<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
PathoGenesis Corporation
...............................................................................
(Name of Registrant as Specified In Its Charter)
PathoGenesis Corporation
...............................................................................
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:(1) (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>
PATHOGENESIS CORPORATION
201 ELLIOTT AVENUE WEST
SEATTLE, WASHINGTON 98119
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of PathoGenesis Corporation:
The Annual Meeting of Stockholders of PathoGenesis Corporation (the
"Company") will be held at the offices of the Company at the address shown
above, at 6 p.m. Pacific Daylight Savings Time on Wednesday, June 25, 1997, for
the following purposes:
1. To elect three Directors to the Board of Directors for three-year
terms;
2. To consider and act upon a proposal to amend Article FOURTH of
the Company's Amended and Restated Certificate of Incorporation
to increase the number of shares of Common Stock which the
Company is authorized to issue from 20,000,000 shares to
60,000,000 shares;
3. To consider and act upon a proposal to adopt the Company's 1997
Stock Option Plan and to terminate the Company's 1996 Stock
Option Plan for Non-Employee Directors;
4. To ratify the appointment of KPMG Peat Marwick LLP as the
independent accountants for the Company for the year ending
December 31, 1997; and
5. To transact such other business as may properly come before the
meeting and any adjournment thereof.
All stockholders are invited to attend the meeting. Stockholders of
record at the close of business on April 28, 1997, the record date fixed by the
Board of Directors, are entitled to notice of, and to vote at, the meeting. A
complete list of stockholders entitled to notice of, and vote at, the meeting
will be open to examination by the stockholders beginning ten days prior to the
meeting for any purpose germane to the meeting during normal business hours at
the office of the Secretary of the Company at 201 Elliott Avenue West, Seattle,
Washington 98119.
Whether or not you intend to be present at the meeting, please sign
and date the enclosed proxy and return it in the enclosed envelope.
BY ORDER OF THE BOARD OF DIRECTORS
MARVIN B. TEPPER
Secretary
Seattle, Washington
April 29, 1997
<PAGE>
PATHOGENESIS CORPORATION
201 ELLIOTT AVENUE WEST
SEATTLE, WASHINGTON 98119
(206) 476-8100
----------------------
PROXY STATEMENT
----------------------
The accompanying proxy is solicited by the Board of Directors of
PathoGenesis Corporation (the "Company") for use at the Annual Meeting of
Stockholders to be held at 6 p.m. Pacific Daylight Savings Time on Wednesday,
June 25, 1997, and any adjournment thereof (the "Annual Meeting"). This proxy
material is being mailed to stockholders commencing on or about May 5, 1997.
VOTING SECURITIES; PROXIES
A majority of the outstanding shares of Common Stock, par value $.001
per share (the "Common Stock"), present in person or represented by proxy shall
constitute a quorum at the Annual Meeting. All shares of Common Stock
represented by properly executed proxies which are returned and not revoked
will be voted in accordance with the instructions, if any, given therein.
Regarding the election of three Class II Directors to serve until the Annual
Meeting of Stockholders in 2000, in voting by proxy, stockholders may vote in
favor of all nominees or withhold their votes as to all nominees or withhold
their votes as to specific nominees. With respect to the other proposals to be
voted upon, stockholders may vote in favor of a proposal, against a proposal or
may abstain from voting. Stockholders should specify their choices on the
enclosed form of proxy. If no specific instructions are given with respect to
the matters to be acted upon, the shares of Common Stock represented by a
signed proxy will be voted FOR all the Board's nominees for Director, FOR the
proposal to amend Article FOURTH of the Company's Amended and Restated
Certificate of Incorporation, FOR the proposal to adopt the 1997 Stock Option
Plan and terminate the 1996 Stock Option Plan for Non-Employee Directors,
FOR the proposal to ratify the appointment of KPMG Peat Marwick LLP as
independent auditors and in accordance with the proxy-holder's best
judgment as to any other matters raised at the Annual Meeting.
Directors will be elected by a plurality of the votes cast by the
holders of shares of Common Stock voting in person or by proxy at the Annual
Meeting. Accordingly, abstentions and broker non-votes will not affect the
outcome of the election. Amendment of Article FOURTH of the Company's Amended
and Restated Certificate of Incorporation will require the affirmative vote of
a majority of the shares outstanding as of the record date. Adoption of the
1997 Stock Option Plan and termination of the 1996 Stock Option Plan for
Non-Employee Directors, and ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors will each require approval by a majority of
the votes cast by the holders of the shares of Common Stock voting on the
proposal in person or by proxy at the Annual Meeting. Thus, with respect to the
proposed amendment, abstentions and broker non-votes will have the same effect
as votes against but, with respect to the adoption of the 1997 Stock Option
Plan and termination of the 1996 Stock Option Plan for Non-Employee Directors
and the ratification of the appointment of KPMG Peat Marwick LLP, abstentions
and broker non-votes will not be included in vote totals and will have no
effect on the outcome of the vote.
A stockholder who has given a proxy may revoke it at any time prior to
its exercise by giving written notice of such revocation to the Secretary of
the Company, executing and delivering to the Company a later dated proxy
reflecting contrary instructions or appearing at the Annual Meeting and taking
appropriate steps to vote in person.
1
<PAGE>
At the close of business on April 28, 1997, _______ shares of Common
Stock were outstanding and eligible for voting at the meeting. Each stockholder
of record is entitled to one vote for each share of Common Stock held on all
matters that come before the meeting. Only stockholders of record at the close
of business on April 28, 1997 are entitled to notice of, and to vote at, the
meeting.
The Company will bear the cost of solicitation of proxies. In addition
to the solicitation of proxies by mail, certain officers and employees of the
Company, without additional remuneration, may also solicit proxies personally
by telefax and by telephone. In addition to mailing copies of this material to
stockholders, the Company may request persons, and reimburse them for their
expenses in connection therewith, who hold stock in their names or custody or
in the names of nominees for others to forward such material to those persons
for whom they hold stock of the Company and to request their authority for
execution of the proxies. The Company may also engage Morrow & Co. to assist in
the solicitation of proxies from stockholders for a fee estimated at
approximately $10,000, plus out of pocket expenses.
PROPOSAL 1
ELECTION OF DIRECTORS
The By-Laws of the Company provide that each Director serves from the
date of his or her election until the annual meeting of stockholders held in
the third year following the year of his or her election and until his or her
successor is elected and qualified or until his or her earlier death,
resignation or removal. Each class consists, as nearly as practicable, of
one-third of the total number of Directors serving on the Board of Directors.
The specific number of Directors is set by a resolution adopted by a majority
of the entire Board of Directors. In November 1996, the Board of Directors
adopted a resolution to increase the number of Directors from eight to nine and
elected Elizabeth M. Greetham to serve as a Class I Director. The terms of all
Class I Directors extend until the Annual Meeting of Stockholders in 1999. The
Board of Directors has nominated Wilbur H. Gantz, Lawrence C. Hoff and Edward
J. Mathias, each a current Director, for re-election to the Board of Directors
as a Class II Director for full three-year terms expiring in 2000. Officers are
elected for one-year terms by the Board of Directors.
The persons named in the accompanying proxy intend to vote for the
election as Director of the nominees listed herein. Each nominee has consented
to serve if elected. The Board of Directors has no reason to believe that the
nominees will not serve if elected, but if any of them should become
unavailable to serve as a Director, and if the Board of Directors designates a
substitute nominee or nominees, the persons named as proxies will vote for the
substitute nominee or nominees designated by the Board of Directors.
The following table sets forth certain information with respect to
each person who is currently a Director or executive officer of the Company and
the individuals nominated and recommended to be elected by the Board of
Directors of the Company and is based on the records of the Company and
information furnished to it by such persons. Reference is made to "Security
Ownership of Certain Beneficial Owners and Management" for information
pertaining to stock ownership by each Director and executive officer of the
Company, including the nominees.
2
<PAGE>
DIRECTORS AND OFFICERS OF THE COMPANY
The Directors and executive officers of the Company, their positions
held with the Company, their ages, and for Directors, the year their terms as
Directors expire, as of March 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Term as
Name Age Positions Director Expires
---- --- --------- ----------------
<S> <C> <C> <C>
Wilbur H. Gantz(1)............ 59 Chief Executive Officer, President and 1997
Director
Alan R. Meyer................. 44 Senior Vice President, Chief Financial 1999
Officer, Treasurer, Assistant Secretary
and Director
A. Bruce Montgomery, M.D. .... 43 Senior Vice President, Research and
Development
Marvin B. Tepper.............. 65 Secretary
Elizabeth M. Greetham......... 47 Director 1999
Lawrence C. Hoff(2)........... 68 Director 1997
Edward J. Mathias(3).......... 55 Director 1997
Michael J. Montgomery(3)...... 42 Director 1999
Talat M. Othman(1)(2)......... 61 Director 1998
Eugene L. Step(1)(3).......... 68 Director 1998
Fred Wilpon(1)(2)(3).......... 60 Director, Chairman of the Board 1998
</TABLE>
- --------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit/Finance Committee.
The following is a brief summary of the background of each Director
and executive officer of the Company:
WILBUR H. GANTZ is a founder of the Company and has been the Chief
Executive Officer, President and a Director of the Company since March 1992.
Prior to joining the Company, he was President of Baxter International Inc.
("Baxter"), a leading maker and distributor of health care products. Mr. Gantz
joined Baxter in 1966 and held several positions including Vice President of
Europe, located in Brussels, Belgium, President of the International Division,
Executive Vice President and Chief Operating Officer. He also served on the
Board of Directors of Baxter. He was named President of Baxter in 1987, which
position he held until joining the Company. Mr. Gantz is a director of the
Gillette Company, W.W. Grainger, Inc. and Bank of Montreal.
