<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PathoGenesis Corporation
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
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<PAGE>
[LOGO] PathoGenesis
Corporation
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Time: 4:00 p.m., Pacific Time
Date: Wednesday, June 3, 1998
Place: 201 Elliott Avenue West
Seattle, Washington 98119
Purpose: 1. Elect three Class III directors
2. Approve the PathoGenesis Corporation Employee Stock Purchase
Plan
3. Ratify the selection of KPMG Peat Marwick LLP as the
Company's independent accountants for 1998
4. Transact any other business that may properly come before the
meeting
Shareholders of record at the close of business on April 6, 1998, are
entitled to vote at the meeting.
Whether or not you plan to attend the meeting, please complete and return
the enclosed proxy card in the enclosed envelope. Returning the proxy card will
not affect your right to attend the meeting and vote.
Marvin B. Tepper
Secretary
Seattle, Washington
April 20, 1998
<PAGE>
PathoGenesis Corporation
____________________
PROXY STATEMENT
____________________
The board of directors of PathoGenesis Corporation solicits your proxy for
the annual meeting of shareholders called to be held on June 3, 1998 and at any
adjournment of the meeting. This proxy statement, together with the proxy card
and the Company's 1997 Annual Report, is first being mailed to shareholders on
or about April 20, 1998.
ABOUT THE MEETING
What is the purpose of the meeting? At the meeting, shareholders will vote
on the matters indicated in the accompanying notice, including (1) the election
of three directors, (2) approval of a proposed Employee Stock Purchase Plan and
(3) ratification of the selection of independent accountants.
Who may vote at the meeting? Only shareholders of record at the close of
business on April 6, 1998, are entitled to vote at the meeting. Each such
shareholder is entitled to one vote for each share of common stock of the
Company ("Common Stock") owned on the record date.
How do I vote? You can vote on matters at the meeting by signing and
returning the enclosed proxy card or by attending the meeting and casting your
vote there. If you return a properly executed proxy card, shares represented by
your proxy will be voted as specified by you or, if you do not otherwise
indicate, voted for the board's nominees as directors and for each of the other
proposals stated in the notice of the meeting. If you hold your shares in
"street name" (through a broker or other nominee) and wish to vote at the
meeting, you will need to bring a copy of your account statement showing your
stock ownership in the Company and check in at the registration desk at the
meeting.
Can I change my vote after I return my proxy card? If you wish, you may
revoke your proxy at any time before it is voted by (i) notifying the Secretary
of the Company in writing before the meeting, (ii) signing another proxy with a
later date, or (iii) attending the meeting, requesting the return of any
previously delivered proxy and voting in person.
What constitutes a quorum? The presence at the meeting, in person or by
proxy, of the holders of a majority of the Common Stock outstanding on the
record date will constitute a quorum for the transaction of business at the
meeting. As of the record date, 16,245,547 shares of Common Stock were
outstanding.
What vote is required? The three nominees who receive the most votes at
the meeting will be elected to the three open directorships. Approval of the
PathoGenesis Corporation Employee Stock Purchase Plan and ratification of the
selection of KPMG Peat Marwick LLP as independent accountants will require the
vote of a majority of the votes cast on the proposal. Abstentions and broker
non-votes are counted as shares present for determining if a quorum is present,
but they will not be included in votes cast on each proposal and thus have no
effect on the outcome of the vote.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The board of directors is divided into three classes, having three-year
terms that expire in successive years. Three Class III directors are to be
elected at the meeting. Class I and Class II directors are not up for election
this year and will continue in office for the remainder of their terms.
Biographical information on each nominee for director and each continuing
director appears below, including his or her age at December 31, 1997.
The board of directors has nominated Talat M. Othman, Eugene L. Step and
Fred Wilpon, each of whom is a current Class III director, for re-election to
serve until the annual meeting in 2001 or until his successor is elected and
qualified. If a nominee is unable to serve, the proxy holders will vote for
another nominee proposed by the board.
The board of directors recommends a vote FOR the election of each nominee
for director.
Nominees for Election at the Meeting (Class III)
<TABLE>
<S> <C>
Talat M. Othman Mr. Othman has been Chairman and Chief Executive Officer of Grove
Age 61 Financial, Inc., a financial services company, since September
Director since 9/92 1995. Prior thereto, he was Chairman, President and Chief
Chair, Compensation and Executive Officer of Dearborn Financial, Inc. He is a director of
Nominating Committee the Middle East Policy Council in Washington, D.C., a member of the
Member, Executive Board of Governors of St. Jude Children's Research Hospital and a
Committee member of the Dean's Advisory Council of the Kennedy School of
Government of Harvard University. Previously he was a director of
Harken Energy Corporation and Hartmarx Corporation (apparel
manufacturer) and President of the Arab Bankers Association of
North America.
