<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / 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 Section 240.14a-11(c) or Section
240.14a-12
GALAGEN 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>
GALAGEN INC.
1275 RED FOX ROAD
ARDEN HILLS, MINNESOTA 55112
(651) 634-4230
April 2, 1999
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of GalaGen Inc. to be held at Land O'Lakes, Inc., 4001 Lexington Avenue
North, Arden Hills, Minnesota, commencing at 10:30 a.m., Central Daylight
Time, on Wednesday, May 12, 1999.
The Secretary's Notice of Annual Meeting and the Proxy Statement which
follow describe the matters to come before the meeting. During the meeting,
we will also review the activities of the past year and items of general
interest about the Company.
We hope that you will be able to attend the meeting in person and we
look forward to seeing you. Please mark, date and sign the enclosed proxy
and return it in the accompanying envelope as quickly as possible, even if
you plan to attend the meeting. If you later desire to revoke the proxy, you
may do so at any time before it is exercised.
Sincerely,
Robert A. Hoerr, M.D., Ph.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
GALAGEN INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 12, 1999
------------------------
The Annual Meeting of Stockholders of GalaGen Inc. (the "Company")
will be held at Land O'Lakes, Inc., 4001 Lexington Avenue North, Arden Hills,
Minnesota, on Wednesday, May 12, 1999, commencing at 10:30 a.m., Central
Daylight Time, for the following purposes:
1. To elect five directors to serve until the next Annual Meeting of
Stockholders or until their successors are duly elected and
qualified.
2. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31,
1999.
3. To transact such other business as may properly be brought before
the meeting.
The Board of Directors of the Company has fixed March 18, 1999 as
the record date for the meeting and only stockholders of record at the close
of business on that date are entitled to receive notice of and vote at the
meeting.
YOUR PROXY IS IMPORTANT TO ENSURE A QUORUM AT THE MEETING. EVEN IF
YOU OWN ONLY A FEW SHARES, AND WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE
MEETING, PLEASE MARK, DATE, SIGN AND MAIL THE ENCLOSED PROXY IN THE
ACCOMPANYING POSTAGE-PAID ENVELOPE. THE PROXY MAY BE REVOKED BY YOU AT ANY
TIME PRIOR TO BEING EXERCISED, AND RETURNING YOUR PROXY WILL NOT AFFECT YOUR
RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING AND REVOKE THE PROXY.
By Order of the Board of Directors,
Robert A. Hoerr, M.D., Ph.D.
Chairman and Chief Executive Officer
Arden Hills, Minnesota
April 2, 1999
<PAGE>
------------------------
PROXY STATEMENT
------------------------
GENERAL INFORMATION
The enclosed proxy is being solicited by the Board of Directors
(the "Board of Directors" or "Board") of GalaGen Inc., a Delaware corporation
(the "Company"), for use in connection with the Annual Meeting of
Stockholders to be held on Wednesday, May 12, 1999, at Land O'Lakes, Inc.,
4001 Lexington Avenue North, Arden Hills, Minnesota, commencing at 10:30
a.m., Central Daylight Time, and at any adjournments thereof. Only
stockholders of record at the close of business on March 18, 1999 will be
entitled to vote at such meeting or adjournments. Proxies in the
accompanying form which are properly signed, duly returned to the Company and
not revoked will be voted in the manner specified. If no instructions are
indicated, properly executed proxies will be voted for the proposals set
forth in this Proxy Statement. As of the date of this Proxy Statement, the
Board of Directors of the Company does not know of any matters, other than
those described in the Notice of Annual Meeting and this Proxy Statement,
that are to come before the meeting. If any other matters are properly
presented at the meeting for action, the persons named in the enclosed form
of proxy and acting thereunder will have the discretion to vote on such
matters in accordance with their best judgment. A stockholder executing a
proxy retains the right to revoke it at any time before it is exercised by
notice in writing to the Secretary of the Company of termination of the
proxy's authority or by properly signing and duly returning a proxy bearing a
later date.
The address of the principal executive office of the Company is
1275 Red Fox Road, Arden Hills, Minnesota 55112 and the Company's telephone
number is (651) 634-4230. The mailing of this Proxy Statement and form of
proxy to stockholders will commence on or about April 8, 1999.
The Company will pay the cost of soliciting proxies in the
accompanying form. In addition to solicitation by the use of the mails,
certain directors, officers and employees of the Company may solicit proxies
by telephone, telecopier, telegram or personal contact, and have requested
brokerage firms and custodians, nominees and other record holders to forward
soliciting materials to the beneficial owners of stock of the Company and
will reimburse them for their reasonable out-of-pocket expenses in so
forwarding such materials.
The Common Stock of the Company, par value $.01 per share, is the
only authorized and issued voting security of the Company. At the close of
business on March 18, 1999, there were 8,948,446 shares of Common Stock of
the Company issued and outstanding, each of which is entitled to one vote.
Holders of Common Stock are not entitled to cumulate their votes for the
election of directors.
Provided a quorum is present at the meeting, directors shall be
elected by a plurality of the votes present in person or represented by proxy
at the meeting and entitled to vote and any other matters considered at the
meeting shall be decided by an affirmative vote of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote
with respect to such matters. Proxies marked to abstain with respect to a
proposal have the same effect as shares submitted with a "withhold" or
"against" vote for such proposal. Broker non-votes are not considered as
votes for or against a proposal.
A majority of the shares of the Common Stock of the Company
entitled to vote shall constitute a quorum for purposes of the meeting.
Abstentions and broker non-votes are counted as being present in person or
represented by proxy at the meeting and entitled to vote for purposes of
determining the presence or absence of a quorum for the transaction of
business. If a quorum is not present at the meeting, the stockholders
present, by vote of a majority of the votes cast by stockholders present in
person or represented by proxy and entitled to vote, may adjourn the meeting,
and at any such adjourned meeting at which a quorum is present any business
may be transacted which might have been transacted at the meeting as
originally called.