ALAN R. MEYER has been a Senior Vice President, Treasurer and
Assistant Secretary of the Company since July 1995, Chief Financial Officer and
a Director of the Company since December 1992 and was a Vice President of the
Company from December 1992 to July 1995. From 1991 to 1992, Mr. Meyer was Vice
President and Chief Financial Officer of Oculon Corporation ("Oculon"), a
biopharmaceutical company. Prior to Oculon, he was Chief Financial Officer of
HealthTech Services Corporation, a medical device company, and Memtec America
Corporation ("Memtec"), an industrial separations company. Before joining
Memtec, Mr. Meyer was employed by Baxter Healthcare Corporation and Arthur
Andersen & Co.
3
<PAGE>
A. BRUCE MONTGOMERY, M.D. has been a Senior Vice President, Research
and Development of the Company since July 1995 and was Vice President of
Medical and Regulatory Affairs of the Company from December 1993 to July 1995.
From 1989 to November 1993, Dr. Montgomery was Associate Director of Clinical
Research at Genentech, Inc., a biotechnology company, where he was involved in
the clinical development of Pulmozyme, an inhaled drug for cystic fibrosis
patients. From 1988 to 1989 he was Assistant Professor of Medicine, Director of
the Medical Intensive Care Unit, Pulmonary Disease Section, Department of
Medicine, State University of New York, Stony Brook, New York. Previously Dr.
Montgomery was Assistant Professor of Medicine in Residence, University of
California, San Francisco and Cardiovascular Research Institute, Chest Service,
San Francisco General Hospital. He is a co-inventor of two use patents related
to aerosolized pentamidine, a drug for an AIDS-related infection. Dr.
Montgomery is the brother of Michael J. Montgomery, a Director of the Company.
MARVIN B. TEPPER has been Secretary of the Company since September
1992. He has been Executive Vice President and General Counsel of Sterling
Equities, Inc., an investment company, since 1989. Previously, Mr. Tepper was a
partner in the law firm of Botein Hays & Sklar, New York, New York.
ELIZABETH M. GREETHAM has been a Director of the Company since
November 1996. She is currently Portfolio Manager of Life Science L.P. Funds
and handles analytical responsibilities for all health care investments for the
institutional, mutual and high individual net worth accounts at Weiss, Peck &
Greer Investments, a registered investment advisor where she has been employed
since 1990. Ms. Greetham also serves as a director of various pharmaceutical
companies, including Medco Research Inc., Access Pharmaceutical Inc., Guilford
Pharmaceutical Inc., ChiRex Inc. and SangStat Medical Corporation. Ms. Greetham
has an M.A. in Economics from Edinburgh University.
LAWRENCE C. HOFF has been a Director of the Company since April 1992.
He was President of The Upjohn Company ("Upjohn"), a pharmaceutical company,
from 1984 through 1990, Chief Operating Officer from 1987 through 1990 and a
director from 1973 until Upjohn's merger in 1995. Mr. Hoff is also a director
of Medimmune Inc., Curative Health Systems and Alpha Beta Technologies, Inc. He
is a past Chairman of the Pharmaceutical Manufacturers Association.
EDWARD J. MATHIAS has been a Director of the Company since November
1994. He has been a Managing Director of The Carlyle Group, a Washington, D.C.
merchant banking firm, since January 1994. Previously, Mr. Mathias was with T.
Rowe Price Associates, Inc., an investment manager, where he served on its
board of directors and was a member of its Management Committee for over ten
years. In addition, he is a director of U.S. Office Products Company and SIRROM
Capital.
MICHAEL J. MONTGOMERY has been a Director of the Company since July
1995. He has been President and Chief Operating Officer of SEGA GAMEWORKS LLC,
an entertainment company, since September 1996. He was a senior executive at
DreamWorks SKG, an entertainment company, involved with financial matters from
January 1995 to September 1996. He was Executive Vice President and Chief
Financial Officer of Euro Disney SCA from April 1993 to August 1994, Vice
President of The Walt Disney Company from 1989 to 1993 and Treasurer from 1991
to 1993. Previously, Mr. Montgomery was employed by Atlantic Richfield Company.
Mr. Montgomery is the brother of Dr. Montgomery, Senior Vice President,
Research and Development, of the Company.
TALAT M. OTHMAN has been a Director of the Company since September
1992. He has been Chairman and Chief Executive Officer of Grove Financial,
Inc., a financial services company, since September 1995. He was President of
Dearborn Financial, Inc. from 1984 to August 1995 and Chairman and Chief
Executive Officer from 1993 to August 1995. He is also director for the Middle
East Policy Council in Washington, D.C. and a member of the Dean's Advisory
Council, the Kennedy School of Government at Harvard University. He was a
director of Harken Energy Corporation and Hartmarx Corporation. He was founding
President of the Mid-America Arab Chamber of Commerce as well as of the Midwest
Chapter of the Forex
4
<PAGE>
Association of North America. From 1985 to 1987, he served as President of the
Arab Bankers Association of North America.
EUGENE L. STEP has been a Director of the Company since April 1992. He
was Executive Vice President of Eli Lilly and Company ("Eli Lilly"), a
pharmaceutical company, from 1986 to 1992 and President of its Pharmaceutical
Division from 1973 to 1992. He was also a director and a member of the
Executive Committee of Eli Lilly. Mr. Step is a past Chairman of the
Pharmaceutical Manufacturers Association and past President of the
International Pharmaceutical Manufacturers Association. Mr. Step is currently a
director of Medco Research Inc., CellGenesys Inc., Scios-Nova Inc. and Guidant
Corp.
FRED WILPON has been a Director of the Company since January 1992 and
Chairman of the Board of Directors since May 1995. He is Co-Founder of and has
been Chairman of the Board of Sterling Equities, Inc. for over 20 years, and
the President and Chief Executive Officer of the New York Mets baseball team
for over 10 years. Mr. Wilpon's business interests include real estate as well
as other businesses. In addition, Mr. Wilpon is a director of Bear, Stearns &
Co. Inc.
COMMITTEES OF THE BOARD OF DIRECTORS - BOARD MEETINGS
The Board of Directors has established an Audit/Finance, a
Compensation and an Executive Committee to assist it in the discharge of its
responsibilities. The principal responsibilities of each committee and the
members of each committee are described in the succeeding paragraphs. Actions
taken by any committee of the Board are reported to the Board of Directors,
usually at its next meeting or by written report. The Company's Board of
Directors held six meetings during the fiscal year ended December 31, 1996 and
acted by consent on two occasions. The Executive Committee serves as the
nominating committee. All Directors attended at least 75% of the meetings held
during the fiscal year ended December 31, 1996.
The Audit/Finance Committee currently consists of Messrs. Mathias,
Step (Chairman), Wilpon and Montgomery, each of whom is an independent
Director. The Audit/Finance Committee held three meetings during the fiscal
year ended December 31, 1996. Each year it recommends the appointment of a firm
of independent public accountants to examine the financial statements of the
Company for the coming year. In making this recommendation, it reviews the
nature of audit services rendered, or to be rendered, to the Company. It
reviews with representatives of the independent public accountants the auditing
arrangements and scope of the independent public accountants' examination of
the financial statements, results of those audits, and any problems identified
by the independent public accountants regarding internal accounting controls,
together with their recommendations. It also meets with the Company's Chief
Financial Officer to review reports on the functioning of the Company's
programs, policies and procedures regarding financial controls and internal
auditing. This includes an assessment of internal controls within the Company
based upon the activities of the Company's internal auditing staff as well as
an evaluation of the performance of those staffs. In addition, the
Audit/Finance Committee meets with the Company's Chief Financial Officer to
review reports on the Company's investment securities and cash management
programs and policies. The Audit/Finance Committee is also prepared to meet at
any time upon request of the independent public accountants or the Chief
Financial Officer to review any special situation arising in relation to any of
the foregoing subjects.
The Compensation Committee currently consists of Messrs. Hoff, Othman
(Chairman) and Wilpon, each of whom is an independent Director. The
Compensation Committee held six meetings during the fiscal year ended December
31, 1996. This Committee makes recommendations to the Board of Directors as to
the salaries of the Chief Executive Officer and compensation of Directors. It
also sets the salaries of the other elected officers and reviews salaries of
certain other senior executives and employees of the Company. It grants
incentive compensation to elected officers and other senior executives and is
charged with the administration of the Company's stock option plans and
incentive programs. It also reviews and approves
5
<PAGE>
or makes recommendations to the Board of Directors on any proposed plan or
program which would benefit the senior executive group.
No member of the Compensation Committee has ever served as an
executive officer or an employee of the Company. In addition, no executive
officer of the Company has ever served as (i) a member of the compensation
committee or equivalent of another entity, one of whose executive officers
served on the Compensation Committee, (ii) a director of another entity, one of
whose executive officers served on the Compensation Committee, or (iii) a
member of the compensation committee or equivalent of another entity, one of
whose executive officers served as a Director of the Company.
The Executive Committee currently consists of Messrs. Gantz
(Chairman), Othman, Step and Wilpon. The Executive Committee held seven
meetings during the fiscal year ended December 31, 1996 and acted by consent on
one occasion. The Executive Committee has the authority to take all actions
that the Board of Directors may take, subject to certain restrictions imposed
by law.
COMPENSATION OF DIRECTORS
The Directors do not receive cash compensation for service on the
Board of Directors or on any of its Committees, but Directors may be reimbursed
for certain expenses in connection with attendance at Board of Directors' and
Committee meetings. During the fiscal year ended December 31, 1996, the
Company's non-employee Directors were granted fully-vested options to purchase
an aggregate of 42,000 shares of Common Stock at a weighted average exercise
price of $17.62 per share under the Company's 1996 Stock Option Plan for
Non-Employee Directors.
