<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 2000
REGISTRATION STATEMENT NO. 333-45822
================================================================================
SECURITIES AND EXCHANGE COMMISSION
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
INCARA PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 56-1924222
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 East Highway 54
Cape Fear Building, Suite 300
P. O. Box 14287
Research Triangle Park, North Carolina 27709
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CLAYTON I. DUNCAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
INCARA PHARMACEUTICALS CORPORATION
3200 EAST HIGHWAY 54, CAPE FEAR BUILDING, SUITE 300
P. O. Box 14287
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709
(919) 558-8688
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY TO:
ALEXANDER M. DONALDSON, ESQ.
WYRICK ROBBINS YATES & PONTON LLP
4101 LAKE BOONE TRAIL, SUITE 300
RALEIGH, NORTH CAROLINA 27607
(919) 781-4000
FAX (919) 781-4865
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
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. [_]
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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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 of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this prospectus is not complete and might change. The +
+ selling stockholder may not sell these securities until the registration +
+ statement that we filed with the SEC is effective. This prospectus is not an +
+ offer to sell, nor does it solicit offers to buy, these securities in any +
+ state where the offer or sale is not permitted, +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 2000
2,940,332 SHARES
INCARA PHARMACEUTICALS CORPORATION
COMMON STOCK
_____________
This is a resale prospectus for the resale of up to 2,940,332 shares of
common stock of Incara Pharmaceuticals Corporation by Torneaux Fund Ltd. or
persons or entities to whom Torneaux assigns its shares of our common stock.
Our common stock is traded on the Nasdaq National Market under the symbol
"INCR". On November 17, 2000, the last sale price of our common stock on the
Nasdaq National Market was $3.0625 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved our securities or determined that this
prospectus is truthful or complete. It is illegal for anyone to tell you
otherwise.
Torneaux is acting as an underwriter in connection with its resale of
shares of our common stock under this prospectus.
The date of this prospectus is ________ __, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 2
Forward-Looking Statements............................................... 8
Financing Arrangement with Torneaux Fund Ltd............................. 8
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Market for Common Stock.................................................. 11
Selected Financial Data.................................................. 12
Unaudited Pro Forma Consolidated Financial Information................... 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 14
Business................................................................. 17
Management............................................................... 30
Certain Relationship and Related Transactions............................ 34
Principal Stockholders................................................... 35
Description of Capital Stock............................................. 37
Selling Stockholder...................................................... 39
Plan of Distribution..................................................... 39
Legal Matters............................................................ 40
Experts.................................................................. 40
Where You Can Find More Information...................................... 41
Index to Consolidated Financial Statements............................... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read carefully the entire prospectus, including
"Risk Factors" and the financial statements, before you decide whether to invest
in our common stock.
Incara Pharmaceuticals Corporation
Our Business
Incara Pharmaceuticals Corporation develops innovative pharmaceutical
products and treatments for major diseases afflicting large patient populations.
We are currently developing a diversified portfolio of three potentially
breakthrough treatments. Each of these products targets a medical disorder for
which there are no fully effective treatments. These three products are as
follows:
. OP2000, an ultra-low molecular weight heparin. Heparin is a naturally
occurring mixture of substances produced by the human body with anti-clotting
and anti-inflammatory properties. OP2000 is derived from heparin by breaking it
down into smaller molecules. Lower weight, or smaller, molecules of heparin may
prove to have certain advantages over heparin itself, including better safety,
efficacy and convenience. We are testing OP2000 as a treatment for inflammatory
bowel disease, or IBD. IBD is a debilitating disease of the intestinal tract
that includes ulcerative colitis and Crohn's disease. Approximately two million
patients suffer from IBD in the United States and Europe combined. Ulcerative
colitis can be so debilitating that up to 20% of patients opt for removal of
their colon as a cure.
. Liver precursor cell transplant, as a treatment for liver failure.
Liver precursor cells are young cells found in the human liver that can grow and
divide many times. Our process purifies liver precursor cells from the livers of
organ donors with the expectation that these cells would be transplanted into
human patients with chronic liver disease. We believe the cells will then be
able to grow and expand to create new tissue in the liver. Currently, there are
an estimated 300,000 hospitalizations for chronic liver disease each year in the
United States, 30,000 of which result in death. There are, however, only
approximately 4,800 donor livers available annually in the United States and
over 16,500 people on the liver transplant waiting list. The number of patients
with severe cirrhosis who could become candidates for a transplant exceeds
100,000. Additionally, with the recent growth in interest in human genomics, our
liver precursor cell technology can assist in determining which genes are active
at the various stages in a liver cell's maturation, providing valuable genomic
information for drug research.
. Small molecule catalytic antioxidants, as a treatment for stroke and
heart attack. Antioxidants destroy free radicals, which damage cells within the
human body and are thought to play a role in stroke, heart attack and other
illnesses. Catalytic antioxidants, unlike other antioxidants, are not consumed
by their reaction with free radicals and, therefore, can destroy many free
radicals. An estimated 500,000 to 700,000 individuals suffer strokes in the
United States each year, with estimated direct costs of treating stroke
exceeding $40 billion annually. Our lead catalytic antioxidant molecule
significantly reduced damaged brain tissue when administered as late as 7.5
hours after obstruction of blood flow in an animal model of stroke.
These three programs reflect our business strategy of building a
diversified portfolio of innovative potential treatments by identifying research
discoveries from leading academic research centers. Incara applies human and
financial resources to these academic programs in order to focus efforts on
pharmaceutical development, including clinical trials. Our goal is to bring
these products to market. We choose products for our portfolio that have large
potential patient markets and can be studied in clinical trials for a reasonable
expenditure of time and money.
We generally plan to partner with companies that have manufacturing, sales
or marketing capabilities to bring our products to market. We believe these
partnerships will provide funding for the commercialization of our products and
allow us to maintain our low fixed cost structure. We generally intend to wait
until we begin to receive indications that the products work before entering
into such partnerships, which should allow us to negotiate more favorable
terms.
1
<PAGE>
Our History
Incara was incorporated in Delaware as Intercardia, Inc. in 1994. In July
1999 Incara changed its name to Incara Pharmaceuticals Corporation.
Corporate Information
Our executive offices are located at 3200 East Highway 54, Cape Fear
Building, Suite 300, P.O. Box 14287, Research Triangle Park, North Carolina
27709, and our telephone number at that location is (919) 558-8688. Our primary
Web site is located at www.incara.com. Information on our Web sites is not part
--------------
of this prospectus.
"Incara" and our logo are registered trademarks. Each other trademark,
trade name or service mark appearing in this prospectus belongs to its holder.
In addition, www.incara.com is a domain name that is owned by Incara.
--------------
RISK FACTORS
You should be aware that there are various risks to an investment in our
common stock, including those described below. You should carefully consider
these risk factors, together with all of the other information included in this
prospectus, before you decide to invest in shares of our common stock.
If any of the following risks, or other risks not presently known to us or
that we currently believe to not be significant, develop into actual events,
then our business, financial condition, results of operations or prospects could
be materially adversely affected. If that happens, the market price of our
common stock could decline, and you may lose all or part of your investment.
We will continue to incur substantial losses and we might never achieve a
profit.
As of September 30, 2000, we had an accumulated deficit of $83,907,000 from
our research, development and other activities. We have not generated any
revenues from product sales and do not expect to do so for several years, at
least. In the past, most of our revenues have come from collaborators who
reimbursed us for research and development activities. None of our current
activities are being funded by third parties at this time.
If we do not raise significant additional capital, we will be unable to fund all
of our research and development activities and will need to eliminate or curtail
these programs.
One of the most significant issues we face is adequate funding of our
existing projects. As of September 30, 2000, we had cash and investments of
$6,555,000. While management believes its existing financial resources are
adequate to fund operations through fiscal 2001, the Company intends to rely on
the Torneaux financing facility or other financing arrangements to support a
higher level of research and development efforts during fiscal 2001.
Our financial requirements during 2001 and over the longer term will depend
upon the success of our research and development programs and our ability to
enter into new collaborations that provide fees and research and development
funding. If some or all of our programs continue to show scientific progress, we
will need significant additional funds to move compounds through the preclinical
stages and into clinical trials. If we are unable to raise the amount of capital
necessary to complete development and reach commercialization of any of our
therapeutic products, we will need to delay or cease development of one or more
of our products.
Stockholders might experience significant dilution from our issuance to Torneaux
Fund Ltd. of up to 2,940,332 shares, or 28.5% of the total number of our shares
which would then be outstanding, based on shares outstanding as of October 31,
2000.
The issuance of up to 2,940,332 shares of our common stock to Torneaux
under the common stock purchase agreement and warrants will have a dilutive
effect on our stockholders of as much as 28.5% of the total number of shares
which would then be outstanding, based on the 7,365,849 shares of common stock
outstanding on October 31, 2000. The number of shares that we issue to Torneaux
under the agreement is based upon a discount to the daily weighted average
market price of our stock over a 20-day trading period. As the market price
declines, the number of shares which may be sold to Torneaux will increase. If
we put shares to Torneaux at a time when our
2
<PAGE>
stock price is low, our stockholders would be significantly diluted. In
addition, the perceived risk of dilution by Torneaux and our other stockholders
may cause them to sell their shares, which could further decrease the market
price of our shares. Torneaux's resale of our common stock will increase the
number of our publicly traded shares, which could also lower the market price of
our common stock.
The ownership interest of our stockholders will be substantially diluted by
future issuances of stock, including new offerings and exercises of currently
outstanding options and warrants.
As of October 31, 2000, Incara had 7,365,849 shares of common stock
outstanding. Options to purchase a total of 2,500,000 shares of Incara common
stock may be granted under the 1994 Stock Option Plan to our employees,
directors and consultants. As of October 31, 2000 options to purchase 1,941,160
shares at exercise prices ranging from $0.04 to $20.50, with a weighted average
exercise price of $3.09, and warrants to purchase 66,816 shares at exercise
prices ranging from $8.25 to $13.49 were outstanding. In addition, we have
reserved 80,928 shares for issuance pursuant to our Employee Stock Purchase
Plan.
We intend to sell new shares of our common stock or preferred stock during
the next year to meet our capital requirements. All of these issuances of stock
will dilute the ownership interests of the existing stockholders. The threat of
dilution posed by shares available for future sale could reduce the market price
of our common stock and could make it more difficult for us to raise funds
through equity offerings in the future.
A return on your investment in our common stock will be dependent on an increase
in the price of our common stock, which has fluctuated between $0.50 and $11.00
in the last two years.
There is no set yield on our common stock. In addition, we do not currently
anticipate paying cash dividends on our common stock as we intend to retain all
earnings for the foreseeable future to fund our business operations. As a
result, anyone investing in our common stock must look to an increase in its
price to derive any value on their investment.
Our common stock is not actively traded and the price of our common stock has
fluctuated from $0.50 to $11.00 in the last two years; and the sale of shares
registered in this offering could cause our stock price to decline.
Our common stock is listed on the Nasdaq National Market System under the
symbol "INCR." The public market for our common stock has been characterized by
low and/or erratic trading volume, often resulting in price volatility. An
active public market for our common stock might be limited because of the small
number of shares outstanding, the limited number of investors and the small
market capitalization (which is less than that authorized for investment by many
institutional investors).
All shares registered in this offering will be freely tradable upon
effectiveness of the registration statement of which this prospectus is a part.
The sale of a significant amount of shares registered in this offering at any
given time could cause the trading price of our common stock to decline and to
be highly volatile.
The market price of our common stock also is subject to wide fluctuations
for factors that we can not control, including the results of preclinical and
clinical testing of our current products, decisions by collaborators regarding
product development, regulatory developments, market conditions in the
pharmaceutical and biotechnology industries, future announcements concerning our
competitors, adverse developments concerning proprietary rights, public concern
as to the safety or commercial value of our 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 can adversely affect the market price and volatility
of our common stock.
Our research and development programs are at an early stage and therefore might
never develop viable products.
Our product programs are in the early stages of development, involve
unproven technology, require significant further research and development and
regulatory approvals, and are subject to the risks of failure inherent in the
development of products or therapeutic procedures based on innovative
technologies. These risks include the
3
<PAGE>
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 us from marketing them; or that third parties market a
superior or equivalent product. Further, the timeframes for commercialization of
any products are long and uncertain, because of the extended testing and
regulatory review process required before marketing approval can be
obtained.
We face intense competition in all of our development programs. The markets
for therapeutic products that address diseases of the intestines, liver, heart
and brain are large and competition is expected to increase. Our products might
never be accepted in the market.
A failure to obtain or maintain patent and other intellectual property rights
would allow others to develop and sell products similar to ours, which could
impair our business.
The success of our business depends, in part, on our ability to establish
and maintain adequate protection for our intellectual property, whether owned by
us or licensed from third parties. We rely primarily on patents in the United
States and in other key markets to protect our intellectual property. If we do
not have patent protection, other companies could sell substantially identical
products as ours, without incurring any liability to us. Patent prosecution,
maintenance and enforcement on a global basis is expensive, and many of these
costs must be incurred before we know whether a product covered by the claims
will be successfully developed or marketed.
Even if we expend considerable time and money on prosecution, a patent
application might never issue as a patent. We can never be certain that we were
the first to invent the particular technology or that we were the first to file
a patent application for the technology, because United States patent
applications are maintained in secrecy until a patent issues. Publications in
the scientific or patent literature generally do not identify the date of an
invention, so it is possible that a competitor could be pursuing the same
invention and have an earlier invention date than ours.
Even if patents issue, the claims allowed might not be sufficiently broad
to protect our technology against competitive products. Patent protection also
may differ from country to country, giving rise to increased competition from
other products in countries where patent coverage is weak or not enforced. Once
a patent issues, we still face the risk that others will try to design around
our patent or will try to challenge or invalidate the patent. If a patent were
invalidated, we could be subject to significant liabilities to a third party, be
required to license the invention from a third party, or be prevented from using
the invention altogether. The cost of litigation can be substantial, even if we
prevail.
If a third party were to bring an infringement claim against us, we would incur
significant costs in our defense; if the claim were successful, we would need to
obtain licenses to develop non-infringing technology.
Our business also depends on our ability to develop and market products
without infringing patents or other proprietary rights of others and without
breaching the scope of the licenses related to our intellectual property. The
pharmaceutical industry is subject to frequent and protracted litigation
regarding patent and other intellectual property rights. Most companies have
numerous patents that protect their intellectual property rights. These third
parties may assert claims against us with respect to our product candidates and
future products. If litigation were required to determine the validity of a
third party's claims, we could spend significant resources and be distracted
from our core business activities, regardless of the outcome. If we did not
prevail in the litigation, we could be required to license a third party's
technology, which might not be possible on satisfactory terms, or discontinue
our own activities and develop non-infringing technology, any of which could
delay our development programs.
We have the exclusive license from Opocrin S.p.A., in all countries other
than Japan and Korea, to develop and market OP2000. This license is based on an
issued patent held by Opocrin claiming a heparin derivative with a specified
range of molecular weight. We also have a non-exclusive license from Opocrin to
practice certain related patents, to the extent required for our activities
related to OP2000. We are aware of a recently issued patent claiming the use of
certain fractions of heparin for the treatment of inflammatory bowel disease. We
do not believe the development of OP2000 will require the licensing of this
patent. If OP2000 were to be determined to fall within the scope of this patent
and if the patent's claims were found to be valid, we would have to license this
patent in order to commercialize OP2000. If this were the case we might not be
able to license this patent at a reasonable cost which would result in our not
being able to market OP2000. Uncertainty regarding the scope or validity of this
patent might deter potential partners from collaborating with us for the
development and commercialization of OP2000.
4
<PAGE>
Protection of trade secret and confidential information is difficult, and loss
of confidentiality could eliminate our competitive advantage.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and confidential information to protect our technological advances. We
use confidentiality agreements with our employees, consultants and collaborative
partners to maintain the proprietary nature of this technology. However,
confidentiality agreements can be breached by the other party, which would make
our trade secrets and proprietary know-how available for use by others. There
is generally no adequate remedy for breach of confidentiality obligations. In
addition, the competitive advantage afforded by trade secrets is limited because
a third party can independently discover or develop something identical to our
own trade secrets or know-how, without liability to us.
If our employees, consultants or collaborators were to use information
improperly obtained from others (even if unintentional), disputes could arise as
to ownership and rights in any resulting know-how or inventions.
Our research and development programs rely on technology licensed from third
parties, and termination of any of those licenses would result in loss of
significant rights to develop and market our products, which would impair our
business.
We have exclusive worldwide rights to our antioxidant small molecule
technology through license agreements with Duke University and National Jewish
Medical Center. We also have the worldwide exclusive rights to patents licensed
from Albert Einstein College of Medicine and patent applications and rights to
license future technology arising out of research sponsored at the University of
North Carolina at Chapel Hill (related to the liver precursor cell program) and
National Jewish Medical Center (related to antioxidant small molecules). Key
financial and other terms, such as royalty payments, for the licensing of this
future technology would still need to be negotiated with the research
institutions, and it may not be possible to obtain any such license on terms
that are satisfactory to us.
Our licenses generally may be terminated by the licensor if we fail to
perform our obligations, including obligations to develop the compounds and
technologies under license. If terminated, we would lose the right to develop
the products, which could adversely affect our business. The license agreements
also generally require us to meet specified milestones or show reasonable
diligence in development of the technology. If disputes arise over the
definition of these requirements or whether we have satisfied the requirements
in a timely manner, or if any other obligations in the license agreements are
disputed by the other party, the other party could terminate the agreement and
we could lose our rights to develop the licensed technology.
We need to obtain collaborative partners to perform manufacturing and marketing
responsibilities for our potential products, and if those partners are not
obtained, we will have to develop the expertise, obtain the additional capital
and spend the resources to perform those functions.
We do not have the staff or facilities to manufacture or market any
products being developed in our programs. We need to enter into collaborative
arrangements in the future to develop, commercialize, manufacture and market
products emerging from our antioxidant program. We also might seek a partner to
develop the manufacturing capability for the liver precursor cell therapy being
developed by us and intend to seek a partner to work with on development of a
liver assist device. We also plan to seek marketing and manufacturing partners
for OP2000.
A large number of small biotechnology companies are seeking collaborators,
some of whom compete in the same therapeutic areas as our programs, and
obtaining and maintaining new collaborative arrangements will be difficult. We
might not be successful in entering into third party arrangements on acceptable
terms, if at all. If we are unable to obtain or retain third party manufacturing
or marketing on acceptable terms, we might be delayed in our ability to
commercialize products. Substantial additional funds and personnel would be
required if we needed to establish our own manufacturing or marketing
operations. We might not be able to obtain adequate funding or establish such
capabilities at all or in a cost-effective manner.
Even if we do succeed in obtaining a collaborator for any of our programs,
the product might not be commercialized profitably, if at all. The compensation
owed to collaborative partners for the manufacturing and marketing of products
will reduce our profit margins and might delay or limit our ability to develop,
deliver and sell products on a timely and competitive basis. Furthermore, a
collaborative partner could pursue alternative
5
<PAGE>
technologies or develop alternative compounds either on its own or in
collaboration with others, targeted at the same diseases as those involved in
our programs.
A manufacturer must conform to certain FDA regulations for the production
and packaging of products. If any of our manufacturers can not meet our needs or
applicable regulatory standards with respect to the timing, quantity or quality
of products, our development programs would be delayed.
We are in discussions with third parties to conduct the cell processing to
produce the liver precursor cells being developed by Incara. To begin clinical
trials, we must contract with a supplier to isolate the liver precursor cells in
compliance with FDA regulations. We have not yet established the terms of any
supply arrangement, and we might not be able to enter into any third party
arrangements on satisfactory terms. We also must establish and maintain sources
of livers or liver tissues from which the precursor cells can be isolated. We
have historically relied on several suppliers of liver tissues for research, but
entering into the clinical trial stage of development will increase our needs.
For clinical trials and ultimately for commercialization, we plan to obtain
livers which are not suitable for full liver transplant from the traditional
organ transplant donor programs.
If we cannot retain or hire qualified personnel, our programs could be delayed.
We have only 21 employees and are highly dependent on the principal members
of the management and scientific staff, including in particular Clayton I.
Duncan, our Chairman, President and Chief Executive Officer. We also are highly
dependent on the academic collaborators for each of our programs. The loss of
key employees or academic collaborators could delay progress in our programs or
result in termination of them in their entirety.
We believe that our future success will depend in large part upon our
ability to attract and retain highly skilled scientific and managerial
personnel. We face competition for the kinds of personnel from other companies,
research and academic institutions, government entities and other organizations.
We might not be successful in hiring or retaining the personnel needed for
success.
If we do not obtain and maintain government authorizations to manufacture and
market products, our business will be significantly harmed.
Our research and development activities and the manufacturing and marketing
of our products are subject to extensive regulation by governmental authorities
in the United States and other countries. Clinical trials and the manufacturing
and marketing of products are subject to the testing and approval processes of
the FDA and foreign regulatory authorities. The process of obtaining required
regulatory approvals for our products from the FDA and other regulatory
authorities takes many years and is expensive. Data obtained from preclinical
and clinical activities are susceptible to varying interpretations, and if
regulatory authorities do not agree with our analyses of data, our product
programs could be delayed or regulatory approval could be withheld. Additional
government regulations might be promulgated which could delay or prevent
regulatory approval of our products. Even if these approvals are obtained, post-
marketing, adverse events or other monitoring of the products could result in
suspension or limitation of the approvals.
Product liability claims, if asserted against us in the future, could exceed our
insurance coverage and require us to use our limited cash resources for payment.
The pharmaceutical and biotechnology business exposes us to the risk of
product liability claims alleging that use of our products caused an injury or
harm. These claims can arise at any point in the development, testing,
manufacture, marketing or sale of pharmaceutical products, and might be made
directly by patients involved in clinical trials of our products, by consumers
or healthcare providers or by organizations selling such products. Product
liability claims can be expensive to defend even if the product did not actually
cause the injury or harm.
Insurance covering product liability claims becomes increasingly expensive
as a product moves through the development pipeline to commercialization. We
have obtained limited product liability insurance coverage for the clinical
trials for OP2000. However, the available insurance coverage may not be
sufficient to cover us against all potential losses due to liability, if any, or
to the expenses associated with defending liability claims. A product liability
claim successfully asserted against us could exceed our coverage and require us
to use our own cash resources, which would then not be available for our own
products.
6
<PAGE>
In addition, some of our licensing agreements with third parties require us
to maintain product liability insurance. If we can not maintain acceptable
amounts of coverage on commercially reasonable terms, the corresponding
agreements would be subject to termination.
The costs of compliance with environmental, safety and similar laws could
increase our cost of doing business or subject us to liability in the event of
noncompliance.
Our business is subject to regulation under state and federal laws
regarding occupational safety, laboratory practices, environmental protection
and the use, generation, manufacture, storage and disposal of hazardous
substances. Although we believe we comply with these laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, we might be required to incur significant costs in the future to
comply with existing or future environmental and health and safety regulations.
