Section 8.1(b), recommend to its stockholders the approval of the Merger
through its Board of Directors.
(b) Transcell will, as soon as practicable following the date of this
Agreement, prepare a proxy statement or information statement (any such
statement, and amendments or supplements thereto, the "Information Statement"),
with respect to
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the Transcell Stockholder Meeting. Transcell shall give Intercardia and its
counsel (who shall provide any comments thereon as soon as practicable) the
opportunity to review the Information Statement prior to its being mailed to
Transcell's stockholders. As promptly as practicable after the Information
Statement has been reviewed and commented on by Intercardia, and upon receipt
of clearance by the SEC of the Statement or any of Intercardia's other filings
made in connection with the Merger, Transcell shall mail the Information
Statement to the stockholders of Transcell. If at any time prior to the
approval of this Agreement by Transcell's stockholders there shall occur any
event that should be set forth in an amendment or supplement to the Information
Statement, Transcell will prepare and mail to its stockholders such an
amendment or supplement. Notwithstanding anything to the contrary contained in
this Agreement, Transcell shall be entitled to deliver a copy of Intercardia's
Statement to its stockholders in lieu of an Information Statement to the extent
such Statement complies with Transcell's disclosure obligations in connection
with the Merger.
(c) Transcell represents and warrants that the Information Statement at
the time it is mailed to Transcell Stockholders will not contain any untrue
statement of a material fact or omit or state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; provided
that Transcell makes no representation or warranty as to any information
included in the Information Statement which relates to or was provided by
Intercardia. Intercardia represents and warrants that none of the information
supplied by Intercardia for inclusion in the Information Statement will at the
time distributed to stockholders of Transcell, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. Transcell agrees
to notify Intercardia a reasonable time prior to the distribution of the
Information Statement of such distribution.
(d) Intercardia shall (i) call a meeting of its stockholders (the
"Intercardia Stockholder Meeting") for the purpose of, among other things,
voting upon the Merger, (ii) hold the Intercardia Stockholder Meeting as soon
as practicable following the date of this Agreement and (iii) subject to its
fiduciary duties under applicable law as advised by outside counsel, recommend
to its stockholders the approval of the Merger.
(e) Intercardia will, as soon as practicable following the date of this
Agreement, prepare and file with the SEC a registration statement on Form S-4,
including a proxy statement and prospectus (such statement, and amendments or
supplements thereto, the "Statement"), with respect to the registration of the
Intercardia Common Stock issuable in connection with the Merger and the
Intercardia Stockholder Meeting. Intercardia shall as soon as practicable
subsequent to the Effective Time file appropriate registration statements
relating to the issuance and resale of Intercardia Common Stock underlying the
Transcell Options (and, if required, the Transcell Warrants). Intercardia shall
give Transcell and its counsel (who shall provide any comments thereon as soon
as practicable) the opportunity to review the Statement prior to its being
mailed to Intercardia's stockholders. As promptly as practicable after the
Statement has been reviewed and commented on by Intercardia, and upon receipt
of clearance by the SEC of the Statement, Intercardia shall mail the Statement
to the stockholders of Intercardia. If at any time prior to the approval of
this Agreement by Intercardia's stockholders there shall occur any event that
should be set forth in an amendment or supplement to the Statement, Intercardia
will prepare and mail to its stockholders such an amendment or supplement.
(f) Intercardia represents and warrants that the Statement will not, at
the time it is mailed to Intercardia Stockholders, contain any untrue statement
of a material fact or omit or state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided that
Intercardia makes no representation or warranty as to any information included
in the Statement which was provided by Interneuron or Transcell. Transcell
represents and warrants that none of the information supplied by Transcell for
inclusion in the Statement will at the time distributed to stockholders of
Intercardia, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. Intercardia agrees to notify Transcell a reasonable time
prior to the distribution of the Statement of such distribution.
(g) Interneuron shall cause all shares of Outstanding Capital Stock owned
by Interneuron to be voted in favor of the Merger, and subject to the fiduciary
duties of the Board of Directors of Transcell, Transcell shall use its
reasonable efforts to obtain the Transcell Stockholder Approval.
(h) Subject to the fiduciary duties of the board of directors of
Intercardia as advised by outside counsel, Intercardia shall use its reasonable
efforts to obtain Intercardia Stockholder Approval.
7.4 Filings; Other Action. Subject to the terms and conditions herein
provided, Transcell and Intercardia shall cooperate and consult with one
another in (i) determining which Regulatory Filings are required to be made
prior to the Effective
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Time with, and which consents, approvals, permits, authorizations or waivers
(collectively, "Consents") are required or to be obtained prior to the
Effective Time from governmental entities or other third parties in connection
with the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby; (ii) preparing all Regulatory Filings and all
other filings, submissions and presentations required or prudent to obtain all
Consents, including by providing to the other party drafts of such material
reasonably in advance of the anticipated filing or submission dates; and (iii)
timely making all such Regulatory Filings and timely seeking all such Consents;
efforts to take, or cause to be taken, all other action and do, or cause to be
done, all other things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. If, at any time
after the Effective Time, any further action is necessary or desirable to carry
out the purpose of this Agreement, the proper officers and directors of the
Surviving Corporation shall take all such necessary action.
7.5 Access to Information. Until the Closing, upon reasonable notice,
Transcell shall, subject to the compliance with applicable laws and
confidentiality obligations to third parties, (i) give Intercardia and its
authorized representatives reasonable access during normal business hours to
all books, records, personnel, research and other consultants, offices and
other facilities and properties of Transcell and their accountants, (ii) permit
Intercardia to make such copies and inspections thereof as Intercardia may
reasonably request and (iii) furnish Intercardia with such financial and
operating data and other information with respect to the business and
properties of Transcell as Intercardia may from time to time reasonably
request. Intercardia agrees that, unless and until the Closing has been
consummated, it and its officers, directors, agents and representatives will
hold in strict confidence any confidential or proprietary data or information
obtained from Transcell or Interneuron with respect to the business or
financial condition of Transcell. Information generally known in the
biotechnology industry or which has been disclosed to Intercardia by third
parties which have a right to do so shall not be deemed confidential or
proprietary information for purposes of this Agreement. If the transaction
contemplated by this Agreement is not consummated, Intercardia will return to
Transcell (or certify that it has destroyed) all copies of such data and
information and all documents prepared from such data and information.
7.6 Publicity. The initial press release relating to this Agreement shall
be a joint press release in substantially the form attached hereto as Exhibit
7.6 and thereafter Interneuron, Transcell and Intercardia shall, subject to
their respective legal obligations, obtain the prior consent of the other
parties (which consent will not be unreasonably withheld or delayed) before
issuing any such press release or otherwise making public statements with
respect to the transactions contemplated hereby and in making any filings with
any national securities exchange with respect thereto.
7.7 Further Action. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger.
7.8 Insurance; Indemnity.
(a) Intercardia shall use reasonable efforts to maintain officers' and
directors' liability insurance covering the parties who are currently covered
in their capacities as officers and directors of Transcell with limits of
$5,000,000 for coverage of acts or omissions prior to the Effective Time.
(b) From and after the Effective Time, the Surviving Corporation shall
indemnify and hold harmless, to the fullest extent permitted under applicable
law, each person who is, or has been at any time prior to the date hereof or
who becomes prior to the Effective Time, an officer or director of Transcell
against all losses, claims, damages, liabilities, costs or expenses (including
attorneys' fees), judgments, fines, penalties and amounts paid in settlement
(collectively, "Losses") in connection with any Litigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such, which acts or omissions occurred prior to the Effective
Time. Without limiting the foregoing, Transcell and after the Effective Time
the Surviving Corporation shall periodically advance expenses as incurred with
respect to the foregoing to the fullest extent permitted under applicable law
provided that the person to whom the expenses are advanced provides an
undertaking to repay such advance if it is ultimately determined that such
person is not entitled to indemnification.
7.9 Employees and Employee Benefit Plans. Through December 31, 1998,
Intercardia shall maintain employee compensation policies and benefit plans for
its employees (who were formerly with Transcell) that, in the aggregate, are
similar to the compensation policies and benefit plans of Transcell as of the
date hereof. From and after the Closing, Intercardia shall honor all existing
employment agreements in accordance with the terms thereof as in effect on the
date hereof or as the same may be amended with the consent of the employee
party thereto and Intercardia. To the extent that employees of the Surviving
Corporation become eligible to participate in any employee benefit plan of
Intercardia after the Effective Time, Intercardia shall cause the service of
such employees with Transcell completed prior to the Effective Time to be
recognized under such employee benefit plan of Intercardia for all purposes of
vesting and eligibility to participate thereunder.
