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SOMATOGEN, INC.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
Commission file number 0-19423
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Somatogen, Inc.
(Exact name of registrant as specified in its charter)
Delaware 84-0991858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2545 Central Ave., Boulder, CO 80301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 440-9988
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /
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SOMATOGEN, INC.
Indicate by checkmark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of voting stock held by
nonaffiliates of the registrant is $206,470,047 as of August 27, 1996.*
20,700,799
(Number of shares of Common Stock outstanding as of August 27, 1996)
Documents Incorporated by Reference
Registrant's Proxy Statement for use in connection with its Annual
Meeting of Stockholders to be held on October 31, 1996 is incorporated
by reference into Part III of this Annual Report on Form 10-K.
____________________________
*Excludes 4,030,643 shares of Common Stock held by Directors and
Officers and Stockholders whose beneficial ownership exceeds ten
percent of the shares outstanding at August 27, 1996. Exclusion of
shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant,
or that such person is controlled by or under common control with
the registrant.
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Somatogen, the Somatogen logo and Optro are registered trademarks of
the Company. All other brand names or trademarks appearing in this
annual report on form 10-K are the property of their respective
holders.
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SOMATOGEN, INC.
PART I
Item 1. Description of Business
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Somatogen is a biopharmaceutical company developing specialty
oxygen therapeutics and other pharmacological agents utilizing its
proprietary recombinant hemoglobin technology. The Company's lead
recombinant hemoglobin molecule is rHb1.1. The Company's first
proposed application of rHb1.1 is as an oxygen carrying pharmaceutical
designed to treat blood loss in surgery, which the Company proposes
to market under the registered trademark "Optro." Concerns about
transfusions with donated blood have created a significant need for
a safe alternative. These concerns include transmission of infectious
diseases (such as AIDS and hepatitis), maintaining an adequate supply,
the need to type and cross-match prior to transfusion and transfusion-
related immunosuppression.
In June 1994, Somatogen entered into a global strategic alliance
with Eli Lilly and Company ("Lilly") whereby Lilly is co-developing
Optro (the "Lilly Alliance") and in September 1995, Somatogen and
Lilly agreed to amend certain terms of the Lilly Alliance. Under
the terms of the Lilly Alliance, Lilly is responsible for establishing
manufacturing facilities to supply Optro for Phase III clinical trials
and for global commercialization. In North America, the Company's
expanded Phase II and Phase III trials for Optro will be performed in
conjunction with Lilly's clinical and research groups, and Lilly and
Somatogen will co-promote the product, splitting the development costs
and sharing equally in the profits. Outside North America, except in
Scandinavia, Lilly will be responsible for clinical development of
Optro and related costs, and will have exclusive marketing rights.
Lilly will pay Somatogen a royalty on product sales outside North
America. Lilly has invested $30,000,000 in exchange for Somatogen
Common Stock. The Lilly Alliance originally contemplated a March 1996
determination date at which Lilly would have made a decision whether
to proceed with the clinical development and commercialization of
Optro. The September 1995 amendment to the Lilly Alliance accelerated
$7,000,000 of the $10,000,000 equity investment which Lilly would have
made at such determination date. Pursuant to the amendment, Lilly
made such $7,000,000 equity investment in October 1995. In addition,
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the amendment eliminated the March 1996 determination date and
combined all remaining milestone equity investments into a single
$7,000,000 milestone equity investment to be made if the joint
Somatogen-Lilly steering committee for the alliance determines that
certain conditions have been met. The amendment also modified the
termination provisions of the alliance, which provide for payment
of certain financial consideration by Lilly to Somatogen in the
event that the alliance is terminated under certain circumstances.
Pharmacia & Upjohn, Inc. ("Pharmacia") has the marketing rights to
Optro in Scandinavia under its 1991 agreement with Somatogen.
Background
The Hemoglobin Molecule
Blood is a complex fluid composed of several distinct types of
cells suspended in plasma. Red blood cells, which form the vast
majority of blood's cellular population, are responsible for
transporting and delivering oxygen throughout the body. Hemoglobin
is the portion of the red blood cell that captures oxygen in the
lungs. The red blood cell then transports the oxygen to the tissues
where the oxygen is released and metabolized.
Hemoglobin is a protein composed of four separate peptide
chains (called "globins") with similar amino acid sequences: two alpha
chains and two beta chains. Each globin chain combines with an
iron-containing component (called "heme") to form the hemoglobin
molecule. The iron atom contained in each heme group directly
binds one oxygen molecule, allowing four oxygen molecules to bind
to each hemoglobin molecule.
Variations in the amino acid sequence of the globin chain can
influence the oxygen delivery characteristics of hemoglobin. Variant
forms of hemoglobin are commonly referred to as "mutants." Hemoglobin
mutants with a high oxygen affinity bind oxygen readily in the lungs
but do not release oxygen as readily to the tissues. Conversely,
hemoglobin mutants with a low oxygen affinity bind oxygen somewhat
less readily in the lungs but may release it more easily to the
tissues.
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Blood Transfusion
Somatogen estimates that approximately 12.5 million units of red
blood cells are transfused annually in the U.S. The U.S. supply of
red blood cells for transfusion is managed primarily by non-profit
organizations that recruit donors, collect, screen and test blood,
separate and purify its useful components and distribute the final
product. According to a 1992 study, the average direct cost of a
unit of red blood cells was $205. Based on such price, the Company
estimates the total U.S. red blood cell transfusion market to be
approximately $2.5 billion annually. The Company estimates that
international red blood cell transfusion markets represent at least an
additional $2.5 billion annually. The direct costs of red blood cell
transfusion do not include the significant additional indirect costs
of treating patients who incur complications resulting from adverse
transfusion reactions and blood-borne infections. The Company believes
that the price of a red blood cell substitute, if successfully
developed, should reflect both direct and indirect costs of
transfusion with red blood cells as well as any other specific
therapeutic advantages that such product may have.
Approximately 8.9 million units of red blood cells are transfused
annually in the U.S. as a treatment for blood loss as a result of
surgery or other causes of acute blood loss. The loss of blood during
surgery or from other acute causes reduces the body's ability to meet
the metabolic demands of the tissues and places additional stress on
the cardiovascular system. In patients who have suffered only mild to
moderate blood loss, cardiovascular stress can be mitigated and the
metabolic demands of the tissues can be met through infusion of a
volume-expanding solution such as saline or human serum albumin.
However, in cases where a patient has lost greater amounts of blood,
the reduction of the blood's oxygen-carrying capacity can have adverse
physiological effects. At the present time, oxygen-carrying capacity
can be enhanced only by a transfusion of red blood cells.
The past decade has seen an increase in the incidence of
blood-borne infectious diseases, such as AIDS and hepatitis, which
has heightened the awareness of both health care professionals and
patients to the inherent risks of blood transfusions. Although new
tests have been developed, such tests have not entirely eliminated
the risk of infectious blood-borne disease transmission. In addition,
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despite improved testing standards, human error still results in the
release of contaminated units of blood. Furthermore, some infectious
diseases are known to contaminate the blood supply but cannot be
avoided because no reliable or cost effective diagnostic tests exist.
New infectious agents can suddenly appear in the blood supply, and it
can take years to develop a reliable test for such agents. Several
years elapsed between the appearance of AIDS and the development of
a reliable test, and numerous patients contracted AIDS from
transfusions during that time. The current blood supply is
dependent upon volunteer donors. Increasingly stringent donor-
screening criteria have caused the donor pool, and therefore the
potential supply of blood, to contract. As a consequence, the cost
and intricacy of collecting, testing and storing blood has greatly
increased in recent years.
Red blood cell transfusions require complex typing and
cross-matching to avoid potentially fatal reactions following
transfusion. An individual has a specific combination of major
antigens (A, B, AB or O and Rh+ or Rh-) which naturally occur on
the surface of each red blood cell. Transfusion with red blood
cells having antigens different from those of the recipient's red
blood cells may result in serious and potentially fatal systemic
reactions. Accident victims and persons with rare blood types may
die while awaiting compatible blood. In addition, clerical error
continues to result in transfusion-related complications due to
administration of the wrong blood type.
Donated blood is fractionated to separate red blood cells from
other blood components such as platelets and plasma. However, a
small quantity of white blood cells sometimes remains, which can
cause delayed transfusion problems, such as graft-versus-host
disease. Donor blood also must be refrigerated or frozen, and
when refrigerated it has a recommended shelf life of 35 to 42
days. These characteristics make it difficult to transfuse blood
at an accident site or in an ambulance.
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The problems associated with human donor blood have stimulated
numerous efforts to reduce transfusions with donated blood. The risk
of blood-borne infectious disease has caused transfusion guidelines
to be changed so that certain patients who historically would have
received transfusions are no longer transfused. Some hospital
transfusion review committees have characterized a transfusion of
donor blood as an "undesirable outcome" of surgery. Certain patients
in good health can elect to deposit their own blood prior to surgery,
potentially reducing or eliminating their need to receive donor blood.
In certain types of surgical procedures, lost blood can be collected,
treated and reinfused, or blood loss can be reduced through the use
of drugs. Modest blood loss can often be treated with a non-oxygen
carrying fluid such as saline or human serum albumin.
There have been numerous attempts to develop a red blood cell
substitute, and a number of companies continue to actively pursue
development of a red blood cell substitute. Hemoglobin extracted
from human or bovine red blood cells ("stroma-free hemoglobin") has
long been explored for such use. However, stroma-free hemoglobin
has several characteristics which must be corrected in order to
make it suitable for use as a blood substitute. First, when human
hemoglobin is removed from the human red blood cell, its oxygen
affinity increases, thereby causing the hemoglobin to bind oxygen
too tightly and significantly reducing oxygen delivery to the tissues.
In order for human-derived stroma-free hemoglobin to be used as a red
blood cell substitute, its oxygen affinity must be reduced by chemical
treatment resulting in additional cost to manufacture. Such
modification, however, is not required for bovine-derived hemoglobin.
Second, stroma-free hemoglobin tends to dissociate (or separate) into
two alpha-beta globin pairs (called "dimers") which can be toxic to the
kidneys. Dissociation can be avoided in stroma-free hemoglobin by
chemically linking, polymerizing or otherwise chemically modifying
the hemoglobin molecule resulting in additional cost to manufacture.
Recently, genetically engineered animals and plants (transgenic
animals and plants) have been explored as potential sources of
human-type hemoglobin. Synthetic products designed to carry oxygen,
such as perfluorocarbons ("PFCs"), have also been explored as
potential red blood cell substitutes. To date, no product based on
stroma-free hemoglobin, transgenic plants or animals has been
approved for human use as a blood substitute in the U.S. See
"Competing Technologies."
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Somatogen's Recombinant Hemoglobin Technology
The Company believes it is a leader in characterizing the
protein chemistry and molecular biology of the human hemoglobin
molecule and in developing recombinant human hemoglobin. Somatogen
believes that it is the only company to have successfully cloned,
expressed and purified recombinant hemoglobin that binds oxygen in
a manner similar to hemoglobin contained in human red blood cells.
The Company is using genetic engineering to develop other forms of
hemoglobin with molecular characteristics designed to address
specific clinical needs.
Somatogen has used its proprietary recombinant hemoglobin
technology to develop its first potential product, Optro, an
oxygen therapeutic designed to treat human blood loss in surgery.
The U.S. Food and Drug Administration ("FDA") has authorized,
and Somatogen and Lilly are currently performing, clinical trials
in anesthetized surgical patients undergoing blood loss to gather
efficacy/activity data and safety data in a large Phase II, multi-
site clinical trial. See "Clinical Development Strategy" and
"Government Regulation." Somatogen believes that Optro may offer
a safe, effective and economically viable solution to the problems
of red blood cell transfusion while avoiding the historical problems
of stroma-free hemoglobin because it:
-- Eliminates the risk of infectious disease
transmission. Because Optro is produced
recombinantly, it has no risk of transmission of
human blood-borne infectious diseases such as AIDS
and hepatitis.
-- Offers universal compatibility regardless of blood
type. Hemoglobin, unlike red blood cells, does not
need to be typed and cross-matched. As a result,
the Company believes that Optro will eliminate the
risk of potentially fatal post-transfusion
reactions due to errors in blood-type matching, and
that it may be used in situations where either time
does not permit cross-matching or it is not
possible to store numerous blood types.
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-- Reduces dependence on blood from donors. Because
Optro is produced through fermentation in E. coli,
its supply is not limited by the availability of
blood from the donor population.
-- Provides longer shelf life. Somatogen believes
that Optro will have a shelf life substantially
longer than the 35 to 42 days currently recommended
for refrigerated red blood cells. The Company is
conducting real time stability tests of Optro; the
Company has demonstrated a shelf life in excess of nine
months at 4 degrees Celsius, and the Company believes
that the shelf life at 4 degrees Celsius may be 12 months
or longer.
-- Avoids the need for chemical modifications.
Somatogen has addressed the inherent limitations of
extracellular hemoglobin by synthesizing a
hemoglobin molecule that is very similar to human
hemoglobin but which has been genetically altered
to prevent the molecule from fragmenting in the
bloodstream. By making these changes at the
genetic level, Somatogen avoids the need to modify
the hemoglobin molecule through chemical
processing.
-- Improves oxygen-delivery capability. Somatogen has
genetically engineered Optro in a manner which it
believes, based on animal studies, may release
oxygen to tissues in the body more effectively than
the hemoglobin contained in transfused red blood
cells. Recent nuclear magnetic resonance
spectroscopy tests in animals to measure tissue
high energy phosphates (and metabolic
intermediates) suggest that Optro is more effective
in delivering oxygen to tissue than red blood
cells.
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Products in Development
Somatogen is using its recombinant hemoglobin technology to
develop products for a range of therapeutic and diagnostic
applications. These products include Optro, the Company's initial
oxygen-carrying pharmaceutical. The Company is currently
performing expanded safety and efficacy studies of Optro in
anesthetized surgical patients who are experiencing blood loss.
The Company believes that rHb1.1, or other forms of genetically
engineered hemoglobin which the Company is currently pursuing might
be useful in treating chronic anemia through its ability to stimulate
red blood cell development (erythropoeisis).
Listed below is a summary of the potential applications of the
Company's recombinant human hemoglobin products currently in
development:
Acute Blood Replacement. Optro, the potential oxygen-carrying
therapeutic application of rHb1.1, has been initially targeted for use
as a replacement for acute blood loss in discrete clinical indications.
