<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Cell Genesys, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
CELL GENESYS, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
------------------------
TO BE HELD ON
JUNE 3, 1998
TO THE STOCKHOLDERS:
Notice is hereby given that the Annual Meeting of Stockholders of Cell
Genesys, Inc., a Delaware corporation ("Cell Genesys" or the "Company"), will be
held on Wednesday, June 3, 1998 at 10:00 a.m., local time, at the Company's
offices at 342 Lakeside Drive, Foster City, California, for the following
purposes:
1. To elect directors to serve until the next annual meeting of
stockholders or until their successors are elected.
2. To approve the adoption of the 1998 Incentive Stock Plan, to replace the
Company's 1989 Incentive Stock Plan, and to reserve a total of 1,760,000
shares for issuance thereunder. The shares reserved reflect the
replacement of common shares which would otherwise be available for
grant under the 1989 Incentive Stock Plan, plus an additional 800,000
common shares.
3. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the fiscal year ending December 31, 1998.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
These items of business are more fully described in the Proxy Statement
accompanying this notice.
Only stockholders of record at the close of business on April 8, 1998 are
entitled to notice of and to vote at the meeting and any adjournment thereof.
All stockholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, please mark, sign, date
and return the enclosed proxy card as soon as possible in the postage-prepaid
envelope enclosed for that purpose. Any stockholder attending the meeting may
vote in person even if the stockholder has returned a proxy.
Sincerely,
LOGO
Kathleen Sereda Glaub
Secretary
Foster City, California
April 27, 1998
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
<PAGE> 3
CELL GENESYS, INC.
342 LAKESIDE DRIVE
FOSTER CITY, CA 94404
------------------------
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the board of directors of Cell
Genesys, Inc., a Delaware Corporation, ("Cell Genesys" or the "Company") for use
at the Annual Meeting of Stockholders to be held on Wednesday, June 3, 1998 at
10:00 a.m., local time, or at any adjournment of the meeting, for the purposes
set forth in this Proxy Statement and in the accompanying Notice of Annual
Meeting of Stockholders. The annual meeting will be held at the Company's
offices at 342 Lakeside Drive, Foster City, California 94404. The Company's
telephone number is (650) 425-4400.
These proxy solicitation materials were mailed on or about April 27, 1998
together with the Company's 1997 Annual Report to Stockholders, to all
stockholders entitled to vote at the meeting.
RECORD DATE
Stockholders of record at the close of business on April 8, 1998 (the
"Record Date") are entitled to notice of and to vote at the meeting. At the
Record Date, 28,259,301 shares of the Company's common stock were issued and
outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or time or by
attending the meeting and voting in person.
VOTING AND SOLICITATION
Every stockholder voting in the election of directors may cumulate such
stockholder's votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of shares held by such
stockholder, or distribute the stockholder's votes on the same principle among
as many candidates as the stockholder may select, provided that votes cannot be
cast for more candidates than the number of directors to be elected. However, no
stockholder shall be entitled to cumulate votes unless the candidate's name has
been placed in nomination prior to the voting and the stockholder, or any other
stockholder, has given notice at the meeting prior to the voting of the
intention to cumulate the stockholder's votes. On all other matters, each share
has one vote.
The cost of soliciting proxies will be borne by the Company. Proxies may
also be solicited by certain of the Company's directors, officers and employees,
without additional compensation, personally or by telephone, facsimile or
letter.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The holders of a majority of the shares of stock entitled to vote at the
meeting, present in person or by proxy, constitutes the required quorum for the
transaction of business at the Annual Meeting. Shares that are voted "FOR",
"AGAINST" or "WITHHELD" on a matter are treated as being present at the meeting
for purposes of establishing a quorum and are also treated as shares cast by the
common stock present in person or represented by proxy at the annual meeting and
entitled to vote on the subject matter (the "Votes Cast").
<PAGE> 4
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of a controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
In a 1988 Delaware case Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
broker non-votes should not be counted for purposes of determining the number of
Votes Cast with respect to the particular proposal on which the broker has
expressly not voted. Accordingly, the Company intends to treat broker non-votes
in this manner. Thus, a broker non-vote will not have any effect on the outcome
of the voting on a proposal.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at next year's annual meeting must be received by the
Company no later than December 31, 1998 in order that they may be included in
the proxy statement and form of proxy relating to the 1999 annual meeting.
PROPOSAL ONE
ELECTION OF DIRECTORS
NOMINEES
Eight directors are to be elected at the meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for the
Company's eight nominees named below, all of whom are presently directors of the
Company. If any nominee of the Company is unable or declines to serve as a
director at the time of the annual meeting, the proxies will be voted for any
nominee designated by the present board of directors (the "Board") to fill the
vacancy. If additional persons are nominated for election as directors, the
proxy holders intend to vote all proxies received by them in such a manner in
accordance with cumulative voting (if applicable) as will assure the election of
as many of the nominees listed below as possible, and, in such event, the
specific nominees to be voted for will be determined by the proxy holders. The
Company is not presently aware of any nominee who will be unable or will decline
to serve as a director. The term of office of each person elected as a director
will continue until the next annual meeting of stockholders or until a successor
has been elected and qualified.
Thomas E. Shenk, Ph.D, a director of the company since its acquisition of
Somatix Therapy Corporation in May 1997, will not be standing for reelection.
Dr. Shenk will remain a member of the company's scientific advisory board, but
is leaving the board of directors at the request of his employer, Howard Hughes
Medical Institute, who has established policies prohibiting its employees from
serving on any corporate boards.
2
<PAGE> 5
The names of the nominees and certain information about them as of the
Record Date are set forth below.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEES AGE PRINCIPAL OCCUPATION SINCE
---------------- --- -------------------- --------
<S> <C> <C> <C>
David W. Carter 60 Chairman of the Board of Xenogen 1997
Corporation
James M. Gower 50 Chief Executive Officer and Chairman of 1996
the Board of Rigel, Inc.
Raju S. Kucherlapati, Ph.D. 55 Chairman, Department of Molecular 1988
Genetics, Albert Einstein College of
Medicine
Joseph E. Maroun 68 Retired Senior Vice President, 1995
President -- International Group,
Bristol-Myers Squibb
John T. Potts, Jr., M.D. 66 Director of Research, Massachusetts 1997
General Hospital
Stephen A. Sherwin, M.D. 49 Chairman of the Board, President and 1990
Chief Executive Officer of the Company
Eugene L. Step 69 Retired Executive Vice President, 1993
President -- Pharmaceutical Division, Eli
Lilly & Co.