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7.10 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, Interneuron, Intercardia, and Transcell shall use their reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, using their reasonable efforts
to satisfy the conditions contained in Article 8 hereof.
7.11 Certain Notification. At all times until the Effective Time, each
party shall promptly notify the other in writing of the occurrence of any event
that will or may result in the failure to satisfy any of the conditions
specified in Article 8.
7.12 Interneuron Obligations. Interneuron shall
(a) as of Closing, contribute to Transcell's equity, with no cost to
Transcell, all debt and open accounts payable owed to Interneuron by Transcell.
(b) as of Closing, cancel and waive any rights it may have to any and all
warrants to purchase Authorized Capital Stock.
(c) as of Closing, release any and all security interests it may have in
any Transcell asset, except for those in which Interneuron's guaranty remains
after closing.
7.13 Interneuron Royalty. At Closing, Intercardia and Interneuron will
enter into an Assignment and Assumption and Royalty Agreement substantially in
the form attached hereto as Exhibit 7.13 (the "Royalty Agreement"), pursuant to
which (i) Interneuron will assign to Intercardia, and Intercardia will assume,
any and all of Interneuron's rights and obligations to and in the Research
Collaboration and License Agreement by and among Merck & Co., Inc., Transcell
and Interneuron dated as of June 30, 1997 (the "Merck Agreement"), the Research
Agreements by and between the Trustees of Princeton and Interneuron dated April
29, 1997, relating to "Construction of a Vancomycin Library" and "Towards a Map
of the Active Site of MurG" (the "Princeton Research Agreements"), and the Side
Agreement by and among Merck & Co., Inc., Transcell, the Trustees of Princeton
University and Interneuron effective as of June 30, 1997 (the "Side
Agreement"), the Agreement to License effective as of June 30, 1997 by and
between Princeton and Interneuron ("Agreement to License") and any license
agreement entered into under the Agreement to License (collectively, the
"Intellectual Property Agreements"); and (ii) Interneuron shall agree to
continue to guarantee (the "Guaranties") Transcell's building and equipment
lease obligations until those obligations can be terminated on the terms and
conditions set forth in the Royalty Agreement.
In consideration for the above promises and assignment of rights by
Interneuron, Intercardia will pay to Interneuron THREE MILLION DOLLARS
($3,000,000) in Intercardia Common Stock at Closing, based upon the Initial
Market Price as determined according to Section 4.1(a)(iv) and certain
royalties resulting from the commercialization of compounds under the
Intellectual Property Agreements, on the terms and conditions set forth in the
Royalty Agreement.
7.14 SEC Filings and Transaction Costs. Intercardia, Interneuron and
Transcell shall cooperate to assist Intercardia in preparing and filing an
Intercardia registration statement (including the Statement) with the SEC. Each
party shall pay its own legal, accounting, valuation and other costs associated
with this transaction, but any transaction costs incurred by Transcell which
are not paid prior to Closing will be paid by or reimbursed by Interneuron.
Interneuron shall fund all of Transcell's operating costs through Closing,
provided however, without Interneuron's approval, Interneuron's cumulative
average monthly net funding requirements from October 1, 1997 until Closing
shall not exceed $700,000 per month plus any payments made for costs incurred
in connection with this Merger. As of Closing, Transcell shall not have any
open accounts payable which have not been paid within thirty days of the
invoice date, calculated in accordance with GAAP. Any and all payments due on
all other Transcell liabilities shall be paid when due and shall be current as
of Closing. Interneuron shall reimburse Intercardia for any amounts which, as
of Closing, exceed these accounts payable and liability provisions.
7.15 Authorization for Trading; Reporting Status. Intercardia shall cause
the Intercardia Common Stock to be authorized for trading on the Nasdaq
National Market at such time as it shall be required to file any additional
listing application and shall file such additional listing application or other
reports required in connection with such authorization on a timely basis.
Intercardia shall file all reports required to be filed with the SEC pursuant
to Section 13 or 15(d) of the Exchange Act, and Intercardia shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would permit such
termination. Intercardia shall use its best efforts to maintain, authorize and
reserve a sufficient number of shares of authorized Intercardia Common Stock
for issuance in the First Installment, the Second Installment and the Third
Installment, including, if necessary, amending its Certificate of
Incorporation.
7.16 Intercardia Approval. Intercardia agrees not to withhold unreasonably
its consent of any action proposed to be taken by Transcell for which
Intercardia's consent is required under this Article VII.
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7.17 Tax Covenant. Intercardia shall take no action, without the consent
of Interneuron, for a period of two (2) years subsequent to the Effective Time
to disqualify the Merger from qualifying as a tax-free reorganization under
Section 368 of the Code. In particular (i) except for fractional share
interests Intercardia has no plan or intention to reacquire any of the
Intercardia Common Stock issuable in connection with the Merger and Intercardia
has not created a stock repurchase program in connection with the Merger; (ii)
Intercardia has no plan or intention to sell or otherwise dispose of any of the
assets of Transcell acquired in the Merger, except for dispositions made in the
ordinary course of business or transfers described in Section 368(a)(2)(C) of
the Code; and (iii) after the Merger, Intercardia will continue the historic
business of Transcell or use a significant portion of Transcell's historic
business assets in a business.
ARTICLE 8
Conditions
8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger and the other
transactions contemplated hereby shall be subject to the satisfaction or waiver
at or prior to the Effective Time of the following conditions, any one or more
of which may be waived:
(a) Stockholder Approvals. Intercardia Stockholder Approval and Transcell
Stockholder Approval shall have been obtained.
(b) Other Approvals. Other than the filing provided for by Section 1.3,
all Consents and Regulatory Filings which are necessary for the consummation of
the Merger, other than Consents and Regulatory Filings the failure to obtain or
make which would, individually and in the aggregate, be immaterial to the
Surviving Corporation or which would, individually and in the aggregate, not
have a Material Adverse Effect on the Merger, shall have been filed, occurred
or been obtained (all such Consents, Regulatory Filings and the lapse of all
such waiting periods being referred to as the "Requisite Regulatory
Approvals"), and all such Requisite Regulatory Approvals shall be in full force
and effect.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order or decree issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided,
however, that each of the parties shall have used its reasonable efforts to
appeal as promptly as possible any injunction or other order or restraint that
may be entered. There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. No action, suit,
proceeding, writ, judgment, injunction, decree or similar order of any
governmental authority or other person restraining, enjoining or otherwise
preventing (or seeking to restrain, enjoin or otherwise prevent) the
consummation of any of the transactions contemplated by this Agreement shall be
pending or threatened.
8.2 Conditions to Obligations of Intercardia. The obligation of
Intercardia to effect the Merger is subject to the satisfaction of the
following conditions unless waived by Intercardia:
(a) Representations and Warranties. The representations and warranties of
Transcell and Interneuron set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement, and Intercardia shall have received a
certificate signed on behalf of Transcell by its Chairman or Chief Executive
Officer and its Chief Financial Officer or other acting executive officer
performing duties equivalent to those of a "chief financial officer" to such
effect. Transcell shall be entitled, as of the Closing Date, to supplement the
representations and warranties set forth in this Agreement to reflect changes
occurring between the date of this Agreement and the Closing by giving written
notice to Intercardia on or before the Closing, provided, however, Intercardia
shall not be obligated to effect the Merger to the extent that any such update
would, individually or in the aggregate have a Material Adverse Effect on the
Merger; provided however that, if the Closing occurs, neither Transcell nor any
of its stockholders shall have any liability under Article 10 or otherwise for
breach of representation or warranty with respect to matters disclosed in the
amended or supplemented representations or warranties.
(b) Performance of Obligations of Transcell. Transcell shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Intercardia shall
have received a certificate signed on behalf of Transcell by its Chairman or
Chief Executive Officer and its Chief Financial Officer or other acting
executive officer performing duties equivalent to those of a "chief financial
officer" to such effect.
