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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2000
REGISTRATION STATEMENT NO.
333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________
INCARA PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 8731 56-1924222
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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3200 East Highway 54
Cape Fear Building, Suite 300
Post Office Box 14287
Research Triangle Park, North Carolina 27709-4287
(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
POST OFFICE BOX 14287
RESEARCH TRIANGLE PARK, NORTH CAROLINA 27709-4287
(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. [_]
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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. [_].
_____________________
CALCULATION OF REGISTRATION FEE
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Title of Each Class Proposed Maximum
of Securities to Aggregate Offering Amount of
be Registered Price(1) (2) Registration Fee
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Common Stock, $0.001 par value per $12,000,000 $3,168.00
share; Warrants to purchase Common
Stock; Preferred Stock, $0.01 par value
per share
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(1) Estimated solely for the purpose of calculating the registration fee, in
accordance with Rule 457(o).
(2) Warrants may be offered and sold entitling the holder to purchase common
stock. Pursuant to Rule 457(g), no registration fee is attributable to the
warrants registered hereby. However, $2,000,000 of the securities registered
hereby represents common stock which may be issued upon the exercise of
warrants.
(3) In addition to any common stock, preferred stock or warrants that may be
issued directly under this Registration Statement, there are being registered
hereunder an indeterminate number of shares of common stock, as may be issued
upon conversion of preferred stock. No separate consideration will be received
for any shares of common stock so issued upon conversion of preferred stock.
_____________________
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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this prospectus is not complete and it might change. +
+ We cannot sell these securities until the registration statement that we +
+ have 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 DECEMBER 20, 2000
$10,000,000
COMMON STOCK
WARRANTS TO PURCHASE COMMON STOCK
PREFERRED STOCK
[LOGO]
INCARA PHARMACEUTICALS CORPORATION
COMMON STOCK
WARRANTS TO PURCHASE COMMON STOCK
PREFERRED STOCK
_____________
Incara Pharmaceuticals Corporation may offer from time to time:
. Common stock;
. Warrants to purchase common stock; and
. Preferred stock, which might be convertible into common stock, might
have a stated dividend, might have a liquidation preference and might
have other attributes, all to be determined by our Board of Directors.
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any prospectus supplement
carefully before you invest.
Our common stock is traded on the Nasdaq National Market under the symbol
"INCR." On December 13, 2000, the last sale price of our common stock on the
Nasdaq National Market was $2.625 per share. There is no market for the warrants
or preferred stock offered hereby.
Investing in our securities involves risks. See "Risk Factors" beginning
on page 2.
Neither the SEC 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.
The date of this prospectus is ________ __, 2000.
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TABLE OF CONTENTS
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Prospectus Summary................................................................................................... 1
Risk Factors......................................................................................................... 2
Forward-Looking Statements........................................................................................... 8
Use of Proceeds...................................................................................................... 8
Dividend Policy...................................................................................................... 8
Market for Securities................................................................................................ 9
Selected Financial Data.............................................................................................. 9
Unaudited Pro Forma Consolidated Financial Information............................................................... 11
Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 12
Business............................................................................................................. 16
Management........................................................................................................... 28
Certain Relationships and Related Transactions....................................................................... 32
Principal Stockholders............................................................................................... 33
Description of Capital Stock......................................................................................... 35
Plan of Distribution................................................................................................. 37
Securities Offered................................................................................................... 37
Legal Matters........................................................................................................ 38
Experts.............................................................................................................. 38
Where You Can Find More Information.................................................................................. 38
Index to Consolidated Financial Statements........................................................................... F-1
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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 such severe cirrhosis that they 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 enter into relationships with companies that have
manufacturing, sales or marketing capabilities to bring our products to market.
We believe these relationships 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 these relationships, which should allow us to
negotiate more favorable terms.
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Our History
Our company was incorporated in Delaware as Intercardia, Inc. in 1994. In
July 1999 our company 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 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 we believe our existing financial resources are adequate to
fund operations through fiscal 2001, we intend to rely on a financing facility
we have with Torneaux Fund Ltd. 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.