Inder M. Verma, Ph.D. 50 Professor of Molecular Biology and 1997
Virology, The Salk Institute Laboratory
of Genetics
</TABLE>
Dr. Sherwin has served as president, chief executive officer and a director
of the Company since March 1990. In March 1994, Dr. Sherwin was elected to the
additional position of chairman of the Company's board of directors. Dr. Sherwin
also is chairman of the board of the Company's subsidiary, Abgenix, Inc., a
position he has held since 1996. From 1983 to 1990, Dr. Sherwin held various
positions at Genentech, Inc., a biotechnology company, most recently as vice
president of clinical research. Prior to 1983, Dr. Sherwin held various
positions on the staff of the National Cancer Institute. Dr. Sherwin also
currently serves as an associate clinical professor of medicine at the
University of California San Francisco, a position he has held since 1986, and
he currently is a director of the California Healthcare Institute, a non-profit
institution. Dr. Sherwin holds a B.A. from Yale University in biology and an
M.D. from Harvard Medical School.
Mr. Carter has served as a director of Cell Genesys since May 1997. Mr.
Carter has served as chairman of the board of directors of Xenogen Corporation
since November 1997. Previously, Mr. Carter served as president, chief executive
officer and chairman of the board of directors of Somatix Therapy Corporation
("Somatix"). Prior to joining Somatix in 1991, he was president and chief
operating officer of Northfield Laboratories.
Mr. Gower has served as a director of Cell Genesys since July 1996. In
1996, Mr. Gower became chairman and chief executive officer of Rigel, Inc. From
1992 to 1996, Mr. Gower served as president and chief executive officer of
Tularik, Inc. From 1981 to 1990, he was with Genentech, Inc., most recently as
senior vice president responsible for sales, marketing, business development and
product planning. From 1972 to 1981, Mr. Gower served in a variety of positions
in sales and marketing at American Hospital Supply Corporation, including as
vice president of marketing in the latter four years. Mr. Gower also is a
director of Terrapin, Inc., a privately held biotechnology company. Mr. Gower
received a B.S. degree in operations research and an M.B.A. from the University
of Tennessee.
Dr. Kucherlapati, a founder of the Company, has been a director since the
Company's inception in 1988 and also serves as a scientific advisor. Since 1989,
he has been the Saul and Lola Kramer Professor and the chairman of the
department of molecular genetics at the Albert Einstein College of Medicine, New
York, New York. From 1982 to 1989, Dr. Kucherlapati was a professor at the
University of Illinois College of Medicine. Dr. Kucherlapati is a director of
several public and privately held biotechnology companies. Dr. Kucherlapati
received a B.S. in biology from Andhra University in India and a Ph.D. in
genetics from the University of Illinois, Urbana.
Mr. Maroun was appointed a director of the Company in June 1995. Mr. Maroun
spent 30 years with Bristol-Myers Squibb, serving until his retirement in 1990,
when he was president of the international group,
3
<PAGE> 6
senior vice president of the corporation, and a member of its policy committee.
He also previously managed operations for Bristol-Myers in Latin America,
Canada, Japan, the Far East and Europe. In addition, Mr. Maroun was chairman of
the international section of the Pharmaceutical Manufacturers Association, and
chaired various administrative and executive committees. He also headed the U.S.
Japan Pharmaceutical Advisory Group. Mr. Maroun received his B.A. degree from
the University of the Witwatersrand, Johannesburg.
Dr. Potts has served as a director of Cell Genesys since May 1997.
Previously, Dr. Potts had served as a director of Somatix since March 1995. His
career spans 40 years of distinguished service in science and medicine. He
earned his M.D. in 1957 from the University of Pennsylvania, then trained at
Massachusetts General Hospital and National Heart Institute. At the National
Institutes of Health, he became head of the section on polypeptide hormones
prior to becoming chief of endocrinology at Massachusetts General Hospital in
1968. Dr. Potts served as physician-in-chief at Massachusetts General Hospital
and the Jackson Distinguished Professor of Clinical Medicine at Harvard Medical
School from 1981 to 1996. In September 1996, Dr. Potts moved from the post of
physician-in-chief to director of research at Massachusetts General Hospital. He
is also a member of the board of directors of Genentech, Inc.
Mr. Step was appointed a director of the Company in March 1993. From 1973
to 1992, Mr. Step served in various positions in senior management of Eli Lilly
and Company, most recently as executive vice president, president of the
pharmaceutical division and as a member of the board of directors and its
executive committee. Mr. Step is a past chairman of the board of the
Pharmaceutical Manufacturers Association and a past president of the
International Federation of Pharmaceutical Manufacturers Association. Mr. Step
is also a director of Scios Nova, Inc., Medco, Inc., Guidant Corporation,
Pathogenesis Corporation and GMIS Inc. Mr. Step holds a B.A. degree in economics
from the University of Nebraska and an M.S. in finance and accounting from the
University of Illinois.
Dr. Verma has served as a director of Cell Genesys since May 1997.
Previously, Dr. Verma had served as a director of Somatix since June 1996. Dr.
Verma is chairman of the faculty and academic council of The Salk Institute, and
co-director of the laboratory of genetics at The Salk Institute. He joined The
Salk Institute in 1974. In 1995, the National Institutes of Health selected Dr.
Verma to chair a committee reviewing the scope and advancement of gene therapy.
Currently, Dr. Verma is an adjunct professor, department of biology, at the
University of California San Diego and has been a member of the faculty since
1979.
There are no family relationships between directors or executive officers
of the Company.
REQUIRED VOTE
The eight nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted for them will be elected
as directors.
BOARD MEETINGS AND COMMITTEES
The board of directors of the Company held a total of fifteen meetings
during the fiscal year ended December 31, 1997. Each director attended at least
seventy-five percent of the meetings of the board of directors and each
committee on which he served during 1997.
The board of directors has an audit committee and a compensation committee.
It does not have a nominating committee or a committee performing the functions
of a nominating committee.
The audit committee of the board of directors met twice during fiscal year
1997 and currently consists of Messrs. Potts and Step. Prior to May 1997, the
audit committee consisted of Messrs. Step and former director, Peter Barton
Hutt. The audit committee recommends engagement of the Company's independent
auditors, and is primarily responsible for reviewing and approving the scope of
the audit and other services performed by
4
<PAGE> 7
the Company's independent auditors and for reviewing and evaluating the
Company's accounting principles and its systems of internal accounting controls.
The compensation committee of the board of directors, which consists of
directors Gower and Step, met six times during fiscal year 1997. The
compensation committee reviews and approves the Company's compensation policies
as well as the compensation of, and grant of stock options to, the executive
officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's compensation committee is composed of directors Gower and
Step neither of whom is or has been an officer or employee of the Company. The
compensation committee grants options and makes recommendations to the board of
directors concerning salaries and incentive compensation for officers of the
Company. Dr. Sherwin, chairman of the board and chief executive officer of the
Company, is not a member of the compensation committee and cannot vote on
matters decided by the Committee. He participates in compensation committee
discussions regarding salaries and incentive compensation for all employees of
and consultants to the Company, except that Dr. Sherwin is excluded from
discussions regarding his own salary and incentive compensation. No interlocking
relationship exists between the Company's board of directors or compensation
committee and the board of directors or compensation committee of any other
party, nor has such relationship existed in the past.
