<PAGE> 1
Somatogen, Inc.
September 3, 1996
DEAR STOCKHOLDER:
You are invited to attend the Annual Meeting of Stockholders of
Somatogen, Inc. to be held on Thursday, October 31, 1996, at
10:00 A.M. MDT, at the Broker Inn, 555 Thirtieth Street
Boulder, Colorado.
At this year's meeting, you are asked to elect seven directors,
increase the number of shares available for issuance under the
Company's Stock Option Plan and to ratify the appointment of the
Company's independent auditors. The accompanying Notice of Meeting
and Proxy Statement describe these proposals. We urge you to read
this information carefully.
Your Board of Directors unanimously believes that election of its
nominees as directors, the approval of the amendment to the Company's
Stock Option Plan to increase the number of shares authorized under
the plan and ratification of its appointment of independent auditors,
are in the best interests of Somatogen, Inc. and its stockholders, and
accordingly, recommends a vote FOR Items 1 through 3 on the enclosed
proxy card.
In addition to the formal business to be transacted, management will
make a presentation on developments of the past year and respond to
comments and questions of general interest to stockholders.
I personally look forward to greeting those Somatogen stockholders able
to attend the meeting.
It is important that your shares be represented and voted, whether or
not you plan to attend the Annual Meeting. Therefore, please sign,
date and promptly mail the enclosed proxy in the prepaid envelope
provided.
Thank you.
Sincerely,
Andre de Bruin
Chairman, President and CEO
<PAGE> 2
Somatogen, Inc.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 31, 1996
TO THE STOCKHOLDERS OF SOMATOGEN, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Somatogen, Inc., a Delaware corporation (the "Company"), will be held
on Thursday, October 31, 1996, at 10:00 A.M. MDT, at the Broker Inn,
555 Thirtieth Street, Boulder, Colorado, for the following purposes:
1. To elect seven directors to hold office until the next annual
meeting of stockholders;
2. To approve an amendment to the Company's Stock Option Plan (the
"Plan") to increase the aggregate number of shares of Common
Stock authorized for issuance under such Plan by an additional
1,000,000 shares;
3. To ratify the selection of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending June 30,
1997; and
4. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on September 3,
1996 as the record date for the determination of stockholders
entitled to notice of and to vote at this Annual Meeting and at any
continuation, adjournment or postponement thereof.
By Order of the Board of Directors
James C.T. Linfield,
Secretary
Boulder, Colorado
September 3, 1996
<PAGE> 3
Somatogen, Inc.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN
ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. A RETURN ENVELOPE
IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE VOTED YOUR PROXY, YOU
MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE,
HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR
OTHER NOMINEE AND YOU WISH TO ATTEND AND VOTE AT THE MEETING, YOU MUST
BRING TO THE MEETING A PROXY ISSUED IN YOUR NAME FROM THE BROKER, BANK
OR OTHER NOMINEE. ADDITIONALLY, IN ORDER TO VOTE AT THE MEETING, YOU
MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 4
Somatogen, Inc.
SOMATOGEN, INC.
2545 Central Avenue
Boulder, Colorado 80301
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors
(the "Board of Directors" or the "Board") of Somatogen, Inc., a
Delaware corporation (the "Company"), for use at the Annual Meeting
of Stockholders to be held on Thursday, October 31, 1996, at
10:00 A.M. MDT, (the "Annual Meeting"), or at any continuation,
adjournment or postponement thereof, for the purposes set forth
herein and in the accompanying Notice of Annual Meeting. The
Annual Meeting will be held at the Broker Inn, 555 Thirtieth
Street, Boulder, Colorado.
Solicitation
The Company will bear the entire cost of solicitation of proxies,
including preparation, assembly and mailing of this proxy statement,
the proxy and any additional information furnished to stockholders.
Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding shares of
the Company's Common Stock (the "Common Stock") in their names
which are beneficially owned by others to forward the solicitation
materials to such beneficial owners. The Company may reimburse
persons representing beneficial owners for their costs of
forwarding the solicitation material to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by
telephone, telegram, or personal solicitation by directors, officers
or other regular employees of the Company, or, at the Company's
request, Beacon Hill Partners, Inc. No additional compensation
will be paid to directors, officers or other regular employees for
such services, but Beacon Hill Partners, Inc. will be paid its
customary fee, estimated to be about $3,000, if it renders
solicitation services.
This proxy statement and accompanying proxy card will be mailed
on or about September 10, 1996, to all stockholders entitled
to vote at the Annual Meeting.
<PAGE> 5
Somatogen, Inc.
Voting Rights and Outstanding Shares
Only holders of record of Common Stock at the close of business on
September 3, 1996 will be entitled to notice of and to vote at the
Annual Meeting. At the close of business on September 3, 1996
there were outstanding and entitled to vote 20,703,605 shares
of Common Stock. Each holder of record on such date is entitled
to one vote for each share held on all matters to be voted upon
at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed
for the meeting, who will separately tabulate affirmative and
negative votes, abstentions and broker non-votes. Abstentions
will be counted towards the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as
negative votes. Broker non-votes are counted towards a quorum,
but are not counted for any purpose in determining whether a
matter has been approved.
Revocability of Proxies
Any person giving a proxy pursuant to this solicitation has the
power to revoke it at any time before it is voted. It may be
revoked by filing with the Secretary of the Company at the
Company's principal executive office, Somatogen, Inc., 2545
Central Avenue, Boulder, Colorado 80301, a written notice of
revocation or a duly executed proxy bearing a later date, or
it may be revoked by attending the meeting and voting in person.
Attendance at the meeting will not, by itself, revoke a proxy.
Stockholder Proposals
Proposals of stockholders that are intended to be presented at
the Company's 1997 Annual Meeting of Stockholders (the "1997
Annual Meeting") must be received by the Company no later than
May 14, 1997 in order to be included in the proxy statement and
proxy relating to the 1997 Annual Meeting.
<PAGE> 6
Somatogen, Inc.
PROPOSAL 1
- ----------
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and By-laws
provide that the authorized number of directors shall be determined
by resolution of the Board of Directors. The resolution currently
in effect provides for a Board of seven members, effective as of
the Annual Meeting of Stockholders to be held on October 31, 1996.
Vacancies on the Board may be filled by a majority of the remaining
directors, unless such directors determine to submit such matter
for a stockholder vote. A director elected by the Board to fill a
vacancy (including a vacancy created by an increase in size of the
Board of Directors) will serve for the remainder of the full term
of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified.
There are seven nominees for the seven Board positions authorized
by resolution of the Board of Directors. If elected at the Annual
Meeting, each of the nominees would serve until the 1997 Annual
Meeting and until his or her successor shall have been elected
and qualified, or until such director's earlier death, resignation
or removal. Each nominee listed below is currently a director of the
Company.