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(c) Burdensome Conditions. There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any governmental entity which, in connection with
the grant of any Regulatory Approval, imposes any requirement upon Intercardia,
or Transcell to (i) dispose of any asset which is material to such person, or
(ii) materially restrict or curtail the current operations or activities of
such person or any of its affiliates.
(d) FIRPTA Certificate. Intercardia shall have received such affidavits or
certifications in form and substance reasonably satisfactory to Intercardia as
are necessary to exempt the Merger from the provisions of section 1445 of the
Code.
(e) Price Protection. The Initial Market Price as determined by Section
4.1(a)(iv)(A) is not less than $10.00 per share or more than $34.00 per share.
(f) Fairness Opinions. Intercardia shall have received and accepted the
opinion of NMSI to the effect that, as of the date hereof, the consideration to
be paid to the security holders of Transcell pursuant to this Agreement, is
fair from a financial point of view, to Intercardia. Intercardia shall have
received a copy of the Transcell fairness opinion prepared by Hempstead and
shall in its sole discretion be satisfied with the contents of such opinion.
(g) Princeton License. The license agreement currently being negotiated by
Interneuron with Princeton University will be completed and all initial
payments due thereunder upon execution of such agreement will be paid prior to
Closing.
(h) Limitation on Liabilities. As of Closing, the liabilities associated
with Transcell's building obligations and capital lease obligations shall not
exceed $491,000 and $1,509,000, respectively, without the written consent of
Intercardia, unless incurred in the ordinary course of business.
(i) SEC Matters. The SEC shall have declared effective the Statement for
the registration of the Intercardia Common Stock constituting the Aggregate
Merger Consideration under the 1933 Act. No stop order suspending the
effectiveness of the Statement or any part thereof shall have been issued and
no proceeding for that purpose, and no similar proceeding in respect of the
Statement, shall have been initiated or to the knowledge of Intercardia
threatened by the SEC. All necessary state securities and blue sky permits,
approvals and exemption orders required in connection with the transactions
contemplated by this Agreement shall have been obtained and the Intercardia
Common Stock constituting the Aggregate Merger Consideration shall have been
listed with the Nasdaq National Market.
(j) Voting Requirements. The affirmative vote of the holders of a majority
of the voting power of all Outstanding Capital Stock, voting as a single class,
at the Transcell stockholder meeting (the "Transcell Stockholder Approval") to
adopt this Agreement shall have been obtained and shall be the only vote of the
holders of any class or series of the Outstanding Capital Stock necessary to
approve and adopt this Agreement and the transactions contemplated hereby.
(k) Absence of Material Adverse Effect. No event, occurrence, fact,
condition, change, development or effect shall have occurred, exist or come to
exist since the date of this Agreement that, individually or in the aggregate,
has constituted or resulted in, or could reasonably be expected to constitute
or result in a Transcell Material Adverse Effect. As of the Closing Date,
Intercardia shall have received a certificate to such effect signed on behalf
of Transcell by its Chief Executive Officer and Chief Financial Officer.
(l) Intercompany Agreement. The Intercompany Agreement between Interneuron
and Transcell, dated as of June 30, 1997, shall have terminated.
8.3 Conditions to Obligations of Transcell and Interneuron. The
obligations of Transcell and Interneuron to effect the Merger are subject to
the satisfaction of the following conditions unless waived by Transcell and
Interneuron:
(a) Representations and Warranties. The representations and warranties of
Intercardia set forth in this Agreement shall be true and correct in all
material respects, in either case as of the date of this Agreement and (except
to the extent such representations speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement, and Transcell shall have received a certificate
signed on behalf of Intercardia by its Chief Executive Officer and Chief
Financial Officer to such effect.
(b) Performance of Obligations of Intercardia. Intercardia shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Transcell shall
have received a certificate signed on behalf of Intercardia by its Chief
Executive Officer and its Chief Financial Officer to such effect.
(c) Price Protection. The Initial Market Price as determined by Section
4.1(a)(iv)(A) is not less than $10.00 per share or more than $34.00 per share.
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(d) Fairness Opinion. Transcell shall have received and accepted the
opinion of Hempstead to the effect that, as of the date hereof, the
consideration to be paid to the security holders of Transcell pursuant to this
Agreement, is fair from a financial point of view, to stockholders of Transcell
(other than Interneuron). Transcell shall have received a copy of the
Intercardia fairness opinion prepared by NMSI and shall in its sole discretion
be satisfied with the contents of such opinion.
(e) SEC Matters. The SEC shall have declared effective the Statement for
the registration of the Intercardia Common Stock constituting the Aggregate
Merger Consideration under the 1933 Act. No stop order suspending the
effectiveness of the Statement or any part thereof shall have been issued and
no proceeding for that purpose, and no similar proceeding in respect of the
Statement, shall have been initiated or to the knowledge of Intercardia
threatened by the SEC. All necessary state securities and blue sky permits
approvals and exemption orders required in connection with the transactions
contemplated by this Agreement shall have been obtained and the Intercardia
Common Stock constituting the Aggregate Merger Consideration shall have been
listed with the Nasdaq National Market.
(f) Voting Requirements. The affirmative vote of the holders of a majority
of the issued shares of Common Stock of Intercardia, voting as a single class,
which are voted at a duly called Intercardia Stockholder Meeting (the
"Intercardia Stockholder Approval"), to adopt this Agreement shall have been
obtained and shall be the only vote of the holders of any class or series of
shares of Intercardia necessary to approve and adopt this Agreement and the
transactions contemplated hereby.
(g) Confirmation. Intercardia shall confirm to Transcell that, as of the
time of execution hereof and the time of the Closing, after a review of the
Transcell Disclosure Letter, neither Clayton I. Duncan nor Richard W. Reichow
has, in connection with their performance of due diligence related to the
Merger, received or reviewed information which if omitted from the Transcell
Disclosure Letter would at such date and time cause the Transcell Disclosure
Letter to be incorrect or incomplete in any material respect and Transcell
shall have received a certificate signed on behalf of Intercardia by Messrs.
Duncan and Reichow to such effect.
(h) Absence of Material Adverse Effect. No event, occurrence, fact,
condition, change, development or effect shall have occurred, exist or come to
exist since the date of this Agreement that, individually or in the aggregate,
has constituted or resulted in, or could reasonably be expected to constitute
or result in an Intercardia Material Adverse Effect. As of the Closing Date,
Transcell shall have received a certificate to such effect signed on behalf of
Intercardia by its Chief Executive Officer and Chief Financial Officer.
ARTICLE 9
Termination; Amendment; Waiver
9.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after Transcell Stockholder Approval or
Intercardia Stockholder Approval:
(a) by mutual written consent of Transcell, Interneuron and Intercardia;
(b) by any of Transcell, Interneuron or Intercardia:
(i) if the Merger shall not have been consummated by May 31, 1998,
provided, that the right to terminate this Agreement pursuant to this
Section 9.1(b)(i) shall not be available to any party whose failure to
perform any of its obligations under this Agreement results in the failure
of the Merger to be consummated by such time;
(ii) if Transcell Stockholder Approval shall not have been obtained at a
Transcell Stockholders Meeting duly convened therefor or at any adjournment
or postponement thereof (or pursuant to a written consent in lieu thereof);
(iii) if Intercardia Stockholder Approval shall not have been obtained at
an Intercardia Stockholders Meeting duly convened therefor or at any
adjournment or postponement thereof; or
(iv) if any governmental entity shall have issued a judgment, order,
decree, statute, law, ordinance, rule, regulation, temporary restraining
order, preliminary or permanent injunction or other order, legal restraint
or prohibition (collectively, "Restraints") or taken any other action
permanently enjoining, restraining or otherwise prohibiting the
consummation of the Merger and such Restraint or other action shall have
become final and nonappealable.
(c) by Intercardia, if Transcell shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or failure to
perform (i) would give rise to the failure of a condition set forth in Section
8.2(a) or (b), and (ii) cannot be or has not been cured within 30
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days after the giving of written notice to Transcell of such breach provided,
that such 30-day period shall be extended for so long as Transcell shall be
making all reasonable attempts to cure such breach, unless the breach is not
susceptible of a cure.