PROPOSAL TWO
APPROVAL OF 1998 INCENTIVE STOCK PLAN
At the Annual Meeting, the stockholders are being requested to consider and
approve the adoption of the 1998 Incentive Stock Plan (the "1998 Plan") to
replace the Company's 1989 Incentive Stock Plan (the "1989 Plan"), and reserve a
total of 1,760,000 common shares for issuance thereunder. The shares reserved
reflect the replacement of common shares which would otherwise be available for
grant under the 1989 Plan, plus an additional 800,000 common shares. The 1998
Plan is described in more detail below. Since each executive officer and
director of the Company is eligible to receive options under the 1998 Plan, each
such executive officer and director has a personal interest in the proposed 1998
Plan.
BACKGROUND
On April 6, 1998, the board of directors adopted the 1998 Plan and reserved
1,760,000 shares of common stock for issuance thereunder, subject to stockholder
approval. The 1998 Plan is intended to replace the Company's 1989 Plan which
expires by its terms in 1999. Concurrently with approval of the 1998 Plan, the
Company does not intend to grant any additional options for shares available for
issuance under the 1989 Plan. The Company cannot estimate the number of shares
which will be returned to the 1989 Plan as a result of any terminations or
forfeitures under the 1989 Plan; however, as of February 28, 1998, there were
959,566 shares available for issuance under the 1989 Plan. Subject to
stockholder approval, shares available for issuance under the 1989 Plan will no
longer be issued and 1,760,000 shares of common stock will be available for
issuance under the 1998 Plan.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the Company's deduction in any one fiscal year for federal
income tax purposes to $1,000,000 per person with respect to the Company's chief
executive officer and its four other highest paid executive officers who are
employed on the last day of the fiscal year unless the compensation was not
otherwise subject to the deduction limit. Generally, option grants under the
1998 Plan will not be subject to the deduction limitation if the stockholders
approve the material provisions of the 1998 Plan as described below. The 1998
Plan allows for the grant of incentive stock options to all employees of the
Company and the grant of nonstatutory stock options and restricted stock to
employees, directors and consultants of the Company. Incentive stock options
must be granted with an exercise price not less than the fair market value of
the Company's common stock on the date of grant. The exercise price for
nonstatutory stock options and the purchase price for restricted stock is
determined by the administrator of the 1998 Plan. The 1998 Plan provides that no
employee of the Company may be granted, in
5
<PAGE> 8
any fiscal year, options or stock purchase rights to purchase more than 250,000
shares of common stock. However, notwithstanding this limit, in connection with
such individual's initial employment with the Company, the individual may be
granted options or stock purchase rights to purchase up to an additional 250,000
shares.
PURPOSE
The board of directors believes that it is in the best interests of the
Company and its stockholders to have an incentive stock plan in place for
several reasons. First, the 1989 Plan expires by its terms in 1999, and the
board of directors believes that having an incentive stock plan in place is
vital to retaining, motivating and rewarding employees, executives and
consultants by providing them with long-term equity participation in the Company
relating directly to the financial performance and long-term growth of the
Company. Second, the board of directors believes that granting stock options to
employees is an important tool in aligning the interests of the Company's
executives and employees with the interests of the Company's stockholders.
Third, the number of shares reserved for issuance under the 1998 Plan will
provide the Company with an adequate pool of options to compete effectively with
other companies for existing and new employees. Competition for qualified
employees in the biotechnology market is extremely intense and, due to the rapid
growth of many successful companies in this sector, such competition is
increasing. The board of directors believes that in order to remain competitive
with other biotechnology companies with regard to its long-term incentive plans,
the Company must continue to provide employees with the opportunity to obtain
equity in the Company. A summary of the principal terms of the 1998 Plan is
located below.
General. The purposes of the 1998 Plan are to attract and retain the best
available personnel for positions of substantial responsibility with the
Company, to provide additional incentive to the employees, directors and
consultants of the Company and to promote the success of the Company's business.
Options and stock purchase rights may be granted under the 1998 Plan. Options
granted under the 1998 Plan may be either "incentive stock options," as defined
in Section 422 of the Code, or nonstatutory stock options.
Administration. The 1998 Plan may generally be administered by the board of
directors or a committee appointed by the board of directors (as applicable, the
"Administrator").
Eligibility; Limitations. Nonstatutory stock options and stock purchase
rights may be granted under the 1998 Plan to employees, directors and
consultants of the Company and any parent or subsidiary of the Company.
Incentive stock options may be granted only to employees. The Administrator, in
its discretion, selects the employees, directors and consultants to whom options
and stock purchase rights may be granted, the time or times at which such
options and stock purchase rights shall be granted, and the number of shares
subject to each such grant.
Section 162(m) of the Code places limits on the deductibility for federal
income tax purposes of compensation paid to certain executive officers of the
Company. In order to preserve the Company's ability to deduct the compensation
income associated with options granted to such persons, the 1998 Plan provides
that no employee, director or consultant may be granted, in any fiscal year of
the Company, options or stock purchase rights to purchase more than 250,000
shares of common stock. Notwithstanding this limit, however, in connection with
such individual's initial employment with the Company, he or she may be granted
options or stock purchase rights to purchase up to an additional 250,000 shares
of common stock.
Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between the Company and the optionee, and is subject to the following
additional terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option may not be less than 100% of the fair market value
of the common stock on the date such option is granted; provided, however,
the exercise price of an incentive stock option granted to a greater than
10% stockholder may not be less than 110% of the fair market value of the
common stock on the date such option is granted. The fair market value of
the common stock is generally determined with reference to the closing sale
price for the common stock (or the closing bid if no sales were reported)
on the date the option is granted.
6
<PAGE> 9
(b) Exercise of Option; Form of Consideration. The Administrator
determines when options become exercisable and any conditions which must be
satisfied before the option may be exercised. Stock options granted under
the 1998 Plan generally vest and become exercisable over four years. The
means of payment for shares issued upon exercise of an option is specified
in each option agreement. The 1998 Plan permits payments to be made by
cash, check, other shares of common stock of the Company (with some
restrictions), cashless exercises, a reduction in the amount of any Company
liability to the optionee, any other form of consideration permitted by
applicable law, or any combination thereof.
(c) Term of Option. The term of an incentive stock option may be no
more than ten (10) years from the date of grant; provided that in the case
of an incentive stock option granted to a greater than 10% stockholder, the
term of the option may be no more than five (5) years from the date of
grant. No option may be exercised after the expiration of its terms.
(d) Termination of Employment. If an optionee's employment or
consulting relationship terminates for any reason (other than death or
disability), the optionee may exercise his or her option within such period
of time as is specified in the option agreement to the extent that the
option is vested on the date of termination (but in no event later than the
expiration of the term of such option as set forth in the option
agreement). In the absence of a specified time in the option agreement, the
option shall remain exercisable for three (3) months following the
optionee's termination.