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth, as of April 1, 1999, the
beneficial ownership of the Common Stock by (i) each person known by the
Company to beneficially hold more than 5% of the outstanding Common Stock,
(ii) each director or nominee for director of the Company, (iii) each officer
of the Company named in the Summary Compensation Table on page 11, and (iv)
all executive officers and directors of the Company as a group. Except as
otherwise noted, the listed beneficial owner has sole voting and investment
power with respect to the listed shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OUTSTANDING SHARES
------------------- ------------------------ ------------------
<S> <C> <C>
Land O'Lakes, Inc.. . . . . . . . . . 1,216,410 13.5%
4001 Lexington Ave. N.
Arden Hills, MN 55126
Perkins Capital Management (2). . . . 893,900 10.0
730 East Lake Street
Wayzata, MN 55391
Investment Advisers, Inc (3). . . . . 693,270 7.7
3700 First Bank Place
Minneapolis, MN 55402
John Pappajohn (4). . . . . . . . . . 505,842 5.6
2116 Financial Center
Des Moines, IA 50309
Austen S. Cargill II, Ph.D. . . . . . - *
Ronald O. Ostby (5) . . . . . . . . . 1,236,410 13.7
Winston R. Wallin (6) . . . . . . . . 54,605 *
Robert A. Hoerr, M.D., Ph.D.. . . . . 124,146 1.4
Henry J. Cardello . . . . . . . . . . 187,500 2.1
Eileen F. Bostwick, Ph.D. . . . . . . 45,376 *
Michael E. Cady . . . . . . . . . . . 53,152 *
Gregg A. Waldon (7) . . . . . . . . . 45,913 *
John G. Watson (7). . . . . . . . . . 550 *
All executive officers and directors
as a group (7 persons). . . . . 1,701,189 18.0
</TABLE>
____________________
* Represents less than 1%.
(1) The number of shares listed for the following beneficial owners includes
the following numbers of shares issuable under options and warrants
exercisable within 60 days of April 1, 1999: Land O'Lakes, Inc. ("Land
O'Lakes"), 57,806 shares; funds controlled by Investment Advisers, Inc.
("IAI"), 64,662 shares; John Pappajohn, 43,360 shares; Ronald O. Ostby,
77,806 shares; Winston R. Wallin, 36,970 shares; Robert A. Hoerr, M.D.,
Ph.D., 118,769 shares; Henry J. Cardello, 187,500 shares; Eileen F.
Bostwick, Ph.D., 35,499 shares; Michael E. Cady, 35,166 shares; Gregg A.
Waldon, 36,249 shares and all executive officers and directors as a group,
491,710 shares.
(2) Based on a Statement on Schedule 13G filed by Perkins Capital Management
dated February 4, 1999.
(3) Based upon records of Common Stock and options for Common Stock, as of
February 15, 1999, maintained by the Company's transfer agent, Norwest Bank
Minnesota, N.A. and on warrant records maintained by the Company. Includes
shares issuable upon exercise of warrants and options of 64,662.
(4) Based on a Statement on Schedule 13G filed by John Pappajohn dated January
8, 1999. Includes 54,166 shares held directly by Mr. Pappajohn's spouse
and 54,166 shares held by a proprietorship owned solely by his spouse.
Mr. Pappajohn disclaims beneficial ownership of such shares.
(5) Mr. Ostby is the Land O'Lakes representative serving on the Board. The
shares listed as being beneficially owned by Mr. Ostby include 1,216,410
shares held by Land O'Lakes, which are the same shares listed as being
2
<PAGE>
owned by Land O'Lakes. Mr. Ostby disclaims beneficial ownership of such
shares. The shares listed also include 20,000 shares issuable under
options exercisable within 60 days of April 1, 1999 held by Mr. Ostby for
being the Land O'Lakes representative.
(6) Includes 17,635 shares and a warrant to purchase 1,805 shares beneficially
owned by The Wallin Foundation. Mr. Wallin disclaims beneficial ownership
of such shares.
(7) Mr. Waldon and Mr. Watson resigned from the Company effective March 31,
1999 and September 16, 1998, respectively.
3
<PAGE>
ELECTION OF DIRECTORS
The Company's By-Laws provide that the number of directors constituting
the Board of Directors shall be fixed from time to time by resolution of the
Board. The Board of Directors has fixed the size of the Board to be elected
at the meeting at five and has nominated the five current members of the
Board named below. Proxies solicited by the Board of Directors will, unless
otherwise directed, be voted to elect the five nominees named below to
constitute the entire Board.
Directors elected at the meeting will serve until the next annual
meeting of stockholders or until their successors are elected and qualified.
Each nominee named below has indicated a willingness to serve as a director
for the ensuing year. In case any nominee is not a candidate at the meeting
for any reason, the proxies named in the enclosed form of proxy may vote for
a substitute nominee in their discretion.
Information regarding the nominees is set forth below.
<TABLE>
<CAPTION>
NAME AGE DIRECTOR SINCE
- ---- --- --------------
<S> <C> <C>
Robert A. Hoerr, M.D., Ph.D.. . . . . . 49 August 1996
Henry J. Cardello . . . . . . . . . . . 47 January 1999
Austen S. Cargill II, Ph.D.. . . . . . 48 March 1999
Ronald O. Ostby (1,2) . . . . . . . . . 61 August 1994
Winston R. Wallin (1,2) . . . . . . . . 73 April 1993
</TABLE>
_______________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
Robert A. Hoerr, M.D., Ph.D., was named President and Chief Operating
Officer of the Company in February 1994, became President and Chief Executive
Officer in September 1994 and became Chairman and Chief Executive Officer in
November 1998. He served as Vice President, Medical and Regulatory Affairs of
the Company from January 1993 to December 1993 and Senior Vice President from
December 1993 to February 1994. Dr. Hoerr was Director of Medical Affairs for
Sandoz Nutrition Corporation, a research-based nutrition company, from March
1990 to January 1993. From 1986 to 1990, Dr. Hoerr was Research Scientist and
Assistant Program Director at the Clinical Research Center, Massachusetts
Institute of Technology ("MIT"). Dr. Hoerr received his A.B. in Biology from
Indiana University, his M.D. from Indiana University School of Medicine and
his Ph.D. in Nutritional Biochemistry and Metabolism from MIT.
Henry J. Cardello has served as President of the Company since January
1999. Mr. Cardello has been advising the Company since April 1998 through
Marketing Ventures of America, Inc. ("MVA"), a consumer-marketing firm that
specializes in commercializing consumer-based products, of which he has been
Chairman and President since July 1987. Prior to July 1987, Mr. Cardello was
President of Sunkist Soft Drinks, Inc., a unit of Cadbury Schweppes, Vice
President of Marketing for Cadbury's Canada Dry business and Director of
Marketing for Coca-Cola USA. Additionally, Mr. Cardello has held several
brand management positions with Anheuser-Busch and General Mills, Inc. Mr.
