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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, 1997
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, Suite FD1 , Boulder,CO 80301-2857
(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. [ X ]
The approximate aggregate market value of voting stock held by
non-affiliates of the registrant is $111,030,159 as of August 28, 1997.*
20,870,621
(Number of shares of Common Stock outstanding as of August 28, 1997)
Documents Incorporated by Reference
Registrant's Proxy Statement for use in connection with its Annual Meeting of
Stockholders to be held on October 28, 1997 is incorporated by reference into
Part III of this Annual Report on Form 10-K.
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*Excludes 3,789,058 shares of Common Stock held by Directors and Officers and
Stockholders whose beneficial ownership exceeds ten percent of the shares
outstanding at August 28, 1997. 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 tradenames and/or
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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PART I
Item 1. Description of Business
Somatogen, Inc. (the "Company") is a biopharmaceutical company
developing specialty oxygen therapeutics and other pharmacological agents
utilizing its proprietary recombinant hemoglobin technology. The Company's lead
development compound, rHb1.1, is a recombinant variant of human hemoglobin. The
Company's first proposed application of rHb1.1 is as an oxygen carrying
pharmaceutical for use in surgery to reduce or eliminate the requirement for
allogeneic (donor) blood transfusions. The Company proposes to market rHb1.1
under the registered trademark "Optro(R)."
Other therapeutic applications under investigation for recombinant
hemoglobin include the treatment or prevention of tissue hypoxia (lack of
oxygen) observed with severe hemorrhage (trauma), acute cerebral ischemia
(stroke) and acute myocardial ischemia (myocardial infarction). Somatogen's
discovery research program is focused on designing recombinant hemoglobin
molecules which are targeted for these and other hypoxia indications.
In June 1994, the Company entered into a global strategic alliance (the
"Alliance") with Eli Lilly and Company ("Lilly") to co-develop Optro. In March
1997, the Company received notice of Lilly's decision to discontinue its
co-development of Optro. The termination was effective May 20, 1997, at which
time all rights to Optro reverted back to the Company, except the marketing
rights to Optro in Scandinavia which Pharmacia & Upjohn Inc. received under its
1991 agreement with the Company. In accordance with the termination provisions
of the Alliance, the Company received a one-time termination payment of
$6,000,000 in May 1997 and in July 1997, the Company and Lilly executed a
revolving credit agreement which provides that the Company may borrow up to
$8,000,000 from Lilly.
Background
Tissue Oxygenation
Maintaining a stable level of oxygenation in all tissues, but
especially those vital to life, is an essential requirement for normal
physiological function. In fact, vital organs begin to shut down and die within
minutes of a disruption in oxygen delivery. The body has several natural
mechanisms that are designed to protect against the potentially catastrophic
effect of a disruption of oxygen delivery: key organs are fed by several primary
and collateral blood vessels; circulating red blood cells normally exist in
overabundance; and shunting and changes in vascular tone can redirect blood flow
to areas of need. Despite these safeguards, vital organs are susceptible to a
sudden reduction in oxygen delivery and resulting acute cellular hypoxia, which
is a leading cause of death.
Organs and tissues become hypoxic when not enough oxygen is delivered
to the cells. Tissue hypoxia is defined as a condition in which cells of a
tissue have abnormal oxygen utilization such that the tissue is experiencing
anaerobic metabolism. Oxygen is transported to tissues by red blood cells
carried in the blood. If red cells are lost or prevented from reaching organs,
hypoxia results. Usually, this occurs one of two ways: red blood cells are
decreased by serious bleeding, often due to trauma, surgery, or some other cause
of bleeding, or red cells cannot reach vital organs due to blockage of a major
blood vessel, as occurs during a stroke or heart attack.
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Bleeding: Serious blood loss is treated by transfusing red blood cells
collected from donors. A blood transfusion replaces volume and most importantly,
oxygen delivering capacity. Donor blood must be typed and crossmatched to ensure
compatibility with the recipient and any mistake in testing can result in death.
In situations of trauma, the time required for matching donor blood with the
recipient can mean the difference between life and death. Blood transfusions
administered in conjunction with surgery are performed to prevent tissue hypoxia
from occurring. Exposure to donor blood, however, carries with it a finite risk
of transmission of infectious diseases (such as AIDS and hepatitis) and
complications of transfusion-related immunosuppression. Concerns about
transfusions with donated blood have created a significant need for minimizing
its use.
Ischemia: Acute blockage of arteries is the cause of both myocardial
(heart) and cerebral (brain) hypoxia. When hypoxia is due to a decrease in blood
flow, it is called ischemia. Therapy is aimed at removing the cause of the
blockage (usually blood clot) and reestablishing flow. In the area of coronary
artery blockage, several options exist. Drugs that break up clots, called
thrombolytics, are employed, as well as several surgical techniques. For
cerebral blockage (stroke) there are fewer choices. Surgery is usually not an
option and thrombolytics have just begun to be cautiously used for certain types
of stroke. Despite great strides in the treatment of both myocardial and
cerebral ischemia, acute hypoxia still leads in many cases to organ damage and
even death. Time is of the essence to reverse the hypoxia, therefore other
therapeutic agents that could minimize the impact of the lack of oxygen are
needed.
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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Tissue Oxygenating Therapeutics
The Company believes that hemoglobin solutions possess characteristics
that make them well-suited for acute oxygen delivery. The hemoglobin molecule is
much smaller than a red blood cell and being in solution it may be able to
travel past blockages and through blood clots to reach vital organs. Also, by
not having to squeeze through capillaries (where oxygen diffusion to tissue
occurs) in a manner similar to red blood cells, hemoglobin solutions may be more
efficient at delivering oxygen than a red blood cell. Hemoglobin solutions may
be useful for preventing or reversing acute hypoxia and preserving vital organ
function until more definitive medical or surgical intervention can be applied.
Examples of conditions or diseases that result in acute hypoxia include: serious
blood loss (e.g., surgical bleeding, trauma, gastrointestinal bleeding), acute
myocardial ischemia, acute cerebral ischemia, sickle cell crisis, acute
peripheral vascular ischemia, and acute bowel ischemia.
There have been numerous attempts to develop a hemoglobin-based oxygen
carrying solution for use in medicine, most particularly as a therapeutic which
can be used in surgery as a temporary oxygenating agent to minimize exposure to
donor blood. Many of these activities are ongoing today and involve hemoglobin
extracted from human or bovine (cow) red blood cells ("stroma-free hemoglobin").
However, stroma-free hemoglobin has several characteristics which must be
corrected in order to make it suitable for use as a therapeutic agent. 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 an effective oxygen
therapeutic, its oxygen affinity must be reduced by chemical treatment. 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. More 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 temporary oxygen carrying therapeutics. To date, no product based on
stroma-free hemoglobin, transgenic plants or animals has been approved for human
use as a therapeutic in the U.S. See "Competing Technologies."
Commercial Opportunity
The Company believes the commercial opportunity for recombinant
hemoglobin-based tissue oxygenating therapeutics potentially spans the spectrum
of human diseases and conditions which lead to or result in tissue hypoxia.
These conditions/diseases include, for example, serious blood loss, acute
myocardial ischemia, acute cerebral ischemia, trauma, sickle cell crisis, acute
peripheral vascular ischemia, and acute bowel ischemia.
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Surgical 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.
Each year in the U.S., approximately 2.5 million patients undergo a
major surgical procedure (elective and emergent) which results in sufficient
bleeding to require a blood transfusion. More than half of these patients
receive 1-2 units of donor blood and another 30% receive 3-4 units. In the U.S.,
approximately 9 million units of donor blood are transfused each year into
surgical patients to treat acute blood loss.
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
re-infused, or blood loss can be reduced through the use of drugs.
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, 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.
The Company believes that oxygen carrying solutions like Optro may
prove to be effective in the treatment of these patients and reduce the
requirement for a donor blood transfusion.
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Enhanced ANH in Cardiac Surgery
Cardiac surgery is a major subset of the surgical procedures described
above. Each year in the U.S., approximately 500,000 patients undergo cardiac
surgery for coronary artery bypass grafting, septal defect repair or valve
replacement. These procedures are highly traumatic to the patient. A 12 to 16
inch incision is made in the chest and the breast bone (sternum) is sawed in
half to allow access to the heart. During this surgical procedure, the patient's
heart is stopped (so surgery can be performed on the heart) and his/her blood is
pumped outside the body, circulated through an extracorporeal oxygenator, and
returned to the patient and pumped throughout the body to provide oxygen to the
tissues. This part of the procedure is called "cardiopulmonary bypass" ("CPB").
Exposure of the patient's blood to the CPB machine may damage the blood and
result in significant post-operative bleeding and other complications. A
procedure called acute normovolemic hemodilution ("ANH") is frequently used in
cardiac surgery to sequester the patient's blood before going on bypass to
minimize exposure to the CPB machine. The Company believes that the use of Optro
in this setting may allow greater amounts of the patient's blood to be
harvested, thus decreasing post-operative blood use and bleeding complications.
Trauma
The opportunity for using recombinant hemoglobin-based oxygen
therapeutics in trauma potentially extends beyond the emergency room and
surgical suite where donor blood is used today. 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). In addition, initial 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. Each year in the U.S., there are approximately
400,000 victims of blunt or penetrating trauma which results in severe
hemorrhage, but resuscitation with an oxygenating therapeutic (donor blood) does
not begin until the patient arrives in the hospital emergency room. The
mortality rate for these victims is quite high, and the Company believes that
earlier resuscitation of these patients with an oxygen-carrying therapeutic like
Optro could potentially save lives.
Stroke (acute cerebral ischemia)
Stroke is the third leading cause of death in the U.S. Approximately
500,000 people suffer a new or recurrent stroke every year, and 150,000 people
die each year as a result. Obstruction of arteries feeding the brain by thrombus
(blood clot) or embolus or failure of the systemic circulation and hypotension,
if severe and prolonged enough, can deprive brain tissue of blood and oxygen,
leading to ischemic disruption of physiologic function and subsequent necrosis
(infarction). The cardinal feature of cerebrovascular disease is the "stroke", a
term that connotes the sudden and dramatic development of a focal neurologic
deficit as a result of disruption of blood flow to a portion of the brain.
Ischemia accounts for 80% of acute strokes, while hemorrhage accounts
for the remainder. Within the thrombotic stroke population, whether or not it is
preceded by warning signs, each year in the U.S. 60% or approximately 240,000
people will experience a single massive attack. A stroke develops suddenly,
often in a matter of minutes.
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It is during this acute onset phase of ischemic stroke that recombinant
hemoglobin-based oxygenating therapeutics could potentially provide a critically
needed benefit by supplying oxygen to deprived brain cells downstream, reducing
the severity of neurologic damage.
Myocardial Infarction (acute myocardial ischemia)
Myocardial infarction is caused by a lack of blood flow to the heart
tissue. An estimated seven million people in the U.S. suffer from clinically
active coronary artery disease, which causes 1.5 million myocardial infarctions
and over half a million deaths each year. Coronary artery disease results from
atherosclerosis, a complex process that occurs in many large arteries including
the coronary arteries which supply blood to the heart. This process develops
over a number of years and may eventually result in the formation of a stenosis
(blockage) in the coronary artery. If the vessel becomes narrowed too much,
blood flow can be reduced to levels which can result in angina pectoris (chest
pain) or a more life-threatening myocardial infarction and even sudden death. In
the case of acute myocardial infarction, plaque in the sclerotic region of the
vessel ruptures and causes a clot to form on the plaque surface, resulting in
many cases in a cessation of blood flow to the heart muscle down stream.
Current therapeutic approaches include drugs that dilate blood vessels,
those which decrease the workload of the heart in order to conserve oxygen,
thrombolytics (clot busters) and combinations of these. There are currently no
drugs available that increase the oxygen content of blood. Recombinant
hemoglobin-based oxygenating therapeutics would appear to be ideal therapeutic
agents to increase the oxygen content of the blood and perfuse the areas distal
to the arterial occlusion.
Several drugs, including tissue plasminogen activator ("TPA") and
streptokinase, have been approved for use in treating heart attacks and related
cardiovascular disorders. In this ischemic setting, the Company believes that a
recombinant hemoglobin-based oxygenating therapeutic may be a useful adjunct to
thrombolytic agents by increasing the speed at which oxygen delivery to the
heart may be restored.
The Company also believes that a recombinant hemoglobin-based
oxygenating therapeutic may be useful as an adjunctive therapy in angioplasty
(cardiac catheterization) procedures. Approximately half of the 600,000
angioplasty procedures performed in the U.S. each year involve patients who have
a high risk of negative outcomes. Recombinant hemoglobin could be given by
intracoronary administration during the angioplasty procedures to minimize
ischemic damage associated with mechanical closure of the vessel during
angioplasty.
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Somatogen's Recombinant Hemoglobin Technology
The Company believes it is a leader in characterizing the structure,
function and molecular biology of the human hemoglobin molecule and in
developing recombinant human hemoglobin as potential tissue oxygenating
therapeutics. 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 (rHb1.1), an oxygen therapeutic for
use in surgery and trauma. rHb1.1 is a molecular variant of human hemoglobin.
Unlike stroma-free hemoglobin, recombinant hemoglobin:
o Eliminates the risk of infectious disease transmission. Because Optro is
produced recombinantly, it has no risk of transmission of human or animal
blood-borne infectious diseases such as AIDS and hepatitis.
o 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.
o 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. 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.
o Can be manufactured at large scale. Optro is manufactured using a
microbial fermentation process which may be performed at large scale.
Unlike stroma-free hemoglobin products which depend on animal or human
blood as a starting material, the raw materials for the fermentation of
Optro are simple sugars and nutrients which are available in large
quantities.
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Products in Development
Somatogen is using its recombinant hemoglobin technology to develop
products for a range of therapeutic 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 surgical patients
who are experiencing blood loss and in patients suffering from chronic anemia.
See "Clinical Development."
Optro (rHb1.1)
Listed below is a summary of the potential applications of the
Company's recombinant human hemoglobin products currently in development:
Enhanced Acute Normovolemic Hemodilution. Patients undergoing cardiac
surgery have their blood exposed to a heart-lung machine which oxygenates and
pumps their blood while surgery is being performed on the heart. This exposure
may damage the blood and result in significant post-operative bleeding and other
complications. A procedure called acute normovolemic hemodilution is frequently
used in cardiac surgery to harvest the patient's blood before going on bypass to
minimize exposure to the heart-lung machine. The Company believes that the use
of Optro in this setting may allow greater amounts of the patient's blood to be
harvested, thus decreasing post-operative blood use and bleeding complications.
Somatogen is currently conducting a Phase II clinical trial in cardiac surgery.
See "Clinical Development."
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 reduce the exposure of surgical patients to transfusion with
donor blood. The Company is currently reviewing and developing its clinical
trial design in the interoperative setting. See "Clinical Development."
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).
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. The Company is currently
in preclinical testing and developing a clinical trial design in trauma.