Our research activities involve the use of hazardous materials, chemicals and
radioactive compounds. Although we believe that our procedures for handling such
materials comply with applicable state and federal regulations, we cannot
eliminate the risk of accidental contamination or injury from these materials.
In the event of an accident, we could be liable for any resulting damages.
Provisions of our charter documents, our stock option program and Delaware law
could lead to entrenchment of our management which could discourage or delay
offers to acquire Incara, which might reduce the market price of our common
stock and the voting rights of the holders of common stock.
Provisions of our charter documents and Delaware law make it more difficult
for our stockholders to change the directors of Incara or for a third party to
acquire Incara, and might discourage a third party from offering to acquire
Incara, even if a change in control or in management would be beneficial to our
stockholders. These provisions also could limit the price that certain investors
might be willing to pay in the future for shares of common stock.
The Board of Directors of Incara has the authority to issue up to 3,000,000
shares of 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. The rights of the holders of Incara 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 with
voting rights could make it more difficult for a third party to acquire a
majority of the outstanding voting stock.
Further, some provisions of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving Incara. Incara is subject to
the antitakeover provisions of Section 203 of the Delaware General Corporation
Law. 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. While such provisions are intended to enable the Incara Board
of Directors to maximize stockholder value, they might have the effect of
discouraging takeovers that could be in the best interest of certain
stockholders. Such provisions could reduce the market value of Incara's common
stock in the future.
We remain contingently liable for certain IRL obligations.
In connection with the sale of Incara Research Laboratories, or IRL, in
December 1999 to a private pharmaceutical company, we remain contingently liable
through May 2007 on debt and lease obligations assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey. This contingent
liability was approximately $8,328,000 in September 2000 and should decline on
an approximately straight-line basis to zero in May 2007.
If we do not reach the market with our products before our competitors offer
products for the same use, or if we do not compete effectively in marketing our
products, the revenues from product sales, if any, will be reduced.
We face intense competition in all of our development programs. The markets
for therapeutic products that address inflammatory, liver and pulmonary diseases
are large and competition is expected to increase. Our products might never be
accepted in the market.
7
<PAGE>
If we fail to meet Nasdaq National Market listing requirements, our common stock
will be delisted and become illiquid.
Our common stock is currently listed on the Nasdaq National Market. Nasdaq
has requirements that a company must meet in order to remain listed on the
Nasdaq National Market. If we continue to experience losses from our operations
or we are unable to raise additional funds, we may not be able to maintain the
standards for continued quotation on the Nasdaq National Market, including a
minimum bid price requirement of $1.00.
If as a result of the application of these listing requirements, our common
stock were delisted from the Nasdaq National Market, our stock will be illiquid.
Further, our stock could be subject to what are known as the "penny stock"
rules. The penny stock rules place additional requirements on broker-dealers who
sell or make a market in such securities. Consequently, if we were removed from
the Nasdaq National Market, the ability or willingness of broker-dealers to sell
or make a market in our common stock could decline. As a result, your ability to
resell your shares of our common stock could be adversely affected.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. You can identify forward-looking
statements by terminology such as "may," "might," "will," "could," "should,"
"would," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"intend," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Our actual
results might differ materially from any forward-looking statement due to
various risks, uncertainties and contingencies, including:
. The success or failure of our efforts to implement our business
strategy;
. The early stage of the products we are developing;
. Uncertainties relating to clinical trials and regulatory reviews;
. The need for additional funds;
. Competition and dependence on collaborative partners;
. The other factors discussed in the "Risk Factors" section and elsewhere
in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
FINANCING ARRANGEMENT WITH TORNEAUX FUND LTD.
On August 17, 2000 we entered into the common stock purchase agreement with
Torneaux Fund Ltd. Pursuant to the purchase agreement, we may issue and sell,
from time to time, up to 2,556,810 shares of common stock. In addition, in
connection with each issuance of common stock to Torneaux, we will issue to
Torneaux warrants to purchase shares of common stock up to a maximum of 383,522
shares. Our stockholders approved this transaction on October 19, 2000.
Beginning on __________, 2000, the date the registration statement, of
which this prospectus forms a part, was declared effective by the SEC, and
continuing for 15 months thereafter, we may in our sole discretion sell, or put,
shares of our common stock to Torneaux. The 15-month period is divided into 12
pricing periods, each consisting of 20 trading days on the Nasdaq National
Market.
From time to time during the 15-month term, we may make 12 draw downs, by
giving notice and requiring Torneaux to purchase shares of our common stock, for
the draw down amount. Torneaux's purchase price will fluctuate based upon the
daily volume weighted average price over a 20-day trading period. Prior to each
draw down, we will provide Torneaux with a notice that sets forth the dollar
amount of the common stock we will sell, the commencement date of the pricing
period, and the threshold price, which is the lowest price per share at which we
will issue new shares of our common stock. We may issue a draw down notice for
up to $250,000 if the threshold price is equal to or exceeds $2.00, and an
additional $100,000 for every $1.00 increase of the threshold price above $2.00
up to $10.00 for a maximum draw down amount of $1,050,000. If we set the
threshold price between $2.00 and $2.99, then the purchase price to be paid by
Torneaux is 88% of the daily volume weighted average price over the pricing
period. For each $1.00 increase in the threshold price above $2.00, the purchase
price to be paid by Torneaux is increased by 0.5% up to a discount of 92%. If
the daily volume weighted average price on a given
8
<PAGE>
trading day is less than the threshold price set by us, then the amount that we
can draw down will be reduced by 1/20 for that pricing period. In addition, if
trading in our common stock is suspended for more than three hours in any
trading day, then the daily volume weighted average price for that trading day
is deemed to be below the threshold price and, consequently, reduces the draw
down amount by 1/20. At no time may the threshold price be less than $2.00 per
share, unless mutually agreed upon by us and Torneaux.
As the price of our common stock increases above $2.00, fewer shares can be
sold to Torneaux. Assuming the price of our common stock was $2.00 every day
during all pricing periods during the 15-month term of the purchase agreement,
the maximum amount of shares of common stock that could be sold by us would be
1,704,540 for gross cash proceeds of $3,000,000, assuming the average trading
volume for 10 trading days preceding a draw down notice by us is less than
200,000 shares. In the event the average trading for such 10-day period exceeds
200,000 or 400,000 shares, Torneaux, in its sole discretion, can purchase
additional common stock by increasing the then available draw down amount by 25%
or 50%, respectively. If the 400,000 share trading volume threshold were met and
the price of our common stock were $2.00 during the entire 15-month term of the
purchase agreement, the maximum draw down amount available to us would be
$4,500,000 and the maximum number of shares possible for sale would be 2,556,810
shares. If the 400,000 share trading volume threshold were met and the price of
our common stock were $10.00 per share during the entire 15-month term of the
purchase agreement, the maximum draw down amount available to us would be
$18,900,000 and the maximum number of shares possible for sale would be
2,054,340 shares. On November 17, 2000, the closing price on the Nasdaq National
Market for our common stock was $3.0625 and the average trading volume for the
10 days preceding November 17, 2000 was 16,027 shares.
The following table sets forth the number of shares of common stock that we
could issue to Torneaux based on a range of stock prices, assuming that the
threshold price was equal to the daily volume weighted average price and that
the daily volume weighted average remained the same throughout the 20-day
pricing period and also assuming that the trading volume for our common stock
does not exceed 200,000 shares. The table also shows the percentage that these
shares would constitute, immediately after issuance, of the total number of
shares which would then be outstanding, based on the 7,365,849 shares of common
stock outstanding on October 31, 2000. The table does not give effect to the
issuance and exercise, if any, of the warrants.
<TABLE>
Per Share Per Share
Average Price Paid Number of Percentage of
Market By of Shares Outstanding
Price Torneaux Issuable Shares
----- -------- -------- -----------
<S> <C> <C> <C>
$ 2.00 $1.76 1,704,540 18.8%
$ 4.00 $3.56 1,516,848 17.1%
$ 6.00 $5.40 1,444,440 16.4%
$ 8.00 $7.28 1,401,096 16.0%
$ 10.00 $9.20 1,369,560 15.7%
</TABLE>
Our ability to cause Torneaux to purchase shares of common stock under the
common stock purchase agreement is subject to the following conditions:
. The number of shares we may sell to Torneaux on any settlement date,
when aggregated with all other shares then owned by Torneaux, cannot
exceed 9.9% of the total common stock we then have outstanding.
. Our common stock continues to be traded on the Nasdaq National Market or
other stock exchange specified in the purchase agreement.
. The registration statement must remain effective so that Torneaux may
publicly resell the shares that it acquires from us under the purchase
agreement.
. There has not been a material change in ownership of Incara in which its
officers and directors no longer own at least 5% of our outstanding
common stock, except as a result of the issuance of shares under the
purchase agreement and upon exercise of the warrants issued to Torneaux.
9
<PAGE>
. There has not been an effect on the business, operations, properties, or
financial condition of Incara that is material and adverse to us and our
subsidiaries or affiliates, taken as a whole and/or any condition or
situation that would prohibit or otherwise interfere, in a material
respect, with our ability to perform our obligations under the purchase
agreement.
We might not be able to satisfy all conditions required to put shares to
Torneaux at any given time. If this occurs, we would likely need to raise money
from other sources in order to continue to fund our operations. Such alternative
funding might not be available. Also, we cannot put shares to Torneaux at a time
when we have not publicly disclosed material information about Incara.
In the event we have not requested draw downs in an aggregate amount of
$1,250,000 within seven months of __________, 2000 (the date the registration
statement was declared effective by the SEC), we, at Torneaux's option, shall
either pay Torneaux $60,000 or issue warrants to Torneaux to purchase 60,000
shares of our common stock with an exercise price of $2.10 per share, the volume
weighted average price of our common stock on August 17, 2000.
Torneaux can terminate the purchase agreement upon our failure to comply
with certain provisions in the purchase agreement or upon any stop order or
suspension of the effectiveness of the registration statement for an aggregate
of five trading days, for any reason other than deferrals or suspension during a
blackout period as a result of corporate development that would require the
registration statement to be amended.
We estimate a total of 1,704,540 shares of common stock could be issued to
Torneaux under the purchase agreement, assuming the price of our common stock is
$2.00 per share and the 10-day average daily trading volume is less than 200,000
shares during the 15-month term of the purchase agreement. Based on this
assumption, warrants convertible into a total of 255,681 shares of our common
stock could be issued to Torneaux. The shares of our common stock will be
purchased by Torneaux at a discount to the then current market price of the
common stock. Consequently, the existing holders of our common stock face
substantial dilution of their voting power and percentage ownership in Incara.
Additionally, as we issue more shares to Torneaux, the price of the common stock
may decline further.
We have filed a registration statement, of which this prospectus forms a
part, with the SEC to permit Torneaux to resell to the public any of our common
stock it purchases pursuant to the purchase agreement and any of our common
stock into which the warrants are converted. We intend to prepare and file such
amendments and supplements to the registration statement as may be necessary in
accordance with the Securities Act and the rules and regulations promulgated
under it, in order to keep effective the registration statement so that we may
put shares to Torneaux during the term of the common stock purchase agreement.
Except in certain circumstances, if the effectiveness of the registration
statement is suspended during the 15-month term of the purchase agreement, or
the common stock is not listed on the Nasdaq National Market or another stock
exchange specified in the purchase agreement, then we must pay in cash to
Torneaux, as liquidated damages, $20,000 if the registration statement is not
declared effective within 120 days from its filing, which was September 14,
2000, or in all other circumstances above, an amount equal to 1% of the
aggregate purchase price for all shares purchased and then held by Torneaux for
the initial 30-day period, and 2% of the aggregate purchase price for each
subsequent 30-day period, until the event is cured. In addition, if we fail to
deliver the shares of common stock when due to Torneaux and the failure
continues for 10 trading days, then we will pay, in cash or restricted shares of
our common stock, at Torneaux's option, an amount equal to 2% of the draw down
amount for the initial 30-day period and each 30-day period thereafter until we
have delivered the shares and warrants. During a draw down pricing period, we
may not enter into any agreement with a third party to secure equity financings
without Torneaux's prior consent, except that we may enter into a loan, credit
or lease facility with a bank or financing institution.
In connection with the purchase agreement, we will issue warrants to
Torneaux in the amount of 15% of the shares of common stock issued in any draw
down by us, at an exercise price equal to 115% of the purchase price per share
Torneaux paid to purchase the related shares of common stock. The warrants will
contain provisions that protect Torneaux against dilution by adjustment of the
exercise price and the number of shares issuable thereunder upon the occurrence
of specified events, such as a merger, stock split,
10
<PAGE>
stock dividend, recapitalization and additional issuance of common stock. The
exercise price for the warrant shares is payable in cash.
Torneaux is acting as an underwriter in connection with its resale of
shares of our common stock under this prospectus.
USE OF PROCEEDS
The proceeds from the resale of our common stock will be received directly
by the selling stockholder. We will receive no proceeds from the resale of the
common stock offered in this prospectus.
We will have received the proceeds from the sale of our common stock to
Torneaux and from the exercise, if any, of the warrants, as part of our
financing arrangement with Torneaux under the common stock purchase agreement,
which arrangement is discussed in detail under the heading. "Financing
Arrangement with Torneaux Fund Ltd." The shares of any common stock that we sell
to Torneaux and the shares issued upon the exercise, if any, of the warrants are
the shares that are being resold by the selling stockholder under this
prospectus.
We intend to use the proceeds from the sale of our common stock to Torneaux
and the exercise of the warrants, if any, to support general corporate purposes,
including working capital.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock and we do not
anticipate paying cash dividends in the foreseeable future. We currently plan to
retain all earnings, if any, for the foreseeable future for use in the operation
of our business and to fund future growth.
MARKET FOR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"INCR". The following sets forth the quarterly high and low sales prices as
reported by Nasdaq for the periods indicated. These prices are based on
quotations between dealers, which do not reflect retail mark-up, markdown or
commissions, and do not necessarily represent actual transactions.
<TABLE>
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended September 30, 1999
October 1, 1998 through December 31, 1998......... 10 1/8 3 3/8
January 1, 1999 through March 31, 1999............ 15 1/2 5
April 1, 1999 through June 30, 1999............... 8 1/4 4 1/16
July 1, 1999 through September 30, 1999........... 5 5/8 1/2
Fiscal Year Ended September 30, 2000
October 1, 1999 through December 31, 1999......... 1 13/16 1/2
January 1, 2000 through March 31, 2000............ 11 1 17/32
April 1, 2000 through June 30, 2000............... 6 1/8 1 1/2
July 1, 2000 through September 30, 2000........... 4 3/4 1 11/16
Fiscal Year Ending September 30, 2001
October 1, 2000 through November 17, 2000......... 3 3/4 2 5/8
</TABLE>
As of October 31, 2000, the number of record holders of our common stock
was 152 and we estimate that the number of beneficial owners was approximately
5,000.
11
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. We derived the consolidated
statements of operations data for the fiscal years ended September 30, 1996,
1997, 1998, 1999 and 2000 and the consolidated balance sheet data at September
30, 1996, 1997, 1998, 1999 and 2000 from our consolidated financial statements
which have been audited by PricewaterhouseCoopers LLP, independent accountants,
and, except for the consolidated statements of operations for the fiscal years
ended September 30, 1996 and 1997 and the consolidated balance sheet data at
September 30, 1996, 1997 and 1998, are included elsewhere in this prospectus.
Please be advised that historical results are not necessarily indicative of
the results to be expected in the future, particularly given our acquisition and
disposition history. Our historical cash expenditures prior to December 31,
1999 were significantly higher than our current cash spending rate. This lower
level of expenditures has resulted from the discontinuance of the IRL and
BEXTRA(R) programs (see "Business - Discontinued Programs").
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Contract and license fee revenue..................... $ 100 $ 2,088 $ 6,121 $ 5,360 $ 5,348
-------- -------- -------- --------- --------
Costs and expenses:
Research and development............................. 7,645 18,996 16,799 19,972 5,276
Purchase of in-process research an development....... 6,664 - 5,343 411 350
General and administrative........................... 2,613 3,045 3,509 4,179 3,396
-------- -------- -------- --------- --------
Total costs and expenses.......................... 16,922 22,041 25,651 24,562 9,022
-------- -------- -------- --------- --------
Loss from operations...................................... (16,822) (19,953) (19,530) (19,202) (3,674)
Gain on sale of division.................................. 9,751 - - - -
Investment income, net.................................... 406 355 384 831 719
Income taxes.............................................. - - - - (37)
Minority interest......................................... - - - 568 (568)
-------- -------- -------- --------- --------
Net loss.................................................. $ (6,665) $(19,598) $(19,146) $ (17,803) $ (3,560)
======== ======== ======== ========= ========
Net loss per common share:
Basic and diluted.................................... $ (1.06) ($2.98) ($2.69) ($2.55) ($0.59)
======== ======== ======== ========= ========
Weighted average common shares outstanding:
Basic and diluted.................................... 6,312 6,583 7,113 6,982 6,062
======== ======== ======== ========= ========
BALANCE SHEET DATA:
(in thousands)
September 30,
---------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Cash and cash equivalents and marketable securities....... $ 6,555 $ 4,960 $ 23,562 $ 37,580 $ 37,391
Working capital........................................... 4,662 2,207 14,607 9,855 28,870
Total assets.............................................. 7,348 8,044 27,836 42,623 40,650
Long-term portion of capital lease obligations and
notes payable........................................ 43 981 1,593 2,128 896
Total liabilities......................................... 2,536 4,253 8,160 29,167 9,401
Total stockholders' equity................................ 4,812 3,791 19,676 13,456 30,680
</TABLE>
12
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial statements of Incara are included elsewhere in
this prospectus. You should read the unaudited pro forma consolidated financial
information presented herein in conjunction with those financial statements and
related notes.
The unaudited pro forma consolidated financial information of Incara for
the year ended September 30, 2000 include adjustments to give effect in the
unaudited pro forma condensed consolidated statement of operations for the
disposition of IRL as if it had occurred on October 1, 1999.
The unaudited pro forma condensed consolidated statements of operations are
provided for informational purposes and are not necessarily indicative of the
results of operations that would have been achieved had the transactions been in
effect as of the beginning of the period presented and are not necessarily
indicative of future results of operations.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 2000
----------------------------------------------------------------------------------
Pro Forma
Consolidated Adjustments- Pro Forma
Actual IRL As Adjusted
------------------------ ----------------------- ------------------------
<S> <C> <C> <C>
Revenue:
Contract and license fee revenue... $ 100 $ 100 $ -
------------------ ----------------- ------------------
Costs and expenses:
Research and development............ 7,645 1,339 6,306
Purchased in-process research.......
and development................ 6,664 - 6,664
General and administrative.......... 2,613 - 2,613
------------------ ----------------- ------------------
Total costs and expenses..... 16,922 1,339 (15,583)
------------------- ----------------- ------------------
Loss from operations..................... (16,822) (1,239) (15,583)
Gain on sale of division................. 9,751 9,751 -
Interest income, net..................... 406 (37) 443
------------------ ----------------- ------------------
Net income (loss)........................ $ (6,665) $ 8,475 $ (15,140)
================== ================= ==================
Net loss per common share:
Basic............................... $ (1.06) $ (2.40)
================== ==================
Diluted............................. $ (1.06) $ (2.40)
================== ==================
Weighted average common shares
outstanding......................... 6,312 6,312
================== ==================
</TABLE>
The pro forma adjustments reflect the elimination of revenue and expenses
related to IRL for the fiscal year ended September 30, 2000 as if the IRL sale
had occurred at the beginning of the fiscal year. The pro forma adjustments also
reflect the elimination of the gain recognized on the sale of IRL.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the notes appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of various
factors, including those discussed in "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
We conduct discovery and development programs in three areas: (1)
inflammatory bowel disease, using an ultra-low molecular weight heparin known as
OP2000; (2) liver disorders, using liver precursor cell therapy; and (3) small
molecule antioxidants as a treatment for disorders resulting from obstruction of
blood flow, such as stroke and heart attack. Our current programs reflect our
business strategy of building a diversified portfolio of innovative therapeutic
products by advancing basic and clinical research discoveries from leading
academic research centers. Our strategy for bringing promising treatments to the
market includes the selection of collaborative partners who have the
manufacturing, sales and marketing capabilities that we do not have. We believe
that collaborative agreements can provide funding and expertise for the
commercialization of our products, and allow us to maintain a lower fixed cost
structure.
On March 31, 2000, Incara acquired all of the minority interests of
Renaissance Cell Technologies, Inc. and Aeolus Pharmaceuticals, Inc. Prior to
this acquisition, Incara owned 78.0% of Renaissance and 65.8% of Aeolus. Incara
issued 1,220,041 shares of its common stock for the subsidiaries' minority
ownership. We accounted for the acquisition using the purchase method of
accounting with a total purchase price of $6,664,000. We allocated the total
purchase price to purchased in-process research and development and immediately
charged it to operations because at the date of the acquisition the in-process
research purchased was in preclinical stages, feasibility had not been
established and we deemed it to have no alternative future use. We estimated at
the acquisition date that Renaissance and Aeolus will need to spend in excess of
an additional $50,000,000 to complete the research and development and that it
would be at least 2006 before the research and development is completed. We
might share the cost to complete research and development for these programs
with collaborative partners in the future. The acquisition of these minority
interests should not have a significant impact on future operating results
because we previously recognized all losses of Renaissance and Aeolus due to our
majority interest in the subsidiaries.
On December 29, 1999, we sold our anti-infective division, known as
Incara Research Laboratories, or IRL, to a private pharmaceutical company for
$11,000,000 in cash and the right to receive future payments totaling up to an
additional $4,000,000 in the event a compound originating from a collaboration
with Merck & Co., Inc. reaches preclinical and clinical trial milestones. We
currently do not expect to receive any additional payments from the purchaser.
The transaction involved the sale of assets associated with IRL, including
rights under the collaboration with Merck and the assumption of related
liabilities by the purchaser. We remain contingently liable through May 2007 on
debt and lease obligations of approximately $8,328,000 assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey. We recognized a gain
of $9,751,000 on the sale of IRL, which we recorded as other income. The effect
of the IRL transaction on Incara's historical financial statements is shown in
"Pro Forma Consolidated Financial Information."