Cardello received his B.S. degree in engineering from Lehigh University and
his M.B.A. from The Wharton Graduate School of Business.
Dr. Austen S. Cargill joined Cargill, Inc., an international marketer,
processor and distributor of agricultural, food, financial and industrial
products company ("Cargill") in 1984 and has served in numerous positions.
Dr. Cargill has served as Corporate Vice President since 1998 and has been
Director of Research and Development worldwide since June 1996. He served as
Director of Corporate Food Safety from January 1990 to December 1998. Dr.
Cargill established and currently supervises Cargill's Nutraceuticals Product
Line. He is also a member of the American Association for The Advancement of
Science and the Institute of Food Technologists. Dr. Cargill received his
B.S. and M.S. degrees from the University of Minnesota and his Ph.D. in
fisheries ecology from Oregon State University. Dr. Cargill also serves as a
director of Cargill, Renessen (Cargill's joint venture with Monsanto Company)
and the Boyce Thompson Plant Research Institute.
4
<PAGE>
Ronald O. Ostby has served as Group Vice President and Chief Financial
Officer of Land O'Lakes, a Minnesota-based dairy cooperative, since 1986. He
served in various capacities at The Pillsbury Company, an international food
company, from 1961 until 1984, most recently as Vice President of Finance and
Planning. Mr. Ostby was Vice President of Finance and Chief Financial
Officer of Ag Processing, Inc., an oil seed processing company, from 1984 to
1986.
Winston R. Wallin served as Chairman of the Board of Directors of
Medtronic, Inc., the world's leading manufacturer of cardiac pacemakers, from
January 1986 to August 1996. Mr. Wallin also served as Chief Executive
Officer of Medtronic from June 1985 to April 1991 and as President of
Medtronic from June 1985 to March 1989. He has served as Chairman Emeritus
of the Board of Directors of Medtronic since August 1996. Prior to joining
Medtronic, Mr. Wallin was with The Pillsbury Company for 37 years, last
serving as its President, Chief Operating Officer and Vice Chairman. Mr.
Wallin also serves as a director of Integ Incorporated.
Land O'Lakes has an understanding with the Company that the Company will
nominate a representative from Land O'Lakes for election to the Board of
Directors so long as Land O'Lakes remains a significant stockholder. Mr.
Ostby is the current Land O'Lakes representative on the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed an Audit Committee and a
Compensation Committee. The Board has not appointed a nominating committee.
The Audit Committee, among other duties, reviews and evaluates significant
matters relating to the audit and internal controls of the Company, reviews
the scope and results of audits by, and the recommendations of, the Company's
independent auditors and approves additional services to be provided by the
auditors. The Audit Committee also reviews the activities of the Company's
accounting staff and reviews audited financial statements of the Company and
is responsible for determining the consideration to be received for stock
issued by the Company in any private or public offering by the Company. The
Compensation Committee reviews and makes recommendations to the Board of
Directors regarding salaries, compensation and benefits of officers and key
employees.
BOARD AND COMMITTEE MEETINGS AND MEETING ATTENDANCE
The Board of Directors met six times and took action in writing in lieu
of a meeting on one occasion during 1998. The Audit Committee met twice
during 1998. The Compensation Committee did not meet during 1998 but took
action in writing in lieu of a meeting on two occasions during 1998. Each
director attended more than 75% of the meetings of the Board of Directors and
Board committees on which he serves, with the exception of Mr. Wallin, who
attended 67% of the meetings of the Board of Directors and committees on
which he serves.
DIRECTOR COMPENSATION
The Company's 1992 Stock Plan formerly provided that, upon election or
appointment to the Board of Directors, each non-employee director (other than
the representatives of Land O'Lakes and IAI) was automatically granted a
non-qualified option to purchase 13,541 shares of Common Stock at its fair
market value on the date of grant. The options were to have terms of five
years and three months and become exercisable as to 2,708 shares on and after
each anniversary of the option. Each non-employee director of the Company
(other than the representatives of Land O'Lakes and IAI) has received such an
option. Land O'Lakes and IAI have each been granted a non-qualified option to
purchase 13,541 shares of Common Stock outside of the 1992 Stock Plan, in
lieu of the automatic grant to the director serving as their respective
representative on the Board of Directors. (David Spreng was formerly IAI's
representative on the Board; IAI no longer has a Board representative.)
These options have similar terms and conditions as the automatic grant to
non-employee directors. The 1992 Plan was amended in December 1996 to
eliminate the automatic grants for non-employee directors and to provide that
directors could receive discretionary grants of options under the 1992 Stock
Plan.
In December 1995, each non-employee director was granted an option
outside of the 1992 Stock Plan to purchase 2,708 shares of Common Stock at
its fair market value on the date of grant. These options have a term of
five years and three months and vest ratably over five years at the end of
each year.
5
<PAGE>
Directors are also eligible to receive discretionary grants of options
under the 1997 Incentive Plan. In December 1996, each non-employee director
was granted an option under the 1997 Incentive Plan to purchase 30,000 shares
of Common Stock at its fair market value on the date of grant. These options
have a term of ten years and vest ratably over three years at the end of each
year.
In May 1998, the Company canceled all of the options described above
having an exercise price greater than $2.56 per share (such options covered
an aggregate of 267,704 shares at the time of cancellation). New replacement
options, covering the same aggregate number of shares and expiring in each
case ten years from the date of the original grant of the related cancelled
option, were then issued with an exercise price of $2.56 per share. See
"Report of the Compensation Committee--Stock Options--Option Repricing" below.
Each director is reimbursed for expenses for attending Board of
Directors meetings. Other than the foregoing, the Company has no regular
compensation arrangements with its directors.
6
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The general compensation policies of the Company and the specific
compensation for each of the Company's executive officers are established by
the Compensation Committee, comprised entirely of non-employee directors.
The Company's executive compensation program for executive officers is
designed to attract, retain and reward executives who are capable of leading
the Company in the achievement of its business objectives. All decisions by
the Compensation Committee relating to the compensation of the Company's
officers are reviewed and approved by the Board.