Intraoperative Blood Replacement. The Company
believes that Optro may be useful in the treatment of
blood loss that occurs in surgery. Concern regarding
transmission of infectious diseases and other adverse
effects of giving donor blood has given rise to efforts
to reduce or eliminate transfusions of donor blood
whenever practicable. A number of techniques are
currently utilized to maximize the conservation of
blood, including autologous donation (self-donation),
intraoperative cell salvage, intraoperative hemodilution,
and use of various pharmacologic agents to reduce
intraoperative blood loss. Notwithstanding these
efforts, over 2.5 million surgical patients are exposed
to blood transfusions with donated blood in the U.S.
each year. Somatogen believes that Optro may play a
role in providing surgical patients with an alternative
to transfusion with donor blood.
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Trauma. Somatogen believes that Optro may also be
useful in the hospital emergency room and in settings
outside of the hospital environment because Optro does
not require typing or cross-matching, thereby
eliminating the time required to perform such functions
or the need to store multiple units of Type O blood
(which may be administered to anyone regardless of blood
type). Initial recent results from animal studies
indicate that Optro is more efficacious than blood in
resuscitation from hypovolemia (a condition resulting
from extensive blood loss), a common problem often
associated with trauma.
Erythropoiesis/chronic anemia. The Company believes that rHb1.1
may have promise in stimulating the production of new red blood cells,
and that rHb1.1 may exert this effect by different mechanisms than
existing therapeutics such as erythropoietin ("EPO"). rHb1.1 may also
serve as a source of iron in anemias where iron deficiency is important
(i.e., anemias unresponsive to EPO in patients with chronic renal
failure). The Company has demonstrated hematopoietic activity of rHb1.1
in an animal model of induced anemia and in human hematopoietic tissues
in vitro. Somatogen recently initiated Phase I clinical studies in
patients with chronic renal failure and primary bone marrow cancer.
Second Generation rHbs
Somatogen has constructed several different forms of recombinant
hemoglobin that have been genetically engineered and, in some cases
chemically modified to achieve enhanced attributes including extended
circulating half-life. The Company believes that such a modified
recombinant hemoglobin may be useful in a number of applications
requiring extended circulating half-life such as severe trauma and
surgical procedures that involve extensive blood loss. In addition,
the Company believes that these molecules may be applicable in some
of the applications identified above for Optro. These molecules are
currently in the research stage and early preclinical testing.
The Company's products will require significant additional
research and development, including extensive preclinical and clinical
testing, before the Company will be able to obtain FDA or foreign
regulatory approval for any indication, if at all. There can be no
assurance that the Company's research and development efforts will be
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successful, that any of the Company's products under development,
including Optro, will prove to be safe or effective in clinical trials,
that the Company will be able to obtain FDA approval to sell any
products, that any products can be manufactured at acceptable cost and
with appropriate quality, or that any products, if and when approved,
can be successfully marketed.
Clinical Development Strategy
Oxygen Delivery Indications
Somatogen is currently pursuing clinical development of Optro
for intraoperative ("IO") blood replacement and acute normovolemic
hemodilution ("ANH"). The clinical trials of Optro are being conducted
in three sequential phases (Phases I, II and III), although the phases
may overlap. The Phase I trials, which have been completed, gathered
data on safety (adverse effects) and dosage tolerance and preliminary
data on pharmacokinetics (clinical pharmacology). Following completion
of the Phase I trials, the Company reviewed the results of such trials
with the FDA, which authorized the Company to proceed to early Phase II
trials. The Company initiated these trials in the fall of 1994 in
order to provide additional safety data, and to gather preliminary
efficacy/activity information, in surgical patients undergoing blood
loss. These trials were completed in September 1995. In these trials
there have been no clinically significant, treatment-related adverse
effects. In July 1996, Somatogen and Lilly commenced expanded Phase II
trials in surgical patients in order to gather additional safety
information as well as more comprehensive efficacy/activity
information. Following successful completion of the Phase II trials,
Phase III trials would be undertaken to establish safety and efficacy
in a larger population of surgical patients in order to provide the
basis for the filing of a product license application with the FDA.
In North America, the expanded Phase II and Phase III trials will be
performed in conjunction with Lilly's clinical and research groups.
Outside North America, Lilly will be responsible for clinical
development of Optro except in Scandinavia where Pharmacia will be
responsible for clinical development if necessary.
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There can be no assurance that any of the clinical testing will
be completed successfully within any specified time period, if at all,
with respect to Optro or any of the Company's products. There can also
be no assurance that such testing will show Optro or any other product
to be safe or efficacious. Furthermore, the Company or the FDA may
suspend clinical trials at any time if the subjects or patients
participating in such trials are thought to be exposed to unacceptable
health risks. The Company is aware of four blood substitute products
developed by other companies which began clinical trials that were
subsequently halted due to safety concerns; all four of these
companies have since announced that they have resumed clinical
trials. Although the Company believes that its products are
substantially different from these other blood substitute products,
there can be no assurance that the Company will not encounter
problems in clinical trials which will cause the Company or the
FDA to suspend clinical trials or which will result in delays in
the Company's clinical trials. See "Risk Factors -- Uncertainties
Regarding Clinical Trials."
Late Phase II Clinical Trials
In July 1996, the Company commenced patient enrollment in a
multi-center, late Phase II study of the IO use of Optro to deliver
oxygen and restore blood volume as a treatment for acute blood loss
during surgery. The study will examine the safety and efficacy of
using 25 to 100 gram doses of Optro to replace one to four units of
blood lost by patients undergoing elective surgery. The study will
enroll approximately 200 patients at 30 sites throughout the U.S.
and Canada.
Early Phase II Clinical Trials
Intraoperative Blood Replacement: This single blinded,
controlled trial was designed to study safety and to gather
preliminary efficacy/activity data in patients who experience
blood loss during surgery. This multi-center clinical trial
involved 23 patients, of whom 16 received Optro at doses ranging
up to 100 grams and seven patients received donated blood as a
control. Six Optro patients received doses of 25 grams, four
received doses of 50 grams, three received doses of 75 grams, and
three received doses of 100 grams. The first three patients at the
25 gram dose level were infused at a controlled rate,
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and all other patients were infused at a rate comparable to the rate of
infusion in blood transfusions. There were no clinically significant,
treatment-related adverse events in this clinical trial. Patients in
this trial received no prophylactic pre-treatment with any drugs to
manage or avoid potential symptoms or side effects of Optro. None of
the patients in this study experienced the gastrointestinal symptoms
that had been seen in certain subjects in the Company's prior Phase I
clinical trials. In certain patients, there were transitory elevations
of amylase and lipase (pancreatic enzymes), which spontaneously
resolved without treatment and which investigators determined not to
be clinically significant.
Acute Normovolemic Hemodilution: This single blinded, controlled
study was designed to measure safety and to gather preliminary
efficacy/activity data in patients who donate blood and receive Optro
just prior to surgery, at doses ranging up to 50 grams. Ten patients
were dosed, of whom seven received Optro and three received saline as
a control. Three patients received 12.5 grams, one patient received 25
grams and three patients received 50 grams of Optro. Patients in this
trial received no prophylactic pre-treatment with any drugs to manage
or avoid potential symptoms or side effects of Optro. There were no
clinically significant, treatment-related adverse events, and no
gastrointestinal symptoms in any of the patients in this study. As in
the IO trial, certain patients experienced transitory elevations of
amylase and lipase levels, which spontaneously resolved without
treatment and which investigators determined not to be clinically
significant.
Phase I and Phase I/II Clinical Trials
From 1991 through 1994, the Company conducted a series of safety
trials of Optro, initially in normal volunteers (Phase I) and later
in surgical patients (Phase I/II). These trials involved an aggregate
of 120 subjects and patients, of whom 99 received Optro and 21 received
control solutions. The maximum dose in these safety trials was 25
grams.
In the course of the trials, certain subjects experienced
transitory mild to moderate symptoms, including certain
gastrointestinal symptoms. The Company instituted manufacturing
process changes which reduced the incidence of certain symptoms,
and used several common pharmacologic agents as appropriate to
prevent or manage these symptoms.
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Chronic Anemia Indication
The Company has initiated Phase I trials of its recombinant
hemoglobin, rHb1.1, as an agent for stimulating red blood cell
formation (hematopoiesis). The first study was initiated in June
1996 and will evaluate the safety and hematopoietic activity of
repeated low doses of rHb1.1 in approximately 50 patients with
anemia resulting from end stage renal disease. The randomized,
double-blind, placebo-controlled trial is a dose-ranging study
being conducted at five sites within the U.S. Participants in
the trial will have been on hemodialysis for six months or more,
and will have responded to treatment with exogenous erythopoietin.
The Company plans to initiate a second Phase I trial. The trial
is expected to evaluate the safety and hematopoietic activity of
repeated low doses of rHb1.1 in approximately 20 patients with chronic
anemia due to primary bone marrow failure and malignancy. This
randomized, open-label dose-ranging study is being conducted at one
site in the U.S.
Research and Development
Somatogen's research and development efforts are focused on
clinical trials of Optro, process development and new product
development. In the process development area, Somatogen is working
on improving all phases of its existing pilot manufacturing processes
in order to allow economical commercial scale production. Somatogen
is also developing recombinant hemoglobin products for additional
applications.
In fiscal 1996, 1995 and 1994, net research and development
expenses were $16,949,000, $14,968,000 and $18,029,000, respectively.
Somatogen expects these expenses to increase during the foreseeable
future.
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Manufacturing
The Company's ability to operate profitably will depend on the
manufacturing of recombinant hemoglobin products in very large
quantities and at a competitive cost, while consistently achieving
appropriate levels of product purity. To date, Somatogen has
manufactured its initial product in a pilot facility and only in
limited quantities. To successfully establish commercial manufacturing
capacity, improvements must be made in enhancing manufacturing
processes, scaling up such processes, reducing product costs and
demonstrating the consistent manufacture of a clinically safe product.
The Company's alliance with Lilly will provide additional resources
and expertise to assist in achieving these development goals. The
implementation and testing of process improvements in the Company's
pilot production facility may affect the production schedule for
clinical material, which may in turn affect the rate of progress in
clinical trials for Optro. Somatogen has devoted substantial resources
to developing an efficient production process capable of producing
recombinant hemoglobin. Somatogen has genetically engineered
recombinant hemoglobin to overcome certain of the inherent limitations
of naturally occurring hemoglobin. By addressing these limitations at
the genetic level, Somatogen has avoided the need to modify the
hemoglobin molecule through chemical processing.
Optro is produced through a fermentation process as a stable,
fully functional, properly folded, soluble intracellular protein.
Optro is produced by introducing the alpha and beta globin genes for
Optro into a host cell (E. coli), growing large quantities of the
genetically engineered host cells, breaking open the cells to
remove the hemoglobin, and purifying the hemoglobin. In order to
function properly, the globin chains must be properly folded.
Additionally, four heme groups must be properly incorporated into
the molecule. Somatogen's proprietary technology enables it to produce
the entire hemoglobin molecule in E. coli without the need for any
subsequent steps to correctly assemble the molecule. The Company has
also developed proprietary purification techniques for Optro using
standard column chromatography and conventional large scale processing
equipment.
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Somatogen constructed and is operating a pilot production
facility consisting of approximately 24,000 square feet. The Company's
pilot manufacturing facility includes a 600 and 1,500 liter fermentor
for production of Optro. The pilot manufacturing facility includes the
equipment necessary to produce hemoglobin in E. coli, to separate the
hemoglobin from the cells and to purify the hemoglobin. This facility
has been producing Optro since December 1990 and is anticipated to
have sufficient capacity to meet clinical needs for Phase II clinical
trials.
Under the terms of the Company's collaboration with Lilly, Lilly
will assume responsibility for producing material for the Company's
Phase III trials as well as commercial production thus eliminating
the need for Somatogen to build commercial scale manufacturing
facilities for Optro at an estimated cost of more than $150,000,000.
Such material is anticipated to be produced at an existing Lilly
facility in the United Kingdom, which will require significant
modifications. Moreover, Lilly, as the Company's manufacturing
partner, must adhere to cGMP regulations and to guidelines enforced
by the FDA and other regulatory agencies through their facilities
inspection programs. A delay in the completion of modifications to
such facilities or the need to modify such facilities to continue
to comply with FDA and other regulatory agency rules could delay
Somatogen's ability to complete its clinical trials and to seek
regulatory approvals for the sale of Optro. To the extent the
Company has manufacturing requirements for non-oxygen carrying
indications of rHb1.1, or other products outside the Lilly
Alliance, the Company may need to develop additional manufacturing
facilities.
The manufacturing process for Optro requires substantial
amounts of water and other raw materials. Although these raw
materials are currently available in quantities sufficient to meet
the Company's current needs, there can be no assurance that these
raw materials will be available in sufficient quantities to meet
the needs for commercial production at an acceptable cost, or that
regulatory agencies will approve the use of these raw materials.
If the Company or Lilly were to experience raw material shortages,
such shortages could affect its ability to produce products.
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SOMATOGEN, INC.
In order to manufacture Optro at a commercial scale at an
acceptable cost, Somatogen and Lilly must make further improvements
in certain existing process technologies, and complete adaptation of
these technologies for use at a large scale. This work is focused on
reducing product cost, improving current expression levels, improving
recovery of recombinant hemoglobin following fermentation, enhancing
purification yields through use of improved techniques and materials,
and increasing product stability. Somatogen believes that developing a
cost-effective manufacturing process for commercial scale production
of Optro with a consistently high level of purity will require
improvements to some phases of its existing pilot manufacturing
processes, but should not require any fundamental technological
breakthroughs. While many of these improvements have now been
demonstrated at 6,000 liter scale, there can be no assurance that
the Company will be able to successfully implement any of these
improvements as scale-up of the process to commercial levels (50,000
liter) proceeds. The Company's products will be given in large
dosages. They must be rigorously purified since impurities may lead
to serious and potentially fatal toxic reactions. The Company must
also develop extremely sensitive analytical techniques to show that
it has achieved acceptable levels of purity. There can be no
assurance that the Company will be able to achieve or maintain
an appropriate level of product purity or that it can develop assays
that are sufficiently sensitive to demonstrate the required high
level of purity. As part of its clinical development program, the
Company has made process improvements to reduce or eliminate certain
side effects. The time required to implement some of these improvements
has resulted in extending the length of the clinical trials. There can
also be no assurance that process changes will not require clinical
studies which would require additional expenditures and may cause
delays in the clinical development of Optro.
The Company's agreement with Lilly provides that Lilly has
certain rights to terminate the agreement. There can be no assurance
that the collaboration will continue and result in successful
commercialization of Optro. If the Lilly collaboration were
discontinued, Somatogen would be required to seek other alternatives
for further manufacturing, clinical development and marketing
activities. There can be no assurance that Somatogen would be able
to develop acceptable alternatives in a timely manner in the event
that the Lilly Alliance were to be discontinued.
<PAGE> 19
SOMATOGEN, INC.