(e) Death or Disability. If an optionee's employment or consulting
relationship terminates as a result of disability, the optionee may
exercise his or her option within such period of time as is specified in
the option agreement (but in no event later than the expiration of the term
of such option as set forth in the option agreement) to the extent that the
option is vested on the date of termination. In the absence of a specified
time in the option agreement, the option shall remain exercisable for
twelve (12) months following the optionee's termination. If an optionee's
employment or consulting relationship terminates as a result of death while
the optionee is an employee or consultant, the option may be exercised by
the optionee's estate or a person who acquired the right to exercise the
option by bequest or inheritance within such period of time as is specified
in the option agreement (but in no event later than the expiration of the
term of such option as set forth in the option agreement) to the extent
that the option is vested on the date of death. In the absence of a
specified time in the option agreement, the option shall remain exercisable
for twelve (12) months following the optionee's death.
(f) Nontransferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, options and stock purchase
rights granted under the 1998 Plan are not transferable other than by will
or the laws of descent and distribution, and may be exercised during the
optionee's lifetime only by the optionee.
(g) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 1998 Plan as may
be determined by the Administrator.
Stock Purchase Rights. In the case of stock purchase rights, unless the
Administrator determines otherwise, the standard form of restricted stock
purchase agreement shall grant the Company a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The purchase price for
shares repurchased pursuant to the restricted stock purchase agreement shall be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall lapse
at a rate determined by the Administrator.
Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale. In the event that the stock of the Company changes by reason of any stock
split, reverse stock split, stock dividend, combination, reclassification or
other similar change in the capital structure of the Company effected without
the receipt of consideration, appropriate adjustments shall be made in the
number and class of shares of stock subject to the 1998 Plan, the number and
class of shares of stock subject to any option or stock purchase right
outstanding under the 1998 Plan, and the exercise price of any such outstanding
option or stock purchase right.
7
<PAGE> 10
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its discretion,
provide that each optionee shall have the right to exercise all of the
optionee's options and stock purchase rights, including those not otherwise
exercisable, until the date thirty (30) days prior to the consummation of the
liquidation or dissolution.
In connection with any merger, consolidation, acquisition of substantially
all the Company's assets or like occurrence involving the Company, each
outstanding option or stock purchase right shall be assumed or an equivalent
option or rights substituted by the successor corporation. If the successor
corporation refuses to assume the options and stock purchase rights or to
substitute substantially equivalent options and stock purchase rights, the
optionee shall have the right to exercise the option or stock purchase right as
to all the optioned stock, including shares not otherwise exercisable, and any
restricted stock will vest and the Company's repurchase right will fully lapse.
In such event, the Administrator shall notify the optionee that the option or
stock purchase right is fully exercisable for thirty (30) days from the date of
such notice and that the option or stock purchase right terminates upon
expiration of such period.
Amendment and Termination of the Plan. The board of directors may amend,
alter, suspend or terminate the 1998 Plan, or any part thereof, at any time and
for any reason. However, the Company shall obtain stockholder approval for any
amendment to the 1998 Plan to the extent necessary to comply with Section 162(m)
and Section 422 of the Code, or any similar rule or statute. No such action by
the board of directors or stockholders may alter or impair any option or stock
purchase right previously granted under the 1998 Plan without the written
consent of the optionee. Unless terminated earlier, the 1998 Plan shall
terminate 10 years from the date of approval by the stockholders or the board of
directors of the Company, whichever is earlier.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to the
alternative minimum tax. Upon a disposition of the shares more than two years
after grant of the option and one year after exercise of the option, any gain or
loss is treated as long-term capital gain or loss. If these holding periods are
not satisfied, the optionee recognizes ordinary income at the time of
disposition equal to the difference between the exercise price and the lower of
(i) the fair market value of the shares at the date of the option exercise or
(ii) the sale price of the shares. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated as ordinary
income is treated as long-term or short-term capital gain or loss, depending on
the holding period. A different rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is also an officer, director, or
greater than 10% stockholder of the Company. The Company is entitled to a
deduction in the same amount as the ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of the Company is subject to tax withholding by the Company. The Company is
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Upon a disposition of such shares by the optionee, any difference
between the sale price and the optionee's exercise price, to the extent not
recognized as taxable income as provided above, is treated as long-term or
short-term capital gain or loss, depending on the holding period.
Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time of
purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code. As a result, the purchaser will
not recognize ordinary income at the time of purchase. Instead, the purchaser
will recognize ordinary income on the dates when a stock ceases to be subject to
a substantial risk of forfeiture. The stock will generally cease to be subject
to a substantial risk of forfeiture when it is no longer subject to the
Company's right to repurchase the stock upon the purchaser's termination of
8
<PAGE> 11
employment with the Company. At such times, the purchaser will recognize
ordinary income measured as the difference between the purchase price and the
fair market value of the stock on the date the stock is no longer subject to a
substantial risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding period
by timely filing an election pursuant to Section 83(b) of the Code. In such
event, the ordinary income recognized, if any, is measured as the difference
between the purchase price and the fair market value of the stock on the date of
purchase, and the capital gain holding period commences on such date. The
ordinary income recognized by a purchaser who is an employee will be subject to
tax withholding by the Company. Different rules may apply if the purchaser is
also an officer, director, or greater than 10% stockholder of the Company.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS AND THE COMPANY WITH RESPECT TO
THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE 1998 PLAN.
IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF
THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF
ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE OR CONSULTANT
MAY RESIDE.
CURRENT PLAN BENEFITS
The Company cannot now determine the number of stock options to be granted
in the future to the Named Officers (as defined in "Executive
Compensation -- Summary Compensation Table"), all executive officers as a group,
all directors who are not executive officers as a group or all employees
(including officers who are not executive officers) as a group. However, the
following table sets forth information with respect to stock option grants under
all plans during the fiscal year ended December 31, 1997 to such persons:
CURRENT PLAN BENEFITS TABLE
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO OPTIONS
NAME OF INDIVIDUAL OR IDENTITY OF GROUP DOLLAR VALUE($)(1) GRANTED(2)
--------------------------------------- ------------------ ------------------
<S> <C> <C>
Stephen A. Sherwin, M.D. .................. 0 60,000
160,000(2)
Kathleen Sereda Glaub...................... 0 50,000
125,000(2)
David F. Broad, Ph.D. ..................... 0 45,000
57,000(2)
Mitchell H. Finer, Ph.D. .................. 0 45,000
57,000(2)
Bruce A. Hironaka.......................... 0 45,000
61,575(2)
All executive officers as a group (8
total)................................... 93,800 1,007,275
Non-Executive Director Group (8 total)..... 255,120 240,000
All other employees as a group............. 124,663 977,613
</TABLE>
- ---------------
(1) This dollar value reflects the difference between $ 6.813 (the closing price
of the Company's Common Stock on February 27, 1998 as listed in the Nasdaq
Stock Market) and the exercise prices of such options, multiplied by the
number of shares subject to such options. Options whose price exceeded the
market price at that date were assigned a zero dollar value.
(2) During 1997, all employees, including officers, were given the option of
surrendering certain previously granted options in exchange for new options
at a revised price. Option grants shown for 1997 include all options granted
during the year, including those granted in exchange for options canceled.