Directors are elected by a plurality of the votes cast. Proxies
may not vote for more than the number of candidates which have
been nominated. It is the intention of the persons named in the
enclosed proxy, unless authorization to do so is withheld, to vote
the proxies received by them for the election of the seven nominees
named below. If, prior to the Annual Meeting, any nominee should
become unavailable for election, an event which is not now
anticipated by the Board, the proxies will be voted for the election
of such substitute nominee or nominees as the Board of Directors
may propose.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF EACH NOMINEE.
- -----------------------------------------------------
<PAGE> 7
Somatogen, Inc.
Nominees
The names of the nominees and certain information about them are set
forth below:
<TABLE>
<CAPTION>
Name Age Principal Occupation
<S> <C> <C>
Andre de Bruin 49 President, Chief Executive Officer and
Chairman of the Board of the Company
Bernadine Healy, M.D. 50 Dean of the College of Medicine and
Professor of Internal Medicine at the
Ohio State University
Carlos A. Ferrer 42 General Partner of Ferrer Freeman
Thompson & Co., the General Partner and
Management Company of Health Care Capital
Partners, L.P.
Gene I. Miller 54 General Partner of Miller & LaHaye, L.P.,
which is the General Partner of Peregrine
Ventures II
George B. Rathmann, 68 Chairman of the Board, Chief Executive
Ph.D. Officer and President of ICOS Corporation
Jack W. Schuler 55 Chairman of the Board and Chief Executive
Officer of Stericycle, Inc.
Ralph Snyderman, M.D. 56 Chancellor for Health Affairs and Dean of
the School of Medicine at the Duke
University Medical Center
</TABLE>
<PAGE> 8
Somatogen, Inc.
Nominees for Election as Director
ANDRE DE BRUIN
- --------------
Mr. de Bruin was appointed President and Chief Executive Officer in
July 1994 and appointed to the Board of Directors in August 1994.
He also 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 healthcare corporation with sales exceeding
$3 billion. Mr. de Bruin also serves on the Board of Directors of
Diametrics Medical, Inc. and BioStar, Inc.
BERNADINE HEALY
- ---------------
Dr. Healy became director in March 1996. She has been Dean of the
College of Medicine and Professor of Internal Medicine at the Ohio
State University since October 1995. Since July 1994 she has
served as Senior Policy Advisor at the Page Center, the Cleveland
Clinic Foundation. Additionally, she was the Director of the
National Institutes of Health (NIH) from April 1991 to June 1993.
Immediately prior to her appointment at NIH, Dr. Healy was
Chairman of the Research Institute of the Cleveland Clinic
Foundation from September 1985 to April 1991, where she directed
the research programs of nine departments, and was a staff member
of the Clinic's Department of Cardiology. From February 1984 to
September 1985, Dr. Healy was Deputy Director of the Office of
Science and Technology Policy at the White House and she served as
Chairman of the White House Cabinet Working Group on Biotechnology.
She additionally served as a member of several advisory groups,
including the Councils of the National Heart, Lung and Blood
Institute.
CARLOS A. FERRER
- ----------------
Mr. Ferrer became a director in July 1996. He is currently a
general partner of Ferrer Freeman Thompson & Co., the general
partner and management company of Health Care Capital Partners, L.P.,
a private equity fund recently formed to invest exclusively in the
Health Care industry. Previously, Mr. Ferrer was Managing Director
and Head of Global Health Care Investment Banking at CS First Boston
Inc. where he was employed since July 1978. Mr. Ferrer is a Director
of Echo Bay Mines, Ltd. and a Trustee of the Cancer Research
Institute, a not-for-profit research institution.
<PAGE> 9
Somatogen, Inc.
GENE I. MILLER
- --------------
Mr. Miller has been a director since October 1988. He has been a
general partner of Miller and LaHaye, L.P. ("M&L"), the general
partner of Peregrine Ventures II, L.P., a private venture capital
firm ("Peregrine"), since 1984 and prior thereto was a general
partner of Peregrine Associates, the general partner of Peregrine
Ventures, also a private venture capital firm, since 1981.
GEORGE B. RATHMANN
- ------------------
Dr. Rathmann has been a director since June 1989. He is currently
Chairman of the Board, Chief Executive Officer and President of
ICOS Corporation, a biotechnology company which he founded in July
1990 and serves on the Board of Directors of Darwin Molecular
Corporation and Hedral Therapeutics, Inc. He is also currently
Chairman Emeritus of Amgen Inc., a biopharmaceutical company.
From 1981 to October 1988, Dr. Rathmann served as President and
Chief Executive Officer of Amgen and from February 1986 to July
1990 as Chairman of the Board of Amgen.
JACK W. SCHULER
- ---------------
Mr. Schuler has been a director since June 1991. He has been
Chairman of the Board and Chief Executive Officer of Stericycle,
Inc., a medical waste processor and recycler, since August 1990.
From 1972 to August 1989, Mr. Schuler was employed by Abbott
Laboratories, Inc., a pharmaceutical company, most recently as
President and Chief Operating Officer. Mr. Schuler also serves
on the Board of Directors of Medtronic, Inc. and Chiron Corp.
RALPH SNYDERMAN
- ---------------
Dr. Snyderman has been a director since March 1989. He has been
Chancellor for Health Affairs and Dean of the School of Medicine at
the Duke University Medical Center since May 1989 and was formerly
Senior Vice President of Medical Research and Development at
Genentech, Inc. from January 1987 to May 1989.
<PAGE> 10
Somatogen, Inc.
Board Committees and Meetings
During the fiscal year ended June 30, 1996 the Board of Directors held
six meetings. The Board of Directors has an Audit Committee and a
Compensation Committee.
The Audit Committee meets with the Company's independent accountants
at least annually to review the results of the annual audit and
discuss the financial statements; recommends to the Board the
independent auditors to be retained; and receives and considers
the independent auditors' comments as to controls, adequacy of
staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of
three non-employee directors: Messrs. Johnson, Miller and Schuler.
The Committee met once during the fiscal year ended June 30, 1996.
The Compensation Committee makes recommendations concerning salaries
and incentive compensation, awards stock options to employees and
consultants under the Company's stock option plans and performs
such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of two
non-employee directors: Mr. Miller and Dr. Rathmann. The
Committee met two times during fiscal year 1996.
During the fiscal year ended June 30, 1996, each director attended
each of the meetings of the Board and the committees on which he
served, held during the period for which he was a director or a
committee member, respectively.
<PAGE> 11
Somatogen, Inc.