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc., a majority-owned subsidiary of Interneuron Pharmaceuticals,
Inc., through a merger with Transcell in exchange for Incara common stock, stock
options and stock warrants. We refer to the former Transcell operation as Incara
Research Laboratories, or IRL. We accounted for the purchase of Interneuron's
77.9% interest in Transcell by Incara in a manner similar to a "pooling-of-
interests," because it represented a transfer of stock between entities under
common control. We accounted for the acquisition of the non-Interneuron
ownership interest by using the purchase method of accounting. We have combined
all of Transcell's past results of operations with our consolidated results of
operations. We issued stock in the Transcell merger in three installments. We
issued the first installment upon the closing of the merger in May 1998. In lieu
of the second installment payment due to Interneuron in connection with the
merger, Interneuron retained 281,703 shares of Incara common stock as part of a
corporate restructuring between Interneuron and Incara. In August 1999, Incara
issued 867,583 shares of Incara common stock to the other former Transcell
stockholders as payment for their second installment of the merger. The third
and final installment of 856,861 shares of Incara common stock was issued to the
former Transcell stockholders, including Interneuron, in February 2000. We
calculated the number of shares issued using a formula based on the market price
of Incara
14
<PAGE>
common stock prior to the stock issuance date. The issuance of these additional
shares did not impact our fiscal 2000 operating results because we included the
value of these shares in the determination of the purchase price of Transcell in
fiscal 1998.
We had net losses of $6,665,000 and $19,598,000 for the fiscal years ended
September 30, 2000 and 1999, respectively. We had an accumulated deficit of
$83,907,000 at September 30, 2000. We have not yet generated any revenues from
product sales and do not expect to receive any product revenues in the
foreseeable future, if at all.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Our net loss of $6,665,000 for fiscal 2000 was $12,933,000 less than the
$19,598,000 net loss for fiscal 1999. The net loss for fiscal 2000 resulted from
the net effect of recognizing a $9,751,000 gain on the sale of IRL, offset by
fiscal 2000 operating expenses and the write-off of $6,664,000 for purchased in-
process research and development in connection with the acquisition of minority
interests of Aeolus and Renaissance.
Contract and license fee revenue for fiscal 2000 was $100,000, as compared
to $2,088,000 for fiscal 1999. All of this revenue resulted from an IRL
collaboration with Merck. We will not receive any additional revenue from this
collaboration, because it was sold with the other IRL assets.
Our research and development ("R&D") expenses decreased $11,351,000, or
60%, to $7,645,000 in fiscal 2000 from $18,996,000 in fiscal 1999. The lower
expenses were primarily due to the result of discontinuing our bucindolol
development program in the fourth quarter of fiscal 1999 and to the sale of our
IRL operation in December 1999.
During the last quarter of fiscal 1999, we discontinued our bucindolol
development program and, therefore, we did not incur any bucindolol-related
expenses for fiscal 2000. During fiscal 1999, we incurred $6,469,000 of
bucindolol-related R&D expenses.
Because we sold IRL at the end of December 1999, we did not incur any
significant R&D expenses for IRL between January 1, 2000 and September 30, 2000.
R&D expenses for IRL were $1,339,000 for fiscal 2000 and $8,245,000 for fiscal
1999. We do not expect any additional expense for IRL in the future.
We incurred $1,712,000 of R&D expenses for OP2000 during fiscal 2000,
versus $228,000 during fiscal 1999. The higher expenses in fiscal 2000 were
primarily due to costs incurred in connection with our Phase 1 clinical trials
that began in October 1999 and were completed in April 2000, as well as
preparation for a Phase 2/3 clinical trial.
R&D expenses for our liver cell program increased $369,000, or 44%, to
$1,201,000 for fiscal 2000 from $832,000 for fiscal 1999. The higher expenses in
fiscal 2000 resulted primarily from more R&D staff time being devoted to the
program.
R&D expenses for our antioxidant program decreased $418,000, or 20%, to
$1,694,000 for fiscal 2000 from $2,112,000 for fiscal 1999. The decrease in
expenses from fiscal 1999 to fiscal 2000 was primarily due to the reduction of
outside contract services and sponsored research costs.
General and administrative ("G&A") expenses decreased $432,000, or 14%, to
$2,613,000 for fiscal 2000 from $3,045,000 for fiscal 1999. The higher G&A
expenses in fiscal 1999 were primarily for expenses related to the bucindolol
program, which we terminated in the last quarter of fiscal 1999, and the IRL
operation, which we sold in December 1999.
Fiscal Year Ended September 30, 1999 Compared To Fiscal Year Ended
September 30, 1998
Our net loss of $19,598,000 for fiscal 1999 was $452,000, or 2%, greater
than the $19,146,000 net loss for fiscal 1998.
Contract and license fee revenue for fiscal 1999 was $2,088,000, as
compared to $6,121,000 for fiscal 1998. Contract and license fee revenue for
fiscal 1999 primarily resulted from our collaboration with Merck. During fiscal
1999, we received a $1,500,000 milestone payment from Merck for compounds that
demonstrated
15
<PAGE>
specific activity in laboratory tests using both resistant and sensitive
bacterial strains. Merck also funded $563,000 of research and development costs
at IRL during fiscal 1999.
Contract and license fee revenue for fiscal 1998 included (1) a $4,000,000
payment from Astra Pharmaceuticals, L.P. received pursuant to the termination of
a collaboration with Astra Merck Inc. for the development, manufacturing and
marketing of bucindolol in the United States, (2) $833,000 of U.S. bucindolol
development support from Astra Merck prior to the termination of the Astra Merck
collaboration, and (3) $1,138,000 of revenue recognized in conjunction with the
Merck collaboration.
Our research and development expenses increased $2,197,000, or 13%, to
$18,996,000 in fiscal 1999 from $16,799,000 in fiscal 1998.
Expenses for the development of bucindolol and general R&D expenses
increased $2,885,000, or 59%, to $7,807,000 for fiscal 1999 from $4,922,000 for
fiscal 1998. Our expenses increased after funding from the Astra Merck
collaboration ended in September 1998 and also increased as a result of the
costs of expanded European clinical trials for bucindolol during fiscal 1999.
Pursuant to the Astra Merck collaboration, during fiscal 1998 Astra Merck
paid for most expenses related to the development of the twice-daily formulation
of bucindolol for the United States, including liabilities assumed by Astra
Merck on our behalf of approximately $6,065,000. This additional amount did not
flow through our statements of operations, because it was offset against related
expenses. Because we terminated the Astra Merck collaboration in September 1998,
we absorbed all of the U.S. development expenses for bucindolol in fiscal 1999.
In addition, we expanded the European bucindolol clinical program with BASF
Pharma/Knoll AG during fiscal 1999, resulting in expense of approximately
$2,326,000 in fiscal 1999 versus approximately $1,309,000 in fiscal 1998. We
terminated the development of bucindolol in the last quarter of fiscal 1999 and
all estimated costs of termination were accrued as of September 30, 1999.
R&D expenses for IRL remained relatively constant, increasing by only
$44,000, or 1%, to $8,245,000 for fiscal 1999 from $8,201,000 for fiscal 1998.
During fiscal 1999 IRL incurred increased expenses for license fees paid to
Princeton University and patent preparation fees. These increased expenses were
offset by lower depreciation costs, because in fiscal 1998 we expensed $856,000
of Transcell property and equipment that did not meet our capitalization
criteria.
R&D expenses for Aeolus increased by $96,000, or 5%, to $2,112,000 for
fiscal 1999 from $2,016,000 for fiscal 1998, primarily due to an increase in
contract services for research and preclinical studies of its antioxidant small
molecule research program.
R&D expenses for Renaissance increased by $172,000, or 26%, to $832,000 for
fiscal 1999 from $660,000 for fiscal 1998, primarily due to increased fees for
patent preparation and a fee to the University of North Carolina for the license
of certain technology developed under the research agreement with UNC.
During fiscal 1998, we paid and expensed a $1,000,000 license fee for a
development compound licensed from Opocrin S.p.A.
In conjunction with the Transcell merger, we incurred a charge of
$5,343,000 for the purchase of in-process research and development during fiscal
1998, because feasibility of the in-process research and development acquired
was not yet established and we had no alternative future use for the technology.
This charge represents the market value of the shares of Incara stock issued to
the former minority interest owners of Transcell.
General and administrative expenses decreased by $464,000, or 13%, to
$3,045,000 for fiscal 1999 from $3,509,000 for fiscal 1998, primarily due to the
elimination of IRL administrative personnel and functions at IRL in conjunction
with the Transcell merger.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had cash and cash equivalents and marketable
securities of $6,555,000, an increase of $1,595,000 from September 30, 1999.
Cash increased due to the receipt of $11,000,000 from the sale of IRL, offset by
operating costs for fiscal 2000.
16
<PAGE>
In August 2000, we entered into a definitive agreement with Torneaux Fund
Ltd., an institutional investor, for an equity financing facility covering the
purchase of our common stock over 15 months. Under this facility, Incara will
control the amount and timing of stock sold to Torneaux, with the amount of the
investment being dependent, in part, on Incara's stock price. Assuming Incara's
stock price maintains a minimum threshold of $2.00, the cumulative potential
investment is anticipated to exceed $3,000,000 and is capped at $18,900,000. The
agreement includes the issuance of warrants to purchase an amount of common
stock equal to 15% of the common stock shares purchased and is subject to a
number of conditions, including filing with and declaration of effectiveness by
the Securities and Exchange Commission of a registration statement.
While management believes its existing financial resources are adequate to
fund operations through fiscal 2001, the Company intends to rely on the Torneaux
financing facility or other financing arrangements to support a higher level of
R&D efforts during fiscal 2001. We expect to incur substantial additional costs
and losses over the next few years. Our cash requirements for subsequent periods
will depend on numerous factors, particularly the progress of our research and
development programs. We will require significant additional funds to continue
our clinical program evaluating the use of OP2000 and to complete preclinical
activities, and to begin clinical trials for our liver precursor cell and
antioxidant programs. We might acquire other products, technologies or
businesses that complement our existing or planned products or programs,
although we currently have no understanding, commitment or agreement with
respect to any such acquisitions.
In addition to the equity financing with Torneaux discussed above, we
intend to seek additional capital necessary to execute our business plan through
one or more potential sources, including the sale of common or preferred stock
in private or public equity offerings and from new collaborations related to one
or more of our product development programs. Adequate funds might not be
available at all or on terms acceptable or favorable to us. At times it is
difficult for biotechnology companies to raise funds in the equity markets. Any
additional equity financing, if available, would likely result in substantial
dilution to Incara's stockholders. If we are successful in obtaining
collaborations for any of our programs, we expect to relinquish rights to
technologies, product candidates or markets which we might otherwise develop
ourselves. If we are unable to enter into new collaborations or raise additional
capital to support our current level of operations, we might be required to
scale back, delay or discontinue one or more of our research and development
programs, such as our proposed clinical trials, or obtain funds on terms that
are not favorable to us, which could have a material adverse affect on our
business. Reduction or discontinuation of research and development programs
could result in additional charges, which would be reflected in the period of
the reduction or discontinuation.
In January 2000, our Board of Directors authorized the repurchase of up to
$2,000,000 of our common stock during the following two months through purchases
on the stock market. During fiscal 2000, we repurchased a total of 140,100
shares of our common stock at a total cost of $412,000.
YEAR 2000 COMPLIANCE
As of September 30, 2000, we had not incurred any material cost directly
associated with our year 2000 compliance efforts. We believe the total cost of
year 2000 issues will not be material to our business, financial condition and
operating results. As of September 30, 2000, we had not encountered any material
year 2000 problems with the hardware and software systems used in our
operations. In addition, none of our critical vendors have reported any material
year 2000 problems nor have we experienced any decline in service levels from
such venders. We expect to continue to monitor internal and external issues
related to year 2000. While no material problems have been discovered, we cannot
assure you that material problems will not materialize in the future.
BUSINESS
General
Incara Pharmaceuticals Corporation develops innovative pharmaceutical
products and treatments for major diseases afflicting large patient populations.
We are currently developing products in three areas that represent a diversified
portfolio of potentially breakthrough therapeutics. Each of these areas is
currently underserved in terms of effective treatments. The three therapeutics
under development by the Company are as follows:
. An ultra-low molecular weight heparin, as a treatment for inflammatory
bowel disease, or IBD, a debilitating disease of the intestinal tract
that includes ulcerative colitis and Crohn's disease.
17
<PAGE>
. Liver precursor cell transplant, as a treatment for liver failure.
. Small molecule catalytic antioxidants, as a treatment for disorders
resulting from obstruction of blood flow, such as stroke and heart
attack.
OP2000
Our program for inflammatory bowel disease, or IBD, centers on OP2000, a
polysaccharide (carbohydrate) product derived from heparin. Heparin is a
naturally occurring substance with anti-clotting and anti-inflammatory
properties. Heparin, as a pharmaceutical product (including the starting
material for OP2000), is derived and purified from domestic mammals, primarily
pigs. In July 1998 we obtained an exclusive 15-year license to develop OP2000
from its manufacturer, Opocrin S.p.A. of Modena, Italy. Clinical evidence of the
treatment of IBD with heparin and the known anti-clotting effects of OP2000 and
other heparin-derived products provide the rationale for evaluating OP2000 in
treating IBD. We have completed two Phase 1 clinical trials in normal volunteers
to determine blood levels and anti-clotting effects following once daily
injections of OP2000. Blood levels are important in determining the dosage
necessary for treatment. Assuming we have adequate financial resources, we plan
to begin a pivotal Phase 2/3 clinical trial in patients with ulcerative colitis
by early 2001. (For information on the three sequential phases of clinical
trials, see "Government Regulation" below).
Inflammatory Bowel Disease
Inflammatory bowel disease describes a group of chronic inflammatory
disorders of the intestine of unknown cause, often causing recurrent abdominal
pain, cramps, diarrhea (with or without bleeding), fever and fatigue. Two forms
of IBD 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, but may involve any portion of the
gastrointestinal tract. Ulcerative colitis results in the large intestine
becoming inflamed with ulceration and bleeding. Current treatments of IBD such
as steroids and other anti-inflammatory drugs are designed to reduce
inflammation and relieve symptoms, but treatment results are often
unsatisfactory. In serious cases, surgery may be required. Ulcerative colitis
can be so debilitating that up to 20% of patients opt for removal of their colon
as a cure. There is no cure for the equally debilitating Crohn's disease.
According to the Crohn's & Colitis Foundation of America, Inc.,
approximately one million people in the United States have IBD. We believe there
is a need for effective and safe treatments.
Heparins and IBD
A large number of case reports and a recent double blind placebo-controlled
clinical trial of heparin in ulcerative colitis support the idea that heparin
can safely induce remission in IBD patients. A review (Korzenik, IBD 1997) of
the clinical use of heparin in IBD (primarily ulcerative colitis) found benefit
in 51 out of 60 reported cases, with increased bleeding in only three cases. In
a recent U.S. double blind placebo-controlled trial of heparin in 68 patients
with active ulcerative colitis receiving treatment with standard therapies, 42%
of patients who were given additional heparin therapy had clinical remission or
improvement, compared with 20% on placebo.
Clinical observations suggest that IBD may result from increased clotting
activity. Investigators have observed evidence of increased clotting in the
bowel and other organs during flares of IBD. Clotting is activated and the
breakdown of clots is reduced during flares. Patients with inherited clotting
deficiencies, such as von Willebrand's disease and hemophilia, have a much lower
incidence of IBD than expected. The clinical results and other supporting
studies discussed above provide a strong rationale for the use of an ultra-low
molecular weight heparin such as OP2000 in the treatment of flares of IBD.
OP2000 is a product of the chemical cleavage of heparin with the
comparatively low molecular weight of 2,500 daltons (compared with full-length
heparin's molecular weight of about 14,000 daltons and other low molecular
weight heparin's molecular weight of 4,000 to 6,000 daltons). Lower molecular
weight, or smaller molecules of heparin may prove to have advantages over
heparin itself, including better safety, efficacy and convenience. OP2000 has
been shown to be a potent anti-clotting agent. Like low molecular weight
heparins, and unlike heparin, routine monitoring of clotting factors during
treatment should not be necessary, providing a substantial advantage over
heparin. OP2000 has a longer lifetime in the body than heparin or low molecular
weight heparins and initial results indicate that OP2000 can be given in once-
daily injections under the skin. A key objective of the Company is to have
OP2000 be the first heparin-related product to obtain regulatory approval to
treat ulcerative colitis in the United States. The composition of OP2000 is
covered by claims of patents issued to
18
<PAGE>
Opocrin in the United States and Europe. We have licensed OP2000 from Opocrin
for all uses worldwide, except in Japan and Korea.
Clinical Development Program
We completed two Phase 1 clinical trials for OP2000, the most recent having
been completed in April 2000. These trials looked at single and multiple dose
administrations of the drug, and preliminary results indicate that we will be
able to give OP2000 on a once-a-day basis. OP2000 has been studied for another
indication in over 150 subjects and patients in Europe with no significant
unexpected side effects. Assuming we have adequate financial resources, we plan
to begin a Phase 2/3 safety and efficacy trial in ulcerative colitis patients by
early 2001. If the results of the Phase 2/3 trial are positive, we plan to
conduct a confirmatory Phase 3 safety and efficacy trial in ulcerative colitis
and additional clinical studies of OP2000 blood levels and other laboratory
measurements. We would also consider a pilot study in Crohn's disease. Our
clinical scientists will manage the trials, including all data collection and
analysis activities.
Commercialization
Because of the relatively large number of patients suffering from
inflammatory bowel disease both in the United States and abroad, effectively
marketing a pharmaceutical for treatment of this indication requires the
resources of a large sales organization. We intend to seek development and
marketing partnerships or licensing arrangements for OP2000 with pharmaceutical
companies with an established marketing presence in the gastrointestinal field.
Human Liver Precursor Cell Transplant
Hepatic precursor cells are cells in the liver that can differentiate into
a variety of daughter cells that provide liver function. These are the early
cells in the maturation of the liver and include the liver stem cells and their
descendants. We are developing human liver precursor cells for use in the
treatment of liver failure.
Incara established its liver precursor cell program with the acquisition of
a majority ownership interest in Renaissance Cell Technologies, Inc. in
September 1997. Renaissance was founded in 1995 to commercialize applications
from research on human liver precursor cells from the laboratory of Dr. Lola
Reid, previously at the Albert Einstein College of Medicine and now a Professor
in the Department of Cell and Molecular Physiology, Program in Molecular Biology
and Biotechnology, at the University of North Carolina at Chapel Hill School of
Medicine. In March 2000, Incara acquired the remaining minority interest of
Renaissance, which is now a wholly owned subsidiary of Incara.
Liver Disease
The liver is one of the largest and most complex organs in the body,
serving many critical metabolic functions. More than most other organs, the
liver has the ability to regenerate itself by repairing or replacing injured
tissue. Despite this protection, once a critical mass of liver cells has died
through disease or damage, the liver can fail, leading to illness and death.
Liver failure is a serious health problem. Each year, there are an estimated
300,000 hospitalizations and 30,000 deaths in the United States due to chronic
liver diseases.
Currently, the only cure for many of these liver diseases is a liver
transplant. However, only about 4,800 donor livers become available each year in
the United States and the total cost of transplantation and first year follow-up
is estimated to average over $300,000. Over 16,500 patients are on the liver
transplant waiting list, an increase of more than 90% over the last three years
and up from 1,000 ten years ago. Furthermore, there are a total of approximately
100,000 adults with severe cirrhosis and other forms of chronic liver failure in
the United States who could become candidates for a transplant. Not all of these
people will get transplants, or even get onto the transplant waiting list. The
incidence of chronic liver failure is expected to increase in the next ten years
as a result of the "silent epidemic" of hepatitis C. Up to 4 million people in
the United States are currently infected with the hepatitis C virus. Researchers
estimate that 15% of these persons will develop cirrhosis, a disease that
typically develops over a period of 10 to 20 years.
As a result of the shortage of donor organs, potential liver transplant
patients must wait for a donor liver to become available, often for years. The
vast majority of patients with liver diseases therefore cannot rely on organ
transplantation as a solution. To bridge the gap between supply and demand for
liver donors, several companies are investigating the use of pig livers and pig
liver cells, as well as mature human liver cells and human cells derived
19
<PAGE>
from tumors housed in a bioartificial liver to support an individual on a short-
term basis. These approaches, however, present a variety of scientific and
medical problems, including the risk of contamination from animal viruses. We
believe there is an urgent need for new technologies to support patients with
damaged livers, both acutely and long-term.
Liver Cell Transplantation
The ability to transplant cells that have the capacity to reproduce and
function in an impaired liver could reduce the need for whole organ transplants
and provide treatment for thousands of patients. In this procedure, a physician
injects a suspension of donor liver cells, or hepatocytes, into blood vessels
leading to the patient's liver or spleen. The transplanted cells take up
residence in the recipient's body and provide liver functions, including
detoxification and protein synthesis.
Positive results from liver cell transplants in rodents (both with mature
liver cells and precursor liver cells) have prompted physicians outside of
Incara to perform transplantation of unfractionated human hepatocytes (liver
cells not separated by their stage of maturity or other parameters) in a number
of human patients with encouraging results. Unfractionated human hepatocytes,
obtained from livers rejected for transplant use, have been introduced into over
30 patients, with beneficial results often observed. These include patients with
cirrhosis, metabolic disorders and severe liver failure. Some patients whose
liver failure resulted in a coma, awoke after receiving liver cell transplant,
coincident with a decrease in ammonia levels, improved cerebral blood flow and
reduction of intracranial pressure. In one patient, a 10-year-old girl, the
transplanted liver cells survived and partially corrected a metabolic disorder
for over 22 months. Treatment by liver cell transplantation, however, has been
limited because of the lack of available organs from which viable liver cells
can be obtained.
Human Liver Precursor Cells
Incara proposes to advance the present state of liver cell transplantation
by isolating, processing and transplanting human liver precursor cells. Human
liver precursor cells, unlike mature liver cells, can divide many times, greatly
expanding the utility of a single donor liver such that one liver could supply
the needs of many patients. Moreover, precursor cells might provide a much
longer functional life, potentially surviving the lifetime of the recipient.
These cells also can survive freezing and thawing better than unfractionated
cells, permitting precursors to be stored until the need for them arises. The
precursor cells should have the capability to differentiate into the entire
lineage of liver cells, providing the functions of early cells that may be
missing and unable to be regenerated by injection of unfractionated hepatocytes.
The precursor cells also might require less immunosuppression drugs to prevent
rejection of the new cells and a smaller injection volume than that of
unfractionated cells. The human liver precursors also avoid some of the medical
and scientific challenges associated with strategies involving pig livers, pig
liver cells and human cells derived from tumors.
Use of Alternative Sources of Donor Livers
Currently, most whole organ liver transplantation procedures require a
donor who has undergone brain death, but whose heart is still beating. This
occurs only in approximately one to two percent of hospital deaths, severely
limiting the potential donor pool.
Dr. Reid has demonstrated that viable liver precursor cells can be isolated
postmortem from the livers of non-beating-heart donors, whose livers cannot be
used for whole organ transplant. A major advantage of liver precursor cells is
their ability to survive periods with limited oxygen. The window of time that
viable liver precursors can be isolated postmortem is now under investigation,
along with the useful age range of donors. Since liver precursor cells can be
purified from livers inappropriate for transplant, our program will not compete
for organs with existing liver transplant programs. We have established an
arrangement with a traditional organ donor program for procurement of livers
from non-beating-heart donors. Preclinical experiments suggest that one donor
liver may provide enough liver precursor cells for many recipients.