Excluding the effects of this option exchange, grants during fiscal 1997
were 60,000, 50,000, 45,000, 45,000 and 45,000 for Sherwin, Glaub, Broad,
Finer, and Hironaka, respectively. See also "Compensation Committee Report
on Executive Compensation and Option Exchange."
9
<PAGE> 12
VOTE REQUIRED
The affirmative vote of a majority of the Votes Cast will be required to
approve the adoption of the Company's 1998 Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE ADOPTION
OF THE COMPANY'S 1998 INCENTIVE STOCK PLAN AND THE RESERVATION OF 1,760,000
SHARES OF COMMON STOCK FOR ISSUANCE THEREUNDER.
PROPOSAL THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The board of directors has selected Ernst & Young LLP, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 1998. Ernst & Young LLP has audited the Company's financial
statements since the year ended December 31, 1989. Representatives of Ernst &
Young LLP are expected to be present at the meeting with the opportunity to make
a statement if they desire to do so, and are expected to be available to respond
to appropriate questions.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock voting in person or by proxy on this proposal at the
annual meeting is required to approve the appointment of the independent
auditors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS.
10
<PAGE> 13
OTHER INFORMATION
STOCK OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of February 28, 1998 by: (a) each person known to the Company who
beneficially owns five percent or more of the outstanding shares of its Common
Stock; (b) each director; (c) each of the officers named in the Summary
Compensation Table below; and (d) all directors and executive officers as a
group:
<TABLE>
<CAPTION>
SHARES PERCENTAGE(%)
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2)
------------------------------------ --------------------- ---------------------
<S> <C> <C>
Hoechst Marion Roussel, Inc.(3).......... 2,750,000 9.75
9300 Ward Parkway
Kansas City, MO 64114
General Electric Investment
Corporation............................ 1,856,420 6.58
T. Rowe Price Associates, Inc............ 1,620,377 5.74
David W. Carter(4)....................... 244,374 *
James M. Gower(5)........................ 19,375 *
Raju S. Kucherlapati, Ph.D.(6)........... 240,919 *
Joseph E. Maroun(7)...................... 48,325 *
John T. Potts, Jr., M.D.(8).............. 15,552 *
Stephen A. Sherwin, M.D.(9).............. 674,904 2.39
Eugene L. Step(10)....................... 59,750 *
Inder M. Verma, Ph.D.(11)................ 82,396 *
David F. Broad, Ph.D.(12)................ 38,250 *
Mitchell H. Finer, Ph.D.(13)............. 88,158 *
Kathleen Sereda Glaub(14)................ 172,956 *
Bruce A. Hironaka(15).................... 57,649 *
All executive officers and directors as a
group (15 persons)(16)................. 1,863,674 6.61
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table, to the Company's knowledge, have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Shares of Common Stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person.
(3) Includes 750,000 shares subject to a warrant, which is exercisable at $13
per share.
(4) Includes 238,599 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(5) Includes 19,375 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(6) Includes 66,833 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(7) Includes 28,125 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(8) Consist of 15,552 shares subject to options, which are exercisable within
60 days after February 28, 1998.
(9) Includes 358,584 shares subject to options, which are exercisable within 60
days after February 28, 1998. Additionally, includes 25,000 shares held in
trust for Dr. Sherwin's children. Dr. Sherwin disclaims beneficial
ownership.
11
<PAGE> 14
(10) Consist of 59,750 shares subject to options, which are exercisable within
60 days after February 28, 1998.
(11) Includes 34,200 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(12) Consist of 38,250 shares subject to options, which are exercisable within
60 days after February 28, 1998.
(13) Includes 75,940 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(14) Includes 170,369 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(15) Includes 51,544 shares subject to options, which are exercisable within 60
days after February 28, 1998.
(16) Includes 1,277,761 shares subject to options, which are exercisable within
60 days after February 28, 1998.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of the Company's chief executive officer ("CEO") and each of the
four other most highly compensated executive officers (collectively, the "Named
Officers") for services in all capacities as officers to the Company during
fiscal years 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
NAME AND --------------------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(2) COMPENSATION($)
------------------ ----- --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Stephen A. Sherwin, M.D. ....... 1997 360,500 (4) 60,000 --
Chairman, President and 160,000(5)
Chief Executive Officer 1996 350,000 80,000 100,000 --
1995 336,000 67,500 100,000(5) --
Kathleen Sereda Glaub........... 1997 212,000 (4) 50,000 --
Senior Vice President and 125,000(5)
Chief Financial Officer 1996 200,000 56,000 75,000 --
1995 183,210 38,000 27,500 --
100,000(5)
Mitchell H. Finer, Ph.D. ....... 1997 184,300 (4) 45,000 --
Vice President, Research 57,000(5)
1996 144,454 24,000 12,000 --
1995 115,500 17,325 14,500 --
7,500(5)
Bruce A Hironaka................ 1997 172,375 (4) 45,000 --
Vice President, 61,575(5)
Corporate Development 1996 142,284 22,500 16,575 --
1995 127,400 20,384 30,000(5) --
David F. Broad, Ph.D. .......... 1997 168,500 (4) 45,000 --
Vice President, 57,000(5)
Process Development(3) 1996 137,306 22,500 12,000 --
1995 112,400 16,860 15,000 12,487
</TABLE>
- ---------------
(1) These bonuses, which were awarded and accrued in the year noted, were paid
in the subsequent year.
(2) Cell Genesys has no restricted stock awards, stock appreciation rights or
long-term incentive plan payouts.
(3) Reflects amounts paid to Dr. Broad in 1995 for $7,492 relocation expenses
and the related additional tax gross-up payment of $4,995.
(4) During 1997, the compensation committee determined that, in lieu of a cash
bonus for 1997, the stock option grants awarded to all employees, including
the above Named Officers, would be granted at levels
12
<PAGE> 15
at least two times the usual merit stock grants. These grants were made in
February 1998, so they are not included in the tables for 1997 herein. The
special 1998 grants included 250,000, 100,000, 60,000, 45,000, and 45,000
option shares for the above officers Sherwin, Glaub, Finer, Hironaka and
Broad, respectively. See also "Compensation Committee Report on Executive
Compensation and Option Exchange."
(5) During 1995 and 1997, all employees, including officers, were given the
option of surrendering certain previously granted options in exchange for
new options at a revised price. See also "Compensation Committee Report on
Executive Compensation and Option Exchange."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options to the Named
Officers in fiscal year 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM($)(3)
OPTIONS EMPLOYEES IN PRICE($) EXPIRATION ----------------------
NAME GRANTED(1) 1997(%)(2) (PER SHARE) DATE 5% 10%
---- ---------- ------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Sherwin, M.D. ...... 60,000(4) 3.0 8.063 2/13/07 304,198 770,943
160,000(5) 8.1 7.000 6/05/07 346,005 1,214,368
Kathleen Sereda Glaub.......... 50,000(4) 2.5 8.063 2/13/07 253,498 642,452
125,000(5) 6.3 7.000 6/05/07 270,317 948,726
David F. Broad, Ph.D. ......... 45,000(4) 2.3 8.063 2/13/07 228,148 578,207
57,000(5) 2.9 7.000 6/05/07 123,265 432,619
Mitchell H. Finer, Ph.D. ...... 45,000(4) 2.3 8.063 2/13/07 228,148 578,207
57,000(5) 2.9 7.000 6/05/07 123,265 432,619
Bruce A. Hironaka.............. 45,000(4) 2.3 8.063 2/13/07 228,148 578,207
61,575(5) 3.1 7.000 6/05/07 133,158 467,342
</TABLE>
- ---------------
(1) Options granted under the 1989 Plan have a maximum term of ten years but may
be terminated earlier upon termination of employment. Shares vest over a
four-year period at the rate of 1/48th per month.