Erythropoiesis/chronic anemia. The Company is investigating whether
rHb1.1 stimulates the production of new red blood cells. Preliminary experiments
in an animal model of induced anemia and in human hematopoietic tissues in
vitro demonstrated hematopoietic activity with rHb1.1. The exact mechanism of
action, however, is not known. Somatogen is currently conducting Phase I
clinical studies in patients with chronic renal failure and primary bone marrow
cancer. See "Clinical Development."
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Next 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 the elimination of
vasoactivity and extended circulating half-life. The Company believes that such
a modified recombinant hemoglobin may be useful in a number of therapeutic
applications such as acute myocardial ischemia and acute cerebral ischemia. 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 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
Oxygen Delivery Indications
Somatogen is currently pursuing clinical development of Optro for the
enhancement of acute normovolemic hemodilution in cardiac surgery and as a
temporary oxygen therapeutic to treat acute blood loss in elective surgery. 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 and dosage tolerance and preliminary
data on pharmacokinetics. 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 patients undergoing elective
surgery. These trials were completed in September 1995. In July 1996, Somatogen
commenced an expanded Phase II trial in elective surgical patients in order to
gather additional safety information as well as more comprehensive
efficacy/activity information. The Phase II trial in the elective general
surgical setting was discontinued after the termination of Somatogen's strategic
alliance with Lilly. In April 1997, a Phase II trial was initiated by Somatogen
to explore safety and preliminary efficacy in enhanced ANH in cardiac surgery.
If the Phase II trial is successfully completed, the Company plans to undertake
Phase III trials to establish safety and efficacy in a larger population of
surgical patients to provide the basis for the filing of a Biologics License
Application with the FDA.
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. 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.
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The range of therapeutic applications for which Optro may be suitable
will depend in part on its duration of action. The Company's clinical trials
conducted to date have not been specifically designed to measure duration of
action, but Optro and other hemoglobin-based oxygen carrying solutions will
likely have significant shorter duration of action than transfused blood. There
can be no assurance that the duration of action of Optro will permit the product
to be therapeutically useful in a sufficient number of indications to make it
commercially viable.
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.
Early Phase II Clinical Trials
From December 1994 to September 1995, Somatogen conducted early Phase
II trials of Optro for two indications: intraoperative blood replacement and
acute normovolemic hemodilution.
Intraoperative Blood Replacement: This single blinded, controlled trial
was designed to study safety and to gather preliminary efficacy/activity data in
patients who experienced 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, 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 donated blood and received 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
intraoperative 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.
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Late Phase II Clinical Trials
In July 1996, the Company commenced patient enrollment in a
multi-center late Phase II study of Optro to deliver oxygen and restore blood
volume as a treatment for acute blood loss during elective surgery. In
connection with the Lilly strategic alliance, Lilly was managing this study and
upon termination of the Alliance the study was discontinued. In April 1997, a
multicenter Phase II trial was initiated by Somatogen as the first of several
studies to explore the safety and efficacy of enhanced ANH in cardiac surgery.
These studies will, when completed, examine the safety and efficacy of removing
up to four units of autologous blood via ANH, with Optro replacing the volume
withdrawn. These studies will enroll approximately 50 patients undergoing
coronary artery bypass graft surgery at approximately five to ten sites
throughout the U.S.
Chronic Anemia Indication
The Company has initiated Phase I trials of its recombinant hemoglobin,
rHb1.1, as a potential agent for stimulating red blood cell formation
(hematopoiesis). The first trial was initiated in June 1996 and will evaluate
the safety and hematopoietic activity of repeated low doses of rHb1.1 in
approximately 35 patients with anemia resulting from end stage renal disease.
This randomized, double-blind, placebo-controlled trial is a dose-ranging study
being conducted at six sites in 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.
A second trial is designed to evaluate the safety and hematopoietic
activity of repeated low doses of rHb1.1 in approximately 15 to 20 patients with
chronic anemia due to primary bone marrow failure and malignancy. This
randomized, open-label dose-ranging study is being conducted at several sites in
the U.S. Based on data analysis and other priorities, the Company will determine
whether to proceed with further development of recombinant hemoglobin in this
indication.
Competition
In some cases 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."
<PAGE> 14
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. 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.
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 an oxygen carrying therapeutic 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.
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 unproved 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 limitations, including some of the same limitations as
stroma-free hemoglobin. At least four other companies have announced that they
are conducting human clinical trials of hemoglobin-based oxygen carrying
solutions. One of these companies, Baxter International Inc., has announced that
they have filed for product registration in Europe and received FDA approval to
commence two pivotal Phase III studies in the U.S. 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.
<PAGE> 15
Certain other non-hemoglobin molecules have also been explored as
oxygen therapeutics. 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 and
can transport large amounts of oxygen. The Company is aware that two of its
potential competitors have commenced human trials for the use of a PFC-based
product as a temporary oxygen carrying fluid.
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 high levels of oxygen. Current anesthesia practice does
not utilize high oxygen inspiration during surgery, and in many situations it is
considered dangerous.
Sales and Marketing
Because the initial target market for Optro is as an oxygen carrying
therapeutic to be used in surgery, Somatogen will focus its marketing and
selling efforts on key operating room personnel, including anesthesiologists and
surgeons. Potential customers are highly concentrated in the hospital setting,
therefore the Company believes it can achieve sales coverage in North America
with a relatively small specialized sales force. The Company will seek an
agreement with a large pharmaceutical company for assistance in selling and
marketing Optro internationally. There can be no assurance that the Company will
be able to build such a sales force for Optro in North America or that a
suitable international partner can be secured.
There can be no assurance that Somatogen or its partners, if any, will
receive the necessary governmental approvals to market and distribute Optro in
any country.
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 cost/benefit of medical products and services
in relation to clinical outcomes. 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.
Research and Development
Somatogen's research and development efforts are focused on clinical
trials of Optro, process development and next generation technology development
of recombinant hemoglobin. 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.
In fiscal 1997, 1996 and 1995, net research and development expenses
were $15,807,000, $16,949,000 and $14,968,000, respectively. Somatogen expects
these expenses to increase during the foreseeable future.
<PAGE> 16
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
quality. To date, Somatogen has manufactured its initial product in a pilot
facility and only in limited quantities. To successfully establish commercial
manufacturing capacity, further development is required to enhance manufacturing
processes, scale-up such processes, reduce product costs and to demonstrate the
consistent manufacture of a clinically safe product. 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.
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 a 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 product demand for
most stages of clinical testing. The Company is currently evaluating various
manufacturing strategies to support launch and commercialization of Optro,
including a full assessment of the feasibility of contract manufacturing.
<PAGE> 17
The manufacturing process for Optro requires substantial amounts of 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 were to experience
raw material shortages, such shortages could affect its ability to produce
products.
In order to manufacture Optro at a commercial scale at an acceptable
cost, Somatogen 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. 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 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 product quality.
There can be no assurance that the Company will be able to achieve or maintain
an appropriate level of product quality or that it can develop assays that are
sufficiently sensitive to demonstrate the required high levels of quality.
As part of its clinical development program, the Company has made
process improvements to improve product quality and to reduce or eliminate
potential 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 additional
clinical studies and expenditures that may cause delays in the clinical
development of Optro. Additionally, there can be no assurance that the
manufacturing processes which have been developed can be successfully scaled-up
to the commercial levels contemplated or that Optro or any other product can be
manufactured at a cost and in quantities to make such product commercially
viable.
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 compounds that are not naturally occurring and
synthetic forms of naturally occurring molecules. To the extent that the
Company's products or inventions are synthetic 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.
<PAGE> 18
The Company's patents include claims for certain hemoglobin
compositions and for the methods of use of certain hemoglobin compositions for
oxygen delivery, hematopoiesis and other uses. 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 or oxygen delivering
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 to non-naturally occurring
hemoglobins has also been granted. 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). U.S. patents covering DNA coding for
mutant hemoglobins and certain dialpha polypeptides were issued in fiscal 1997.
A broad European patent to dialpha and/or dibeta DNA and related polypeptides
was also granted in fiscal 1997. Other U.S. patents to hematopoiesis, certain
multimeric hemoglobins and certain processes have recently been issued. The
remaining hemoglobin-related patent applications owned, co-owned or licensed by
the Company are pending.
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 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.
<PAGE> 19
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.
Government Regulation
Regulation by governmental authorities in the U.S. and foreign
countries will significantly affect the Company'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 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.
Clinical studies involve the administration of the investigational new
drug to healthy subjects and to patients, under the supervision of a qualified
principal investigator. Clinical studies 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.
In order to obtain FDA approval of Optro, the Company will need to
establish the product's efficacy during its Phase III trials. There currently is
no FDA established criteria for measuring efficacy of an oxygen carrying
solution. Although the FDA has indicated on several occasions that it may
consider the avoidance of donor blood as a surrogate marker for oxygen carrying
product's efficacy if such avoidance were measured by a suitable clinical trial,
there can be no assurance that the FDA will ultimately accept such an efficacy
endpoint. Commercial introduction of Optro could be delayed or prevented or the
market restricted if the Company were not able to define and achieve in Phase
III trials an efficacy endpoint acceptable to the FDA.
<PAGE> 20
In the case of biologic products such as the Company's recombinant
hemoglobin, the results of pharmaceutical development and the preclinical and
clinical testing and the results, data and facility description must be
submitted to the FDA in the form of a Biologics License Application ("BLA"). The
BLA must be approved before commercial sales may begin. The FDA may respond to
the BLA by granting a product license, or by denying the application if it finds
that the application does 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 Act,
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."
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. 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> 21
Human Resources
As of July 31, 1997, Somatogen employed 133 individuals, of whom
approximately 42 hold Ph.D., M.D. or other advanced degrees. Of its total work
force, 44 employees are dedicated to manufacturing, 49 are engaged in research
and development activities and 40 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.
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> 22
Officers
The officers of the Company and their ages as of August 28, 1997 are as
follows:
Name Age Position
Andre de Bruin.................. 50 Chairman of the Board, President and
Chief Executive Officer
Robert F. Caspari, M.D.......... 50 Senior Vice President of Medical and
Regulatory Affairs
J. William Freytag, Ph.D........ 46 Senior Vice President of Technology
and Business Development
Timothy D. Hoogheem............. 44 Senior Vice President of Finance and
Administration, Chief Financial Officer,
Treasurer and Assistant Secretary
Carol L. Cech, Ph.D............. 49 Vice President of Technology and
Intellectual Property
Richard J. Gorczynski, Ph.D..... 49 Vice President of Research
and Development
Thomas A. Keuer................. 38 Vice President of Operations
Conrad A. McCarty............... 30 Corporate Controller
James C.T. Linfield............. 42 Secretary
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. From 1989 until June 1994, he
was Chairman, President and Chief Executive Officer of Boehringer Mannheim
Corporation, Indianapolis, Indiana, a U.S. subsidiary of Corange Ltd., a
private, global healthcare corporation. Mr. de Bruin also serves on the Board of
Directors of Diametrics Medical, Inc., and is Vice Chairman of the Board of
Directors of Quidel Corporation.
<PAGE> 23
Dr. Caspari was appointed Senior Vice President of Medical and Regulatory
Affairs in July 1997. From October 1994 through June 1997, Dr. Caspari served as
the Company's Senior Vice President of Medical Affairs. 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 Technology and Business
Development in July 1997. From October 1994 through June 1997, Dr. Freytag
served as the Company's Senior Vice President of Commercial Development. 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 1992 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. 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.
<PAGE> 24
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.
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 Operations in July 1997. From
October 1994 through June 1997, Mr. Keuer served as the Company's Vice President
of Manufacturing and Process Engineering. 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.
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. From August 1990 to December 1991, he
held the position of risk analyst at RiskCap Inc. 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.
<PAGE> 25
Item 2. Properties
Somatogen's administrative offices, research laboratories and pilot
manufacturing operations occupy 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 January 1998. The Company
anticipates that its current facilities will meet the Company's research and
development needs through fiscal 1998.
The Company has a pilot manufacturing facility consisting of
approximately 24,000 square feet. The Company's lease covering this facility
expires in October 2001.
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, canceled
construction of the CMF-1 facility and recorded a charge of approximately $29.2
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.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
<PAGE> 26
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 Stock 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
Stock Market. These prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal 1997
First Quarter................................................................ $14.75 $10.00
Second Quarter............................................................... 12.38 9.50
Third Quarter................................................................ 14.25 3.00
Fourth Quarter............................................................... 6.50 4.44
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
</TABLE>
As of July 31, 1997, there were approximately 1,186 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> 27
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
1997 1996 1995 1994 1993 June 30, 1997
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ -- $ -- $ -- $ 11 $ 659 $ 6,588
--------- --------- --------- -------- --------- ----------
Operating expenses:
Research and development 20,079 19,849 18,890 18,029 19,859 121,331
Reimbursements from Lilly (5,405) (6,150) (4,022) -- -- (15,577)
Reimbursements to Lilly 1,133 3,250 100 -- -- 4,483
-------- --------- --------- -------- --------- ----------
Research and development, net 15,807 16,949 14,968 18,029 19,859 110,237
General, administrative and
marketing 3,605 4,150 4,282 4,199 5,466 31,372
Writedown of manufacturing
facility assets (1) -- -- -- 29,194 -- 29,194
---------- --------- --------- -------- --------- ----------
Total expenses 19,412 21,099 19,250 51,422 25,325 170,803
---------- --------- ------ --------- --------- ----------
Operating loss (19,412) (21,099) (19,250) (51,411) (24,666) (164,215)
Interest income and other, net (2) 8,472 3,076 2,146 708 1,326 17,245
---------- ---------- --------- --------- --------- ----------
Loss from continuing operations (10,940) (18,023) (17,104) (50,703) (23,340) (146,970)
Discontinued operations -- -- -- -- -- (925)
----------- ---------- --------- --------- --------- ----------
Net loss $ (10,940) $ (18,023) $(17,104) $ (50,703) $ (23,340) $ (147,895)
=========== ========== ========= ========= ========= ==========
Loss per share data:
Loss from continuing operations $ (0.53) $ (0.90) $ (0.94) $ (3.64) $ (2.37)
=========== ========== ========== ========= =========
Net loss $ (0.53) $ (0.90) $ (0.94) $ (3.64) $ (2.37)
=========== ========== ========== ========= =========
Shares used in calculating per
share data 20,765 20,075 18,269 13,935 9,852
=========== ========== ========== ========= =========
June 30,
Balance Sheet Data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Cash, cash equivalents and short-
term investments $ 44,026 $ 54,276 $ 37,909 $ 52,017 $ 22,658
Working capital 42,458 51,739 35,789 45,446 15,436
Total assets 56,031 69,161 51,880 65,994 60,368
Long-term debt and capital lease
obligations -- 11 370 1,106 3,079
Deficit accumulated during the
development stage (151,888) (140,948) (122,925) (105,821) (55,118)
Stockholders' equity 53,598 63,304 47,361 57,803 49,211
</TABLE>
- ----------------
(1) Reflects revaluation of manufacturing facilities. See Note 2 to
Consolidated Financial Statements included herein.
(2) Fiscal 1997 reflects the receipt of $6 million from Lilly pursuant to the
strategic alliance termination provisions.