Development Strategy
We are now scaling-up the liver precursor cell isolation and selection
process to produce the cells required for clinical trials. This step includes
establishing isolation and processing procedures needed for a 1,500-gram to
3,000-gram whole human liver instead of the 100-gram portions of liver used in
the basic research stage of the program. The scaled-up procedures are being
adapted for a sterile good manufacturing practices, or cGMP,
20
<PAGE>
environment. After scale-up, we expect to transfer the liver precursor cell
processing procedure to a contract cell processor with a facility compliant with
cGMP to produce cells suitable for use in clinical trials.
Clinical Trials
Incara is exploring two patient populations for the initial clinical trials
of precursor cell transplantation. The first group consists of infants with
life-threatening inherited genetic diseases who are too young for liver
transplants. This patient population represents a group with limited treatment
alternatives where improvement in patient condition and production of the
missing gene products would demonstrate the function of the transplanted cells.
The other series of clinical trials being planned targets the approximately
100,000 adults in the United States with severe cirrhosis and other forms of
chronic liver failure that could become candidates for a transplant. Initially,
these patients would receive the same immunosuppression as liver transplant
patients to prevent rejection of the transplanted cells. Assuming we have
adequate financial resources, Incara plans to begin these initial Phase 1
clinical trials in 2001. Clinical investigators from several leading research
hospitals have expressed interest in participating in our clinical trials. Some
of these investigators have experience with cell transplants using
unfractionated human liver cells and bioartificial livers and believe the
strategy of transplanting liver precursor cells provides a better rationale for
hepatocyte transplants.
Gene Therapy
Gene therapy clinical trial results have in general been disappointing for
both physicians and patients, often because of the inability to obtain sustained
gene expression of the target gene. Precursor cells, because of their extensive
expansion potential, represent a promising cell population to produce continued
gene expression. Incara's gene therapy strategy will be to insert into the liver
precursor cells a correct copy of a gene deficient in the patient and transplant
these cells into the patient. Logical target disorders are diseases resulting
from the inability of the patient's liver cells to properly make an important
protein, such as the missing LDL receptors in hypercholesterolemia and clotting
factors in hemophilia.
Genomics and Research Applications
The liver precursor cell technology developed by Incara has application as
a tool for identifying new drugs and in the drug development and testing
process. The liver precursor cells can be made to grow and differentiate into
mature liver cells. Determining gene expression patterns at various stages of
the liver lineage provides genomic information for drug discovery. For example,
this information can be used to identify new targets for drug discovery programs
or to identify proteins performing biological functions that may have
applications in therapy.
As a tool for the drug testing and development process, the liver precursor
cells and their daughter cells could be used to assess changes in gene
expression patterns caused by drugs being considered for development. The
changes in gene expression pattern from potential drugs could be compared with
those caused by drugs known to damage the liver. This would allow a
pharmaceutical company to screen compounds for their effect on the liver earlier
in the development process, saving time and money. The full lineage of liver
cells, from precursors to mature cells, could also be used to test drugs for
toxicity to the liver and to study how the drug is metabolized. Currently,
pharmaceutical companies have difficulty obtaining a consistent supply of human
liver cells for toxicity testing.
Liver Assist Device
Incara's liver precursor cell technology has application in the development
of a liver assist device, or LAD. LADs are designed to provide treatment for
patients with acute liver failure by providing liver function for a short period
of time (7 to 30 days) to allow sufficient time for a patient's own liver to
recover from failure or to provide a bridge to transplant. Incara's LAD is
expected to be an artificial liver composed of human liver cells in a device
through which the patient's blood or plasma is circulated.
Attempts at clinically useful LADs by others have utilized pig hepatocytes
or human liver cells derived from tumors in a wide variety of bioreactor types.
These devices have shown promise, but all utilize cells with limitations that
our LAD is designed to overcome. The pig hepatocytes, while easily obtained,
have severe limitations; e.g., potential immune reactions to secreted pig
proteins, limited lifetime and non-human viruses. The liver cells derived from
tumors cells can easily be grown, but retain only a subset of the functions of
normal liver cells and involve safety concerns. Functioning human liver cells
from donor organs have not been an alternative due to the scarcity of donor
livers.
21
<PAGE>
We believe that a LAD using our human liver precursor cells could overcome
many of the problems experienced to date. Proteins secreted by these cells will
be of human origin so immune reactions should be minimized. The precursor cells
can divide extensively in culture so that cells from one donor liver may be able
to supply many LADs. Most importantly, these cells should display the wide range
of liver functions necessary for clinical utility.
Commercialization
There are approximately 120 liver transplant programs in hospitals in the
United States. We believe that marketing to these hospitals could be
accomplished by an internal sales force of approximately 15 trained specialists.
We intend to maintain rights to market the liver precursor cell transplantation
therapy in the United States and develop a focused marketing effort following
establishment of the safety and efficacy of the program in clinical trials.
Outside of the United States, we expect to seek a partnership or licensing
arrangement with another pharmaceutical or biotechnology company for
commercialization of the liver precursor cell therapy program. We also intend to
seek partnerships for the development of our liver precursor cells in gene
therapy, drug research and genomic applications and for use in a liver assist
device.
Catalytic Antioxidant Small Molecule Program
Incara established its catalytic antioxidant program with the acquisition
of a majority interest in Aeolus Pharmaceuticals, Inc. in July 1995. The
scientific founders of Aeolus, James D. Crapo, M.D., and Irwin Fridovich, Ph.D.,
in collaboration with colleagues at Duke University, the National Jewish Medical
and Research Center and Incara, are working to develop small molecules as
therapeutics that act in the same manner as naturally occurring antioxidant
enzymes. Antioxidant enzymes such as superoxide dismutase normally protect the
body from harmful free radicals. In March 2000, Incara acquired the remaining
minority interest in Aeolus, which is now a wholly owned subsidiary of Incara.
Incara has obtained from Duke University and the National Jewish Medical and
Research Center the right to license the products developed by Drs. Crapo and
Fridovich in exchange for the payment of costs associated with the research and
royalties on sales of the licensed products.
Antioxidants and Disease
Oxygen plays a pivotal role in supporting life by enabling energy stored in
food to be converted to energy that living organisms can use. The ability of
oxygen to participate in key metabolic processes derives from its highly
reactive nature; this reactivity is necessary for life, but also causes oxygen
to react harmfully with living organisms. In the body, oxygen is converted to
various free radicals, which can then damage DNA, proteins and lipids. The
cumulative result of these reactions is reduced cellular function and,
ultimately, disease. Free radicals are thought to play a role in a wide variety
of conditions including chronic bronchitis, stroke, asthma, reperfusion injury
following heart attack, rheumatoid arthritis, Alzheimer's disease, Parkinson's
disease and even aging itself.
The enzyme SOD plays a critical role in protecting the body against attack
by free radicals. However, the natural enzyme's high molecular weight, short
half-life in circulation, inability to penetrate cells and high cost of
production limit its usefulness as a drug. Numerous attempts by many
pharmaceutical companies in the 1980's and 1990's using forms of the SOD enzyme
failed to demonstrate the expected efficacy.
Incara has synthesized a group of small molecules that have multiple potent
catalytic antioxidant activities, destroy free radicals and protect cell
membranes. Catalytic antioxidants, unlike other antioxidants, function like
enzymes and are not consumed by their reaction with free radicals and,
therefore, can destroy many free radicals. Some of these compounds have
antioxidant activities greater than the natural SOD enzymes on a weight basis in
laboratory experiments. The lead compounds in this series have shown promising
activity in preclinical models of stroke and heart attack. We also have a number
of additional compounds available in this series.
Stroke
An estimated 500,000 to 700,000 people in the United States annually suffer
strokes, about 400,000 of which are first-time strokes that occur essentially
without warning. In the United States, stroke kills approximately 158,000 people
annually and has left more than one million people disabled to some extent,
according to the American Heart Association. The estimated direct cost of stroke
is over $40 billion annually, much of which is attributable to the high expense
of rehabilitating and caring for victims.
22
<PAGE>
Stroke is an injury to the brain caused by the blockage of blood flow. The
reestablishment of blood flow after blockage can cause further damages which is
called reperfusion injury. Many scientists believe that the damage from stoke
and reperfusion injury might be caused, at least in part, by free radicals. In a
model of stroke, where the middle cerebral artery of a rat is blocked for 90
minutes and then unblocked, AEOL 10113 reduced damaged brain tissue
significantly when introduced as late as 7 1/2 hours after the start of the
stroke. AEOL 10150 significantly reduced damaged brain tissue in a mouse model
of severe stroke in which blood flows to a portion of the brain was permanently
blocked.
The following activities are expected to be completed prior to initiating
Phase 1 clinical trials:
. Scale-up manufacturing of drug candidate
. Analytical/bioanalytical methods development and validation
. Formulation development
. Manufacture and release of preclinical and clinical supplies
. Additional toxicology studies (through two-week exposure in two species)
Assuming we have adequate financial resources and satisfactory completion of the
preclinical studies, Incara intends to initiate Phase 1 clinical trials in
2001.
Heart Attack
Acute myocardial infarction, commonly called a heart attack, is the death
of heart tissue that results from interruption of blood flow through one or more
coronary blood vessels to portions of the heart. Prolonged or permanent
interruption of blood flow deprives a portion of the heart of oxygen, eventually
leading to death of heart muscle cells. If blood flow is reestablished quickly,
either spontaneously or through medical intervention, the damage caused may be
reversed or reduced. However, reestablishment of blood flow to heart muscle
cells can also cause injury to these or neighboring cells. This injury is called
ischemia reperfusion injury.
Research suggest that free radicals play an important role both in the
damage caused by interruption of blood flow and the damage associated with
ischemia reperfusion injury. Antioxidants, therefore, might offer benefit in
heart attack patients by reducing tissue injury. Preliminary studies in animal
model systems suggest that AEOL 10113 could reduce damage caused by heart
attacks. Additional studies are underway to confirm these observations.
According to the American Heart Association, approximately 1.1 million
people in the United States have heart attacks each year, of whom 40% die within
a year. More than half of these deaths occur after the patient arrives at the
hospital. Survivors may experience other serious health problems resulting from
the heart attack such as chronic congestive heart failure. Medical intervention
that reduces the damage caused by heart attack may save lives and reduce
suffering.
Commercialization
Because of the large numbers of patients suffering from stroke and heart
attack, effectively marketing a pharmaceutical for treatment of these
indications requires the resources of a large sales organization. We intend to
seek development and marketing partnerships or licensing arrangements for the
stroke and heart attack indications of our antioxidant program with
pharmaceutical companies with an established marketing presence in the target
indications.
Collaborative and Licensing Arrangements
Incara's strategy is to develop and add value to both in-licensed products
and sponsored research programs and, once a product appears viable, to enter
into collaborations and licensing agreements with corporate partners for
manufacturing and marketing. All of our product development programs rely on
licenses of technology from third parties, as described below.
Opocrin License
In July 1998, we signed a 15-year agreement with Opocrin to obtain the
exclusive rights to OP2000 on a worldwide basis, except for Japan and Korea. We
paid $1,000,000 to Opocrin as a license fee upon execution of the agreement.
Additional compensation will be payable to Opocrin upon initiation of specified
clinical trials, upon filing for specified regulatory approval, upon obtaining
specified regulatory approval, and upon achieving specified
23
<PAGE>
aggregate annual sales. Incara also is to pay Opocrin royalties on net sales and
is responsible for the costs of conducting clinical trials for OP2000. Incara
and Opocrin have agreed to diligently pursue the negotiation and execution of a
manufacturing supply agreement, whereby Opocrin would manufacture OP2000 for
commercial purposes.
University of North Carolina License
We have a sponsored research agreement which covers research at the
University of North Carolina by scientists in the area of hepatic stem cells and
which grants us a first option to obtain an exclusive license to inventions
resulting from the research during the term of the research agreement, or during
the one-year period following termination of the agreement. The research aspect
of the agreement with UNC can be terminated by mutual consent or by 12 months
written notice by either party. In August 1999, we obtained an exclusive
worldwide license from UNC to make, use and sell products using proprietary
information and technology developed under this sponsored research agreement.
The UNC license includes rights to five U.S. patent applications filed during
1999 and 2000, including patent applications for isolating and purifying human
liver precursor cells. We are pursuing international patent protection, as
appropriate. We will make milestone payments to UNC upon the occurrence of
development milestones and royalties on net sales. We are also obligated to pay
patent filing, prosecution, maintenance and defense costs.
Albert Einstein College of Medicine
We have obtained exclusive worldwide rights from Albert Einstein College of
Medicine for patents resulting from research conducted on liver stem and
precursor cells by Dr. Reid and other scientists, while Dr. Reid was at
Einstein. The United States component of this patent portfolio includes four
issued patents, and three pending patent applications. We also have two pending
patent applications in each of Europe and Japan.
Incara must pay royalties to Einstein on net product sales during the term
of the licenses and must pay minimum royalties beginning in 2004. We also must
pay patent prosecution, maintenance and defense costs. The Einstein licenses are
terminable in the event of breach, and otherwise expire when the last licensed
patent expires.
Duke Licenses
We have obtained exclusive worldwide rights from Duke University to
products using antioxidant technology and compounds developed by Dr. Irwin
Fridovich and other scientists at Duke. These scientists provide research
support and advice in the field of free radical and antioxidant research.
Further discoveries in the field of antioxidant research from these scientists'
laboratories at Duke also are covered by the licenses from Duke.
Incara must pay royalties to Duke on net product sales during the term of
the Duke licenses, and payments upon the occurrence of development milestones.
In addition, we are obligated under the Duke license to pay patent prosecution,
maintenance and defense costs. The Duke licenses are terminable in the event of
breach and otherwise expire when the last licensed patent expires.
National Jewish License
In September 1997, Aeolus executed a Sponsored Research Agreement with
National Jewish Medical and Research Center. The National Jewish Agreement
grants Aeolus an option to negotiate a royalty-bearing exclusive license for
technology, patents and inventions resulting from research by individuals at
National Jewish within the field of antioxidant compounds and related
discoveries. Aeolus has agreed to support National Jewish's costs incurred in
performance of the research. In November 2000, we obtained an exclusive
worldwide license from National Jewish to develop, make, use and sell products
using proprietary information and technology developed under this sponsored
research agreement. We will make milestone payments to National Jewish upon the
occurrence of development milestones and royalties on net sales. We are also
obligated to pay patent filing, prosecution, maintenance and defense costs.
Manufacturing and Marketing
Our strategy is to contract with third parties for manufacturing
capabilities that cannot be established by us in a cost-effective manner. Our
most advanced product, OP2000, is being manufactured for clinical trials for us
in bulk form by Opocrin, the licensor of that product, on a cost plus basis.
Incara and Opocrin have agreed to
24
<PAGE>
diligently pursue the negotiation and execution of a manufacturing supply
agreement, whereby Opocrin would manufacture OP2000 for commercial purposes.
We have identified and are in discussions with third parties to conduct the
cell processing for hepatic precursor cells being developed by Incara. To begin
clinical trials, we must contract with a supplier to isolate the hepatic
precursor cells in compliance with cGMP regulations. We have not yet
established the terms of any supply arrangement, and we might not be able to
enter into any third party arrangements on satisfactory terms. We also must
establish and maintain sources of livers or liver tissues from which the
precursor cells can be isolated. We have historically relied on several
suppliers of liver tissues for research, but entering into the clinical trial
stage of development will increase our needs. For clinical trials and
ultimately for commercialization, we plan to obtain livers which are not
suitable for full liver transplant from the traditional organ transplant donor
programs.
We have identified a potential manufacturer of clinical products for the
catalytic antioxidants being developed, but we have not yet negotiated the terms
of clinical supply.
Because some of our potential products are being developed for large
therapeutic markets requiring broad sales and marketing capabilities, we expect
to partner with larger pharmaceutical companies to obtain the needed reach of a
large sales force for these products. This could include OP2000 and products
resulting from our antioxidant program and the international marketing of all of
our products. We have not identified marketing partners for our ongoing product
development programs. We might not be able to enter into any marketing
arrangements on satisfactory terms.
We might choose to establish our own marketing capabilities for product
areas where a targeted marketing effort would be appropriate. This could
include the liver precursor cell program, which we believe would target the
approximately 120 liver transplant centers in the United States. Establishing
marketing capabilities could require substantial funds and we might not
successfully establish our own marketing capabilities on a cost effective basis
or at all.
Competition
General
Competition in the pharmaceutical industry is intense and we expect it to
increase. Technological developments in our fields of research and development
occur at a rapid rate and we expect competition to intensify as advances in
these fields are made. We will be required to continue to devote substantial
resources and efforts to research and development activities. Our most
significant competitors are fully integrated pharmaceutical companies and more
established biotechnology companies, which have substantially greater financial,
technical, sales and marketing and human resources. These companies might
succeed in obtaining regulatory approval for competitive products more rapidly
than we can for our own products. In addition, competitors might develop
technologies and products that are cheaper, safer or more effective than those
being developed by us or that would render our technology obsolete.
We expect that important competitive factors in our potential product
markets will be the relative speed with which we and other companies can develop
products, complete the clinical testing and approval processes, and supply
commercial quantities of competitive product(s) to the market. With respect to
clinical testing, competition may result in a scarcity of clinical investigators
and patients available to test our potential products, which could delay
development.
As described below, we are aware of products in research or development by
our competitors that address the diseases being targeted by us.
Inflammatory Bowel Disease
The two major forms of inflammatory bowel disease, ulcerative colitis and
Crohn's disease, are treated by antidiarrheals, steroids and other anti-
inflammatory drugs, and immunosuppressants. Crohn's disease also is being
treated by off-label use of metronidazole, an antibiotic that acts as an anti-
inflammatory through an unknown mechanism. Some of the drugs used to treat these
diseases are available in generic form and are being marketed at a price that
could be less than the price of OP2000, if it were successfully developed and
approved. Low molecular weight heparins are approved for non-IBD indications and
marketed by others, who might seek to attempt to develop their low molecular
weight heparins for IBD.
25
<PAGE>
Remicade(R) was approved by the FDA in 1998 for use in treating moderately
to severely active Crohn's disease. Remicade is an antibody indicated for the
reduction of the signs and symptoms of Crohn's disease in patients who have an
inadequate response to conventional therapy. The drug is being marketed in the
United States by Centocor, Inc. Its cost and the concern over possible allergic
reaction to the protein, however, have limited its use in this indication.
Hepatic Diseases
We are aware of competitive efforts in academic, research and commercial
institutions using human hepatic cells in treatment of liver disease. Tissue
Transformation Technologies, Inc. and Diacrin, Inc. are conducting Phase 1
clinical trials for treatment of cirrhosis using human liver cell transplants.
In addition, other companies and academic laboratories are pursuing strategies
to investigate the use of pig livers in transplantation as a substitute for
human liver and the use of hepatocytes prepared from pig livers as a form of
cell therapy. Several other companies have conducted research and development on
a bioartificial liver device to treat acute liver failure that could be
competitive with our technology under development. In particular, Circe
Biomedical, Inc. has conducted clinical trials with a bioartificial liver that
uses pig liver cells, and VitaGen Incorporated is conducting a clinical trial
with a bioartificial liver that utilizes human liver cells derived from tumors.
At least one company is pursuing the growth of mini-organs, including liver.
StemCells, Inc., formerly Cytotherapeutics, Inc., other corporations and
academic institutions are conducting research in the area of liver and other
organ stem and precursor cells. Stem cell research in general is being developed
by a number of companies, including Geron Corporation, which has announced that
it has isolated embryonic stem cells. Embryonic stem cells in theory could have
the capacity to differentiate into all human systems, including the liver.
Antioxidants
Several companies have explored the therapeutic potential of antioxidant
compounds in numerous indications. Historically, most of these companies have
focused on engineered versions of naturally occurring antioxidant enzymes, but
with limited success, perhaps because the large size of these molecules makes
delivery into the cells difficult. Antioxidant drug research continues at a
rapid pace despite previous clinical setbacks. In October 1998, Metaphore
Pharmaceuticals Inc. reported results from preclinical studies of a small
molecule that performs the same chemical reactions as the antioxidant enzyme
superoxide dismutase (SOD). Metaphore reported that this compound substantially
reduced tissue damage due to inflammation and reperfusion in animal models.
Eukarion, Inc. is also developing similar compounds which are in preclinical
development for conditions associated with damage caused by free radicals.
AstraZeneca is developing a nitrone compound with free radical trapping
properties for stroke. The compound, licensed from Centaur Pharmaceuticals, is
currently in Phase 2 development.
Patents and Proprietary Rights
We generally seek patent protection for potential products and proprietary
technology in the United States and other jurisdictions, including products and
technology licensed from third parties. The process for preparing and
prosecuting patents is lengthy, uncertain and costly. Patents might not issue on
any of the pending patent applications owned or licensed by us from third
parties. Even if patents issue, the claims allowed might not be sufficiently
broad to protect our technology or provide us protection against competitive
products or otherwise be commercially valuable. Patents issued to or licensed by
us could be challenged, invalidated, infringed, circumvented or held
unenforceable. Even if we successfully defend our patents, the costs of defense
can be significant.
We have the exclusive license from Opocrin, in all countries other than
Japan and Korea, for an issued patent to develop and commercialize OP2000. We
also have a non-exclusive license from Opocrin to practice related patents, to
the extent required for our activities related to OP2000. We are aware of a
recently issued patent claiming the use of fractions of heparin for the
treatment of inflammatory bowel disease. We do not believe the development of
OP2000 will require the licensing of this patent. If OP2000 were to be
determined to fall within the scope of this patent and if the patent's claims
were found to be valid, we would have to license this patent in order to
commercialize OP2000. If this were the case we might not be able to license this
patent at a reasonable cost which would result in our not being able to market
OP2000. Uncertainty regarding the scope or validity of this patent might deter
potential partners from collaborating with us for the development and
commercialization of OP2000.
In the liver precursor cell program, we have an exclusive license for four
issued United States patents and three pending patent applications from Albert
Einstein College of Medicine. Claims included in these issued patents
26
<PAGE>
include an isolated hepatocyte precursor capable of differentiating into a
hepatocyte and a population of genetically engineered hepatocyte precursor
cells. We also have two related pending patent applications in each of Europe
and Japan. Our UNC sponsored research agreement allows us to obtain an exclusive
worldwide license to make, use and sell products using proprietary information
and technology developed under the UNC sponsored research agreement. Rights to
five U.S. patent applications filed during 1999 and 2000 are currently included
in the UNC license, as well as appropriate related international applications.
Pending claims on the UNC patents include human liver precursor cell composition
and process for their isolation, expansion and cryopreservation and the use of
non-beating-heart donors as a source for precursor cells.