(2) Based on an aggregate of 1,984,888 options granted to employees in 1997,
including 558,775 options granted on 2/13/97 but cancelled on 6/5/97 in
exchange for new option price of $7.00.
(3) The potential realizable value is calculated based on the ten-year term of
the option and the fair market value of the common stock at the time the
option was granted, compounded annually. The 5% and 10% assumed annualized
rates of compound stock price appreciation are provided in compliance with
the rules of the SEC and are not meant to represent the Company's estimate
or a projection by the Company of future common stock prices.
(4) Consists of options granted 2/13/97, which were later cancelled on 6/5/97 in
exchange of new options with an option price of $7.00.
(5) Consists of options granted in exchange for the surrender of previously
granted options as part of a general option exchange for all company
employees (see below).
13
<PAGE> 16
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth certain information concerning option
exercises in 1997 and unexercised options held as of December 31, 1997 by the
Named Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE OPTIONS AT DECEMBER 31, 1997 OPTIONS AT DECEMBER 31, 1997
NAME ON EXERCISE REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE($)(2)
---- ----------- -------------- ---------------------------- -------------------------------
<S> <C> <C> <C> <C>
Stephen A. Sherwin,
M.D. .................... -- -- 316,084/124,166 1,315,126/186,249
Kathleen Sereda Glaub...... -- -- 141,041/111,459 219,139/169,923
David F. Broad, Ph.D. ..... 5,833 28,436 28,500/ 43,500 46,969/ 66,656
Mitchell H. Finer,
Ph.D. ................... -- -- 64,358/ 45,562 273,272/ 69,702
Bruce A. Hironaka.......... -- -- 40,163/ 51,412 60,245/ 77,118
</TABLE>
- ---------------
(1) Fair market of the underlying securities minus the exercise price of the
option.
(2) Fair market value of the underlying securities at December 31, 1997 less the
exercise price, based on a closing stock price of $8.50.
COMPENSATION OF DIRECTORS
Beginning July 1, 1995, non-employee directors became eligible to receive
for their services as directors of the Company a $15,000 annual retainer and
$1,000 fee for each board meeting attended, as well as reimbursement of expenses
incurred in attending board meetings. In addition, the Company's 1989 Incentive
Stock Plan, as amended, provides for the automatic grant of 30,000 shares of
common stock, vesting ratably over 48 months, to each non-employee director
(currently seven persons) every four years on the day following the annual
meeting of stockholders beginning with the 1995 annual meeting. The exercise
price of all options granted is the fair market value at the time of grant. In
addition, the following directors also serve on the Company's Scientific
Advisory Board: Dr. Kucherlapati, Dr. Potts and Dr. Verma. The Company provides
a stock option grant of 10,000 shares, vesting ratably over 48 months, to each
non-employee member of the Scientific Advisory Board.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL AGREEMENTS
Since the time of Dr. Sherwin's initial employment in March 1990 the
Company has agreed to maintain his salary for twelve months after termination of
his employment with the Company, unless the Company terminates Dr. Sherwin for
cause or he terminates his employment voluntarily.
During 1997 the Company implemented certain change in control agreements.
Under these agreements, the Company has agreed to provide officers: Bridget P.
Binko, David F. Broad, Mitchell H. Finer, Kathleen Sereda Glaub, Bruce A.
Hironaka and Christine McKinley with severance payments in an aggregate amount
equal to twelve months salary plus bonus and certain employee benefits,
following a change in control of the Company and termination without cause by
the company or upon constructive termination. Also, under a similar change of
control agreement, the Company has agreed to provide Dr. Sherwin with severance
payments in an aggregate amount equal to two years salary plus bonus and certain
employee benefits. Included in Dr. Sherwin's change in control agreement is a
provision for payments by the Company of certain taxes that may be incurred as a
consequence of the agreement. Dr. Sherwin's change of control agreement, when
applicable, will supersede his employment contract.
CERTAIN TRANSACTIONS
In September 1996, while a director of Somatix, Dr. Verma received a
$400,000 loan from Somatix, secured by his shares of Somatix common stock. Cell
Genesys assumed Dr. Verma's loan following its acquisition of Somatix. Dr.
Verma's shares of common stock in Cell Genesys now secure the loan. The loan
bears interest at 8.5% per annum and is due and payable in full on September 1,
2001. As of May 30, 1997 and December 31, 1997 the outstanding balance of the
loan was $300,000.
14
<PAGE> 17
The Company retains certain directors under scientific consulting
agreements. During 1997, Dr. Kucherlapati was paid $5,000 and Dr.Verma earned
$50,000 of which $6,375 was applied to the payment of interest on his loan from
the Company, described above.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
AND OPTION EXCHANGE
Decisions regarding compensation of the Company's executive officers are
made by the Cell Genesys Compensation Committee of the board of directors (the
"Compensation Committee"). The Compensation Committee is comprised of two
non-employee directors, Messrs. Gower and Step. The Compensation Committee is
responsible for setting compensation policy and determining the annual
compensation of the executive officers of Cell Genesys, including base salaries,
bonuses, if any, and stock options. Cell Genesys' executive pay programs are
designed to attract and retain executives who will contribute to Cell Genesys'
long-term success, to reward executives for achieving both short- and long-term
goals of Cell Genesys, to link executive and stockholder interests through
equity-based compensation plans, and to provide a compensation package that
recognizes both individual contributions and company performance. A substantial
portion of each executive's total compensation is intended to be variable and to
relate to, and be contingent upon, performance. The Compensation Committee
evaluates the performance and determines the compensation of the chief executive
officer and other executive officers of Cell Genesys annually, based upon
individual performance and the achievement of corporate goals.
GENERAL COMPENSATION POLICY
Cell Genesys' executive compensation programs seek to accomplish several
major goals:
O To recruit and retain highly qualified executive officers by offering
overall compensation that is competitive with that offered for
comparable positions in companies in the biotechnology industry of
comparable size and at a comparable stage of development.
O To motivate executives to achieve important business and performance
objectives and to reward them when such objectives are met; and
O To align the interests of executive officers with the long-term
interests of stockholders through participation in the Company's stock
option plan.
The achievement of these goals is based on a mix of compensation elements,
as described below:
BASE SALARY
Base salaries for all employees, including executive officers, are
determined based on an established job grade and compensation matrix that is
designed to provide a base salary that is competitive with comparable companies.