<PAGE> 28
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. No revenue has
been generated by Somatogen to date from commercial product sales, and such
sales are not expected to commence for several years, if at all. To achieve
sustained profitable operations, Somatogen must successfully develop, obtain
regulatory approval for, manufacture and market its products. The time-frame
necessary to achieve market success for any individual product is long and
uncertain. There can be no assurance that the Company will be able to achieve
profitability at all or on a sustained basis.
For the period from its inception to June 30, 1997, the Company
incurred a cumulative net loss of $147,895,000. The Company expects to incur
substantial and increasing operating losses for the next several years as the
Company's products will require significant additional research and development,
including extensive preclinical and clinical testing, before the Company will be
able to apply for and obtain approval from the FDA or corresponding foreign
authorities for any indication, if at all. There can be no assurance that the
Company's research and development efforts will be 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 regulatory
approval to sell any products, that the products can be manufactured at an
acceptable cost and with appropriate quality, or that any products, if and when
approved, could be successfully marketed.
Pursuant to a strategic alliance (the "Alliance") between Somatogen and
Eli Lilly and Company ("Lilly"), effective June 24, 1994 and through May 20,
1997, Lilly was co-developing Somatogen's lead recombinant hemoglobin product,
Optro, sharing in certain development costs and contributing advisory and
support services. The Alliance was terminated effective May 20, 1997, upon
notification from Lilly in March 1997.
<PAGE> 29
Results of Operations
Fiscal year ended June 30, 1997 ("fiscal 1997") as compared to the
fiscal years ended June 30, 1996 ("fiscal 1996") and June 30, 1995 ("fiscal
1995"):
Operating Expenses
For fiscal 1997, total operating expense decreased by 8% to $19,412,000
from $21,099,000 for fiscal 1996 primarily due to increased net reimbursements
from Lilly and from lower general, administrative and marketing expenses. For
fiscal 1996, total operating expense increased by 10% from $19,250,000 for
fiscal 1995 primarily due to increased net research and development
expenditures.
Net research and development expense for fiscal 1997 decreased by 7% to
$15,807,000 from $16,949,000 in fiscal 1996. Net research and development
expense for fiscal 1996 increased by 13% from $14,968,000 for fiscal 1995. These
variances are further discussed in the following paragraphs.
Excluding Lilly reimbursements, research and development expense for
fiscal 1997 increased by 1% to $20,079,000 from $19,849,000 in fiscal 1996. For
fiscal 1996, excluding Lilly reimbursements, research and development expense
increased by 5% from $18,890,000 for fiscal 1995. These increases were primarily
a result of increased expenditures related to process and product development.
Reimbursements from Lilly for fiscal 1997 decreased by 12% to
$5,405,000 from $6,150,000 in fiscal 1996. This decrease was primarily a result
of decreased reimbursable clinical material manufacturing costs partially offset
by increased reimbursable process development expenditures. For fiscal 1996,
reimbursements from Lilly increased by 53% from $4,022,000 in fiscal 1995 due to
increased reimbursable clinical development expenditures and from an amendment
to the Alliance which provided that, effective January 1, 1996, certain process
development expenditures would be reimbursable.
Reimbursements to Lilly for fiscal 1997 decreased by 65% to $1,133,000
from $3,250,000 for fiscal 1996. This decrease was due to a decrease in
reimbursable clinical and process development costs. For fiscal 1996,
reimbursements to Lilly increased from $100,000 in fiscal 1995 due to the
sharing of clinical development costs and from sharing in process development
costs which began January 1, 1996 pursuant to an amendment to the Alliance.
General, administrative and marketing expense for fiscal 1997 decreased
by 13% to $3,605,000 from $4,150,000 for fiscal 1996. This decrease was
primarily a result of lower expenses incurred related to the disposal of certain
assets held for sale, combined with a decrease in commercial development
expenditures. For fiscal 1996, general, administrative and marketing expense
decreased by 3% compared to expenses of $4,282,000 in fiscal 1995.
<PAGE> 30
Interest Income and Other, Net
For fiscal 1997, net interest and other income increased to $8,472,000
from $3,076,000 in fiscal 1996. This increase was the result of a $6,000,000
termination payment received from Lilly, net of a decrease in interest income
due to lower average investment balances. For fiscal 1996, net interest income
and other increased from $2,146,000 in fiscal 1995. This increase was the result
of interest earned from higher average cash and investment balances and
decreased interest expense resulting from lower debt and capital lease balances.
Taxes
The Company incurred losses for federal income tax purposes in fiscal
1997, 1996 and 1995 and therefore incurred no tax liability or expense for any
of those years.
At June 30, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $122,000,000. 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 2012. 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 $4,300,000 which expire in
the years 2001 through 2012.
Deferred tax assets of approximately $59,100,000 have been reduced to
the amount realizable, zero, by a valuation allowance based on the Company's
history of losses.
<PAGE> 31
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
1998 compared to the levels experienced in fiscal 1997, and to increase in
subsequent fiscal years as the clinical studies 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
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, 1997, the Company had cash, cash equivalents and short-term
investments of $44,026,000. The Company's cash, cash equivalents and short-term
investments decreased by approximately $10,250,000 during fiscal 1997. This
decrease was primarily due to the use of cash for operations. Pursuant to the
termination provisions of the Lilly Alliance, a revolving credit agreement was
executed effective July 28, 1997, which provides that the Company may borrow up
to $8,000,000 from Lilly.
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 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 $5,942,000 are classified in Somatogen's balance sheet as assets
held for sale.
For the year ended June 30, 1997, the Company realized $504,000 in
proceeds from the sale of clinical manufacturing assets. 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. At June 30,
1997, the Company had aggregate future operating lease obligations of
approximately $2,713,000. The Company spent $1,256,000 during the year ended
June 30, 1997 for the purchase of capital equipment and leasehold improvements.
<PAGE> 32
During the fiscal year beginning July 1, 1997, the Company's operating
requirements include increases in research and development costs, including
costs related to clinical studies 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 studies and new product development,
expenditures associated with commercial manufacturing, 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 strategic alliances. The Company is currently
engaged in preliminary discussions with potential strategic partners. However,
there can be no assurance that the Company will be able to enter into any
strategic relationships and/or raise additional financing. There can be no
assurance that any strategic relationship which the Company enters into will be
on terms favorable to the Company, or that any additional funding which may
become available to the Company will be on satisfactory 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 studies. 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 study
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 44-63 of this Annual Report on
Form 10-K.
<PAGE> 33
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 28, 1997.
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 28, 1997.
Item 11. Executive Compensation
Incorporated by reference from the registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on October 28, 1997.
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 28, 1997.
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 28, 1997.
<PAGE> 34
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 as
Appendix F to this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
<S> <C>
Page
Report of Price Waterhouse LLP, Independent Accountants 43
Consolidated Balance Sheet at June 30, 1997 and 1996 44
Consolidated Statement of Operations for each of the three years in the period
ended June 30, 1997 and for the period from July 10, 1985 (inception) to
June 30, 1997 45
Consolidated Statement of Stockholders' Equity for the period from July 10, 1985
(inception) to June 30, 1997 46
Consolidated Statement of Cash Flows for each of the three years in the period
ended June 30, 1997 and for the period from July 10, 1985 (inception) to
June 30, 1997 48
Notes to Consolidated Financial Statements 51
</TABLE>
(a-2) The exhibits to this Annual Report on Form 10-K are listed under item
14(c) below.
<PAGE> 35
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)
10.69 Amendment to the Somatogen, Inc. Amended and Restated
Stock Option Plan (5)
(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.
(5) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 dated November 6, 1996 and incorporated
herein by reference thereto.
(b) Reports on Form 8-K
The registrant filed a Report on Form 8-K on June 10, 1997,
concerning the adoption of a preferred share purchase rights plan.
(c) Exhibits
<PAGE> 36
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)
10.5 Employment and Executive Stock Agreement between the
Registrant and Charles H. Scoggin dated October 13, 1988. (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 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)
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)
<PAGE> 37
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)
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
Limited. (8)
10.47 Form of Severance Agreement entered into between the
Registrant and certain of its Executive Officers with
Related Schedule. (8)
<PAGE> 38
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)
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 Stock Purchase Agreement between Somatogen, Inc. and
Eli Lilly and Company, dated as of September 18, 1995. (13)
10.65 Amendment No. 1 to the Stock Purchase Agreement between
Somatogen, Inc. and Eli Lilly and Company dated June 29,
1994. (13)
10.66 Amendment No. 3 to the Agreement between Somatogen, Inc. and
Eli Lilly and Company dated June 24, 1994, and subsequently
amended on June 24, 1994 and May 4, 1995 (with certain
confidential information in brackets deleted). (13)
10.67 Promissory Note of Fiona Wood for the benefit of the
Registrant dated July 30, 1996. (14)
10.68 Amendment dated July 1, 1996 to Exclusive Agency Agreement
with Binswanger Chesterton. (15)
10.69 Amendment to the Somatogen, Inc. Amended and Restated Stock
Option Plan. (16)
10.70 Lease Extension Agreement dated January 21, 1997 with Central
for 2545 Central Avenue, Boulder, Colorado.(17)
10.71 Lease Extension Agreement dated January 21, 1997 with Centra
for 2590 Central Avenue, Boulder, Colorado.(17)
10.72 Lease Extension Agreement dated January 21, 1997 with Central
for 5797 Central Avenue, Boulder, Colorado.(17)
10.73 Rights Agreement dated as of June 5, 1997.(18)
10.74 Revolving Credit Facility Agreement dated as of July 28,
1997 (with certain confidential information in brackets
deleted).
10.75 Amendment dated July 23, 1997 to Exclusive Agency Agreement
with Binswanger Chesterton.
10.76 Form of Retention Agreement entered into between the
Registrant and certain Executive Officers.
<PAGE> 39
16.1 Letter Re: Change in Certifying Accountant. (9)
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney. Reference is made to page 41.
27.1 Financial Data Schedule (submitted only to the SEC in
electronic format).
(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.
(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.
<PAGE> 40
(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.
(13) Previously filed with the Commission as an exhibit to Amendment No. 1 to
Schedule 13D filed by Eli Lilly and Company (File No. 5-42128) on
November 9, 1995 and incorporated herein by reference thereto.
(14) Previously filed with the Commission as exhibit 10.64 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference thereto.
(15) Previously filed with the Commission as exhibit 10.65 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996 and
incorporated herein by reference thereto.
(16) Previously filed with the Commission as an exhibit to the Company's S-8
Registration Statement dated November 6, 1996 and incorporated herein by
reference thereto.
(17) Previously filed as an exhibit to the Company's Annual Report on Form 10-Q
for the period ended December 31, 1996 and incorporated herein by
reference thereto.
(18) Previously filed as an exhibit to the Company's Form 8-K filed on June 10,
1997 and incorporated herein by reference thereto.
<PAGE> 41
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 11th day of
September, 1997.
SOMATOGEN, INC.
By: Andre de Bruin
---------------
Chairman of the Board, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Andre de Bruin Chairman of the Board, President September 11, 1997
and Chief Executive Officer
(Principal executive officer)
Timothy D. Hoogheem Senior Vice President of September 11, 1997
Finance and Administration,
Chief Financial Officer
and Treasurer
(Principal financial officer)
Conrad A. McCarty Corporate Controller September 11, 1997
(Principal accounting officer)
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Carlos Ferrer Director September 11, 1997
Bernadine Healy Director September 11, 1997
Gene I. Miller Director September 11, 1997
George B. Rathmann, Ph.D. Director September 11, 1997
Jack W. Schuler Director September 11, 1997
Ralph Snyderman, M.D. Director September 11, 1997
</TABLE>
<PAGE> 43
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, 1997 and 1996, and the results
of their operations and their cash flows for the three years ended June 30,
1997, 1996 and 1995 and for the period from inception (July 10, 1985) to
June 30, 1997, 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
audits 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 25, 1997
<PAGE> 44
<TABLE>
<CAPTION>
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
ASSETS
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,868 $ 29,541
Short-term investments 19,158 24,735
Receivable from Lilly -- 1,852
Other receivables 483 1,013
Prepaid expenses and other current assets 382 444
---------- ---------
Total current assets 44,891 57,585
Property and equipment, at cost, net of
accumulated depreciation and amortization 3,842 4,042
Assets held for sale 5,942 6,446
Other assets, net 1,356 1,088
---------- ---------
$ 56,031 $ 69,161
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,363 $ 1,826
Accrued payroll and payroll related 543 801
Payable to Lilly 100 2,454
Other accrued liabilities 427 603
Current portion of long-term debt
and capital lease obligations -- 162
---------- ---------
Total current liabilities 2,433 5,846
Long-term debt and capital lease obligations -- 11
---------- ---------
Total liabilities 2,433 5,857
---------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000
shares authorized, no shares issued or outstanding -- --
Common stock, $.001 par value, 35,000,000
shares authorized, 20,865,362 and 20,684,970
shares issued and outstanding at June 30, 1997
and 1996, respectively 21 21
Additional paid-in capital 205,652 204,518
Deficit accumulated during the development stage (151,888) (140,948)
Deferred compensation related to grant of stock options (187) (287)
---------- ---------
Total stockholders' equity 53,598 63,304
---------- ---------
$ 56,031 $ 69,161
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 45
<TABLE>
<CAPTION>
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
Year ended June 30, Period From
July 10, 1995
------------------------------------------------ (inception to)
1997 1996 1995 June 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Revenue:
Technology disclosure and
license fees $ 4,904
Research and development
grants and contracts -- -- -- 1,684
----------- ----------- ------------ ------------
Total revenue -- -- -- 6,588
----------- ----------- ------------ ------------
Operating expenses:
Research and development $ 20,079 $ 19,849 $ 18,890 121,331
Reimbursements from Lilly (5,405) (6,150) (4,022) (15,577)
Reimbursements to Lilly 1,133 3,250 100 4,483
----------- ----------- ------------ ------------
Research and development, net 15,807 16,949 14,968 110,237
General, administrative
and marketing 3,605 4,150 4,282 31,372
Writedown of manufacturing
facility assets -- -- -- 29,194
----------- ----------- ------------ ------------
Total operating expenses 19,412 21,099 19,250 170,803
----------- ----------- ------------ ------------
Operating loss (19,412) (21,099) (19,250) (164,215)
Interest income and other, net 8,472 3,076 2,146 17,245
----------- ----------- ------------ ------------
Loss from continuing operations (10,940) (18,023) (17,104) (146,970)
Discontinued operations:
Loss from operations
of subsidiary -- -- -- (1,225)
Gain on sale of subsidiary -- -- -- 300
----------- ----------- ----------- ------------
Net loss $ (10,940) $ (18,023) $ (17,104) $ (147,895)
=========== =========== =========== ============
Net loss per share $ (0.53) $ (0.90) $ (0.94)
=========== =========== ===========
Shares used in calculating
per share data 20,765,000 20,075,000 18,269,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 46
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, 1994 17,406,995 $17 $163,747 $(105,821) $(140) $ 57,803
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
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 47
<TABLE>
<CAPTION>
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands, except share and per share amounts)
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 258,751 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 263,751 -- 773 -- -- 773
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 20,684,970 21 204,518 (140,948) (287) 63,304
Issuance of 106,229 shares of
common stock upon exercise of
stock options for cash at
$1.20 to $12.75 per share 106,229 -- 634 -- -- 634
Other 74,163 -- 500 -- 100 600
Net loss -- -- -- (10,940) -- (10,940)
---------- --- -------- --------- ----- --------
Balance, June 30, 1997 20,865,362 $21 $205,652 $(151,888) $(187) $53,598
========== === ======== ========= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 48
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
(Caption>
Period From
July 10, 1985
Year ended June 30, (inception) to
1997 1996 1995 June 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in)
operating activities:
Net loss $(10,940) $(18,023) $(17,104) $(147,895)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 1,685 1,928 2,504 16,452
Writedown of manufacturing
facility assets -- -- -- 29,194
Other 251 418 192 1,213
Changes in assets and liabilities:
Receivables 2,382 (1,265) (1,247) (321)
Prepaid expenses and other
current assets 62 (15) (106) (357)
Accounts payable and accrued
liabilities (3,251) 2,700 (1,848) 2,584
Other, net 2 (3) 6 330
------- --------- ------- -------
Net cash used in operating
activities (9,809) (14,260) (17,603) (98,800)
------- --------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 49
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
(Caption>
Period From
July 10, 1985
Year ended June 30, (inception) to
1997 1996 1995 June 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Cash flows provided by (used in)
investing activities:
Purchases of short-term
investments (59,718) (66,723) (29,651) (308,679)
Proceeds from sale of short-term
investments 65,295 53,521 42,501 289,521
Purchases of property and
equipment (1,256) (2,009) (2,132) (23,511)
Proceeds from sale of property
and equipment 532 971 1,711 3,310
Additions to construction-
in-progress -- -- -- (18,956)
Other, net (397) (521) (200) (9,283)
------- -------- ------- ---------
Net cash provided by (used in)
investing activities 4,456 (14,761) 12,229 (67,598)
------- -------- ------- ---------
Cash flows provided by (used in)
financing activities:
Payments of capital lease
obligations and long-term debt (173) (1,362) (2,233) (10,467)
Net proceeds from issuance of
stock and warrants 853 33,548 6,349 198,214
Other, net -- -- -- 3,519
------- --------- ------- ---------
Net cash provided by
financing activities 680 32,186 4,116 191,266
------- --------- ------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 50
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
Period From
July 10, 1985
Year ended June 30, (inception) to
1997 1996 1995 June 30, 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Net increase (decrease) in
cash and cash equivalents (4,673) 3,165 (1,258) 24,868
Cash and cash equivalents at
beginning of period 29,541 26,376 27,634 --
-------- -------- -------- -------
Cash and cash equivalents at
end of period $ 24,868 $ 29,541 $ 26,376 $24,868
======== ======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 19 $ 111 $ 265 $ 2,399
Capital lease obligations
incurred for purchase of
property and equipment $ -- $ -- $ 560 $ 5,318
Equipment deposits transferred
to net property, plant and
equipment $ -- $ -- $ -- $ 3,423
Net property, plant and
equipment transferred to
assets held for sale $ -- $ -- $ -- $ 9,541
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 51
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. 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.