PROPOSAL 2
- ----------
APPROVAL OF THE STOCK OPTION PLAN, AS AMENDED
In January 1989, the Company adopted its Stock Option Plan (the
"Plan"), under which 1,825,960 shares of Common Stock have been
reserved for issuance. In November 1993 and October 1994, the
stockholders approved an amendment to the Plan to increase the
aggregate number of shares of common stock authorized for issuance
under such plan by 500,000 shares and 1,200,000 shares, respectively.
The Board of Directors believe that the Company's existing Plan has
been effective in attracting and retaining executives and key
employees. The Plan provides for the grant of both incentive
stock options ("ISOs") intended to qualify as such under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and non-statutory stock options ("NSOs") as well as the grant of
supplemental stock bonuses and stock appreciation rights
(collectively "Stock Awards"). The Plan will terminate in
January 1999, unless sooner terminated by the Board of Directors.
As of July 31, 1996, the Company had net outstanding options to
purchase an aggregate of 2,304,413 shares held by 205 persons at a
weighted average exercise price of $11.15 per share. As of the
fiscal year ended June 30, 1996, options to purchase 1,065,246
shares of Common Stock granted pursuant to the Plan had been
exercised and no supplemental stock bonuses or stock appreciation
rights had been granted. As of July 31, 1996, there were 142,022
shares of Common Stock available for future grants under the Plan
(plus shares that may become available as a result of cancellation
or expiration of options).
In July 1996, the Board approved an amendment to the Plan, subject
to stockholder approval, to increase the number of shares authorized
for issuance under the Plan from an aggregate of 3,525,960 shares
to an aggregate of 4,525,960 shares. The Board adopted this
amendment to ensure that the Company can continue to grant Stock
Awards to employees at levels determined appropriate by the Board
and the Compensation Committee.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2.
- ----------------------------------------------------
<PAGE> 12
Somatogen, Inc.
The essential features of the Plan are outlined below:
Administration
The Plan is administered by the Board, or by one or more Committees
appointed by the Board. The Board of Directors is authorized to
delegate administration of the Plan to a committee composed of not
fewer than two members of the Board. The Board has appointed a
Compensation Committee, consisting of two disinterested directors,
to administer the Plan. The Company intends to limit the directors
who may serve as members of the Compensation Committee to those who
are "outside directors". This limitation excludes from the
Compensation Committee: (i) current employees of the Company;
(ii) former employees of the Company receiving compensation for
past services (other than benefits under a tax-qualified pension
plan); (iii) current and former officers of the Company; and (iv)
directors currently receiving compensation from the Company for
personal services (other than as a director). In addition, the
Board has appointed a Non-Officer Stock Option Administration
Committee (currently consisting of one member, Mr. Andre de Bruin)
with authority to make initial grants of options to new employees
(other than officers) not to exceed 25,000 shares per grant.
All references herein to the "Board" shall include the Compensation
Committee, the Non-Officer Stock Option Administration Committee and
any other committees appointed by the Board under the Plan. Subject
to the limitations set forth in the Plan, and to the resolutions
establishing such committee, the Board has the authority to select
the persons to whom grants are to be made, to designate the number
of shares to be covered by each stock award, to determine whether
a granted option is an ISO or a NSO, to establish vesting schedules,
to specify the type of consideration to be paid to the Company upon
exercise of an option or stock appreciation right and, subject to
certain restrictions, to specify other terms of stock awards. The
maximum term of options granted under the Plan is ten years. The
aggregate fair market value of the stock with respect to which
ISO's are first exercisable in any calendar year may not exceed
$100,000. Options granted under the Plan generally are non-
transferable and expire three months after the termination of
an optionee's employment relationship with the Company. In
general, if an optionee is permanently disabled during his or
her employment by or service to the Company, such person's
option may be exercised up to one year following such disability.
<PAGE> 13
Somatogen, Inc.
Eligibility
ISO's may be granted under the Plan only to employees of the Company
or its affiliates. NSO's, stock appreciation rights and
supplemental bonuses may be granted to any employee or director
of the Company or its affiliates.
The exercise price of ISO's and NSO's must equal at least the fair
market value of the Common Stock on the date of grant. The
exercise price of ISO's granted to any person who at the time of
grant owns stock possessing more than 10% of the total combined
voting power of all classes of stock must be at least 110% of the
fair market value of such stock on the date of grant, and the term
of these options cannot exceed five years.
In October 1994, the Company added to the Plan a per-employee,
per fiscal year limitation equal to 600,000 shares of Common Stock.
The purpose of adding this limitation was to ensure that the
Company generally would continue to be able to deduct for tax
purposes the compensation attributable to the exercise of options
granted under the Plan. Previously, the Board determined in its
sole discretion, the number of shares subject to an option for
any employee and no such formal limitation was placed on the
number of shares available for an option to an employee. To date,
the Company has not granted to any employee in any fiscal year
options to purchase a number of shares equal to the limitation
and does not currently have any intention of granting such number
of options to any employee. There can be no assurance, however,
that the Compensation Committee will not determine in some future
circumstances that it would be in the best interest of the Company
and its stockholders to grant options to purchase such number of
shares to a single employee during a fiscal year.
Stock Subject to the Plan
If Stock Awards granted under the Plan expire or otherwise
terminate without being exercised, the Common Stock not
purchased pursuant to such Stock Awards again becomes
available for issuance under the Plan.
<PAGE> 14
Somatogen, Inc.
Terms of Stock Awards
The Board may provide that a participant may surrender previously
acquired shares of Common Stock or a promissory note in full or
partial payment for the exercise of any options. The Board may
also determine that the shares of Common Stock acquired on the
exercise of an option may be subject to a right of first refusal
or repurchase right in favor of the Company.
The Board may also grant stock appreciation rights which are
tied to any underlying option granted under the Plan. Stock
appreciation rights require the holder to elect either to exercise
the underlying option or to surrender the option and receive an
amount equal to the market price of the vested shares purchasable
under the surrendered option less the aggregate option price
payable for such shares. Amounts payable upon exercise of
stock appreciation rights may, at the Board's discretion, be
made in cash, shares of Common Stock or a combination thereof.
In connection with options or stock appreciation rights granted
under the Plan, the Board may grant supplemental bonuses at the
time of grant or at any other time prior to the time of exercise
of the applicable option or stock appreciation right. Supplemental
bonuses, which are payable in cash, shares of Common Stock or any
combination thereof, are paid upon the exercise of the option or
stock appreciation right. Under the Plan, the amount of any
supplemental bonus may not exceed the maximum amount of tax
liability incurred by reason of the exercise of an option or
stock appreciation right.