Eugene L. Step Mr. Step was Executive Vice President, a director and a member of
Age 68 the Executive Committee of Eli Lilly and Company, a pharmaceutical
Director since 4/92 company, from 1986 until his retirement in 1992 and President of
Chair, Audit/Finance its Pharmaceutical Division from 1973 to 1992. He is a past
Committee Chairman of the Pharmaceutical Manufacturers Association (now
Member, Executive PhRMA) and past President of the International Pharmaceutical
Committee Manufacturers Association. He is a director of CellGenesys Inc.
(biotechnology company), DBT Online (data management company),
Guidant Corp. (medical device company), Medco Research Inc.
(medical research company) and Scios-Nova Inc. (biotechnology
company).
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Fred Wilpon Mr. Wilpon, a founder of the Company, was Chairman of the Board
Age 61 from May 1995 to January 1998. He is co-founder of and has been
Director since 1/92 Chairman of the Board of Sterling Equities, Inc. (real estate
Chair, Executive developer) for more than 20 years, and has been President and Chief
Committee Executive Officer of the New York Mets baseball team for more than
Member, Compensation and 10 years. He is a director of Bear, Stearns & Co. Inc. (investment
Nominating Committee bank).
and Audit/Finance
Committee
</TABLE>
Continuing Directors Whose Terms Expire in 1999 (Class II)
<TABLE>
<S> <C>
Alan R. Meyer Mr. Meyer joined the Company in December 1992 as Vice President and
Age 44 Chief Financial Officer and a director. He was promoted to Senior
Director since 12/92 Vice President and Chief Financial Officer in July 1995, when he
Executive Vice President, also assumed the offices of Treasurer and Assistant Secretary, and
Chief Financial was promoted to Executive Vice President in January 1998. From
Officer, Treasurer and 1987 to 1992, he was Chief Financial Officer for several
Assistant Secretary development stage healthcare companies, and previously he held
corporate finance and corporate development positions with Baxter
Healthcare Corporation and was a management consultant with Arthur
Andersen & Co.
Elizabeth M. Greetham Ms. Greetham is a Portfolio Manager for Weiss, Peck & Greer, L.L.C.
Age 47 (investment adviser) where she manages the portfolios of WPG Life
Director since 11/96 Science Fund, L.P. and WPG Institutional Life Sciences Fund, L.P.
Member, Audit/Finance and shares analytical responsibilities for all healthcare
Committee investments for the firm's clients. She is a director of various
pharmaceutical companies, including ChiRex Inc., Guilford
Pharmaceuticals Inc., Progenies Pharmaceuticals, Inc. and SangStat
Medical Corporation.
Michael J. Montgomery Mr. Montgomery has been President and Chief Operating Officer of
Age 43 Sega GameWorks L.L.C. (entertainment company) since September 1996.
Director since 7/95 He was a senior executive of DreamWorks SKG (entertainment
Member, Audit/Finance company), from 1995 to 1996; Executive Vice President and Chief
Committee Financial Officer of Euro Disney SCA from 1993 to 1994; and Vice
President of The Walt Disney Company from 1989 to 1993 and
Treasurer from 1991 to 1993. Mr. Montgomery is a brother of
A. Bruce Montgomery, M.D., the Company's Executive Vice
President--Research and Development.
</TABLE>
3
<PAGE>
Continuing Directors Whose Terms Expire in 2000 (Class I)
<TABLE>
<S> <C>
Wilbur H. Gantz Mr. Gantz, a founder of the Company, has been Chief Executive
Age 60 Officer and President of the Company since March 1992 and Chairman
Director since 3/92 since January 1998. He was President of Baxter International Inc.
Member, Executive (a leading maker and distributor of healthcare products) from 1987
Committee to 1992 and previously held a number of executive positions with
Chairman, Chief Executive Baxter, including President, Executive Vice President and Chief
Officer and President Operating Officer and Vice President of the International Division.
He is a director of The Gillette Company (personal care products
company), W.W. Grainger, Inc. (electrical products company), Harris
Bancorp (bank holding company) and Harris Trust and Savings Bank.
He is a past trustee of Princeton University.