Sales and Marketing
Because the initial target market for Optro is replacement of
blood lost in surgery, Somatogen and Lilly will focus their marketing
and selling efforts on key operating room personnel, including
anesthesiologists and surgeons. The Company's strategic alliance with
Lilly contemplates that Lilly will be responsible for marketing,
sales and distribution of Optro in all markets outside of North
America. The alliance also contemplates that the Company and Lilly
will jointly market and sell Optro in North America, while Lilly
will assume sole responsibility for distribution. The Company is
required to contribute to the total selling effort in North America
in order to maintain a profit sharing relationship. Given the fact
that the customers are highly concentrated in the hospital setting,
the Company and Lilly believes they can achieve optimal sales coverage
in North America with a relatively small specialized sales force.
There can be no assurance that the Company will be able to build
such a sales force for Optro or any other potential products or
that its sales and marketing efforts will be successful.
There can be no assurance that Somatogen or its partners will
receive the necessary governmental approvals to market and distribute
Optro in any country.
Somatogen may enter into additional strategic alliances with
Lilly or other companies to develop and promote products for
erythropoiesis/anemia and other non-oxygen carrying indications.
Patents and Trade Secrets
Proprietary protection for the Company's products, processes
and know-how is important to Somatogen's business. The Company's
policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the
development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
The Company seeks patent protection for its proprietary
technology and products in the United States and in foreign countries.
The Company's products and inventions may involve both synthetic
compounds that are not naturally occurring and synthetic forms of
<PAGE> 20
SOMATOGEN, INC.
naturally occurring molecules. To the extent that the Company's
products or inventions are synthetic chemical compounds that are
not natural products, they may, provided standard patentability
criteria are met, be afforded patent protection under well settled
principles and procedures established by the U.S. and other patent
offices. To the extent Somatogen's products or inventions are
synthetic forms of naturally occurring molecules, the extent and
nature of the protection available is less certain.
The Company's patents include claims for certain hemoglobin
compositions and for the methods of use of certain hemoglobin
compositions as a blood substitute. The Company has filed or
licensed patent applications in the U.S. and in certain other
countries seeking protection for recombinant hemoglobin technology
and compounds developed by the Company and/or the Medical Research
Council ("MRC"). In July 1991, the Company's initial U.S. patent
was issued covering blood substitute products based upon hemoglobin
that has been genetically engineered to improve its ability to
deliver oxygen to the tissues. This patent will expire in the year
2008. Similar patents have been issued jointly to the Company and
the MRC in the United Kingdom (expiring in 2007) and Australia
(expiring in 2004). A European patent containing certain related
claims has also been granted, but is being opposed by another
company. Somatogen has entered into an agreement with the MRC,
which grants the Company the exclusive right to make, use and sell
products covered by such U.S. and U.K. patents and certain additional
foreign counterparts. The Company has agreed to pay the MRC a royalty
on net sales in certain countries of artificial hemoglobin products
using the MRC know-how or covered by an MRC patent for a period of
15 years from the date of agreement. Patents covering methods of
expressing and genetically stabilizing hemoglobin have been issued
to the Company in Australia, South Africa and New Zealand. A patent
covering non-naturally occurring disulfide-stabilized hemoglobin has
also been issued in the U.S. (expiring in 2008). The remaining
hemoglobin-related patent applications owned, co-owned or licensed
by the Company are pending.
<PAGE> 21
SOMATOGEN, INC.
The patent positions of biotechnology firms, including
Somatogen, are generally uncertain and involve complex legal and
factual questions. Consequently, the Company does not know whether
any of its pending applications will result in the issuance of any
patents or whether any issued patents will provide significant
proprietary protection or will be circumvented or invalidated.
Since patent applications in the U.S. are maintained in secrecy
until patents issue and publication of discoveries in the scientific
or patent literature tend to lag behind actual discoveries by several
months, Somatogen cannot be certain that it was the first creator of
inventions covered by pending patent applications or that it was the
first to file patent applications for such inventions. The Company
is aware of certain U.S. patents owned by other parties who may
claim infringement by certain products or processes contemplated by
the Company. The Company believes that certain of such patents may
be invalid. The Company believes that licenses would be available
for other patents, that the Company's contemplated products,
processes or methods could be used in a manner that would avoid
infringement, could be modified to avoid infringement, or are not
material to the Company's business. There can, however, be no
assurance that licenses would be available on terms acceptable to
the Company, or its partners, or at all. If the Company cannot
obtain such licenses and cannot show such unlicensed patents to
be invalid or unenforceable, the Company could encounter delays
in product market introductions and incur substantial additional
costs while it attempts to design around such intellectual property
rights, or it could be prevented from the development, manufacture
or sale of products requiring such licenses. There also can be no
assurance that any modifications effected by the Company in an effort
to avoid infringement of certain patents would be successful or would
not result in infringement of other patents. Moreover, there can be
no assurance that all U.S. patents that may pose a risk of
infringement have been identified. Additionally, the Company has
not sought to identify foreign patent applications or patents
which might affect its future foreign sales or operations. The
Company could incur substantial costs in defending against suits
brought against it on such U.S. or foreign intellectual property
rights or prosecuting suits which the Company
<PAGE> 22
SOMATOGEN, INC.
brings against other parties to protect its intellectual property
rights. Competitors or potential competitors may have filed
applications for, or have received patents and may obtain additional
patents and proprietary rights relating to, compounds or processes
competitive with those of the Company. The Company has not reached a
final decision as to all details of its manufacturing process, and
modifications to that process may increase the patent infringement
risks faced by the Company.
The Company also relies upon unpatented trade secrets, and there
can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques, or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its rights to
its unpatented trade secrets. Somatogen requires each of its employees,
consultants and advisors to execute a confidentiality agreement upon
the commencement of an employment or consulting relationship with the
Company. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets in the
event of unauthorized use or disclosure of such information.
Competing Technologies
Problems associated with the transfusion of human donor blood
have stimulated numerous efforts to reduce transfusion with donated
blood. Most efforts to develop a blood substitute have concentrated
on developing stroma-free hemoglobin from human or bovine red blood
cells. Stroma-free hemoglobin must be rigorously purified to remove
all of the non-hemoglobin elements of the red blood cell to avoid
potentially severe reactions resulting from the contaminating elements.
In addition, stroma-free hemoglobin must be chemically modified in order
to prevent dissociation into dimers which can be toxic to the kidneys.
Hemoglobin derived from human red blood cells must also be chemically
modified to reduce its oxygen affinity.
<PAGE> 23
SOMATOGEN, INC.
The use of stroma-free hemoglobin suffers from certain inherent
limitations. Hemoglobin that is obtained from human blood may carry a
risk of transmission of blood-borne infectious disease. The
technologies for inactivating viral agents in human blood are rather
limited and unproven at present. In addition, the supply of human-
derived hemoglobin is dependent on the availability of human donor
blood. Today, there is not a ready supply of excess human blood. An
alternative approach to the supply problem associated with human-
derived hemoglobin is to derive products from plants or animals that
have been genetically engineered to produce human hemoglobin
(transgenic plants or animals). However, Somatogen believes that the
transgenic production of hemoglobin may have a number of limitations,
including many of the same limitations as stroma-free hemoglobin. At
least four other companies have announced that they have commenced
human clinical trials of hemoglobin-based oxygen carrying solutions.
One of these companies, Baxter International Inc., has announced that
they have received FDA approval to commence two pivotal phase III
studies with their human derived hemoglobin solution.
Several of the Company's competitors are currently developing
products derived from bovine hemoglobin, which has a molecular
structure that is different from human hemoglobin. One of the Company's
competitors is attempting to modify bovine-derived hemoglobin by
attaching polyethylene glycol molecules in an effort to mask the
differences between bovine and human hemoglobin from the human immune
system. Just as hemoglobin sourced from human red cells carries a risk
of blood-borne disease transmission, hemoglobin sourced from animal red
blood cells may also transmit blood-borne disease.
Certain other non-hemoglobin molecules have also been explored as
blood substitutes. PFCs, inert chemicals which are capable of
dissolving and transporting oxygen, have been studied most extensively.
PFCs are synthetically produced thereby eliminating the risk of
transmission of infectious diseases, can transport large amounts of
oxygen, and have no antigenicity thereby eliminating the need for
blood-typing and cross-matching. The Company is aware that two of its
potential competitors have commenced human trials for the use of a PFC-
based product as a blood substitute.
<PAGE> 24
SOMATOGEN, INC.
The mechanism of oxygen transport by PFC compounds is very
different from hemoglobin or blood. Oxygen is physically dissolved
into PFC emulsions, with no specific bonding interaction with the
perfluorocarbon molecules. Thus, a linear increase in available
oxygen results in a linear increase in the amount of oxygen dissolved
in the PFC carrier, in contrast to the sigmoidal oxygen saturation-
dissociation curve for hemoglobin. Consequently, PFCs require very
high oxygen levels in the lung in order for them to dissolve
physiologically meaningful amounts of oxygen. To achieve these high
levels of oxygen, patients must be ventilated with very high levels
of oxygen. Current anesthesia practice does not utilize high oxygen
inspiration during surgery, and in many situations it is considered
dangerous.
Competition
Optro will compete directly with red blood cells for volume
expansion and oxygen delivery applications and with other solutions
for volume expansion applications. Additionally, Optro may supply
clinical utility in specific clinical situations where the use of
red blood cells is not necessary. There can be no assurance that
Optro or any other product of Somatogen will have advantages which
will be significant enough to cause medical professionals to adopt
its use rather than to continue to use established therapies. The
pricing of Somatogen's products in relation to established therapies
could also affect market acceptance of such products. Somatogen
believes, however, that Optro will compete on the basis of quality
because it may offer a safe and cost-effective solution to the
problems of red blood cell transfusions, while avoiding the problems
of stroma-free hemoglobin. See "Somatogen's Recombinant Hemoglobin
Technology."
Competition in the pharmaceutical industry is intense. There
are many pharmaceutical companies, biotechnology companies, public
and private universities and research organizations actively engaged
in research and development of blood substitute products. Many of the
Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company
and may be better equipped to develop, manufacture and market
products.
<PAGE> 25
SOMATOGEN, INC.
In addition, many of these companies have extensive experience in
preclinical testing and human clinical trials. These companies may
develop and introduce products and processes competitive with or
superior to those of the Company. Companies pursuing several competing
technologies have entered or are expected to enter clinical trials for
their products. There can be no assurance that the Company will be able
to compete successfully.
Government Regulation
Regulation by governmental authorities in the United States and
foreign countries will significantly affect the Company's and Lilly's
ability to manufacture and market the Company's products and to
conduct the Company's ongoing research and product development
activities. All of Somatogen's current and anticipated future
products will require regulatory approval by appropriate government
agencies before those products can be commercialized. Human
therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the FDA and
similar health authorities in foreign countries. Various federal,
state and foreign statutes also govern or influence the manufacture,
safety, labeling, storage, record keeping and marketing of such
products. The process of obtaining these approvals is costly and
time-consuming. Moreover, ongoing compliance with these requirements
can require the expenditure of substantial resources. Any failure by
the Company or Lilly or other collaborators or licensees to obtain,
or any delay in obtaining, required regulatory approvals would
adversely affect the marketing of the Company's products and its
ability to derive product or royalty revenue.
Preclinical testing is generally conducted in animal or in
vitro models to evaluate the potential efficacy and safety of a
compound before it is administered to humans. The results of these
studies are submitted to the FDA as part of an Investigational New
Drug Application ("IND"), which must be reviewed before human
clinical testing can begin. The Company's preclinical studies for
the initial indications for Optro described in the Company's first
IND were completed in April 1991, and such studies did not show
any significant toxic effect of Optro. These studies were performed
in part by an independent preclinical testing lab, and the protocols
were designed in consultation with the FDA.
<PAGE> 26
SOMATOGEN, INC.
Clinical trials involve the administration of the investigational
new drug to healthy subjects and to patients, under the supervision of
a qualified principal investigator. Clinical trials are conducted
under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy/activity
criteria to be evaluated. Each protocol and subsequent amendments
must be submitted to the FDA. In addition, each clinical study must
be conducted in accordance with "Good Clinical Practices" as
prescribed by the FDA. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") at
the institution at which the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human
subjects and patients, and the possible liability of the institution.
Following completion of the Company's Phase I clinical trials,
the Company reviewed the results of such trials with the FDA, which
authorized the Company to proceed to early Phase II trials in
surgical patients undergoing blood loss. The Company initiated
these trials in the fall of 1994. See "Clinical Development
Strategy." There can be no assurance that clinical testing will
be completed successfully within any specified time period, if at
all, with respect to any of the Company's products subject to such
testing. Furthermore, the Company or the FDA may suspend clinical
trials at any time if it is felt that the subjects or patients are
being exposed to an unacceptable health risk. The Company is aware
of four blood substitute products developed by other companies which
began clinical trials that were subsequently halted due to safety
concerns; all four of these companies have since announced that they
have resumed and are continuing clinical trials. Although the Company
believes that its products are substantially different from other
blood substitute products, there can be no assurance that the Company
will not encounter problems in clinical trials which will cause the
Company to delay or suspend clinical trials.
<PAGE> 27
SOMATOGEN, INC.
In the case of biologic products such as the Company's
recombinant hemoglobin, the results of pharmaceutical development
and the preclinical and clinical testing are submitted to the FDA
in the form of a product license application ("PLA"), and the
results, data and facility description are submitted to the FDA in
the form of an establishment license application ("ELA"). Under
user fee legislation the ELA must be submitted within six months
under standard review and three months under expedited review. The
PLA and ELA must be approved before commercial sales may begin. The
FDA may respond to the PLA and ELA by granting a product license,
or by denying the applications if it finds that the applications do
not meet the criteria for regulatory approval.
The FDA also may respond by requiring the Company to perform
additional testing or supply additional information. Notwithstanding
the submission of such data, the FDA may ultimately decide that the
applications do not satisfy its regulatory criteria for licensing.
The testing and approval process is likely to require substantial
time and effort. There can be no assurance that approval will be
granted for any of Somatogen's products on a timely basis, if at
all. Somatogen has made and must continue to make substantial
financial commitments in order to prove safety and efficacy/
activity of Optro in humans to receive FDA approval of Optro.
In addition to regulations enforced by the FDA, the Company
also may be subject to regulation under the Occupational Safety
and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, the Compensation
and Liability Act, the National Environmental Policy Act, the
Clean Air Act, the Medical Waste Tracking Act, the federal Water
Pollution Control Act and other present and potential future
federal, state or local regulations. See "Manufacturing."
<PAGE> 28
SOMATOGEN, INC.