The Board may, in its discretion, provide optionees or recipients
of supplemental bonuses or stock appreciation rights with the
election to have the Company withhold from the shares purchased
or issued under the Plan a number of shares with an aggregate
fair market value up to the full amount of the income tax liability
incurred in connection with the acquisitions of the shares.
Restrictions on Transfer
No option, supplemental bonus or stock appreciation right is
assignable or transferable by a participant, other than by will
or the laws of descent and distribution. Notwithstanding the
foregoing, the Board may in its sole discretion permit the transfer
or assignment of an NSO.
<PAGE> 15
Somatogen, Inc.
Effect of Certain Corporate Events
Upon the merger or liquidation of the Company, the Board shall have
the power and discretion to prescribe the terms and conditions of
exercise or modification of the options or other rights granted
under the Plan. Such provisions may include the complete or
partial acceleration of the vesting of options or other rights,
the exchange or conversion of the options or other rights into
options or other rights to acquire securities of the surviving
or acquiring corporation, or for the payment or distribution in
respect to outstanding options or rights.
Amendment
The Board may from time to time amend the Plan. However, no
amendment shall be effective unless approved by the stockholders
of the Company within twelve months before or after its adoption
by the Board if the amendment would (i) increase the maximum
number of shares of Common Stock that may be made subject to
stock options unless necessary to affect the adjustments for
stock splits, stock dividends, etc., (ii) materially increase
the benefits accruing to participants under the Plan, or (iii)
materially modify the requirements as to eligibility for
participation in the Plan.
Federal Income Tax Information
At the time of exercise of an NSO, the optionee generally
recognizes ordinary income equal to the difference between the
exercise price and the fair market value of the stock. The
Company is generally entitled to a business expense deduction
at the time of exercise equal to the ordinary income recognized
by the optionee (subject to the requirement of reasonableness,
the provisions of Section 162(m) of the Code and the satisfaction
of any withholding obligation). An optionee is not taxed on an
ISO at the time of exercise unless the optionee is subject to the
alternative minimum tax. If an optionee disposes of the stock
acquired upon exercise of an ISO before the expiration of either
one year from the date of exercise or two years from the date of
grant, the optionee generally will recognize income and the
Company will generally be entitled to a corresponding business
expense deduction (subject to the requirement of reasonableness,
<PAGE> 16
Somatogen, Inc.
the provisions of Section 162(m) of the Code and the satisfaction
of any withholding obligation). The amount of the ordinary income
will equal the lesser of (i) the excess of the stock's fair market
value on the date of exercise over the exercise price, or (ii) the
optionee's actual gain, if any, on the purchase and sale. The
spread between the exercise price and the fair market value of
the shares on the date they are acquired is includible in income
for purpose of the alternative minimum tax. Slightly different
rules may apply where optionees acquire stock subject to certain
repurchase options or where optionees are subject to Section 16(b)
of the Securities Exchange Act of 1934, as amended ("Exchange Act").
To the extent any option, including an ISO, is granted in tandem
with a stock appreciation right, such that an optionee may choose
at the time of exercise whether to receive stock or an amount of
cash equal to the appreciation inherent in the stock, if the
optionee chooses to exercise the stock appreciation right instead
of the option, the optionee will generally recognize ordinary income
at the time of exercise equal to the difference between the
exercise price and the fair market value of the stock. The
Company will generally be entitled to a corresponding business
expense deduction.
Potential Limitation on Company Deductions
As part of the Omnibus Budget Reconciliation Act of 1993, the U.S.
Congress amended the Code to add Section 162(m) which denies a
deduction to any publicly held corporation for compensation paid
to certain employees in a taxable year to the extent that
compensation exceeds $1 million for a covered employee. It is
possible that compensation attributable to stock options, when
combined with all other types of compensation received by a
covered employee from the Company, may cause this limitation to
be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-
based compensation," are disregarded for purposes of the deduction
limitation. In accordance with proposed Treasury regulation
issued under Code Section 162(m), compensation attributable to
stock options will qualify as performance-based compensation,
provided that: (i) the option plan contains a per-employee
limitation on the number of shares for which options may be
granted during a specified period; (ii) the per-employee limitation
is approved by the stockholders; (iii) the option is granted by
a compensation committee comprised solely of "outside directors";
<PAGE> 17
Somatogen, Inc.
and (iv) either the exercise price of the option is no less than
the fair market value of the stock on the date of grant, or the
option is granted (or exercisable) only upon the achievement (as
certified by the Compensation Committee) of an objective
performance goal established by the Compensation Committee while
the outcome is substantially uncertain.
PROPOSAL 3
- ----------
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Price Waterhouse LLP as the
Company's independent accountants for the fiscal year ending
June 30, 1997 and has further directed that management submit
the selection of independent accountants for ratification by
the stockholders at the Annual Meeting. Representatives of
Price Waterhouse LLP are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they
so desire and will be available to respond to appropriate
questions.
Stockholder ratification of the selection of Price Waterhouse LLP
as the Company's independent accountants is not required by the
Company's By-laws or otherwise. However, the Board is submitting
the selection of Price Waterhouse LLP to the stockholders for
ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the Audit Committee
and the Board will reconsider whether or not to retain that firm.
Even if the selection is ratified, the Audit Committee and the
Board in their discretion may direct the appointment of a
different independent accounting firm at any time during the
year if they determine that such a change would be in the best
interest of the Company and its stockholders.
<PAGE> 18
Somatogen, Inc.
Effective August 24, 1994, the Company 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 auditing 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 their satisfaction 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 indicating their agreement with the above statement.
The affirmative vote of the holders of a majority of the shares
represented and entitled to vote at the meeting will be required
to ratify the selection of Price Waterhouse LLP.
MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3.
- ----------------------------------------------------
<PAGE> 19
Somatogen, Inc.
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of July 31, 1996 (except
s otherwise indicated) by (i) each director of the Company; (ii) each
Named Executive Officer (as hereinafter defined); (iii) all executive
officers and directors as a group; and (iv) all those known by the
Company to be beneficial owners of more than five percent of its
Common Stock.