The ownership interest of our stockholders will be substantially diluted by the
securities issued in this offering and by future issuances of stock, including
new offerings and exercises of currently outstanding options and warrants.
As of November 30, 2000, Incara had 7,365,849 shares of common stock
outstanding. We can issue up to $10 million worth of our shares of common stock
in this offering and an additional $2 million worth of our common stock issuable
pursuant to warrants that we might sell in this offering. This could result in
up to 4,571,428 shares of our common stock being issued in this offering, based
on the closing price of $2.625 of our common stock on
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December 13, 2000, which represents 38.3% of the total number of our shares of
common stock which would then be outstanding, based on shares outstanding as of
November 30, 2000.
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 November 30, 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, including the issuance of up to
2,940,332 shares of our common stock to Torneaux Fund Ltd. discussed below. 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.
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 November 30,
2000.
In August 2000, we entered into a financing arrangement with Torneaux Fund
Ltd. under which we will sell our common stock to Torneaux and also issue to
Torneaux warrants which are convertible into our common stock. The issuance of
up to 2,940,332 shares of our common stock (including shares covered by
warrants) to Torneaux under this financing arrangement 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 November 30, 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. If and as the
market price declines, the number of shares which may be sold to Torneaux will
increase. If we sell shares to Torneaux at a time when our stock price is low,
our stockholders would be significantly diluted. In addition, the perceived
risk of dilution by Torneaux and our other stockholders might 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.
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 because 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 to
Torneaux and 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.
In addition, all 2,940,332 shares of our common stock that we might issue to
Torneaux have been registered for resale with the SEC and will be freely
tradable. The sale of a significant amount of shares sold to Torneaux or 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
due to 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
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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 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.
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
differs 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 might 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
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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. 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 companies
from collaborating with us for the development and commercialization of OP2000.
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 might 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 arrangements for manufacturing and marketing of
our potential products, or 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 company to
develop the manufacturing capability for the liver precursor cell therapy being
developed by us and intend to seek a company to work with on development of a
liver assist device. We also plan to seek companies to market and manufacture
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
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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 our manufacturers and marketers 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, one of these companies could pursue alternative
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 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 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,
from the traditional organ transplant donor programs, livers which are not
suitable for full liver transplant.
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 use our cash resources.
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 might not be
sufficient to cover us against all
6
<PAGE>
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.
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. 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 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 some stockholders.
Such provisions could reduce the market value of Incara's common stock in the
future.
We remain contingently liable for certain IRL obligations.
Despite 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. If the purchaser were to default, or
the lender or landlord otherwise collect from us, our financial condition would
be materially adversely affected. 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.
7
<PAGE>
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 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 than us. These companies
might succeed in obtaining regulatory approval for competitive products more
rapidly than we can for our 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.
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 might 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 would become
harder to buy and sell. 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 might 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. 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.
USE OF PROCEEDS
Unless otherwise specified in the prospectus supplement accompanying this
prospectus, we will add the net proceeds from the sale of the securities to
which this prospectus and the prospectus supplement relate to our general funds
which we will use for financing our operations. We can conduct additional
financing at any time.
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. In addition, any
preferred stock to be issued and any future credit facilities might contain
restrictions on our ability to declare and pay dividends on our common stock.
We plan to retain all earnings, if any, for the foreseeable future for use in
the operation of our business and to fund future growth.
8
<PAGE>
MARKET FOR SECURITIES
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>
<CAPTION>
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 December 13, 2000............... 3 3/4 2
</TABLE>
As of November 30, 2000, the number of record holders of our common stock
was 143 and we estimate that the number of beneficial owners was approximately
5,000.
There is no market for our preferred stock or warrants offered by this
prospectus and none is expected to develop in the future. We will not take any
action to register the preferred stock or warrants on any exchange.
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.
The unaudited quarterly financial information is derived from our financial
records and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present our quarterly consolidated financial position
for the respective periods.
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").