EXECUTIVE COMPENSATION PHILOSOPHY
The Company's compensation program for executive officers is designed to
promote the financial performance, business strategies and other values and
objectives of the Company. This program seeks to enhance stockholder value
by linking the financial interests of the Company's executives with those of
its stockholders. Under the guidance of the Compensation Committee, the
Company has developed and implemented an executive compensation program to
achieve the following objectives:
- To provide formal performance appraisals as measured against
objectives.
- To provide compensation that will attract, retain and reward
executives of superior talent who will contribute to the success of
the Company.
- To align executives' interests with the Company's by linking a portion
of compensation to the long-term success of the Company by providing
executives with equity ownership in the Company.
The Company's executive compensation program consists of the following
elements:
- BASE SALARY determined by individual contributions and sustained
performance within an established competitive salary range.
- INCENTIVE COMPENSATION which rewards executives for attaining
pre-determined Company goals which create stockholder value through an
increase in the market value of the Company's Common Stock.
- OTHER COMPENSATION which includes certain benefits, such as employee
relocation, medical benefits, a 401(k) Savings Plan and an Employee
Stock Purchase Plan, most of which are generally available to all
employees of the Company.
THE COMPENSATION PROCESS
BASE SALARY. Base salaries for executive officers are determined by
reviewing and comparing salaries, and the corresponding job descriptions,
offered for similar positions reported by a survey and by reviewing salaries
of persons with comparable qualifications, experience and responsibilities at
other companies of comparable size in the appropriate industry. The Chief
Executive Officer's salary is partly determined by this process and by other
factors described below. After reviewing these salaries and job
descriptions, the Company establishes a range of salaries paid for various
executive positions. The Compensation Committee believes that the Company's
executive base salaries should be set at the lower end of the salary ranges
described above but that the overall executive compensation package should be
comparable or higher than other executive compensation packages if overall
Company goals and individual objectives are met. As an executive officer's
level of responsibility increases, a greater portion of the total
compensation package is based on incentive compensation, described below,
which may cause greater variability in the individual's overall compensation
package from year to year. In addition, the higher that an executive officer
rises in the organization, the more the compensation package shifts to
reliance on appreciation of the value of the Company's stock through stock
options. The Company also strives to achieve equitable relationships both
among the compensation of individual executives and between the compensation
of executives and other employees throughout the organization.
7
<PAGE>
INCENTIVE COMPENSATION. Short-term cash incentive compensation for each
executive officer, with the exception of the Chief Executive Officer, is
determined based upon the executive's annual performance, as measured against
pre-determined Company and individual goals. Under this short-term cash
incentive bonus program, a bonus pool is established by the Compensation
Committee from which all employees are eligible to receive bonuses at the
discretion of the Compensation Committee. The amount of the pool is based
upon a percentage of the total annualized base salaries of eligible employees
and the achievement of corporate goals approved by the Board of Directors.
Each executive officer may earn an annual targeted cash incentive from the
bonus pool based upon the accomplishment of corporate goals, the achievement
of individual goals set at the beginning of each year and on other subjective
factors. Subjective performance criteria include an executive's ability to
motivate others, develop the skills necessary to grow as the Company matures,
recognize and pursue new business opportunities and initiate programs to
enhance the Company's growth and success. The Compensation Committee does
not use a specific formula based on these subjective criteria, but makes an
evaluation of each executive officer's contributions in light of all such
criteria. Such targeted cash incentive amounts range up to 45% of base
salary depending upon the level of the executive officer. Long-term
incentive compensation, in the form of stock options, is used to align the
interests of officers and stockholders and enables executives to develop a
long-term stock ownership position in the Company. Stock option grants are
intended to focus executives on managing the Company from the perspective of
an owner with an equity position in the business. Executives, including the
Chief Executive Officer, are granted options to purchase shares of the Common
Stock upon commencement of employment and are eligible for consideration of
additional annual option grants at the discretion of the Compensation
Committee and the Board. Factors considered (which are not given a
particular relative weighting) include increases in the level of
responsibility, promotions, sustained exceptional performance over a period
of years and overall stock performance. In granting new options, the
Compensation Committee takes into account the number of options already
granted to an officer. Stock options are granted at an option price equal to
the fair market value of the Common Stock on the date of grant and generally
vest over a five-year period. Although an executive's past performance is
considered when awarding incentive compensation, the Company's desire to
retain an individual is also a consideration in this determination.
OTHER COMPENSATION. The Company's executives are entitled to relocation
benefits upon commencement of employment. They also receive medical benefits
and participate in the Company's 401(k) Savings Plan on the same basis as
other full-time employees of the Company. Executive officers of the Company
are also eligible to participate in the Company's Employee Stock Purchase
Plan. The plan is available to virtually all employees of the Company and
generally permits participants to purchase Common Stock at a discount of 15%
from fair market value at the beginning or end of the applicable purchase
periods.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee evaluates the performance and fixes the base
salary of the Chief Executive Officer on an annual basis based in part on the
compensation package data discussed above and the Compensation Committee's
assessment of his past performance and its expectation as to his future
contributions in leading the Company and its development. Because the
Company was in the development stage in 1997, the profitability of the
Company was not considered in setting the Chief Executive Officer's 1998
compensation; however, the Compensation Committee does consider a number of
financial factors, including the Company's ability to secure financing,
expense reduction and control, and the efficient use of working capital to
achieve goals. In addition, the Compensation Committee also considers
significant accomplishments made by the Company during the prior year and
other performance factors, such as the effectiveness of the Chief Executive
Officer in establishing the Company's strategic direction. Any incentive
compensation is entirely dependent on the accomplishment by the Company of
certain corporate goals approved by the Board and the Company's ability to
pay. Factors considered by the Compensation Committee in determining the
Chief Executive Officer's base salary and cash bonus, if any, are not subject
to any specific weighting factor or formula.
In determining the Chief Executive Officer's base salary for 1998 as
reported in the Summary Compensation Table on page 11, the Committee
considered the comparative compensation data and performance factors
discussed above. The 1998 base salary for all executive officers, including
the Chief Executive Officer, was not changed from the base salary set in
1997. No annual cash bonuses were paid to the Chief Executive Officer or to
any of the other executive officers for 1998.