Note 2. Summary of significant accounting policies
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> 52
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
1997 1996 Lives
---- ---- -----
<S> <C> <C> <C>
Laboratory and pilot production equipment $ 10,558 $ 10,127 3 - 10 years
Office furniture and equipment 3,326 3,075 3 - 10 years
Leasehold improvements 3,858 3,718 2 - 4 years
---------- ---------
17,742 16,920
Less accumulated depreciation
and amortization (13,900) (12,878)
---------- ---------
$ 3,842 $ 4,042
========== =========
</TABLE>
Property and equipment purchased are depreciated using the straight-line
method over their estimated useful lives. Leasehold improvements are amortized
over the shorter of the life of the related asset or the life of the lease.
Assets held for sale:
Land and building related to manufacturing facilities and the related
manufacturing equipment, aggregating $5,942,000 and $6,446,000 at June 30, 1997
and 1996, respectively, are classified as assets held for sale. These assets are
carried at their estimated net realizable value (See Note 3).
<PAGE> 53
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other assets:
Other assets at June 30, 1997 and 1996 include approximately $1,290,000 and
$1,010,000, respectively, of patent costs, net of accumulated amortization of
$276,000 and $161,000, respectively, 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, 1997. Pharmacia &
Upjohn Inc. has the marketing rights to Optro in Scandinavia under its 1991
agreement with the Company. Research and development fees and grant revenue
irrevocably received are recognized as revenue when received.
<PAGE> 54
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
Pursuant to an alliance between Somatogen and Eli Lilly and Company
("Lilly") effective June 24, 1994, and through May 20, 1997, Lilly was
co-developing Somatogen's lead recombinant hemoglobin product, Optro, sharing in
certain clinical development costs and contributing advisory and support
services. Expense reimbursements receivable from Lilly and payable to Lilly are
disclosed as separate components of research and development in the Consolidated
Statement of Operations.
Stock-Based Compensation Plans:
Stock-based compensation plans are accounted for using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," rather than applying the fair value
method prescribed in Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation."
<PAGE> 55
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Net loss per share:
Net loss per share is computed based upon the weighted average number of
common shares and common equivalent shares outstanding. Common equivalent shares
from stock options and warrants are included in the per share calculations where
the effect of their inclusion would be dilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128, which is effective for periods ending
after December 15, 1997, requires changes in the computation, presentation, and
disclosure of earnings per share. All prior period earnings per share data must
be restated to conform with the provisions of SFAS No. 128. The Company will
adopt SFAS No. 128 for the year ended June 30, 1998, but does not expect the new
accounting standard to have a material impact on the Company's reported
financial results.
Reclassifications:
Certain prior year amounts in the consolidated financial statements and
footnotes have been reclassified to conform to the current year presentation.
Note 3. Lilly Alliance
In June 1994, the Company entered into a global strategic alliance (the
"Alliance") with Lilly to co-develop Somatogen's lead recombinant hemoglobin
product, Optro. In March 1997, the Company received notice of Lilly's decision
to discontinue their co-development of Optro. The termination was effective
May 20, 1997.
<PAGE> 56
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Under the terms of the Alliance, Lilly invested $30,000,000 in exchange for
Somatogen common stock, including milestone equity investments of $1,000,000 in
September 1994 and $2,000,000 in October 1995 and a $7,000,000 equity investment
made on October 27, 1995 in conjunction with Somatogen's October 18, 1995 public
common stock offering. Additionally, in accordance with the termination
provisions of the Alliance, in May 1997 the Company received a one-time
termination payment of $6,000,000, which is reflected in interest and other
income, net in the Consolidated Statement of Operations. Additionally, in July
1997 the Company and Lilly executed a revolving credit agreement which provides
that the Company may borrow up to $8,000,000 from Lilly. Borrowings bear
interest at Lilly's weighted average cost of capital. The credit agreement
expires in May 2002, or earlier under certain circumstances as identified in the
agreement, and it contains certain conditions including, but not limited to,
restrictions related to consolidation, mergers, sales of assets, indebtedness,
dividends, stock repurchases and loans.
Upon entering the 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 $433,000
of this balance is remaining at June 30, 1997.
Note 4. Income taxes
At June 30, 1997, the Company had net operating loss carryforwards for
federal income tax reporting purposes of approximately $122,000,000. 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 2012. 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 $4,300,000 which will
expire in the years 2001 through 2012.
<PAGE> 57
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: 1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 45,800 $ 40,600
Research and development carryforwards 4,300 3,700
Temporary differences, net 9,000 10,100
----------- -----------
59,100 54,400
Valuation allowance (59,100) (54,400)
------------ -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
There were no material deferred tax liabilities as of June 30, 1997 or
June 30, 1996.
At June 30, 1997 and 1996, a valuation allowance for deferred tax assets of
$59,100,000 and $54,400,000, respectively, is 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 $4,700,000 during the year ended
June 30, 1997, primarily due to additional losses incurred during the year for
which no tax benefit was recorded.
<PAGE> 58
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5. 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 2001. Total rent expense charged to operations for the
years ended June 30, 1997, 1996 and 1995 was $1,331,000, $1,225,000 and
$1,387,000, respectively.
The aggregate future minimum rental commitments as of June 30, 1997 for
non-cancelable operating leases with initial or remaining terms in excess of one
year is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal
Year Ending Operating
June 30, Leases
-------- ------
<S> <C>
1998 $1,130
1999 671
2000 575
2001 252
2002 85
-------
Total lease obligations $2,713
======
</TABLE>
<PAGE> 59
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6. 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. For the years ended June 30, 1997, 1996 and 1995, the
Company made stock match contributions of 39,508, 23,150 and 22,054 shares at an
aggregate value of $265,070, $339,135 and $191,855, respectively.
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, 1997, 1996 and 1995, 34,655,
25,363 and 30,759 common shares were issued under the Purchase Plan,
respectively.
Note 7. Stock Option Plans and Warrants
The Company's Stock Option Plan (the "Stock Option Plan") provides for the
granting of stock options and supplemental stock bonuses to officers, employees
and directors.
The Company currently has 4,525,960 shares authorized for issuance under
its Stock Option Plan. The Stock Option Plan was amended on October 31, 1996,
increasing the number of shares of common stock authorized for issuance under
such plan by 1,000,000 shares.
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, subject to acceleration at the discretion of the Board of Directors.
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. The options are priced at the fair market value of the
Company's common stock on the date of grant.
<PAGE> 60
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.
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Outstanding Options Outstanding Vested Options
---------------------------------------- --------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Number Exercise Number
Exercise Price Life Price Outstanding Price Outstanding
-------------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.40 -- $1.80 0.6 years $1.35 7,759 $1.35 7,759
5.13 -- 7.50 4.1 years 6.37 1,017,096 6.68 321,036
7.75 -- 10.63 3.8 years 9.01 972,865 8.60 537,227
11.00 -- 16.50 4.3 years 13.87 625,282 13.65 333,738
16.75 -- 21.38 4.3 years 18.40 150,265 18.43 70,659
25.75 -- 32.50 1.1 years 30.25 300 30.25 300
----------- -----------
2,773,567 1,270,719
=========== ===========
</TABLE>
In July 1997, the Board of Directors ratified an amendment to the
Directors' Plan. The amendment provides for a 200,000 share increase in the
Directors' Plan option pool, a non-discretionary option grant of 15,000 shares
upon initial appointment to the Board of Directors, an increase in the minimum
and maximum annual grant to 7,500 and 15,000 shares, respectively, accelerates
option vesting upon a change in control and gives non-employee board members the
alternative of deferring fees in exchange for discounted option grants with the
discount equal to the amount of the deferred fee. The amendment is subject to
stockholder approval.
During fiscal 1997 certain employees and consultants, holding options to
purchase shares of the Company's common stock with a weighted average exercise
price per share of $24.68 exchanged their existing vested and unvested options
for replacement options to purchase the same number of shares of common stock at
a weighted average exercise price per share of $9.44, which was the market value
at the date of exchange. The vesting period on all the replacement options began
on the date of grant and continues quarterly over two and one-half years for
options granted to consultants and five years for options granted to employees.
Options for 131,000 shares were exchanged in fiscal 1997 and are reflected in
both the cancelation and grant activity in the following options outstanding
table.
<PAGE> 61
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock option transactions for the years ended June 30, 1997, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Weighted Average
Number of Exercise Price
Shares Per Share
--------- ---------------
<S> <C> <C>
Balance at June 30, 1994 1,840,880 $ 7.89
Granted 1,057,559 9.25
Exercised (381,463) .79
Canceled (204,605) 15.80
-----------
Balance at June 30, 1995 2,312,371 8.93
Granted 577,141 16.88
Exercised (258,751) 2.84
Canceled (96,550) 12.14
-----------
Balance at June 30, 1996 2,534,211 11.26
Granted 923,690 8.79
Exercised (106,229) 5.93
Canceled (578,105) 16.13
-----------
Balance at June 30, 1997 2,773,567 9.63
===========
Exercisable at June 30, 1997 1,270,719 9.95
===========
</TABLE>
At June 30, 1997, total shares available for grant under the Stock Option
Plan, the Consultants' Plan and the Directors' Plan are 955,937, 19,000 and
90,456, respectively,
<PAGE> 62
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company applies APB No. 25 in accounting for its Stock Option Plan,
Directors' Plan and Purchase Plan (collectively, the "Plans"), and no
compensation expense has been recognized in the financial statements. Had
compensation expense for the Company's Plans been determined based on the fair
value at the grant dates for awards under the Plans consistent with the method
of accounting prescribed by SFAS No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
June 30,
1997 1996
---- ----
<S> <C> <C>
Net loss As reported $10,940 $18,023
Pro forma 12,339 18,753
Net loss per common share As reported $(0.53) $(0.90)
Pro forma (0.59) (0.93)
</TABLE>
<PAGE> 63
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In accordance with the guidance provided under SFAS No. 123, fair values
are based on minimum values. The weighted average fair value of options is
estimated as $4.82 and $8.09 for options granted during fiscal years 1997 and
1996, respectively, using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants during the years ended
June 30, 1997 and 1996: dividend yield of zero; expected volatility of 58% and
49%, respectively; risk-free interest rates of 6.4% and 6.1%, respectively; and,
an expected term of 4.4 years. The risk-free rates used in the calculation
represent the average U.S. Government Security interest rates on the stock
option grant date with maturities equal to the expected term of the option. The
effect of actual forfeitures is included in the computation of compensation cost
for options granted during each of the respective years.
Warrants:
As of June 30, 1997, the Company had warrants outstanding to purchase
85,000 shares of common stock at an exercise price of $9.75 per share. The
warrants expire November 9, 1997.
Note 8. Stockholder Rights Plan
In June 1997, the Board of Directors adopted a stockholder rights plan
("Rights Plan"). The Rights Plan is designed to deter coercive or unfair
takeover tactics and to prevent an acquiring entity from gaining control of the
Company without offering a fair price to all of the Company's stockholders.
Each right would entitle the holder of the Company's common stock to purchase
one one-hundredth of a share of Series A Junior Participating Preferred Stock at
an exercise price of $44.00, subject to adjustment to prevent dilution. The
rights are evidenced by the common stock certificates and will not separate from
the common stock until the earlier of (i) the date of a public announcement that
a person, entity or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 15% or more of the outstanding
shares of common stock; or (ii) 10 days after a public announcement of a tender
or exchange offer by any person or entity if upon consummation such person would
be an Acquiring Person. Further, upon the occurrence of certain events described
below, the rights generally entitle each right holder (except the Acquiring
Person) to purchase that number of shares of the Company's common stock which
equals the $44.00 exercise price of the right divided by one-half of the current
market price of the common stock. Those events generally include (i) upon any
person or entity becoming an Acquiring Person; and (ii) if any person or entity
becomes an Acquiring Person and thereafter, (a) the Company is merged with or
into an Acquiring Person and the Company's common stock is changed, converted or
exchanged; or (b) 50% or more of the Company's assets or earning power is sold;
or (c) an Acquiring Person engages in one or more "self-dealing" transactions as
described in the Rights Agreement.