<TABLE>
<CAPTION>
Percentage
Beneficially
Number of Shares (1) Owned(2)
-------------------- ------------
<S> <C> <C>
Eli Lilly and Company...................... 2,954,104 14.3%
Lilly Corporate Center
Indianapolis, Indiana 46285
Loomis, Sayles & Company, Inc. ............ 1,316,300 6.4
One Financial Center
Boston, Massachusetts 02111 (3)
Kinney L. Johnson (4)...................... 372,940 1.8
Gene Miller (5)............................ 451,208 2.2
Andre de Bruin............................. 143,448 *
Bernadine Healy............................ 2,003 *
George B. Rathmann (6)..................... 67,056 *
Jack W. Schuler (7)........................ 177,801 *
Ralph Snyderman............................ 74,181 *
Robert Caspari............................. 22,829 *
J. William Freytag......................... 35,211 *
Richard J. Gorczynski...................... 21,124 *
Timothy D. Hoogheem........................ 51,654 *
All directors and executive officers as a
group (14 persons) (2), (4)-(8)............ 1,475,777 7.0
</TABLE>
________________
*Less than one percent
<PAGE> 20
Somatogen, Inc.
(1) This table is based upon information supplied by officers,
directors and principal stockholders and a Schedule 13F filing
with the SEC. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where
applicable, each of the stockholders named in this table has
sole voting and investment power with respect to the shares
indicated as beneficially owned. Percentage of ownership is
based on 20,699,250 shares of Common Stock outstanding as of
July 31, 1996 adjusted as required by rules promulgated by
the SEC.
(2) Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of
Common Stock subject to options currently exercisable or
exercisable within 60 days of July 31, 1996, are deemed
outstanding for computing the percentage of the person or entity
holding such securities but are not outstanding for computing the
percentage of any other person or entity. Except as indicated by
footnote, and subject to community property laws where applicable,
the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown
as beneficially owned by them. Includes an aggregate number of
shares that may be issuable upon exercise within 60 days for each
individual as follows: Mr. Johnson, 17,056; Mr. Miller, 17,056;
Mr. Schuler, 17,056; Dr. Healy, 2,003; Dr. Rathmann, 17,056;
Dr. Snyderman, 32,681; Mr. de Bruin, 142,860; Dr. Caspari, 22,000;
Dr. Freytag, 23,562; Dr. Gorczynski, 20,625; and Mr. Hoogheem,
49,937; all directors and executive officers as a group (14
persons), 399,438.
(3) Based on a Schedule 13F filing as of June 30, 1996.
(4) Includes 345,163 shares held of record by American Health Care
Fund ("AHF"). Mr. Johnson is the general partner of Capital
Health Venture Partners, the general partner of AHF. Mr. Johnson
shares voting and investment power with respect to such shares and
may be deemed to be the beneficial owner of such shares.
(5) Includes 433,952 shares held of record by Peregrine. Mr. Miller
is a general partner of M&L, the general partner of Peregrine.
Mr. Miller shares voting and investment power with respect to
such shares and may be deemed to be the beneficial owner of such
shares. Also includes 200 shares held by Mr. Miller's spouse as
to which he disclaims beneficial ownership.
<PAGE> 21
Somatogen, Inc.
(6) Includes 12,500 shares owned by Falcon Technology Partners, a
limited partnership managed by Dr. Rathmann's sons of which Dr.
Rathmann is a limited partner.
(7) Includes 7,000 shares owned by Mr. Schuler's spouse and an
aggregate of 600 shares owned by Mr. Schuler's spouse as joint
tenant with or as custodian for Mr. Schuler's children.
(8) Includes 250 shares held by an officer's spouse.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors and
certain officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the
Security and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than ten
percent stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that
no other reports were required, for the fiscal year ended June 30,
1996, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners
were complied with; except that two Form 4 reports were filed late by
Kinney Johnson and Jack Schuler, both Directors of the Corporation.
<PAGE> 22
Somatogen, Inc.
EXECUTIVE COMPENSATION
- ----------------------
Compensation of Directors
During fiscal 1996, directors of the Company who were not employees
of the Company were not paid any cash compensation for their service
on the Board of Directors or any committees thereof. The members of
the Board of Directors are eligible for reimbursement of expenses
incurred in connection with their service on the Board. Upon
appointment to the Board of Directors, non-employee directors are
eligible to receive a stock option grant from the Company's Stock
Option Plan. On the date of each Annual Meeting of Stockholders, each
non-employee director is also eligible to receive option grants under
the Non-Employee Directors' Stock Option Plan ("the Directors' Plan").
Option grants are non-discretionary. On the date of each Annual
Meeting of Stockholders, each non-employee director who is elected
as a director at such meeting is granted a stock option to purchase
a number of shares of Common Stock determined by multiplying 7,500
by a fraction, the numerator of which is $20.00 and the denominator
of which is the fair market value of one share of Common Stock on
such date. The number of shares subject to each annual stock option
grant will not exceed 10,000 and will not be less than 5,000. No
other options may be granted at any time under the Directors' Plan.
The exercise price of options granted under the Directors' Plan is
100% of the fair market value of the Common Stock subject to the
option on the date of the option grant. Options granted under the
Directors' Plan vest in equal quarterly installments over a period of
three years from grant and expire six years after the date of grant.
As of July 31, 1996, no options had been exercised under the
Directors' Plan.
During fiscal 1996, the Company granted options covering 8,219 shares
to each of Messrs. Johnson, Miller and Schuler and Drs. Rathmann and
Snyderman at an exercise price of $18.25, the fair market value of
such Common Stock (based on the closing sales price reported on The
Nasdaq National Market) on the date of grant. The fiscal 1996
option grants to Messrs. Johnson, Miller and Schuler and Drs.
Rathmann and Snyderman were made under the provisions of the
Directors' Plan.
<PAGE> 23
Somatogen, Inc.
Upon the appointment of Dr. Healy and Mr. Ferrer to the Company's Board
of Directors, Dr. Healy and Mr. Ferrer were each granted stock options
to purchase 12,500 shares at a per share exercise price of $17.00 and
$11.375, respectively. The options were granted from the Company's Stock
Option Plan and vest in equal quarterly installments over a period of three
years from the date of grant and expire six years after the date of grant.
Compensation of Executive Officers
- ----------------------------------
Summary of Compensation
The following table shows for the fiscal years ending June 30, 1996,
1995 and 1994, certain compensation awarded or paid to, or earned by,
the Company's current Chief Executive Officer and its other four most
highly compensated executive officers at June 30, 1996 (the "Named
Executive Officers"):
<PAGE> 24
Somatogen, Inc.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
Other Securities
Annual Compensation Annual Underlying All Other
Name and Fiscal Salary Bonus Compensation Options Compensation
Principal Position Year ($) ($) ($) (1) (#) (2) ($) (3)
- ------------------ ------ ------ ----- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andre de Bruin 1996 $300,000 $47,632 $ 0 0 $ 5,053
President and CEO 1995 300,000 47,621 0 500,000 2,944
Timothy D. Hoogheem 1996 163,260 0 0 5,000 4,851
Vice President of 1995 154,000 0 0 10,000 5,064
Finance, Chief 1994 143,769 45,000 0 60,000 4,725
Financial Officer
and Treasurer
Robert F. Caspari, M.D.(4)1996 210,000 25,000 1,031 0 4,620
Senior Vice President 1995 141,500 25,000 135,189 110,000 4,620
of Medical Affairs
J.William Freytag,Ph.D.(4)1996 205,000 20,000 0 5,000 4,750
Senior Vice President 1995 141,900 20,000 96,272 110,000 4,620
of Commercial
Development
Richard J. Gorczynski,
Ph.D. (4) 1996 185,520 30,000 9,368 2,000 4,620
Vice President of 1995 96,300 30,000 35,605 100,000 2,783
Research and
Development
</TABLE>
<PAGE> 25
Somatogen, Inc.