In monitoring the job grade and compensation matrix, the Compensation Committee
compared compensation information derived from compensation surveys including
compensation levels for companies of similar size and stage of development.
Included in the survey are some, but not all of the companies included in the
Nasdaq Pharmaceutical Index, with the primary focus on biotechnology companies
at a similar stage in the San Francisco Bay Area which may compete for the same
pool of employees. In addition, the Compensation Committee retains an outside
compensation consultant who provides advisory services for compensation matters
relating to all employees, including executive officers. The assessment
confirmed that Cell Genesys' base compensation overall was comparable to the
industry averages. Adjustments to each individual's base salary, including
executive officers, are made in connection with annual performance reviews. The
amounts of such increases are calculated using merit increase guidelines based
on the employee's position within the relevant compensation range and the
results of their performance review. The recommended percentage increases are
adjusted annually to reflect the compensation committee's assessment of
appropriate salary adjustments given the results of competitive surveys and
general economic conditions. In reflection of these market data and individual
performance against goals, the Compensation Committee approved 1997 targets and
merit increases to base compensation.
15
<PAGE> 18
PERFORMANCE BASED INCENTIVE PLAN
Officers and other key employees may earn an annual bonus, set as a
percentage of base salary, based on the achievement of individual objectives and
company goals. These goals are established at the start of each year in
conjunction with the Compensation Committee and the full board of directors.
Awards made to executive officers were based upon the achievement of Cell
Genesys' established goals as well as selected department goals of the
individual officers. These goals may include progress made in preclinical and
clinical trials, strategic alliances, financing activities and the financial
results of Cell Genesys. Cell Genesys' compensation policy was also compared to
relevant market data and found to be comparable to industry averages. In
February 1998, reflecting the company's achievements and individual performance
in 1997 and with the objectives of providing long-term incentives and aligning
employees' interests with those of the Company, retaining key personnel, and in
lieu of a cash bonus for 1997, and thereby conserving the Company's financial
resources, the Compensation Committee approved a special stock option grant of
at least two times the company's target level for all Company employees,
including the executive officers. These grants were awarded in fiscal 1998, and
therefore are not included in the preceding stock option tables for fiscal 1997
except as a footnote.
STOCK-BASED INCENTIVE COMPENSATION
Stock options enable Cell Genesys to provide long-term incentives to its
employees, which align the interests of all employees, including the executive
officers, with those of the stockholders. Options are exercisable in the future
at the fair market value at the time of grant, so that an option holder is
rewarded only by the appreciation in price of the Cell Genesys common stock.
Stock options granted generally have a four-year vesting period and expire ten
years after the date of grant. Periodic grants of stock options are generally
made annually to all eligible employees, with additional grants made to certain
employees upon commencement of employment and occasionally following a
significant change in job responsibility, scope or title or a particularly
noteworthy achievement. Guidelines for the number of options granted to each
eligible employee are determined by the Compensation Committee based on several
factors, including a valuation analysis reflecting market-based compensation,
salary grade and the performance of each participant. The size of the resulting
grants developed under this procedure are targeted to be at or above competitive
levels as a reflection of both providing an incentive for favorable performance
of Cell Genesys, as well as the risk attached to the future growth of the
biotechnology industry. As discussed more fully above, special one-time grants
were made in 1998 for 1997.
CEO COMPENSATION
Dr. Sherwin's salary and stock option grant for fiscal 1997 are consistent
with the criteria described above and with the Compensation Committee's
evaluation of his overall leadership and management of Cell Genesys. 1997 was a
year of significant accomplishments for the Company. Cell Genesys completed its
acquisition of Somatix Therapy Corporation, made significant progress in both
its clinical and preclinical programs, achieved certain scientific breakthroughs
and maintained its financial strength. The addition of Somatix's intellectual
property portfolio, programs and technologies gives the Company the critical
mass necessary to develop and commercialize gene therapy. Five treatment
indications are presently undergoing clinical trials, including AIDS and cancer
gene therapies for melanoma, colon, lung and prostate cancer. In addition, the
Company made significant progress in its preclinical programs, including the
validation of new gene delivery technologies for applications in cardiovascular
disease, hemophilia and central nervous system disorders. On the financial side,
Cell Genesys ended the year with $89 million in cash. This was made possible, in
part, by milestone payments and corporate partnership revenues relating to AIDS
gene therapy product development and gene activation licensing programs. In
addition, the Company and its subsidiary Abgenix, Inc., each completed private
placements of preferred stock late in 1997 raising $20 million and $21 million,
respectively. Dr. Sherwin has continued to ensure that Cell Genesys' assets are
utilized effectively and to their best advantage, while also conservatively
managing Cell Genesys' financial resources.
16
<PAGE> 19
OPTION EXCHANGE
During 1997, the Compensation Committee found that as a result of a variety
of factors, many of which were external to the company, including the state of
the biotechnology industry as a whole, many of the company's employees were
holding options priced substantially above then current market prices. This was
particularly true of employees transferred from Somatix following its
acquisition, whose options had converted to Company options. Accordingly, the
Compensation Committee and the board of directors approved an option exchange in
order to re-align all employee's interests with those of the Company's. The
option exchange was effective June 1997 under the following conditions: (a) all
employees were eligible; (b) the prior vesting and future vesting period for the
new grant would be the same as for those grants surrendered; and (c) the new
grants would be priced at $7.00, which was over 120% of the market price of the
stock at that time. Approximately 1,126,000 shares were exchanged under this
program, which included options previously granted to executive officers.
TEN YEAR OPTION EXCHANGE
The following table set forth certain information regarding the exchange of
stock options held by executive officers during the preceding ten years:
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF ORIGINAL
SECURITIES OPTION TERM
UNDERLYING MARKET PRICE OF EXERCISE PRICE REMAINING AT
OPTIONS/SARS STOCK AT TIME AT TIME OF NEW DATE OF
DATE OF EXCHANGED OR OF EXCHANGE OR EXCHANGE OR EXERCISE EXCHANGE OR
NAME EXCHANGE AMENDED AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT
---- -------- ------------ --------------- -------------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Bridget P. Binko.......... 2/16/95 33,500 6.63 11.00 7.00 8 years, 1 month
Vice President 6/5/97 9,000 5.63 10.13 7.00 8 years, 8 months
Regulatory Affairs 6/5/97 45,000 5.63 8.06 7.00 9 years, 8 months
David F. Broad, Ph.D. .... 6/5/97 12,000 5.63 10.13 7.00 8 years, 8 months
Vice President 6/5/97 45,000 5.63 8.06 7.00 9 years, 8 months
Process Development
Mitchell H. Finer,
Ph.D. .................. 2/16/95 7,500 6.63 11.00 7.00 8 years
Vice President 6/5/97 12,000 5.63 10.13 7.00 8 years, 8 months
Research 6/5/97 45,000 5.63 8.06 7.00 9 years, 8 months
Kathleen Sereda Glaub..... 2/16/95 100,000 6.63 18.00 7.00 8 years, 7 months
Senior Vice President 6/5/97 75,000 5.63 10.13 7.00 8 years, 8 months
Chief Financial Officer 6/5/97 50,000 5.63 8.06 7.00 9 years, 8 months
Bruce A. Hironaka......... 2/16/95 30,000 6.63 9.50 7.00 9 years, 7 months
Vice President 6/5/97 16,575 5.63 10.13 7.00 8 years, 8 months
Development 6/5/97 45,000 5.63 8.06 7.00 9 years, 8 months
Christine McKinley........ 2/16/95 40,000 6.63 9.50 7.00 9 years, 7 months
Vice President 6/5/97 12,700 5.63 10.13 7.00 8 years, 8 months
Human Resources 6/5/97 45,000 5.63 8.06 7.00 9 years, 8 months
Stephen A. Sherwin,
M.D. ................... 2/16/95 100,000 6.63 9.75 7.00 9 years, 5 months
Chairman of the Board, 6/5/97 100,000 5.63 10.13 7.00 8 years, 8 months
President and 6/5/97 60,000 5.63 8.06 7.00 9 years, 8 months
Chief Executive Officer
</TABLE>
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company may not take a federal income tax
deduction for compensation paid to certain executive officers, to the extent
that compensation exceeds $1 million per officer in any one year. This
limitation became effective for each year beginning after December 31, 1993 and
applies to all compensation paid to the covered executive officers which is not
considered to be performance-based. Compensation that does qualify as
performance-based compensation will not have to be taken into account for
purposes of this limitation.