9
<PAGE>
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 and
development............................. 6,664 - 5,343 411 350
General and administrative.............. 2,613 3,045 3,509 4,179 3,396
--------- --------- --------- --------- ---------
Total cost 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
========= ========= ========= ========= =========
</TABLE>
BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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>
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<PAGE>
QUARTERLY FINANCIAL DATA (unaudited):
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Fiscal 2000 Quarter Quarter Quarter Quarter Year
----------- ------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Total Revenue............................... $ 100 $ - $ - $ - $ 100
Net income (loss)........................... $ 6,923 $(8,460) $(2,944) $(2,184) $ (6,665)
Net income (loss) per common share:
Basic.................................. $ 1.33 $ (1.53) $ (0.41) $ (0.30) $ (1.06)
Diluted................................ $ 1.26 $ (1.53) $ (0.41) $ (0.30) $ (1.06)
Fiscal 1999
-----------
Total Revenue............................... $ 191 $ 209 $ 188 $ 1,500 $ 2,088
Net loss.................................... $(6,121) $(6,176) $(4,119) $(3,182) $(19,598)
Net loss per common share:
Basic.................................. $ (0.84) $ (0.85) $ (0.56) $ (0.73) $ (2.98)
Diluted................................ $ (0.84) $ (0.85) $ (0.56) $ (0.73) $ (2.98)
</TABLE>
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.
11
<PAGE>
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.
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 entering into relationships with companies 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.
12
<PAGE>
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 would 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 if 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. We issued
the third and final installment of 856,861 shares of Incara common stock 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 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, or 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
13
<PAGE>
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, or 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 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
14
<PAGE>
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 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.
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
controls 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.
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.
To execute our business plan, we intend to seek additional capital from 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 business plan, we might be required to
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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 and the value of our common stock. 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.
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.
. 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 open sores 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 is 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,
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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, and has 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, might 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 Incara 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 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 healthy 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 relationships 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.
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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, often for years, for a donor liver to become available. 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 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.
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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
after death 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 after death is now under investigation,
along with the useful age range of donors. Because 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 might 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, 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 who are
too young for liver transplants and have life-threatening inherited genetic
diseases. 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 such severe cirrhosis and other forms
of chronic liver failure that they 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
Many gene therapy clinical trial results have in general been disappointing
for both physicians and patients, often because of the inability of the
treatment to provide the patient with the ability to sustain expression of the
inserted 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
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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. For seven to thirty days, a LAD provides liver
function to allow 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 use cells with limitations that our
LAD is designed to overcome. The pig hepatocytes, while easily obtained, have
severe limitations such as potential immune reactions to secreted pig proteins,
limited lifetime and non-human viruses. The liver cells derived from tumor cells
are easy to grow, 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.
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 an arrangement with another
pharmaceutical or biotechnology company for commercialization of the liver
precursor cell therapy program. We also intend to seek arrangements 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. In March
2000, Incara acquired the remaining minority interest in Aeolus, which is now a
wholly owned subsidiary of Incara. 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.
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, as
well as 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.
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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. In the 1980's and 1990's numerous
attempts by many pharmaceutical companies to develop 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. Therefore,
they can destroy many free radicals. In laboratory experiments some of these
compounds have shown antioxidant activities greater than the natural SOD enzymes
on a weight basis. The lead compounds in this series, AEOL 10113 and AEOL 10150,
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, strokes kill approximately 158,000 people
annually and have 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.
Stroke is an injury to the brain caused by the blockage of blood flow. The
reestablishment of blood flow after blockage can cause further damage, 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 significantly reduced damaged brain
tissue 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 flow to a portion of the brain was permanently blocked.
We expect to complete the following activities 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; and
. Additional toxicology studies, through two-week exposure in two species.
Assuming we have adequate financial resources and satisfactory completion of the
preclinical studies, we intend 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 can 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 suggests 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 to
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, 40% of whom die within
a year. More than half of these deaths occur after the patient arrives at the
hospital. Survivors often 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 might save lives and
reduce suffering.
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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, marketing 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
Our 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 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 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, under which 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.
This agreement grants us the 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 on 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 we deem 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
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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 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 pay 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 we cannot establish 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 diligently pursue the negotiation and execution of a
manufacturing supply agreement, under which 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, from the traditional organ transplant donor programs, livers
that are not suitable for full liver transplant.