6
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid or earned for the
fiscal years ended December 31, 1996, December 31, 1995 and December 31, 1994
for those persons who were, at December 31, 1996, (i) the chief executive
officer and (ii) the two other most highly compensated executive officers of
the Company (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Annual All Other
Name and Principal Position Year Salary Bonus Compensation(1) Compensation
--------------------------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Wilbur H. Gantz................................... 1996 $290,690 $116,276 -- --
Chief Executive Officer and 1995 279,510 -- -- --
President 1994 279,510 -- -- --
A. Bruce Montgomery, M.D. ........................ 1996 194,070 67,865 -- --
Senior Vice President, Research 1995 183,057 63,665 --
and Development 1994 170,000 24,000 -- $58,318(2)
Alan R. Meyer..................................... 1996 180,000 63,000 -- --
Senior Vice President and 1995 168,667 58,800 -- --
Chief Financial Officer 1994 160,417 24,000 -- --
</TABLE>
- --------------
(1) Excludes items which are, in the aggregate, less than $50,000 or 10% of
the total annual salary and bonus.
(2) Represents amounts paid to Dr. Montgomery for moving expenses.
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the fiscal year ended December
31, 1996.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Value at Assumed
Individual Grants Annual Rates of
--------------------------------------------------------------- Stock
Number of Percent of Price Appreciation
Securities Total Options for
Underlying Granted to Exercise or Option Term
Options Employees in Base Price Expiration -----------------------
Name Granted(1) Fiscal Year ($/Share) Date 5% 10%
---- ---------- ----------- --------- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Wilbur H. Gantz................. 60,000 14% $16.25 1/24/06 $613,200 $1,553,900
A. Bruce Montgomery,
M.D............................. 25,000 6% 16.25 1/24/06 255,500 647,500
Alan R. Meyer................... 15,000 4% 16.25 1/24/06 153,300 388,500
</TABLE>
- --------------
(1) All options were granted at an exercise price equal to the fair market
value of the Common Stock on the date of grant.
7
<PAGE>
AGGREGATED OPTION EXERCISES DURING THE
FISCAL YEAR ENDED DECEMBER 31, 1996
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the
number and value of shares underlying exercisable and unexercisable stock
options as of the fiscal year end December 31, 1996 by the Named Executive
Officers. No options were exercised by any of the Named Executive Officers
during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End(1)
----------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Wilbur H. Gantz................................ 191,250 -- $1,734,695 $ --
A. Bruce Montgomery, M.D. ..................... 28,124 56,251 302,333 451,573
Alan R. Meyer.................................. 53,125 49,375 611,719 448,906
</TABLE>
- --------------
(1) These figures are based on a price of $21.75 per share, the closing price
of the Common Stock on December 31, 1996 as reported on the Nasdaq
National Market as of such date.
EMPLOYMENT AGREEMENTS
Wilbur H. Gantz entered into a five-year employment agreement with the
Company (the "Gantz Employment Agreement") which commenced in March 1992.
Under the terms of Mr. Gantz's employment agreement, Mr. Gantz is entitled
to receive an annual base salary and bonus (up to 60% of his annual base
salary) as determined by the Board of Directors. Mr. Gantz is also entitled
to receive benefits offered to the Company's employees generally. The Gantz
Employment Agreement provides that the employment of Mr. Gantz may be
terminated by the Company for "cause." "Cause" is defined as (i) willful and
repeated failure by Mr. Gantz to perform his duties under the Gantz Employment
Agreement, which failure is not remedied within 30 days after written notice
from the Company; (ii) conviction of Mr. Gantz for a felony; (iii) Mr. Gantz's
dishonesty or willfully engaging in conduct that is demonstrably and materially
injurious to the Company; or (iv) willful violation by Mr. Gantz of any
provision of the Gantz Employment Agreement which violation is not remedied
within 30 days after written notice from the Company. In addition, Mr. Gantz
may terminate his employment if (i) the Company substantially reduces his
duties, position, authority or responsibility under the Gantz Employment
Agreement and does not reinstate the same within 30 days or (ii) the Company
breaches its obligations with regard to Mr. Gantz's compensation, expenses and
benefits. The agreement also contains a provision prohibiting Mr. Gantz from
competing with the Company for a one-year period following termination of his
employment.
A. Bruce Montgomery, M.D. has an employment agreement with the Company
which extends until May 1997, and month-to-month thereafter. Under the terms of
Dr. Montgomery's employment agreement (the "Montgomery Employment Agreement"),
Dr. Montgomery is entitled to receive an annual base salary and bonus (up to
30% of his annual base salary) as determined by the Board of Directors. Dr.
Montgomery is also entitled to receive benefits offered to the Company's
employees generally. The Montgomery Employment Agreement provides that the
employment of Dr. Montgomery may be terminated by the Company for "cause."
"Cause" is defined as: (i) willful and repeated failure by Dr. Montgomery to
perform his duties under the Montgomery Employment Agreement, which failure is
not remedied within 30 days after written notice from the Company; (ii)
conviction of Dr. Montgomery for a felony; (iii) Dr. Montgomery's dishonesty or
willfully engaging in conduct that is demonstrably and materially injurious to
the Company; or (iv) willful violation by Dr. Montgomery of any provision of
the Montgomery Employment Agreement which violation
8
<PAGE>
is not remedied within 30 days after written notice from the Company. The
agreement also contains a provision prohibiting Dr. Montgomery from competing
with the Company for a one-year period following termination of his employment.
COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS
The Compensation Committee makes recommendations to the Board of
Directors as to the salaries of the Chief Executive Officer and compensation of
Directors. It also sets the salaries of the other elected officers and reviews
salaries of certain other senior executives and employees of the Company. It
grants incentive compensation to elected officers and other senior executives
and is charged with the administration of the Company's stock option plans and
incentive programs. It also reviews and approves or makes recommendations to
the Board of Directors on any proposed plan or program which would benefit the
senior executive group.
GENERAL POLICIES REGARDING COMPENSATION OF EXECUTIVE OFFICERS
The Company's executive compensation policies are intended (i) to
attract and retain high quality managerial and executive talent and to motivate
these individuals to maximize shareholder returns, (ii) to afford appropriate
incentives for executives to produce sustained superior performance and (iii)
to reward executives for superior individual contributions to the achievement
of the Company's business objectives. The Company's compensation structure
consists of base salary, annual cash bonuses and stock options. Together these
components link each executive's compensation directly to individual and
Company performance.
Salary. Base salary levels reflect individual positions, responsibilities,
experience, leadership, and potential contribution to the success of the
Company. Actual salaries vary based on the Compensation Committee's subjective
assessment of the individual executive's performance and the Company's
performance.
Bonuses. Executive officers are eligible to receive cash bonuses based on the
Compensation Committee's assessment of the respective executive's individual
performance and the performance of the Company. In its evaluation of executive
officers and the determination of incentive bonuses, the Compensation Committee
does not assign quantitative relative weights to different factors and follow
mathematical formulas. Rather, the Compensation Committee makes its
determination in each case after considering the factors it deems relevant.
Stock Options. Stock options, which are granted at the fair market value of the
Common Stock on the date of grant, are currently the Company's sole long-term
compensation vehicle. The stock options are intended to provide employees with
sufficient incentive to manage from the perspective of an owner with an equity
stake in the business.
In determining the size of individual options grants, the Compensation
Committee considers the aggregate number of shares available for grant, the
number of individuals to be considered for an award of stock options, and the
range of potential compensation levels that the option awards may yield. The
number and timing of stock option grants to executive officers are decided by
the Compensation Committee based on its subjective assessment of the
performance of each grantee. In determining the size and timing of option
grants, the Compensation Committee weighs any factors it considers relevant and
gives such factors the relative weight it considers appropriate under the
circumstances then prevailing. While an ancillary goal of the Compensation
Committee in awarding stock options is to increase the stock ownership of the
Company's management, the Compensation Committee does not, when determining the
amount of stock options to award, consider the amount of stock already owned by
an officer. The Compensation Committee believes
9
<PAGE>
that to do so could have the effect of inappropriately or inequitably
penalizing or rewarding executives based upon their personal decisions as to
stock ownership and option exercises.
In 1993, the Internal Revenue Code was amended to limit the
deductibility of compensation paid to certain executives in excess of $1
million. Compensation not subject to the limitation includes certain
compensation payable solely because an executive attains performance goals
("performance-based compensation"). The Company's compensation deduction for a
particular executive's total compensation, including compensation realized from
the exercise of stock options, will be limited to $1 million. The Compensation
Committee believes that the compensation paid by the Company in the fiscal year
ended December 31, 1996 will not result in any material loss of tax deductions
for the Company.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Gantz's base salary for the fiscal year ended December 31, 1996
was determined by the terms of his employment agreement for the five-year
period which commenced in March 1992 described elsewhere in the proxy
statement. In January 1997, the Compensation Committee granted Mr. Gantz
options pursuant to the Company's 1997 Stock Option Plan, subject to
stockholder approval of such plan, to purchase 75,000 shares of Common Stock at
$22.25 per share, the fair market value on the date of grant, in recognition of
Mr. Gantz's leadership and contributions during 1996 as the Company's Chief
Executive Officer and President. Mr. Gantz was instrumental in the initiation,
negotiation and successful completion of the Company's initial public offering
in November 1995 and a subsequent public offering in April 1996. In addition,
Mr. Gantz has maintained and enhanced a strong record in product development,
technology, innovation, quality and management efficiency and provided strong
leadership to the Company's management team, and aggressively pursued new areas
for growth. The Compensation Committee believes Mr. Gantz has made outstanding
contributions to the Company's development of its drug candidates and the
future marketing of such proposed products.