(d) by Intercardia, if Transcell, or any of its directors, employees,
representatives or agents shall take any of the actions proscribed by Section
7.1, unless such action was taken by a director, employee, representative or
Agent and was inadvertent, provided that, upon learning of such violation,
Transcell forthwith gives Intercardia notice thereof and takes all reasonable
action requested by Intercardia to cure such violation and to ensure future
compliance with Section 7.1;
(e) by Transcell, if Intercardia shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement, or if Intercardia shall have
failed to satisfy the condition set forth in Section 8.3(b) prior to the date
set forth in Section 9.1(b)(i) (and all other conditions set forth in Sections
8.1 (other than obtaining Intercardia Stockholder Approval) and 8.2 have been
satisfied or waived), which breach or failure to perform (i) would give rise to
the failure of a condition set forth in Sections 8.3(a) or (b) and (ii) cannot
be or has not been cured within 30 days after the giving of written notice to
Intercardia of such breach, provided that such 30 day period shall be extended
for so long as Intercardia shall be making all reasonable attempts to cure such
breach unless the breach is not susceptible of a cure.
9.2 Effect of Termination. If this Agreement is terminated and the Merger
is abandoned pursuant to Section 9.1 hereof, this Agreement, except for the
provisions of Sections 7.6, 9.2 and 11.5, shall terminate, without any
liability on the part of any party to this Agreement for breach of this
Agreement. Such a termination will not prejudice the ability of the non-
breaching party to seek damages from any other party for any breach of this
Agreement, including without limitation, reasonable attorneys' fees.
9.3 Amendment. To the extent permitted by applicable law, this Agreement
may be amended by action taken by or on behalf of the Board of Directors of
Transcell, and Intercardia at any time before or after Transcell Stockholder
Approval is obtained but, after such approval, no amendment shall be made which
decreases the Merger Consideration or which adversely affects the rights of
Transcell's stockholders hereunder without the approval of such stockholders as
required by law. This Agreement may not be amended except by an instrument in
writing signed on behalf of all of the parties.
9.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken by or on behalf of the Boards of Directors of
Transcell and Intercardia, may (i) extend the time for the performance of any
of the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE 10
Indemnification
10.1 Indemnification of Intercardia. The stockholders of Transcell
(hereinafter the "Exchanging Stockholders") agree to indemnify and hold
harmless Intercardia and its successors and assigns (individually an "Acquiror
Indemnitee", and collectively the "Acquiror Indemnitees") from, against, and in
respect of the following:
(a) any and all losses, damages, deficiencies or liabilities caused by or
resulting or arising from: (i) any breach of the representations and warranties
of Transcell contained in this Agreement; (ii) any failure by Transcell or
Interneuron to perform or otherwise fulfill or comply with (X) if this
Agreement shall have been terminated, any other covenant, undertaking,
agreement or obligation to be performed, fulfilled or complied with by
Transcell or Interneuron, as applicable, prior to the Closing; or (Y) if the
Closing shall occur, any undertaking or other agreement or obligation hereunder
to be performed, fulfilled or otherwise complied with by Transcell or
Interneuron, as applicable, after the Closing; or (iii) taxes due for periods
ending prior to the Effective Time, including Payment Taxes; and
(b) any and all actions, suits, proceedings, claims, liabilities, demands,
assessments, judgments, interest, penalties, costs and expenses, including
reasonable attorneys' fees (whether or not incurred by the Acquiror Indemnitees
or in connection with investigating, defending, settling (with the consent of
Interneuron, which shall not be unreasonably withheld) or prosecuting any
action, suit, proceeding or claim against any of the Acquiror Indemnitors
hereunder), directly incident to such indemnification;
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provided, however, that if any action, suit, proceeding, claim, liability,
demand or assessment shall be asserted against any Acquiror Indemnitee in
respect of which such Acquiror Indemnitee proposes to demand indemnification,
such Acquiror Indemnitee shall notify Interneuron thereof within twenty (20)
days after assertion thereof, and such notice shall include copies of all suit,
service and claim documents, all other relevant documents in the possession of
the Acquiror Indemnitee, and an explanation of the Acquiror Indemnitee's
contentions and defenses with as much specificity and particularity as the
circumstances permit. Subject to rights of or duties to any insurer or other
third Person having liability therefor, Interneuron shall have the right within
20 days after receipt of such notice to assume the control of the defense,
compromise or settlement of any such action, suit, proceeding, claim,
liability, demand or assessment, including, at its own expense, employment of
counsel; provided further, however, that if Transcell or Interneuron shall have
exercised its right to assume such control, the Acquiror Indemnitees: (X) may,
in their sole discretion and expense, employ counsel to represent them (in
addition to counsel employed by Interneuron) in any such matter, and in such
event counsel selected by Interneuron shall be required to reasonably cooperate
with such counsel of the Acquiror Indemnitee in such defense, compromise or
settlement for the purpose of informing and sharing information with such
Acquiror Indemnitee; and (Y) shall, at its own expense, make available to
Interneuron those employees of the Acquiror Indemnitees whose assistance,
testimony or presence is reasonably deemed by Interneuron necessary or
beneficial to assist Interneuron in evaluating and in defending any such
action, suit, proceeding, claim, liability, demand or assessment; provided
further, however, that any such access shall be conducted in such a manner as
not to interfere unreasonably with the operations of the businesses of the
Acquiror Indemnitees.
10.2 Indemnification of Exchanging Stockholders. Intercardia agrees to
indemnify and hold harmless the Exchanging Stockholders and their respective
successors and assigns (individually a "Transferor Indemnitee", and
collectively the "Transferor Indemnitees") from, against and in respect of:
(a) any and all losses, damages, deficiencies or liabilities caused by,
resulting or arising from or otherwise relating to: (i) any breach of the
representations and warranties of Intercardia contained in this Agreement; and
(ii) any failure by Intercardia to perform or otherwise fulfill or comply with
(X) if this Agreement shall have been terminated or any covenant, undertaking,
agreement or obligation to be performed, fulfilled or complied with by
Intercardia prior to or in connection with the Closing; or (Y) if the Closing
shall occur, any undertaking or other agreement or obligation hereunder to be
performed, fulfilled or otherwise complied with by Intercardia after the
Closing; and
(b) any and all actions, suits, proceedings, claims, liabilities, demands,
assessments, judgments, interest, penalties, costs and expenses, including
reasonable attorneys' fees (whether or not incurred by the Transferor
Indemnitees in connection with investigating, defending, settling or
prosecuting any action, suit, proceeding or claim against Intercardia
hereunder), incident to any of the items referred to herein or such
indemnification;
provided, however, that if any action, suit, proceeding, claim, liability,
demand or assessment shall be asserted against any Transferor Indemnitee in
respect of which such Transferor Indemnitee proposes to demand indemnification,
such Transferor Indemnitee shall notify Intercardia thereof within a reasonable
period of time after assertion thereof, and such notice shall include copies of
all suit, service and claim documents, all other relevant documents in the
possession of the Transferor Indemnitees and an explanation of the Transferor
Indemnitees' contentions and defenses with as much specificity and
particularity as the circumstances permit, provided that the failure of the
Transferor Indemnitee to give such notice shall not relieve Intercardia of its
obligations under this Section 10.2 if the Transferor Indemnitee shall have
demonstrated that: (i) it acted in good faith and without unreasonable delay;
and (ii) Intercardia shall not have been prejudiced thereby. Subject to rights
of or duties to any insurer or other third Person having liability therefor,
Intercardia shall have the right within 10 days after receipt of such notice to
assume the control of the defense, compromise or settlement of any such action,
suit, proceeding, claim, liability, demand or assessment, including, at its own
expense, employment of counsel; provided further, however, that if Intercardia
shall have exercised its right to assume such control, the Transferor
Indemnitees: (X) may, in their sole discretion and expense, employ one counsel
to represent them (in addition to counsel employed by Intercardia) in any such
matter, and in such event counsel selected by Intercardia shall be required to
cooperate with such counsel of the Transferor Indemnitees in such defense,
compromise or settlement for the purpose of informing and sharing information
with such Transferor Indemnitees; and (Y) shall, at their own expense, make
available to Intercardia those employees of Transcell whose assistance,
testimony or presence is reasonably deemed by Intercardia necessary or
beneficial to assist Intercardia or Interneuron in evaluating and in defending
any such action, suit, proceeding, claim, liability, demand or assessment;
provided further, however, that any such access shall be conducted in such a
manner as not to interfere unreasonably with the operations of the businesses
of the Acquiror Indemnitees.