The regulatory process, which includes preclinical and clinical
testing of each product to establish its safety and efficacy and post-
marketing studies, can take many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could
delay, limit or prevent FDA regulatory approval. In addition, delays
or rejections may be encountered based upon changes in FDA policy
during the period of product development and FDA regulatory review
of each submitted new product license application. Similar delays may
also be encountered in foreign countries. Each manufacturing facility
for a biologic product, such as Optro, must also be licensed by the
FDA. There can be no assurance that even after such time and
expenditures, regulatory approval will be obtained for any products
developed by Somatogen or any manufacturing facility intended to
produce such products by the Company or Lilly. Moreover, if
regulatory approval of a product is granted, such approval may
entail limitations on the indicated uses for which it may be
marketed. Further, even if such regulatory approval is obtained,
a marketed product, manufacturer and manufacturing facilities are
subject to continual review and periodic inspections, and later
discovery of previously unknown problems with a product, manufacturer
or facility may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.
Failure to comply with the applicable regulatory requirements
can, among other things, result in fines, suspension of regulatory
approvals, product recalls, operating restrictions and criminal
prosecution. Further, additional governmental regulation may be
established which could prevent or delay regulatory approval of the
Company's products.
<PAGE> 29
SOMATOGEN, INC.
Reimbursement
Somatogen's ability to successfully commercialize its products
will depend in part on the extent to which reimbursement of the cost of
such products and related treatment will be available from government
health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price
of medical products and services. Significant uncertainty exists
as to the reimbursement status of newly approved health care products,
and there can be no assurance that adequate third-party coverage will
be available to enable Somatogen to maintain price levels sufficient
for realization of an appropriate return on its investment in product
development. The public and the federal government have recently
focused significant attention on reforming the health care system in
the U.S. A number of health care reform measures have been suggested,
including price controls on therapeutics. Public discussion of such
measures is likely to continue, and concerns about the potential
effects on different possible proposals have been reflected in the
volatility of the stock prices for companies in health care and related
industries. Although the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what
impact they may have on the Company, adoption of certain of the
proposals could have a material adverse effect on the Company and its
business and could cause volatility in the market price of the
Company's stock.
Human Resources
As of July 31, 1996 Somatogen employed 200 individuals, of whom
approximately 56 hold Ph.D., M.D. or other advanced degrees. Of its
total work force, 83 employees are dedicated to manufacturing, 65
are engaged in research and development activities and 52 are devoted
to support and administrative activities. A significant number of
the Company's management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical products
companies. Somatogen believes that it has been successful in
attracting skilled and experienced scientific personnel and that
it maintains good relations with its employees. The Company's
success will depend in large part upon its ability to attract and
retain these and future employees. The Company faces competition
in this regard from other companies, research and academic
institutions and government entities.
<PAGE> 30
SOMATOGEN, INC.
Somatogen's success is highly dependent on the continued services
of a limited number of skilled managers and scientists. The loss of
any of these individuals could have a material adverse effect on the
Company. In addition, the success of the Company will depend upon,
among other factors, successful recruitment and retention of additional
highly skilled and experienced management and technical personnel.
There can be no assurance that the Company will be able to retain
existing employees, or find, attract or retain additional personnel
on acceptable terms given the competition among numerous pharmaceutical
and health care companies, universities and non-profit research
institutions of such personnel.
Somatogen's anticipated growth and expansion into areas and
activities requiring additional expertise, such as clinical testing,
government approval, manufacturing, sales and marketing, are expected
to place increased demands on the Company's resources. These demands
are expected to require the addition of new management personnel and
the development of additional expertise by existing management
personnel. The failure to acquire such services or to develop such
expertise will adversely affect prospects for the Company's success.
<PAGE> 31
SOMATOGEN, INC.
Officers
The officers of the Company and their ages as of August 31, 1996
are as follows:
Name Age Position
Andre de Bruin 49 President and Chief Executive Officer
Robert F. Caspari, M.D 49 Senior Vice President of Medical
Affairs
J. William Freytag, Ph.D. 45 Senior Vice President of Commercial
Development
Timothy D. Hoogheem 43 Senior Vice President of Finance and
Administration, Chief Financial Officer,
Treasurer and Assistant Secretary
Richard J. Gorczynski, Ph.D.48 Vice President of Research and
Development
Thomas A. Keuer 37 Vice President of Manufacturing and
Process Engineering
Carol L. Cech, Ph.D 48 Vice President of Technology and
Intellectual Property
Conrad A. McCarty 29 Corporate Controller
James C.T. Linfield 41 Secretary
<PAGE> 32
SOMATOGEN, INC.
Mr. de Bruin was appointed President and Chief Executive Officer
in July 1994 and appointed to the Board of Directors in August 1994.
He was appointed Chairman of the Board in January 1996. Since 1989,
immediately prior to joining Somatogen, he was Chairman, President
and Chief Executive Officer of Boehringer Mannheim Corporation,
Indianapolis, Indiana, the U.S. subsidiary of Corange Ltd., a
private, global health care corporation with sales exceeding
$3 billion. Mr. de Bruin serves on the Board of Directors of
Diametrics Medical Inc. and BioStar, Inc.
Dr. Caspari was appointed Senior Vice President of Medical
Affairs in October 1994. Prior to joining Somatogen, he served
as Vice President of Medical Affairs at Boehringer Mannheim
Corporation, from August 1991 to October 1994. Immediately prior,
he held the position of Executive Director of Research and
Development at GynoPharma, Inc., from September 1988 to August
1991. Dr. Caspari was employed at Schering Plough from 1987 to
April 1988 as Senior Director, Worldwide Cardiovascular Research
and as Senior Director, International Clinical Research. He served
in various positions at Lederle Laboratories from 1982 to 1987,
including Director of Global New Product Management. Dr. Caspari
received his M.D. from Georgetown University School of Medicine in
1975.
Dr. Freytag was appointed Senior Vice President of Commercial
Development in October 1994. Prior to joining Somatogen, he served
as President of Molecular Diagnostics at Boehringer Mannheim
Corporation, from October 1993 to October 1994. Immediately prior,
he held the position of President of Research and Development from
June 1990 to October 1993. Dr. Freytag was employed at DuPont
Medical Products in various positions including Research and
Development and Commercial Development from 1980 to 1990.
Dr. Freytag received his Ph.D. in biochemistry from the
University of Kansas Medical Center. He served as a
Postdoctoral Fellow at Duke University for four years.
Mr. Hoogheem was appointed Senior Vice President of Finance
and Administration in July 1996 and has been Chief Financial Officer
since May 1992. From May 992 to July 1996, Mr. Hoogheem served as
the Company's Vice President of Finance. Mr. Hoogheem was appointed
Assistant Secretary in March 1994 and appointed Treasurer in July 1994.
Prior to joining Somatogen, he was employed by McDATA Corporation, a
network communications company, from October 1990 to May 1992 as
President and Chief Operating Officer and from October 1989 to October
1990 as Vice President of Finance and Chief Financial Officer.
<PAGE> 33
SOMATOGEN, INC.
Mr. Hoogheem was employed at Storage Technology Corporation, a
computer peripherals manufacturer, from March 1978 to October 1989,
in various financial and administrative positions including Corporate
Controller, Assistant to the President and Controller of the company's
German Operations. He is a Certified Public Accountant.
Dr. Gorczynski was appointed Vice President of Research and
Development in November, 1994. Prior to joining Somatogen, he
served as Senior Director of Drug Discovery at G.D. Searle from
April 1993 to November 1994, where he led the Cardiovascular
Diseases Research Department and managed the Discovery to
Development Product Transition at Searle. He served in various
other positions at G.D. Searle from 1985 to 1993, including
Senior Director of Scientific and Product Affairs in the Licensing
and Business Development Group; Director, Cardiovascular Diseases
Research Department; and Director, Biological Research. Prior to
Searle, Dr. Gorczynski served as Section Head of Pharmacology at
American Critical Care from 1983 to 1985. Dr. Gorczynski received
his Ph.D. in Physiology at the University of Virginia in 1976.
Mr. Keuer was appointed Vice President of Manufacturing and
Process Engineering in October 1994. He served in various other
positions at Somatogen from 1990 to 1994, including Director of
Project Engineering. Prior to joining Somatogen, he was employed
by Monsanto Company from 1980 to September 1990 in various
manufacturing, process development and engineering positions,
most recently as an Engineering Specialist for biotechnology-
related projects. Mr. Keuer received an M.S. degree in biochemical
engineering from Rice University in 1984.
Dr. Cech has been Vice President of Technology and Intellectual
Property since May 1991. Dr. Cech served as Director of Special
Projects from November 1989 to May 1991 with responsibility for
intellectual property and government contracts. From January 1987
to November 1989, she served as Scientific Director of Somatogenetics
Instruments, Inc., a former subsidiary of Somatogen whose assets
were sold to Beckman Instruments, Inc. in 1989. Before joining
Somatogen, Dr. Cech was an Assistant Professor of Chemistry at the
University of Colorado from 1978 to 1986. Dr. Cech received a Ph.D.
in biophysical chemistry at the University of California, Berkeley,
in 1975 and completed postdoctoral work as a Jane Coffin Childs Fellow
in the Department of Biochemistry and Molecular Biology at Harvard
University.
<PAGE> 34
SOMATOGEN, INC.
Mr. McCarty has been Corporate Controller since December 1995.
Prior to joining Somatogen, he was employed by the accounting firm
of Price Waterhouse LLP from December 1991 to December 1995 and held
the position of audit manager immediately prior to joining the
Company. Immediately prior, he held the position of risk analyst
at RiskCap from August 1990 to December 1991. He is a Certified
Public Accountant.
Mr. Linfield has been Secretary since May 1991. Mr. Linfield
has been a Partner of Cooley Godward LLP, counsel to the Company,
since June 1993. Mr. Linfield served as Vice President and General
Counsel of Somatogen from May 1992 through May 1993, and Vice
President of Finance from February 1991 to May 1992 and as Chief
Financial Officer from May 1991 to May 1992. Before joining
Somatogen, he had been a partner of Davis, Graham & Stubbs, a
Denver law firm, from 1985 to May 1991 (on leave from February
1991 to May 1991). He received a J.D. from Harvard Law School in
1980.
Item 2. Properties
- ------
Somatogen's administrative offices and research laboratories
comprise approximately 76,900 square feet located in Boulder,
Colorado. The Company's laboratories are equipped for research
activities in biochemistry, analytical chemistry and synthetic
chemistry. The leases covering these facilities expire beginning
in February 1997. The Company anticipates that its current
facilities will meet the Company's research and development
needs through fiscal 1997.
The Company has a pilot manufacturing facility consisting
of approximately 24,000 square feet. The Company's lease covering
this facility expires in October 1997.
In September 1992, the Company began construction of a
clinical manufacturing facility ("CMF-1"), which was designed
to expand the Company's capacity to produce Optro for U.S. and
international clinical trials, as well as support initial
commercial production. After entering into the Lilly Alliance,
the Company reevaluated its manufacturing facility requirements,
cancelled construction of the CMF-1 facility and recorded a
charge of approximately $29 million in fiscal 1994. The land,
building and related equipment of CMF-1 and land intended for
construction of a larger commercial manufacturing facility
are being held for sale.
<PAGE> 35
SOMATOGEN, INC.
Item 3. Legal Proceedings
- ------
In December 1991, a warrantholder, with warrants to purchase
an aggregate of 1,112 shares of Common Stock at a weighted average
exercise price of $46.51 per share, filed a complaint in the
District Court for the City and County of Denver, Colorado, James
McCabe v. Somatogen, Inc., Charles H. Scoggin and James C.T.
Linfield, apparently claiming, among other things, that he is
entitled to warrants to purchase one-half of one percent of the
number of shares of the Company's Common Stock outstanding as of
an unspecified date for an aggregate exercise price of $59,512.
The trial court granted summary judgment in favor of the Company
in May 1994 on all claims. The grant of summary judgment was
sustained in June 1996 by the Colorado Court of Appeals, and the
Colorado Supreme Court has declined to hear the warrantholder's
appeal.
In October 1994, three other warrantholders with warrants
to purchase an aggregate of 2,375 shares of Common Stock at a
weighted average exercise price of $60 per share, filed a complaint
in the District Court of the City and County of Denver, Colorado,
Kenneth D. Anderson, et al. v. Somatogen, Inc. asserting claims
similar to those asserted by James McCabe. In July 1995, the
trial court granted summary judgment in favor of the Company on
all claims. The warrantholders have appealed the grant of summary
judgment. The Colorado Court of Appeals has not yet rendered a
decision on such appeal. The Company believes that the
warrantholders claims in the foregoing proceedings are without
merit and that the outcome of the litigation will not have a
material effect on the Company's capital structure or financial
position.
Item 4. Submission of Matters to a Vote of Security Holders
- ------
Not applicable.
<PAGE> 36
SOMATOGEN, INC.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- ------ Matters
The Common Stock (NASDAQ symbol SMTG) began trading publicly in the
over-the-counter market through The Nasdaq National Market on
August 2, 1991. Prior to that date, there was no public market for
the Common Stock. The following table presents quarterly information
on the price range of the Common Stock. This information indicates
the high and low sale prices reported by The Nasdaq National Market.
These prices do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
Fiscal 1996:
First Quarter................................. $26.13 $12.88
Second Quarter................................ 21.38 12.13
Third Quarter................................. 25.38 16.75
Fourth Quarter................................ 19.13 13.00
Fiscal 1995:
First Quarter................................. 9.06 7.50
Second Quarter................................ 8.50 5.88
Third Quarter................................. 9.75 6.38
Fourth Quarter................................ 15.00 8.50
Fiscal 1994:
First Quarter................................. 12.75 6.75
Second Quarter................................ 15.00 8.25
Third Quarter................................. 10.50 6.75
Fourth Quarter................................ 10.00 6.25
</TABLE>
As of July 31, 1996, there were approximately 1,252 holders of
record of the Common Stock.
The Company has paid no dividends on its Common Stock since its
inception and does not plan to pay dividends on its Common Stock in
the foreseeable future.
<PAGE> 37
SOMATOGEN, INC.