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 contract 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 who will market 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 we consider a targeted marketing effort 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 than us. These companies
might succeed in obtaining regulatory approval for competitive products more
rapidly than we can for our products. In addition, competitors might
23
<PAGE>
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 might 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, 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 try to develop their low molecular weight heparins
for IBD.
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 investigating 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., and other companies 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. In theory, embryonic stem cells 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.
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<PAGE>
Patents and Proprietary Rights
We generally seek patent protection in the United States and other
jurisdictions for potential products and proprietary technology, 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. 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 companies
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 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
25
<PAGE>
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 might 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;
. 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
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<PAGE>
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, 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 November 30, 2000, we had 21 employees. 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 are
negotiating a lease for other facilities and believe adequate facilities are
available in the area to meet our current and future needs.
Legal Proceedings
We are not a party to any material 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.
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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 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 November 30, 2000
are as follows;
<TABLE>
<CAPTION>
Age Position
--- --------
<S> <C> <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................. 50 ................ 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.
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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.
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.
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
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"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.
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.
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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 2000, Incara entered into a three-year employment agreement
with Mr. Duncan. The agreement provides for an annual base salary of $360,000
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 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.
31
<PAGE>
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, 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
32
<PAGE>
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 November 30, 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 November 30, 2000 Incara had 7,365,849 shares of common stock
outstanding. Share ownership in each case includes shares issuable upon
exercise of options that may be exercised within 60 days after November 30, 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.
33
<PAGE>
<TABLE>
<CAPTION>
Beneficially Percentage
Owned Owned
------------ ----------
<S> <C> <C>
Clayton I. Duncan (1)................................................. 678,526 9.0%
3200 East Highway 54, Cape Fear Building, Suite 300
Research Triangle Park, North Carolina 27709
David B. Sharrock (2)................................................. 47,034 *
Edgar H. Schollmaier (3).............................................. 34,645 *
Stephen M. Prescott, M.D. (3)......................................... 16,155 *
David P. Ward, M.D. (4)............................................... 249,847 3.3%
Richard W. Reichow (5)................................................ 303,480 4.1%
W. Bennett Love (6)................................................... 116,202 1.6%
John P. Richert (7)................................................... 116,039 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)...... 1,561,928 19.7%
</TABLE>
_____________
* Less than one percent
(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 164,056 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 46,034 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 124,833 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 84,133 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 38,500 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 38,500 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).
34
<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 November 30, 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 November 30, 2000, there were no shares of preferred stock
outstanding.
Warrants
As of November 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 and expire in February 2001, and 17,783 of which are exercisable at an
exercise price of $13.49 per share and expire in 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
35
<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.
36
<PAGE>
PLAN OF DISTRIBUTION
We may sell our securities through agents, underwriters, dealers or
directly to purchasers.
We may designate agents to solicit offers to purchase our securities.
. We will name any agent involved in offering or selling our
securities, and any commissions that we will pay to the agent, in our
prospectus supplement.
. Unless we indicate otherwise in our prospectus supplement, our agents
will act on a best efforts basis for the period of their appointment.
. Our agents may be deemed to be underwriters under the Securities Act
of 1933 of any of our securities that they offer or sell.
We may use an underwriter or underwriters in the offer or sale of our
securities.
. If we use an underwriter or underwriters, we will execute an
underwriting agreement with the underwriter or underwriters at the
time that we reach an agreement for the sale of our securities.
. We will include the names of the specific managing underwriter or
underwriters, as well as any other underwriters, and the terms of the
transactions, including the compensation the underwriters and dealers
will receive, in our prospectus supplement.
. The underwriters will use our prospectus supplement to sell our
securities.
We may use a dealer to sell our securities.
. If we use a dealer, we, as principal, will sell our securities to the
dealer.
. The dealer will then sell our securities to the public at varying
prices that the dealer will determine at the time it sells our
securities.
. We will include the name of the dealer and the terms of our
transactions with the dealer in our prospectus supplement.
We may solicit directly offers to purchase our securities, and we may
directly sell our securities to institutional or other investors. We will
describe the terms of our direct sales in our prospectus supplement.