The Company is generally entitled to redeem the rights for $.01 per right
at any time prior to the earlier of the date on which any person or entity
becomes an Acquiring Person or June 5, 2007. The rights will expire on June 5,
2007, unless redeemed or exchanged earlier by the Company pursuant to the Rights
Plan.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-42012, 33-43332, 33-79466, 33-89426, 333-00896,
333-00894, 333-00892 and 333-15757) 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 25, 1997 appearing on page 43 of this Form 10-K.
PRICE WATERHOUSE LLP
Boulder, Colorado
September 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,868
<SECURITIES> 19,158
<RECEIVABLES> 483
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,891
<PP&E> 17,742
<DEPRECIATION> 13,900
<TOTAL-ASSETS> 56,031
<CURRENT-LIABILITIES> 2,433
<BONDS> 0
<COMMON> 21
0
0
<OTHER-SE> 53,598
<TOTAL-LIABILITY-AND-EQUITY> 56,031
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (10,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,940)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> 0
</TABLE>
*CONFIDENTIAL TREATMENT FOR MARKED
PORTIONS REQUESTED UNDER 17 C.F.R.
SECTION 200.80(b)(4) and 240.24(b).*
- -------------------------------------------------------------------------------
$8,000,000
REVOLVING CREDIT FACILITY AGREEMENT
Dated as of July 28, 1997
Between
SOMATOGEN, INC.,
and
ELI LILLY AND COMPANY
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS Page
1.01. Defined Terms---------------------------------------------4
1.02. Terms Generally-------------------------------------------8
ARTICLE II. THE CREDITS
2.01. Commitments-----------------------------------------------8
2.02. Borrowing Procedure---------------------------------------9
2.03. Repayment of Term Loans; Evidence of Debt-----------------9
2.04. Interest on Loans-----------------------------------------9
2.05. Default Interest------------------------------------------10
2.06. Prepayment------------------------------------------------10
2.07. Payments--------------------------------------------------10
2.08. Mandatory Repayment---------------------------------------11
ARTICLE III. REPRESENTATIONS AND WARRANTIES
3.01. Organization; Powers--------------------------------------11
3.02. Authorization---------------------------------------------11
3.03. Enforceability--------------------------------------------12
3.04. Governmental Approvals------------------------------------12
3.05. Financial Statements--------------------------------------12
3.06. Litigation; Compliance with Laws--------------------------12
3.07. Use of Proceeds-------------------------------------------13
3.08. Taxes-----------------------------------------------------13
3.09. Solvency--------------------------------------------------13
ARTICLE IV CONDITIONS OF LENDING
4.01. All Borrowings--------------------------------------------13
4.02. Closing Date----------------------------------------------14
ARTICLE V. COVENANTS
5.01. Existence-------------------------------------------------15
5.02. Business and Properties-----------------------------------15
5.03. Financial Statements, Reports, Etc.-----------------------15
5.04. Insurance-------------------------------------------------16
5.05. Obligations and Taxes-------------------------------------16
5.06. Litigation and Other Notices------------------------------16
5.07. Right to Inspect------------------------------------------17
5.08. Consolidations, Mergers, and Sales of Assets--------------17
5.09. Indebtedness----------------------------------------------18
5.10. Dividends; Repurchases of Stock---------------------------18
5.11. Liens-----------------------------------------------------18
5.12. Limitations on Sale and Leaseback Transactions------------19
5.13. Loans-----------------------------------------------------19
5.14. Transactions with Affiliates------------------------------19
<PAGE> 3
ARTICLE VI. EVENTS OF DEFAULT
ARTICLE VII. MISCELLANEOUS
7.01. Notices---------------------------------------------------21
7.02. Survival of Agreement-------------------------------------22
7.03. Binding Effect--------------------------------------------22
7.04. Successors and Assigns------------------------------------22
7.05. Expenses; Indemnity---------------------------------------22
7.06. Applicable Law--------------------------------------------23
7.07. Waivers; Amendment----------------------------------------23
7.08. Entire Agreement------------------------------------------23
7.09. Severability----------------------------------------------23
7.10. Counterparts----------------------------------------------24
7.11. Headings--------------------------------------------------24
7.12. Right of Setoff-------------------------------------------24
7.13. Jurisdiction and Venue------------------------------------24
7.14. Confidentiality-------------------------------------------25
EXHIBITS AND SCHEDULES
Exhibit A Form of Opinion of counsel to Somatogen-----------------------------26
<PAGE> 4
REVOLVING CREDIT FACILITY AGREEMENT dated as of July 28,
1997 among:
SOMATOGEN, INC.,
a Delaware corporation ("Somatogen");
and
ELI LILLY AND COMPANY,
an Indiana corporation ("Lilly").
The parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01. Defined Terms. As used in this Agreement, the following
terms shall have the meanings specified below:
"Affiliate" means, when used with respect to a specified
person, another person that directly or indirectly controls or is
controlled by or is under common control with the person specified.
"Board of Directors" means the Board of Directors of Somatogen
or any duly authorized committee thereof.
"Borrowing" means a Loan from Lilly to Somatogen under this
Agreement.
"Business Day" means any day (other than a Saturday, Sunday or
legal holiday in the State of New York) on which banks are open for
business in New York City.
"Capital Lease Obligations" of any person means the
obligations of such person to pay rent or other amounts under any lease
of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligations are required to
be classified and accounted for as capital leases on a balance sheet of
such person under GAAP (as defined herein) and, for the purposes of
this Agreement, the amount of such obligations at any time shall be the
capitalized amount thereof at such time determined in accordance with
GAAP.
<PAGE> 5
A "Change in Control" shall be deemed to have occurred if any
person or group of persons (other than Lilly) shall have acquired
beneficial ownership of shares representing more than 50% of the
combined voting power represented by the outstanding Voting Shares of
Somatogen (within the meaning of Section 13(d) or 14(d) of the Exchange
Act, and the applicable rules and regulations thereunder).
"Closing Date" means July 28, 1997, or such other date as may
be mutually agreed by the parties.
"Code" means the Internal Revenue Code of 1986, as the same
may be amended from time to time.
"Commitment" means the obligation of Lilly to make a loan in
the amount set forth in Section 2.01.
"Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of
a person, whether through the ownership of voting securities, by
contract or otherwise, and the terms "controlling" and "controlled"
shall have meanings correlative thereto.
"Default" means any Event of Default or any event or condition
which upon notice, lapse of time or both would constitute an Event of
Default.
"Dollars" or "$" means lawful money of the United States of
America.
"Event of Default" has the meaning assigned to such term in
Article VI.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Financial Officer" of any corporation means the chairman,
president, chief financial officer, principal accounting officer, or
treasurer of such corporation.
"GAAP" means generally accepted accounting principles, applied
on a consistent basis.
"Governmental Authority" means any Federal, state, local or
foreign court or governmental agency, authority, instrumentality or
regulatory body.
<PAGE> 6
"Guarantee Obligations" of or by any person means any
obligation, contingent or otherwise, of such person guaranteeing or
having the economic effect of guaranteeing any indebtedness (including
any interest and fees owing in respect of such indebtedness) of any
other person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of such person, direct or
indirect, (a) to purchase or pay (or advance or supply funds for the
purchase or payment of) such indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of
such indebtedness, (b) to purchase property, securities or services for
the purpose of assuring the owner of such indebtedness of the payment
of such indebtedness or (c) to maintain working capital, equity capital
or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such indebtedness;
provided that the term Guarantee Obligations shall not include
endorsements for collection or deposit, in either case in the ordinary
course of business.
"Indebtedness" of any person means, without duplication, (a)
all obligations of such person for borrowed money, (b) all obligations
of such person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such person under conditional sale
or other title retention agreements relating to property or assets
purchased by such person, (d) all obligations of such person issued or
assumed as the deferred purchase price of property or services, other
than trade accounts payable (other than for borrowed money) arising,
and accrued expenses incurred, in the ordinary course of business so
long as such trade accounts payable are payable within 30 days of the
date the respective goods or services are delivered or rendered, (e)
all indebtedness of others secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be
secured by), any Lien on property owned or acquired by such person,
whether or not the obligations secured thereby have been assumed, (f)
all Guarantee Obligations of such person and (g) all Capital Lease
Obligations of such person. The Indebtedness of any person shall
include the Indebtedness of any partnership in which such person is a
general partner.
"Lien" means any mortgage, lien, pledge, encumbrance, charge
or security interest.
<PAGE> 7
"Loan" means a loan from Lilly to Somatogen pursuant to this
Agreement.
"Loan Documents" means this Agreement and any agreement
required to be executed and delivered by Somatogen pursuant to this
Agreement.
"Material Adverse Effect" means a materially adverse effect on
the business, results of operations, properties, or financial condition
of Somatogen.
"Maturity Date" means the earlier of (1) the date specified in
Section 2.08 and (2) May 18, 2002.
"Person" means any natural person, corporation, business
trust, joint venture, association, company, limited liability company,
partnership or government, or any agency or political subdivision
thereof.
"Sale and Leaseback Transaction" means any arrangement with
any person pursuant to which Somatogen leases any property that has
been or is to be sold or transferred by Somatogen to such person, other
than (1) temporary leases for a term, including renewals at the option
of the lessee, of not more than three years, (2) leases of property
executed by the time of, or within 12 months after the acquisition of
the property, and (3) arrangements pursuant to any provision of law
with an effect similar to the former Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any person (the "parent"),
any other person (other than a natural person) of which securities or
other ownership interests representing more than 50% of the ordinary
voting power, or more than 50% of the general partnership interests,
are, at the time as of which any determination is being made, owned or
controlled by the parent or one or more subsidiaries of the parent or
by the parent and one or more subsidiaries of the parent.
"Subsidiary" means a subsidiary of Somatogen.
"Transactions" has the meaning assigned to such term in
Section 3.02.
<PAGE> 8
"Value" means, with respect to a Sale and Leaseback
Transaction, an amount equal to the net present value of the lease
payments with respect to the term of the lease remaining on the date as
of which the amount is being determined, without regard to any renewal
or extension options contained in the lease, discounted at the interest
rate on the Loans which are outstanding on the effective date of such
Sale and Leaseback Transaction.
"Voting Shares" means, as to shares of a particular
corporation, outstanding shares of stock of any class of such
corporation entitled to vote in the election of directors, excluding
shares entitled so to vote only upon the happening of some contingency,
and including shares that would be entitled to vote but for the
application of a control share statute.
"Weighted Average Cost of Capital" means, for any calendar
year, the "Cost of Capital" for that year determined by Lilly in its
discretion pursuant to Section 3.5 of the Eli Lilly and Company EVA
Bonus Plan. For calendar year 1997, the Weighted Average Cost of
Capital is thirteen percent (13%).
Section 1.02. Terms Generally. The definitions in Section 1.01 shall
apply equally to both the singular and plural forms of the terms defined. The
words "include", "includes" and "including" shall be deemed to be followed by
the phrase "without limitation". Except as otherwise expressly provided herein,
all terms of an accounting or financial nature shall be construed in accordance
with GAAP.
ARTICLE II. THE CREDITS
Section 2.01. Commitments.
(a) Subject to the terms and conditions and relying upon the
representations and warranties herein set forth, Lilly agrees
to make Loans in Dollars to Somatogen, on any Business Day
during the period from and including the Closing Date to the
Maturity Date, in a principal amount not to exceed $8,000,000
outstanding at any time.
(b) Within the foregoing limits, Somatogen may borrow, pay or
prepay and reborrow Loans from and including the Closing Date
to the Maturity Date, subject to the terms, conditions, and
limitations set forth herein.
(c) Loans shall be in an aggregate principal amount of at least
$1,000,000 and may be in integral multiples of $100,000 in
excess of $1,000,000. Loans shall be made only in accordance
with the borrowing procedure set forth in the next Section.
<PAGE> 9
Section 2.02. Borrowing Procedure.
(a) In order to effect a Borrowing, Somatogen shall hand deliver
or telecopy to Lilly a notice of borrowing not later than
thirty (30) days before the day of such Borrowing. Such notice
shall be irrevocable and shall specify the amount of the
Borrowing, the date of the Borrowing, and funds transfer
instructions.
(b) On the effective date of the Borrowing, Somatogen shall hand
deliver or telecopy the certificate of a Financial Officer
called for under Section 4.01(d).
Section 2.03. Repayment of Loans: Evidence of Debt.
(a) Somatogen hereby promises to pay to Lilly the entire aggregate
unpaid principal amount of the Loans on the Maturity Date. The
Loans shall bear interest on the unpaid principal amount as
set forth in Section 2.04.
(b) Lilly shall maintain an account or accounts evidencing the
borrowing, including any amounts of principal and interest
payable and paid Lilly from time to time under this Agreement.
(c) The entries made in the accounts described above shall be
prima facie evidence of the existence and amounts of the
obligations therein recorded; provided that the failure of
Lilly to maintain such accounts or any error therein shall not
in any manner affect the obligations of Somatogen to repay the
Loans in accordance with their terms.
Section 2.04. Interest on Loans.
(a) Subject to the provisions of Section 2.05, each Borrowing
shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 365 days) at a rate per
annum equal to Lilly's Weighted Average Cost of Capital, as
adjusted for each calendar year. Interest shall compound
annually.
(b) Interest on each Loan shall be payable (i) upon voluntary
prepayment pursuant to Section 2.06; and (ii) at maturity,
whether on the Maturity Date, by acceleration, or otherwise.
<PAGE> 10
Section 2.05. Default Interest. If Somatogen shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, whether by scheduled maturity, notice of prepayment, acceleration
or otherwise, Somatogen shall on demand from time to time from Lilly pay
interest on such defaulted amount up to (but not including) the date of actual
payment (after as well as before judgment) at a rate per annum (computed as
provided in Section 2.04(a)) equal to Lilly's Weighted Average Cost of Capital
plus 1%.
Section 2.06. Prepayment.
(a) Somatogen shall have the right at any time and time to time to
prepay any Borrowing, in whole or in part, upon giving
telecopy notice (or phone notice promptly confirmed by
telecopy) to Lilly before 10:00 a.m., New York City time, one
Business Day prior to prepayment. Prepayments shall be in a
minimum amount of $100,000 or in integral multiples thereof.
(b) Each notice of prepayment shall specify the prepayment date
and the principal amount of each Borrowing (or portion
thereof) to be prepaid, shall be irrevocable and shall commit
Somatogen to prepay such Borrowing (or portion thereof) by the
amount stated therein on the date specified therein. All
prepayments under this Section 2.06 shall be accompanied by
accrued interest on the principal amount being prepaid to and
including the date of payment.
Section 2.07. Payments.
(a) Somatogen shall make each payment (including principal of or
interest on any Borrowing and any other amounts) hereunder not
later than 12:00 noon, New York City time, on the date when
due, in Dollars and immediately available funds, to Lilly's
designated account.
(b) Whenever any payment (including principal of or interest on
any Borrowing or any Fees or other amounts) hereunder shall
become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding
Business Day, and such extension of time shall in such case be
included in the computation of interest, if applicable.