Item 6. Selected Consolidated Financial Data
- ------ (In thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
July 10, 1985
Years ended June 30, (inception) to
1996 1995 1994 1993 1992 June 30, 1996
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue..........................$ -- $ -- $ 11 $ 659 $ 3,682 $ 6,588
Operating expenses:
Research and development......... 19,849 18,890 18,029 19,859 11,612 101,252
Reimbursements from Lilly........ (6,150) (4,022) -- -- -- (10,172)
Reimbursements to Lilly.......... 3,250 100 -- -- -- 3,350
------ ------ ------ ------ ------ -------
Research and development, net.... 16,949 14,968 18,029 19,859 11,612 94,430
General, administrative and
marketing...................... 4,150 4,282 4,199 5,466 3,920 27,767
Writedown of manufacturing
facility assets (1)............ -- -- 29,194 -- -- 29,194
------ ------ ------ ------ ------ -------
Total expenses................... 21,099 19,250 51,422 25,325 15,532 151,391
------ ------ ------ ------ ------ -------
Operating loss...................(21,099) (19,250) (51,411) (24,666) (11,850) (144,803)
Interest income and other, net... 3,076 2,146 708 1,326 1,391 8,773
------ ------ ------ ------ ------ -------
Loss from continuing operations..(18,023) (17,104) (50,703) (23,340) (10,459) (136,030)
Discontinued operations ......... -- -- -- -- -- (925)
------ ------ ------ ------- ------ -------
Net loss........................$(18,023) $(17,104) $(50,703) $(23,340) $(10,459) $(136,955)
====== ====== ====== ====== ====== =======
Loss per share data:
Loss from continuing
operations..................$ (0.90) $ (0.94) $ (3.64) $ (2.37) $ (1.37)
====== ====== ====== ====== ======
Net loss .......................$ (0.90) $ (0.94) $ (3.64) $ (2.37) $ (1.37)
====== ====== ====== ====== ======
Shares used in calculating
per share data................ 20,075 18,269 13,935 9,852 7,611
====== ====== ====== ====== ======
</TABLE>
<PAGE> 38
SOMATOGEN, INC.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
Balance Sheet Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-
term investments.............. $54,276 $37,909 $52,017 $22,658 $31,011
Working capital................. 51,739 35,789 45,446 15,436 27,859
Total assets.................... 69,161 51,880 65,994 60,368 43,883
Long-term debt and capital lease
obligations................... 11 370 1,106 3,079 3,121
Deficit accumulated during the
development stage.............(140,948) (122,925) (105,821) (55,118) (31,331)
Stockholders' equity............ 63,304 47,361 57,803 49,211 36,154
</TABLE>
________________
(1) Reflects revaluation of manufacturing facilities. See Notes 1 and
2 to Consolidated Financial Statements included herein.
<PAGE> 39
SOMATOGEN, INC.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the
following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results
could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are
not limited to, those discussed in this section and elsewhere in
this Form 10-K.
Since 1987, Somatogen has been a development stage company and
has devoted substantially all of its efforts and resources to
research and development related to its recombinant hemoglobin
technology. The Company has been unprofitable to date and expects
to incur substantial and increasing operating losses for the next
several years due to continued requirements for product and process
research and development, preclinical and clinical testing,
regulatory activities and establishment of a sales and marketing
organization. For the period from its inception to June 30, 1996,
the Company incurred a cumulative net loss of $136,955,000. The
amount of future net losses and the time required by the Company
to achieve profitability are highly uncertain. There can be no
assurance that the Company will be able to achieve profitability
at all or on a sustained basis.
In June 1994, the Company entered into the Lilly Alliance
whereby Lilly is co-developing Somatogen's lead human hemoglobin
product, Optro and in September 1995, Somatogen and Lilly agreed
to amend certain terms of the Lilly Alliance. Somatogen and Lilly
share certain development costs of Optro. Lilly has responsibility
for commercial-scale manufacture of the product and will have
exclusive marketing rights worldwide, except in North America and
Scandinavia. Lilly and Somatogen will co-promote Optro in North
America. Lilly will pay a royalty to the Company on sales of Optro
outside North America (except in Scandinavia, where Pharmacia has
the right to market Optro).
Results of Operations
Fiscal year ended June 30, 1996 ("fiscal 1996") as compared to
the fiscal years ended June 30, 1995 ("fiscal 1995") and June 30,
1994 ("fiscal 1994"):
<PAGE> 40
SOMATOGEN, INC.
Revenue
The Company had no revenue for fiscal 1996 and 1995. The
Company had revenue of $11,000 for fiscal 1994. Fiscal 1994
revenue was derived primarily from a cost plus fixed fee
government contract with the U.S. Navy which expired in September
1993 and research and development grants.
Operating Expenses
For fiscal 1996, total operating expenses increased 10% to
$21,099,000 from $19,250,000 for fiscal 1995, due to increased
research and development efforts as further described herein.
For fiscal 1995, total operating expenses decreased to
$19,250,000 from $51,422,000 for fiscal 1994. Fiscal 1994
operating expenses included a $29,194,000 non-recurring charge
related to the writedown of manufacturing assets. Excluding the
non-recurring charge, total operating expenses decreased 13% from
$22,228,000 in fiscal 1994, primarily due to the sharing of Optro
development costs with Lilly.
Net research and development expense for fiscal 1996 increased
by 13% to $16,949,000 from $14,968,000 in fiscal 1995. For fiscal
1995, net research and development expenses decreased by 17% from
$18,029,000 in fiscal 1994.
Excluding Lilly reimbursements, research and development
expense for fiscal 1996 increased by 5% to $19,849,000 from
$18,890,000 for fiscal 1995. For fiscal 1995, research and
development expense increased by 5% from $18,029,000 in fiscal
1994. These increases are primarily a result of increased
expenditures related to product and process development,
including preclinical trials.
Reimbursements from Lilly aggregated $6,150,000 and $4,022,000
in fiscal 1996 and 1995, respectively. There were no reimbursements
from Lilly in fiscal 1994. The increase in the reimbursements from
Lilly is primarily a result of increased reimbursable clinical
development expenditures and from the September 1995 amendment to
the Lilly Alliance which provided that, effective January 1, 1996,
certain process development expenditures would be reimbursable.
<PAGE> 41
SOMATOGEN, INC.
Reimbursements to Lilly aggregated $3,250,000 and $100,000 in
fiscal years 1996 and 1995, respectively. There were no reimbursements
to Lilly in fiscal 1994. The increase in reimbursements to Lilly
results from the sharing of clinical development costs and from
sharing process development costs which began January 1, 1996
pursuant to the September 1995 amendment to the Lilly Alliance.
Reimbursements attributable to the Lilly Alliance may vary
significantly from quarter to quarter and year to year.
General, administrative and marketing expenses for fiscal 1996
of $4,150,000 decreased $132,000 or 3% compared to fiscal 1995.
For fiscal 1995, general, administrative and marketing expenses
of $4,282,000 increased $83,000 or 2% compared to fiscal 1994.
The Company incurred a non-recurring charge, which was
principally non-cash, for the year ended June 30, 1994 associated
with the writedown of its clinical manufacturing assets of
$29,194,000.
Interest Income and Other, Net.
For fiscal 1996, net interest income and other increased
$930,000, or 43% to $3,076,000. The increase is the result of
interest earned from higher average cash and investment balances
and decreased interest expense resulting from lower debt and
capital lease balances.
For fiscal 1995, net interest income and other increased
203% to $2,146,000 from $708,000 in fiscal 1994. The increase
is the result of higher average cash and investment balances,
lower debt and capital lease balances and higher yields on U.S.
government securities, commercial paper and money market funds
held by the Company.
Taxes
The Company incurred losses for federal income tax purposes
in fiscal 1996, 1995 and 1994 and therefore incurred no tax
liability or expense for any of those years.
<PAGE> 42
SOMATOGEN, INC.
At June 30, 1996, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$109,000,000. Under the federal income tax laws, approximately
$3,000,000 of these loss carryforwards cannot be utilized due to
prior changes in stock ownership. The remainder of the loss
carryforwards will expire in the years 2003 through 2011.
Future changes in stock ownership could result in a further
limitation on the utilization of present and future loss
carryforwards. The Company also has research and development
tax credit carryforwards of approximately $3,700,000 which
expire in the years 2003 through 2011.
Deferred tax assets have been reduced to the amount
realizable, zero, by a valuation allowance based on the
Company's history of losses.
Liquidity and Capital Resources
Somatogen's operations to date have consumed substantial
amounts of cash. Negative cash flow from operations is expected
to increase during fiscal 1997 compared to the levels experienced
in fiscal 1996, and to increase in subsequent fiscal years as the
clinical trials for Optro increase in scope and the preclinical
and clinical studies of new products are undertaken. Somatogen
will need to raise significant additional funds in order to fund
the Company's future operations and capital expenditures prior
to commercialization of the Company's products. The Company has
relied primarily on public and private offerings of equity and
cost sharing and equity investments pursuant to the Lilly Alliance
to fund its operations and upon equipment leasing arrangements to
finance the acquisition of capital equipment for the Company's
laboratory and pilot manufacturing facilities.
At June 30, 1996 the Company had cash, cash equivalents and
short-term investments of $54,276,000. The Company's cash, cash
equivalents and short-term investments increased approximately
$16,367,000 during fiscal 1996. This increase is primarily due to
cash proceeds provided from the issuance of common stock offset
partially by the use of cash for operations.
<PAGE> 43
SOMATOGEN, INC.
In September 1992, the Company commenced construction of a
clinical manufacturing facility. The Company had also acquired
land for, and begun the design of, a larger commercial
manufacturing facility. In conjunction with entering into
the Lilly Alliance, an evaluation of the Company's future
manufacturing requirements was completed and construction of
the clinical manufacturing facility was discontinued. During
the fourth quarter of fiscal 1994, the Company recognized a non-
recurring charge, which was principally non-cash, associated
with the writedown of its clinical and commercial manufacturing
assets of approximately $29,200,000. The components of the
charge included approximately $21,000,000 for the clinical
manufacturing facility, $6,000,000 for related manufacturing
equipment and approximately $2,200,000 for engineering design
costs for the proposed commercial manufacturing facility. Land
and building related to manufacturing facilities and the related
manufacturing equipment aggregating $6,446,000 are classified
in Somatogen's balance sheet as assets held for sale.
For the year ended June 30, 1996, the Company realized
$941,000 in proceeds from the sale of clinical manufacturing
assets. At June 30, 1994, approximately $1,700,000 was recorded
as an accrual related to obligations resulting from the
discontinuance of construction of the clinical manufacturing
facility and related activities. At June 30, 1996, the balance
of this accrual is $457,000.
The Company believes the aggregate carrying value of all
assets held for sale approximates the assets' net realizable
value; however, the Company continues to monitor estimated
realizable values on a quarterly basis. There can be no assurance
that the Company will realize the aggregate carrying value of
assets held for sale. Proceeds from such asset sales are being
used for general corporate purposes.
The Company historically has leased a significant portion of
the equipment used in its laboratory and pilot manufacturing
facilities. As of June 30, 1996, the Company had outstanding
capital lease obligations of $170,000. Additionally, the Company
had aggregate future operating lease obligations of approximately
$1,700,000 at June 30, 1996. The Company spent $2,009,000 during
the year ended June 30, 1996 for the purchase of capital equipment
and leasehold improvements.
<PAGE> 44
SOMATOGEN, INC.
During the fiscal year beginning July 1, 1996, the Company's
operating requirements include increases in research and development
costs, including costs related to clinical trials and product
development and manufacturing. The Company's capital spending
program includes purchases of additional equipment for its research
and development laboratories and pilot manufacturing facility.
In subsequent fiscal years, the Company's operating requirements
will include continuing increases in research and development
funding to cover the costs of expanded preclinical and clinical
trials and product development, including reimbursements to Lilly,
as well as general, administrative, marketing and distribution
expenses.
In order to meet its long-term financing requirements, the
Company may pursue a number of financing alternatives, including
public and/or private offerings of securities and additional strategic
alliances. However, there can be no assurance that the Company
will be able to raise additional financing from any of such sources,
or that any additional funding which may become available to the
Company will be on acceptable terms. The Company's ability to
raise additional financing may be dependent on many factors beyond
the Company's control, including the state of the capital markets
and the rate of progress of the Company's clinical field trials.
Any additional financing that the Company may be able to obtain
could result in substantial dilution to existing stockholders.
If adequate funds are not available, the Company will be required
to significantly curtail operations. Any such action could impact
the Company's research and development programs, including the
Company's clinical field trial program. Any of these events
could adversely affect the Company's ability to commercialize
its products.
Cash requirements for the Company may vary materially from
those now planned due to results of research and development,
results of clinical testing, changes in focus and direction of
the Company's research and development programs, manufacturing
processes, competitive and technological advances, the FDA
regulatory process, changes in the Company's marketing and
distribution strategy and other factors.
Item 8. Financial Statements and Supplementary Data
- ------
Financial Statements appear on pages 57 to 77 of this
Annual Report on Form 10-K.
<PAGE> 45
SOMATOGEN, INC.
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ and Financial Disclosure
The Company, effective August 24, 1994, engaged Price
Waterhouse LLP as its independent accountants. The former
independent accountants for the Company were Ernst & Young LLP.
There were no disagreements with Ernst & Young LLP on any matter
of accounting principles or practices, financial statement
disclosure, or audit scope or procedure in connection with the
audits of the Company's financial statements for the fiscal years
ended June 30, 1994 and 1993 or for any subsequent interim period
which disagreements, if not resolved to the satisfaction of Ernst &
Young LLP, would have caused Ernst & Young LLP to make reference
to the matter in their report, and neither report contained an
adverse opinion or disclaimer of opinion or was qualified or
modified as to uncertainty, audit scope or accounting principles.
The Company has received a letter from its former auditors
concurring with the above statement. The decision to change
auditors was recommended by the Company's Audit Committee and
approved by the Company's Board of Directors.
PART III
Item 10. Directors and Executive Officers
- -------
The information required by this item (with respect to
Directors) is incorporated by reference from the information
under the caption "Election of Directors" contained in the
registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on October 31, 1996.
The required information concerning Executive Officers of the
Company is contained in Item 1, "Description of Business -- Officers."
The required information concerning compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference
from the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on October 31, 1996.
<PAGE> 46
SOMATOGEN, INC.
Item 11. Executive Compensation
- -------
Incorporated by reference from the registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on October 31, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------
Incorporated by reference from the registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on October 31, 1996.
Item 13. Certain Relationships and Related Transactions
- -------
Incorporated by reference from registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on October 31, 1996.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
- ------- 8-K
(a-1) Financial Statements
The following consolidated financial statements of the registrant are
filed with this Annual Report on Form 10-K:
Page
Report of Price Waterhouse LLP, Independent Accountants 55
Report of Ernst & Young LLP, Independent Auditors 56
Consolidated Balance Sheet at June 30, 1996 and 1995 57
Consolidated Statement of Operations for each of the three
years in the period ended June 30, 1996 and for the period
from July 10,1985 (inception) to June 30, 1996 59
Consolidated Statement of Stockholders' Equity for the period
from July 10, 1985 (inception) to June 30, 1996 61
Consolidated Statement of Cash Flows for each of the three
years in the period ended June 30, 1996 and for the period
from July 10, 1985 (inception) to June 30, 1996 64
Notes to Consolidated Financial Statements 67
<PAGE> 47
SOMATOGEN, INC.
(a-2) The exhibits to this annual report on Form 10-K are listed
under item 14(c) below.