8
<PAGE>
STOCK OPTIONS--OPTION REPRICING
Historically, the policy of the Compensation Committee has been to grant
stock options on an annual basis to employees of the Company, including
executive officers. The exercise price of the stock options is set at the
fair market value of the underlying stock on the date of grant. Accordingly,
the stock options provide value to all employees only when the price of the
Company's stock increases above the price on the date of grant.
On May 13, 1998, the Compensation Committee recommended and the Board of
Directors approved the issuance of replacement stock options for all
outstanding employee options with exercise prices in excess of $2.56 per
share. The exercise price for these replacement options was $2.56 per share,
the fair market value of the Company's Common Stock on the date of repricing.
The replacement options were given a ten-year term commencing in each case
from the date of grant of the related cancelled option. Vesting schedules
were not changed in the replacement options. This action was in response to
the decline in the market price of the Company's stock during the preceding
months which had effectively eliminated the incentive value of options with
significantly higher exercise prices. The Compensation Committee's
recommendation and the Board's decision was based on a number of factors,
including significant events that had taken place during the prior months.
These events included the transformation of the Company from a research and
development-based pharmaceutical company to a nutritional products-based
company in the nutraceutical and functional foods area, and the resulting
changes in the employee base. The Board determined that replacement options
were necessary to provide incentives for valued employees of the Company and
to reward good job performance.
As detailed in the Option Repricing Table below, the repricing on May
13, 1998 resulted in the issuance of replacement options with an exercise
price of $2.56 per share for all existing stock options with an exercise
price in excess of $2.56 per share. A total of 941,075 options, with exercise
prices ranging from $3.69 to $11.07 per share were repriced, including
368,644 options held by current executive officers, 266,666 options held by
former executive officers and 267,704 director-related options (see "Election
of Directors--Director Compensation" above). The May 13, 1998 repricing is
the only repricing of options held by executive officers since April 1, 1996
(the effective date of the initial public offering of the Company's Common
Stock).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
OPTION REPRICING TABLE
- -----------------------------------------------------------------------------------------------------------------------------
Length of
Original
Market Price Exercise Option Term
Number of of Stock at Price at New Remaining at
Options Time of Time of Exercise Date of
Name Date Repriced Repricing Repricing Price Repricing
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hoerr, M.D., PhD. May 13, 1998 27,083 $2.56 $3.69 $2.56 1 yr., 1 mo.
May 13, 1998 52,812 2.56 11.08 2.56 2 yr., 10 mo.
May 13, 1998 150,000 2.56 4.00 2.56 8 yr., 7 mo.
John G. Watson (1) May 13, 1998 125,000 2.56 5.75 2.56 3 yr., 8 mo.
May 13, 1998 15,000 2.56 4.00 2.56 8 yr., 7 mo.
Eileen F. Bostwick, Ph.D. May 13, 1998 8,125 2.56 3.69 2.56 1 yr., 1 mo.
May 13, 1998 18,958 2.56 5.38 2.56 2 yr., 10 mo.
May 13, 1998 40,000 2.56 4.00 2.56 8 yr., 7 mo.
Michael E. Cady May 13, 1998 5,416 2.56 3.69 2.56 1 yr., 1 mo.
May 13, 1998 16,250 2.56 11.08 2.56 2 yr., 10 mo.
May 13, 1998 50,000 2.56 4.00 2.56 8 yr., 7 mo.
Francois Lebel, M.D. (1) May 13, 1998 55,000 2.56 4.00 2.56 8 yr., 7 mo.
Gregg A. Waldon (1) May 13, 1998 8,125 2.56 3.69 2.56 1 yr., 1 mo.
May 13, 1998 13,541 2.56 11.08 2.56 2 yr., 10 mo.
May 13, 1998 50,000 2.56 4.00 2.56 8 yr., 7 mo.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
(1) No longer employed by the Company, but was an executive officer of the
Company at the time of repricing.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a
tax deduction to public companies for compensation over $1 million paid to
the corporation's chief executive officer or any of the four other most
highly compensated executive officers. Compensation is not subject to the
deduction limit if certain requirements are met, including that the
compensation be performance-based. The Company intends to structure the
performance-based portion of the compensation of its executive officers in a
manner that complies with the statute to mitigate any disallowance of
deductions.
COMPENSATION COMMITTEE
Winston Wallin, Chairman
10
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended
December 31, 1998, 1997 and 1996 of the Chief Executive Officer of the
Company and the four other executive officers of the Company earning salary
and bonus compensation in excess of $100,000 for 1998 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
- ----------------------------------------------------------------------------------------------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options (Shares) Compensation
<S> <C> <C> <C> <C> <C>
Robert A. Hoerr, M.D., Ph.D. 1998 $200,000 $ -0- 379,895 (1) $ 9,570 (2)
Chairman of the Board and Chief 1997 200,000 -0- 73,000 10,411 (2)
Executive Officer 1996 150,000 25,000 77,000 8,973 (3)
John G. Watson 1998 123,958 (4) -0- 140,000 (1) 84,535 (5)
Chief Operating Officer 1997 175,000 -0- 7,300 51,015 (6)
1996 42,249 (4) -0- 132,700 -0-
Eileen F. Bostwick, Ph.D. 1998 105,000 -0- 123,159 (1) 1,653 (7)
Vice President, 1997 105,000 -0- 19,400 1,520 (7)
Research and Development 1996 85,000 -0- 39,558 540 (8)
Michael E. Cady 1998 115,000 -0- 123,159 (1) 1,827 (9)
Vice President, 1997 115,000 -0- 24,300 3,012 (9)
Manufacturing and 1996 95,000 10,000 25,700 2,255 (10)
Engineering
Gregg A. Waldon 1998 115,000 -0- 143,159 (1) 6,859 (11)
Vice President, 1997 115,000 -0- 24,300 7,198 (11)
Chief Financial Officer, 1996 75,000 10,000 25,700 6,472 (12)
Treasurer and Secretary
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Of the options granted to the Named Executive Officers in 1998, 580,310
were replacement options granted in connection with the May 13, 1998
repricing described above under "Report of the Compensation
Committee--Stock Options--Repricing". Of these replacement options,
229,895 were granted to Dr. Hoerr, 140,000 were granted to Mr. Watson,
67,083 were granted to Dr. Bostwick, 71,666 were granted to Mr. Cady
and 71,666 were granted to Mr. Waldon.
(2) Amount reflects payment by the Company of premiums for a life insurance
policy and premium payments of group life insurance in excess of $50,000
the proceeds of which are both payable to a beneficiary chosen by Dr.