SUBMITTED BY THE
COMPENSATION COMMITTEE
Talat M. Othman (Chairman)
Lawrence C. Hoff
Fred Wilpon
10
<PAGE>
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on
the Common Stock since November 22, 1995 (the date the Common Stock began
trading on Nasdaq National Market) through February 28, 1997 with the
cumulative total return of the Nasdaq National Market Total Return Index and
the Nasdaq Pharmaceutical Stocks Index. Total return values were calculated
based on the assumption of $100 invested and on cumulative total return values
assuming reinvestment of dividends. The stock price performance shown on the
graph below is not necessarily indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG PATHOGENESIS CORPORATION,
NASDAQ STOCK MARKET TOTAL RETURN INDEX AND
NASDAQ PHARMACEUTICAL STOCKS INDEX
<TABLE>
<CAPTION>
Date Company Index Market Index Peer Index
---- ------------- ------------ ----------
<S> <C> <C> <C>
11/22/95 100,000 100,000 100,000
11/30/95 102,500 103,847 104,784
12/29/95 110,000 103,294 120,875
01/31/96 163,750 103,805 131,374
02/29/96 142,500 107,761 128,898
03/29/96 163,750 108,119 125,785
04/30/96 180,000 117,090 132,283
05/31/96 165,000 122,466 136,763
06/28/96 155,000 116,945 122,224
07/31/96 123,750 106,529 108,918
08/30/96 161,250 112,497 116,808
09/30/96 177,500 121,107 124,978
10/31/96 210,000 119,768 119,374
11/29/96 253,750 127,179 117,640
12/31/96 217,500 127,047 121,242
01/31/97 302,500 136,071 131,423
02/28/97 295,000 128,650 132,333
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CRSP Total Returns Index for: 11/22/95 12/29/95 12/31/96
- -----------------------------
<S> <C> <C> <C>
PathoGenesis Corp. Index 100.0 110.0 217.5
NASDAQ Market Index 100.0 103.3 127.0
NASDAQ Pharmaceutical 100.0 120.9 121.2
SIC 2830-2839 US & Foreign
</TABLE>
- -------------------------------------------------------------------------------
11
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 31, 1997, by (i) each
person or group who is known by the Company to own beneficially more than five
percent of the Common Stock, (ii) each of the Company's Directors, (iii) each
of the Named Executive Officers and (iv) all current executive officers and
Directors as a group.
<TABLE>
<CAPTION>
Number of Shares Percent
NAME AND ADDRESS Beneficially Owned (1) Beneficially Owned
- ---------------- --------------------- ------------------
<S> <C> <C>
The Capital Group Companies, Inc.(2)............. 870,000 5.4%
333 South Hope Street
Los Angeles, California 90071
Wilbur H. Gantz(3)............................... 544,525 3.4%
c/o PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
Elizabeth M. Greetham (4)........................ 256,000 1.6%
c/o Weiss, Peck & Greer, LLC
1 New York Plaza
New York, New York 10004
Lawrence C. Hoff(5).............................. 19,250 *
12821 Marsh Landing
Palm Beach Gardens, Florida 33418
Edward J. Mathias(6)............................. 14,250 *
c/o The Carlyle Group
1001 Pennsylvania Avenue N.W.
Washington, D.C. 20004
Alan R. Meyer(7)................................. 76,500 *
c/o PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
Michael J. Montgomery(8)......................... 20,500 *
c/o SEGA GAMEWORKS LLC
10 Universal City Plaza
Building 509
Universal City, California 91608
Talat Othman(9).................................. 24,500 *
c/o Grove Financial, Inc.
750 Lake Cook Road
Buffalo Grove, Illinois 60089
Eugene L. Step(10)............................... 29,500 *
741 Round Hill Road
Indianapolis, Indiana 46260
Fred Wilpon(11).................................. 753,500 4.7%
c/o Sterling PathoGenesis Company
575 Fifth Avenue
New York, New York 10017
12
<PAGE>
A. Bruce Montgomery, M.D.(12).................... 45,024 *
c/o PathoGenesis Corporation
201 Elliott Avenue West
Seattle, Washington 98119
Marvin B. Tepper(13)............................. 747,250 4.6%
c/o Sterling PathoGenesis Company
575 Fifth Avenue
New York, New York 10017
All Directors and Executive Officers as a group
of 11 persons(3)(4)(5)(6)(7)(8)(9)(10)(11)
(12)(13)..................................... 1,812,049 11.0%
</TABLE>
- --------------
* Less than 1.0%
1) Unless otherwise indicated, the persons named in the table above have sole
voting and investment power with respect to all Common Stock beneficially
owned by them, subject to applicable community property laws.
2) Based on Form 13-G filed on February 12, 1997.
3) Includes: (i) 112,500 shares of Common Stock held by The Wilbur H. Gantz
1992 Irrevocable Children's Trust; (ii) 18,750 shares of Common Stock held
by The Wilbur H. Gantz 1992 Irrevocable GST Trust; (iii) 3,750 shares of
Common Stock held by The Wilbur H. Gantz Children's Graduate School Trust;
and (iv) options to purchase 191,250 shares of Common Stock. Mr. Gantz is
the trustee of the foregoing trusts and disclaims beneficial ownership of
the Common Stock held thereby. Includes 1,875 shares of Common Stock held
by Mr. Gantz's wife and 26,400 shares of Common Stock held by the Linda T.
Gantz Revocable Trust. Does not include 15,000 shares of Common Stock held
by certain relatives of Mr. Gantz. Mr. Gantz disclaims beneficial
ownership of the Common Stock held by his wife and relatives.
4) Includes: (i) options to purchase 14,000 shares of Common Stock and (ii)
242,000 shares of Common Stock held by Weiss, Peck & Greer Investments.
Ms. Greetham handles all healthcare investments for the institutional,
mutual and high individual net worth accounts at Weiss, Peck & Greer
Investments, and may be deemed to have share voting and investment power
in such shares arising from her interest in the entity above. Ms. Greetham
disclaims beneficial ownership of such shares, except to the extent of her
interest in the entity referred to above.
5) Represents: (i) 5,000 shares of Common Stock held by the Lawrence C. Hoff
Trust and (ii) options to purchase 14,250 shares of Common Stock.
6) Includes options to purchase 14,250 shares of Common Stock. Does not
include 176,042 shares of Common Stock and warrants to purchase 30,483
shares of Common Stock held by The Carlyle Group. Mr. Mathias is a
managing director of The Carlyle Group. Mr. Mathias does not have or share
voting or investment power for the shares held by The Carlyle Group.
7) Includes options to purchase 72,500 shares of Common Stock.
8) Includes options to purchase 14,250 shares of Common Stock. Does not
include shares beneficially owned by A. Bruce Montgomery.
9) Includes options to purchase 24,500 shares of Common Stock.
10) Includes options to purchase 24,500 shares of Common Stock.
11) Represents: (i) 718,750 shares of Common Stock held by Sterling
PathoGenesis Company, of which Mr. Wilpon is managing partner and (ii)
options to purchase 34,750 shares of Common Stock.
12) Includes options to purchase 34,374 shares of Common Stock. Does not
include shares beneficially owned by Michael J. Montgomery.
13) Represents: (i) 718,750 shares of Common Stock held by Sterling
PathoGenesis Company, of which Mr. Tepper is a partner and (ii) options to
purchase 28,500 shares of Common Stock.
13
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company rents office space in New York, New York from an affiliate
of Sterling PathoGenesis Company ("Sterling"), a founding stockholder of the
Company, pursuant to an oral lease, at an annual rental of $36,200. The Company
believes such annual rate to be comparable to a rate which could be obtained
from an independent third party. Messrs. Fred Wilpon and Marvin B. Tepper are
two of the partners of Sterling.
PROPOSAL 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED SHARES OF COMMON STOCK
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Company to issue 20,000,000
shares of Common Stock. On April 28, 1997, there were approximately ________
shares of Common Stock outstanding, and another _________ shares of Common
Stock reserved for issuance pursuant to exercise of outstanding stock options
and warrants. The Board of Directors believes it to be advisable to increase
the number of authorized shares of Common Stock to 60,000,000 shares in order
to provide the Company with flexibility of action for possible future financing
transactions, acquisitions and other corporate purposes. The additional shares
of Common Stock would be capable of being issued for any proper corporate
purpose by the Board of Directors at any time without further corporate
approval. The Board of Directors believes it is desirable to give this
flexibility in considering such matters as stock splits or stock dividends,
raising additional capital, acquisitions and other corporate purposes.
Holders of Common Stock are not entitled to preemptive rights, and to
the extent that any additional shares of Common Stock or securities convertible
into Common Stock may be issued on other than a pro rata basis to current
stockholders, the present ownership portion of current stockholders may be
diluted. Depending upon the circumstances in which additional shares of Common
Stock are issued, the overall effects of such issuance may be to render more
difficult or to discourage a merger, tender offer, proxy contest or the
assumption of control by a holder of a large block of Common Stock and the
removal of incumbent management. Management is not aware of any possible
takeover attempts at this time.
The proposed amendment would amend and restate Article Fourth,
Paragraph A of the Certificate of Incorporation to read in its entirety as
follows:
FOURTH. A. The aggregate number of shares which the Corporation
shall have authority to issue is 61,000,000, of which 1,000,000
shares of the par value of $.01 per share shall be designated
"Preferred Stock" and 60,000,000 shares of the par value of $.001
per share shall be designated "Common Stock."
The Board of Directors recommends a vote FOR the approval of the
amendment to the Certificate of Incorporation to increase the number of
authorized shares of Common Stock to 60,000,000 shares, which is designated as
Proposal 2 on the enclosed proxy card.
14
<PAGE>
PROPOSAL 3
1997 STOCK OPTION PLAN
APPROVAL OF THE 1997 STOCK OPTION PLAN
The Company's Board of Directors has adopted the 1997 Stock Option
Plan (the "1997 Stock Option Plan"), subject to the approval by the
stockholders.