(1) Represents solely relocation expenses reimbursed by Somatogen.
As permitted by rules promulgated by the SEC, no amounts are shown
with respect to certain "perquisites" where such amounts do not
exceed the lesser of 10% of bonus plus salary or $50,000.
(2) The Company has not issued any stock appreciation rights.
(3) Represents solely employer matching contributions to the
Somatogen, Inc. Custom 401(k) Plan (the "401(k) Plan") paid in
shares of Common Stock which vest over a four-year period
commencing as of the later of the employee's hire date or April 1,
1988.
(4) Drs. Freytag, Caspari and Gorczynski joined the Company in October
1994, October 1994 and December 1994, respectively. For fiscal
1995, salary and bonus for these officers represent amounts earned
from the date they joined the Company through June 30, 1995.
Stock Option Grants And Exercises
- ---------------------------------
The Company grants options to its executive officers under its Stock
Option Plan. As of July 31, 1996, options to purchase a total of
2,304,413 shares had been granted and were outstanding under the Plan,
and options to purchase 142,022 shares remained available for grant
thereunder.
The following tables show for the fiscal year ended June 30, 1996,
certain information regarding options granted to, exercised by, and
held at year end by, the Named Executive Officers:
<PAGE> 26
Somatogen, Inc.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
_________________________________
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price
Underlying Granted to Exercise Appreciation for Option
Options Employees in Price per Expiration Term(3)
Name Granted (#)(1) Fiscal Year(2) Share Date 5% 10%
- ---- -------------- -------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Andre de Bruin -- -- -- -- -- --
Timothy D. Hoogheem 3,000 0.6% $16.00 07/27/2001 $16,325 $37,035
2,000 0.4 18.50 08/07/2001 12,584 28,548
Robert F. Caspari -- -- -- -- -- --
J. William Freytag 3,000 0.6 16.00 07/27/2001 16,325 37,035
2,000 0.4 18.50 08/07/2001 12,584 28,548
Richard J. Gorczynski 2,000 0.4 18.50 08/07/2001 12,584 28,548
</TABLE>
- ---------------------
(1) Options granted to Mr. Hoogheem and Drs. Freytag and Gorczynski in
fiscal 1996 have a six-year term and vest quarterly over a four-
year period.
(2) Based on 490,046 options granted to employees in fiscal 1996.
(3) The potential realizable value is based on the term of the option
at its time of grant (six years in the cases of the options listed
above). It is calculated by assuming that the stock price on the
date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated
stock price. These amounts represent certain assumed rates of
appreciation only, in accordance with the rules of the SEC, and do
not reflect the Company's estimate or projection of future stock
price performance. Actual gains, if any, are dependent on the
actual future performance of the Company's Common Stock and no
gain to the optionee is possible unless the stock price increased
over the option term, which will benefit all stockholders.
<PAGE> 27
Somatogen, Inc.
<TABLE>
<CAPTION>
Aggregated Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values
Number of Unexercised
Securities Underlying Value of Unexercised In-
Options at the-Money Options at
Shares Value Fiscal Year-End Fiscal Year-End (2)
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) ($) (1) (#) (#) ($) ($)
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andre de Bruin -- -- 142,860 357,140 $1,053,593 $2,633,908
Timothy D. Hoogheem -- -- 70,375 39,625 193,172 140,578
Robert F. Caspari -- -- 22,000 88,000 140,251 561,000
J. William Freytag -- -- 23,250 91,750 134,751 539,000
Richard J. Gorczynski -- -- 20,500 81,500 141,250 565,000
</TABLE>
- ---------------------------
(1) Value realized is based on the fair market value of the Company's
Common Stock on the date of exercise less the exercise price.
(2 Calculated on the basis of the closing sale price per share for
the Common Stock as quoted on The Nasdaq National Market of
$14.125 on June 30, 1996, less the exercise price.
<PAGE> 28
Somatogen, Inc.
Stock Option Exchange
The Compensation Committee, at its regularly scheduled meeting on
July 16, 1996, approved a stock option exchange plan for employees
who held stock options at exercise prices ranging from $23.00 to
$40.50. The exchange plan allowed employees to exchange stock options
with exercise prices in excess of $22.00 for the same number of
options at the then current market value of $11.50. The new
options have a quarterly vesting schedule over a five year period
commencing September 28, 1996, and six year terms.
Nine employees accepted the exchange, including Mr. Hoogheem, who
exchanged options to purchase 35,000 shares with an exercise price
of $26.75 (of which options to purchase 28,000 share had vested) for
options to purchase 35,000 at an exercise price of $11.50. Had the
exchange occurred prior to June 30, 1996, Mr. Hoogheem's number of
unexercised securities underlying options at June 30, 1996 would have
been 42,375 exercisable and 67,625 unexercisable, rather than 70,375
exercisable and 39,625 unexercisable.
Employment Agreements
In fiscal 1994, the Company entered into a Severance Agreement with
Mr. Hoogheem. The agreement provides that if within two years of a
change in control of the Company or a change in the chief executive
officer of the Company, (a) his employment is terminated without
cause or (b) he voluntarily leaves after any of (i) a reduction in
his salary, (ii) a substantial change in the nature or status of
his position, (iii) a relocation of the Company's executive offices
or such officer outside of Boulder County, (iv) a material breach
of the Severance Agreement, or (v) a failure to assume the Severance
Agreement by a successor to the Company, Mr. Hoogheem will receive
severance compensation in an aggregate amount equal to his salary,
bonus and incentive compensation for a period of twelve (12) months.
In addition, Mr. Hoogheem will receive his Company-paid health
insurance and all stock options held by him subject to vesting for
the two-year period subsequent to his termination shall become
exercisable in full.
<PAGE> 29
Somatogen, Inc.