<PAGE> 11
Section 2.08. Mandatory Repayment. In the event a Change in Control
shall occur and the person or group of persons obtaining control [ * ], the date
of the closing of the transaction which causes the Change in Control shall be
considered the Maturity Date. Somatogen shall pay to Lilly on the Maturity Date
the entire aggregate unpaid principal amount of the Loans, together with all
unpaid interest to and including the date of payment.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
Somatogen represents and warrants to Lilly that:
Section 3.01. Organization: Powers. Somatogen
(a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organiza-
tion,
(b) has all requisite corporate power and authority to own its
property and assets and to carry on its business as now
conducted and as proposed to be conducted,
(c) is qualified to do business in every jurisdiction where such
qualification is required, except where the failure so to
qualify would not result in a Material Adverse Effect, and (d)
has the corporate power and authority to execute, deliver and
perform its obligations under this Agreement and to borrow
hereunder.
Section 3.02. Authorization. The execution, delivery and performance by
Somatogen of this Agreement and the Borrowings hereunder (collectively, the
"Transactions") (a) have been duly authorized by all requisite corporate action
and (b) will not (i) violate (A) any provision of any law, statute, rule or
regulation or of the certificate of incorporation or other constitutive
documents or bylaws of Somatogen or any Subsidiary, (B) any order of any
Governmental Authority or (C) any provision of any indenture, agreement or other
instrument to which Somatogen or any Subsidiary is a party or by which it or any
of its property is or may be bound, (ii) be in conflict with, result in a breach
of or constitute (alone or with notice or lapse of time or both) a default under
any such indenture, agreement or other instrument or (iii) result in the
creation or imposition of any lien upon any property or assets of Somatogen or
any Subsidiary.
*CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTION 200.80(b)(4) and
240.24(b).*
<PAGE> 12
Section 3.03. Enforceability. This Agreement constitutes a legal, valid
and binding obligation of Somatogen, enforceable in accordance with its terms
(subject, as to enforceability, to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and to general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity)).
Section 3.04. Governmental Approvals. Other than the filing of the Loan
Agreement as an exhibit to the Borrower's next periodic report filed under the
Exchange Act, no action, consent or approval of, registration or filing with or
other action by any Governmental Authority is required in connection with the
Transactions.
Section 3.05. Financial Statements. Somatogen has heretofore furnished
to Lilly copies of (i) its audited consolidated financial statements for the
year ended June 30, 1996, together with the opinion thereon of Price Waterhouse
LLP, and (ii) its unaudited consolidated financial statements for the quarters
ended September 30, 1996, December 31, 1996, and March 31, 1997. Such financial
statements present fairly, in all material respects, the financial condition and
the results of operations of Somatogen and the Subsidiaries, taken as a whole,
as of, and for accounting periods ending on, such dates in accordance with GAAP
(subject, in the case of said unaudited financial statements, to normal year-end
audit adjustments and the absence of footnotes).
Section 3.06. Litigation: Compliance with Laws.
(a) There are no actions, proceedings or investigations filed or
(to the knowledge of Somatogen) threatened against Somatogen
or any Subsidiary in any court or before any Governmental
Authority or arbitration board or tribunal which question the
validity or legality of this Agreement, the Transactions or
any action taken or to be taken pursuant to this Agreement and
no order or judgment has been issued or entered restraining or
enjoining Somatogen from the execution, delivery or
performance of this Agreement.
(b) Neither Somatogen nor any Subsidiary is in violation of any
law, rule or regulation, or in default with respect to any
judgment, writ, injunction or decree of any Governmental
Authority, where such violation or default would be reasonably
likely to result in a Material Adverse Effect.
<PAGE> 13
Section 3.07. Use of Proceeds. All proceeds of the Loans shall be
used for working capital or other general corporate purposes.
Section 3.08. Taxes. Somatogen and the Subsidiaries have filed or
caused to be filed all Federal and material state, local and foreign tax returns
which are required to be filed by them, and have paid or caused to be paid all
taxes shown to be due and payable on such returns or on any assessments received
by any of them, other than any taxes or assessments the validity of which is
being contested in good faith by appropriate proceedings, and with respect to
which appropriate accounting reserves have, to the extent required by GAAP, been
set aside.
Section 3.09. Solvency. To the extent that any proceeds of a Loan are
used by Somatogen, directly or indirectly, to fund the repurchase of Somatogen
common stock from Lilly, Somatogen represents and warrants that, after giving
effect to any Borrowing and such use of the proceeds of such Borrowing, (a) the
aggregate value of all properties of Somatogen at their present fair saleable
value (i.e., the amount that may be realized within a reasonable time,
considered to be six months to one year, either through collection or sale at
the regular market value, conceiving the latter as the amount that could be
obtained for the property in question within such period by a capable and
diligent businessperson from an interested buyer who is willing to purchase
under ordinary selling conditions), exceeds the amount of all the debts and
liabilities (including contingent, subordinated, unmatured and unliquidated
liabilities) of Somatogen, (b) Somatogen will not have unreasonably small
capital with which to conduct its business operations as previously conducted
and (c) Somatogen projects that it will have sufficient cash flow to enable it
to pay its debts as they mature.
ARTICLE IV. CONDITIONS OF LENDING
The obligations of Lilly to make Loans hereunder are subject to the
satisfaction of the following conditions:
Section 4.01. All Borrowings. On the date of each Borrowing:
(a) Lilly shall have received a notice of Borrowing as required by
Section 2.02.
(b) The representations and warranties set forth in Article III
shall be true and correct in all material respects on and as
of the date of such Borrowing with the same effect as though
made on and as of the Closing Date, except to the extent such
representations and warranties expressly relate to an earlier
date.
(c) At the time of and immediately after such Borrowing no Default
shall have occurred and be continuing.
(d) Lilly shall have received a Financial Officer's Certificate of
Somatogen confirming compliance with the conditions precedent
set forth in paragraphs (b) and (c) of this Section.
<PAGE> 14
Section 4.02. Closing Date. On the Closing Date:
(a) Lilly shall have received favorable written opinion, dated the
Closing Date, of counsel to Somatogen in substantially the
form of Exhibit A hereto.
(b) Lilly shal have received (i) copies of the
certificate of incorporation and by-laws, including all
amendments thereto, of Somatogen, certified by the Secretary
or an Assistant Secretary of Somatogen, and (ii) a
certificate of the Secretary or an Assistant Secretary of
Somatogen dated the Closing Date and certifying (A) that
attached thereto is a true and complete copy of resolutions
duly adopted by the Board of Directors authorizing the
execution, delivery and performance of this Agreement
and the Borrowings hereunder, and that such resolutions
have not been modified, rescinded or amended and are in
full force and effect, and (B) as to the incumbency and
specimen signature of the officer executing this Agreement on
behalf of Somatogen.
(c) Lilly shall have received a certificate, dated the Closing
Date and signed by a Financial Officer of Somatogen,
confirming compliance with the conditions precedent set forth
in paragraphs (b) and (c) of Section 4.01.
ARTICLE V. COVENANTS
A. Affirmative Covenants.
Somatogen covenants and agrees with Lilly that so long as this
Agreement shall remain in effect or the principal of or interest on any Loan or
any other amounts payable hereunder shall be unpaid, unless Lilly otherwise
consents in writing, it will, and will cause each of the Subsidiaries to:
<PAGE> 15
Section 5.01. Existence. Do or cause to be done all things necessary,
to preserve and keep in full force and effect its corporate existence, rights
and franchises, except as expressly permitted under Section 5.07 and except, in
the case of any Subsidiary, where the failure to do so would not result in a
Material Adverse Effect.
Section 5.02. Business and Properties. Comply in all respects with all
applicable laws, rules, regulations and orders of any Governmental Authority,
whether now in effect or hereafter enacted except instances that could not, in
the aggregate, reasonably be expected to result in a Material Adverse Effect;
and at all times maintain and preserve all property material to the conduct of
its business and keep such property in good repair, working order and condition
and from time to time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto necessary in order
that the business carried on in connection therewith may be properly conducted
at all times except to the extent that the failure to do so would not have a
Material Adverse Effect.
Section 5.03. Financial Statements, Reports. Etc. Furnish to Lilly:
(a) within 90 days after the end of each fiscal year, its
consolidated balance sheet and the related consolidated
earnings statement showing its consolidated financial
condition as of the close of such fiscal year and the
consolidated results of its operations during such year,
all audited by Price Waterhouse LLP or other independent
certified public accountants of recognized national standing
selected by Somatogen and accompanied by an opinion of such
accountants to the effect that such consolidated financial
statements fairly present Somatogen' financial condition and
results of operations on a consolidated basis in accordance
with GAAP;
(b) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year, its unaudited consolidated
balance sheet and related consolidated earnings statement,
showing its consolidated financial condition as of the close
of such fiscal quarter and the consolidated results of its
operations during such fiscal quarter and the then elapsed
portion of the fiscal year (and each delivery of such
statements shall be deemed a representation that such
financial condition and results of operations on a
consolidated basis in accordance with GAAP, subject to normal
year-end audit adjustments and the absence of footnotes);
(c) at any time in which a Default has occurred and is uncured,
within 20 days after the end of each month that is not also
the end of a fiscal quarter, its unaudited consolidated
balance sheet and related consolidated earnings statement,
showing its consolidated financial condition as of the close
of such month and the consolidated results of its operations
during such month and the then elapsed portion of the fiscal
year;
<PAGE> 16
(d) promptly after the same become publicly available, copies of
all periodic and other reports or proxy statements filed by
Somatogen or any Subsidiary with the SEC or with any national
securities exchange; and
(e) concurrently with any delivery of financial statements under
paragraph (a), (b) or (c) above, a certificate of a Financial
Officer of Somatogen (i) certifying as to whether a Default
has occurred and is continuing and, if a Default has occurred
and is continuing, specifying the details thereof and any
action taken or proposed to be taken with respect thereto,
and (ii) stating whether any change in GAAP or in the
application thereof has occurred since the date of the
audited financial statements referred to in Section 3.05(a)
and, if any such change has occurred, specifying the effect
of such change on the financial statements accompanying such
certificate.
Section 5.04. Insurance. Keep its insurable properties adequately
insured at all times by financially sound and reputable insurers, and maintain
such other insurance, to such extent and against such risks, including fire and
other risks insured against by extended coverage, as is customary with companies
similarly situated and in the same or similar businesses.
Section 5.05. Obligations and Taxes. Pay and discharge promptly when
due all material taxes, assessments and governmental charges imposed upon it or
upon its income or profits or in respect of its property, in each case before
the same shall become delinquent or in default and before penalties accrue
thereon, unless and to the extent that the same are being contested in good
faith by appropriate proceedings and adequate reserves with respect thereto
shall, to the extent required by GAAP, have been set aside.
Section 5.06. Litigation and Other Notices. Give Lilly prompt written
notice of the following:
(a) the filing, commencement or written threat of any action,
suit or proceeding of the type described in Section 3.06(a);
and
(b) any Default, specifying the nature and extent thereof and the
action (if any) which is proposed to be taken with respect
thereto.
<PAGE> 17
Section 5.07. Right to Inspect. Upon reasonable notice by Lilly and
during normal business hours, allow Lilly and its representatives to inspect and
photocopy the financial records of Somatogen at Somatogen's principal offices,
and use best efforts to facilitate discussions with Somatogen's independent
auditors for review of their work papers, and to discuss such records with
Somatogen's independent auditors. So long as Somatogen is not in Default, this
right of inspection shall be limited to twice per calendar year. After a Default
has occurred, this right shall not be limited in number. The information
disclosed in any such inspection is subject to the confidentiality provisions of
Section 7.14 regardless of whether the information is marked as confidential.
B. Negative Covenants.
Somatogen covenants and agrees with Lilly that so long as this
Agreement shall remain in effect or the principal of or interest on any Loan
shall be unpaid, unless Lilly shall otherwise consent in writing, it will not,
and will not permit any of the Subsidiaries to:
Section 5.08. Consolidations, Mergers, and Sales of Assets.
(a) consolidate or merge with or into any other person or
liquidate, wind up or dissolve (or suffer any liquidation
or dissolution) or
(b) sell, lease or otherwise transfer (in one transaction or a
series of transactions), or permit any Subsidiary to sell,
lease or otherwise transfer (in one transaction or a series of
transactions), all or substantially all of the assets
(including capital stock of any Subsidiary) of Somatogen and
the Subsidiaries, taken as a whole, to any other person;
provided that Somatogen may merge with another person if
(A) Somatogen is the corporation surviving such merger,
or if not, the surviving corporation succeeds to all
the rights, duties and obligations of Somatogen under
this Agreement, and
(B) immediately after giving effect to such merger, no
Default shall have occurred and be continuing
(including no Default as a result of such merger's
giving rise to an earlier Maturity Date pursuant to
Section 2.08).
<PAGE> 18
Section 5.09. Indebtedness. Create, incur or suffer to exist any
Indebtedness other than:
(a) Indebtedness existing as of the date of this Agreement and
any refinancing or extensions thereof,
(b) Indebtedness of Somatogen hereunder,
(c) unsecured Indebtedness the payment of which (whether of
principal or interest, and whether at stated maturity, by
acceleration, by reason of an Event of Default or otherwise)
is expressly subordinated to the payment of all principal and
interest under this Agreement as set forth in a subordination
agreement which has been approved in writing by Lilly prior to
the creation of such Indebtedness, which approval will not be
unreasonably withheld.
(d) [ * ]
(e) other Indebtedness, not to exceed [ * ].
Section 5.10. Dividends and Stock Repurchases. Declare or pay any
dividends or make any other distribution of cash or other property on any of its
shares of capital stock now or hereafter existing; or purchase, redeem, retire,
or otherwise acquire any of such capital stock, except for (i) stock dividends
or stock splits payable in common stock to holders of common stock, (ii)
distributions of options, warrants or rights to acquire securities of the
Company, (iii) payment of dividends on preferred stock issued after the date
hereof, and (iv) repurchases of common stock from employees pursuant to
employment agreements or similar arrangements not exceeding [ * ] in the
aggregate.
Section 5.11. Liens. Create, assume or suffer to exist any Lien upon
any property to secure any Indebtedness of Somatogen, any Subsidiary or any
other person, or permit any Subsidiary to do so, except that the foregoing shall
not prevent Somatogen or any Subsidiary from creating, assuming or suffering to
exist Liens of the following character:
(a) Liens existing on the date hereof or in conjunction with
refinancing of any indebtedness as to which a Lien exists on
the date hereof;
(b) any Lien existing on property at the time of the acquisition
thereof by Somatogen or any Subsidiary;
(c) [ * ]
(d) any Lien arising by operation of law to secure taxes,
assessments and other government charges.
*CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTION 200.80(b)(4) and
240.24(b).*
<PAGE> 19
Section 5.12. Limitations on Sale and Leaseback Transactions. Enter
into any Sale and Leaseback Transaction, or permit any Subsidiary to do so,
unless Somatogen or such Subsidiary would be entitled to incur Indebtedness (in
a principal amount at least equal to the Value of such Sale and Leaseback
Transaction) secured by Liens on the property to be leased without thereby
violating Section 5.09.