The purpose of the 1997 Stock Option Plan is (i) to align the
interests of the Company's stockholders with those of the Company's directors,
officers and key employees by providing recipients with a proprietary interest
in the Company's growth, profitability and success and (ii) to advance the
interests of the Company by attracting and retaining well-qualified scientists,
key employees, and directors who are not officers or other salaried employees
of the Company ("Non-Employee Directors").
The Company's current stock-based incentive plan, the 1992 Stock
Option Plan ("the 1992 Stock Option Plan"), provided for the grant of options
to acquire a maximum of 1,500,000 shares of Common Stock when it was
established in 1992. As of January 31, 1997, 67,611 shares remained available
for grant. The 1996 Stock Option Plan for Non-Employee Directors had 258,000
shares available for grant as of January 31, 1997, but the Board decided not to
grant any additional options under such plan. Accordingly, the Board believes
that it is in the best interest of the Company and its stockholders at this
time to terminate the 1996 Stock Option Plan for Non-Employee Directors and
adopt a new stock-based incentive plan in order to accomplish the purposes set
forth above.
A description of the 1997 Stock Option Plan, which is attached hereto
as Annex A, appears below.
The 1997 Stock Option Plan provides for the grant of options to
acquire a maximum of 2,000,000 shares of the Common Stock. Of such shares, as
of March 31, 1997, 377,050 shares were subject to outstanding options and
1,622,950 shares remained available for grant. The weighted average exercise
price at which options were issued under the 1997 Stock Option Plan is $22.93.
All such options were granted at exercise prices equal to the fair market value
of the Company's Common Stock on the dates of grant. The 1997 Stock Option Plan
permits the granting of qualified incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"), at the discretion of the administrator of
the 1997 Stock Option Plan (the "Plan Administrator"). The Board of Directors
has appointed the Compensation Committee of the Board, which consists of
Messrs. Hoff, Othman (Chairman) and Wilpon, as the Plan Administrator. Subject
to the terms of the 1997 Stock Option Plan, the Plan Administrator determines
the terms and conditions of options granted under the 1997 Stock Option Plan.
Options granted under the 1997 Stock Option Plan are evidenced by written
agreements which contain such terms, conditions, limitations and restrictions
as the Plan Administrator deems advisable and which are not inconsistent with
the 1997 Stock Option Plan.
ISOs may be granted to individuals who, at the time of grant, are
employees of the Company or its affiliates. NSOs may be granted to Directors,
employees, consultants and other agents of the Company or its affiliates.
The 1997 Stock Option Plan provides that the Plan Administrator must
establish an exercise price for ISOs that is not less than the fair market
value per share of the Common Stock at the date of grant and an exercise price
for NSOs of not less than 85% of such fair market value. Each ISO must expire
within 10 years of the date of grant. However, if ISOs are granted to persons
owning more than 10% of the voting stock of the Company, the 1997 Stock Option
Plan provides that the exercise price may not be less than 110% of the fair
market value per share at the date of grant and that the term of such ISOs may
not exceed five years. Unless otherwise provided by the Plan Administrator,
options granted under the 1997 Stock Option Plan vest at a rate of 25% per year
over a four-year period.
15
<PAGE>
An optionee whose relationship with the Company or any related
corporation ceases for any reason (other than termination for cause, death or
total disability, as such terms are defined in the 1997 Stock Option Plan) may
exercise options that are then exercisable only within the three-month period
following such cessation (unless such options terminate or expire sooner by
their terms), or within such longer period as may be determined by the Plan
Administrator in the case of NSOs. Unexercised options granted under the 1997
Stock Option Plan terminate upon a merger (other than a stock merger),
reorganization or liquidation of the Company; however, prior to such a
transaction, optionees may exercise such options without regard to whether the
vesting requirements have been satisfied.
Options granted under the 1997 Stock Option Plan convert into options
to purchase shares of another corporation that is the successor to the Company
in a stock merger with the Company, unless the Company and such other
corporation, in their sole discretion, determine that such options terminate.
Such converted options become fully vested without regard to whether the
vesting requirements in the option agreements for such options have been
satisfied, unless the Board of Directors determines otherwise.
The option exercise price must be paid in full at the time the notice
of exercise of the option is delivered to the Company and must be tendered in
cash, by bank certified or cashier's check or by personal check. Options may
also be exercised in "cashless exercises" (delivery of such shares of stock or
cancellation of such options of the Company having a fair market value equal to
the exercise price). Unless otherwise provided by the Plan Administrator,
options are nontransferable. The Board of Directors has certain rights to
suspend, amend or terminate the 1997 Stock Option Plan. Stockholder approval
must be obtained for certain amendments which will (i) increase the number of
shares which are to be reserved for the issuance of options under such plan or
(ii) permit the granting of stock options to a class of persons other than
those presently permitted to receive stock options under such plan.
16
<PAGE>
NEW PLAN BENEFITS
The following table sets forth the stock options that the individuals
and groups referred to below will receive in 1997 if the 1997 Stock Option Plan
is approved by the Company's stockholders at this Annual Meeting.
1997 STOCK OPTION PLAN
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE ($) (A) NUMBER OF UNITS (B)
----------------- -------------------- -------------------
<S> <C> <C>
Wilbur H. Gantz $206,250 75,000
Chief Executive Officer and President
A. Bruce Montgomery, M.D. 82,500 80,000
Senior Vice President, Research and
Development
Alan R. Meyer 55,000 20,000
Senior Vice President and Chief Financial
Officer
Executive Group 343,750 175,000
Non-Executive Officer Director Group -- --
Non-Executive Officer Employee Group 435,050 202,050
</TABLE>
- --------------
(a) Dollar value is based on a price of $25.00 per share, the closing price of
the Common Stock on March 31, 1997 as reported on the Nasdaq National
Market as of such date.
(b) All options are subject to vesting; as of March 31, 1997, none have
vested.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE 1997 STOCK OPTION PLAN UNDER
CURRENT LAW
The following is a brief description of the federal income tax
consequences of stock options which may be granted under the 1997 Stock Option
Plan under present tax laws.
Incentive Stock Options. There will be no federal income tax consequences
to either the recipient or the Company upon the grant of an ISO. Except as
described below, the recipient will not have to recognize any income upon the
exercise of an ISO, and the Company will not be allowed any deduction, as long
as the recipient does not dispose of the shares within two years from the date
the ISO was granted or within one year from the date the shares were
transferred to the recipient (the "holding period requirement"). Upon a sale of
the shares after the holding period requirement is satisfied, the recipient
will recognize a long-term capital gain (or loss) measured by the excess (or
deficit) of the amount realized from such sale over the option price of such
shares, but no deduction will be allowed to the Company. If a recipient
disposes of shares before the holding period requirement is satisfied, the
recipient will recognize ordinary income in the year of disposition, and the
Company will be entitled to a corresponding deduction, in an amount equal to
the lesser of (a) the excess of the fair market value of the shares on the date
of exercise over the option price of the shares or (b) the excess of the amount
realized from such disposition over the option price of the
17
<PAGE>
shares. Where shares are sold before the holding period requirement is
satisfied, the recipient will also recognize a capital gain to the extent that
the amount realized from the disposition of the shares exceeded the fair market
value of the shares on the date of exercise.
A recipient may under certain circumstances by permitted to pay all or
a portion of the option price of an ISO by delivering Common Stock of the
Company. If the Common Stock delivered by a recipient as payment of the option
price was acquired through a prior exercise of an ISO or an option granted
under an employee stock purchase plan, and if the holding period requirement
applicable to such Common Stock has not yet been met, the delivery of such
Common Stock to the Company could be treated as a taxable sale or disposition
of such stock. In general, where a recipient pays the option price of an ISO be
delivering Common Stock of the Company, the recipient pays the option price of
an ISO by delivering Common Stock of the Company, the recipient will have a
zero tax basis in the shares received that are in excess of the number of
shares of Common delivered in payment of the option price.
For alternative minimum tax purposes, regardless of whether the
recipient satisfies the holding period requirement, the excess of the fair
market value of the shares on the exercise date over the option price will be
treated as a positive adjustment to the recipient's alternative minimum taxable
income for the year the ISO is exercised. If the shares are disposed of in the
year the ISO was exercised, however, the positive adjustment taken into account
for alternative minimum tax purposes will not exceed the gain realized on such
sale. Exercise of an ISO may thus result in liability for alternative minimum
tax.
An ISO will generally be treated as an NSO for federal income tax
purposes if it is exercised more than three months after the recipient
terminates his or her employment with the Company, provided that this
three-month limitation will not apply if the employment terminates by reason of
the recipient's death. Under the 1997 Stock Option Plan, an ISO will terminate
90 days after the recipient terminates employment, except in the case of a
termination resulting from death or retirement. In the case of a recipient who
retires, an option will not be treated as an ISO for federal income tax
purposes (and will instead be treated as an NSO) if such option is exercised
more than three months after the termination of employment.
Non-Qualified Stock Options. There will be no federal income tax
consequences to either the recipient or the Company upon the grant of an NSO.
Upon the exercise of an NSO, the recipient will recognize ordinary compensation
income in an amount equal to the fair market value of each share on the date of
exercise over the option price, and the Company generally will be entitled to a
federal income tax deduction of the same amount.
If a recipient pays the option price of an NSO by surrendering Common
Stock held by the recipient, then, to the extent the shares received upon
exercise of the option do not exceed the number of shares delivered, the
recipient will be treated as making a tax-free exchange of stock and the new
shares received will have the same tax basis and holding period requirement as
the shares given up. In such case, the recipient will recognize ordinary
compensation income in an amount equal to the fair market value of the shares
in excess of the shares delivered in payment of the option price. The basis of
such additional shares will equal their fair market value on the date the
option was exercised. If a recipient exercises an NSO on a cashless basis as
permitted under the 1997 Stock Option Plan, the recipient will recognize
compensation income equal to the fair market value of the shares received and
the recipient's initial tax basis in such shares will equal their fair market
value.