Hoerr. Also includes payment by the Company of premiums for long-term
disability policies the proceeds of which are payable to Dr. Hoerr.
(3) Amount reflects payment by the Company of premiums for a life insurance
policy the proceeds of which are payable to a beneficiary chosen by Dr.
Hoerr. Also includes payment by the Company of premiums for long-term
disability policies the proceeds of which are payable to Dr. Hoerr.
(4) Amount reflects salary for partial year. Mr. Watson started employment
with the Company on September 30, 1996 and terminated his employment
September 16, 1998.
(5) Amount reflects severance compensation of approximately $84,000 and
premium payments of group life insurance in excess of $50,000 the proceeds
of which are payable to a beneficiary chosen by Mr. Watson.
11
<PAGE>
(6) Amount reflects moving expense payments by the Company for employee
relocation.
(7) Amount reflects payment by the Company of premiums for a life insurance
policy of which one-half of the proceeds are payable to a beneficiary
chosen by Dr. Bostwick and premium payments of group life insurance in
excess of $50,000 the proceeds of which are payable to a beneficiary chosen
by Dr. Bostwick.
(8) Amount reflects payment by the Company of premiums for a life insurance
policy of which one-half of the proceeds are payable to a beneficiary
chosen by Dr. Bostwick.
(9) Amount reflects payment by the Company of premiums for a life insurance
policy of which one-half of the proceeds are payable to a beneficiary
chosen by Mr. Cady and premium payments of group life insurance in excess
of $50,000 the proceeds of which are payable to a beneficiary chosen by Mr.
Cady. Also includes payment by the Company of premiums for long-term
disability policies the proceeds of which are payable to Mr. Cady.
(10) Amount reflects payment by the Company of premiums for a life insurance
policy of which one-half of the proceeds are payable to a beneficiary
chosen by Mr. Cady. Also includes payment by the Company of premiums for
long-term disability policies the proceeds of which are payable to Mr.
Cady.
(11) Amount reflects payment by the Company of premiums for a life insurance
policy and premium payments of group life insurance in excess of $50,000
the proceeds of which are both payable to a beneficiary chosen by Mr.
Waldon.
(12) Amount reflects payment by the Company of premiums for a life insurance
policy the proceeds of which are payable to a beneficiary chosen by Mr.
Waldon.
12
<PAGE>
STOCK OPTIONS
The following table provides certain information concerning grants of
stock options during the fiscal year ended December 31, 1998 to the Named
Executive Officers. In accordance with the rules of the Securities and
Exchange Commission (the "Commission"), the table sets forth the potential
realizable value over the terms of the options (the period from the grant
date to the expiration date) based on assumed rates of stock appreciation of
five percent and ten percent, compounded annually. These amounts do not
represent the Company's estimate of future stock price. Actual realizable
values, if any, of stock options will depend on the future performance of the
Common Stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable
- -------------------------------------------------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock Price
Shares Options Appreciation for Option
Underlying Granted to Exercise Term (1)
Options Employees in Price Per Expiration -------------------------------
Name Granted Fiscal Year Share Date 5% 10%
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hoerr, 150,000 (2) 10.4 % $3.13 8/12/08 $294,794 $747,067
M.D., Ph.D. 27,083 (3) 1.9 2.56 3/10/04 23,603 53,546
52,812 (3) 3.7 2.56 12/27/05 59,854 141,577
150,000 (3) 10.4 2.56 12/30/06 197,719 480,764
John G. Watson 140,000 (3) 9.7 2.56 (4)
Eileen F. Bostwick, 56,076 (2) 3.9 3.13 8/12/08 110,206 279,283
Ph.D. 8,125 (3) 0.6 2.56 3/10/04 7,081 16,064
18,958 (3) 1.3 2.56 12/27/05 21,486 50,822
40,000 (3) 2.8 2.56 12/30/06 52,725 128,204
Michael E. Cady 51,493 (2) 3.5 3.13 8/12/08 101,199 256,458
5,416 (3) 0.4 2.56 3/10/04 4,720 10,708
16,250 (3) 1.1 2.56 12/27/05 18,417 43,562
50,000 (3) 3.5 2.56 12/30/06 65,906 160,255
Gregg A. Waldon 71,493 (2) 5.0 3.13 8/12/08 140,505 356,067
8,125 (3) 0.6 2.56 3/10/04 7,081 16,064
13,541 (3) 0.8 2.56 12/27/05 15,347 36,300
50,000 (3) 3.5 2.56 12/30/06 65,906 160,255
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The potential realizable value is based on the length of (i) the term of
the option at the time of grant (ten years) for options granted in 1998
that were not repriced as described below or (ii) the remaining term of the
option for options that were repriced, and on the assumption that the fair
value of the Common Stock appreciates at the indicated rate for the entire
term or remaining term of the option and that the option is exercised at
the exercise price and sold on the last day of its term at the appreciated
price.
(2) The listed options become exercisable with respect to one-fifth of the
shares covered thereby on each of the first five anniversaries of the date
of grant. The options each have a maximum term of ten years, subject to
earlier termination in the event of the optionee's cessation of service
with the Company. In the event of (i) a dissolution or liquidation of the
Company, (ii) a merger, consolidation of the Company with or into any other
entity, regardless of whether the Company is a surviving corporation, or a
proposed statutory share exchange with any other entity, or (iii) a sale of
substantially all of the assets of the Company, the listed options granted
under the 1997 Incentive Plan will either be replaced with substitute
options or become exercisable in full, and upon an event changing control
of the Company (as defined in the 1997 Incentive Plan), the listed options
granted under the 1997 Incentive Plan will become exercisable in full.
13
<PAGE>
(3) The listed options represent options that were repriced May 13, 1998 (see
"Report of the Compensation committee--Stock Options--Option Repricing").
The terms of the replacement options are identical to the terms of the
original options, with the exception of (i) a lower grant price ($2.56 per
share) and (ii) the expiration date of certain options was changed from
five years and three months to ten years from the original grant date,
subject to earlier termination in the event of the optionee's cessation of
service with the Company.