We may indemnify agents, underwriters, and dealers against certain
liabilities, including liabilities under the Securities Act of 1933. Our
agents, underwriters, and dealers, or their affiliates, may engage in other
transactions with or perform other services for us in the ordinary course of
business.
We may authorize our agents and underwriters to solicit offers by certain
institutions to purchase our securities at the public offering price under
delayed delivery contracts.
. If we use delayed delivery contracts, we will disclose that we are
using them in the prospectus supplement and will tell you when we
will demand payment and delivery of the securities under the delayed
delivery contracts.
. These delayed delivery contracts will be subject only to the
conditions that we set forth in the prospectus supplement.
We will indicate in our prospectus supplement, the commission that
underwriters and agents soliciting purchases of our securities under delayed
contracts will be entitled to receive.
SECURITIES OFFERED
Using this prospectus, we may offer common stock, preferred stock or
warrants to purchase common stock. We registered these securities with the SEC
using a "shelf" registration statement. This "shelf" registration statement
allows us to offer any combination of these securities. Each time we offer
securities, we must provide a prospectus supplement that describes the specific
terms of the securities. The prospectus supplement may also provide new
information or update the information in the prospectus.
37
<PAGE>
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
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.
38
<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 expense...................... 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 Total
Number Par Paid-in Restricted Deferred Accumulated Stockholders'
of Shares Value Capital Stock Compensation Deficit Equity
---------- ----- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1997................... 6,956,545 $ 7 $52,243 $ -- $ (296) $(38,498) $ 13,456
Exercise of common stock
options................ 15,576 -- 59 -- -- -- 59
Grants of common stock
options at below fair
value.................. -- -- 1,450 -- (1,450) -- --
Stock-based
compensation........... -- -- 464 -- -- -- 464
Amortization of deferred
compensation........... -- -- -- -- 660 -- 660
Proceeds from offerings
of Employee Stock
Purchase Plan.......... 13,592 -- 142 -- -- -- 142
Contribution to
Transcell capital by
Interneuron............ -- -- 18,698 -- -- -- 18,698
Common stock issued to
unrelated parties in
conjunction with
Transcell Merger....... 303,440 -- 5,343 -- -- -- 5,343
Net loss for the fiscal
year ended September
30, 1998............... -- -- -- -- -- (19,146) (19,146)
---------- ---- ------- ----- ------- -------- --------
Balance at September 30,
1998................... 7,289,153 7 78,399 -- (1,086) (57,644) 19,676
Exercise of common stock
options................ 21,851 -- 53 -- -- -- 53
Amortization of deferred
compensation........... -- -- -- -- 827 -- 827
Proceeds from offerings
of Employee Stock
Purchase Plan.......... 67,851 -- 134 -- -- -- 134
Contribution of payables
to capital by
Interneuron............ -- -- 2,421 -- -- -- 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) -- -- 1
Stock-based compensation
and amortization of
Restricted Stock....... -- -- 266 11 -- -- 277
Net loss for the fiscal
year ended September
30, 1999............... -- -- -- -- -- (19,598) (19,598)
---------- ---- ------- ----- ------- -------- --------
Balance at September 30,
1999................... 5,226,969 5 81,772 (744) -- (77,242) 3,791
Exercise of common stock
options................ 140,000 -- 50 -- -- -- 50
Proceeds from offerings
of Employee Stock
Purchase Plan.......... 208,744 -- 122 -- -- -- 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 -- -- -- 6,664
Stock-based compensation
and amortization of
Restricted Stock....... -- -- 838 424 -- -- 1,262
Restricted Stock
forfeited.............. (146,666) -- (81) 81 -- -- --
Common stock
repurchased............ (140,100) -- (412) -- -- -- (412)
Net loss for the fiscal
year ended September
30, 2000............... -- -- -- -- -- (6,665) (6,665)
---------- ---- ------- ----- ------- -------- --------
Balance at September 30,
2000................... 7,365,849 $ 7 $88,951 $(239) $ -- $(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
Purchase 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 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.
F-7
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-8
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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,
F-9
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
<TABLE>
<CAPTION>
2000 1999
----- -------
<S> <C> <C>
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
===== =======
</TABLE>
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.