TERMINATION OF 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
Due to recent changes to Section 16 of the Securities Exchange Act of
1934, as amended, and Rule 16(b) promulgated thereunder, it is no longer
necessary for the Company to maintain a separate stock option plan for
Non-Employee Directors. Therefore, the Board of Directors has proposed
terminating the 1996 Stock
18
<PAGE>
Option Plan for Non-Employee Directors and granting all future options to
non-employee Directors pursuant to the 1997 Stock Option Plan, if such plan is
approved by the stockholders. The termination of the 1996 Stock Option Plan for
Non-Employee Directors will not have any effect on outstanding options granted
under such plan. As of the date hereof, options to purchase an aggregate of
42,000 shares of Common Stock have been granted pursuant to the 1996 Stock
Option Plan for Non-Employee Directors in accordance with the terms thereof.
The Board of Directors recommends a vote FOR the approval of the 1997
Stock Option Plan and the termination of the 1996 Stock Option Plan for
Non-Employee Directors, which is designated as Proposal 3 on the enclosed proxy
card.
PROPOSAL 4
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company has appointed KPMG Peat Marwick
LLP as independent accountants for the 1997 fiscal year and to render other
professional services as required. The appointment of KPMG Peat Marwick LLP is
being submitted to stockholders for ratification.
Representatives of KPMG Peat Marwick LLP will be present at the Annual
Meeting, where they will have the opportunity to make a statement if they
desire to do so, and are expected to be available to respond to appropriate
questions.
The Board of Directors recommends a vote FOR the ratification of KPMG
Peat Marwick LLP as independent accountants of the Company, which is designated
as Proposal 4 on the enclosed proxy card.
ANNUAL REPORT
The Annual Report of the Company for the fiscal year ended December
31, 1996 is being mailed to stockholders with this proxy statement.
DEADLINE FOR STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Stockholder proposals intended to be considered for inclusion in the
proxy statement for presentation at the Company's 1998 Annual Meeting of
Stockholders must be received at the Company's offices at 201 Elliott Avenue
West, Seattle, Washington 98119 no later than January 5, 1998, for inclusion in
the Company's proxy statement and form of proxy relating to such meeting. All
proposals must comply with applicable Commission rules and regulations.
OTHER MATTERS
The Board of Directors is not aware of any other matter other than
those set forth in this proxy statement that will be presented for action at
the meeting. If other matters properly come before the meeting, the persons
named as proxies intend to vote the shares they represent in accordance with
their best judgment in the interest of the Company.
19
<PAGE>
THE COMPANY UNDERTAKES TO PROVIDE ITS STOCKHOLDERS WITHOUT CHARGE A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES FILED THEREWITH. WRITTEN REQUESTS FOR SUCH REPORT SHOULD BE ADDRESSED
TO THE OFFICE OF THE SECRETARY, PATHOGENESIS CORPORATION, 201 ELLIOTT AVENUE
WEST, SEATTLE, WASHINGTON 98119.
20
<PAGE>
Annex A
-------
PATHOGENESIS CORPORATION
1997 STOCK OPTION PLAN
SECTION 1. Purpose. The purpose of the PathoGenesis Corporation 1997 Stock
Option Plan (this "Plan") is to provide a means whereby selected employees,
officers, directors, agents, consultants and independent contractors of
PathoGenesis Corporation (the "Company") or of any parent or subsidiary (as
defined in subsection 5.7 and referred to hereinafter as "related
corporations") thereof, may be granted incentive stock options and/or
nonqualified stock options to purchase the Common Stock (as defined in Section
3) of the Company, in order to attract and retain the services or advice of
such employees, officers, directors, agents, consultants and independent
contractors and to provide added incentive to them by encouraging stock
ownership in the Company.
SECTION 2. Administration.
(a) This Plan shall be administered by the Board of Directors of the
Company (the "Board"), except to the extent the Board delegates its authority
to a committee of the Board to administer this Plan. The administrator of this
Plan shall hereinafter be referred to as the "Plan Administrator."
(b) For so long as the Company's Common Stock is registered under Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no
option shall be granted to a director or officer (subject to Section 16 of the
Exchange Act) of the Company by the Board unless (i) approved in advance by the
Board or the Plan Administrator in accordance with the provisions of Rule
16b-3(d)(1) under the Exchange Act (where the Plan Administrator, if not the
entire Board, is a committee of the Board composed solely of two or more
non-employee directors who satisfy the requirements of Rule 16b-3(b)(3) under
the Exchange Act), (ii) approved in advance, or subsequently ratified by the
stockholders in accordance with the provisions of Rule 16b-3(d)(2) under the
Exchange Act or (iii) absent approval pursuant to subsections (i) or (ii), no
officer or director of the Company may sell shares received upon the exercise
of an option during the six-month period immediately following the grant of
such option.
2.1 Procedures. The Board shall designate one of the members of the
Plan Administrator as chairman. The Plan Administrator may hold meetings at
such times and places as it shall determine. The acts of a majority of the
members of the Plan Administrator present at meetings at which a quorum exists,
or acts reduced to or approved in writing by all Plan Administrator members,
shall be valid acts of the Plan Administrator.
2.2 Responsibilities. Except for the terms and conditions explicitly
set forth in this Plan, the Plan Administrator shall have the authority, in its
discretion, to determine all matters relating to the options to be granted
under this Plan, including selection of the individuals to be granted options,
the number of shares to be subject to each option, the exercise price, and all
other
- 1 -
<PAGE>
terms and conditions of the options, including the designation of such options
as incentive stock options or nonqualified stock options. Grants under this
Plan need not be identical in any respect, even when made simultaneously. The
interpretation and construction by the Plan Administrator of any terms or
provisions of this Plan or any option issued hereunder, or of any rule or
regulation promulgated in connection herewith, shall be conclusive and binding
on all interested parties, so long as such interpretation and construction with
respect to incentive stock options corresponds to the requirements of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations thereunder.
2.3 Section 16(b) Compliance and Bifurcation of Plan. It is the
intention of the Company that this Plan comply in all respects with Section
16(b) and Rule 16b-3 under the Exchange Act, to the extent applicable, and, if
any Plan provision is later found not to be in compliance with such Section or
Rule, as the case may be, the provision shall be deemed null and void, and in
all events the Plan shall be construed in favor of its meeting the requirements
of Section 16(b) and Rule 16b-3 under the Exchange Act. Notwithstanding
anything in the Plan to the contrary, the Board, in its absolute discretion,
may bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors or other
persons subject to Section 16(b) of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other participants.
SECTION 3. Stock Subject to This Plan. The stock subject to this Plan shall
be the Company's common stock, par value $.001 per share (the "Common Stock"),
presently authorized but unissued or held in the Company's treasury or
subsequently acquired by the Company. Subject to adjustment as provided in
Section 7 hereof, the aggregate amount of Common Stock to be delivered upon the
exercise of all options granted under this Plan shall not exceed 2,000,000
shares as such Common Stock was constituted on the effective date of this Plan.
If any option granted under this Plan shall expire, be surrendered, exchanged
for another option, canceled or terminated for any reason without having been
exercised in full, the unpurchased shares subject thereto shall thereupon again
be available for purposes of this Plan, including for replacement options which
may be granted in exchange for such surrendered, canceled or terminated
options.
SECTION 4. Eligibility. An incentive stock option may be granted only to
any individual who, at the time the option is granted, is an employee of the
Company or any related corporation. A nonqualified stock option may be granted
to any director, employee, officer, agent, consultant or independent contractor
of the Company or any related corporation, whether an individual or an entity.
Any party to whom an option is granted under this Plan shall be referred to
hereinafter as an "Optionee".
SECTION 5. Terms and Conditions of Options. Options granted under this Plan
shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan (the "Option
Agreement"). Notwithstanding the foregoing, options shall include or
incorporate by reference the following terms and conditions:
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<PAGE>
5.1 Number of Shares and Price. The maximum number of shares that may
be purchased pursuant to the exercise of each option and the price per share at
which such option is exercisable (the "exercise price") shall be as established
by the Plan Administrator, provided that the Plan Administrator shall act in
good faith to establish the exercise price which shall be not less than the
fair market value per share of the Common Stock at the time the option is
granted with respect to incentive stock options and not less than 85% of the
fair market value per share of the Common Stock at the time the option is
granted with respect to nonqualified stock options and also provided that, with
respect to incentive stock options granted to greater than 10% stockholders,
the exercise price shall be as required by Section 6.
5.2 Term and Maturity. Subject to the restrictions contained in
Section 6 with respect to granting incentive stock options to greater than 10%
stockholders, the term of each incentive stock option shall be as established
by the Plan Administrator and, if not so established, shall be 10 years from
the date it is granted but in no event shall the term of any incentive stock
option exceed 10 years. The term of each nonqualified stock option shall be as
established by the Plan Administrator and, if not so established, shall be 10
years from the date it is granted. To ensure that the Company or related
corporation will achieve the purpose and receive the benefits contemplated in
this Plan, any option granted to any Optionee hereunder shall, unless the
condition of this sentence is waived or modified in the agreement evidencing
the option or by resolution adopted by the Plan Administrator, be exercisable
according to the following schedule:
<TABLE>
<CAPTION>
Period of Optionee's
Continuous Relationship
With the Company or Related
Corporation From the Date Portion of Total Option
the Option is Granted Which is Exercisable
--------------------------- -----------------------
<S> <C>
after 1 year 25%
after 2 years 50%
after 3 years 75%
after 4 years 100%
</TABLE>
5.3 Exercise. Subject to the vesting schedule described in subsection
5.2 above, each option may be exercised in whole or in part; provided, however,
that no fewer than 100 shares (or the remaining shares then purchasable under
the option, if less than 100 shares) may be purchased upon any exercise of
option rights hereunder and that only whole shares will be issued pursuant to
the exercise of any option. Options shall be exercised by delivery to the
Company of notice of the number of shares with respect to which the option is
exercised, together with payment of the exercise price.
