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 MARCH 11, 1999
----------------------------------------
TO THE STOCKHOLDERS OF INTERCARDIA, INC.:
The Annual Meeting of Stockholders (the "Meeting") of Intercardia, Inc.
("Intercardia") will be held at the North Carolina Biotechnology Center, 15
Alexander Drive, Research Triangle Park, North Carolina, on Thursday, March 11,
1999 at 9:00 a.m., for the following purposes:
1. To elect a board of five directors;
2. To approve an amendment to Intercardia's 1995 Employee Stock Purchase
Plan to increase the number of shares of Common Stock reserved for
issuance thereunder from 100,000 shares to 200,000 shares;
3. To ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors of Intercardia for the fiscal year ending September
30, 1999; and
4. To act upon such other matters as may properly come before the meeting
or any adjournments thereof.
The foregoing items are more fully described in the attached Proxy Statement.
The Board of Directors has fixed the close of business on January 21, 1999, as
the record date for the determination of stockholders entitled to notice of and
to vote at the Meeting or any adjournments thereof. A list of stockholders of
Intercardia entitled to vote at the Meeting will be available for examination
by a stockholder at Intercardia's office, for the ten days prior to the Meeting
and during normal business hours. All such stockholders are cordially invited
to attend the Meeting in person. However, to assure your representation at the
Meeting, you are urged to mark, sign, date and return the enclosed proxy card
as promptly as possible in the postage-prepaid envelope enclosed for that
purpose. Any stockholder attending the Meeting may vote in person, even if such
stockholder returned a proxy.
Intercardia's Proxy Statement and proxy is submitted herewith along with
Intercardia's Annual Report to Stockholders for the fiscal year ended September
30, 1998.
IMPORTANT -- YOUR PROXY IS ENCLOSED
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, STOCKHOLDERS ARE URGED TO
EXECUTE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED FOR MAILING IN THE UNITED STATES.
By Order of the Board of Directors
RICHARD W. REICHOW
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
TREASURER AND SECRETARY
Research Triangle Park,
North Carolina
January 28, 1999
<PAGE>
INTERCARDIA, INC.
P.O. BOX 14287
3200 EAST HIGHWAY 54
CAPE FEAR BUILDING, SUITE 300
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MARCH 11, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited by the Board of Directors (the "Board") of
Intercardia, Inc., a Delaware corporation ("Intercardia"), for use at
Intercardia's Annual Meeting of Stockholders to be held at the North Carolina
Biotechnology Center, 15 Alexander Drive, Research Triangle Park, North
Carolina, at 9:00 a.m. on Thursday, March 11, 1999, and any adjournments
thereof (the "Meeting"). The cost of soliciting proxies will be borne by
Intercardia. In addition to solicitation of proxies by mail, employees of
Intercardia, without extra remuneration, may solicit proxies personally or by
telephone. Intercardia will reimburse brokerage firms and other custodians,
nominees and fiduciaries for their reasonable out-of pocket expenses for
forwarding proxy materials to beneficial owners and seeking instruction with
respect thereto. The mailing address of the principal executive offices of
Intercardia is P.O. Box 14287, Research Triangle Park, North Carolina 27709.
Copies of this Proxy Statement and accompanying proxy card will be mailed to
stockholders on or about February 4, 1999.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy has the power to revoke it at any time
before it is voted by giving a later proxy or written notice to Intercardia
(Attention: Richard W. Reichow, Corporate Secretary), or by attending the
Meeting and voting in person.
VOTING
When the enclosed proxy is properly executed and returned (and not
subsequently properly revoked), the shares it represents will be voted in
accordance with the directions indicated thereon, or, if no direction is
indicated thereon, it will be voted:
1. FOR the election of the five nominees for director identified below;
2. FOR approval of the amendment to the 1995 Employee Stock Purchase Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder from 100,000 shares to 200,000 shares;
3. FOR ratification of the appointment of PricewaterhouseCoopers LLP,
Raleigh, North Carolina, as independent auditors of Intercardia for the
fiscal year ending September 30, 1999; and
4. In the discretion of the proxies with respect to any other matters
properly brought before the stockholders at the Meeting.
RECORD DATE
Only the holders of record of Intercardia's Common Stock at the close of
business on the record date, January 21, 1999 (the "Record Date"), are entitled
to notice of and to vote at the Meeting. On the Record Date, 7,304,453 shares
of Common Stock were outstanding. Stockholders will be entitled to one vote for
each share of Common Stock held on the Record Date.
<PAGE>
PROPOSAL NO. 1 -- ELECTIONS OF DIRECTORS
NOMINEES
Intercardia's By-Laws 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 authorized is five. Therefore, that number of directors
are to be elected, each to serve for one year, or until the election and
qualification of his successor, or until his earlier death, removal or
resignation.
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. Each nominee listed below has agreed to
serve as a director if elected. 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 .............. 49 1995
Glenn L. Cooper, M.D. .......... 46 1994
Joseph J. Ruvane, Jr. .......... 73 1995
David B. Sharrock .............. 62 1995
Edgar H. Schollmaier ........... 65 1998
</TABLE>
CLAYTON I. DUNCAN has been President, Chief Executive Officer and a
director of Intercardia since January 1995. From 1989 until December 1993, Mr.