10.3 Procedures Relating to Indemnification of Tax Claims. If an inquiry
shall be made by any taxing authority, which, if successful, might result in an
indemnity payment to any Acquiror Indemnitee relating to Payment Taxes (a "Tax
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Claim"), Intercardia shall as promptly as reasonably practicable notify
Interneuron in writing of such claim; provided, however, that the failure to
give such notice shall not affect the indemnification provided hereunder except
to the extent Interneuron has been actually prejudiced as a result of such
failure.
With respect to any Tax Claim, Intercardia shall control proceedings in
connection with such Tax Claim (including selection of counsel reasonably
acceptable to Interneuron) and Interneuron shall be entitled to participate in
any such proceedings and, without limiting the foregoing, Intercardia may
pursue or forego administrative appeals, proceedings, hearings and conferences
with any taxing authority with respect thereto, and Intercardia may either pay
the tax claimed and sue for a refund where applicable law permits such refund
suits or contest the Tax Claim in any permissible manner; provided, however,
that (i) Interneuron shall have no liability for indemnification under this
Section 10 for any Tax Claims if any payment of the tax claimed was made by
Intercardia without Interneuron's prior written consent, which consent shall
not be unreasonably withheld, and (ii) Interneuron may, upon written request,
assume control of such proceedings including, without limiting the generality
of the foregoing, assuming the rights of Intercardia in the preceding clause
and Intercardia shall be entitled to continue to participate in any such
proceeding.
Intercardia and Interneuron shall cooperate in contesting any Tax Claim,
which cooperation shall include, without limitation, the retention and (upon
request) the provision to the requesting party of records and information which
are reasonably relevant to such Tax Claim, and in making employees available on
a mutually convenient basis to provide additional information or explanation of
any material provided hereunder or to testify at proceedings relating to such
Tax Claim.
10.4 Remedies. Notwithstanding any provision to the contrary in this
Agreement, the indemnification rights set forth in this Article 10, all of
which are subject to the terms, limitations and restrictions of this Article
10, and the enforcement thereof and collection thereunder, shall be the
exclusive remedy after Closing with respect to claims relating to the subject
matter of this Agreement or certificates to be delivered at Closing hereunder.
Such limitations set forth in this Section 10.4 shall not impair the rights of
any of the parties to seek non-monetary equitable relief, including (without
limitation) specific performance or injunctive relief to redress any default or
breach of this Agreement. In connection with the seeking of any non-monetary
equitable relief, each of the parties acknowledges and agrees that the other
parties hereto would be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the parties hereto agrees the
other parties hereto shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any
competent court having jurisdiction over the parties (subject to the provisions
of Section 11.11 below), in addition to any other remedy to which they may be
entitled, at law or in equity.
10.5 Survival. Notwithstanding anything herein to the contrary, this
Article 10 shall survive termination of this Agreement without limitation;
provided however, that this survival shall not extend a liability otherwise
limited by Article 9, and no indemnifying party shall be liable for any claim
for indemnification initially asserted by an indemnified party pursuant to any
provision of this Agreement after the date which is eighteen (18) months after
the Effective Time except for indemnification relating to Section 5.4 (relating
in any manner to employment tax matters) and Section 5.10 (relating in any
manner to Class A Common Stock or the calculation of Class A Common Stock
Equivalents) which indemnity obligation shall survive without limitation so
long as notice of such indemnity obligation is given to the indemnifying party
on a timely basis.
10.6 Limitation on Liability.
(a) Notwithstanding any provision to the contrary in this Article 10, no
claim, either individually or in the aggregate, for indemnification hereunder,
shall be valid and assertable unless such claims in the aggregate are equal to
or greater than $75,000 (the "Basket Deductible"), in which case, subject to
the limitations set forth in Section 10.9(b), the indemnifying party shall be
liable for amounts relating back to amounts in excess of $50,000.
(b) In no event shall the aggregate liability of any of the Exchanging
Stockholders for indemnification hereunder or otherwise arising out of or
relating to this Agreement exceed the aggregate market value of his pro rata
share of the Aggregate Merger Consideration as of the Closing Date; provided,
however, the aggregate amount of the indemnity obligation under Article 10
(except those relating to a breach or breaches of Section 5.10, relating in any
manner to Class A Common Stock or the calculation of Class A Common Equivalent
Shares) shall not exceed One Million Five Hundred Thousand ($1,500,000)
Dollars. Notwithstanding anything to the contrary stated above, the indemnity
obligation relating to a breach or breaches of Section 5.4 relating in any
manner to Payment Taxes shall not be an obligation of any Exchanging
Stockholder other than Interneuron, as to whom it shall be unlimited. In no
event shall the aggregate liability of Intercardia and Transcell for
indemnification hereunder or otherwise arising out of or relating to this
Agreement exceed One Million Five Hundred Thousand ($1,500,000) Dollars.
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(c) The Exchanging Stockholders shall have no claim or right to action
against Transcell for recovery of any indemnity obligation hereunder;
(d) Transcell hereby appoints Interneuron to act on behalf of the
Exchanging Stockholders with respect to all matters under this Article 10.
10.7 Calculation of Indemnification. The amount of indemnification payable
by an indemnifying party under this Article 10 shall be (a) reduced by any
insurance proceeds received by the indemnified party with respect to the claim
for which indemnification is sought and (b) reduced by the amount of any net
tax benefits realized by the indemnified party. If the amount to be netted
under this Section 10.7 (the "Reduction Amount") from any payment required
under this Article 10 is determined after payment by the indemnifying party of
any amount otherwise required to be paid to an indemnified party pursuant to
this Article 10, the indemnified party shall promptly upon such determination
repay the Reduction Amount to the indemnifying party.
ARTICLE 11
General Provisions
11.1 Survival of Representations and Warranties. The representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Effective Time for a period of eighteen (18)
months, provided, however, that representation and warranties set forth in
Section 5.4 (relating in any manner to employment tax matters) and Section 5.10
(relating in any manner to Class A Common Stock or the calculation of Class A
Common Stock Equivalents) shall survive the Effective Time without limitation
11.2 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission (with a
confirmatory copy sent by overnight courier), by courier service (with proof of
service), hand delivery or certified or registered mail (return receipt
requested and first-class postage prepaid), addressed as follows:
<TABLE>
<S> <C>
If to Intercardia With a copy to:
Post Office Box 14287 Wyrick Robbins Yates & Ponton LLP
3200 East Highway 54 4101 Lake Boone Trail -- Suite 300
Cape Fear Building, Suite 300 Raleigh, North Carolina 27607
Research Triangle Park, NC 27709 Telephone: 919-781-4000
Telephone: 919-558-8688 Facsimile: 919-781-4865
Facsimile: 919-544-1245 Attention: Larry E. Robbins, Esq.
Attention: Clayton I. Duncan
If to Transcell: With a copy to:
Transcell Technologies, Inc. Bachner Tally Polevoy & Misher LLP
8 Cedar Brook Drive 380 Madison Avenue, 18th Floor
Cranbury, NJ 08512 New York, NY 10017
Telephone: 609-655-6900 Telephone: 212-687-7000
Facsimile: 609-655-6960 Facsimile: 212-682-5729
Attention: Glenn L. Cooper, M.D. Attention: Jill M. Cohen, Esq.
If to Interneuron: With a copy to:
Interneuron Pharmaceuticals, Inc. Bachner Tally Polevoy & Misher LLP
99 Hayden Avenue 380 Madison Avenue, 18th Floor
Lexington, MA 02173 New York, NY 10017
Attention: Glenn L. Cooper, M.D. Telephone: 212-687-7000
Facsimile: 617-862-3859 Facsimile: 212-682-5729
Attention: Jill M. Cohen, Esq.
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
11.3 Assignment; Binding Effect; Third Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject to
the preceding sentence, this Agreement shall be binding upon and shall
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inure to the benefit to the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to the contrary,
except for the provisions of Section 7.8, nothing in this Agreement, expressed
or implied, is intended to confer on any person other than the parties hereto
or their respective heirs, successors, executors, administrators and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
11.4 Entire Agreement. This Agreement, the Disclosure Letter, the
Schedules and the Exhibits, and any other documents delivered by the parties in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto including, without
limitation, the letter dated November 5, 1997 by and among Intercardia,
Transcell and Interneuron.