(4) Mr. Watson terminated his employment with the Company on September 16,
1998. At December 31, 1998, all of Mr. Watson's options had expired.
The following table summarizes option exercises during the year ended
December 31, 1998 and provides information regarding the number of all
unexercised stock options held by the Named Executive Officers as of December
31, 1998, the end of the Company's last fiscal year:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year-End Fiscal Year-End (2)
Acquired on Value ------------------------------------------------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hoerr, -- -- 118,769 261,126 $-0- $-0-
M.D., Ph.D.
John G. Watson (3) -- -- -- -- -0- -0-
Eileen F. Bostwick, -- -- 35,499 87,660 -0- -0-
Ph.D.
Michael E. Cady -- -- 35,166 87,993 -0- -0-
Gregg A. Waldon -- -- 36,249 106,910 -0- -0-
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated on the basis of the fair market value of the underlying shares
of Common Stock on the date of exercise minus the exercise price.
(2) Calculated on the basis of the fair market value of the underlying shares
of Common Stock at December 31, 1998, as reported by The Nasdaq Stock
Market, of $2.156 per share, minus the per share exercise price, multiplied
by the number of shares underlying the option.
(3) Mr. Watson terminated his employment with the Company on September 16,
1998. At December 31, 1998, all of Mr. Watson's options had expired.
14
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The comparative stock performance graph below compares the cumulative
stockholder return on the Common Stock of the Company for the period from
April 1, 1996 (the effective date of the initial public offering of the
Company's Common Stock) through December 31, 1998 with the cumulative total
return on (i) the CRSP Total Return Index for the Nasdaq Stock Market (US),
(ii) the Nasdaq Non-Financial Stocks Index and (iii) the Nasdaq
Pharmaceutical Stocks Index. The table assumes the investment of $100 in the
Company's Common Stock, the CRSP Total Return Index for the Nasdaq Stock
Market (US), the Nasdaq Non-Financial Stocks Index and the Nasdaq
Pharmaceutical Stocks Index on April 1, 1996, and the reinvestment of all
dividends through the last trading day of the years ended December 31, 1996,
December 31, 1997 and December 31, 1998. The Company determined to change
its comparative index to the Nasdaq Non-Financial Stocks Index due to the
Company's change from a pharmaceutical-based company to a nutritional
products-based company.
<TABLE>
<CAPTION>
April 1, December 31, December 31, December 31,
1996 1996 1997 1998
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
GalaGen Inc. $100 $42.943 $18.404 $21.162
CRSP Total Return Index for the $100 $116.916 $143.436 $201.634
Nasdaq Stock Market (US)
Nasdaq Non-Financial Stocks $100 $115.104 $135.042 $197.795
Index
Nasdaq Pharmaceutical Stocks $100 $96.047 $99.172 $126.948
Index
</TABLE>
15
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that the Company's directors and executive officers file initial reports of
ownership and reports of changes in ownership with the Commission. Directors
and executive officers are required to furnish the Company with copies of all
Section 16(a) forms they file. Based solely on a review of the copies of such
forms furnished to the Company and written representations from the Company's
directors and executive officers, all Section 16(a) filing requirements were
met for the fiscal year ended December 31, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Henry J. Cardello joined GalaGen Inc. as President and a member of
the Board of Directors effective January 1, 1999. Mr. Cardello has been
advising the Company since April 1998 through MVA, a consumer-marketing firm
that specializes in commercializing consumer-based products, of which he is
Chairman and President. The Company paid MVA $300,000 plus expenses of
approximately $42,000 in 1998. On April 14, 1998, April 30, 1998, June 19, 1998
and September 30, 1998, the Company issued five-year warrants to purchase
75,000, 25,000, 25,000 and 12,500 shares of Common Stock at $1.38, $2.63, $3.00
and $1.81 per share, respectively, to Henry J. Cardello for services performed
under the consulting agreement with MVA.
The Company is party to a number of agreements with Land O'Lakes, a
13.5% stockholder of the Company, including a supply agreement, a license
agreement, a royalty agreement and a master services agreement. Mr. Ostby, a
director of the Company, is an executive officer of Land O'Lakes.
Under the supply agreement, the Company will purchase and Land O'Lakes
will supply, at their option, all of the Company's commercial requirements
for colostrum and milk through May 7, 2002 (with an option to extend the
right of first refusal for an additional ten years at the discretion of Land
O'Lakes). Additionally, Land O'Lakes will provide expertise in dairy herd
selection, on-farm management, membership relations and procurement to the
Company for the manufacture of antibody material.
Under the license agreement, Land O'Lakes received a perpetual, paid-up,
worldwide license from the Company to use then-existing polyclonal antibody
technology and future improvements (defined to include such technology
developed or acquired) for animal products, functional foods (food or food
supplements providing medical or nutritional benefits which are not regulated
by the FDA) and infant formula. Land O'Lakes has the right to sublicense the
polyclonal antibody technology and future improvements for use in animal
products, functional foods and infant formula. If Land O'Lakes sublicenses
any Company technology improvements for use in functional foods, a royalty on
such functional foods must be paid to the Company. If the Company desires to
distribute or market any animal products for use by farm animals and that are
based on new technologies or animal products for use by other than farm
animals that are based on Company technology improvements, the Company must
give Land O'Lakes a right of first refusal to distribute or market such
products, and Land O'Lakes will pay the Company a license fee. No royalties
have accrued under this license agreement. The Company agreed not to compete
for 15 years in the area of animal products and functional foods based on
polyclonal antibody technology. Land O'Lakes did not receive a license and
specifically agreed not to compete, directly or indirectly, for 15 years in
the areas of prescription drugs and over-the-counter drugs regulated by the
FDA for humans. However, as described below, under the royalty agreement the
Company is required to pay Land O'Lakes a royalty on all such prescription
drugs and other drugs regulated by the FDA. Land O'Lakes automatically
receives, in connection with any license acquired by the Company, a
sublicense to the same technology for application to animal products,
functional foods and infant formula.
In March 1997, Land O'Lakes granted the Company a license to use
existing polyclonal antibody technology and future improvements in the
development, formulation, manufacture, marketing, distribution and sale of
kefir-based products, as defined in the granted license. In consideration of
granting the Company this license, Land O'Lakes will receive a royalty of
five percent from food components or ingredients sold by the Company to be
included in a kefir-based product and one percent of net receipts from a
kefir-based finished product sold by the Company.
In March 1998, the Company and Land O'Lakes signed an amended and
restated license agreement (the "Restated License") in which the Company has
significantly broadened its rights to develop and market functional foods.