Duncan was President and Chief Executive Officer of Sphinx Pharmaceuticals
Corporation ("Sphinx"), a biopharmaceutical company which was acquired by Eli
Lilly and Company ("Lilly") in September 1994. From December 1993 until
September 1994, he served as an independent consultant to Sphinx with regard to
the sale of Sphinx to Lilly. From 1987 to 1989, Mr. Duncan was a General
Partner of Intersouth Partners, a venture capital firm. From 1979 to 1987, he
was an executive with Carolina Securities Corporation, a regional investment
banking firm, serving as Executive Vice President and a director from 1984 to
1987. Mr. Duncan was founder and Chairman of the Board of CRX Medical, Inc., a
medical products company that conducted research and development in wound
management, ophthalmic disorders and interventional radiology. Mr. Duncan is
also a director of Aeolus Pharmaceuticals, Inc. ("Aeolus"), CPEC, Inc.
("CPEC"), and Renaissance Cell Technologies, Inc., all of which are
majority-owned subsidiaries of Intercardia. 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. Since May 1993, Dr. Cooper has
been President, Chief Executive Officer and a director of Interneuron
Pharmaceuticals, Inc. ("Interneuron"), which owns approximately 62% of
Intercardia's outstanding Common Stock. Dr. Cooper was the Chairman of the
Board of Directors, acting President and Chief Executive Officer of Transcell
Technologies, Inc. ("Transcell") from March 1996 until Intercardia acquired
Transcell in May 1998. He was President and Chief Executive Officer of
Progenitor, Inc. ("Progenitor"), 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. Prior to that time and
since 1985, he was associated with Lilly, from 1987 to 1990 as Director,
Clinical Research, Europe, of Lilly Research Center Limited, and from 1986 to
1987 as International Medical Advisor, Regulatory Affairs, Chemotherapy
Division at Lilly Research Laboratories. Dr. Cooper is a director of Genta
Incorporated, a biotechnology company, Aeolus, Progenitor and InterNutria,
Inc., a privately held majority-owned subsidiary of Interneuron. Dr. Cooper
received his M.D. from Tufts University School of Medicine.
JOSEPH J. RUVANE, JR. has been a 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, and as Chairman of the Board of
Pozen, Inc., a privately held drug development company.
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
Pharmaceuticals Inc. Mr. Sharrock is also a director of Interneuron and
Cincinnati Bell Inc.
2
<PAGE>
EDGAR H. SCHOLLMAIER has been a director of Intercardia since May 1998.
Mr. Schollmaier is Chairman of Alcon Laboratories, Inc. ("Alcon"), a wholly
owned subsidiary of Nestle` SA. He served as President of Alcon from 1972 to
1997 and was Chief Executive Officer for the last 20 years of that term. He is
a graduate of the University of Cincinnati and the Harvard Graduate School of
Business Administration. He serves as a director of DENTSPLY International,
Inc., a dental products company, and Stevens International Inc., a printing and
packaging company. In addition, he is a Regent of Texas Christian University
and a director of the University of Cincinnati Foundation, the Cook Children's
Hospital, Research to Prevent Blindness and the Foundation of the American
Academy of Ophthalmology.
INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES
The business of Intercardia is under the general management of the Board
of Directors as provided by the laws of Delaware and the By-Laws of
Intercardia. During the fiscal year ended September 30, 1998, the Board of
Directors held six formal meetings, excluding actions by unanimous written
consent. Each member of the Board attended all of the fiscal 1998 meetings of
the Board of Directors and Board committees of which he was a member.
The Board of Directors has established an audit committee (the "Audit
Committee") and a compensation committee (the "Compensation Committee"). The
Board has no Nominating Committee. The Audit Committee currently consists of
Mr. Ruvane, Mr. Sharrock and Mr. Schollmaier. During fiscal 1998, the Audit
Committee held two formal meetings. 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, Mr. Ruvane and Mr. Sharrock. During fiscal 1998, the Compensation
Committee held five formal meetings. The Compensation Committee makes
recommendations to the Board of Directors regarding salaries and incentive
compensation for officers of Intercardia, and determines the amount and type of
equity incentives granted to participants in Intercardia's 1994 Stock Option
Plan (the "Option Plan").
VOTE REQUIRED
The five nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted at the 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 will be excluded from the vote on this proposal.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE ELECTION OF THE NOMINEES LISTED ABOVE.
3
<PAGE>
PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT
TO THE 1995 EMPLOYEE STOCK PURCHASE PLAN
Intercardia's 1995 Employee Stock Purchase Plan (the "ESPP") was adopted
and approved by the Board of Directors in October 1995 and by the stockholders
in November 1995. The ESPP is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). A total of 200,000 shares of Common Stock have been
reserved for issuance under the ESPP, 100,000 of which are subject to
stockholder approval at the Meeting. As of December 31, 1998, 42,447 shares of
Common Stock had been purchased pursuant to the ESPP.
The ESPP is administered by the Compensation Committee of the Board of
Directors. Generally, each offering of Common Stock under the ESPP (an
"Offering") is for a period of 12 months. Offerings under the ESPP commence on
or about October 1 of each year. The first day of an Offering is the "Offering
Date" for such Offering. The Board may adjust the Offering Dates and periods,
subject to certain limitations. The ESPP will continue until terminated by the
Board of Directors or until all of the shares reserved for issuance under the
ESPP have been issued.