11.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws. Each of Transcell and Intercardia hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in such courts), waives
any objection to the laying of venue of any such litigation in the Delaware
Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
11.6 Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
11.7 Interpretation; Certain Definitions. In this Agreement, unless the
context otherwise requires, words describing the singular number shall include
the plural and vice versa, and words denoting any gender shall include all
genders and words denoting natural persons shall include corporations and
partnerships and vice versa. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." As used in this Agreement, the words
"Subsidiary," "affiliate" and "associate" shall have the meanings ascribed
thereto in Rule 12b-2 under the Exchange Act. For purposes of this Agreement,
one party shall be considered "wholly owned" by another party if all of the
shares of its outstanding capital stock or issued share capital, other than
directors' qualifying shares, are beneficially owned by such other party.
11.8 Investigations. No action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement.
11.9 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
11.10 Enforcement of Agreement.
(a) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with its specific terms or was otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any Delaware Court, this being in addition to any other
remedy to which they are entitled at law or in equity.
(b) The prevailing party in any judicial action shall be entitled to
receive from the other party reimbursement for the prevailing party's
reasonably attorneys' fees and disbursements, and court costs.
11.11 Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all, of the parties hereto.
11.12 Knowledge. Intercardia hereby agrees that to the extent that any
representation or warranty of Transcell contained in this Agreement is untrue
or incorrect and Intercardia had actual knowledge of such untruth or inaccuracy
prior to the execution of this Agreement, (i) Intercardia shall have no rights
under this Agreement with respect to such untruth or inaccuracy and (ii) any
such representation or warranty shall be deemed to be amended to the extent
necessary to render it consistent with the actual knowledge of Intercardia;
provided, however, the provisions of this Section 11.12 shall not apply to
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warranties or representations relating to Payment Taxes or the calculation of
Class A Common Equivalent Shares. The knowledge of Intercardia shall be defined
as the actual knowledge of Clayton I. Duncan or Richard W. Reichow.
11.13 Further Action. Each of the parties hereto shall use such party's
best efforts to take such actions as may be necessary or reasonably requested
by the other parties hereto to carry out and consummate the transactions
contemplated by this Agreement.
11.14 Arbitration. The parties agree that they shall attempt in good faith
to settle any controversy or claim arising out of or relating to this
Agreement, or any breach hereof by arbitration in accordance with the rules of
the American Arbitration Association then in effect. The arbitration shall be
held in Wilmington, Delaware. Any arbitration award shall be final and
conclusive and shall be binding upon the parties and a judgment may be entered
in the highest state or federal court of Delaware having jurisdiction.
11.15 Invalidity, Etc. Should any provision of this Agreement be held by a
court of arbitration panel of competent jurisdiction to be enforceable only if
modified, such holding shall not affect the validity of the remainder of this
Agreement, the balance of which shall continue to be binding upon the parties
hereto with any such modification to become a party hereof and treated as
though originally set forth in this Agreement. The parties further agreed that
any such court or arbitration panel is expressly authorized to modify any such
unenforceable provision of this Agreement in lieu of severing such
unenforceable provision from this Agreement in its entirety, whether by
rewriting the offending provision, deleting any or all of the offending
provision, adding additional language to this Agreement, or by making such
other modifications as it deems warranted to carry out the intent and agreement
of the parties as embodied herein to the maximum extent permitted by law. The
parties expressly agree that this Agreement as so modified by the arbitration
panel shall be binding upon and enforceable against each of them. In any event,
should one or more provisions of this Agreement be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions hereof, and if such
provision or provisions are not modified as provided above, this Agreement
shall be construed as if such invalid, illegal or unenforceable provisions had
never been set forth herein.
IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of
Merger and caused the same to be duly delivered on their behalf on the day and
year first written above.
TRANSCELL TECHNOLOGIES, INC.
By: /s/ GLENN L. COOPER
------------------------------------
Name: Glenn L. Cooper
Title: Acting President & CEO
INTERNEURON PHARMACEUTICALS INC.
By: /s/ GLENN L. COOPER
------------------------------------
Name: Glenn L. Cooper
Title: Acting President & CEO
INTERCARDIA, INC.
By: /s/ CLAYTON I. DUNCAN
------------------------------------
Name: Clayton I. Duncan
Title: President & CEO
A-25
<PAGE>
ANNEX B
NMS FAIRNESS OPINION
March 2, 1998
Board of Directors
Intercardia, Inc.
P.O. Box 14287
3200 East Highway 54
Cape Fear Building, Suite 800
Research Triangle Park, NC 27709-4287
Gentlemen:
We understand that Transcell Technologies, Inc., a Delaware corporation
("Seller"), and Intercardia, Inc., a Delaware corporation ("Buyer"), have
entered into a Merger Agreement (the "Merger Agreement"), which contemplates a
merger of Seller with and into Buyer, which will be the surviving entity (the
"Merger"). Pursuant to the Merger, as more fully described in the Merger
Agreement, we understand that all of the outstanding shares of the capital
stock of Seller will be converted into the right to receive over a 21-month
period shares of the common stock, $0.001 par value per share ("Buyer Common
Stock"), of Buyer with an estimated discounted present value as of the closing
of the Merger of approximately $12.8 million, subject to certain adjustments
set forth in the Merger Agreement. In addition, Interneuron Pharmaceuticals,
Inc., a Delaware corporation ("Interneuron"), the majority stockholder of both
Seller and Buyer, will agree to cancel certain indebtedness presently owing
from Seller to Interneuron in connection with the closing of the Merger, and as
a further term Buyer will agree to pay Interneuron a minimum royalty of $3.0
million payable in Buyer Common Stock in consideration for the assignment of
certain rights by Interneuron to Buyer and the guarantee by Interneuron of
certain lease obligations. The terms and conditions of the Merger are set forth
in more detail in the Merger Agreement. The Buyer Common Stock to be issued to
the stockholders of Seller in the Merger taken together with the Buyer Common
Stock to be issued to Interneuron in connection with the aforementioned
assignment of rights and guarantee of lease obligations is collectively
referred to herein as the "Total Consideration".
You have asked for our opinion as investment bankers as to whether the
Total Consideration to be paid by Buyer in connection with the Merger is fair
to Buyer from a financial point of view, as of the date hereof. As you are
aware, we were not retained to nor did we advise Buyer with respect to
alternatives to the Merger or Buyer's underlying decision to proceed with or
effect the Merger.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Buyer,
including the consolidated financial statements of Buyer for recent years and
interim periods to December 31, 1997 and certain other relevant financial and
operating data relating to Seller and Buyer made available to us from published
sources and from the internal records of Seller and Buyer, including the
financial statements of Seller for recent years and interim periods to
September 30, 1997; (ii) reviewed the financial terms and conditions of the
Merger Agreement; (iii) compared Seller from a financial point of view with
certain other companies in the biotechnology industry which we deemed to be
relevant; (iv) considered the financial terms, to the extent publicly
available, of selected recent business combinations of companies in the
biotechnology industry which we deemed to be comparable, in whole or in part,
to the Merger; (v) reviewed and discussed with representatives of the
management of Seller and Buyer certain information of a business and financial
nature regarding Seller and Buyer, furnished to us by them, including financial
forecasts and related assumptions of Seller and Buyer; (vi) made inquiries
regarding and discussed the Merger and the Merger Agreement and other matters
related thereto with Buyer's management; and (vii) performed such other
analyses and examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Seller and Buyer provided to us by their respective managements,
upon their advice and with your consent we have assumed for purposes of our
opinion that the forecasts have been reasonably prepared on bases reflecting
the best available estimates and judgments of their respective managements at
the time of preparation as to the future financial performance of Seller and
Buyer and that they provide a reasonable basis upon which we can form our
opinion. We have also assumed that there have been no material changes in
Seller's or Buyer's assets, financial condition, results of operations,
business or prospects since the respective dates of their last financial
statements made available to us. We have relied on advice of counsel and
independent accountants to Buyer as to all legal and financial reporting
matters with respect to Buyer, the Merger and the Merger
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Agreement. We have assumed that the Merger will be consummated in accordance
with the terms of the Merger Agreement and in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934 and all
other applicable federal and state statutes, rules and regulations. In
addition, we have not assumed responsibility for reviewing any individual
credit files, or making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
Seller or Buyer, nor have we been furnished with any such appraisals. Finally,
our opinion is based on economic, monetary and market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Accordingly, although subsequent developments may affect this opinion, we have
not assumed any obligation to update, revise or reaffirm this opinion.