The following management compensatory plans and arrangements are
required to be filed as exhibits to this Annual Report on Form
10-K pursuant to Item 14(c):
Exhibit
Number Description
- ------ -----------------
10.2 Registrant's Stock Option Plan as amended (the "Plan"). (1)
10.3 Form of Incentive Stock Option under the Plan. (2)
10.4 Form of Nonstatutory Stock Option under the Plan. (2)
10.25 Registrant's Employee Stock Purchase Plan and related offering
document. (2)
10.40 Non-Employee Director Stock Option Plan. (3)
10.63 Consultants Stock Option Plan. (4)
(1) Previously filed with the Commission as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-48789)
and incorporated by reference thereto.
(2) Previously filed with the Commission as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-41229)
and incorporated by reference thereto.
(3) Previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30,
1993 and incorporated herein by reference thereto.
(4) Previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30,
1995 and incorporated herein by reference thereto.
(b) Reports on Form 8-K
The registrant did not file any Reports on Form 8-K during the
last quarter of fiscal 1996.
(c) Exhibits
<PAGE> 48
SOMATOGEN, INC.
Exhibit
Numbers Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.3 Bylaws.(1)
4.1 Reference is made to Exhibits 3.1 and 3.3.(1)
4.2 Amended and Restated Registration Agreement between the
Registrant and the parties named therein, dated as of
March 28, 1990, as amended.(1)
4.3 Reference is made to Exhibit 10.8.(1)
4.4 Amendment to the Amended and Restated Registration Agreement,
dated as of June 14, 1991, between the Registrant and the
parties named therein.(1)
4.5 Specimen Common Stock certificate.(1)
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers with related
schedule.(2)
10.2 Registrant's Stock Option Plan as amended (the "Plan").(2)
10.3 Form of Incentive Stock Option under the Plan.(1)
10.4 Form of Nonstatutory Stock Option under the Plan.(1)
10.6 Purchase Agreement between the Registrant and parties named
therein, dated as of October 28, 1988.(1)
10.7 Series B Preferred Stock Purchase Agreement between the
Registrant and the parties named therein, dated as of
March 28, 1990.(1)
10.8 Amendment to Series B Preferred Stock Purchase Agreement,
dated as of February 22, 1991, between the Registrant and the
parties named therein.(1)
10.9 Amendment to Preferred Stock Purchase Agreements, dated as
of June 14, 1991, between the Registrant and the parties
named therein.(1)
10.19 Lease Agreement between the Registrant and 2545 Central
Avenue Partnership ("Central"), dated as of April 13, 1990,
as amended.(2)
10.20 Lease Agreement between the Registrant and Central, dated as
of September 21, 1990.(1)
10.21 Master Lease and Warrant Agreement between the Registrant and
Pacific, as the assignee of Equitec, dated as of March 31,
1989.(1)
10.22 Master Lease and Warrant Agreement between the Registrant and
Pacific, dated as of May 2, 1990.(1)
10.23 Master Lease Agreement between the Registrant and Dominion,
dated as of June 29, 1990.(1)
10.25 Registrant's Employee Stock Purchase Plan and related
offering document.(1)
<PAGE> 49
SOMATOGEN, INC.
10.26 Master Lease Agreement between the Registrant and General
Electric Capital Corporation, dated as of March 19, 1992, and
accompanying Letter of Credit, as amended, dated as of
March 30, 1992, and Promissory Note, Master Security
Agreement, and Cross Collateral Agreement, dated as of
May 22, 1992.(2)
10.27 Lease/Option Agreement between the Registrant and the parties
named therein, dated as of November 26, 1991, as amended
(with certain confidential information in brackets
deleted).(2)
10.28 Purchase Agreement between the Registrant and the parties
named therein, dated as of November 26, 1991, as amended
(with certain confidential information in brackets
deleted).(2)
10.29 Engineering, Procurement and Validation Service Agreement for
Commercial Manufacturing Facility No. 1 between the
Registrant and Fluor Daniel, Inc., dated as of April 1, 1992
(with certain confidential information in brackets
deleted).(2)
10.30 Engineering, Procurement and Validation Services Agreement
for Commercial Manufacturing Facility No. 2 between the
Registrant and Fluor Daniel, Inc., dated as of April 1, 1992
(with certain confidential information in brackets
deleted).(2)
10.31 Form of warrant with related schedule.(2)
10.33 Letter agreement dated July 9, 1992 between the Registrant
and General Electric Capital Corporation, amending the Master
Lease Agreement between the Registrant and General Electric
Capital Corporation, dated as of March 19, 1992.(2)
10.34 Lease Agreement between the Registrant and Central, dated as
of November 25, 1991.(3)
10.35 Deed of Trust Note to Flatiron Industrial Park Co. and
related Warranty Deed dated September 2, 1992.(3)
10.36 Water and Wastewater Service Agreement between the City of
Boulder and the Company dated as of September 28, 1992.(4)
10.38 Construction Management Services Agreement for Commercial
Manufacturing Facility No. 1 between the Company and Fluor
Daniel, Inc., dated as of August 1, 1992 (with certain
confidential information deleted) and related letter
agreement dated December 1, 1992 (with certain confidential
information deleted).(5)
10.39 Letter agreement dated October 9, 1992 between the Company
and Comdisco Electronics Group regarding lease financing
commitment.(5)
<PAGE> 50
SOMATOGEN, INC.
10.40 Non-Employee Director Stock Option Plan.(6)
10.41 Master lease agreement dated April 28, 1993 between
Registrant and BancBoston. (6)
10.42 Amendment to the Engineering Procurement and Validation
Services Agreement for Commercial Manufacturing Facility
No.1, between the Company and Fluor Daniel, Inc., dated as of
April 1, 1994 (with certain confidential information in
brackets deleted). (7)
10.43 Amendment to the Construction Management Services Agreement
for Commercial Manufacturing Facility No. 1 between the
Company and Fluor Daniel, Inc., dated as of April 1, 1994
(with certain confidential information in brackets
deleted).(7)
10.44 Agreement dated June 24, 1994, among Somatogen, Inc., Eli
Lilly and Company, and Lilly Industries Limited (with certain
confidential information in brackets deleted). (8)
10.45 Amendment dated June 24, 1994, among Somatogen, Inc., Eli
Lilly and Company and Lilly Industries Limited. (8)
10.46 Stock Purchase Agreement between Somatogen, Inc., Eli Lilly
and Company and Lilly Industries Limited. (8)
10.47 Form of Severance Agreement entered into between the
Registrant and certain of its Executive Officers with Related
Schedule. (8)
10.48 Key Employee Agreement for Andre de Bruin, dated July 13,
1994. (10)
10.49 Letter of Employment for J. W. Freytag, dated September 28,
1994. (10)
10.50 Letter of Employment for Robert F. Caspari, dated October 14,
1994. (10)
10.51 Letter of Employment for Richard J. Gorczynski, dated
November 14, 1994. (10)
10.52 Promissory Note of J. William Freytag for the benefit of the
Registrant, dated November 21, 1994. (10)
10.53 Promissory Note of Robert F. Caspari for the benefit of the
Registrant dated December 14, 1994. (10)
10.54 Consulting Agreement for Charles H. Scoggin, dated
January 18, 1995. (10)
10.55 Lease Agreement dated February 14, 1995 with Central for
portion of 2545 Central Avenue, Boulder, Colorado. (11)
10.56 Lease Agreement dated February 14, 1995 with Central for
2590 Central Avenue, Boulder, Colorado. (11)
<PAGE> 51
SOMATOGEN, INC.
10.57 Lease Agreement dated February 14, 1995 with Central for
5797 Central Avenue, Boulder, Colorado. (11)
10.58 Lease Renewal Amendment dated December 29, 1994 to the Master
Lease Agreement with General Electric Capital Corporation
dated March 19, 1992. (11)
10.59 Lease Renewal Contract dated December 29, 1994 with Ellco
Leasing Corporation. (11)
10.60 Exclusive Agency Agreement dated March 30, 1995 with
Binswanger Chesterton. (11)
10.61 Promissory Note of Richard Gorczynski for the benefit of
the Registrant dated July 13, 1995. (12)
10.62 Consulting Agreement with Ralph Snyderman, M.D., dated
October 24, 1994. (12)
10.63 Consultants Stock Option Plan. (12)
10.64 Promissory Note of Fiona Wood for the benefit of the
Registrant dated July 30, 1996.
10.65 Amendment dated July 1, 1996 to Exclusive Agency Agreement
with Binswanger Chesterton.
16.1 Letter Re: Change in Certifying Accountant. (9)
23.1 Consent of Price Waterhouse LLP, Independent Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 53.
(1) Previously filed with the Commission as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-41229)
and incorporated herein by reference thereto.
(2) Previously filed with the Commission as an exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-48789)
and incorporated herein by reference thereto.
(3) Previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30,
1992 and incorporated herein by reference thereto.
(4) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1992 and
incorporated herein by reference thereto.
(5) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1992 and
incorporated herein by reference thereto.
<PAGE> 52
SOMATOGEN, INC.
(6) Previously filed with the Commission as an exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30,
1993 and incorporated herein by reference thereto.
(7) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994 and
incorporated herein by reference thereto.
(8) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended June 30, 1994 and incorporated herein
by reference thereto.
(9) Previously filed as an exhibit to the Company's Form 8-K filed on
August 24, 1994 and incorporated herein by reference thereto.
(10) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1994 and
incorporated herein by reference thereto.
(11) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995 and
incorporated herein by reference thereto.
(12) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended June 30, 1995 and incorporated herein
by reference thereto.
<PAGE> 53
SOMATOGEN, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized on the 4th day of September 1996.
SOMATOGEN, INC.
By: Andre de Bruin
----------------------
President and Chief Executive Officer
(Principal executive officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Andre de Bruin and Timothy D.
Hoogheem, or either of them, his or her attorney-in-fact, each with
the power of substitution, for him or her in any and all capacities,
to sign any amendments to this Report, and to file the same, with
exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
<PAGE> 54
SOMATOGEN, INC.
<TABLE>
<S> <C> <C>
Signature Title Date
Andre de Bruin President, Chief Executive September 4, 1996
Officer and Director
(Principal executive officer)
Timothy D. Hoogheem Senior Vice President of September 4, 1996
Finance and Administration,
Chief Financial Officer
and Treasurer
(Principal financial officer)
Conrad A. McCarty Corporate Controller September 4, 1996
(Principal accounting officer)
Kinney L. Johnson Director September 4, 1996
Bernadine Healy Director September 4, 1996
Gene I. Miller Director September 4, 1996
George B. Rathmann, Director September 4, 1996
Ph.D.
Jack W. Schuler Director September 4, 1996
Ralph Snyderman, M.D. Director September 4, 1996
</TABLE>
<PAGE> 55
SOMATOGEN, INC.
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of
Somatogen, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity
and of cash flows present fairly, in all material respects, the
financial position of Somatogen, Inc. (a development stage enterprise)
at June 30, 1996 and 1995, and the results of their operations and
their cash flows for the two fiscal years then ended and for the period
from inception (June 10, 1985) to June 30, 1996, in conformity with
generally accepted accounting principles. 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
generally accepted auditing standards 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 the opinion expressed
above.
PRICE WATERHOUSE LLP
Boulder, Colorado
July 26, 1996
<PAGE> 56
SOMATOGEN, INC.
Report of Independent Auditors
------------------------------
The Board of Directors and Stockholders
Somatogen, Inc.