5.4 Payment of Exercise Price. Payment of the option exercise price
shall be made in full at the time the notice of exercise of the option is
delivered to the Company and shall be in cash, bank certified or cashier's
check or personal check (unless at the time of exercise the
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<PAGE>
Plan Administrator in a particular case determines not to accept a personal
check) for the Common Stock being purchased.
The Plan Administrator can determine at the time the option is granted for
incentive stock options, or at any time before exercise for nonqualified stock
options, that additional forms of payment will be permitted. To the extent
permitted by the Plan Administrator and applicable laws and regulations
(including, but not limited to, federal tax and securities laws and regulations
and state corporate law), an option may be exercised by:
(a) delivery of shares of stock of the Company held by an Optionee having a
fair market value equal to the exercise price, such fair market value to be
determined in good faith by the Plan Administrator;
(b) delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, all in accordance with the regulations of
the Federal Reserve Board, to promptly deliver to the Company the amount of
sale or loan proceeds to pay the exercise price and any federal, state or local
withholding tax obligations that may arise in connection with the exercise;
provided, that the Plan Administrator, in its sole discretion, may at any time
determine that this subparagraph (b), to the extent the instructions to the
broker call for an immediate sale of the shares, shall not be applicable to any
Optionee whose relationship with the Company has terminated prior to the time
of exercise;
(c) delivery of a properly executed exercise notice together with
instructions to the Company to withhold from the shares that would otherwise be
issued upon exercise that number of shares having a fair market value equal to
the option exercise price.
5.5 Withholding Tax Requirement. The Company or any related
corporation shall have the right to retain and withhold from any payment of
cash or Common Stock under the Plan the amount of taxes required by any
government to be withheld or otherwise deducted and paid with respect to such
payment. At its discretion, the Company may require an Optionee receiving
shares of Common Stock to reimburse the Company for any such taxes required to
be withheld by the Company and withhold such shares in whole or in part until
the Company is so reimbursed. In lieu thereof, the Company shall have the right
to withhold from any other cash amounts due or to become due from the Company
to the Optionee an amount equal to such taxes or retain and withhold a number
of shares having a market value not less than the amount of such taxes required
to be withheld by the Company to reimburse the Company for any such taxes and
cancel (in whole or in part) any such shares so withheld. If required by
Section 16(b) of the Exchange Act, the election to pay withholding taxes by
delivery of shares held by any person who at the time of exercise is subject to
Section 16(b) of the Exchange Act, shall be made either six months prior to the
date the option exercise becomes taxable or at such other times as the Company
may determine as necessary to comply with Section 16(b) of the Exchange Act.
5.6 Assignability and Transferability of Option. Options granted under
this Plan and the rights and privileges conferred hereby may not be
transferred, assigned, pledged or
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<PAGE>
hypothecated in any manner (whether by operation of law or otherwise) other
than (i) by will or by the applicable laws of descent and distribution, (ii)
pursuant to a qualified domestic relations order as defined in Section 414(p)
of the Code, or Title I of the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder, or (iii) as otherwise determined by the
Plan Administrator and set forth in the applicable Option Agreement. Any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any
option under this Plan or of any right or privilege conferred hereby, contrary
to the Code or to the provisions of this Plan, or the sale or levy or any
attachment or similar process upon the rights and privileges conferred hereby
shall be null and void. The designation by an Optionee of a beneficiary does
not, in and of itself, constitute an impermissible transfer under this Section.
5.7 Termination of Relationship. If the Optionee's relationship with
the Company or any related corporation ceases for any reason other than
termination for cause, death or total disability, and unless by its terms the
option sooner terminates or expires, then the Optionee may exercise, for a
three-month period, that portion of the Optionee's option which is exercisable
at the time of such cessation, but the Optionee's option shall terminate at the
end of the three-month period following such cessation as to all shares for
which it has not theretofore been exercised, unless, in the case of a
nonqualified stock option, such provision is waived in the agreement evidencing
the option or by resolution adopted by the Plan Administrator within 90 days of
such cessation.
If an Optionee is terminated for cause, any option granted hereunder
shall automatically terminate as of the first discovery by the Company of any
reason for termination for cause, and such Optionee shall thereupon have no
right to purchase any shares pursuant to such option. "Termination for cause"
shall mean dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violations), fraud, misconduct or disclosure of
confidential information. If an Optionee's relationship with the Company or any
related corporation is suspended pending an investigation of whether or not the
Optionee shall be terminated for cause, all Optionee's rights under any option
granted hereunder likewise shall be suspended during the period of
investigation.
If an Optionee's relationship with the Company or any related
corporation ceases because of a total disability, the Optionee's option shall
not terminate or, in the case of an incentive stock option, cease to be treated
as an incentive stock option until the end of the 12-month period following
such cessation (unless by its terms it sooner terminates and expires). As used
in this Plan, the term "total disability" refers to a mental or physical
impairment of the Optionee which is expected to result in death or which has
lasted or is expected to last for a continuous period of 12 months or more and
which causes the Optionee to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to be
engaged in any substantial gainful activity. Total disability shall be deemed
to have occurred on the first day after the Company and the two independent
physicians have furnished their opinion of total disability to the Plan
Administrator.
- 5 -
<PAGE>
For purposes of this subsection 5.7, a transfer of relationship
between or among the Company and/or any related corporation shall not be deemed
to constitute a cessation of relationship with the Company or any of its
related corporations. For purposes of this subsection 5.7, with respect to
incentive stock options, employment shall be deemed to continue while the
Optionee is on military leave, sick leave or other bona fide leave of absence
(as determined by the Plan Administrator). The foregoing notwithstanding,
employment shall not be deemed to continue beyond the first 90 days of such
leave, unless the Optionee's reemployment rights are guaranteed by statute or
by contract.
As used herein, the term "related corporation," when referring to a
subsidiary, shall mean any corporation (other than the Company) or other entity
in, at the time of the granting of the option, an unbroken chain of
corporations or other entities ending with the Company, if stock or other
interests possessing 50% or more of the total combined voting power of all
classes of stock or other interests of each of the corporations or other
entities other than the Company is owned by one of the other corporations or
other entities in such chain. When referring to a parent corporation or other
entity, the term "related corporation" shall mean any corporation or other
entity in an unbroken chain of corporations or other entities ending with the
Company if, at the time of the granting of the option, each of the corporations
or other entities other than the Company owns stock or other interests
possessing 50% or more of the total combined voting power of all classes of
stock or other interests in one of the other corporations or other entities in
such chain.
5.8 Death of Optionee. If an Optionee dies while he or she has a
relationship with the Company or any related corporation or within the
three-month period (or 12-month period in the case of totally disabled
Optionees) following cessation of such relationship, any option held by such
Optionee to the extent that the Optionee would have been entitled to exercise
such option, may be exercised within one year after his or her death by the
personal representative of his or her estate or by the person or persons to
whom the Optionee's rights under the option shall pass by will or by the
applicable laws of descent and distribution.
5.9 Status of Shareholder. Neither the Optionee nor any party to which
the Optionee's rights and privileges under the option may pass shall be, or
have any of the rights or privileges of, a shareholder of the Company with
respect to any of the shares issuable upon the exercise of any option granted
under this Plan unless and until such option has been exercised.
5.10 Continuation of Employment. Nothing in this Plan or in any option
granted pursuant to this Plan shall confer upon any Optionee any right to
continue in the employ of the Company or of a related corporation, or to
interfere in any way with the right of the Company or of any such related
corporation to terminate his or her employment or other relationship with the
Company at any time.
5.11 Modification and Amendment of Option. Subject to the requirements
of Code Section 422 with respect to incentive stock options and to the terms
and conditions and within the limitations of this Plan, the Plan Administrator
may modify or amend outstanding options granted under this Plan. The
modification or amendment of an outstanding option shall not,
- 6 -
<PAGE>
without the consent of the Optionee, impair or diminish any of his or her
rights or any of the obligations of the Company under such option. Except as
otherwise provided in this Plan, no outstanding option shall be terminated
without the consent of the Optionee. Unless the Optionee agrees otherwise, any
changes or adjustments made to outstanding incentive stock options granted
under this Plan shall be made in such a manner so as not to constitute a
"modification" as defined in Code Section 424(h) and so as not to cause any
incentive stock option issued hereunder to fail to continue to qualify as an
incentive stock option as defined in Code Section 422(b).
5.12 Limitation on Value for Incentive Stock Options. As to all
incentive stock options granted under the terms of this Plan, to the extent
that the aggregate fair market value (determined at the time the incentive
stock option is granted) of the stock with respect to which incentive stock
options are exercisable for the first time by the Optionee during any calendar
year (under this Plan and all other incentive stock option plans of the
Company, a related corporation or a predecessor corporation) exceeds $100,000,
such options shall be treated as nonqualified stock options. The previous
sentence shall not apply if the Code is amended or if the Internal Revenue
Service publicly rules, issues a private ruling to the Company, any Optionee,
or any legatee, personal representative or distributee of an Optionee or issues
regulations, changing or eliminating such annual limit, in which case the
limitation shall be that provided by the Code or the Internal Revenue Service,
as the case may be.
5.13 Valuation of Common Stock Received Upon Exercise
5.13.1 Exercise of Options Under Sections 5.4(a) and (c). The
value of Common Stock received by the Optionee from an exercise under Sections
5.4(a) and 5.4(c) hereof shall be the fair market value as determined by the
Plan Administrator, provided that, if the Common Stock is traded in a public
market, such valuation shall be the average of the high and low trading prices
or bid and asked prices, as applicable, of the Common Stock for the date of
receipt by the Company of the Optionee's delivery of shares under Section
5.4(a) hereof or delivery of the exercise notice under Section 5.4(c) hereof.