The Company entered into an employment agreement effective June 24,
1994 with Andre de Bruin, the Company's President and Chief
Executive Officer. The employment agreement provides for a base
salary of $300,000 to be reviewed annually, an employment bonus of
$142,862 to be paid biweekly over a three-year period commencing on
July 29, 1994 and a bonus of up to fifty percent of his base salary
to be awarded at the discretion of the Compensation Committee. The
employment agreement also provides that if Mr. de Bruin is terminated
without cause prior to the expiration of the aforementioned three-year
period, he will be entitled to continue to receive the employment
bonus on a monthly basis until it has been paid in full. See the
Compensation Committee Report for a discussion of the other terms
of Mr. de Bruin's compensation package.
In fiscal 1995, the Company entered into an employment agreement
effective October 17, 1994 with Dr. Freytag. The employment
agreement provides for a base salary of $205,000 to be reviewed
annually. An employment bonus of $100,000 payable in equal annual
installments of $20,000 over five years is also included in this
agreement. In the event Dr. Freytag voluntarily terminates his
employment or leaves for cause, the unpaid portion will be forfeited.
Based on performance and achievement of mutually agreed upon goals,
Dr. Freytag will be eligible to receive a target bonus of up to 40
percent of base salary. The Company reimbursed Dr. Freytag for his
relocation costs which totaled $96,272 in fiscal 1995. The Company
also provided him with an interest free bridge loan of $133,000
which was repaid in September 1995. If the Company terminates
Dr. Freytag's employment for any reason other than cause or
persistent unsatisfactory performance, he will receive severance
compensation in an aggregate amount equal to base salary for a
period of six months. Corporate-paid health insurance will
continue for six months after the termination date.
<PAGE> 30
Somatogen, Inc.
The Company entered into an employment agreement effective
October 24, 1994 with Dr. Caspari. The employment agreement
provides for a base salary of $210,000 to be reviewed annually
and an employment bonus of $50,000 of which, $25,000 was paid on
his first day of employment and $25,000 was paid on his one-year
employment anniversary date. Based on performance and achievement
of mutually agreed upon goals, Dr. Caspari will be eligible to
receive a target bonus of up to 40 percent of base salary. The
Company reimbursed Dr. Caspari for his relocation costs which
totaled $136,220 and provided him with an interest free bridge
loan of $90,000 from December 1994 through March 1995.
The Company entered into an employment agreement effective December 19,
1994 with Dr. Gorczynski. The employment agreement provides for a
base salary of $185,520 to be reviewed annually and an employment
bonus of $90,000 of which, $30,000 was paid on his first day of
employment and $30,000 on his one-year employment anniversary and
$30,000 will be paid on his two-year employment anniversary. In the
event Dr. Gorczynski voluntarily terminates his employment or leaves
for cause, the unpaid portion will be forfeited. Based on performance
and achievement of mutually agreed upon goals, Dr. Gorczynski will be
eligible to receive up to 40 percent of base salary. The Company is
reimbursing Dr. Gorczynski for his relocation costs which totaled
$44,973 through June 30, 1996 and has provided him with an interest
free bridge loan of $73,872 through August 20, 1995. Effective
August 21, 1995, the bridge loan began accruing interest at 6% per
annum. The bridge loan and accrued interest are secured by
Dr. Gorczynski's former residence and are payable upon the sale
of his former residence.
Compensation Committee Report (1)
The Compensation Committee of the Board of Directors (the
"Committee") is composed of two non-employee directors, currently
Dr. George Rathmann and Mr. Gene Miller. The Committee is
responsible for setting the Company's policies governing employee
compensation and administering the Company's employee benefit
plans, including the Stock Option Plan, the Somatogen, Inc. Custom
401(k) Savings Plan and the Employee Stock Purchase Plan.
- ------------------------
(1)The material in this report is not "soliciting material," is not
deemed filed with the SEC and is not to be incorporated by reference
in any filing of the Company under the Securities Act of 1933 as
amended (the "1933 Act") or the Securities Exchange Act of 1934, as
amended (the "1934 Act"), whether made before or after the date hereof
and irrespective of any general incorporation language in any such filing.
<PAGE> 31
Somatogen, Inc.
The Company's executive compensation programs are designed to
attract and retain executives capable of leading the Company to
meet its business objectives and to motivate them to enhance long-
term stockholder value. The Committee annually evaluates the
performance and determines the compensation of the Chief Executive
Officer and other executive officers of the Company, based upon a
mix of the achievement of corporate goals, individual performance
and comparisons of compensation paid to executive officers of other
biotechnology and biopharmaceutical companies. The competition for
experienced senior executive officers in the biotechnology and
biopharmaceutical industries is intense. The Committee takes into
account the compensation paid by competing companies from survey
data to assist it in determining the compensation paid to executive
officers of the Company. The annual compensation for the Company's
executive officers consists of three components: i) a base salary;
ii) an annual cash incentive; and iii) stock option grants. Each
of these components is described in detail below.
Base Salary: Base salaries for executive officers are determined
in the context of a review of salaries for similar positions offered
by the Radford Biotechnology Survey. According to current survey
data, the executive officers' salaries are currently set
competitively between the middle and high-end of the range when
compared to other biotechnology companies. The Committee generally
reviews each executive officer's base salary on an annual basis.
The Committee increased the base salaries for certain officers at
the beginning of fiscal 1995 to make such salaries competitive in
comparison with other biotechnology companies. Higher salary
targets were used to attract experienced executives to the Company
in fiscal 1995. The specifics of base salaries for executive
officers hired during fiscal 1995 are described in "Employment
Agreements".
Annual Cash Incentive Plan: The annual cash incentive plan
established for the executive, management and other key employees
to reward participants for their contributions to the achievement
of Company-wide performance goals was suspended for fiscal years
1995 and 1996. This plan may be reestablished by the Board in the
future.
<PAGE> 32
Somatogen, Inc.
Stock Option Plan: The Stock Option Plan has been established to
provide all employees of the Company, including executive officers,
with an opportunity to share, along with stockholders of the Company,
in the benefits deriving from the long-term performance of the Company.
Grants of stock options have generally been granted on an annual
basis to all eligible employees based on evaluations of individual
performance levels. Stock options granted under the Plan generally
have a four or five-year vesting schedule and expire six to ten
years from the date of the grant. The exercise price of options
granted under the Plan is 100% of the fair market value of the
underlying stock on the date of grant. In fiscal 1996, the
Committee granted options to officers to purchase an aggregate of
30,000 shares of Common Stock. The Committee also granted options
to other eligible employees in the Company to purchase an aggregate
of 460,046 shares of Common Stock. Options were awarded based on
accomplishments and progress toward targeted individual performance
objectives for 1995 supporting the Company's strategic goals.