Our catalytic antioxidant small molecule technology base is described in
four issued U.S. patents and five patent applications that are pending. These
patents and patent applications belong in whole or in part to Duke or National
Jewish and are licensed to us. These patents and patent applications cover
soluble manganic porphyrins as antioxidant molecules as well as targeted
compounds obtained by coupling such antioxidant compounds to molecules that bind
to specific extracellular elements. The pending U.S. applications include
composition of matter claims for several series of compounds. Corresponding
international patent applications have been filed, one of which has issued.
In addition to patent protection, we rely upon trade secrets, proprietary
know-how and technological advances that we seek to protect in part through
confidentiality agreements with our collaborative partners, employees and
consultants. Our employees and consultants are required to enter into agreements
providing for confidentiality and the assignment of rights to inventions made by
them while in our service. We also enter into non-disclosure agreements to
protect our confidential information furnished to third parties for research and
other purposes. These types of agreements can be difficult to enforce and for
some types of breach there is no satisfactory remedy for unauthorized
disclosures. It is possible that our trade secrets and proprietary know-how will
become known or will be independently discovered by others despite our efforts.
Our commercial success will also depend in part on our ability to
commercialize products without infringing patents or other proprietary rights of
others or breaching the licenses granted to us. If we are not able to obtain a
license to any third-party technology needed for our business at a reasonable
cost, we might have to stop developing the product.
As with any pharmaceutical company, our patent and other proprietary
rights are uncertain. The patent rights related to our products might conflict
with current or future proprietary rights of others. For the same reasons the
products of others could infringe our patent or proprietary rights. Litigation
or patent interference proceedings, either of which could result in substantial
cost, might be necessary to enforce any patents or other proprietary rights
issued to us or to determine the scope and validity or enforceability 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 us. Any adverse outcome could make us pay damages to
third parties, require disputed rights to be licensed from third parties, or
require us to cease selling our products.
Government Regulation
Our research and development activities and the manufacturing and
marketing of our 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 our products under development, we 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. Our clinical trials may not
successfully demonstrate the safety and efficacy of any products or result in
marketable products.
The steps required by the FDA before new drug or cell therapy products may
be marketed in the United States include:
. preclinical studies;
. the submission to the FDA of a request for authorization to conduct
clinical trials on an investigational new drug or cell therapy, which
must become effective before human clinical trials may commence;
27
<PAGE>
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug or cell therapy for its intended use;
. submission to the FDA of a New Drug Application, or NDA, for a drug, or
submission to the FDA of a Biological License Application, or BLA, in
the case of a cell therapy; and
. review and approval of the NDA or BLA by the FDA before the product may
be shipped or sold commercially.
In addition to obtaining FDA approval for each product, each manufacturing
and cell processing establishment must be registered with the FDA and undergo an
inspection prior to the approval of an NDA or BLA. Each manufacturing facility,
and its quality control and manufacturing procedures must also conform and
adhere at all times to the FDA's cGMP regulations. In addition to preapproval
inspections, the FDA and other government agencies regularly inspect
manufacturing facilities for compliance with these requirements. Manufacturers
must expend time, money and effort in the area of production and quality control
to ensure full technical compliance with these standards.
Preclinical testing includes laboratory evaluation and characterization of
the safety and efficacy of a drug or cell therapy and its formulation.
Preclinical testing results are submitted to the FDA as a part of an
Investigational New Drug Application, or IND, which must become effective prior
to commencement of human clinical trials. Clinical trials are typically
conducted in three sequential phases following submission of an IND. Phase 1
represents the initial administration of the drug or cell therapy 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 of effectiveness. Phase 2 involves studies in a small sample of the
actual intended patient population to assess the efficacy of the drug or cell
therapy 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 or cell therapy is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, Phase 3 studies are initiated to further establish clinical safety
and efficacy of the therapy in a broader sample of the general patient
population, in order to determine the overall risk-benefit ratio of the drug or
cell therapy and to provide an adequate basis for any physician labeling. During
all clinical studies, we must take care to adhere to good clinical practice, or
GCP, standards. The results of the research and product development,
manufacturing, preclinical studies, clinical studies and related information are
submitted in an NDA or BLA to the FDA.
The process of completing clinical testing and obtaining FDA approval for
a new drug or cell therapy 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 or BLA. Even after 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 or cell
therapy. Results of post-marketing programs may limit or expand the further
marketing of the products. Further, if there are any modifications to the drug
or cell therapy, including changes in indication, manufacturing process,
labeling or a change in manufacturing facility, an NDA or BLA supplement may be
required to be submitted to the FDA.
The rate of completion of our clinical trials will be 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
trial, the availability of alternative therapies and drugs, 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 us.
Failure to comply with applicable FDA requirements may result in a number
of consequences that could materially and adversely affect us. Failure to adhere
to approved trial standards and GCPs 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. Noncompliance with
GCPs could also have a negative impact on FDA's evaluation of an NDA or BLA.
Failure to adhere to GMPs and other applicable requirements could result in FDA
enforcement action and in civil and criminal sanctions, including but not
limited to fines, seizure of product, refusal of the FDA to approve product
approval applications, withdrawal of approved applications, and 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,
28
<PAGE>
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.
In addition to the regulatory framework for product approvals, we and our
collaborative partners must comply with laws and regulations regarding
occupational safety, laboratory practices, the use, handling and disposition of
radioactive materials, environmental protection and hazardous substance control,
and other local, state, federal and foreign regulation. The impact of such
regulation upon us cannot be predicted and could be material and adverse.
Employees
As of October 31, 2000, we had 21 employees. We enhance our research and
development activities with sponsored research at Universities, collaborators,
consultants and clinical research organizations. None of our employees is
represented by a labor union. We consider our employee relations to be good. We
are highly dependent on the principal members of our management and scientific
staff. The loss of certain key employees could have a material adverse effect on
us. In addition, we believe that our future success will depend in large part
upon our ability to attract and retain highly skilled scientific and managerial
personnel. We face competition for such personnel from other companies, research
and academic institutions, government entities and other organizations. We might
not be successful in hiring or retaining the personnel we require.
Properties
Incara currently leases 9,444 square feet of office space in Research
Triangle Park, North Carolina, which is leased through April 2001. We believe
that these leased facilities or other facilities available in the area will be
adequate to meet our current and future needs.
Legal Proceedings
The Company is not a party to any legal proceedings.
Discontinued Programs
Our historical cash expenditures prior to December 31, 1999 were
significantly higher than our current cash spending rate. This lower level of
expenditures has resulted from the discontinuation of the IRL and BEXTRA
programs.
IRL
On December 29, 1999, we completed the sale of Incara Research
Laboratories, or IRL, our anti-infective drug discovery division, to a
subsidiary of Advanced Medicine, Inc., a private pharmaceutical company, for a
cash payment of $11,000,000 and the right to receive future payments totaling up
to an additional $4,000,000 in the event a compound originating from the
collaboration with Merck & Co., Inc. reaches preclinical and clinical trial
milestones. We currently do not expect to receive additional payments from the
purchaser. The transaction involved the sale of assets associated with Incara's
anti-infective division, including rights under the collaboration agreement with
Merck, and the assumption of related liabilities by the purchaser. Expenses for
IRL were $1,339,000 and $8,245,000 for the fiscal years ended September 30, 2000
and 1999, respectively. We do not expect any additional expenses for IRL. As a
result of the sale of IRL, we remain contingently liable through May 2007 on
debt and lease obligations assumed by the purchaser, including the IRL facility
lease in Cranbury, New Jersey. This contingent liability was approximately
$8,328,000 in September 2000 and should decline on an approximately straight-
line basis to zero in May 2007.
BEXTRA
Until July 1999, our most advanced product was BEXTRA (bucindolol HCl), a
beta-blocker that was being evaluated in a Phase 3 clinical trial conducted by
the National Institutes of Health and the United States Department of Veterans
Affairs for use in treating congestive heart failure patients. The study was
terminated in July 1999 prior to its scheduled termination date based on an
interim analysis by the Data and Safety Monitoring Board that showed that
treatment with bucindolol did not demonstrate a statistically significant
improvement in survival in the patient population as a whole. Based on this
result, we agreed to end our collaboration with BASF Pharma/Knoll AG for
29
<PAGE>
BEXTRA for countries outside the United States and Japan, and we terminated the
European trial of BEXTRA. We do not expect to pursue further development of the
compound for this or any other indication. The compound was being developed with
Interneuron Pharmaceuticals, Inc. through a jointly owned company named CPEC
LLC. BEXTRA related expenses were $6,469,000 for fiscal 1999.
MANAGEMENT
Directors And Executive Officers
Our executive officers and directors and their ages as of October 31, 2000
are as follows;
<TABLE>
<CAPTION>
Age Position
--- --------
<S> <C>
Clayton I. Duncan......... 51 Director, President and Chief Executive Officer
David B. Sharrock......... 64 Director
Edgar H. Schollmaier...... 66 Director
Stephen M. Prescott, M.D.. 52 Director
Richard W. Reichow........ 49 Executive Vice President and Chief Financial Officer
David P. Ward, M.D........ 54 Executive Vice President, Research and Development
John P. Richert........... 50 Vice President, Market Development
W. Bennett Love........... 45 Vice President, Corporate Planning/Communications
</TABLE>
Clayton I. Duncan has been President, Chief Executive Officer and a
director of Incara since January 1995. From 1989 until December 1993, Mr. Duncan
was President and Chief Executive Officer of Sphinx Pharmaceuticals Corporation,
a biopharmaceutical company which was acquired by Eli Lilly and Company 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., CPEC LLC, and Renaissance Cell Technologies, Inc., all of
which are subsidiaries of Incara. Mr. Duncan received an M.B.A. from the
University of North Carolina at Chapel Hill. In addition, Mr. Duncan is a
director of The Forest at Duke, a continuing care retirement community and
Chairman of the Board of Directors of the Carolina Ballet, a professional ballet
company.
David B. Sharrock has been a director of Incara since October 1995. Mr.
Sharrock was associated with Marion Merrell Dow, Inc., a multi-national
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
Pharmaceuticals, Inc. and Broadwing Inc.
Edgar H. Schollmaier has been a director of Incara since May 1998. Mr.
Schollmaier is Chairman of Alcon Laboratories, Inc., 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.
Stephen M. Prescott, M.D. was elected to the Board in April 2000. Dr.
Prescott is the Executive Director of the Huntsman Cancer Institute at the
University of Utah in Salt Lake City. Dr. Prescott received his M.D. degree from
Baylor College of Medicine in 1973 and then completed training in Internal
Medicine at the University of Utah. Dr. Prescott subsequently undertook advanced
research training in biochemistry and molecular biology at Washington University
School of Medicine. He joined the faculty at the University of Utah in 1982 and
currently is a Professor of Internal Medicine at the University of Utah and
holds the H.A. & Edna Benning Presidential Endowed Chair in Human Molecular
Biology and Genetics. From 1998 until 1999, Dr. Prescott was Director of the
Program in Human Molecular Biology & Genetics in the Eccles Institute at the
University of Utah.
30
<PAGE>
Richard W. Reichow has been Executive Vice President since July 1998,
Secretary since October 1995, and Senior Vice President, Chief Financial Officer
and Treasurer since March 1995. Mr. Reichow was employed by Sphinx as President
and Chief Executive Officer from December 1993 to September 1994, as Vice
President, Finance & Administration from August 1991 to September 1994, and as
Chief Financial Officer and Treasurer from March 1990 to September 1994. Between
September 1994 and March 1995, he was an independent financial consultant. Mr.
Reichow was Vice President, Chief Financial Officer and Treasurer of CRX Medical
from 1987 to 1990. Mr. Reichow is a Certified Public Accountant.
David P. Ward, M.D. has been Executive Vice President, Research and
Development of Incara since July 1998, and was Senior Vice President, Research &
Development from March 1995 to July 1998. 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 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 a Vice President in various clinical areas. Dr. Ward
received his M.D. degree from Case Western Reserve University Medical School.
John P. Richert has been employed by Incara since 1995, and has been
Vice President, Market Development since December 1996. Mr. Richert served as
Director, Market Development with Sphinx from 1991 to 1994. Mr. Richert was
employed by Schering-Plough Corporation, a major pharmaceutical manufacturer,
from 1981 to 1990 where he held positions of increasing responsibility in
marketing. Mr. Richert received an M.B.A. in Pharmaceutical Marketing from
Fairleigh-Dickinson University.
W. Bennett Love has been employed by Incara since 1995, and has been Vice
President, Corporate Planning/Communications since June 1997. From 1990 to 1994,
Mr. Love was employed as Sphinx as Director, Corporate Planning/ Communications.
From 1983 through 1989, he was an investment banker with a regional securities
firm. Mr. Love received an M.B.A. from the University of North Carolina at
Chapel Hill.
31
<PAGE>
Executive Compensation
Summary Compensation
The following table sets forth all compensation earned for services
rendered to it in all capacities for the fiscal years ended September 30, 2000,
1999 and 1998, by Incara's Chief Executive Officer and by the four most highly
compensated executive officers who earned at least $100,000 in the respective
fiscal year (collectively, the "Named Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
------------------------- --------------------------------------
Name and Fiscal Stock Options Restricted Stock All Other
Principal Position Year Salary Bonus (Shares) (Shares) (2) Compensation (1)
------------------ -------- ----------- ----------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan 2000 $ 322,500 $ 30,000 --- --- $2,823
President and Chief 1999 300,000 84,000 --- 188,375 2,934
Executive Officer 1998 295,225 78,652 235,877 --- 2,791
David P. Ward, M.D. 2000 252,625 30,844 --- --- 3,340
Executive Vice President, 1999 235,000 51,994 --- 120,000 3,993
Research & Development 1998 221,250 44,520 140,000 --- 3,657
Richard W. Reichow 2000 252,625 31,844 --- --- 2,762
Executive Vice President, 1999 235,000 54,637 --- 120,000 3,044
Chief Financial Officer, 1998 212,250 46,825 140,000 --- 2,811
Treasurer and Secretary
W. Bennett Love 2000 131,150 13,344 --- --- 1,664
Vice President, Corporate 1999 122,000 23,028 --- 44,000 1,608
Planning/Communications 1998 117,333 17,480 54,000 --- 1,554
John P. Richert 2000 131,150 9,531 --- --- 1,159
Vice President, 1999 122,000 22,341 --- 49,000 1,200
Market Development 1998 119,083 18,262 59,000 --- 1,126
</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) As of September 23, 1999, the Named Officer purchased the number of
shares of restricted stock indicated at par value ($0.001 per share) and
cancelled stock options to purchase an equal number of shares of common
stock. The shares of restricted stock vest over three years from the date
of grant and vesting could be accelerated pursuant to a change of control
or an involuntary termination of employment. As of September 30, 2000 a
total of 66,884 shares had vested for Mr. Duncan, 40,494 shares for Dr.
Ward, 40,494 shares for Mr. Reichow, 12,696 shares for Mr. Love and
14,570 shares for Mr. Richert. The value of the restricted stock received
by the Named Officer, based on the closing price of Incara's stock on
September 23, 1999 ($0.625), was as follows: for Mr. Duncan $117,546; for
Dr. Ward $74,880; for Mr. Reichow $74,880; for Mr. Love $27,456; and for
Mr. Richert $30,625.
Management Incentive Plan
The Compensation Committee and the Board of Directors have approved a
Management Incentive Plan ("MIP") for the executive officers of Incara.
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 September 30, 2000, the corporate objectives related to financing
and our three research and development programs. For the calendar years
ended December 31, 1999 and 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 2000 have not yet
been evaluated.
32
<PAGE>
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values
No stock option grants were made to any of the Named Officers during
the fiscal year ended September 30, 2000.
The following table sets forth certain information concerning all stock
options exercised during the fiscal year ended September 30, 2000 by the Named
Officers, and the number and value of unexercised options held by the Named
Officers as of September 30, 2000:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Value of
Securities Underlying Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value at September 30, 2000 at September 30, 2000 (2)
--------------------------------- ----------------------------------
Name on Exercise Realized (1) Exercisable Unexerciseable Exercisable Unexerciseable
---------------------- ------------- ------------- ------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Clayton I. Duncan 100,000 $232,750 151,557 - $ 420,267 $ -
David P. Ward, M.D. - - 116,500 - $ 338,448 $ -
Richard W. Reichow 40,000 $93,100 75,800 - $ 215,737 $ -
W. Bennett Love - - 36,000 - $ 85,500 $ -
John P. Richert - - 36,000 - $ 97,500 $ -
</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, 2000 ($3.375), as quoted on
the Nasdaq Stock Market, and the exercise price of the options.
Employment Agreements
In September 1999, Incara entered into individual severance agreements with
Mr. Duncan, Dr. Ward, Mr. Reichow, Mr. Love and Mr. Richert. The severance
agreements provide that if the officer's employment with Incara is terminated,
without just cause, subsequent to a change in control as defined in the
severance agreements, such officer shall receive a severance benefit of two and
one-half times his annual base salary and average bonus.
In December 1997, Incara entered into a three-year employment agreement
with Mr. Duncan. The agreement provides for an annual base salary (which was
increased to $330,000 in January 2000) and annual bonuses based on the
achievement of performance milestones to be mutually agreed upon by Mr. Duncan
and the Board or its 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 Incara, directly or indirectly. In the event Mr. Duncan's
employment is terminated by the Board, other than in a change in control and
without just cause, Incara 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, Incara 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
mutually agreed upon by the officer and the Chief Executive Officer, the Board
or the Compensation Committee. Each agreement also provides that during its term
and, unless the employee terminates his employment for cause, for a period of
nine months thereafter, the employee will not compete with Incara, directly or
indirectly. In the event that the employment of Dr. Ward or Mr. Reichow is
terminated by the Board, other than in a change in control and without just
cause, Incara shall continue to pay, for a period of nine months, Dr. Ward or
Mr. Reichow, as the case may 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 1998, Incara entered into three-year employment agreements with
Mr. Love and Mr. Richert. The agreements provide for base salary and annual
bonus 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. Each agreement also provides that during its term and,
unless the officer terminates his employment for cause, for a period of six
months thereafter, the officer will not compete with Incara, directly or
indirectly. In the event that the
33
<PAGE>
employment of the officer is terminated by the Board, other than in a change in
control and without just cause, Incara shall continue to pay the officer 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. From October 1, 1999 and through January
17, 2000, each director who was not an employee of Incara received a fee of
$2,000 per Board meeting attended in person. In addition, the 1994 Stock Option
Plan provided for the grant of nonstatutory options to non-employee directors of
Incara pursuant to a non-discretionary, automatic grant mechanism (the
"Automatic Grant Program"). Each non-employee director of Incara ("Eligible
Director") was granted a stock option to purchase 5,000 shares of Incara common
stock on the date each such person first became an Eligible Director. Each
Eligible Director thereafter was granted automatically each year upon re-
election (except in the year his or her initial director stock option was
granted) an option to purchase 3,000 shares of Incara common stock as long as
such director was a member of the Board. The exercise price of options granted
under the Automatic Grant Program was the fair market value of Incara's common
stock on the date of grant. Such options became exercisable ratably over 36
months commencing one month from the date of grant and expire the earlier of 10
years after the date of grant or 90 days after termination of the director's
service on the Board.
After a review of director compensation programs of other companies in its
industry, on January 18, 2000, the Compensation Committee and the Board adopted
a new compensation program for Eligible Directors. Each Eligible Director will
receive an annual retainer of $13,000 and will receive a fee of $500 for each
Board meeting attended in person. The annual retainer will be due on the date
that the Eligible Director is elected or re-elected to the Board of Directors.
Directors may elect to receive all or a portion of their annual retainer as an
option to purchase common stock. Any remainder will be paid in cash. Any option
elected will enable the director to purchase a number of shares equal to three
times the number of shares that could have been purchased with the portion of
the annual retainer elected to be received as option. The exercise price per
share for the option will be the fair market value of the common stock on the
date of the grant. The date of grant will be the date the annual retainer is
granted to the director. These options will be fully vested upon grant and will
be exercisable for ten years from the date of the grant. This director
compensation program was adopted on January 18, 2000, subject to the transition
policy that the date of the annual retainer and the grant date was January 18,
2000 for each Eligible Director who was a director on the date the program was
adopted and the director did not receive any additional retainer at the
following Annual Meeting. In addition, the Automatic Grant Program was revised
to increase the initial stock option grant for new Eligible Directors from 5,000
shares to 10,000 shares and the annual automatic stock option grant was
increased from 3,000 shares to 6,000 shares. The options will become exercisable
ratably over 36 months commencing one month from the date of grant and will
expire 10 years after the date of grant.
Compensation Committee Interlocks and Insider Participation
During fiscal 2000, the Compensation Committee consisted of Joseph J.
Ruvane, Jr., Mr. Sharrock, Mr. Schollmaier and Dr. Prescott. Mr. Ruvane, Mr.
Sharrock, Mr. Schollmaier and Dr. Prescott were not at any time during fiscal
2000 or at any other time an officer or employee of Incara. No executive officer
of Incara 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 Incara or the Compensation Committee. Mr. Ruvane died
in June 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 26, 2000, Incara purchased from each of Lola M. Reid and James D.
Crapo, both of whom are consultants to Incara, 18,000 shares of our common stock
at a per share price of $2.25, the closing price as listed on Nasdaq on July 26,
2000. Incara repurchased these shares in order to comply with Nasdaq Rule 4460,
which limits the amount of our common stock we can issue under certain
circumstances without stockholder approval. The shares repurchased were issued
to Drs. Reid and Crapo in the acquisitions of Renaissance Cell Technologies and
Aeolus Pharmaceuticals on March 31, 2000.
On March 31, 2000, Incara purchased all of the minority interests of
Renaissance Cell Technologies, Inc. and Aeolus Pharmaceuticals, Inc. Prior to
the acquisition, Incara owned 78.0% of Renaissance and 65.8% of Aeolus. Incara
issued 1,220,041 shares of its common stock in exchange for the subsidiaries'
minority ownership. The acquisition has been accounted for using the purchase
method of accounting. The total purchase price of $6,664,000 consisted of
1,220,041 shares of Incara's common stock with a fair market value of $5.46 per
share,
34
<PAGE>
based on the price of the Company's common stock at the date of acquisition. The
total purchase price was allocated to purchased in-process research and
development and immediately charged to operations because the in-process
research purchased was in preclinical stages and feasibility had not been
established at the date of the acquisition and was deemed to have no alternative
future use. Additionally, Renaissance and Aeolus had no workforce or other
tangible fixed assets.
In January 2000, the Company's Board of Directors authorized the repurchase
of up to $2,000,000 of Incara's common stock during the following two months
through purchases on the stock market. During that period, the Company
repurchased 104,100 shares of common stock at a cost of $331,000.