We have audited the accompanying consolidated balance sheet of
Somatogen, Inc. (a corporation in the development stage), as of June
30, 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended June 30, 1994,
and for the period from July 10, 1985 (inception) to June 30, 1994
(not separately presented herein). These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Somatogen, Inc. at June 30, 1994, and the
consolidated results of its operations and its cash flows for the year
ended June 30, 1994, and for the period from July 10, 1985
(inception) to June 30, 1994, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Jose, California
July 29, 1994
<PAGE> 57
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
ASSETS
June 30, June 30,
1996 1995
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $29,541 $26,376
Short-term investments 24,735 11,533
Receivable from Lilly 1,852 1,130
Other receivables 1,013 470
Prepaid expenses and other current assets 444 429
------- -------
Total current assets 57,585 39,938
Property and equipment, at cost, net of
accumulated depreciation and amortization 4,042 3,885
Assets held for sale 6,446 7,407
Other assets 1,088 650
------- -------
$69,161 $51,880
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,826 $1,463
Accrued payroll and payroll related 801 844
Payable to Lilly 2,454 100
Other accrued liabilities 603 577
Current portion of long-term debt
and capital lease obligations 162 1,165
------- ------
Total current liabilities 5,846 4,149
Long-term debt and capital lease obligations 11 370
------- ------
Total liabilities 5,857 4,519
------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 58
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
STOCKHOLDERS' EQUITY
June 30, June 30,
1996 1995
------- --------
<S> <C> <C>
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000
shares authorized at June 30, 1996
no shares issued or outstanding -- --
Common stock, $.001 par value, 35,000,000
shares authorized, 20,684,970 and 18,552,021
shares issued and outstanding at June 30, 1996
and 1995, respectively 21 18
Additional paid-in capital 204,518 170,268
Deficit accumulated during the development stage (140,948) (122,925)
Deferred compensation related to grant of options (287) --
-------- --------
Total stockholders' equity 63,304 47,361
-------- --------
$ 69,161 $ 51,880
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 59
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
Period From
July 10, 1985
Year ended June 30, (inception) to
1996 1995 1994 June 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Revenue:
Technology disclosure and
license fees $ 7 $ 4,904
Research and development
grants and contracts 4 1,684
-------- ---------
Total revenue 11 6,588
-------- ---------
Operating expenses:
Research and development, $19,849 $ 18,890 18,029 101,252
Reimbursements from Lilly (6,150) (4,022) -- (10,172)
Reimbursements to Lilly 3,250 100 -- 3,350
------- -------- -------- ---------
Research and development, net 16,949 14,968 18,029 94,430
General, administrative
and marketing 4,150 4,282 4,199 27,767
Writedown of manufacturing
facility assets -- -- 29,194 29,194
------- -------- -------- ---------
Total operating expenses 21,099 19,250 51,422 151,391
------- -------- -------- ---------
Operating loss (21,099) (19,250) (51,411) (144,803)
Interest income and other, net 3,076 2,146 708 8,773
------- -------- -------- ---------
Loss from continuing operations (18,023) (17,104) (50,703) (136,030)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 60
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
Period From
July 10, 1985
Year ended June 30, (inception) to
1996 1995 1994 June 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Discontinued operations:
Loss from operations
of subsidiary -- -- -- $ (1,225)
Gain on sale of subsidiary -- -- -- 300
-------- --------- --------- ---------
Net loss $ (18,023) $ (17,104) $ (50,703) $(136,955)
========== ========= ========= =========
Net loss per share $ (0.90) $ (0.94) $ (3.64)
========== ========= =========
Shares used in calculating
per share data 20,075,000 18,269,000 13,935,000
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 61
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
Deficit Deferred
accumulated compensation
Additional during the related to Total
Common Stock paid-in development grant of stockholders'
Shares Amount capital stage options equity
------ ------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances accumulated from
July 10, 1985 (inception)
through June 30, 1993 10,200,428 $10 $104,875 $(55,118) $(556) $ 49,211
Issuance of 197,737 shares of
common stock upon exercise of
stock options for cash at $0.40
to $9.50 per share and exchange
of 23,482 warrants 221,219 -- 217 -- -- 217
Issuance of 5,052,000 shares of
common stock, net of issuance
costs of $2,774 5,052,000 5 42,887 -- -- 42,892
Issuance of 1,822,669 shares of
common stock to Lilly 1,822,669 2 14,998 -- -- 15,000
Other 110,679 -- 770 -- 416 1,186
Net loss -- -- -- (50,703) -- (50,703)
--------- --- ------- -------- ---- -------
Balance, June 30, 1994 17,406,995 17 163,747 (105,821) (140) 57,803
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 62
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Deficit Deferred
accumulated compensation
Additional during the related to Total
Common Stock paid-in development grant of stockholders'
Shares Amount capital stage options equity
------ ------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 381,463 shares of
common stock upon exercise of
stock options for cash at $0.40
to $9.75 per share 381,463 -- 299 -- -- 299
Issuance of 710,750 shares of
common stock to Lilly 710,750 1 5,999 -- -- 6,000
Other 52,813 -- 223 -- 140 363
Net loss -- -- -- (17,104) -- (17,104)
---------- --- ------ -------- ----- -------
Balance, June 30, 1995 18,552,021 18 170,268 (122,925) -- 47,361
Issuance of 263,571 shares of
common stock upon exercise of
stock options for cash at $0.40
to $18.50 per share and exchange
of 5,000 warrants 263,571 -- 773 -- -- 773
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 63
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
Deficit Deferred
accumulated compensation
Additional during the related to Total
Common Stock paid-in development grant of stockholders'
Shares Amount capital stage options equity
------ ------ ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 420,685 shares of
common stock to Lilly 420,685 1 8,999 -- -- 9,000
Issuance of 1,400,000 shares of
common stock, net of issuance
costs of $1,735 1,400,000 2 23,464 -- -- 23,466
Other 48,513 -- 1,014 -- (287) 727
Net loss -- -- -- (18,023) -- (18,023)
---------- --- -------- --------- ----- --------
Balance, June 30, 1996 20,684,790 $21 $204,518 $(140,948) $(287) $ 63,304
========== === ======== ========= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 64
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
Period From
July 10, 1985
Year ended June 30, (inception) to
1996 1995 1994 June 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in)
operating activities:
Net loss $(18,023) $(17,104) $(50,703) $(136,955)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 1,928 2,504 2,812 14,767
Writedown of manufacturing
facility assets -- -- 29,194 29,194
Other 418 192 179 962
Changes in assets and liabilities:
Receivables (1,265) (1,247) 220 (2,703)
Prepaid expenses and other
current assets (15) (106) 122 (419)
Accounts payable and accrued
liabilities 2,700 (1,848) (786) 5,835
Other, net (3) 6 221 328
------- --------- ------- -------
Net cash used in operating
activities (14,260) (17,603) (18,741) (88,991)
------- --------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 65
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
(Caption>
Period From
July 10, 1985
Year ended June 30, (inception) to
1996 1995 1994 June 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in)
investing activities:
Purchases of short-term
investments (66,723) (29,651) (34,246) (248,961)
Proceeds from sale of short-term
investments 53,521 42,501 12,387 224,226
Purchases of property and
equipment (2,009) (2,132) (5,535) (22,255)
Proceeds from sale of property
and equipment 971 1,711 96 2,778
Additions to construction-
in-progress -- -- (2,809) (18,956)
Other (521) (200) (159) (8,886)
------- -------- ------- ---------
Net cash provided by (used in)
investing activities (14,761) 12,229 (30,266) (72,054)
------- -------- ------- ---------
Cash flows provided by (used in)
financing activities:
Payments of capital lease
obligations and long-term debt (1,362) (2,233) (2,381) (10,294)
Net proceeds from issuance of
stock and warrants 33,548 6,349 58,888 197,361
Other -- -- -- 3,519
------- --------- ------- ---------
Net cash provided by
financing activities 32,186 4,116 56,507 190,586
------- --------- ------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 66
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period From
July 10, 1985
Year ended June 30, (inception) to
1996 1995 1994 June 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Net increase (decrease) in
cash and cash equivalents 3,165 (1,258) 7,500 29,541
Cash and cash equivalents at
beginning of period 26,376 27,634 20,134 --
-------- -------- -------- -------
Cash and cash equivalents at
end of period $ 29,541 $ 26,376 $ 27,634 $29,541
======== ======== ======== =======
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 111 $ 265 $ 285 $ 2,380
Capital lease obligations
incurred for purchase of
property and equipment -- 560 202 5,318
Equipment deposits transferred
to net property, plant and
equipment -- -- 3,423 3,423
Net property, plant and
equipment transferred to
assets held for sale -- -- 9,541 9,541
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 67
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Organization:
Somatogen, Inc. (the "Company") was organized in 1985. The
Company has devoted substantially all of its efforts and resources
since 1987 to research and development related to its recombinant
hemoglobin technology and is considered to be in the development
stage. The Company was reincorporated in the State of Delaware
in March 1989. The Company's corporate research and development
offices and pilot production facility are located in Boulder, Colorado.
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its previously owned subsidiary. All
significant intercompany transactions and accounts have been eliminated
in consolidation.
Significant 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 and
disclosure of assets and liabilities as of the date of the financial
statements and the reported amounts of expenses during the periods.
Significant estimates have been made by management in the preparation
of these financial statements, in particular with respect to the
carrying value and realizability of the assets held for sale. Actual
results could differ from estimates making it reasonably possible that
a change in the estimates could occur in the near term.
Cash and cash equivalents and short-term investments:
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents. Short-
term investments are carried at cost plus accrued interest and consist
of commercial paper and government obligations, having original
maturities of longer than three months but less than one year, held
at financial institutions. The carrying values of the Company's cash
equivalents and short-term investments approximate their market values
based on quoted market prices. All cash equivalents and short-term
investments are expected to be held to maturity.
<PAGE> 68
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and equipment:
The components of property and equipment, exclusive of assets held
for sale, are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------- Estimated
1996 1995 Lives
---- ---- ---------
<S> <C> <C> <C>
Laboratory and pilot production equipment $4,364 $2,873 5 - 10 years
Laboratory and pilot production equipment
under capital leases 5,763 5,788 3 - 5 years
Office furniture and equipment 1,809 1,429 3 - 10 years
Office furniture and equipment under
capital leases 1,266 1,266 3 - 5 years
Leasehold improvements 3,718 3,616 2 - 4 years
------ -----
16,920 14,972
Less accumulated depreciation
and amortization (12,878) (11,087)
------ ------
$4,042 $3,885
====== ======
</TABLE>
Property and equipment purchased are depreciated using the
straight-line method over their estimated useful lives. Property and
equipment acquired under capital lease agreements are amortized using
the straight-line method over the shorter of the useful life or the
related lease term. Accumulated depreciation for leased equipment was
$6,853,000 and $6,526,000 at June 30, 1996 and 1995, respectively.
<PAGE> 69
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets held for sale:
Land and building related to manufacturing facilities and the
related manufacturing equipment, aggregating $6,446,000 and
$7,407,000 at June 30, 1996 and June 30, 1995, respectively, are
classified as assets held for sale. These assets are carried at
their estimated net realizable value (See Note 2).
Other assets:
Other assets at June 30, 1996 and 1995 include approximately
$1,010,000 and $560,000, respectively, of patent costs, net of
accumulated amortization, which are capitalized as incurred and
amortized over a twelve-year period.
Revenue recognition:
Technology disclosure fees, licensing fees and option payments,
related to future performance, are deferred and recorded as revenue
as they are earned over specified future performance periods. In
return for contract payments, contract partners have received or
will receive certain marketing and/or manufacturing rights and
material for clinical use and testing. Revenue recognized under
arrangements with Pharmacia & Upjohn, Inc. aggregated approximately
$4,500,000 for the period from July 10, 1985 (inception) to June 30,
1996. Research and development fees and grant revenue irrevocably
received are recognized as revenue when received.
Research and development costs:
Research and development costs are expensed as incurred. These
costs consist of direct and indirect costs associated with specific
projects as well as fees paid to various laboratories that conduct
certain activities on behalf of the Company.
<PAGE> 70
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to an alliance between Somatogen and Eli Lilly and
Company ("Lilly") entered into on June 24, 1994, Lilly is co-
developing Somatogen's lead human hemoglobin product, Optro, sharing
in and being reimbursed for certain clinical development costs and
contributing advisory and support services. Expense reimbursements
from Lilly and payable to Lilly are disclosed as separate components
of research and development in the Consolidated Statement of Operations.
Net loss per share:
Net loss per share is computed using the weighted average number
of shares of common stock outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation as their
effect would dilute the loss per share for all periods presented.
New accounting standards:
In June 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets to be Disposed of
("Statement 121") which requires companies to review long-lived
assets and certain identifiable intangibles to be held, used or
disposed of, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company is required to adopt Statement
121 for fiscal 1997. The Company believes the adoption of
Statement 121 will not have a significant effect on its financial
statements.
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"), which requires that the Company's
financial statements include certain disclosures about stock-based
employee compensation arrangements. As allowed by Statement 123,
the Company will continue to apply the accounting provisions of
Accounting Principles Board Opinion No. 25; accordingly the adoption
of Statement 123 will have no effect on the Company's financial
position or results of operations.
<PAGE> 71
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications:
Certain prior year amounts on the consolidated financial
statements and footnotes have been reclassified to conform to
the current year presentation.
Note 2. Lilly Alliance
In June 1994, the Company entered into a global strategic
alliance with Lilly whereby Lilly will co-develop Somatogen's
lead human hemoglobin product, Optro, (the "Lilly Alliance") and
in September 1995, Somatogen and Lilly agreed to amend certain
terms of the Lilly Alliance. Under the terms of the Lilly Alliance,
Lilly is responsible for establishing manufacturing facilities to
supply Optro for Phase III clinical trials and for global
commercialization. In North America, the Company's expanded
Phase II and Phase III trials for Optro will be performed in
conjunction with Lilly's clinical and research groups, and Lilly
and Somatogen will co-promote the product, splitting the development
costs and sharing equally in the profits. Outside of North America,
except in Scandinavia, Lilly will be responsible for clinical
development of Optro and related costs, and will have exclusive
marketing rights. Lilly will pay Somatogen a royalty on Optro
sales outside North America.
Lilly has invested $30,000,000 in exchange for Somatogen
common stock, including a $2,000,000 milestone equity investment
in Somatogen made on September 18, 1995, as a result of Somatogen's
completion of enrollment in its early Phase II clinical trials and
a $7,000,000 equity investment made on October 27, 1995 in
conjunction with Somatogen's October 18, 1995 public common
stock offering. The September 1995 amendment to the Lilly
Alliance accelerated $7,000,000 of the $10,000,000 equity
investment which Lilly would have made in March 1996 if it
determined at such time to proceed with the clinical development
and commercialization of Optro. In addition, the amendment
eliminated the March 1996 determination date and combined all
remaining milestone equity investments into a single $7,000,000
milestone equity investment to be made if the joint Somatogen-Lilly
steering committee for the alliance determines that certain
conditions have been met.
<PAGE> 72
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amendment also modified the termination provisions of
the alliance, which provide for payment of certain financial
consideration by Lilly to Somatogen in the event that the alliance
is terminated under certain circumstances. Pharmacia & Upjohn,
Inc. has the marketing rights to Optro in Scandinavia under its
1991 agreement with Somatogen.
In accordance with the terms of the Lilly Alliance, Somatogen
and Lilly share certain development costs. Pursuant to the September
1995 amendment, effective January 1, 1996 Somatogen and Lilly began
to share certain process improvement costs.
As a result of the Lilly Alliance, the Company discontinued
all activity surrounding its clinical and commercial manufacturing
facilities and reduced the carrying value of these manufacturing
facilities to their estimated net realizable values during the year
ended June 30, 1994. The fiscal 1994 charge to operations of
$29,200,000 included approximately $21,000,000 for the clinical
manufacturing facility under construction, $6,000,000 for the
related clinical manufacturing equipment and $2,200,000 for the
engineering design costs of the commercial manufacturing facility.
Approximately $1,700,000 of the charge was related to liabilities
accrued at June 30, 1994 to terminate certain construction
contracts and provide for costs to ready certain assets for sale.
Approximately $457,000 of this balance is remaining at June 30, 1996.
Note 3. Income taxes
At June 30, 1996, the Company had net operating loss
carryforwards for federal income tax reporting purposes of
approximately $109,000,000. Under the federal income tax laws,
approximately $3,000,000 of these carryforwards cannot be utilized
due to prior changes in stock ownership. The remainder of the
loss carryforwards will expire in the years 2003 through 2011.
Future changes in stock ownership could result in a further
limitation on the utilization of present and future loss
carryforwards. The Company also has research and development
tax credit carryforwards of approximately $3,700,000 which will
expire in the years 2003 through 2011.
<PAGE> 73
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of significant items comprising the Company's
deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
June 30
Deferred tax assets: 1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards $40,600 $33,200
Research and development carryforwards 3,700 3,200
Temporary differences, net 10,100 10,700
------- -------
54,400 47,100
Valuation allowance (54,400) (47,100)
------- -------
Net deferred tax asset $ -- $ --
======= =======
</TABLE>
There were no material deferred tax liabilities as of June 30,
1996 or June 30, 1995.
At June 30, 1996 and 1995, a valuation allowance for deferred
tax assets of $54,400,000 and $47,100,000, respectively, are required
to reduce the deferred tax assets to the amount realizable, zero,
based on the Company's history of losses. The valuation allowance
increased by $7,300,000 during the year ended June 30, 1996,
primarily due to additional losses incurred during the year for
which no tax benefit was recorded.
Note 4. Leases
The Company leases office, production and research and
development facilities as well as certain equipment under agreements
that expire at various dates through October 1998. Total rent
expense charged to operations for the years ended June 30, 1996,
1995 and 1994 was $1,225,000, $1,387,000 and $1,718,000, respectively.