The cash compensation paid to the Company's executive officers during 1997
did not exceed the $1 million limit per officer, nor is the cash compensation to
be paid to the Company's executive officers for 1998 expected to reach that
level. Because it is very unlikely that the cash compensation payable to any of
the
17
<PAGE> 20
Company's executive officers in the foreseeable future will approach the $1
million limitation, the Compensation Committee has decided not to take any
action at this time to limit or restructure the elements of cash compensation
payable to the Company's executive officers. The Committee will reconsider this
decision should the individual compensation of any executive officer ever
approach the $1 million level.
The foregoing report has been submitted by the undersigned in our capacity
as members of the Compensation Committee of the Company's board of directors.
Members of the Compensation Committee
James M. Gower
Eugene L. Step
18
<PAGE> 21
STOCK PERFORMANCE GRAPH
STOCKHOLDER RETURN COMPARISON
The graph below compares the cumulative total return* on the Company's
common stock for fiscal years 1997, 1996, 1995 and 1994 and the fiscal year
period commencing January 26, 1993 (the date on which the Company's common stock
was first publicly traded) and ending December 31, 1997 compared to the CRSP
Total Return Index for the Nasdaq National Market (U.S. companies) and the CRSP
Total Return Index for the Nasdaq Pharmaceutical Stocks (SIC 283). The stock
price performance shown on the graph below is not necessarily indicative of
future price performance.
COMPARISON OF CUMULATIVE STOCKHOLDER RETURN*
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ
(FISCAL YEAR COVERED) 'CELL GENESYS, INC.' NASDAQ - US PHARMACEUTICAL
<S> <C> <C> <C>
1/26/93 100 100 100
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 102 98 76
<S> <C> <C> <C>
6/30/93 123 99 81
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 164 108 87
<S> <C> <C> <C>
12/31/93 177 110 95
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 132 105 77
<S> <C> <C> <C>
6/30/94 84 100 67
89 109 109 76
12/31/94 75 107 71
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 50 117 77
<S> <C> <C> <C>
6/30/95 41 134 89
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 57 150 112
<S> <C> <C> <C>
12/31/95 91 152 130
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 69 159 136
<S> <C> <C> <C>
6/30/96 69 172 132
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 63 178 135
<S> <C> <C> <C>
12/31/96 83 187 130
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 56 177 124
<S> <C> <C> <C>
6/30/97 45 209 134
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) 72 245 150
<S> <C> <C> <C>
12/31/97 77 229 135
</TABLE>
* Assumes $100 invested on January 26, 1993 in the Company's common stock and in
each index listed above. The total return for the Company's common stock and
the indices used assumes the reinvestment of dividends, even though dividends
have never been declared on the Company's common stock.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors and persons who own more than ten percent of a registered class of
the Company's equity securities, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Executive
officers, directors and ten percent stockholders are required by SEC regulation
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge (based solely on review of the copies of such
reports furnished to the Company or written representations that no other
reports were required), during the fiscal year ended December 31, 1997, all
executive officers, directors and ten percent stockholders complied with all
Section 16(a) filing requirements, with the exception of Dr. Verma, who had one
late Form 4 filing due to his absence from the country.
19
<PAGE> 22
OTHER MATTERS
The Company knows of no other matters to be submitted at the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy to vote the shares they represent as the
board of directors may recommend.
It is important that your shares be represented at the meeting, regardless
of the number of shares, which you hold. Please complete, date, execute and
return, at your earliest convenience, the accompanying proxy card in the
envelope, which has been enclosed.
THE BOARD OF DIRECTORS
Dated: April 27, 1998
20
<PAGE> 23
11 63-PS-98
<PAGE> 24
DETACH HERE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CELL GENESYS, INC.
1998 ANNUAL MEETING OF STOCKHOLDERS
JUNE 3, 1998
The undersigned stockholder of Cell Genesys, Inc., a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
Proxy Statement, each dated April 27, 1998, and hereby appoints Stephen A.
Sherwin, M.D. and Kathleen Sereda Glaub, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 1998 Annual Meeting
of Stockholders of Cell Genesys, Inc. to be held on June 3, 1998 at 10:00 a.m.,
local time, at 342 Lakeside Drive, Foster City, CA 94404, and at any
adjournments thereof, and to vote all shares of Common Stock which the
undersigned is entitled to vote on the matters set forth on the reverse side.
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
<PAGE> 25
DETACH HERE
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE.
1. ELECTION OF DIRECTORS:
FOR WITHHELD
NOMINEES: David W. Carter; James M. Gower; [ ] [ ]
Raju S. Kacherlapati, Ph.D.; Joseph E. Maroun;
John T. Potts, Jr., M.D.; Stephen A. Bhanwith,
M.D.; Eugene L. Step; Inder M. Varma, Ph.D.
[ ]
-------------------------------------------
For all nominees except as noted above.
2. To approve the adoption of the 1998 Incentive FOR AGAINST ABSTAIN
Stock Plan, to replace the Company's 1989 [ ] [ ] [ ]
incentive Stock Plan, and reserve a total of
1,760,000 shares for issuance thereunder.
3. Proposal to ratify the appointment of Ernst & FOR AGAINST ABSTAIN
Young LLP as independent auditors for the 1998 [ ] [ ] [ ]
fiscal year.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
Please sign this proxy exactly as your name(s)
appear(s) hereon. Joint owners should sign
personally. An attorney, administrator, trustee,
executor, guardian, or other person signing in a
representative capacity should indicate the name
of the corporation and such officer's capacity.
Signature: Date:
------------------------------------------ ----------------------
Signature: Date:
------------------------------------------ ----------------------