On July 15, 1999, Incara restructured its corporate relationship with
Interneuron Pharmaceuticals, Inc. to reduce Interneuron's majority ownership of
Incara in exchange for an increased ownership by Interneuron of CPEC, Inc. (the
"Restructuring"). Prior to the Restructuring, CPEC, Inc. was owned 80.1% by
Incara and 19.9% by Interneuron. As a preliminary step in the Restructuring,
Incara acquired Interneuron's 19.9% interest in CPEC, Inc., which was then
merged into CPEC LLC, a Delaware limited liability company. Incara redeemed
4,229,381 of the 4,511,084 shares of Incara common stock owned by Interneuron,
in exchange for a 65.0% ownership of CPEC LLC and cancellation of certain
liabilities owed to Interneuron by Incara and CPEC, Inc. which totalled
$2,421,000.
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. in a merger of Transcell with and into Incara and also
acquired certain related technology rights held by Interneuron in exchange for
Incara common stock with an aggregate market value of $14,200,000. In addition,
Incara issued replacement stock options and warrants to purchase 241,705 shares
and 17,783 shares, respectively, of Incara common stock to Transcell employees
consultants and warrant holders, with a total estimated value of $1,507,000.
Prior to the Transcell merger, Transcell and Incara were both majority-owned
subsidiaries of Interneuron. Under the terms of the Agreement and Plan of Merger
between Incara, Transcell and Interneuron dated March 2, 1998, Transcell
stockholders received Incara common stock in three installments. The first
installment of 320,151 shares was issued upon closing the transaction on May 8,
1998 (the "Closing"). In exchange for certain license and technology rights held
by Interneuron, and for Interneuron's continuing guarantee of certain of
Transcell's lease obligations, Incara issued to Interneuron 174,672 shares of
Incara common stock at Closing with a value of $3,000,000 and agreed to pay
Interneuron a royalty on net sales of certain products that might result from a
Research Collaboration and Licensing Agreement originally entered into among
Transcell, Interneuron and Merck & Co., Inc. In lieu of the second installment
payment due to Interneuron, Interneuron retained 281,703 shares of Incara common
stock as part of the Restructuring. On August 9, 1999, Incara issued 867,583
shares of Incara common stock, valued at approximately $1.38 per share, to the
other former Transcell stockholders as payment for their second installment in
the principal amount of $1,202,000. On February 8, 2000, Incara issued 856,861
shares of Incara common stock, valued at approximately $3.36 per share, to
Interneuron and the other former Transcell stockholders as payment for the third
and final installment in the principal amount of $2,881,000.
Incara has adopted a policy that all transactions between Incara and its
executive officers, directors and other affiliates must be approved by a
majority of the members of the Board of Directors of Incara and by a majority of
the disinterested members of the Board, and must be on terms no less favorable
to Incara than could be obtained from unaffiliated third parties. In addition,
the policy requires that any loans by Incara to its executive officers,
directors or other affiliates be for bona fide business purposes only.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of shares of Incara's common stock as of October 31, 2000 by
. each person known by Incara to beneficially own more that 5% of the
outstanding shares of common stock,
. each director of Incara,
. each executive officer of Incara, and
. all directors and executive officers of Incara 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.
As of October 31, 2000 Incara had 7,365,849 shares of common stock
outstanding. Share ownership in
35
<PAGE>
each case includes shares issuable upon exercise of options that may be
exercised within 60 days after October 31, 2000 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.
<TABLE>
<CAPTION>
Beneficially Percentage
Owned Owned
-------------- ---------------
<S> <C> <C>
Clayton I. Duncan (1)................................................... 674,360 9.0%
3200 East Highway 54, Cape Fear Building , Suite 300
Research Triangle Park, North Carolina 27709
David B. Sharrock (2)................................................... 46,701 *
Edgar H. Schollmaier (3)................................................ 34,256 *
Stephen M. Prescott, M.D. (3)........................................... 15,878 *
David P. Ward, M.D. (4)................................................. 247,070 3.3%
Richard W. Reichow (5).................................................. 300,703 4.0%
W. Bennett Love (6)..................................................... 115,368 1.6%
John P. Richert (7)..................................................... 115,205 1.6%
Lola M. Reid (8)........................................................ 555,890 7.4%
3621 Sweeten Creek Road
Chapel Hill, North Carolina 27514
James D. Crapo (9)...................................................... 495,951 6.6%
4650 South Forest St.
Englewood, Colorado 80110
Interneuron Pharmaceuticals, Inc........................................ 482,011 6.5%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02421
All directors and executive officers as a group (8 persons) (10)........ 1,549,541 19.6%
</TABLE>
(1) Includes 362,470 shares owned (of which, 107,992 shares are unvested shares
of restricted stock) by Mr.Duncan, 152,000 shares owned by Mr. Duncan's
children, and 159,890 shares issuable upon exercise of options held by Mr.
Duncan. Mr. Duncan disclaims beneficial ownership of the shares held by his
children. Mr.Duncan is Chairman of the Board of Directors, President and
Chief Executive Officer of Incara.
(2) Includes 1,000 shares owned and 45,701 shares issuable upon exercise of
options held by Mr. Sharrock, a director of Incara.
(3) Consists of shares issuable upon exercise of options held by the named
individual, a director of Incara.
(4) Includes 125,014 shares owned (of which, 70,672 shares are unvested shares
of restricted stock) and 122,056 shares issuable upon exercise of options
held by Dr. Ward, an executive officer of Incara.
(5) Includes 219,347 shares owned (of which, 70,672 shares are unvested shares
of restricted stock) and 81,356 shares issuable upon exercise of options
held by Mr. Reichow, an executive officer of Incara.
(6) Includes 77,702 shares owned (of which 27,826 shares are unvested shares of
restricted stock) and 37,666 shares issuable upon exercise of options held
by Mr. Love, an executive officer of Incara.
(7) Includes 77,539 shares owned (of which, 30,604 shares are unvested shares
of restricted stock) and 37,666 shares issuable upon exercise of options
held by Mr. Richert, an executive officer of Incara.
(8) Includes 314,286 shares owned by Dr. Reid and 131,604 shares owned by Dr.
Mark Furth, Dr. Reid's husband and 110,000 shares issuable upon exercise of
options held by Dr. Reid. Dr. Reid disclaims beneficial ownership of the
shares held by her husband.
(9) Includes 339,951 shares owned by Dr. Crapo and 156,000 shares issuable upon
exercise of options held by Dr. Crapo.
(10) See footnotes (1)-(7).
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Incara 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 October 31, 2000, there were 7,365,849 shares of common stock
outstanding, 1,941,160 shares of common stock issuable upon the exercise of
outstanding stock options and 66,816 shares of common stock issuable upon the
exercise of warrants.
Holders of shares of the 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
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
Incara, the holders of shares of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
distributions rights applicable to any outstanding shares of preferred stock.
Shares of common stock have no preemptive, conversion or other subscription
rights, and there are no redemption or sinking fund provisions applicable to the
common stock.
Preferred Stock
The Company has the authority to issue up to 3,000,000 shares of preferred
stock. The Board of Directors 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 Incara. Because the terms of the
preferred stock may be fixed by the Board of Directors of Incara without
stockholder action, the preferred stock could be issued quickly with terms
calculated to defeat a proposed take-over of Incara or to make the removal of
management of Incara more difficult. Under certain circumstances this could
have the effect of decreasing the market price of the common stock. Management
of Incara is not aware of any threatened transaction to obtain control of
Incara. As of October 31, 2000, there were no shares of preferred stock
outstanding.
Warrants
As of October 31, 2000, warrants to purchase 66,816 shares were
outstanding, 49,033 of which are exercisable at an exercise price of $8.25 per
share and expire on February 2001, and 17,783 of which are exercisable at an
exercise price of $13.49 per share and expire on May 2003. Each warrant
contains provisions for the adjustment of the exercise price under certain
circumstances, including sales of stock at less than the exercise price, stock
dividends, stock splits, reorganizations, reclassifications or mergers.
Section 203 of the Delaware Corporation Law
Section 203 of the General Corporation Law of the State of Delaware (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:
. 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;
. upon consummation of the transaction that resulted in the interested
stockholder's 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 plant will be tendered in a tender or exchange offer); or
. 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
37
<PAGE>
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 Incara and therefore could discourage attempts to acquire Incara.
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:
. shall be indemnified by the corporation for all expenses of such legal
proceedings when he is successful on the merits;
. 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
. 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.
The indemnification discussed in clauses two and three 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. The indemnification discussed
in clause three above may be made, 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.
Article Seventh of Incara'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 Incara. The indemnification
provided by Incara'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
. for any breach of the director's duty of loyalty to the corporation or its
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under Section 174 of the DGCL, or
. for any transaction from which the director derived an improper personal
benefit.
Article Ninth of Incara'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.
We maintain liability insurance on our officers and directors against
liabilities that they may incur in such capacities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is American Stock
Transfer and Trust Company.
38
<PAGE>
SELLING STOCKHOLDER
The shares being offered by Torneaux consist of shares of common stock that
it may purchase from us pursuant to the common stock purchase agreement,
including upon exercise of warrants issued pursuant to the purchase agreement.
For additional information about the purchase agreement, see "Financing
Arrangement with Torneaux Fund Ltd." The address of Torneaux is c/o Mees
Pierson Fund Services (Bahamas) Ltd., Montague Sterling Centre, East Bay Street,
P.O. Box SS-6238 Nassau, Bahamas.
The following table sets forth information about the beneficial ownership
of our common stock by Torneaux as of October 31, 2000.
<TABLE>
<CAPTION>
Shares Of Common Stock Number Of Shares Of Common
Beneficially Owned Prior Stock Beneficially Owned
To The Offering Number Of Shares Following The Offering
--------------------------- Of Common Stock -----------------------------
Name of Selling Stockholder Number Percent Being Offered Number Percent
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Torneaux Fund Ltd. 0 0 Up to 2,940,332(1) 0(2) 0
</TABLE>
(1) Includes 383,522 shares of common stock issuable pursuant to warrants
issuable to Torneaux at a per share price equal to 115% of the applicable
purchase price of the common shares on any given settlement date.
(2) Assumes the resale of 2,556,810 shares of common stock which we have the
right to cause Torneaux to purchase pursuant to the common stock purchase
agreement and the resale of up to 383,522 shares of common stock that
Torneaux may acquire upon exercise of warrants which may be issued to
Torneaux pursuant to the agreement. The shares offered hereby are to be
acquired by Torneaux pursuant to the purchase agreement or upon the
exercise of warrants.
PLAN OF DISTRIBUTION
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing:
. the name of any broker-dealers;
. the number of shares of common stock involved;
. the price at which the common stock is to be sold;
. the commissions paid or discounts or concessions allowed to such broker-
dealers, where applicable;
. that such broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, as
supplemented; and
. other facts material to the transaction.
We and Torneaux, as the selling stockholder, will be subject to applicable
provisions of the Exchange Act and the rules and regulations under it,
including, without limitation, Rule 10b-5 and, insofar as the selling
stockholder is a distribution participant and we, under certain circumstances,
may be a distribution participant, Regulation M. All of the foregoing may
affect the marketability of the common stock.
TORNEAUX FUND LTD.
We have been advised by Torneaux that it may sell the common stock from time
to time in transactions on the Nasdaq National Market (or any exchange where the
common stock is then listed), in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices which may be changed, at market
prices at the time of sale, at prices related to market prices or at negotiated
prices. Torneaux may effect these transactions by selling the common stock to
or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from Torneaux or the purchasers of the
common stock for whom the broker-dealer may act as an agent or to whom it may
sell the common stock as a principal, or both. The compensation to a particular
broker-dealer may be in excess of customary commissions. Neither we nor
Torneaux can presently estimate the amount of such compensation.
Torneaux is an underwriter within the meaning of the Securities Act in
connection with the sale of the common stock offered hereby. Assuming that we
are in compliance with the conditions of the common stock
39
<PAGE>
purchase agreement, Torneaux must accept puts of shares from us, subject to
maximum aggregate dollar amounts, during the term of the purchase agreement.
Broker-dealers who act in connection with the sale of the common stock may also
be deemed to be underwriters. Profits on any resale of the common stock as a
principal by such broker-dealers and any commissions received by such broker-
dealers may be deemed to be underwriting discounts and commissions under the
Securities Act. Any broker-dealer participating in such transactions as agent
may receive commissions from Torneaux (and, if they act as agent for the
purchaser of our common stock, from such purchaser). Broker-dealers may agree
with Torneaux to sell a specified number of shares of our common stock at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for Torneaux, to purchase as principal any unsold common
stock at the price required to fulfill the broker-dealer commitment to Torneaux.
Broker-dealers who acquire common stock as principal may thereafter resell the
common stock from time to time in transactions (which may involve crosses and
block transactions and which may involve sales to and through other broker-
dealers, including transactions of the nature described above) in the over-the-
counter market, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices, and in connection with
such resales may pay to or receive from the purchasers of such common stock
commissions computed as described above.
The common stock offered hereby is being registered pursuant to our
contractual obligations with Torneaux, and we have agreed to pay the costs of
registering the shares hereunder. We have also agreed to reimburse Torneaux's
costs and expenses incurred in connection with the common stock purchase
agreement, including fees, expenses and disbursements of counsel for Torneaux
for the preparation of the purchase agreement up to a maximum of $35,000, and
all reasonable fees incurred in connection with any amendment, modification or
waiver, to or enforcement of the agreement. We will pay all of the expenses
incident to the registration, offering and sale of the common stock to the
public other than commissions or discounts of underwriters, broker-dealers or
agents.
The price at which the common shares will be issued by us to Torneaux will be
between 88% and 92% of the daily volume weighted average price over a 20-day
trading period on the Nasdaq National Market, and the price at which we issue
the common stock to Torneaux may fluctuate. See "Financing Arrangement with
Torneaux Fund Ltd."
In order to comply with the securities laws of certain states, if applicable,
the shares may be sold only through registered or licensed brokers or dealers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons, we have
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.
With certain exceptions, Regulation M precludes Torneaux, as the selling
stockholder, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connecting with the distribution of that security. All
of the foregoing may affect the marketability of the common stock offered
hereby.
This offering will terminate on the earlier of:
. the date on which the shares of common stock are eligible for resale
without restrictions pursuant to Rule 144 under the Securities Act; or
. the date on which all shares of common stock offered by this prospectus
have been sold by Torneaux.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for us by Wyrick Robbins Yates & Ponton LLP, Raleigh, North
Carolina.
EXPERTS
The financial statements as of September 30, 2000 and 1999 and for each of
the three years in the period ended September 30, 2000 included in this
prospectus have been so included in reliance on the report of
40
<PAGE>
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-1,
including exhibits, schedules and amendments, under the Securities Act with
respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all the information included in the registration
statement. For further information about us and the shares of our common stock
to be sold in this offering, please refer to this registration statement.
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
our registration statement or any other document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
You should call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public at the SEC's
web site at "http:/www.sec.gov."
You may request a copy of our filings, at no cost, by writing or
telephoning us at the following address:
Incara Pharmaceuticals Corporation
Investor Relations
Post Office Box 14287
3200 East Highway 54, Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
(919) 558-8688
You should rely only on the information or representations provided in this
prospectus. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document.
41
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................................................. F-2
Consolidated Balance Sheets - As of September 30, 2000 and 1999.................................................... F-3
Consolidated Statements of Operations - For the fiscal years ended September 30, 2000, 1999 and 1998............... F-4
Consolidated Statements of Stockholders' Equity - For the fiscal years ended September 30, 2000, 1999 and 1998..... F-5
Consolidated Statements of Cash Flows - For the fiscal years ended September 30, 2000, 1999 and 1998............... F-6
Notes to Consolidated Financial Statements......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INCARA PHARMACEUTICALS CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Incara
Pharmaceuticals Corporation and its subsidiaries (the "Company") at September
30, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Raleigh, North Carolina
November 15, 2000
F-2
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 1,877 $ 2,407
Marketable securities............................................. 4,678 2,553
Accounts receivable............................................... 197 282
Prepaids and other current assets................................. 403 237
-------- --------
Total current assets.......................................... 7,155 5,479
Property and equipment, net.......................................... 193 2,483
Other assets......................................................... - 82
-------- --------
$ 7,348 $ 8,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 637 $ 654
Accrued expenses.................................................. 1,807 1,933
Current portion of capital lease obligations...................... 22 488
Current portion of notes payable.................................. 27 197
-------- --------
Total current liabilities..................................... 2,493 3,272
Long-term portion of capital lease obligations....................... 43 399
Long-term portion of notes payable................................... - 582
Stockholders' equity:
Common stock, $.001 par value per share, 40,000,000 shares
authorized, 7,365,849 and 5,226,969 shares issued and
outstanding at September 30, 2000 and 1999, respectively........ 7 5
Additional paid-in capital........................................ 88,951 81,772
Restricted stock.................................................. (239) (744)
Accumulated deficit............................................... (83,907) (77,242)
-------- --------
Total stockholders' equity.................................... 4,812 3,791
-------- --------
$ 7,348 $ 8,044
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Contract and license fee revenue.......................... $ 100 $ 2,088 $ 6,121
-------- -------- --------
Costs and expenses:
Research and development.................................. 7,645 18,996 16,799
Purchase of in-process research and development........... 6,664 - 5,343
General and administrative................................ 2,613 3,045 3,509
-------- -------- --------
Total costs and expenses................................ 16,922 22,041 25,651
-------- -------- --------
Loss from operations........................................ (16,822) (19,953) (19,530)
Gain on sale of division.................................... 9,751 - -
Investment income, net...................................... 406 355 384
-------- -------- --------
Net loss.................................................... $ (6,665) $(19,598) $(19,146)
======== ======== ========
Net loss per common share:
Basic..................................................... $ (1.06) $ (2.98) $ (2.69)
======== ======== ========
Diluted................................................... $ (1.06) $ (2.98) $ (2.69)
======== ======== ========
Weighted average common shares outstanding.................. 6,312 6,583 7,113
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock
-------------------- Additional
Number Par Paid-in Restricted Deferred
of Shares Value Capital Stock Compensation
----------- ------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997.................................. 6,956,545 $ 7 $52,243 $ - $ (296)
Exercise of common stock options............................. 15,576 - 59 - -
Grants of common stock options at below fair value........... - - 1,450 - (1,450)
Stock-based compensation..................................... - - 464 - -
Amortization of deferred compensation........................ - - - - 660
Proceeds from offerings of Employee Stock Purchase Plan...... 13,592 - 142 - -
Contribution to Transcell capital by Interneuron............. - - 18,698 - -
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... 303,440 - 5,343 - -
Net loss for the fiscal year ended September 30, 1998........ - - - - -
---------- --- ------- ----- -------
Balance at September 30, 1998.................................. 7,289,153 7 78,399 - (1,086)
Exercise of common stock options............................. 21,851 - 53 - -
Amortization of deferred compensation........................ - - - - 827
Proceeds from offerings of Employee Stock Purchase Plan...... 67,851 - 134 - -
Contribution of payables to capital by Interneuron........... - - 2,421 - -
Cancellation of common stock returned by Interneuron......... (4,229,381) (4) 4 - -
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... 867,583 1 (1) - -
Write-off of deferred compensation related to common
stock options cancelled.................................... - - (259) - 259
Restricted common stock sold to employees and consultants.... 1,209,912 1 755 (755) -
Stock-based compensation and amortization of Restricted Stock - - 266 11 -
Net loss for the fiscal year ended September 30, 1999........ - - - - -
---------- --- ------- ----- -------
Balance at September 30, 1999.................................. 5,226,969 5 81,772 (744) -
Exercise of common stock options............................. 140,000 - 50 - -
Proceeds from offerings of Employee Stock Purchase Plan...... 208,744 - 122 - -
Common stock issued in conjunction with Transcell Merger..... 856,861 1 (1) - -
Common stock issued in conjunction with Aeolus and
Renaissance mergers........................................ 1,220,041 1 6,663 - -
Stock-based compensation and amortization of Restricted Stock - - 838 424 -
Restricted Stock forfeited................................... (146,666) - (81) 81 -
Common stock repurchased..................................... (140,100) - (412) - -
Net loss for the fiscal year ended September 30, 2000........ - - - - -
---------- --- ------- ----- -------
Balance at September 30, 2000.................................. 7,365,849 $ 7 $88,951 $(239) $ -
========== === ======= ===== =======
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
------------ --------------
<S> <C> <C>
Balance at September 30, 1997.................................. $(38,498) $ 13,456
Exercise of common stock options............................. - 59
Grants of common stock options at below fair value........... - -
Stock-based compensation..................................... - 464
Amortization of deferred compensation........................ - 660
Proceeds from offerings of Employee Stock Purchase Plan...... - 142
Contribution to Transcell capital by Interneuron............. - 18,698
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... - 5,343
Net loss for the fiscal year ended September 30, 1998........ (19,146) (19,146)
-------- --------
Balance at September 30, 1998.................................. (57,644) 19,676
Exercise of common stock options............................. - 53
Amortization of deferred compensation........................ - 827
Proceeds from offerings of Employee Stock Purchase Plan...... - 134
Contribution of payables to capital by Interneuron........... - 2,421
Cancellation of common stock returned by Interneuron......... - -
Common stock issued to unrelated parties in conjunction with
Transcell Merger........................................... - -
Write-off of deferred compensation related to common
stock options cancelled.................................... - -
Restricted common stock sold to employees and consultants.... - 1
Stock-based compensation and amortization of Restricted Stock - 277
Net loss for the fiscal year ended September 30, 1999........ (19,598) (19,598)
-------- --------
Balance at September 30, 1999.................................. (77,242) 3,791
Exercise of common stock options............................. - 50
Proceeds from offerings of Employee Stock Purchase Plan...... - 122
Common stock issued in conjunction with Transcell Merger..... - -
Common stock issued in conjunction with Aeolus and
Renaissance mergers........................................ - 6,664
Stock-based compensation and amortization of Restricted Stock - 1,262
Restricted Stock forfeited................................... - -
Common stock repurchased..................................... - (412)
Net loss for the fiscal year ended September 30, 2000........ (6,665) (6,665)
-------- --------
Balance at September 30, 2000.................................. $(83,907) $ 4,812
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (6,665) $ (19,598) $ (19,146)
Adjustments to reconcile net loss to net cash used in operating activities.......