In the ordinary course of our business, we actively trade the equity
securities of Buyer and Interneuron for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have also acted as an underwriter in connection with
offerings of securities of Interneuron and Buyer and performed various
investment banking services for Buyer, Interneuron and Seller.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Total Consideration to be paid by Buyer in
connection with the Merger is fair to Buyer from a financial point of view, as
of the date hereof.
This opinion is directed to the Board of Directors of Buyer in its
consideration of the Merger and is not a recommendation to any stockholder as
to how such stockholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Total Consideration to
Buyer and does not address the relative merits of the Merger and any
alternatives to the Merger, Buyer's underlying decision to proceed with or
effect the Merger, or any other aspect of the Merger. This opinion may not be
used or referred to by Buyer, or quoted or disclosed to any person in any
manner, without our prior written consent, which consent is hereby given to the
inclusion of this opinion in any proxy statement or prospectus filed with the
Securities and Exchange Commission by Buyer in connection with the Merger. In
furnishing this opinion, we do not admit that we are experts within the meaning
of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report of valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
/s/ NationsBanc Montgomery Securities
LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
B-2
<PAGE>
ANNEX C
HEMPSTEAD FAIRNESS OPINION
February 26, 1998
The Board of Directors
Transcell Technologies, Inc.
8 Cedar Brook Drive
Cranbury, NJ 08512
Gentlemen:
You have asked us to render an opinion regarding the terms of a proposed
transaction whereby Intercardia, Inc. ("Intercardia") will acquire all of the
issued and outstanding capital stock and assume the stock option plan and the
outstanding stock options and stock warrants of Transcell Technologies, Inc.
("Transcell"), a Delaware corporation, through a merger of Transcell with and
into Intercardia (the "Merger").
The basic terms and conditions of the Merger are outlined in a draft
Agreement and Plan of Merger between Intercardia, Inc., Transcell Technologies,
Inc. and Interneuron Pharmaceuticals, Inc. (the "Draft Merger Agreement"). We
also discussed terms of the Merger with certain members of the management of
Interneuron Pharmaceuticals, Inc. ("Interneuron") and Transcell. Interneuron
owns a majority ownership position in the stock of Transcell. The remaining
equity interests, including certain contingent equity interests, are held by a
variety of investors, managers, employees and others (collectively referred to
as the "Minority Interest Shareholders"). Specifically, our opinion addresses
the fairness, from a financial point of view, of the Merger to the Minority
Interest Shareholders of Transcell Technologies, Inc.
Under the terms of the Merger, as expressed in the Draft Merger Agreement,
all of the issued and outstanding capital stock of Transcell shall be canceled
in exchange for the consideration (the "Aggregate Merger Consideration") to be
paid by Intercardia. The total Aggregate Merger Consideration will be paid in
common stock of Intercardia or in warrants or options to purchase Intercardia
common stock. The proposed allocation of the Purchase Price among the
Shareholders of Transcell, including the Minority Interest Shareholders, is
described in detail in the Draft Merger Agreement.
In connection with this opinion we have, among other things, (i) reviewed
a Letter of Intent, dated November 5, 1997 sent by Intercardia to Dr. Glenn L.
Cooper, which outlines proposed terms of the Merger; (ii) reviewed the Draft
Merger Agreement as of February 26, 1998; (iii) conferred recently with Dr.
Daniel Kahne, the founder of Transcell, and Dr. Michael J. Sofia, regarding the
development, current status and potential of Transcell's business including the
current status of a Research Collaboration and License Agreement by and among
Merck & Co., Inc., Transcell Technologies, Inc. and Interneuron
Pharmaceuticals, Inc.; (iv) reviewed certain unaudited financial statement
information for Transcell including preliminary income statement data for the
fiscal year ending September 30, 1997, and balance sheet data as of September
30, 1997; (v) reviewed additional financial statement information as of
December 31, 1997; (vi) reviewed certain publicly available information,
including SEC filings and analyst's reports pertaining to Interneuron,
Transcell and Intercardia; and vii) conducted such other financial studies,
analyses and investigations and reviewed such other factors we deemed
appropriate for purposes of this opinion.
In conducting our analysis, we considered a number of approaches to
financial valuation, including market-based, earnings-based and asset based
approaches. In particular, we reviewed pricing data pertaining to transactions
in Transcell's capital stock, pricing data derived from publicly traded
companies which we deemed relevant and pricing data derived from other industry
transactions.
In rendering this opinion, we have relied, without independent
verification, on the accuracy and completeness of all financial and other
information supplied to us by Transcell or its parent company, Interneuron. Our
opinion is based upon the economic, monetary and market conditions existing on
the date of this letter. We have not been requested to make, nor have we made,
an independent evaluation or appraisal of the individual assets and liabilities
(contingent or otherwise) associated with Transcell, nor were we furnished with
any such evaluations or appraisals. Estimates of value used in the course of
developing this opinion are not appraisals and should not be misconstrued as
appraisals.
We have not been involved in the negotiation of the Merger. We have
assumed that the Merger will be consummated on the terms and conditions
described in the Draft Merger Agreement reviewed by us, and as described to us
by the management of Interneuron and Transcell.
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It is understood that this letter is directed to inform the Board of
Directors of Transcell Technologies, Inc. only and may not be used for any
other purpose without the prior written consent of Hempstead & Co. Inc.
Based on the foregoing and other considerations which we deemed pertinent,
we are of the opinion that as of the current date, the proposed terms of the
Merger, as described in the body of this letter and in the Draft Merger
Agreement, are fair, from a financial point of view, to the Minority Interest
Shareholders of Transcell Technologies, Inc.
Very truly yours,
/s/ Hempstead & Co. Inc.
HEMPSTEAD & CO. INC.
C-2
<PAGE>
ANNEX D
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
Section 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section
228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
(a) Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
(b) Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) at the effective date of the merger or consolidation
will be either listed on a national securities exchange or designated as
a national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
(c) Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
(d) Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
D-1
<PAGE>
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsection (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger
or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date,
the record date shall be the close of business on the day next preceding
the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
D-2
<PAGE>
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 ("Section 145") of the DGCL, provides a detailed statutory
framework covering indemnification of officers and directors against
liabilities and expenses arising out of legal proceedings brought against them
by reason of their being or having been directors or officers. Section 145
generally provides that a director or officer of a corporation (i) shall be
indemnified by the corporation for all expenses of such legal proceedings when
he is successful on the merits, (ii) may be indemnified by the corporation for
the expenses, judgments, fines and amounts paid in settlement of such
proceedings (other than a derivative suit), even if he is not successful on the
merits, if he acted in good faith in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful, and (iii) may be indemnified by the corporation for the
expenses of a derivative suit (a suit by a stockholder alleging a breach by a
director or officer of a duty owed to the corporation), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. No indemnification may be made under clause (iii) above, however,
if the director or officer is adjudged liable for negligence or misconduct in
the performance of his duties to the corporation, unless a corporation
determines that, despite such adjudication, but in view of all of the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of
disinterested directors, independent legal counsel, the stockholders or a court
of competent jurisdiction.
Article Seventy of Intercardia's Certificate of Incorporation provides in
substance that, to the fullest extent permitted by Delaware law as it now
exists or as amended, each director and officer shall be indemnified against
reasonable costs and expenses, including attorney's fees, and any liabilities
which he may incur in connection with any action to which he may be made a
party by reason of his being or having been a director or officer of
Intercardia. The indemnification provided by Intercardia's Certificate of
Incorporation is not deemed exclusive of or intended in any way to limit any
other rights to which any person seeking indemnification may be entitled.
Section 102(b)(7) of the DGCL, permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
Article Ninth of Intercardia's Certificate of Incorporation provides for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The Company maintains liability insurance through Interneuron insuring the
Company's officers and directors against liabilities that they may incur in
such capacities.
Intercardia's Investors' Rights Agreements provide for
cross-indemnification of the stockholders of Intercardia whose shares with
registration rights are included in a registration under the Act, and of
Intercardia, its officers and directors for certain liabilities arising in
connection with such registration.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling Intercardia pursuant to
the foregoing provisions, Intercardia has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
At present, there is no pending litigation or proceeding involving a
director or officer of Intercardia as to which indemnification is being sought
nor is Intercardia aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
II-1
<PAGE>
Item 21. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------- -----------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of March 2, 1998, among the Registrant, Interneuron Pharmaceuticals,
Inc. and Transcell Technologies, Inc. (see page A-1).