Participation in the ESPP is limited to eligible employees of Intercardia
and any parent or subsidiary corporation of Intercardia designated by the Board
of Directors for inclusion in the ESPP (individually, a "Participating
Company") who authorize payroll deductions. Payroll deductions may not exceed
10% of compensation. No person who owns shares or holds options to purchase, or
who as a result of participation in the ESPP would own shares or hold options
to purchase, 5% or more of the total combined voting power or value of all
classes of stock of Intercardia is entitled to participate in the ESPP. In
addition, employees who customarily work fewer than 20 hours per week or who
customarily work not more than five months in any calendar year are not
eligible to participate. Once an employee becomes a participant in the ESPP (a
"Participant"), the employee will automatically participate in each successive
Offering until such time as the employee ceases to be an eligible employee,
withdraws from the ESPP or terminates employment.
On the last day of each Purchase Period (the "Purchase Date"),
Participants purchase shares of Intercardia's Common Stock ("Shares") with
their accumulated payroll deductions. The purchase price per share (the
"Purchase Price") at which the Shares are sold under the ESPP generally will be
85% of the lesser of the fair market value of the Common Stock on the first day
of the Offering or the Purchase Date. The ESPP provides that if the fair market
value of the Common Stock on a Purchase Date other than the final Purchase Date
of an Offering is less than the fair market value of the Common Stock on the
Offering Date for such Offering, then every Participant, unless such
Participant otherwise elects in accordance with the ESPP, shall automatically
be withdrawn from such Offering at the end of such Purchase Date and after the
acquisition of shares for such Purchase Period and be enrolled in the next
Offering commencing subsequent to such Purchase Period.
The number of Shares a Participant purchases in each Offering is determined
by dividing the total amount of payroll deductions withheld from the
Participant's compensation by the Purchase Price. Subject to certain
limitations, during an Offering each Participant has a "Purchase Right"
consisting of the right to purchase the lesser of the whole number of shares
determined by dividing $50,000 by the fair market value of a share on the first
day of the Offering or 10,000 shares. However, Participants may not purchase
shares under the ESPP or any other Company plan under Section 423 of the Code
having a fair market value exceeding $25,000 (as determined for purposes of the
Code as of the Offering Date for each ESPP Offering Period) in any calendar year
in which such Participant's Purchase Right with respect to such ESPP Offering
Period remains outstanding. Any cash balance remaining in the Participant's
account is refunded to the Participant as soon as practicable after the Purchase
Date. If the refund is less than the amount necessary to purchase a whole share,
Intercardia may maintain cash in the Participant's account and apply it toward
the purchase of shares in the subsequent Purchase Period or ESPP Offering.
A Participant may withdraw from an ESPP Offering at any time without
affecting his or her eligibility to participate in future ESPP Offerings. In
effect, therefore, a Participant is given an option which he or she may or may
not exercise at the end of a Purchase Period. However, once a Participant
withdraws from an ESPP Offering, that Participant may not again participate in
the same ESPP Offering.
In the event of a transfer of control of Intercardia (as defined in the
ESPP), the Board of Directors may arrange with the surviving, continuing,
successor or purchasing corporation, or parent corporation thereof (the
"Acquiring Corporation"), to assume Intercardia's rights and obligations under
the ESPP. Purchase Rights which are neither assumed by the Acquiring Corporation
nor exercised as of the transfer of control terminate as of the date of the
transfer of control.
The Board may amend or terminate the ESPP but may not affect Purchase
Rights previously granted under the ESPP or adversely affect the right of any
Participant except as permitted by the ESPP, as necessary to qualify the ESPP
as an "employee stock purchase plan" pursuant to Section 423 of the Code or to
obtain qualification or registration of the shares
4
<PAGE>
under applicable foreign, federal or state securities laws, and provided
further that amendments with respect to options granted to persons subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), cannot be made more frequently than once every six months. The
stockholders must approve any amendment increasing the shares reserved or
changing the class of employees eligible for participation in the ESPP or the
definition of a corporation that may be designated by the Board as a
Participating Company within 12 months of the adoption of such amendment by the
Board. In addition, the stockholders must approve an amendment to the ESPP if
stockholder approval is necessary in order to comply with Rule 16b-3
promulgated under Section 16 of the Exchange Act.
Of the 100,000 shares subject to stockholder approval, the amount to be
received by any Participant is not determinable at this time.
FEDERAL INCOME TAX CONSEQUENCES
The following summary is intended only as a general guide under current
law as to the United States federal income tax consequences of participation in
the ESPP and does not attempt to describe all possible federal or other tax
consequences of such participation. Furthermore, the tax consequences are
complex and subject to change, and a taxpayer's particular situation may be
such that some variation of the described rules is applicable. This summary
assumes that the exercise of a Purchase Right under the ESPP constitutes an
exercise pursuant to an "employee stock purchase plan" under Section 423 of the
Code.
PURCHASE RIGHTS. Generally, there are no tax consequences to an employee
of either becoming a Participant in the ESPP or purchasing Shares under the
ESPP. The tax consequences of a disposition of Shares vary depending on the
period such stock is held before its disposition. If a Participant disposes of
Shares within two years of the Offering Date or within one year after the
Purchase Date on which the Shares are acquired (a "disqualifying disposition"),
the Participant recognizes ordinary income in the year of disposition in an
amount equal to the excess (if any) of the fair market value of the Shares on
the Purchase Date (determined without regard to securities law restrictions)
over the purchase price. Such income may be subject to withholding of tax. Any
additional gain or resulting loss recognized by the Participant from the
disposition of the Shares is a capital gain or loss.