Depreciation and amortization............................................... 260 771 1,837
Noncash compensation........................................................ 1,262 1,105 1,125
Write-off of in-process research and development............................ 6,664 - 5,343
Gain on sale of division.................................................... (9,751) - -
Loss on disposal of property and equipment.................................. 36 - -
Interest expense on notes to Interneuron.................................... - - 918
Change in assets and liabilities:
Accounts receivable...................................................... 85 814 31
Prepaids and other assets................................................ (170) (117) 120
Accounts payable and accrued expenses.................................... (653) (1,356) (10,054)
Deferred revenue......................................................... - - (500)
----------- ----------- -----------
Net cash used in operating activities............................. (8,932) (18,381) (20,326)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of division................................................... 11,000 - -
Proceeds from sales and maturities of marketable securities...................... 6,468 11,406 20,400
Purchases of marketable securities............................................... (8,593) (1,044) (13,920)
Purchases of property and equipment.............................................. (114) (278) (1,110)
----------- ----------- -----------
Net cash provided by investing activities......................... 8,761 10,084 5,370
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of stock and warrants................................. 172 187 201
Proceeds from capital leases..................................................... 38 - -
Repurchase of common stock....................................................... (412) - -
Proceeds from notes payable...................................................... 2 2 460
Principal payments on notes payable.............................................. (58) (194) (117)
Principal payments on capital lease obligations.................................. (101) (494) (345)
Advances from Interneuron, net................................................... - 556 7,219
----------- ----------- -----------
Net cash provided by (used by) financing activities............... (359) 57 7,418
----------- ----------- -----------
Net decrease in cash and cash equivalents......................... (530) (8,240) (7,538)
Cash and cash equivalents at beginning of period..................................... 2,407 10,647 18,185
----------- ----------- -----------
Cash and cash equivalents at end of period........................................... $ 1,877 $ 2,407 $ 10,647
=========== =========== ===========
Supplemental disclosure of investing and financing activities:
Cash payments of interest........................................................ $ 37 $ 251 $ 222
=========== =========== ===========
Contribution of payables to capital by Interneuron............................... $ - $ 2,421 $ -
=========== =========== ===========
Property and equipment acquired through financing arrangements................... $ 38 $ - $ 110
=========== =========== ===========
</TABLE>
The accompanying notes are in an integral part of the consolidated
financial statements.
F-6
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF THE BUSINESS
The Company conducts discovery and development programs in three areas: (1)
inflammatory bowel disease, using an ultra-low molecular weight heparin; (2)
liver disorders, using a novel form of hepatic progenitor cell therapy; and (3)
novel small molecule catalytic antioxidants for disorders such as stroke and
heart attack.
The "Company" refers collectively to Incara Pharmaceuticals Corporation
("Incara") and its wholly owned subsidiaries, Aeolus Pharmaceuticals, Inc., a
Delaware corporation ("Aeolus"), and Renaissance Cell Technologies, Inc., a
Delaware corporation ("Renaissance"). At September 30, 2000, the Company also
owned a 35.0% interest in CPEC LLC, a Delaware limited liability company
("CPEC").
Until July 15, 1999, Incara was a majority-owned subsidiary of Interneuron
Pharmaceuticals, Inc. ("Interneuron"). On July 15, 1999, Incara restructured its
corporate relationship with Interneuron to reduce Interneuron's majority
ownership of Incara in exchange for an increased ownership by Interneuron of
CPEC (the "Restructuring"). Prior to the Restructuring, CPEC was owned 80.1% by
Incara and 19.9% by Interneuron. Subsequent to the Restructuring, CPEC became
owned 35.0% by Incara and 65.0% by Interneuron (see Note I).
Until July 1999, the Company's most advanced product was BEXTRA(R) (bucindolol
HCl), a beta-blocker that was being evaluated in a Phase 3 clinical trial
conducted by the National Institutes of Health and the U.S. Department of
Veterans Affairs for use in treating congestive heart failure patients. The
agencies terminated the study in July 1999, prior to its scheduled termination
date, because an interim data analysis indicated there was no significant
survival advantage of treatment with bucindolol for the patient population as a
whole. In August 1999, the Company agreed to end the collaboration (the "Knoll
Collaboration") with BASF Pharma/Knoll AG ("Knoll") for BEXTRA for countries
outside the United States and Japan (the "Knoll Territory"), and terminated the
European trial of BEXTRA. The Company does not expect to pursue the compound
further for this or any other indication.
In May 1998, Incara acquired all of the outstanding stock of Transcell
Technologies, Inc. ("Transcell"), a majority-owned subsidiary of Interneuron, in
a merger of Transcell with and into Incara and also acquired certain related
technology rights held by Interneuron in exchange for Incara common stock, stock
options and stock warrants (the "Transcell Merger"). The purchase of
Interneuron's 77.9% interest in Transcell by Incara was treated in a manner
similar to a "pooling-of-interests," because it represented a transfer of stock
between entities under common control, and the acquisition of the non-
Interneuron ownership interest was accounted for by using the "purchase" method
of accounting. All of Transcell's past results of operations have been combined
with the results of operations for the Company, and the Company's financial
statements for all prior periods presented have been restated to reflect the
Transcell Merger.
On December 29, 1999, the Company sold the former Transcell operation, which is
referred to as Incara Research Laboratories ("IRL"), to a private pharmaceutical
company for $11,000,000 and the right to receive up to an additional $4,000,000
in the event a compound originating from the Research Collaboration and
Licensing Agreement (the "Merck Collaboration"), originally entered into among
Transcell, Interneuron and Merck & Co., Inc. ("Merck"), reaches certain
preclinical and clinical trial milestones. The Company currently does not expect
to receive any additional payments from the purchaser. The transaction involved
the sale of assets associated with IRL, including rights under the Merck
Collaboration and the assumption of certain related liabilities by the
purchaser. The Company remains contingently liable through May 2007 on debt and
lease obligations of approximately $8,328,000 assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey.
On March 31, 2000, Incara purchased all of the minority interests of
Renaissance and Aeolus. Prior to the acquisitions, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock in exchange for the subsidiaries' minority ownership. The acquisitions
have been accounted for using the purchase method of accounting. The total
purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's common
stock with a fair value of $5.46 per share, based on the price of the Company's
common stock at the date of acquisition. The total purchase price was allocated
to purchased in-process research and development and immediately charged to
operations because at the date of the acquisition the in-process research
purchased was in preclinical stages, feasibility had not been established and it
was deemed to have no alternative future use.
F-7
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Incara and its wholly owned subsidiaries. The Company uses the
equity method to account for its 35.0% ownership interest in CPEC. 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. The carrying value of cash and
cash equivalents approximate their fair market value at September 30, 2000 and
1999 due to their short-term nature.
Marketable Securities: The Company considers its investment portfolio
available-for-sale. 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. The amortized cost of
marketable securities approximates their market value, yielding no unrealized
holding gains or losses at September 30, 2000 and 1999. At September 30, 2000,
the Company owned $4,678,000 of bank certificates of deposit due within one
year. At September 30, 1999 the Company owned $2,553,000 of corporate notes due
within one year.
Accounts Receivable: The accounts receivable balances at September 30, 2000
and 1999 are primarily comprised of amounts due from Interneuron for a portion
of the amount payable by the Company to Knoll for bucindolol-related
liabilities.
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 years for computers and five
years for equipment. No impairments of property and equipment were required to
be recognized during the fiscal years ended September 30, 2000 and 1999.
Subsequent to the Transcell Merger in May 1998, the Company wrote off $856,000
of property and equipment acquired from Transcell because certain items did not
meet the Company's minimum cost per item capitalization criteria. The majority
of the Company's property and equipment at September 30, 1999 related to the IRL
operations, which was sold in December 1999.
Expenses for repairs and maintenance are charged to operations as incurred. Upon
retirement or sale, the cost of the assets disposed of 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 collaboration or research and
development agreements when services are performed or when contractual
obligations are met. Cash received in advance of revenue recognition is recorded
as deferred revenue.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101, as
amended by SAB 101A and SAB101B, outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Adoption is required by the Company no later than the
quarter ending September 30, 2001. The Company does not expect SAB 101 to have a
significant impact on the Company's revenue recognition policies.
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 either capitalized or expensed based upon the stage of
development of the acquired compound or technology at the date of
acquisition.
F-8
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - 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 net deferred tax assets to the amounts
expected to be realized.
Net Loss Per Common Share: Basic net loss per common share is computed using
the weighted average number of shares of common stock outstanding during the
period. Diluted net loss per common share is computed using the weighted average
number of shares of common and dilutive potential common shares outstanding
during the period. Potential common shares consist of stock options, warrants
and convertible preferred stock using the treasury stock method and are excluded
if their effect is antidilutive. At September 30, 2000 had such potential common
shares not been antidilutive, their effect would be to increase the shares used
in computing diluted net loss per common share by 500,291 shares to 6,812,143
shares.
Accounting for Stock-Based Compensation: The Company accounts for stock-based
compensation based on the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"), which states that
no compensation expense is recorded for stock options or other stock-based
awards to employees that are granted with an exercise price equal to or above
the estimated fair value per share of the Company's common stock on the grant
date. The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires compensation expense to be disclosed
based on the fair value of the options granted at the date of the grant.
Segment Reporting: The Company currently operates in only one segment.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 138 was issued in June 2000 and provides certain amendments
to SFAS 133 and must be implemented at the same time as SFAS 133. SFAS 133 and
SFAS 138 establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
As issued, SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May 1999,
the FASB delayed the effective date of SFAS 133 for one year, to fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company does not
currently use, nor does it intend in the future to use, derivative instruments
and, therefore, does not expect that the adoption of SAFS 133 and SFAS 138 will
have any impact on its financial position or results of operations.
C. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2000 and 1999
(in thousands):
2000 1999
----------- ----------
Office equipment................................. $ 428 $ 735
Laboratory equipment............................. 341 1,411
Leasehold improvements........................... 58 1,774
----------- ----------
827 3,920
Less: accumulated depreciation and amortization.. (634) (1,437)
----------- ----------
$ 193 $ 2,483
=========== ==========
The above amounts included equipment under capital lease obligations with a cost
of $268,000 and $930,000 at September 30, 2000 and 1999, respectively, and a net
book value of $57,000 and $394,000 at September 30, 2000 and 1999, respectively.
Depreciation expense was $260,000 and $771,000 for the fiscal years ended
September 30, 2000 and 1999, respectively.
F-9
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. ACCRUED EXPENSES
At September 30, 2000 and 1999, accrued expenses consisted of the following (in
thousands):
2000 1999
------ ------
Payroll-related liabilities......... $ 446 $ 305
Bucindolol development costs........ 1,350 1,619
Other............................... 11 9
------ ------
$1,807 $1,933
====== ======
E. COMMITMENTS
The Company leases office and laboratory space under non-cancelable operating
leases. Rent expense under non-cancelable operating leases was $423,000,
$1,147,000 and $1,154,000 for the fiscal years ended September 30, 2000, 1999
and 1998, respectively. The Company also leases equipment under capital leases.
At September 30, 2000, the Company's non-cancelable future minimum payments
under lease arrangements were as follows (in thousands):
Operating Capital
Leases Leases
------ ------
2001............................................. $ 116 $ 28
2002............................................. - 28
2003............................................. - 19
-------- -------
Total minimum lease payments..................... $ 116 75
========
Less: amount representing interest............... (10)
-------
Present value of future minimum lease payments... $ 65
=======
The Company remains contingently liable through May 2007 on debt and lease
obligations of approximately $8,328,000 assumed by the purchaser of IRL,
including the IRL facility lease in Cranbury, New Jersey.
F. NOTES PAYABLE
Notes payable at September 30, 2000 and 1999 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Note payable to North Carolina Biotechnology Center, including accrued
interest at 8.75%, principal and interest due in December 2000............... $ 27 $ 25
Note payable to minority stockholder of Renaissance, including accrued
interest at 5.79%............................................................ - 29
Note payable to a financial institution, including accrued interest at 13.4%...... - 297
Note payable to IRL facility landlord, including accrued interest at 11.5%........ - 428
---------- ----------
Notes payable, including current maturities....................................... 27 779
Less: current maturities......................................................... (27) (197)
---------- ----------
Long-term notes payable........................................................... $ - $ 582
========== ==========
</TABLE>
F-10
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
G. STOCKHOLDERS' EQUITY
Preferred Stock: The Certificate of Incorporation of Incara 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, 2000 and 1999.
Common Stock: In May 1998, Incara issued 494,823 shares of common stock as
the first installment of the Transcell Merger (see Note J). In lieu of the
second installment payment due to Interneuron, Interneuron retained 281,703
shares of Incara common stock as part of the Restructuring (see Note I). On
August 9, 1999, Incara issued 867,583 shares of Incara common stock, valued at
approximately $1.38 per share, to the other former Transcell stockholders as
payment for their second installment of the Transcell Merger in the principal
amount of $1,202,000. Incara issued the third and final installment of the
purchase price of 856,861 shares of Incara common stock, valued at approximately
$3.36 per share, to the former stockholders of Transcell on February 8, 2000.
The issuance of these additional shares did not impact the Company's operating
results, because the value of these shares was included in the determination of
the purchase price of Transcell in fiscal 1998.
In January and February 2000, Incara repurchased 104,100 shares of its common
stock at a cost of $331,000 through purchases on the stock market. In July 2000,
Incara purchased from each of Lola M. Reid, Ph.D. and James D. Crapo, M.D., both
of whom are consultants to Incara, 18,000 shares of Incara's common stock at a
per share price of $2.25, the closing price as listed on Nasdaq on July 26,
2000. The shares repurchased had been issued to Drs. Reid and Crapo in the
acquisitions of Renaissance and Aeolus on March 31, 2000.
Restricted Stock: As an integral component of a management and employee
retention program designed to motivate, retain and provide incentive to the
Company's management, employees and key consultants, the Company's Board of
Directors adopted the 1999 Equity Incentive Plan (the "1999 Plan") in September
1999. The 1999 Plan provides for the grant of restricted stock ("Restricted
Stock") awards which entitle employees and consultants to receive up to an
aggregate of 1,400,000 shares of common stock upon satisfaction of specified
vesting periods. During September 1999, an aggregate of 1,209,912 shares of
Restricted Stock were granted to employees and key consultants of the Company
(the "Participants") in consideration of services rendered by the Participants
to the Company, the cancellation of options for an equal number of shares of
common stock and payment of the par value of the shares. A total of 578,437
shares of Restricted Stock were unvested at September 30, 2000. These remaining
shares of Restricted Stock vest in equal quarterly installments through October
2001.
The Company has incurred and will continue to incur compensation expense through
the vesting period of the Restricted Stock. The value of the Restricted Stock
awards of 1,209,912 shares at the date of the grant totaled $755,000, based on
the trading price of the Company's common stock of $0.625 per share. The value
of the Restricted Stock is amortized on a straight-line basis over the vesting
period. The Company recognized $424,000 and $11,000 of expenses related to these
awards during fiscal 2000 and 1999, respectively.
Employee Stock Purchase Plan: In October 1995, Incara adopted the Employee
Stock Purchase Plan (the "ESPP"). In April 2000, the stockholders approved an
amendment to increase the common stock reserved for issuance under the ESPP to
400,000 shares. Offerings are for one-year periods beginning on October 1 of
each year (an "Offering") and are 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.
Common stock is purchased at the end of each Purchase Period with employee
contributions at the lower of 85% of the closing price of Incara's common stock
on the first day of an Offering or the last day of the related Purchase Period.
As of September 30, 2000, Incara had sold 319,072 shares of common stock
pursuant to the ESPP and 80,928 shares were reserved for future issuances.
Stock Option Plan: Under Incara's 1994 Stock Option Plan (the "1994 Plan"),
incentive stock options ("ISOs") or non-qualified stock options to purchase
2,500,000 shares of Incara's common stock may be granted to employees, directors
and consultants of the Company. The exercise price of the ISOs granted under the
1994 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.
Options typically vest over three to four years following the date of the
grant.
F-11
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Stock option activity under the 1994 Plan was as follows:
Weighted Average
Shares Exercise Price
----------- --------------
Outstanding at September 30, 1997...... 1,416,710 $ 9.89
Granted...................... 1,901,886 $ 9.61
Exercised.................... (15,629) $ 3.77
Cancelled.................... (1,032,835) $ 19.18
-----------
Outstanding at September 30, 1998...... 2,270,132 $ 5.47
Granted...................... 95,500 $ 5.66
Exercised.................... (21,851) $ 2.45
Cancelled.................... (1,359,220) $ 7.53
-----------
Outstanding at September 30, 1999...... 984,561 $ 2.70
Granted...................... 781,540 $ 3.93
Exercised.................... (140,000) $ 0.36
Cancelled.................... (288,941) $ 5.57
-----------
Outstanding at September 30, 2000...... 1,337,160 $ 3.05
===========
In August 1998, Incara's Board of Directors approved a resolution whereby
current employees and consultants were granted the right to amend the terms of
stock options with an exercise price greater than $11.00 per share. The amended
options reduced the exercise price to $8.00 per share, which was the trading
value of Incara's stock on the date of the repricing, and extended the vesting
period of the stock options.
F-12
<PAGE>
The details of stock options outstanding at September 30, 2000 were as
follows:
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -------------------------------
Number Weighted Weighted Number
Range of Outstanding at Average Average Exercisable at Weighted
Exercise September 30, Exercise Remaining September 30, Average
Prices 2000 Price Contractual Life 2000 Exercise Price
--------------- ------ -------- ---------------- ---- --------------
<S> <C> <C> <C> <C> <C>
$ 0.04 17,029 $ 0.04 6.1 years - -
$ 0.36 283,048 $ 0.36 4.4 years 283,048 $ 0.36
$ 0.60 - $ 0.81 90,500 $ 0.63 5.7 years 83,832 $ 0.63
$ 1.00 162,809 $ 1.00 4.9 years 162,809 $ 1.00
$ 1.75 - $ 2.00 141,855 $ 1.88 9.5 years 66,855 $ 1.75
$ 2.37 - $ 5.09 106,517 $ 3.38 9.4 years 17,571 $ 4.39
$ 5.12 458,000 $ 5.12 9.5 years 426,998 $ 5.12
$ 7.12 - $ 8.00 50,026 $ 7.62 7.7 years 42,497 $ 7.64
$11.03 - $20.50 27,376 $14.42 5.6 years 27,376 $14.42
--------- ---------
1,337,160 $ 3.05 7.4 years 1,110,986 $ 3.08
========= =========
</TABLE>
Under the principles of APB No. 25, the Company does not recognize compensation
expense associated with the grant of stock options to employees unless an option
is granted with an exercise price at less than fair market value. SFAS 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.
The Company's pro forma information utilizing the Black-Scholes option valuation
model for the fiscal years ended September 30, 2000, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------- -------
<S> <C> <C> <C>
Net loss (in thousands)
As reported............................. $6,665 $19,598 $19,146
Pro forma............................... $6,965 $20,889 $22,353
Basic and diluted net loss per share
As reported............................. $ 1.06 $ 2.98 $ 2.69
Pro forma............................... $ 1.10 $ 3.17 $ 3.14
</TABLE>
Pro forma information regarding net loss was determined as if the Company had
accounted for its employee stock options and shares sold under the ESPP under
the fair value method of SFAS 123. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option valuation
model with the following weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Dividend Yield..................................... 0% 0% 0%
Expected volatility................................ 133% 85% 70%
Risk-free interest rate............................ 6.0% - 6.3% 4.8% - 5.3% 5.3% - 5.6%
Expected Option life after shares are vested....... 2 years 3 years 2 years
</TABLE>
For the fiscal years ended September 30, 2000, 1999 and 1998, all stock options
issued were either issued at fair market value or were replacement stock options
issued pursuant to the Transcell Merger. During fiscal 1998, Transcell granted
stock options to consultants with an exercise price below fair market value on
the date of the grant.
Warrants: In May 1998, Incara issued replacement stock warrants to purchase
17,783 shares of Incara common stock at an exercise price of $13.49 in
connection with the Transcell Merger. As of September 30, 2000, warrants to
purchase 66,816 shares were outstanding, 49,033 of which are exercisable at an
exercise price of $8.25 per share until February 2001, and 17,783 of which are
exercisable at an exercise price of $13.49 per share until May 2003.
F-13
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. INCOME TAXES
As of September 30, 2000 and 1999, the Company had federal net operating loss
carryforwards of $57,359,000 and $56,375,000, respectively, and state operating
loss carryforwards of $18,493,000 and $17,509,000, respectively. The use of
these federal net operating loss carryforwards might be subject to limitation
under the rules regarding a change in stock ownership as determined by 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,
2000 and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net operating loss carryforwards.................. $ 20,448 $ 20,063
AMT credit carryforwards.......................... 37 37
Research and development credit carryforwards..... 1,195 1,195
Accrued payroll related liabilities............... 1,204 1,521
Charitable contribution carryforwards............. 637 441
Other............................................. 495 533
---------- ----------
Total deferred tax assets............... 24,016 23,790
Valuation allowance for deferred assets........... (24,016) (23,790)
---------- ----------
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 change in the valuation allowance is
primarily a result of the net operating loss carryforwards.
Taxes computed at the statutory federal income tax rate of 34% are reconciled to
the provision for income taxes as follows (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Effective tax rate........................ 0% 0% 0%
== == ==
United States Federal statutory rate...... $ (2,266) $ (6,663) $ (6,510)
State taxes (net of federal benefit)...... 1 (273) 853
Change in valuation reserves.............. 226 4,909 4,394
Gain on sale of subsidiary................ - 2,371 -
Pipeline research and development......... 2,273 - 1,464
Other..................................... (234) (344) (201)
----------- ---------- ----------
Provision for income taxes....... $ - $ - $ -
=========== ========== ==========
</TABLE>
I. BUCINDOLOL TRANSACTIONS
In September 1994, Incara acquired 80.0% of the outstanding stock of CPEC. CPEC
held the exclusive, worldwide license from Bristol-Myers Squibb Company to
develop bucindolol for congestive heart failure and left ventricular
dysfunction.
In December 1995, the Company entered into a collaboration with Astra Merck Inc.
("Astra Merck") for the development of bucindolol in the United States (the
"Astra Merck Collaboration"). During the fiscal year ended September 30, 1998,
the Company recognized contract revenue of $834,000 from payments made by Astra
Merck to the Company, exclusive of a termination fee of $4,000,000 received in
September 1998 discussed below. During the fiscal year ended September 30, 1998,
Astra Merck funded $6,065,000 of the Company's research and development
expenses. These additional amounts did not flow through the Company's statements
of operations, because they were offset against related expenses. Pursuant to
the terms of the Astra Merck Collaboration,
F-14
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
the Company paid Astra Merck $10,000,000 in December 1997, which had been
accrued as a liability at September 30, 1997. In July 1998, Astra Merck's
business was restructured to combine it with Astra AB's wholly-owned subsidiary,
Astra USA Inc., in a new limited partnership in which Astra AB had management
control as the general partner. The new company, Astra Pharmaceuticals, had an
expanded product line that included a beta-blocker (metoprolol succinate).
Because metoprolol and bucindolol were both beta-blockers being investigated for
heart failure, Astra Pharmaceuticals and the Company agreed in September 1998 to
terminate the Astra Merck Collaboration. Pursuant to the Termination and
Settlement Agreement, Astra Pharmaceuticals returned to the Company all rights,
material and information relating to bucindolol and paid it a termination fee in
the amount of $4,000,000. This payment was immediately recognized as contract
and license fee revenue because the Company had no ongoing obligations.