Section 5.13. Loans. Make any loans or advances to any person
including without limitation any Affiliate, officer, director, employee,
consultant, or shareholder of Somatogen except:
(a) advance payments to suppliers and consultants in the ordinary
course of Somatogen's business and consistent with its past
practices;
(b) advances to officers, directors and employees with respect to
reasonable business expenses incurred by them which are
properly reimbursable by Somatogen as an ordinary and
necessary business expense under the Code, and loans or
guarantees made in connection with relocation of employees;
and
(c) other loans to non-Affiliates made in connection with
Somatogen's business operations and not exceeding an aggregate
of [ * ] at any time.
Section 5.14. Transactions with Affiliates. Except for agreements in
effect on the date hereof, enter into any transaction with an Affiliate,
including any purchase, sale, exchange or lease of property or the rendering of
any service, unless the transaction is otherwise permitted under this Agreement
and is on fair and reasonable terms no less favorable to Somatogen than it would
obtain in a comparable arm's length transaction with a non-affiliate.
ARTICLE VI. EVENTS OF DEFAULT
In case of the happening of any of the following events (each an "Event
of Default"):
(a) any representation, warranty or certification made or deemed
made herein or in any other Loan Document (or in any
modification or supplement hereto or thereto) by Somatogen or
Somatogen, or any certificate furnished to Lilly pursuant to
the provisions hereof or thereof, shall prove to have been
false or misleading as of the time made or furnished in any
material respect;
*CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTION 200.80(b)(4) and
240.24(b).*
<PAGE> 20
(b) default shall be made in the payment of any principal or
interest of any Loan when and as the same shall become due and
payable, whether at the due date thereof or at a date fixed
for prepayment thereof or by acceleration thereof or
otherwise;
(c) default shall be made in the payment of any other amount
(other than an amount referred to in paragraph (b) above) due
hereunder, when and as the same shall become due and payable,
and such default shall continue unremedied for a period of
thirty days;
(d) default shall be made in the due observance or performance of
any covenant, condition or agreement contained in Section
5.08, 5.10, or 5.12;
(e) default shall be made in the due observance or performance of
any covenant, condition or agreement contained herein (other
than those specified in (b), (c) or (d) above) and such
default shall continue unremedied for a period of thirty days
after notice thereof from Lilly to Somatogen;
(f) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction
seeking (i) relief in respect of Somatogen or any Subsidiary,
or of a substantial part of the property or assets of
Somatogen or any Subsidiary, under Title 11 of the United
States Code, as now constituted or hereafter amended, or any
other Federal or state bankruptcy, insolvency, receivership
or similar law, (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for
Somatogen or any Subsidiary or for a substantial part of the
property or assets of Somatogen or any Subsidiary or (iii)
the winding up or liquidation of Somatogen or any Subsidiary;
and such proceeding or petition shall continue undismissed fo
60 days or an order or decree approving or ordering any of
the foregoing shall be entered; or
(g) Somatogen or any Subsidiary shall (i) voluntarily commence an
proceeding or file any petition seeking relief under Title 11
of the United States Code, as now constituted or hereafter
amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law, (ii) consent to the institution
of, or fail to contest in a timely and appropriate manner, an
proceeding or the filing of any petition described in (f)
above, (iii) apply for or consent to the appointment of a
trustee, custodian, sequestrator, conservator or similar
official for Somatogen or any Subsidiary or for a substantial
part of the property or assets of Somatogen or any Subsidiary
(iv) file an answer admitting the material allegations of a
petition filed against it in any such proceeding, (v) make a
general assignment for the benefit of creditors, (vi) become
unable, admit in writing its inability or fail generally to
pay its debts as they become due or (vii) take any action for
the purpose of effecting any of the foregoing;
<PAGE> 21
then, and in every such event (other than an event described in paragraph (f) or
(g) above), and at any time thereafter during the continuance of such event,
Lilly shall, by notice to Somatogen, take either or both of the following
actions, at the same or different times: (i) terminate forthwith the Commitments
and (ii) declare the Loans then outstanding to be forthwith due and payable in
whole or in part, whereupon the principal of the Loans so declared to be due and
payable, together with accrued interest thereon and all other liabilities of
Somatogen accrued hereunder, shall become forthwith due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived, anything contained herein to the contrary
notwithstanding; and, in any event described in paragraph (f) or (g) above, the
Commitments shall automatically terminate and the principal of the Loans then
outstanding, together with accrued interest thereon and all other liabilities of
Somatogen accrued hereunder shall automatically become due and payable, without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived, anything contained herein to the contrary
notwithstanding.
ARTICLE VII. MISCELLANEOUS
Section 7.01. Notices. Except as otherwise expressly provided herein,
notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight courier service or sent by telecopy, as
follows:
(a) If to Somatogen:
Mr. Timothy D. Hoogheem, Senior Vice President of
Finance and Administration, CFO and Treasurer
Somatogen, Inc.
2545 Central Avenue, Suite FD1
Boulder, CO 80301
(Fax: 303-444-3013)
(b) If to Lilly:
Mr. Edwin W. Miller
Vice President and Treasurer
Lilly Corporate Center,
Indianapolis, IN 46285
D.C. 1878
(Fax: 317-277-3275)
All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of receipt if delivered by hand or overnight courier service
or sent by telecopy to such party as provided in this Section or in accordance
with the latest unrevoked direction from such party given in accordance with
this Section.
<PAGE> 22
Section 7.02. Survival of Agreement. All covenants, agreements,
representations and warranties made by Somatogen herein and in the certificates
or other instruments prepared or delivered in connection with or pursuant to
this Agreement shall be considered to have been relied upon by Lilly and shall
survive the making by Lilly of the Loans regardless of any investigation made by
Lilly, and shall continue in full force and effect as long as the principal of
or any accrued interest on any Loan or any Fee or any other amount payable under
this Agreement is outstanding and unpaid or the Commitments have not been
terminated.
Section 7.03. Binding Effect. This Agreement shall become effective
when it shall have been executed by Somatogen and Lilly, and thereafter shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that Somatogen shall not have the Right to assign
any rights hereunder or any interest herein, except in a transaction permitted
by section 5.08 (b) (A) and (B), without the prior consent of Lilly.
Section 7.04. Successors and Assigns.
(a) Whenever in this Agreement any of the parties hereto or
thereto is referred to, such reference shall be deemed to
include the successors and assigns of such party; and all
covenants, promises and agreements by or on behalf of any
party that are contained in this Agreement shall bind and
inure to the benefit of its successors and assigns.
(b) Neither party shall assign or delegate any of its rights and
duties hereunder without the prior written consent of the
other party, and any attempt so to assign or delegate shall be
void; provided, however, that Lilly may assign its rights and
delegate its duties hereunder to an Affiliate of Lilly upon 30
days' prior written notice to Somatogen.
Section 7.05. Expenses: Indemnity.
(a) Each party agrees to pay all reasonable out-of-pocket expenses
incurred by or on behalf of the other party in connection with
the enforcement of its rights under this Agreement, including
the reasonable fees and disbursements of counsel.
(b) Somatogen agrees to indemnify Lilly, its Affiliates and the
directors, officers,employees and agents of the foregoing
(each such person being called an "Indemnitee") against, and
to hold each indemnitee harmless from, any and all losses,
claims, damages, liabilities and related expenses, including
reasonable counsel fees and expenses, incurred by or asserted
against any Indemnitee arising out of (i) the use of the
proceeds of the Loans or (ii) any claim, litigation,
investigation or proceeding relating thereto, whether or not
any Indemnitee is a party thereto; provided that such
indemnity shall not, as to any Indemnitee, be available to the
extent that such losses, claims, damages, liabilities or
related expenses resulted from the negligence or willful
misconduct of such Indemnitee.
<PAGE> 23
(c) The provisions of this Section shall remain operative and in
full force and effect regardless of the expiration of the term
of this Agreement, the consummation of the transactions
contemplated hereby, the repayment of any of the Loans, the
invalidity or unenforceability of any term or provision of
this Agreement or any investigation made by or on behalf of
Lilly. All amounts due under this Section shall be payable on
written demand therefor.
Section 7.06. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF INDIANA.
Section 7.07. Waivers: Amendment.
(a) No failure or delay of Lilly in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right
or power, preclude any other or further exercise thereof or
the exercise of any other right or power. The rights and
remedies of Lilly hereunder are cumulative and are not
exclusive of any rights or remedies which it would otherwise
have. No waiver of any provision of this Agreement or consent
to any departure therefrom shall in any event be effective
unless the same shall be permitted by paragraph (b) below,
and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No
notice or demand on Somatogen or any Subsidiary in any case
shall entitle such party to any other or further notice or
demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or
agreements in writing entered into by Somatogen and Lilly.
Section 7.08. Entire Agreement. This Agreement constitutes the entire
contract among the parties relative to the subject matter hereof. Any previous
agreement among the parties with respect to the subject matter hereof is
superseded by this Agreement. Nothing in this Agreement, expressed or implied,
is intended to confer upon any party other than the parties hereto any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
Section 7.09. Severability. In the event any one or more of the
provisions contained in this Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
<PAGE> 24
Section 7.10. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original but all of which
when taken together shall constitute but one contract.
Section 7.11. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
Section 7.12. Right of Setoff. If an Event of Default shall have
occurred and be continuing, Lilly is hereby authorized at any time and from time
to time, to the fullest extent permitted by law, to set off and apply any and
all indebtedness at any time owing by Lilly to Somatogen now or hereafter
existing, irrespective of whether or not such Lender shall have made any demand
under this Agreement and although such obligations may be unmatured. Lilly
agrees promptly to notify Somatogen after such setoff and application, but the
failure to give such notice shall not affect the validity of such setoff and
application. The rights of Lilly under this Section are in addition to other
rights and remedies (including other rights of setoff) which it may have.
Section 7.13. Jurisdiction and Venue.
(a) Somatogen hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of
any Indiana State court or Federal court of the United States
of America sitting in the Southern District of Indiana, and
any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement, or
for recognition or enforcement of any judgment, and each of
the parties hereto hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or
proceeding may be heard and determined in such Indiana State
or, to the extent permitted by law, in such Federal court.
Each of the parties hereto agrees that a final judgment in
any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in
any other manner provided by law. Subject to the foregoing
and to paragraph (b)below, nothing in this Agreement shall
affect any right that any party hereto may otherwise have to
bring any action or proceeding relating to this Agreement
against any other party hereto in the courts of any
jurisdiction.
(b) Each of the parties hereto hereby irrevocably and
unconditionally waives, to the fullest extent it may legally
and effectively do so, any objection which it may now or
thereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any
Indiana State or Federal court. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.
<PAGE> 25
Section 7.14. Confidentiality. Lilly agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its affiliates' directors, officers, employees
and agents, including accountants, legal counsel and other advisors (it being
understood that the persons to whom such disclosure is made will be informed of
the confidential nature of such Information and instructed to keep such
Information confidential), (b)to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) in connection with the exercise of
any remedies hereunder or any suit, action or proceeding relating to this
Agreement or the enforcement of rights hereunder, (e) with the consent of
Somatogen or (f) to the extent such Information (i) becomes publicly available
other than as a result of a breach of this Section or (ii) becomes available to
Lilly on a nonconfidential basis from a source other than Somatogen. For the
purposes of this Section, "Information" means all information received from
Somatogen relating to Somatogen or its business, other than any such information
that is available to Lilly on a nonconfidential basis prior to disclosure by
Somatogen, provided that, in the case of information received from Somatogen
after the date hereof, such information is clearly identified at the time of
delivery as confidential. Any person required to maintain the confidentiality of
Information as provided in this Section shall be considered to have complied
with its obligation to do so if such person has exercised the same degree of
care to maintain the confidentiality of such Information as such person would
accord to its own confidential information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
ELI LILLY AND COMPANY
By: Edwin W. Miller
Title: Vice President and Treasurer
SOMATOGEN, INC.
By: Timothy D. Hoogheem
Title: Senior Vice President of Finance
and Administration, CFO and Treasurer
<PAGE> 26
Exhibit A - Form of Opinion of Counsel to Somatogen
July 28, 1997
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46285
Ladies and Gentlemen:
We have acted as counsel for Somatogen, Inc., a Delaware corporation (the
"Borrower"), in connection with the execution of the Revolving Credit Facility
Agreement dated as of July 28, 1997 by and between Eli Lilly and Company, (the
"Lender") and Borrower (the "Loan Agreement"). We are rendering this opinion
pursuant to Section 4.02a of the Loan Agreement. Except as otherwise defined
herein, capitalized terms used but not defined herein have the meanings given to
them in the Loan Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Loan Agreement by the various parties and upon originals or
copies certified to our satisfaction of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below.
Where we render an opinion "to the best of our knowledge" or concerning an item
"known to us" or our opinion otherwise refers to our knowledge, it is based
solely upon (i) an inquiry of attorneys within this firm who perform legal
services for the Borrower, (ii) receipt of a certificate executed by an officer
of the Borrower covering such matters, and (iii) such other investigation, if
any, that we specifically set forth herein.
In rendering this opinion, we have assumed the genuineness and authenticity of
all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by Borrower of the Loan Agreement) where authorization, execution and delivery
are prerequisites to the effectiveness of such documents. We have also assumed
that all individuals executing and delivering documents had the legal capacity
to so execute and deliver; that you have received all documents you were to
receive under the Loan Agreement; that the Loan Agreement is an obligation
binding upon you; and that there are no extrinsic agreements or understandings
among the parties to the Loan Agreement that would modify or interpret the terms
of the Loan Agreement or the respective rights or obligations of the parties
thereunder.
We have assumed that Lender will disburse the loan funds in accordance with the
terms of the Loan Agreement and that at the time of each such disbursement all
facts and applicable law will be the same as those existing at closing.
<PAGE> 27
Our opinion is expressed with respect only to the laws of the State of Colorado
and the Delaware General Corporation Law. We express no opinion as to whether
the laws of any particular jurisdiction apply, and no opinion to the extent that
the laws of any jurisdiction other than Colorado or the Delaware General
Corporation Law are applicable to the subject matter hereof. Our opinion is
expressed only as to the outcome that would pertain were Colorado law or the
Delaware General Corporation Law (excluding choice of law principles and
excluding the effect of any law other than Colorado law or the Delaware General
Corporation Law) the sole law applicable to the subject matter hereof. For
purposes of this opinion, we have assumed, with your permission, that the laws
of Indiana are the same in all material respects as the laws of Colorado.
We express no opinion relative to the applicability or effect of any law, rule
or regulation relating to securities or to the sale or issuance thereof.
With regard to our opinion in paragraph 2 below with respect to defaults or
violations under any material agreement, we have relied solely upon (i)
inquiries of officers of Borrower and (ii) an examination of documents which
Borrower has filed with the Securities and Exchange Commission as exhibits to
either registration statements filed pursuant to the Securities Act of 1933, as
amended or periodic reports filed pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act") (the "Material Agreements"); we have made
no further investigation. With regard to the violation or breach of provisions
in the Material Agreements relating to financial covenants and other financial
and factual matters we have relied solely on a certificate of an officer of the
Borrower that such covenants will not be violated or breached by the execution,
delivery and performance by the Borrower of the terms of the Loan Agreement.
With regard to our opinion in paragraph 3, we have assumed with your permission
that the Weighted Average Cost of Capital will not exceed 43.9%.