The aggregate future minimum rental commitments as of June 30,
1996 for capital and non-cancelable operating leases with initial or
remaining terms in excess of one year are as follows (in thousands):
<PAGE> 74
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Year Ending Operating Capital
June 30, Leases Leases
-------- -------
<S> <C> <C>
1997 $1,169 $165
1998 531 9
1999 -- 3
2000 -- --
------ ----
Minimum lease payments $1,700 177
Less amount representing interest ====== (7)
Present value of future minimum lease payments 170
Less portion due within one year (159)
----
$ 11
====
</TABLE>
The Company purchased certain assets and borrowed against
available lease-line facilities to finance the purchases. Under the
terms of certain master lease agreements, the Company has the option
to purchase the leased equipment at its fair market value or at
specified percentages of its original cost at the end of the lease
term. Certain of the Company's lease agreements contain provisions
that restrict the payment of cash dividends and require the
maintenance of certain financial covenants.
Note 5. Employee benefit plans
Savings plan:
The Company maintains a Retirement Plan covering substantially
all employees under Section 401(k) of the Internal Revenue Code. The
Retirement Plan provides for matching Company contributions of common
stock. Twice each year, the Company contributes common stock equal
in value to 50% of participant's voluntary contributions for the
preceding six-month period, up to a maximum of 5% of the participant's
compensation for the period. The contributed shares vest over a four-
year period, commencing as of the later of the participant's hire date
or April 1, 1988. For the years ended June 30, 1996, 1995 and 1994,
the Company made stock match contributions of 23,150, 22,054 and
19,598 shares valued at $339,135, $191,855 and $179,000, respectively.
<PAGE> 75
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee stock purchase plan:
The Company maintains an Employee Stock Purchase Plan (the
"Purchase Plan") under which 300,000 shares of common stock are
authorized for issuance. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers,
in periodic, biannual offerings following the commencement of the
Purchase Plan. For the years ended June 30, 1996, 1995 and 1994;
25,363, 30,759 and 36,779 common shares were issued under the
Purchase Plan, respectively.
Note 6. Stock Option Plans and Warrants
The Company's Stock Option Plan (the "Stock Option Plan")
provides for the granting of stock options, stock appreciation
rights and supplemental stock bonuses to officers, employees and
directors.
The Company currently has 3,525,960 shares authorized for
issuance under its Stock Option Plan. On July 17, 1996, the
Company's Board of Directors approved an amendment to the Stock
Option Plan to increase the number of shares of common stock
authorized for issuance under such plan by 1,000,000 shares.
The amendment is subject to approval by the Company's stockholders
at the Annual Meeting of Stockholders to be held on October 31, 1996.
Options granted under the Stock Option Plan may be exercised
for a period of not more than ten years from the date of grant or
any shorter period as determined by the Board of Directors.
Options vest as determined by the Board of Directors, over a
period of three to seven years, subject to acceleration under
certain events. The options are priced at the fair market value
of the Company's common stock on the date of grant.
In fiscal 1995, the Company adopted the Consultants Stock
Option Plan (the "Consultants' Plan") and currently has 80,000
shares of common stock authorized for issuance thereunder.
Options granted may be exercised for a period of not more than
ten years from the date of grant. Options vest as determined by
the Board of Directors, subject to acceleration under certain
events. The options are priced at the fair market value of the
Company's common stock on the date of grant.
<PAGE> 76
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also maintains a Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") under which 270,000 shares of common stock
are authorized for issuance. The Directors' Plan provides for automatic
and non-discretionary grants. On the date of each annual meeting of
stockholders, each non-employee director who is then a member of the
Company's Board of Directors will receive an option to purchase a
number of shares determined by a specified formula. The minimum
annual option grant is 5,000 shares and the maximum annual grant is
10,000 shares. The options expire six years after grant, vest in
twelve equal quarterly installments (so long as the optionee continues
to serve as a director of the Company) and are priced at the fair
market value of the Company's common stock on the date of grant.
Stock option transactions for the years ended June 30, 1996, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
Weighted Average
Number of Exercise Price
Shares Per Share
<S> <C> <C>
Balance at June 30, 1993 1,340,400 $ 8.80
Granted 1,026,660 8.19
Exercised (197,737) .76
Cancelled (328,443) 16.87
---------
Balance at June 30, 1994 1,840,880 7.89
Granted 1,057,559 9.25
Exercised (381,463) .79
Cancelled (204,605) 15.80
---------
Balance at June 30, 1995 2,312,371 8.93
Granted 577,141 16.88
Exercised (258,751) 2.84
Cancelled (96,550) 12.14
---------
Balance at June 30, 1996 2,534,211
=========
Exercisable at June 30, 1996 1,028,726 11.35
=========
</TABLE>
<PAGE> 77
SOMATOGEN, INC.
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 1996, total shares available for grant under the
Stock Option Plan, the Consultants' Plan and the Directors' Plan
are 148,598, 34,000 and 128,905, respectively,
During 1994 certain employees, excluding senior management,
holding options to purchase shares of the Company's common stock
exchanged their existing vested and unvested options for the same
number of options at $7.75 per share which was the market value at
the date of exchange. The vesting period on all the replacement
options began on April 4, 1994 and continues quarterly over a period
of three years with a term of six years. Options are not exercisable
before the first anniversary date of the optionee's employment.
Options for 103,930 were exchanged in fiscal 1994 and are reflected
in both the cancellation and grant activity of the preceding
options outstanding table.
Warrants:
As of June 30, 1996, the Company had warrants outstanding
to purchase 85,000 shares of common stock at an exercise price of
$9.75 per share.
The Company is a party to two separate legal proceedings with
one individual warrantholder and another group of warrantholders.
All of the warrantholders have alleged that they are entitled to
adjustments in the number of shares and the exercise price of their
warrants, and have asserted claims for securities fraud, common law
fraud and breach of fiduciary duty. The trial court has granted
summary judgment in favor of the Company on all claims of the
individual warrantholder in May of 1994 and in July of 1995 on all
claims of the group of warrantholders. The grant of summary
judgment on the individual warrantholder's claim was sustained by
the Colorado Court of Appeals and the Colorado Supreme Court has
declined to hear the warrantholder's appeal. The group of
warrantholders have appealed the grant of summary judgment and
the Colorado Court of Appeals has not yet rendered a decision on
such appeal. The Company believes that the warrantholders' claims
are without merit, and that the outcome of the litigation will not
have a material effect on the Company's capital structure or financial
position. The warrants expired in October 1993.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30,
1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
TWELVE MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 29,541
<SECURITIES> 24,735
<RECEIVABLES> 2,865
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,585
<PP&E> 16,920
<DEPRECIATION> 12,878
<TOTAL-ASSETS> 69,191
<CURRENT-LIABILITIES> 5,846
<BONDS> 11
<COMMON> 21
0
0
<OTHER-SE> 63,283
<TOTAL-LIABILITY-AND-EQUITY> 69,161
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> (18,023)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,023)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,023)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
PROMISSORY NOTE
Boulder, Colorado
July 30, 1996
Recitals
A. Fiona Wood (hereinafter sometimes referred to as "Employee"
and sometimes referred to collectively with Graham Wood, her husband,
as "the undersigned") is an employee of Somatogen, Inc., a Delaware
corporation ("the Company").
B. Based on the substantial services to be rendered to and for
the Company by Employee, the Company has agreed to provide the
undersigned a loan in order to assist the undersigned in her
relocation and purchasing a new principal residence in Colorado.
C. The undersigned have agreed to evidence the loan extended by
execution of this note ("Note").
D. This Note will be secured by a Deed of Trust of even date
herewith encumbering the real property located at 22 South Woodmont
Circle, Madison, Wisconsin (the "Wisconsin Deed of Trust").
NOW THEREFORE, FOR VALUE RECEIVED the undersigned promise to pay
to the order of the Company at 2545 Central Avenue, Suite FD1,
Boulder, Colorado 80301, Attn: Chief Financial Officer (or such place
as the holder hereof may from time to time designate in writing to the
undersigned) the principal sum of $42,894.00 due and payable on the
earlier of (i) one year from the date of the Note or (ii) concurrently
with the closing of the sale of the Employee's home in Wisconsin (the
"Wisconsin Property").
1. Proceeds. The undersigned warrants that the undersigned
will use the principal amount of this Note to purchase a new principal
residence in Colorado and for no other purpose (the "Colorado
Property").
<PAGE> 2
2. Prepayment. The undersigned may prepay all or any part of
this Note at any time without penalty.
3. Security. This Note is secured by: (a) the Wisconsin Deed
of Trust of even date herewith between the undersigned, as Trustor,
Preferred Title Company of Madison, Dane County as Trustee, and the
Company, as Beneficiary, covering that certain real property located
at 22 South Woodmont Circle, Madison, Wisconsin and more particularly
described in the Wisconsin Deed of Trust.
4. Interest. This note shall bear interest at the prime rate
as stated in the Wall Street Journal beginning November 30, 1996 and
through the date the note is repaid.
5. Acceleration. The entire unpaid balance of principal shall
become immediately due and payable under this Note at the time, and in
the circumstances provided, below:
(a) Upon any sale, conveyance, alienation, hypothecation
or other transfer or encumbrance of the Wisconsin Property, or any
interest in it;
(b) The cessation of either of the undersigned's
occupation of the Colorado Property as a principal residence, whether
voluntary or involuntary; or
(c) The date upon which Employee ceases to be a full-time
employee of the Company by reason of Employee's resignation or
termination for cause (as defined below). "Cause" for termination
shall mean: (a) indictment or conviction of any felony or of any crime
involving dishonesty; (b) participation in any fraud, theft or other
misconduct against the Company; (c) persistent unsatisfactory
performance of job duties; (d) intentional damage to any property of
the Company; or (e) conduct by Employee which in the good faith and
reasonable determination of the Board demonstrates gross unfitness to
serve.
(d) Six (6) months from the date upon which Employee ceases
to be a full-time employee of the Company, where such cessation of
employment is without cause (as defined above) or by reason of death.
6. Default. The undersigned shall be in default hereunder upon
the occurrence of any of the following events:
(a) Any failure of the undersigned to make any payment
required under this Note, at the time and in the manner provided
herein: or
<PAGE> 3
(b) Any failure of the undersigned to perform any other
obligation under this Note or any of the undersigned's obligations
under the Wisconsin Deed of Trust.
In the event of default, and without in any way
limiting any other remedies of the holder hereof, the holder may
declare the entire unpaid principal immediately due and payable.
In the event such default if not cured by the Employee
within 30 days of such default, the Note shall automatically begin
accruing interest at a rate per quarter equal to the prime rate as
announced by the Wall Street Journal from time to time as the going
prime rate (the "Prime Rate") which rate shall change
contemporaneously with any change in the Prime Rate.
7. No Right to Continued Employment. Nothing in this Note or
in the Wisconsin Deed of Trust which secures this Note shall be
construed to confer upon the Employee any right to continued
employment with the Company. Without limiting the generality of the
foregoing, the undersigned expressly acknowledges the undersigned's
understanding and agreement that, pursuant to paragraph 5(c) of this
Note, a cessation of the Employee's employment will result in an
acceleration of all amounts of principal due under this Note.
8. Cost of Collection. The undersigned agrees to pay all costs
of collection of this Note and the Wisconsin Deed of Trust, including
attorneys' fees and costs.
9. Governing Law. This Note shall be governed by the laws of
the State of Colorado as such laws are applied to contracts between
Colorado residents entered into and to be performed entirely within
said state.
10. Joint and Several Obligations. The obligations of the
undersigned under this Note shall be the joint and several obligations
of each of the undersigned.
11. Notices. Any notice or other communication under this Note
shall be in writing, signed by or on behalf of the person giving the
notice, and shall be personally delivered or mailed by prepaid
certified or registered mail, return receipt requested, to the person
or persons to whom such notice is to be given, addressed to such
person as follows:
<PAGE> 4
If to the Company: 2545 Central Avenue, Suite FD1
Boulder, CO 80301
Attn: Chief Financial Officer
If to the undersigned: Fiona Wood
1700 Eldorado Circle
Superior, CO 80027
In the case of notices personally delivered, such notice shall be
deemed to have been effectively given upon the earlier of actual
delivery or when delivery has been attempted but cannot be completed.
In the case of notices mailed, such notices shall be deemed to have been
effectively given upon the earlier to occur of receipt by the addressee
or on the third (3rd) business day following the date of mailing. Either
party may at any time change its address for notices (and any holder may
change the name of the holder) by giving the other party written notice
of such change in accordance with the provisions of this paragraph 11.
IN WITNESS WHEREOF, the undersigned have executed this Note as of the
date first written above.
/s/ Fiona Wood 7/29/96
-------------- -------
Fiona Wood
/s/ Graham Wood 7/29/96
--------------- -------
Graham Wood
July 1, 1996
The Binswanger Companies
Two Logan Square, 4th Floor
18th and Arch Streets
Philadelphia, PA 19102-2759
Ladies and Gentlemen:
This letter is to confirm the following understandings regarding
the Exclusive Right to Sell Agreement dated April 4, 1995 (the
"Agreement"), pursuant to which you were acting as our exclusive agent
in connection with the sale of the Property. Capitalized terms used
herein without definition have the meanings respectively assigned
thereto in the Agreement.
1. Notwithstanding any provision contained in the Agreement, the
Company will not be obligated to pay to the Binswanger Companies
("Binswanger") any commission, fee or any other compensation,
including but not limited to the Commission Fee, lease commission
or cancellation fee, pursuant to the Agreement or otherwise, if
the Company sells, leases, conveys, or in any other way transfers
the Property to the Flatiron Park Company or an affiliate thereof
at any time (an "FIP Transfer").
2. If the Company completes an FIP Transfer, the Agreement and
all rights and obligations set forth therein shall be immediately
terminated upon the closing of such transfer.
3. The Agreement is hereby reinstated as of the date hereof through
January 15, 1997 on the terms and conditions contained in the
Agreement, subject to the modifications set forth in this letter.
Very truly yours,
SOMATOGEN, INC.
By: Timothy D. Hoogheem
Date: 07-01-96
BINSWANGER OF COLORADO, INC.
By: Susan Sygenda, Corporate Council
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-42012, 33-43332, 33-79466, 333-00896,
333-00894 and 333-00892) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 33-73224) of Somatogen, Inc. of
our report dated July 26, 1996 appearing on page 55 of this Form 10-K.
PRICE WATERHOUSE LLP
Boulder, Colorado
August 29, 1996
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-42012, 33-43332, 33-79466, 333-00896,
333-00894 and 333-00892) pertaining to certain warrantholders, the
Consultants' Stock Option Plan, the Employee Stock Purchase Plan, the
Non-Employee Directors' Stock Option Plan and the certain Options
Granted Outside of Any Plan of Somatogen, Inc. and in the related
Prospectuses, as applicable, of our report dated July 29, 1994 with
respect to the 1994 consolidated financial statements of Somatogen,
Inc. included in this Annual Report (Form 10-K) for the year ended
June 30, 1996.
ERNST & YOUNG LLP
San Jose, California
August 29, 1996