If the Participant disposes of Shares more than two years after the
Offering Date or more than one year after the Purchase Date on which the Shares
are acquired, or dies while holding Shares (whether or not within such period)
the Participant recognizes ordinary income in the year of disposition or death
in an amount equal to the lesser of (1) the excess of the fair market value of
the Shares on the date of disposition or death over the purchase price or (2)
the excess of the fair market value of the Shares on the Offering Date over the
purchase price. For this purpose, if the purchase price cannot be determined at
the date of the option grant, then the purchase price is determined as though
the option were exercised when granted. Any additional gain recognized by the
Participant on the disposition of the Shares is a capital gain. If the fair
market value of the Shares on the date of disposition is less than the purchase
price (as so determined), there is no ordinary income, and the loss recognized
is a capital loss.
If an employee disposes of the Shares in a disqualifying disposition,
Intercardia is entitled to a deduction equal to the amount of ordinary income
recognized by the Participant as a result, subject to the Section 162(m)
Deduction Limit discussed below. In all other cases, no deduction is allowed
Intercardia.
SECTION 162(M) DEDUCTION LIMIT. Under Section 162(m) of the Code, the
allowable deduction for compensation paid or accrued with respect to the chief
executive officer and each of the four most highly compensated executive
officers of a publicly-held corporation (the "Covered Employees") is limited to
no more than $1 million per year for fiscal years beginning on or after January
1, 1994 (the "Deduction Limit"). Income to a Covered Employee under the ESPP is
subject to the Deduction Limit.
PROPOSED AMENDMENT
In December 1998, the Board of Directors adopted an amendment to the ESPP
to increase the number of shares reserved for issuance thereunder from 100,000
shares to 200,000 shares (the "Share Amount Amendment").
At the Meeting, the stockholders are being asked to approve the
above-described amendment to the ESPP to increase the number of shares
authorized for issuance thereunder from 100,000 shares to 200,000 shares. The
Board of Directors believes that increasing the number of shares available
under the ESPP will benefit Intercardia as it will provide Participants with
more opportunities to purchase shares pursuant to the ESPP, which will be
helpful in attracting, retaining and motivating valued employees.
5
<PAGE>
VOTE REQUIRED
The affirmative vote of the holder of a majority of the shares of
Intercardia's Common Stock present or represented and voting on this proposal
at the Meeting will be required to approve the Share Amount Amendment. 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 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
Meeting and the total number of shares represented and voting on this proposal
at the Meeting. In the absence of controlling precedent to the contrary,
Intercardia intends to treat abstentions in this manner, which means they will
have the same effect as votes against the proposal. 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
of 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 BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE
"FOR" THE PROPOSED AMENDMENT TO THE 1995 EMPLOYEE STOCK PURCHASE PLAN.
6
<PAGE>
PROPOSAL NO. 3 -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors of Intercardia has appointed the firm of
PricewaterhouseCoopers LLP, Raleigh, North Carolina ("PricewaterhouseCoopers")
to serve as the independent auditors of Intercardia for the fiscal year ending
September 30, 1999, and recommends that the stockholders ratify such action.
PricewaterhouseCoopers has audited the accounts of Intercardia and its
subsidiaries (collectively, the "Company") 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 PricewaterhouseCoopers are expected to attend the 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 Meeting shall constitute ratification of the appointment of
PricewaterhouseCoopers. If the appointment of PricewaterhouseCoopers is not
ratified by the stockholders, the Board of Directors will reconsider its
selection.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE
"FOR" THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS AS
INDEPENDENT AUDITORS OF INTERCARDIA FOR THE FISCAL YEAR ENDING SEPTEMBER 30,
1999.
7
<PAGE>
OTHER INFORMATION
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of shares of Intercardia's Common Stock as of the Record Date by (i) each
person known by Intercardia to beneficially own more that 5% of the outstanding
shares of Common Stock, (ii) each director of Intercardia, (iii) each of the
Named Officers, as listed under " -- Executive Compensation -- Summary
Compensation" below, and (iv) all directors and executive officers of
Intercardia as a group.
<TABLE>
<CAPTION>
BENEFICIALLY PERCENTAGE
OWNED(1) OWNED(2)
-------------- -----------
<S> <C> <C>
Interneuron Pharmaceuticals, Inc. ................................ 4,511,084 61.8%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02421
Glenn L. Cooper, M.D. (3) ........................................ 4,515,802 61.8%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02421
Clayton I. Duncan (4) ............................................ 349,182 4.6%
Joseph J. Ruvane, Jr. (5) ........................................ 15,109 *
David B. Sharrock (6) ............................................ 16,166 *
Edgar H. Schollmaier (7) ......................................... 971 *
David P. Ward, M.D. (8) .......................................... 128,978 1.7%
Richard W. Reichow (9) ........................................... 134,997 1.8%
Michael J. Sofia (10) ............................................ 8,568 *
John P. Richert (11) ............................................. 35,006 *
All directors and executive officers as a group (11 persons) (12) 5,238,958 65.9%
</TABLE>
- ---------
* Less than one percent
(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 of
Common Stock indicated below.
(2) As of the Record Date, Intercardia has 7,304,453 shares of Common Stock
outstanding. 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 percentage owned by any
other person.
(3) Consists of 4,511,084 shares held by Interneuron, 739 shares held by Dr.
Cooper and 3,979 shares issuable upon exercise of options held by Dr.