D. ACCRUED EXPENSES
At September 30, 2000 and 1999, accrued expenses consisted of the following
(in thousands):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Payroll-related liabilities................................... $ 446 $ 305
Bucindolol development costs.................................. 1,350 1,619
Other......................................................... 11 9
------ ------
$1,807 $1,933
====== ======
</TABLE>
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):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
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
====
</TABLE>
F-10
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
F-11
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-12
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity under the 1994 Plan was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------- --------
<S> <C> <C>
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
==========
</TABLE>
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.
The details of stock options outstanding at September 30, 2000 were as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Number Weighted Number
Outstanding Weighted Average Exercisable Weighted
at Average Remaining at Average
Range of September 30, Exercise Contractual September 30, Exercise
Exercise Prices 2000 Price Life 2000 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.
F-13
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-14
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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
F-15
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-16
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-17
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-18
<PAGE>
INCARA PHARMACEUTICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Incara's
stockholders approved this financing transaction in October 2000.
F-19
<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 securities 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.
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
SEC Registration fee......................................... $ 3,168
-------------------------------------------------------------------------------
Nasdaq National Market listing fee........................... 17,500
-------------------------------------------------------------------------------
Printing expenses............................................ 10,000
-------------------------------------------------------------------------------
Legal fees and expenses...................................... 15,000
-------------------------------------------------------------------------------
Accounting fees and expenses................................. 3,000
-------------------------------------------------------------------------------
Blue sky fees and expenses................................... 5,000
-------------------------------------------------------------------------------
Miscellaneous and registration costs......................... 1,000
-------------------------------------------------------------------------------
Total........................................................ $54,668
-------------------------------------------------------------------------------
</TABLE>
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 breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good
II-1
<PAGE>
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
------ -----------
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./(s)/
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)/
10.22 Lease Amendment Number Two, dated March 14, 1997, to Office Lease
between Highwoods/Forsyth Limited Partnership and Intercardia, Inc.
/(d)/
II-2
<PAGE>
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)/
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)/
II-3
<PAGE>
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)/
10.52 Common Stock Purchase Agreement dated August 17, 2000 between Incara
Pharmaceuticals Corporation and Torneaux Fund Ltd. /(q)/
10.53 Employment Agreement between Clayton I. Duncan and Incara
Pharmaceuticals Corporation, dated December 11, 2000/(t)/
10.54 Amendment No. 3, dated July 6, 2000, to sponsored Research Agreement
between The University of North Carolina at Chapel Hill and
Renaissance Cell Technologies, Inc./(t)/
21.1 List of Subsidiaries/(p)/
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Consent of Wyrick Robbins Yates & Ponton LLP (included in Exhibit 5.1)
24.1 Power of Attorney (See page II-7)
*Confidential treatment granted.
___
(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.
II-4
<PAGE>
(k) Incorporated by reference to the similarly numbered Exhibit to the
Company's Form 8-K Current Report filed on July 23, 1999.
(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.
(s) Incorporated by reference to the similarly numbered Exhibit to the
Company's Registration Statement on Form S-1 (File No. 333-45822).
(t) 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, 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
II-5
<PAGE>
(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 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 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Research Triangle Park, North
Carolina, on the 20th day of December, 2000.
INCARA PHARMACEUTICALS CORPORATION
By /s/ Clayton I. Duncan
---------------------------------
Clayton I. Duncan,
Chairman, President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Clayton
I. Duncan and Richard W. Reichow, and each of them, his true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and any related registration statements filed pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement 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 December 20, 2000
Clayton I. Duncan and Director (Principal Executive Officer)
/s/ Richard W. Reichow
---------------------------------- Executive Vice President, Chief Financial December 20, 2000
Richard W. Reichow Officer and Treasurer (Principal Financial
and Accounting Officer)
/s/ Stephen M. Prescott
---------------------------------- Director December 20, 2000
Stephen M. Prescott
/s/ David B. Sharrock
----------------------------------- Director December 20, 2000
David B. Sharrock
/s/ Edgar H. Schollmaier
---------------------------------- Director December 20, 2000
Edgar H. Schollmaier
</TABLE>
II-7