In the future, the Committee plans to continue the formalized stock
bonus award program that rewards individual job performance at all
levels of the Company commensurate with accomplishments and progress
toward specific individual performance objectives as prescribed by a
Managing-by-Objectives ("MBO") performance management system which
supports achievement of the Company's strategic goals.
The Company has amended its Stock Option Plan to comply with
exclusions related to Section 162(m) of the Code relating to the
non-deductibility of compensation of Named Executive Officers in
excess of $1,000,000 per year.
Chief Executive Officer Compensation: The Committee used the same
procedures described above for the other executive officers in
setting the base salary, and stock option awards for the Chief
Executive Officer. During the past fiscal years, the Chief
Executive Officer's salary was determined based on comparisons
with biotechnology companies as described above. Since
Mr. de Bruin's base salary, set in fiscal 1994, was considered
competitive, it remained at $300,000 in fiscal 1996. The
employment bonus of $142,862 (paid bi-weekly for three years),
which represents the portion of earned but unvested compensation
Mr. de Bruin lost as a result of departing from his former employer,
continues through 1997. In addition, as described in 1994,
<PAGE> 33
Somatogen, Inc.
Mr. de Bruin remains eligible for a discretionary performance
bonus of up to 50% of his base salary which will be within the
sole discretion of the Committee and will be based on his
performance and his achievement of goals mutually agreed upon
by the Committee and Mr. de Bruin. The Committee has not
specified the terms of Mr. de Bruin's performance bonus and has
no plans to specify such terms until the Company achieves a
stronger financial position. This compensation package was set
forth in an employment agreement between the Company and
Mr. de Bruin in 1994. As noted above, compensation was set high
in the range compared to the other biotechnology companies in
the surveys. In setting this amount, the Committee took into
account: (i) its belief that Mr. de Bruin has significant and
broad-based experience in the health care industry; (ii) the
scope of Mr. de Bruin's responsibility; and (iii) the Committee's
confidence in Mr. de Bruin to lead the Company's development and
commercialization efforts. As a result of these factors and
consistent with competitive practices, Mr. de Bruin was also
granted in 1994, a stock option to purchase an aggregate of 500,000
shares of Common Stock as an incentive for future performance.
This option was granted at an exercise price equal to the fair
market value of the common stock on the date of grant and vests
on an annual basis over a seven-year period and has a ten-year
term. The Board of Directors remains confident in Mr. de Bruin's
leadership abilities and is pleased and encouraged by the
Company's progress under Mr. de Bruin during fiscal 1996.
Mr. de Bruin's establishment of a MBO system has made assessment
of progress toward strategic business goals possible. In fiscal
1996, Dr. Charles Scoggin, who served as Chief Executive Officer
until July 1994, received $143,635 and, in connection with Dr.
Scoggin's agreement with the Company, $20,000 was paid to Crow
Camp, Ltd., a corporation controlled by him.
COMPENSATION COMMITTEE
Dr. George B. Rathmann
Mr. Gene I. Miller
<PAGE> 34
Somatogen, Inc.
Performance Measurement Comparison (1)
The following graph shows total shareholder return of the Nasdaq
CRSP Total Return Index for the Nasdaq Stock Market (U.S. Companies)
and Nasdaq Pharmaceutical Index beginning on July 31, 1991, and for
the Company beginning on August 2, 1991, the date on which the
Company's Common Stock commenced public trading:
[Graph]
_________________________________
(1)This Section is not "soliciting material," is not deemed "filed"
with the SEC and is not to be incorporated by reference in any filing
of the Company under the 1933 Act or the Exchange Act whether made
before or after the date hereof and irrespective of any general
incorporation language in any such filing.
*The total return on investment (change in year-end stock price plus
reinvested dividends) assumes $100 invested on August 2, 1991 (or on
July 31, 1991 as indicated on the above index) in Somatogen, Inc.
Common Stock (at the initial public offering price of $19.00 per share),
the Nasdaq CRSP Total Return Index for Nasdaq Stock (U.S. Companies)
Index and the Nasdaq Pharmaceutical Index.
<PAGE> 35
Somatogen, Inc.
CERTAIN TRANSACTIONS
During fiscal 1996, the Company sold certain manufacturing equipment
to ICOS Corporation, a company of which George Rathmann, a Somatogen
Director, serves as Chief Executive Officer and Chairman of the Board
of Directors. The assets sold were a portion of the assets for which
Somatogen recognized an impairment loss in fiscal 1994 due to the
Company's discontinuation of development of clinical and commercial
manufacturing facilities following the Company's strategic alliance
agreement with Eli Lilly and Company ("Lilly"), which provides that
Lilly will be responsible for providing manufacturing facilities for
certain clinical and commercial production. The assets sold to ICOS
Corporation had an original cost of $393,076 and a carrying value,
after impairment writedown, of $196,538. The assets were sold for
$270,006. The Company believes that the sales of those assets were
on terms no less favorable to the Company than could have been
obtained from unrelated parties.
The Company's By-laws provide that the Company will indemnify its
directors and executive officers and may indemnify its other
officers, employees and other agents to the fullest extent permitted
by Delaware law. The Company is also empowered under its By-laws
to enter into indemnification contracts with its directors and
officers and to purchase insurance on behalf of any person whom it
is required or permitted to indemnify. Pursuant to this provision,
the Company has entered into indemnity agreements with each of its
directors and officers.
In addition, the Company's Certificate of Incorporation provides
that to the fullest extent permitted by Delaware law, the Company's
directors will not be liable for monetary damages for breach of
the directors' fiduciary duty of care to the Company and its
stockholders. This provision in the Certificate of Incorporation
does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware
law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Company, for acts
or omissions not in good faith or involving intentional misconduct
or knowing violations of law, for acts or omissions that the
director believes to be contrary to the best interests of the
Company or its stockholders, for any transactions from which the
<PAGE> 36
Somatogen, Inc.
director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the
Company or its stockholders when the director was aware or should
have been aware of a risk of serious injury to the Company or its
stockholders, for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's
duty to the Company or its stockholders, for improper transactions
between the director and the Company and for improper distributions
to stockholders and loans to directors and officers. This provision
also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal
environmental laws.
OTHER BUSINESS
The Board of Directors knows of no other business that will be
presented for consideration at the Annual Meeting. If other
matters are properly brought before the meeting, it is the intention
of the persons named in the accompanying proxy to vote the shares
represented thereby on such matters in accordance with their best
judgment.
By Order of the Board of Directors
James C.T. Linfield
Secretary
September 3, 1996
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended June 30, 1996 is
available without charge upon written request to Secretary, Somatogen,
Inc., 2545 Central Avenue, Suite FD1, Boulder, Colorado 80301.