Cooper. Dr. Cooper is President, Chief Executive Officer and a director of
Interneuron. Dr. Cooper disclaims beneficial ownership of the shares held
by Interneuron.
(4) Includes 18,127 shares owned by Mr. Duncan, 50,000 shares owned by Mr.
Duncan's children, and 281,055 shares issuable upon exercise of options
held by Mr. Duncan. Mr. Duncan disclaims beneficial ownership of the
shares held by his children.
(5) Includes 3,000 shares owned and 12,109 shares issuable upon exercise of
options held by Mr. Ruvane.
(6) Includes 1,000 shares owned and 15,166 shares issuable upon exercise of
options held by Mr. Sharrock.
(7) Consists of shares issuable upon exercise of options held by Mr.
Schollmaier.
(8) Includes 813 shares owned and 128,165 shares issuable upon exercise of
options held by Dr. Ward.
(9) Includes 7,532 shares owned and 127,465 shares issuable upon exercise of
options held by Mr. Reichow.
(10) Includes 408 shares owned and 8,160 shares issuable upon exercise of
options held by Dr. Sofia.
(11) Includes 3,341 shares owned and 31,665 shares issuable upon exercise of
options held by Mr. Richert.
(12) See footnotes (3)-(11). Also includes 2,514 shares owned and 31,665 shares
issuable upon exercise of options held by the two executive officers who
are not Named Officers.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth all compensation earned for services
rendered to Intercardia in all capacities for the fiscal years ended September
30, 1998, 1997 and 1996, by Intercardia's Chief Executive Officer and by the
four other most highly compensated executive officers who earned at least
$100,000 in the respective fiscal year (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------- --------------------
NAME AND FISCAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION(1)
- ----------------------------------- -------- ----------- ---------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Clayton I. Duncan, 1998 $295,225 $ 78,652 235,877 (2) $2,791
President and Chief 1997 275,600 95,400 -- 3,345
Executive Officer 1996 251,667 112,500 139,241 1,555
David P. Ward, M.D., 1998 221,250 44,520 140,000 (2) 3,657
Executive Vice President, 1997 207,000 54,000 20,000 3,134
Research & Development 1996 193,750 37,000 20,000 1,364
Richard W. Reichow, 1998 212,250 46,825 140,000 (2) 2,811
Executive Vice President, 1997 196,650 52,725 20,000 3,192
Chief Financial Officer, 1996 173,333 30,000 20,000 1,600
Treasurer and Secretary
Michael J. Sofia, 1998 149,189 13,125 101,424 (2) 698
Vice President,
Intercardia Research Laboratories
John P. Richert, 1998 119,083 18,262 59,000 (2) 1,126
Vice President, 1997 107,083 17,280 10,000 1,245
Market Development
</TABLE>
- ---------
(1) Consists of life and long-term disability insurance premiums and health
club fees reimbursed or paid on behalf of the Named Officers.
(2) See " -- Option Grants, Exercises and Holdings and Fiscal Year-End Option
Values."
MANAGEMENT INCENTIVE PLAN
The Compensation Committee and the Board of Directors 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,
1997 ("Calendar 1997") and the calendar year ended December 31, 1998 ("Calendar
1998"), 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 1998 have been evaluated and measured, and cash payments were made to
the executive officers in January 1999.
9
<PAGE>
OPTION GRANTS, EXERCISES AND HOLDINGS AND FISCAL YEAR-END OPTION VALUES
The following table summarizes all option grants during fiscal year ended
September 30, 1998 to the Named Officers:
OPTION GRANTS DURING FISCAL YEAR ENDED SEPTEMBER 30, 1998
<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 1998 SHARE(1) DATE 5% 10%
---------------- ----------------- ----------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan 1,632 (3) 0.1% $ 3.190 3/20/07 $34,723 $ 55,107
4,080 (4) 0.3% 11.030 5/17/06 50,808 94,165
43,422 (5) 2.7% 16.875 2/12/08 460,820 (5) 1,167,809 (5)
4,080 (4) 0.3% 8.000 5/17/06 15,065 35,862
130,266 (6) 8.2% 8.000 9/18/06 506,445 1,216,990
43,422 (7) 2.7% 8.000 2/12/08 205,380 513,382
8,975 (8) 0.6% 8.000 2/1/06 31,676 74,813
David P. Ward, M.D. 20,000 (5) 1.3% 16.875 2/12/08 212,252 (5) 537,888 (5)
60,000 (9) 3.8% 8.000 8/6/08 301,869 764,996
20,000 (10) 1.3% 8.000 2/12/08 94,597 236,462
20,000 (11) 1.3% 8.000 2/19/07 82,701 201,079
20,000 (12) 1.3% 8.000 6/13/06 74,693 178,172
Richard W. Reichow 20,000 (5) 1.3% 16.875 2/12/08 212,252 (5) 537,888 (5)
60,000 (9) 3.8% 8.000 8/6/08 301,869 764,996
20,000 (10) 1.3% 8.000 2/12/08 94,597 236,462
20,000 (11) 1.3% 8.000 2/19/07 82,701 201,079
20,000 (12) 1.3% 8.000 6/13/06 74,693 178,172
Michael J. Sofia 3,264 (13) 0.2% 3.190 3/20/07 69,447 110,214
8,160 (3) 0.5% 11.030 5/17/06 101,615 188,329
45,000 (5) 2.8% 15.875 5/8/08 449,267 (5) 1,138,530 (5)
45,000 (14) 2.8% 8.000 5/8/08 219,467 552,297
John P. Richert 10,000 (5) 0.6% 16.875 2/12/08 106,126 (5) 268,944 (5)
10,000 (15) 0.6% 8.000 2/12/08 47,299 118,231
10,000 (16) 0.6% 8.000 2/19/07 41,350 100,539
24,000 (17) 1.5% 8.000 9/18/06 93,307 224,216
5,000 (18) 0.3% 8.000 6/13/06 18,673 44,543
</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 Board of Directors.