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(f) 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.
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(f) Sponsored Research Agreement between The University of North Carolina at Chapel Hill and Renaissance Cell
Technologies, Inc. dated September 4, 1997.
10.24(f) Sponsored Research Agreement between National Jewish Medical and Research Center and Aeolus
Pharmaceuticals, Inc., dated September 11, 1997.
10.25(f)* Development, Manufacturing, Marketing and License Agreement between Knoll AG, Intercardia, Inc. and
CPEC, Inc., effective as of December 19, 1996.
10.26(f) Employment Agreement between Clayton I. Duncan and Intercardia, Inc., dated December 15, 1997.
21.1 (f) List of Subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P. relating to Intercardia.
23.1.1 Consent of Coopers & Lybrand L.L.P. relating to Intercardia.
23.2 Consent of Coopers & Lybrand L.L.P. relating to Transcell.
23.3 Consent of Wyrick Robbins Yates & Ponton LLP (contained in Exhibit 5.1).
24.1 Power of Attorney (see page S-1).
</TABLE>
- ---------
* Confidential treatment requested.
II-2
<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.
(f) 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, 1997.
Item 22. Undertakings
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the foregoing paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for directors,
officers, and controlling persons of the Registrant pursuant to provisions
described in Item 20 above, or otherwise, the Registrant has been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
Intercardia being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Research Triangle Park, State of
North Carolina, on this 6th day of April 1998.
INTERCARDIA, INC.
/s/ Clayton I. Duncan
-------------------------------------
Clayton I. Duncan,
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Clayton
I. Duncan and Richard W. Reichow, and each of them, his true and lawful
attorney-in-fact and agent, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons 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 April 6, 1998
----------------------------------
Clayton I. Duncan Officer (Principal Executive Officer)
/s/ RICHARD W. REICHOW Senior Vice President, Chief Financial April 6, 1998
----------------------------------
Richard W. Reichow Officer and Treasurer (Principal
Financial and Accounting Officer)
/s/ GLENN L. COOPER, M.D. Director April 6, 1998
----------------------------------
Glenn L. Cooper, M.D.
/s/ JOSEPH J. RUVANE, JR. Director April 6, 1998
----------------------------------
Joseph J. Ruvane, Jr.
/s/ DAVID B. SHARROCK Director April 6, 1998
----------------------------------
David B. Sharrock
</TABLE>
II-4
<PAGE>
*******************************************************************************
APPENDIX
INTERCARDIA, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
PROXY
The undersigned, a stockholder of Intercardia, Inc., a Delaware
corporation ("Intercardia"), hereby constitutes and appoints Clayton I. Duncan
and Richard W. Reichow, or either of them, attorneys and proxies with full
power of substitution to act and vote all shares of the undersigned at the
annual meeting of stockholders of Intercardia to be held at the North Carolina
Biotechnology Center, 15 Alexander Drive, Research Triangle Park, North
Carolina, on May 6, 1998, commencing at 9:30 a.m., Eastern Time, and any
adjournment(s) thereof (the "Meeting"). The undersigned hereby directs this
proxy to be voted as follows:
1. The approval of the Merger Agreement, as described in the accompanying
Proxy Statement/Prospectus:
Vote for [ ] Vote against [ ] Abstain [ ]
2. The election of four directors:
<TABLE>
<S> <C>
[ ] FOR ALL NOMINEES [ ] WITHHOLD AUTHORITY TO
LISTED BELOW (except as VOTE FOR ALL NOMINEES
marked to the contrary below) LISTED BELOW
</TABLE>
INSTRUCTION: To withhold authority to vote for any individual nominee
strike a line through the nominee's name listed below.
Clayton I. Duncan, Glenn L. Cooper, M.D.,
Joseph J. Ruvane, Jr., David B. Sharrock
3. The approval of amendments to the 1994 Stock Option Plan to, among
other things, increase the number of shares reserved for issuance thereunder
from 1,500,000 to 2,500,000 shares as described in the accompanying Proxy
Statement/Prospectus:
Vote for [ ] Vote against [ ] Abstain [ ]
4. The ratification of the appointment of Coopers & Lybrand L.L.P. as the
independent auditors of Intercardia for the fiscal year ending September 30,
1998:
Vote for [ ] Vote against [ ] Abstain [ ]
DIRECTORS RECOMMEND A VOTE FOR ALL NOMINEES LISTED ABOVE, FOR PROPOSAL 1,
FOR PROPOSAL 3 AND FOR PROPOSAL 4.
This Proxy will be voted as directed above. In the absence of any
direction, this Proxy will be voted for the Intercardia's slate of nominees for
director, for Proposals 1, 3 and 4, and with discretion to vote upon such other
matters as may be brought before the Meeting. Any proxy heretofore given by the
undersigned for the Meeting is hereby revoked and declared null and void and
without any effect whatsoever.
DATED: , 1998
(SEAL)
[Please sign exactly as name appears on
certificate(s)]
----------------------------------------
Print name and title, if appropriate
(SEAL)
[Please sign exactly as name appears on
certificate(s)]
----------------------------------------
Print name and title, if appropriate
<PAGE>
TRANSCELL TECHNOLOGIES , INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
PROXY
The undersigned, a stockholder of Transcell Technologies, Inc., a Delaware
corporation ("Transcell"), hereby constitutes and appoints Glenn L. Cooper,
M.D. attorney and proxy with full power of substitution to act and vote all
shares of the undersigned at the special meeting of stockholders of Transcell
to be held at the North Carolina Biotechnology Center, 15 Alexander Drive,
Research Triangle Park, North Carolina, on May 6, 1998, commencing at 9:00
a.m., Eastern Time, and any adjournment(s) thereof (the "Meeting"). The
undersigned hereby directs this proxy to be voted as follows:
1. The approval of the Merger Agreement, as described in the accompanying
Proxy Statement/Prospectus:
Vote for [ ] Vote against [ ] Abstain [ ]
DIRECTORS RECOMMEND A VOTE FOR PROPOSAL 1.
This Proxy will be voted as directed above. In the absence of any
direction, this Proxy will be voted for Proposal 1, with discretion to vote
upon such other matters as may be brought before the Meeting. Any proxy
heretofore given by the undersigned for the Meeting is hereby revoked and
declared null and void and without any effect whatsoever.
DATED: , 1998
(SEAL)
[Please sign exactly as name appears on
certificate(s)]
----------------------------------------
Print name and title, if appropriate
(SEAL)
[Please sign exactly as name appears on
certificate(s)]
----------------------------------------
Print name and title, if appropriate
Exhibit 5.1
[LETTERHEAD OF WYRICK ROBBINS YATES & PONTON LLP]
April 6, 1998
Intercardia, Inc.
P.O. Box 14287
3200 East Highway 54
Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4, File No. 333-
(the "Registration Statement"), filed by Intercardia, Inc., a Delaware
corporation (the "Company"), with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of 920,308 shares of Intercardia's Common Stock, $.001 par value per share (the
"Shares"). The Shares are to be issued to the stockholders of Transcell
Technologies, Inc. as described in the Registration Statement and pursuant to
the Agreement and Plan of Merger filed as an exhibit thereto. In our
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as
originals and the conformity with the original of all documents submitted to us
as copies thereof.
As your counsel, we have examined the proceedings taken, and are familiar
with the proceedings proposed to be taken, in connection with the issuance of
the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as such counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable State securities
laws, the Shares when issued in the manner referred to in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of Intercardia, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 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. We also consent to the
references to our firm under the captions "Selected Historical and Unaudited
Pro Forma Condensed Combined Financial Data", "Accounting Treatment" and
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
April 6, 1998
Exhibit 23.1.1
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 Registration Statement on Form S-4 of Intercardia,
Inc. filed with the Securities and Exchange Commission pursuant to the
Securities Act of 1933.
/s/ COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
April 6, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated October 23, 1997, except as to the information presented in
Note 10, for which the date is February 12, 1998, on our audits of the
financial statements of Transcell Technologies, Inc. (a Development Stage
Company) as of September 30, 1997 and 1996, and for each of the three years in
the period ended September 30, 1997, and for the period from October 21, 1991
(date of inception) to September 30, 1997. We also consent to the reference to
our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 6, 1998