On the basis of the foregoing, in reliance thereon, and with the foregoing
qualifications, we are of the opinion that:
1. Borrower (a) is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, (b) has all requisite
corporate power and authority to own its property and assets and to carry on its
business as now conducted, (c) is, to the best of our knowledge, qualified to do
business in every jurisdiction where such qualification is required, except
where the failure to so qualify would not have a material adverse effect on
Borrower, and (d) has the corporate power and authority to execute, deliver and
perform its obligations under the Loan Agreement and to borrow thereunder.
2. The execution, delivery and performance by Borrower of the Loan
Agreement and the Borrowings thereunder (collectively, the "Transactions") (a)
have been duly authorized by all requisite corporate action on the part of
Borrower and (b) will not (i) result in a violation having a material adverse
effect on Borrower of (A) any provision of any law, statute, rule or regulation
or of the certificate of incorporation or by laws of Borrower, (B) any order of
any Governmental Authority entered against Borrower known to us, or (C) any
provision of any Material Agreement, or (ii) be in material conflict with,
result in a material breach or constitute (alone or with notice or lapse of time
or both) a material default under any such Material Agreement.
<PAGE> 28
3. The Loan Agreement constitutes a legal, valid and binding obligation
of Borrower, enforceable in accordance with its terms except (i) as
enforceability may be subject to or limited by rights to indemnity, contribution
or acceleration which may be limited by applicable laws; and (ii) as enforcement
may be limited by (a) the effect of applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium, receivership, suretyship or other
similar laws relating to or affecting creditors' rights; (b) general equity
principles and limitations on the availability of equitable relief, including
specific performance; (c) compliance with the requirements, and the effect of
the limitations, of Colorado law relating to the exercise of remedies by a
lender; (d) limitations on a lender's ability to waive rights or benefits given
by statute or otherwise; (e) limitations on the right of a lender to impose
added charges for late payments or defaults by the Company, where it is
determined that such charges bear no reasonable relation to the damage suffered
by the lender as a result of such late payments or defaults; (f) limitations on
the enforceability of a clause prohibiting or restricting prepayment of an
indebtedness or imposing prepayment charges; (g) limitations imposed by Colorado
law on the appointment of receivers; (h) laws with respect to fraudulent
conveyance; (i) limitations created by or arising under statute or case law on
the enforceability of certain covenants and provisions of agreements where (x)
the breach of such covenants or provisions imposes restrictions or burdens upon
the Borrower, including the acceleration of indebtedness due under the
Indenture, and it cannot be demonstrated that the enforcement of such
restrictions or burdens is reasonably necessary for the protection of the lender
or (y) the lender's enforcement of such covenants or provisions under the
circumstances would violate the lender's implied covenant of good faith and fair
dealing.
4. Other than the filing of the Loan Agreement as an exhibit to the
Borrower's next periodic report filed under the Exchange Act, no action, consent
or approval of, registration or filing with or other action by any governmental
authority is required on the part of Borrower in connection with the
Transactions.
This opinion is intended solely for your benefit and is not to be made available
to or relied upon by any other person, firm, or entity without our prior written
consent.
Very truly yours,
Cooley Godward LLP
By: _________________
cc:
AMENDMENT DATED JULY 23, 1997 TO EXCLUSIVE
AGENCY AGREEMENT WITH BINSWANGER CHESTERTON.
July 23, 1997
The Binswanger Companies
Two Logan Square, 4th Floor
18th and Arch Streets
Philadelphia, PA 19103-2759
Re: Boulder, Colorado
Ladies and Gentlemen:
This letter is to confirm our understanding that the Exclusive Right to Sell
Agreement dated April 4, 1995, as amended July 1, 1996, (the "Agreement"),
pursuant to which you are 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. This extension shall be
on the same terms and conditions as contained in the Agreement, except as follow
and extended through December 31, 1997:
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 any party that was introduced to the Company
through an entity or individual (such entity or individual, an
"Investment Bank") that has a written agreement with the Company
which obligates the Company to pay a fee to such Investment Bank
in connection with a transaction involving the Company.
Very truly yours, SOMATOGEN, INC.
By: Timothy D. Hoogheem
Date: July 23, 1997
BINSWANGER OF COLORADO, INC.
By: Susan Sygenda
Corporate Council
FORM OF RETENTION AGREEMENT ENTERED INTO
BETWEEN THE REGISTRANT AND CERTAIN
EXECUTIVE OFFICERS
RESTRICTED & CONFIDENTIAL INTERNAL USE ONLY
SOMATOGEN, INC.
RETENTION AGREEMENT
This RETENTION AGREEMENT is entered into as of (Date), between
Somatogen, Inc., a Delaware corporation (the "Corporation"), and (Officer).
RECITAL
Officer serves as the Corporation's (Officer's Title), and the
Corporation and the Officer desire to set forth herein the terms and conditions
of his/her compensation in the event of the termination of his/her employment,
following a Change in Control, or Change of Management (as defined herein). In
the event of a Change in Control, or Change of Management, the Officer and other
key employees may be more vulnerable to dismissal without regard to quality of
their service. Because such key employees are in a unique position to affect the
acquisition effort by another party and are vulnerable in the event of a Change
of Management, the Board of Directors of the Corporation (the "Board") believes
that it is in the best interests of the Corporation and its stockholders to
enter into Agreements such as this one in order to ensure fair treatment of such
key employees and to reduce the distractions and other adverse effects upon such
employees' performance which are inherent in such an acquisition, change in
control, or change of management.
AGREEMENT
The parties hereto agree as follows:
1. Term. If a Change in Control or Change of Management (as defined
below) has not occurred, this Agreement shall expire two years from the date
hereof. This Agreement may be renewed by written agreement of the parties for
successive one-year periods. If a Termination Following a Change in Control or
Change of Management occurs during the term of this Agreement, this Agreement
shall continue in full force and effect and shall not terminate until the
Officer shall have received the severance compensation provided hereunder.
2. Termination Following a Change in Control or Change of Management.
In the event of a Termination Following a Change in Control or Change of
Management (as defined below), the Officer shall immediately be paid all accrued
salary, bonus compensation to the extent earned, vested deferred compensation
(other than pension
<PAGE> 2
plan or profit sharing plan benefits, which will be paid in accordance with the
applicable plan), any benefits then due under any plans of Corporation in which
Officer is a participant, accrued vacation pay and any appropriate business
expenses incurred by Officer in connection with his/her duties, all to the date
of termination ("Accrued Compensation"). The Officer shall also be entitled to
the severance compensation described in Section 3.
"Termination Following a Change in Control or Change of Management" shall mean a
termination by the Officer for Good Reason (as defined below) of Officer's
employment with Corporation within one year after the occurrence of a Change in
Control or Change of Management (as defined below) or a termination by
Corporation of Officer's employment by Corporation within one year after the
occurrence of a Change in Control or Change of Management other than a
termination by reason of death or disability (as defined below) or a Termination
for Cause (as defined below).
For purposes hereof, the following terms shall have the meanings set
forth below.
A "Change in Control" of the Corporation shall be deemed to have
occurred if (i) any person (as such term is used in Sections 13(d) and 14(d) (2)
of the Securities and Exchange Act of 1934 (the "Exchange Act"), other than the
Corporation, is or becomes the beneficial owner (as defined in Rule 13D-3 under
the Exchange Act), directly or indirectly, of 50% or more of the combined voting
power of the outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire capital stock),
whether by means of a tender offer or exchange offer, Transaction or otherwise;
or (ii) the Board or the stockholders of the Corporation approve a Transaction.
A "Transaction" is: a) any consolidation or merger of the Corporation other than
a merger solely to effect a reincorporation or a merger of the Corporation as to
which stockholder approval is not required pursuant to Sections 251(f) or 253 of
the Delaware General Corporation Law; or b) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of 50% or more
of the assets of the Corporation; or c) the adoption of any plan or proposal for
the liquidation or dissolution of the Corporation.
A "Change of Management" shall be deemed to have occurred if the
Company's current Chief Executive Officer ceases to serve as such, or a new
Chief Executive Officer or Chief Operating Officer is appointed by the Board of
Directors.
<PAGE> 3
"Disability" shall mean that the Officer, in the reasonable judgment of
the Board, is incapable of performing the duties of his office by reason of
illness or physical or mental disability, which condition has continued for a
period of more than three (3) consecutive months.
"Good Reason" shall include any of the following:
(i) the assignment to the Officer by the Corporation of duties
inconsistent with, or a substantial alteration in the nature or status
of, Officer's responsibilities; as in effect immediately prior to the
Change in Control or Change of Management;
(ii) a reduction by Corporation in the Officer's salary or
other benefits as in effect on the date of a Change in Control or
Change of Management;
(iii) a relocation of Corporation's principal executive
offices to a location outside Boulder County, Colorado, or Officer's
relocation to any place other than said offices of Corporation, except
for reasonably required travel by Officer on Corporation's business;
(iv) any material breach by the Corporation of any provision
of this Agreement, if such material breach has not been cured within
thirty (30) days following written notice by the Officer to the
Corporation of such breach setting forth with specificity the nature of
the breach; or
(v) any failure by Corporation to obtain the assumption of
this Agreement by any successor or assign of Corporation.
"Termination for Cause" shall mean termination of the Officer's
employment by the Corporation by reason of the following: (i) Officer's willful
dishonesty towards, fraud upon, crime against, deliberate or attempted injury or
bad faith action with respect to the Corporation; or (ii) Officer's conviction
for any felony crime (whether in connection with the Corporation's affairs or
otherwise).
3. Severance Compensation.
a. Severance Payments. In the event of a Termination Upon a
Change in Control or Change of Management, the Corporation and Officer hereby
stipulate and agree that the Corporation shall pay to the Officer severance
compensation in an aggregate amount equal to Officer's compensation (as defined
below) for a period of twelve (12) months.
<PAGE> 4
Such Compensation shall be computed with reference to the Compensation paid to
the Officer for the last full calendar month coinciding with or immediately
preceding the month in which the Change in Control or Change of Management
occurred or the month in which the Officer's employment terminates, whichever
amount is higher. "Compensation" of Officer means and includes all wages,
salary, bonus and incentive compensation paid by the Corporation as
consideration for the Officer's service that are includible in the gross income
of the Officer for federal income tax purposes, (or are deferred by Officer's
elections or contributed to any employee benefit plan on a pre-tax basis), but
excluding any taxable income recognized upon the exercise of stock options or
disposition of shares acquired upon the exercise of stock options. Compensation
as to any month shall include: (i) one twelfth (1/12) of the amount of any bonus
or other lump sum compensation entitled to the Officer during the subsequent
twelve (12) months and all amounts accrued with respect to such month under any
deferred compensation plan. All severance compensation shall be without
prejudice to Officer's right to receive all Accrued Compensation (as defined in
Section 2) earned and unpaid up to the time of termination. Severance
compensation payments to the Officer shall, at the Company's option, be paid in
a lump sum, or in equal semi-monthly installments for twelve (12) months
following the termination. Severance compensation payments shall continue for
the stipulated twelve (12) months without respect to the Officers employment
status with any other organization or self employment.
b. Other Severance Provisions. In addition to the severance
payments described above, the Corporation will either (I) reimburse the
officer's COBRA premiums, or (ii) if permitted by the Corporation's health plan,
continue in such plans at the Corporation's expense. If Officer's health
insurance coverage included the Officer's dependents immediately prior to the
Officer's termination, such dependents will also be covered at the Corporation's
expense. Continuation coverage under this Section 3(b) shall continue for twelve
(12) months after the Officer's Termination Upon a Change in Control or Change
of Management, provided, however, that such continuation of coverage shall end
as of the date the Officer becomes covered under any other group health plan
that is not maintained by the Corporation.
4. Acceleration of Options. In the event of Termination, all stock
options held by the Officer, shall become exercisable in full, even if the
vesting conditions set forth therein have not been satisfied in full, and shall
remain exercisable for a period of 90 days if the Termination occurs following a
Change of Control in which the Company's stock exchanged for consideration
consisting of 75% or more cash, or a period of two (2) years following any other
Termination, or a period of twelve (12) months in the event of termination
because of the Officer's disability.
<PAGE> 5
5. Other Benefits. Neither the provisions of this Agreement nor the
severance compensation provided for hereunder shall reduce any amounts otherwise
payable, or in any way diminish the Officer's rights as an employee of the
Corporation, whether existing now or hereafter, under any benefit, incentive,
retirement, stock option, stock bonus, stock purchase plan, or any employment
agreement or other plan or arrangement.
6. Employment Status. This Agreement does not constitute a contract of
employment or impose on the Officer or the Corporation any obligation to retain
the Officer as an employee, or to change the status of the Officer's employment.
The Officer acknowledges that he or she is an "at-will" employee of the Company,
and that the Company may terminate his or her employment at any time, with or
without cause.
7. Miscellaneous.
a. Severability. Should a court or other body of competent
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, so that it is enforceable to the maximum extent
possible.
b. Withholding. All compensation and benefits to the Officer
hereunder shall be reduced by all federal, state, local and other withholdings
and similar taxes and payments required by applicable law.
c. Arbitration. Except as provided in Section 3, the parties
hereby submit all controversies, claims and matters of difference in any way
related to this Agreement or the performance or breach of the whole or any part
hereof to arbitration in Denver, Colorado, according to the rules and practices
of the American Arbitration Association from time to time in force. If such
rules and practices shall conflict with the Colorado Rules of Civil Procedure or
any other provisions of the Colorado Rules of Civil Procedure or any other
provisions of Colorado law then in force, such Colorado rules and provisions
shall govern. Arbitration of any such controversy, claim or matter of difference
shall be a condition precedent to any legal action thereon. This submission and
agreement to arbitration shall be specifically enforceable. Awards shall be
final and binding on all parties to the extent and in the manner provided by
Colorado law. All awards may be filed by any party with the Clerk of the
District Court in the County of Boulder, Colorado, and an appropriate judgment
entered thereon and execution issued therefor. At the election of any party,
said award may also be filed, and judgment entered thereon and execution issued
therefor, with the clerk of one or more other courts, state or federal, having
jurisdiction over the party against whom such an award is rendered or its
property.
<PAGE> 6
The arbitrators shall allocate the costs of the arbitration in such manner as
they deem equitable, and may require the reimbursement of all or a portion of
the reasonable legal fees incurred by the prevailing party in such arbitration
proceeding, and any legal proceedings which are taken to enforce the arbitral
award.
d. Entire Agreement; Modifications. This Agreement represents
the entire agreement between the parties and may be amended modified, superseded
or canceled, and any of the terms hereof may be waived, only by a written
instrument executed by each party hereto or, in the case of a waiver, by the
party waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right at a
latter time to enforce the same. No waiver by any party of the breach of any
provision contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such breach or of any other term of this Agreement.
e. Applicable Law. This Agreement shall be construed
under and governed by the laws of the State of Colorado.
f. Successors and Assigns. This agreement shall be binding
upon, and shall issue to the benefit of, the Company's successors and assigns
and the Executive's heirs and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of (
Date ).
SOMATOGEN, INC.
By______________________________
OFFICER:
---------------------------------