(2) The compounding assumes the full remaining 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 fully vested options were issued in May 1998 as replacement stock
options for stock options of Transcell pursuant to the terms of the merger
between Intercardia and Transcell (the "Transcell Merger").
(4) These options were issued in May 1998 as replacement stock options for
stock options of Transcell held by Mr. Duncan prior to the Transcell
Merger. In August 1998, these options were repriced and the vesting period
was extended to vest 16.7% in February 1999, and the remainder in equal
installments over a 26-month period commencing in March 1999.
(5) Subsequent to the date of issuance, this option was surrendered by the
named recipient and canceled in exchange for an option to purchase the
same number of shares represented by this option at an exercise price
equal to the fair market value of the shares on August 8, 1998.
10
<PAGE>
(6) These options were originally granted in September 1996 and were repriced
in August 1998. The vesting period was extended to vest 16.7% in February
1999, and the remainder in equal installments over a 26-month period
commencing in March 1999.
(7) These options were originally granted in February 1998 and were repriced in
August 1998. The options are exercisable in equal installments over a
36-month period commencing in February 2001.
(8) These options were originally granted in February 1996 and were repriced in
August 1998. The vesting period was extended and the options are
exercisable at 16.7% in February 1999, and the remainder in equal monthly
installments over a 26-month period commencing in March 1999.
(9) These options were granted in August 1998 and are exercisable in equal
installments over a 36-month period commencing in September 1998.
(10) These options were originally granted in February 1998 and were repriced
in August 1998. The options are exercisable in equal installments over a
36-month period commencing in April 1999.
(11) These options were originally granted in February 1997 and were repriced
in August 1998. The options are exercisable in equal installments over a
36-month period commencing in April 1999.
(12) These options were originally granted in June 1996 and were repriced in
August 1998. The options are exercisable in equal installments over a
36-month period commencing in April 1999.
(13) These options were issued in May 1998 as replacement stock options for
stock options of Transcell held by Dr. Sofia. These options will vest in
three equal annual installments commencing upon the earlier of March 20,
2002 or one year after the date a corporate transaction is signed in which
a third party commits to a minimum of $6 million in research support and
other guaranteed payments covering a combinatorial chemistry program.
(14) These options were originally granted in May 1998 and were repriced in
August 1998. The vesting period was extended and the options are
exercisable in four equal annual installments commencing in August 1999.
(15) These options were originally granted in February 1998 and were repriced
in August 1998. The options are exercisable in equal installments over a
36-month period commencing in July 1999.
(16) These options were originally granted in February 1997 and were repriced
in August 1998. The options are exercisable in equal installments over a
36-month period commencing in July 1999.
(17) These options were originally granted in September 1996 and were repriced
in August 1998. The vesting period was extended to vest 16.7% in February
1999, and the remainder in equal monthly installments over a 26-month
period commencing in March 1999.
(18) These options were originally granted in June 1996 and were repriced in
August 1998. The options are exercisable in equal installments over a
36-month period commencing in July 1999.
The following table sets forth certain information concerning all stock
options exercises during the fiscal year ended September 30, 1998 by the Named
Officers, and the number and value of unexercised options held by the Named
Officers as of September 30, 1998:
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, 1998 AT SEPTEMBER 30, 1998(2)
ACQUIRED VALUE ----------------------------- ----------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ------------ ------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan -- -- 253,189 186,743 $ 880,312 $ --
David P. Ward, M.D. 3,500 45,926 88,166 148,334 305,260 106,000
Richard W. Reichow 1,200 9,618 87,466 148,334 302,712 106,000
Michael J. Sofia -- -- 8,160 48,264 -- 2,644
John P. Richert -- -- 27,000 58,000 90,000 30,000
</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, 1998 ($4.00), as quoted on the Nasdaq
Stock Market, and the exercise price of the options.
11
<PAGE>
REPORT ON REPRICING OF OPTIONS
On August 6, 1998, the Compensation Committee and the Board approved
resolutions giving current employees, directors and consultants the right to
reset the exercise price of stock options held by them if the option's exercise
price was greater than $11.00 per share (the "Option Repricing"). Each eligible
optionee could keep his/her existing options, or elect to exchange the options
on a one-for-one basis, with extended vesting terms, at $8.00 per share, which
was the fair market value of Intercardia's Common Stock as of such date. This
action was taken to help restore the incentive value of these options to the
holders and to retain and motivate employees and consultants. The option
holders elected to reprice options for 1,001,694 shares. The following table
contains information concerning the repricing of options held by Named Officers
during the portion of the last 10 years during which Intercardia was a
reporting company under the Exchange Act.