5.13.2 Exercise of Option Under Section 5.4(b). The value of
Common Stock received by the Optionee from an exercise under Section 5.4(b)
hereof shall equal (a) in the case of the sale of the Common Stock received as
a result of the exercise by a broker on the date of receipt by the Company of
the Optionee's exercise notice, the sales price received for such shares; and
(b) in all other cases, the average of the high and low trading prices or bid
and asked prices, as applicable, of the Common Stock for the date of receipt by
the Company of the Optionee's exercise notice.
SECTION 6. Greater Than 10% Stockholders.
6.1 Exercise Price and Term of Incentive Stock Options. If incentive
stock options are granted under this Plan to employees who own more than 10% of
the total combined
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<PAGE>
voting power of all classes of stock of the Company or any related corporation,
the term of such incentive stock options shall not exceed five years and the
exercise price shall be not less than 110% of the fair market value of the
Common Stock at the time the incentive stock option is granted. This provision
shall control notwithstanding any contrary terms contained in an option
agreement or any other document. The term and exercise price limitations of
this provision shall be amended to conform to any change required by a change
in the Code or by a ruling or pronouncement of the Internal Revenue Service.
6.2 Attribution Rule. For purposes of subsection 6.1, in determining
stock ownership, an employee shall be deemed to own the stock owned, directly
or indirectly, by or for his or her brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. If an
employee or a person related to the employee owns an unexercised option or
warrant to purchase stock of the Company, the stock subject to that portion of
the option or warrant which is unexercised shall not be counted in determining
stock ownership. For purposes of this Section 6, stock owned by an employee
shall include all stock owned by him which is actually issued and outstanding
immediately before the grant of the incentive stock option to the employee.
SECTION 7. Adjustments Upon Changes in Capitalization. The aggregate number
and class of shares for which options may be granted under this Plan, the
number and class of shares covered by each outstanding option, and the exercise
price per share thereof (but not the total price), and each such option, shall
all be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock of the Company resulting from a split-up or
consolidation of shares or any like capital adjustment, or the payment of any
stock dividend.
7.1. Effect of Liquidation, Reorganization or Change in Control.
7.1.1 Cash, Stock or Other Property for Stock. Except as provided
in subsection 7.1.2, upon a merger (other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock in the surviving corporation
immediately after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or the creation
of a holding company) or liquidation of the Company, as a result of which the
stockholders of the Company receive cash, stock or other property in exchange
for or in connection with their shares of Common Stock, any option granted
hereunder shall terminate, but the Optionee shall have the right immediately
prior to any such merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation to exercise such Optionee's option in
whole or in part whether or not the vesting requirements set forth in the
option agreement have been satisfied.
7.1.2 Conversion of Options on Stock for Stock Exchange. If the
stockholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger (other than a
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<PAGE>
merger of the Company in which the holders of Common Stock immediately prior to
the merger have the same proportionate ownership of common stock in the
surviving corporation immediately after the merger), consolidation, acquisition
of property or stock, separation or reorganization (other than a mere
reincorporation or the creation of a holding company), all options granted
hereunder shall be converted into options to purchase shares of Exchange Stock
unless the Company and corporation issuing the Exchange Stock, in their sole
discretion, determine that any or all such options granted hereunder shall not
be converted into options to purchase shares of Exchange Stock but instead
shall terminate in accordance with the provisions of subsection 7.1.1. The
amount and price of converted options shall be determined by adjusting the
amount and price of the options granted hereunder in the same proportion as
used for determining the number of shares of Exchange Stock the holders of the
Common Stock receive in such merger, consolidation, acquisition of property or
stock, separation or reorganization. Unless the Board determines otherwise, the
converted options shall be fully vested whether or not the vesting requirements
set forth in the option agreement have been satisfied.
7.2 Fractional Shares. In the event of any adjustment in the number of
shares covered by an option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the
number of full shares resulting from such adjustment.
7.3 Determination of Board to Be Final. All Section 7 adjustments
shall be made by the Board, and its determination as to what adjustments shall
be made, and the extent thereof, shall be final, binding and conclusive. Unless
an Optionee agrees otherwise, any change or adjustment to an incentive stock
option shall be made in such a manner so as not to constitute a "modification"
as defined in Code Section 425(h) and so as not to cause his or her incentive
stock option issued hereunder to fail to continue to qualify as an incentive
stock option as defined in Code Section 422(b).
SECTION 8. Securities Regulation. Shares shall not be issued with respect
to an option granted under this Plan unless the exercise of such option and the
issuance and delivery of such shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or inter-dealer quotation system upon which the shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance, including the availability of an exemption
from registration for the issuance and sale of any shares hereunder. Inability
of the Company to obtain from any regulatory body having jurisdiction the
authority deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares hereunder or the unavailability of an exemption
from registration for the issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the nonissuance or sale of
such shares as to which such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the Company may require the
Optionee to represent and warrant at the time of any such exercise that the
shares are being purchased only for investment and without any present
intention to sell or distribute such shares if, in the opinion of
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<PAGE>
counsel for the Company, such representation is required by any relevant
provision of the aforementioned laws. At the option of the Company, a
stop-transfer order against any shares of stock may be placed on the official
stock books and records of the Company, and a legend indicating that the stock
may not be pledged, sold or otherwise transferred unless an opinion of counsel
is provided (concurred in by counsel for the Company) stating that such
transfer is not in violation of any applicable law or regulation, may be
stamped on stock certificates in order to assure exemption from registration.
The Company may also require such other action or agreement by the Optionees as
it may from time to time deem to be necessary or advisable. THE COMPANY SHALL
NOT BE OBLIGATED, BY REASON OF THIS PROVISION OR OTHERWISE, TO UNDERTAKE
REGISTRATION OF THE OPTIONS OR STOCK HEREUNDER.
Should any of the Company's capital stock of the same class as the stock
subject to options granted hereunder be listed on a national securities
exchange, all stock issued hereunder if not previously listed on such exchange
or inter-dealer quotation system shall be authorized by that exchange or system
for listing thereon prior to the issuance thereof.
SECTION 9. Amendment and Termination.
9.1 Board Action. The Board may at any time suspend, amend or
terminate this Plan, provided that except as set forth in Section 7, the
approval of the holders of a majority of the Company's outstanding shares of
voting capital stock present and entitled to vote at any meeting is necessary
for the adoption by the Board of any amendment which will:
(a) increase the number of shares which are to be reserved for
the issuance of options under this Plan;
(b) permit the granting of stock options to a class of persons
other than those presently permitted to receive stock options under this Plan;
or
(c) require shareholder approval under applicable law, including
Section 16(b) of the Exchange Act.
9.2 Automatic Termination. Unless sooner terminated by the Board, this
Plan shall terminate ten years from the earlier of (a) the date on which this
Plan is adopted by the Board or (b) the date on which this Plan is approved by
the stockholders of the Company. No option may be granted after such
termination or during any suspension of this Plan. The amendment or termination
of this Plan shall not, without the consent of the option holder, alter or
impair any rights or obligations under any option theretofore granted under
this Plan.
SECTION 10. Effectiveness Of This Plan. This Plan shall become effective
upon adoption by the Board so long as it is approved by the holders of a
majority of the Company's outstanding shares of voting capital stock present
and entitled to vote at any meeting at any time within 12 months before or
after the adoption of this Plan.
- 10 -
<PAGE>
Adopted by the Board of Directors on January 8, 1997 and approved by the
stockholders on _______________ .
- 11 -
<PAGE>
PATHOGENESIS CORPORATION
ANNUAL MEETING OF STOCKHOLDERS - JUNE 25, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned stockholder of PathoGenesis Corporation (the "Company") hereby
constitutes and appoints Wilbur H. Gantz and Alan R. Meyer, and each of them,
his true and lawful attorneys and proxies, with full power of substitution in
and for each of them, to vote all shares of the Company which the undersigned
is entitled to vote at the Annual Meeting of Stockholders to be held at the
offices of the Company, on Wednesday, June 25, 1997, 6 p.m., or at any
postponement or adjournment thereof, on any and all of the proposals contained
in the Notice of the Annual Meeting of Stockholders, with all the powers the
undersigned would possess if present personally at said meeting, or at any
postponement or adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE NOMINEES LISTED ON THE REVERSE SIDE AND FOR THE APPROVAL OF
PROPOSALS 2, 3 AND 4.
(Continued and to be signed and dated on the other side)
<PAGE>
THE DIRECTORS RECOMMEND A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
Please mark
your votes
[X] as this
example
------------
COMMON
1. Election of Directors FOR all nominees listed WITHHOLD
(except as marked to the AUTHORITY to
contrary, see instruction vote for all
below) nominees listed
at left
Wilbur H. Gantz, Lawrence C. Hoff and [ ] [ ]
Edward J. Mathias
INSTRUCTION: To withhold authority to vote for any individual nominee,
strike through the name of the nominee above.
FOR AGAINST ABSTAIN
2. Proposal to amend the PathoGenesis Corporation [ ] [ ] [ ]
Amended and Restated Certificate of
Incorporation to increase the number of
authorized shares of Common Stock from
20,000,000 shares to 60,000,000 shares.
3. Proposal to adopt the PathoGenesis Corporation [ ] [ ] [ ]
1997 Stock Option Plan and to terminate the
PathoGenesis Corporation 1996 Stock Option
Plan for Non-Employee Directors.
4. Proposal to ratify the appointment of KPMG [ ] [ ] [ ]
Peat Marwick LLP as independent accountants.
The proxies are granted the authority, in their discretion, to act upon such
other matters as may properly come before the meeting or any postponement or
adjournment thereof.
Dated , 1997
------------------------------------------
Signature(s)
------------------------------------------
Signatures
--------------------------------------------
Please sign exactly as your name appears and return
this proxy immediately in the enclosed stamped
self-addressed envelope.