In December 1996, the Company entered into the Knoll Collaboration with Knoll to
develop bucindolol for the Knoll Territory. Knoll and the Company had agreed to
share the development costs of bucindolol for the Knoll Territory. In general,
Knoll was to pay approximately 60% of certain development and marketing costs
and the Company was to pay approximately 40% of such costs, subject to certain
maximum dollar limitations. The Company recognized contract and license fee
revenue from the Knoll Collaboration of $26,000 and $149,000 for the fiscal
years ended September 30, 1999 and 1998, respectively.
On July 15, 1999, Incara restructured its corporate relationship with
Interneuron to reduce Interneuron's majority ownership of Incara in exchange for
an increased ownership by Interneuron of CPEC. Prior to the Restructuring, CPEC
was owned 80.1% by Incara and 19.9% by Interneuron. As a preliminary step in
the Restructuring, Incara acquired Interneuron's 19.9% interest in CPEC. Incara
redeemed 4,229,381 of the 4,511,084 shares of Incara Common stock owned by
Interneuron, in exchange for a 65.0% ownership of CPEC and cancellation of
liabilities owed to Interneuron by Incara and CPEC which totalled $2,421,000.
This cancellation was treated as a contribution to capital by Interneuron to
Incara. The Company's net investment in CPEC of $332,000 at September 30, 2000
is included in Prepaids and other current assets in the accompanying
consolidated balance sheet. The Company's share of CPEC's net operating
expenses since the date of the Restructuring are included in research and
development expenses in the accompanying consolidated statements of operations.
Before the Restructuring, Incara had funded approximately 80.1% of the net
worldwide expenses related to bucindolol and Interneuron funded approximately
19.9%, in proportion to their respective ownership interests in CPEC. After the
Restructuring, Incara and Interneuron are responsible for funding 35.0% and
65.0%, respectively, of CPEC's expenses related to the development of bucindolol
in the United States and Japan (the "CPEC Territory"). As part of the
Restructuring, Incara received an exclusive license of CPEC's rights in the
Knoll Territory and is responsible for all bucindolol expenses in the Knoll
Territory.
On July 29, 1999, the double-blind, placebo-controlled, Phase 3 study of
bucindolol known as BEST (Beta-blocker Evaluation of Survival Trial) was
terminated earlier than scheduled, based on an interim analysis by the Data and
Safety Monitoring Board that treatment with bucindolol did not demonstrate a
statistically significant improvement in survival in the patient population as a
whole. Based on the information, the Company does not expect to pursue the
compound further for this or any other indication. All estimated BEST
termination costs were accrued as of September 30, 1999.
On August 3, 1999, Knoll terminated the Knoll Collaboration. Knoll and Incara
also terminated the Phase 3 clinical study of bucindolol being conducted in
Europe, which was known as BEAT (Bucindolol Evaluation after Acute myocardial
infarction Trial). All estimated BEAT termination costs were accrued as of
September 30, 1999.
J. ACQUISITIONS AND DISPOSITION
Renaissance Cell Technologies, Inc. and Aeolus Pharmaceuticals, Inc.
On March 31, 2000, Incara purchased all of the minority interests of
Renaissance and Aeolus. Prior to the acquisitions, Incara owned 78.0% of
Renaissance and 65.8% of Aeolus. Incara issued 1,220,041 shares of its common
stock in exchange for the subsidiaries' minority ownership. The acquisitions
have been accounted for using the purchase method of accounting. The total
purchase price of $6,664,000 consisted of 1,220,041 shares of Incara's common
stock with a fair value of $5.46 per share, based on the price of the Company's
common stock at the date of acquisition. The total purchase price was allocated
to purchased in-process research and development and immediately charged to
operations because at the date of the acquisition the in-process research
purchased was in preclinical stages, feasibility had not been established and it
was deemed to have no alternative future use.
F-15
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Additionally, Renaissance and Aeolus had no workforce or other tangible fixed
assets. Renaissance and Aeolus had incurred approximately $10,000,000 in
research and development costs prior to the acquisition of the minority
interests by Incara. Incara expects that it will take until at least 2006 to
complete development of all aspects of the research and that Renaissance and
Aeolus will need to spend in excess of an additional $50,000,000 to do so.
Transcell Technologies, Inc.
In May 1998, Incara acquired all of the outstanding stock of Transcell in a
merger of Transcell with and into Incara, and also acquired related technology
rights held by Interneuron in exchange for Incara common stock with an aggregate
market value of $14,200,000. In addition, Incara issued replacement stock
options and warrants to purchase 241,705 shares and 17,783 shares, respectively,
of Incara common stock to Transcell employees, consultants and warrant holders,
with a total estimated value of $1,507,000. Prior to the Transcell Merger,
Incara and Transcell were both majority-owned subsidiaries of Interneuron.
Under the terms of the Agreement and Plan of Merger between Incara, Transcell
and Interneuron dated March 2, 1998, Transcell stockholders received Incara
common stock in three installments. The first installment of 320,151 shares was
issued upon closing the transaction on May 8, 1998 (the "Closing"). In exchange
for certain license and technology rights held by Interneuron, and for
Interneuron's continuing guarantee of certain of Transcell's lease obligations,
Incara issued to Interneuron 174,672 shares of Incara common stock at Closing
with a value of $3,000,000 at the date of issuance and will pay Interneuron a
royalty on net sales of certain products that may result from the Merck
Collaboration. In lieu of the second installment payment due to Interneuron,
Interneuron retained 281,703 shares of Incara common stock as part of the
Restructuring. On August 9, 1999, Incara issued 867,583 shares of Incara common
stock, valued at approximately $1.38 per share, to the other former Transcell
stockholders as payment for their second installment of the Transcell Merger in
the principal amount of $1,202,000. On February 8, 2000, Incara issued 856,861
shares of Incara common stock, valued at approximately $3.36 per share, to
Interneuron and the other former Transcell stockholders as payment for the third
and final installment. The acquisition of Interneuron's 77.9% ownership
interest in Transcell by Incara was treated in a manner similar to a "pooling-
of-interests", because it represented a transfer of stock between entities under
common control. The acquisition of the non-Interneuron ownership interest was
accounted for using the "purchase" method of accounting. The Company incurred a
charge to operations of $5,343,000 in fiscal 1998 for the purchase of the non-
Interneuron interest in Transcell, because feasibility of the in-process
research and development was not yet established and the technology had no
alternative future use at the date of the acquisition. All of Transcell's prior
results of operations were combined with the results of operations of the
Company, because Transcell's minority interest owners had no responsibility to
fund their share of the losses of Transcell.
On December 29, 1999, the Company sold the former Transcell operation,
known as IRL, to a private pharmaceutical company for $11,000,000 in cash and
the right to receive up to an additional $4,000,000 if a compound originating
from the Merck Collaboration reaches preclinical and clinical trial milestones.
The Company currently does not expect to receive any additional payments from
the purchaser. The transaction involved the sale of assets associated with IRL,
including rights under the Merck Collaboration and the assumption of related
liabilities by the purchaser. The Company recognized a gain of $9,751,000 on the
sale of IRL. The Company remains contingently liable through May 2007 on debt
and lease obligations of approximately $8,328,000 assumed by the purchaser,
including the IRL facility lease in Cranbury, New Jersey.
K. AGREEMENTS
UNC License
Renaissance has a sponsored research agreement (the "UNC Agreement") with the
University of North Carolina at Chapel Hill ("UNC") which covers research at UNC
by scientists in the area of hepatic stem cells and which grants Renaissance a
first option to obtain an exclusive license to inventions resulting from the
agreement with UNC. Renaissance has agreed to reimburse UNC for certain costs
incurred in connection with the research, of which $338,000 remained to be paid
as of September 30, 2000. In August 1999, Renaissance obtained an exclusive
worldwide license (the "UNC License") from UNC to make, use and sell products
using proprietary information and technology developed under the UNC Agreement.
Renaissance paid license fees of $75,000 to UNC and will also pay milestones on
certain development events and royalties on net sales. Renaissance is also
obligated to pay patent filing, prosecution, maintenance and defense costs.
Unless terminated earlier, the UNC License continues until the last underlying
patent expires.
F-16
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Opocrin License
In July 1998, Incara licensed a development compound ("OP2000") from Opocrin
S.p.A., of Modena, Italy ("Opocrin"). Incara is investigating the use of OP2000
as a drug for the treatment of inflammatory bowl disease. The license is
worldwide except for Japan and Korea. During fiscal 1998, Incara made a
$1,000,000 license fee payment to Opocrin, which was expensed by the Company
because the compound was in the early clinical stage of development. Incara is
responsible for conducting clinical trials for OP2000 and is required to make
additional milestone payments to Opocrin upon initiation of Phase 3 clinical
trials, upon filing for regulatory approval, upon obtaining regulatory approval
and upon achieving specified annual sales.
Merck Collaboration
In July 1997, Transcell and Interneuron entered into the Merck Collaboration to
discover and commercialize certain novel antibacterial agents. 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 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 was shared two-thirds by the Company and one-third by
Interneuron. The Company's share of revenue in conjunction with this agreement
was $100,000, $2,063,000 and $1,138,000 for the fiscal years ended September 30,
2000, 1999 and 1998, respectively, including a $1,500,000 milestone payment
received from Merck in August 1999. In conjunction with the sale of IRL, the
Company has transferred its rights and obligations under the Merck Collaboration
and its licenses with Princeton University to the purchaser.
Duke Licenses
Aeolus has obtained exclusive worldwide licenses (the "Duke Licenses") 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 Licenses. The Duke Licenses require Aeolus to use its best
efforts to pursue development of products using the licensed technology and
compounds. These 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 U.S. Food and Drug Administration 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 Licenses, and
milestone payments upon certain regulatory approvals and annual sales levels.
In addition, Aeolus is obligated under the Duke Licenses to pay all or a portion
of patent prosecution, maintenance and defense costs. Unless earlier
terminated, the Duke Licenses continue until the expiration of the last to
expire issued patent on the licensed technology.
National Jewish Medical and Research Center Agreement
Aeolus has a sponsored research agreement with National Jewish Medical and
Research Center ("NJC") which grants Aeolus an option to negotiate a royalty-
bearing exclusive license for certain technology, patents and inventions
resulting from research by certain individuals at NJC within the field of
antioxidant, nitrosylating and related areas. Aeolus has agreed to support
certain of NJC's costs incurred in performance of the research, of which $75,000
remained to be paid as of September 30, 2000.
L. EQUITY FINANCING
In August 2000, Incara entered into a definitive agreement with Torneaux Fund
Ltd. ("Torneaux"), an institutional investor, for an equity financing facility
covering the purchase of Incara's common stock over 15 months. Under this
facility, Incara will control the amount and timing of stock sold to Torneaux,
with the amount of the investment being dependent, in part, on Incara's stock
price. Assuming Incara's stock price maintains a minimum threshold, the
cumulative potential investment is anticipated to exceed $3,000,000 and is
capped at $18,900,000. The agreement includes the issuance of warrants to
purchase an amount of common stock equal to 15% of the common stock shares
purchased and is subject to a number of conditions, including declaration of
effectiveness by the SEC of a registration statement filed in September 2000.
Incara's stockholders approved this financing transaction in October 2000.
F-17
<PAGE>
Part II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the
registrant in connection with the sale of common stock being registered. All
accounts are estimates except the SEC registration fee and the Nasdaq National
Market listing fee. There are no underwriters involved in the sale of common
stock being registered.
-----------------------------------------------------------
SEC Registration fee......................... $ 3,129
-----------------------------------------------------------
Nasdaq National Market listing fee.......... 17,500
-----------------------------------------------------------
Printing expenses........................... 10,000
-----------------------------------------------------------
Legal fees and expenses..................... 75,000
-----------------------------------------------------------
Accounting fees and expenses................ 3,000
-----------------------------------------------------------
Blue sky fees and expenses.................. 5,000
-----------------------------------------------------------
Miscellaneous and registration costs........ 2,000
-----------------------------------------------------------
-----------------------------------------------------------
Total....................................... $115,629
-----------------------------------------------------------
Item 14. Indemnification of Directors and Officers.
Section 145 ("Section 145") of the Delaware General Corporation Law, as
amended, generally provides that a director or officer of a corporation (i)
shall be indemnified by the corporation for all expense of such legal
proceedings when he or she 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 or she
is not successful on the merits, if he or she acts in good faith and in a manner
he or she reasonably believes to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his or her 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 or she is not successful on the merits, if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interest 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 or her duties to
the corporation, unless a corporation determines that, despite such
adjudication, but in view of all the circumstances, he or she is entitled to
indemnification. The indemnification described in clauses (ii) and (iii) above
may be made by 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.
The Company's Amended and Restated Bylaws provide 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 attorneys' fees and any liabilities which he or she may incur in
connection with any action to which he or she may be made a party by reason or
his or her being or having been a director or officer of the Registrant or any
of its affiliated enterprises. The indemnification provided by the Company's
Bylaws 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 Delaware General Corporation Law, as amended,
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
II-1
<PAGE>
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
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit. The Company's Amended and
Restated 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 Delaware General Corporation Law.
The Registrant maintains liability insurance insuring the Registrant's
officers and directors against liabilities that they may incur in such
capacities.
Item 15. Recent Sales of Unregistered Securities.
None
Item 16. Exhibits.
The following exhibits are filed as part of this Registration
Statement:
Exhibit
Number Description
------ -----------
1.1 Common Stock Purchase Agreement dated August 17, 2000 between Incara
Pharmaceuticals Corporation and Torneaux Fund Ltd./(q)/
3.1 Certificate of Incorporation, as amended/(a)/
3.2 Bylaws/(a)/
3.3 Amendment to Bylaws dated September 23, 1999/(m)/
4.1 Form of Common Stock Certificate/(m)/
4.2+ Form of Warrant to be issued to Torneaux Fund Ltd.
5.1+ Opinion of Wyrick Robbins Yates & Ponton LLP
10.1 Form of Investors' Rights Agreement/(a)/
10.4* License Agreement between Duke University and Aeolus Pharmaceuticals,
Inc., dated July 21, 1995/(a)/
10.7 Acquisition Agreement relating to the acquisition by Intercardia, Inc.
of 80% of CPEC, Inc. dated May 13, 1994, as amended/(a)/
10.8 Incara Pharmaceuticals Corporation 1994 Stock Option Plan, as
amended/(n)/
10.9 Office Lease between Highwoods/Forsyth Limited Partnership and
Intercardia, Inc., dated April 24, 1995/(a)/
10.10 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./(a)/
10.11* Development and Marketing Collaboration and License Agreement between
Astra Merck Inc., Intercardia, Inc. and CPEC, Inc., dated December 4,
1995/(a)/
10.12 Incara Pharmaceuticals Corporation 1995 Employee Stock Purchase Plan,
as amended/(o)/
10.16 Tax Allocation Agreement between Interneuron Pharmaceuticals, Inc. and
Intercardia, Inc., dated December 4, 1995/(a)/
10.19 Lease Amendment Number One, dated March 6, 1996, to Office Lease
between Highwoods/Forsyth Limited Partnership and Intercardia, Inc.
/(b)/
10.21* Agreement among Intercardia, Inc., CPEC, Inc. and Knoll AG dated
December 19, 1996/(c)/
II-2
<PAGE>
10.22 Lease Amendment Number Two, dated March 14, 1997, to Office Lease
between Highwoods/Forsyth Limited Partnership and Intercardia,
Inc./(d)/
10.23 Sponsored Research Agreement between The University of North Carolina
at Chapel Hill and Renaissance Cell Technologies, Inc. dated September
4, 1997/(e)/
10.24* Sponsored Research Agreement between National Jewish Medical and
Research Center and Aeolus Pharmaceuticals, Inc., dated September 11,
1997/(e)/
10.26 Employment Agreement between Clayton I. Duncan and Intercardia, Inc.,
dated December 15, 1997/(e)/
10.27 Assignment and Assumption and Royalty Agreement effective as of May 8,
1998 between Intercardia, Inc. and Interneuron Pharmaceuticals, Inc.
/(f)/
10.28* Research Collaboration and License Agreement dated effective as of
June 30, 1997, as amended, by and among Interneuron Pharmaceuticals,
Inc., Transcell Technologies, Inc. and Merck & Co., Inc., as assigned
to Intercardia, Inc. effective May 8, 1998/(f)/
10.29* License Agreement dated June 29, 1998 between Princeton University and
Intercardia, Inc./(f)/
10.30 License Agreement dated April 15, 1998, effective as of June 30, 1997,
between Princeton University and Interneuron Pharmaceuticals, Inc., as
assigned to Intercardia, Inc. by Interneuron Pharmaceuticals, Inc.
effective May 8, 1998/(f)/
10.31 Lease Agreement dated September 19, 1996, as amended, between Cedar
Brook Corporate Center, L.P. and Transcell Technologies, Inc., as
assigned to Intercardia, Inc. effective May 8, 1998/(f)/
10.32 Amendment 1, dated as of July 1, 1998, to Sponsored Research Agreement
between National Jewish Medical and Research Center and Aeolus
Pharmaceuticals, Inc./(f)/
10.33 Termination and Settlement Agreement dated September 29, 1998, between
Astra Pharmaceuticals, L.P., Intercardia, Inc. and CPEC, Inc./(g)/
10.34* License, Development, Marketing and Clinical Trials Supply Agreement
between Opocrin S.p.A. and Intercardia, Inc., dated July 20, 1998/(h)/
10.35 Employment Agreement between Richard W. Reichow and Intercardia, Inc.,
dated November 16, 1998/(h)/
10.36 Employment Agreement between David P. Ward and Intercardia, Inc.,
dated November 16, 1998/(h)/
10.37 Employment Agreement between John P. Richert and Intercardia, Inc.,
dated November 16, 1998/(h)/
10.38 Employment Agreement between W. Bennett Love and Intercardia, Inc.,
dated November 16, 1998/(h)/
10.39* Development, Manufacturing, Marketing and License Agreement, effective
as of December 19, 1996, among Knoll AG, CPEC, Inc. and Intercardia,
Inc./(j)/
10.40 Exchange Agreement dated July 15, 1999, between Intercardia, Inc. and
Interneuron Pharmaceuticals, Inc./(k)/
10.41 Registration Rights Agreement dated July 15, 1999, between Interneuron
Pharmaceuticals, Inc. and Intercardia, Inc./(k)/
10.42 Amended and Restated Limited Liability Company Agreement of CPEC LLC
dated July 15, 1999, among CPEC LLC, Intercardia, Inc. and Interneuron
Pharmaceuticals, Inc./(k)/
10.43 Assignment, Assumption and License Agreement dated July 15, 1999,
between CPEC LLC and Intercardia, Inc./(k)/
10.44 Incara Pharmaceuticals Corporation 1997 Equity Incentive Plan, Form of
Restricted Stock Award Agreement (7-month vesting) and Form of
Restricted Stock Award Agreement (3-year vesting)/(l)/
II-3
<PAGE>
10.45 Amendment No. 2, dated June 22, 1999, to Sponsored Research Agreement
between The University of North Carolina at Chapel Hill and
Renaissance Cell Technologies, Inc./(m)/
10.46 Amendment 2, dated August 16, 1999, to Sponsored Research Agreement
between National Jewish Medical and Research Center and Aeolus
Pharmaceuticals, Inc./(m)/
10.47 Form of Severance Agreement dated September 23, 1999 with Clayton I.
Duncan, Richard W. Reichow, David P. Ward, John P. Richert and W.
Bennett Love/(m)/
10.48* Asset Purchase Agreement dated December 17, 1999/(m)/
10.49* License Agreement dated August 23, 1999 between The University of
North Carolina at Chapel Hill and Renaissance Cell Technologies, Inc.
/(o)/
10.50* License Agreement, effective July 1996, between Albert Einstein
College of Medicine of Yeshiva University and Renaissance Cell
Technologies, Inc./(o)/
10.51 Registration Rights Agreement dated August 17, 2000 between Incara
Pharmaceuticals Corporation and Torneaux Fund Ltd./(r)/
21.1 List of Subsidiaries/(p)/
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2+ Consent of Wyrick Robbins Yates & Ponton LLP
24.1+ Power of Attorney
*confidential treatment granted
+ previously filed
__
(a) Incorporated by reference to the similarly numbered Exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-08209).
(b) Incorporated by reference to the similarly numbered Exhibit to the
Company'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
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1996.
(d) Incorporated by reference to the similarly numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
(e) Incorporated by reference to the similarly numbered Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1997.
(f) Incorporated by reference to the similarly numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(g) Incorporated by reference to the similarly numbered Exhibit to the
Company's Form 8-K Current Report filed on September 30, 1998.
(h) Incorporated by reference to the similarly numbered Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1998.
(i) Incorporated by reference to the similarly numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1998.
(j) Incorporated by reference to the similarly numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
(k) Incorporated by reference to the similarly numbered Exhibit to the
Company's Form 8-K Current Report filed on July 23, 1999.
II-4
<PAGE>
(l) Incorporated by reference to the similarly numbered Exhibit to the
Company's Form 8-K Current Report filed on October 11, 1999.
(m) Incorporated by reference to the similarly numbered Exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1999.
(n) Incorporated by reference to the similarly numbered Exhibit to the
Company's Report on Form S-8 filed on March 30, 2000.
(o) Incorporated by reference to the similarly numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
(p) Incorporated by reference to the similarly numbered Exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-43050).
(q) Incorporated by reference to Appendix A of the Company's definitive proxy
statement filed on September 7, 2000.
(r) Incorporated by reference to Appendix B of the Company's definitive proxy
statement filed on September 7, 2000.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, 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; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised 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. 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
II-5
<PAGE>
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 Act and will be governed by the final adjudication of such
issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
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.
[The next page is the signature page]
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this pre-effective amendment No. 2 to the registration statement
(No. 333-45822) to be signed on its behalf by the undersigned, thereunto duly
authorized, in Research Triangle Park, North Carolina, on the 28th day of
November, 2000.
INCARA PHARMACEUTICALS CORPORATION
By: /s/ Clayton I. Duncan
------------------------------------------
Clayton I. Duncan,
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this pre-effective amendment No.1 to the registration statement (No. 333-45822)
has been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Clayton I. Duncan Chairman, President, Chief Executive Officer November 28, 2000
-------------------------------------
Clayton I. Duncan and Director (Principal Executive Officer)
/s/ Richard W. Reichow Executive Vice President, Chief Financial November 28, 2000
-------------------------------------
Richard W. Reichow Officer and Treasurer (Principal Financial
and Accounting Officer)
* Director November 28, 2000
-------------------------------------
Stephen M. Prescott
* Director November 28, 2000
-------------------------------------
David B. Sharrock
* Director November 28, 2000
-------------------------------------
Edgar H. Schollmaier
*By: /s/ Clayton I. Duncan November 28, 2000
---------------------------------
Clayton I. Duncan
Attorney-in-Fact
</TABLE>
II-7