TEN-YEAR OPTION REPRICING
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE EXERCISE LENGTH OF ORIGINAL
UNDERLYING OF STOCK PRICE NEW OPTION TERM
DATE OF OPTIONS AT TIME OF AT TIME OF EXERCISE REMAINING AT DATE OF
NAME REPRICING REPRICED REPRICING REPRICING PRICE REPRICING
- --------------------- ----------- ------------ -------------- ------------ ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan 8/6/98 4,080 $ 8.00 $ 11.030 $ 8.00 7 years, 284 days
8/6/98 8,975 8.00 15.000 8.00 7 years, 179 days
8/6/98 43,422 8.00 16.875 8.00 9 years, 190 days
8/6/98 130,266 8.00 20.500 8.00 8 years, 43 days
David P. Ward, M.D. 8/6/98 20,000 8.00 16.875 8.00 9 years, 190 days
8/6/98 20,000 8.00 19.000 8.00 8 years, 197 days
8/6/98 20,000 8.00 32.000 8.00 7 years, 311 days
Richard W. Reichow 8/6/98 20,000 8.00 16.875 8.00 9 years, 190 days
8/6/98 20,000 8.00 19.000 8.00 8 years, 197 days
8/6/98 20,000 8.00 32.000 8.00 7 years, 311 days
Michael J. Sofia 8/6/98 45,000 8.00 15.875 8.00 9 years, 276 days
John P. Richert 8/6/98 10,000 8.00 16.875 8.00 9 years, 190 days
8/6/98 10,000 8.00 19.000 8.00 8 years, 197 days
8/6/98 24,000 8.00 20.500 8.00 8 years, 43 days
8/6/98 5,000 8.00 32.000 8.00 7 years, 311 days
</TABLE>
Submitted by: The Compensation Committee
GLENN L. COOPER, M.D., CHAIRMAN
JOSEPH J. RUVANE, JR.
DAVID B. SHARROCK
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 Mr. Duncan and the Board or the Compensation Committee.
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 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 1998, Intercardia entered into new three-year employment
agreements with each of Dr. Ward and Mr. Reichow, replacing their prior
employment agreements. The agreements provide for base salaries and annual
bonuses based upon the achievement of performance milestones to be mutually
agreed upon by the officer and the Chief Executive Officer, the Board or the
Compensation Committee. The agreements also provide that during their term and,
unless the employee terminates his employment for cause, for a period of nine
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 Board without just cause, Intercardia shall continue to pay,
for a period of nine months, Dr. Ward or Mr. Reichow, as the case may
12
<PAGE>
be, his 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 and December 1998, Intercardia entered into three-year
employment agreements with each of Mr. Richert and Dr. Sofia, respectively. The
agreements provide for base salaries and annual bonuses based upon the
achievement of performance milestones to be mutually agreed upon by the officer
and the Chief Executive Officer, the Board or the Compensation Committee. 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 Mr. Richert or Dr. Sofia is terminated by the
Board without just cause, Intercardia shall continue to pay Mr. Richert or Dr.
Sofia, as the case may be, his base salary 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.
In addition, 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
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 Board.
On August 6, 1998, the Compensation Committee and the Board approved the
Option Repricing. All of the directors were eligible to participate in the
Option Repricing, and the following directors exchanged options pursuant to the
Option Repricing for the following number of shares: Mr. Duncan (186,743
shares); Dr. Cooper (12,080 shares); Mr. Ruvane (16,000 shares); Mr. Sharrock
(3,000 shares) and Mr. Schollmaier (5,000 shares). See " -- Report on Repricing
of Options."
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
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 of 1933, as
amended or the Exchange Act, whether made before or after the date of this
proxy statement and irrespective of any general incorporating language in such
filing.
The Compensation Committee is responsible for establishing compensation
policy and administering the compensation programs of Intercardia's executive
officers. The Compensation Committee met five times during fiscal 1998 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 1998.
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
13
<PAGE>
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. The
Compensation Committee has decided not to use the compensation information of
the companies included in the CRSP Nasdaq Pharmaceuticals Stocks Index shown in
the Performance Graph because most of the companies included in the index are
larger than Intercardia and therefore the information is not considered to be
comparable.
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 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. Awarded amounts are directly related to performance. 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. The MIP target payment as a percentage of base
salary for the Chief Executive Officer is 40%, for executive vice presidents it
is 30% and for the other vice presidents it is 25%. An individual may earn from
0% to two times the MIP target percentage.
For Calendar 1997 and Calendar 1998, Intercardia's corporate objectives
focused primarily on the development and commercialization of bucindolol and
the identification and advancement of other potential products or programs. For
Calendar 1997, the Company achieved a weighted average of 70% of its corporate
objectives, as the bucindolol-related objectives were 90% satisfied and the
other objectives were 50% satisfied.
Company and individual performance for the Calendar 1998 objectives has
been evaluated, and cash payments were made to the executive officers in
January 1999. See " -- Executive Compensation -- Management Incentive Plan".
STOCK OPTIONS
The 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 Option Plan 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".
On August 6, 1998, the Compensation Committee and the Board approved the
Option Repricing. This action was taken to help restore the incentive value of
these options to the holders and to retain and motivate employees and
consultants. See " -- Report on Repricing of Options."
CEO COMPENSATION
Mr. Duncan's base salary and grants of stock options for fiscal 1998 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 $78,652
in January 1998 pursuant to the MIP for Calendar 1997.
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 the Company and
14
<PAGE>
the stockholders. The Compensation Committee intends to continue to review and
analyze its policies in light of the environment in which the Company competes
for executives.
Submitted by: The Compensation Committee
GLENN L. COOPER, M.D., CHAIRMAN
JOSEPH J. RUVANE, JR.