Under the Restated License, the Company can use, improve, exploit, license or
share existing Procor
16
<PAGE>
technology, Procor technology improvements and new technologies, as defined,
in all areas of functional foods except under certain "reserved food product"
and "first refusal food product" categories. If the Company intends to
engage in manufacturing or marketing any "first refusal food product" as
defined, the Company must give Land O'Lakes notice of its intent, in which
case Land O'Lakes can negotiate with the Company, in good faith and within a
defined period of time, to undertake any part of the manufacturing or
marketing areas. If the Company intends to engage in manufacturing or
marketing any "reserved food product" as defined, the Company must give Land
O'Lakes notice of its intent and must work only with Land O'Lakes to
undertake the manufacturing or marketing of such products.
In April 1998, the Company entered into an agreement with Land O'Lakes to
develop and introduce into market a line of yogurt products incorporating
Proventra. Products developed under this arrangement will leverage Land
O'Lakes strength as a dairy producer and marketer.
Under the royalty agreement, the Company is required to pay Land O'Lakes
a royalty on net receipts from any product which is based on its polyclonal
antibody technology, including future improvements thereon, as defined by the
royalty agreement. Additionally, the Company must pay a royalty on net
receipts from infant formula based on new technology, as defined by the
agreement. The royalty agreement continues until terminated by both parties.
The Company has paid no royalty fees to Land O'Lakes to date under this
agreement.
Under the master services agreement, the Company may purchase services
from Land O'Lakes for certain office, technology and research and development
activities. The services agreement enables the Company to access expertise,
on an as-needed basis, from Land O'Lakes. The cost to the Company for these
services is the pro rata share of Land O'Lakes' cost. In 1997, the Company
rented approximately 4,500 square feet of administrative and laboratory space
from Land O'Lakes. The Company was charged approximately $375,000 for these
services and space in 1998. The services agreement has been extended through
December 31, 1999, and may be terminated by either party upon a one-month
notice. In June 1996, the Company entered into a five-year lease agreement
with Land O'Lakes in connection with the Company's manufacturing facility.
The lease calls for annual payments of approximately $87,000, which amount
the Company paid in 1998 under such lease.
In December 1996, the Company entered into an operating lease with
Cargill Leasing Corporation for $835,393 of manufacturing equipment for the
Company's pilot plant facility. Lease payments continue for a period of
seven years with the Company's option to extend for an additional 12 months.
The lease is guaranteed by Land O'Lakes.
APPOINTMENT OF AUDITORS
Ernst & Young LLP, independent public accountants, have been the
auditors for the Company since 1992. Upon recommendation of the Audit
Committee, the Board of Directors again has selected Ernst & Young LLP to
serve as the Company's auditors for the year ending December 31, 1999,
subject to ratification by the stockholders. While it is not required to do
so, the Board of Directors is submitting the selection of that firm for
ratification in order to ascertain the view of the stockholders. If the
selection is not ratified, the Board of Directors will reconsider its
selection.
A representative of Ernst & Young LLP will be present at the meeting and
will be afforded an opportunity to make a statement if such representative so
desires and will be available to respond to appropriate questions during the
meeting.
DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders must be received by the Secretary of the Company,
1275 Red Fox Road, Arden Hills, Minnesota 55112, no later than December 1,
1999 for inclusion in the Proxy Statement and form of proxy for such meeting.
If notice of any other stockholder proposal intended to be presented at the
2000 Annual Meeting of Stockholders but not intended to be included in the
Company's Proxy Statement and form of proxy for such meeting is not received
by the Company on or before March 14, 2000, the proxy solicited by the Board
of Directors of the Company for use in connection with the meeting may confer
authority on the proxies named therein to vote in their discretion on such
proposal without any discussion in the Company's Proxy Statement for that
meeting of either the proposal or how such proxies intend to exercise their
voting discretion.
17
<PAGE>
ADDITIONAL MATTERS
The Annual Report to Stockholders of the Company for 1998 is being
mailed with this Proxy Statement.
As of the date of this Proxy Statement, management knows of no matters
that will be presented for determination at the meeting other than those
referred to herein. If any other matters properly come before the meeting
calling for a vote of stockholders, it is intended that the shares
represented by the proxies solicited by the Board of Directors will be voted
by the proxies named therein in accordance with their best judgment.
By Order of the Board of Directors,
Robert A. Hoerr, M.D., Ph.D.
Chairman and Chief Executive Officer
Dated: April 2, 1999
18
<PAGE>
GALAGEN INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS - MAY 12, 1999
The undersigned, revoking any proxy heretofore given, hereby appoints Robert
A. Hoerr, M.D., Ph.D. and Henry J. Cardello, or either of them, as Proxies, each
with full power of substitution, and hereby authorizes them to represent and to
vote, as designated herein, all the shares of Common Stock of GalaGen Inc. held
of record by the undersigned at the close of business on March 18, 1999, upon
the following matters more fully described in the Notice of and Proxy Statement
for the Annual Meeting of Stockholders to be held on May 12, 1999, and at any
adjournment or adjournments thereof.
1. ELECTION OF DIRECTORS. Nominees of the Board of Directors are: Robert A.
Hoerr, M.D., Ph.D., Henry J. Cardello, Austen S. Cargill II, Ph.D., Ronald
O. Ostby and Winston R. Wallin.
<TABLE>
<S> <C>
/ / VOTE FOR all nominees / / WITHHOLD AUTHORITY
except those listed below: to vote for all nominees listed above.
</TABLE>
- --------------------------------------------------------------------------------
2. Ratify the appointment of Ernst & Young LLP as independent auditors for the
1999 fiscal year.
/ / FOR / / AGAINST / / ABSTAIN
(Continued, and to be signed and dated, on reverse side)
<PAGE>
(Continued from reverse side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER(S), BUT IF NO DIRECTION IS GIVEN, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1 AND 2. THE PROXIES ARE AUTHORIZED TO VOTE IN THEIR
DISCRETION UPON SUCH OTHER BUSINESS, IF ANY, AS MAY PROPERLY COME BEFORE THE
MEETING.
I plan to attend the meeting. / /
Please sign exactly as name
appears hereon. Joint owners
should each sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title as such. If a
corporation, please sign in full
corporate name by President or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
----------------------------------
----------------------------------
SIGNATURE(S) DATE