DAVID B. SHARROCK
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Dr. Cooper, Mr. Ruvane and Mr.
Sharrock. Mr. Ruvane and Mr. Sharrock were not at any time during fiscal 1998
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. From February 1996 to May 1998, Mr. Duncan, President, Chief
Executive Officer and a director of Intercardia, was also Vice Chairman of the
Board of Directors of Transcell, of which Dr. Cooper, a member of Intercardia's
Compensation Committee, was the Chairman and the acting President and Chief
Executive Officer. Although Dr. Cooper and Mr. Duncan received options to
purchase common stock of Transcell, neither individual received cash
compensation for his services as an executive officer or director 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 Board of Directors of Intercardia
or the Compensation Committee.
15
<PAGE>
PERFORMANCE GRAPH
The following graph shows a three-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.
2/1/96 9/30/96 9/30/97 9/30/98
------ ------- ------- -------
ITRC 100 165 150 27
Pharmaceuticals 100 95 106 92
NASDAQ 100 117 160 164
- ---------
(1) Indicates comparison of total return for all of fiscal 1998 and 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.
16
<PAGE>
CERTAIN TRANSACTIONS
At September 30, 1998, Interneuron owned 61.9% of the outstanding Common
Stock of Intercardia. Intercardia has agreed to offer Interneuron the right to
purchase shares of Common Stock at fair market value, if necessary to provide
Interneuron's equity ownership in Intercardia does not fall below 51.0%.
Intercardia and Interneuron have 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 employee benefit programs administered by Interneuron, at
cost, and to provide research and development services to Intercardia upon
request, on a cost plus basis. Because Intercardia has its own research and
development staff, Intercardia has not utilized Interneuron's research and
development services during the past three years. As of September 30, 1998, the
Company owed Interneuron $1,865,000 from advances by Interneuron to the
Company. 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, Interneuron has guaranteed
certain of Intercardia's equipment and facility leases. 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 Board of Directors of Intercardia and by a majority of the disinterested
members of the Board, and must be on terms no less favorable to Intercardia
than could be obtained from unaffiliated third parties. In addition, the policy
requires that any loans by Intercardia to its executive officers, directors or
other affiliates be for bona fide business purposes only.
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 Intercardia'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 Intercardia or a sale
of Intercardia or other change of control supported by the other stockholders
of Intercardia. In addition, Intercardia may be subject to various risks
arising from Interneuron's influence over Intercardia, including conflict 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 May 1998, Intercardia acquired all of the outstanding stock of
Transcell in a merger of Transcell with and into Intercardia and also acquired
certain related technology rights held by Interneuron in exchange for
Intercardia Common Stock with an aggregate market value of $14,200,000. In
addition, Intercardia issued replacement stock options and warrants to purchase
241,705 shares and 17,783 shares, respectively, of Intercardia Common Stock to
Transcell employees consultants and warrant holders, with a total estimated
value of $1,507,000. Prior to the Transcell Merger, Transcell was a
majority-owned subsidiary of Interneuron. Under the terms of the Agreement and
Plan of Merger between Intercardia, Transcell and Interneuron dated March 2,
1998, Transcell stockholders will receive Intercardia Common Stock in three
installments. The first installment of 320,151 shares was issued upon closing
the transaction on May 8, 1998 (the "Closing"). The second and third
installments will each consist of $3,000,000 of Intercardia Common Stock, as
valued at each issuance date, and will be issued in August 1999 and February
2000. In exchange for certain license and technology rights held by
Interneuron, and for Interneuron's continuing guarantee of certain of
Transcell's lease obligations, Intercardia issued to Interneuron 174,672 shares
of Intercardia Common Stock at Closing with a value of $3,000,000 and will pay
Interneuron a royalty on net sales of certain products that may result from a
Research Collaboration and Licensing Agreement originally entered into among
Transcell, Interneuron and Merck & Co., Inc.
In September 1994, Intercardia acquired 80.0% of the outstanding common
stock of CPEC. The Company will incur additional charges to operations relating
to the acquisition of CPEC in the event that certain milestones are achieved in
the development and commercialization of bucindolol. The Company will be
required to issue to the former CPEC stockholders shares of Interneuron's
common stock upon achieving the milestones of filing a New Drug Application (
an "NDA") and receiving an approval letter (an "Approval Letter") from the U.S.
Food and Drug Administration (the "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 was not included
in the purchase price because their issuance is contingent upon achieving these
milestone. 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. In the event the Company files an NDA for
bucindolol, the Company expects it would recognize the expense immediately, and
in the event an Approval Letter for bucindolol is received, the Company expects
it would capitalize the amount and amortize it over the expected life of the
product.
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. Interneuron owns the 19.9% of CPEC not
owned by Intercardia.
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Intercardia has a right of first refusal, expiring in September 1999, with
respect to certain sales (registered or not) of CPEC stock by 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 that were not timely filed during the fiscal year
ended 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 relating to such
meeting, submit such proposals in time to be received by Intercardia not later
than October 4, 1999, or the proxies may exercise their discretionary authority
to vote on the proposal notwithstanding that the stockholders did not receive
notice of the proposal. To be so included, all such submissions must comply
with the requirements of Rule 14a-8 promulgated under the Exchange Act and the
Board of Directors 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 Board of Directors knows of no other business to be brought before the
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 judgement of
the person or persons acting thereunder.
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