John L. Gordon Mr. Gordon is chairman and founder of Quercus Management Limited, a
Age 53 biotechnology support company based in Oxford, England. He was
Director since 11/97 Chief Executive Officer of Neures Limited (biotechnology company)
Member, Compensation from 1994 to 1996, and Director of Research of Neures' parent
and Nominating company, British Biotech plc, from 1987 to 1994. He is a director
Committee since 4/98 of Chemical Design Holdings plc, PowderJect Pharmaceuticals plc and
Reabourne Merlin Life Sciences Investment Trust PLC, each a
publicly held company in the UK.
</TABLE>
How often did the board meet in 1997? The board of directors held four
regular meetings in 1997. Each current director attended at least 75% of the
number of meetings of the board and of committees on which he or she served that
were held during 1997.
What committees has the board established? The board of directors has
three committees: the Audit/Finance Committee, the Compensation and Nominating
Committee, and the Executive Committee. Committees report their actions to the
full board, usually at the next meeting of the board or by written report.
The Audit/Finance Committee met twice in 1997. The Audit/Finance Committee
recommends the appointment of the Company's independent accountants. In
addition, it reviews auditing arrangements with the independent accountants, the
scope and results of their audits, and any problems they may identify regarding
internal accounting controls, as well as their recommendations. It also meets
with the Company's Chief Financial Officer to review the Company's programs,
policies and procedures regarding financial controls and internal auditing. The
Audit/Finance Committee also reviews with the Company's Chief Financial Officer
the Company's investment securities and cash management programs and policies.
The Audit/Finance Committee is prepared to meet at any time at the request of
the independent accountants or the Chief Financial Officer to review any special
situation that may arise relating to audit/finance matters. Eugene L. Step
(chair), Elizabeth M. Greetham, Michael J. Montgomery and Fred Wilpon are
members of this committee.
4
<PAGE>
The Compensation and Nominating Committee (which was known as the
Compensation Committee before April 1, 1998 as it did not perform the functions
of the nominating committee before then) held seven meetings and acted by
consent three times during 1997. This committee administers the Company stock
option plans and makes recommendations to the board regarding the compensation
for directors, officers, employees and consultants. It also reviews and
approves, and thereafter makes recommendations to the board of directors on, any
proposed plan or program that would benefit the senior executives. The
committee recommends to the board regarding candidates for the board and
executive officers. The committee would consider candidates for director
suggested by shareholders; suggestions should be submitted in writing to:
Secretary, PathoGenesis Corporation, 201 Elliott Avenue West, Seattle,
Washington 98119. This committee currently consists of Talat M. Othman (chair),
John L. Gordon and Fred Wilpon.
The Executive Committee met on ten occasions and acted by consent once in
1997. The Executive Committee has the authority to take any action that the
board of directors may take, subject to some restrictions imposed by law. Until
April 1, 1998, the Executive Committee also served as the nominating committee.
Fred Wilpon (chair), Wilbur H. Gantz, Talat M. Othman and Eugene L. Step are
members of the Executive Committee.
What compensation do directors receive? Of the current board members, only
Messrs. Gantz and Meyer are employees of the Company, who do not receive
compensation for serving on the board. Until 1998, non-employee directors did
not receive cash compensation for serving on the board or any of its committees,
but were eligible for stock option grants. During 1997, those directors
received grants of fully-vested options to purchase an aggregate of 98,000
shares of Common Stock at a weighted average exercise price of $25.48 per share.
In November 1997, upon recommendation of the Compensation Committee, the
board of directors adopted a compensation program for non-employee directors for
the years 1998-2002. Under that program, non-employee directors are compensated
in cash and options to purchase the Company's Common Stock as follows:
<TABLE>
<S> <C> <C>
Annual Retainer: Basic $15,000
Executive Committee chair supplement $10,000
Other committee chair supplement $ 5,000
Meeting Fee: $1,000 for each board meeting attended in
person or by telephone (no separate
compensation for committee meetings)
Option Grant: Initial Grant
10,000 shares at January 1, 1998 or
upon subsequent initial election to the board
Subsequent Annual Grant
Basic 6,000 shares
Executive Committee chair additional 2,000 shares
Other committee chair additional 1,000 shares
</TABLE>
5
<PAGE>
Instead of receiving the basic annual retainer for the years 1998--2002 in
cash, non-employee directors may elect to receive additional stock options
(based on the exercise price) equal to four times the amount of cash annual
retainer waived. These options have a ten-year term and are granted at an
exercise price equal to the fair market value of the Common Stock on the grant
date. The options will vest in five equal installments, on the date of grant
and on each of the four ensuing anniversaries of the date of grant provided the
grantee remains a director at the time of vesting. A director joining the board
during the term of the program may elect to receive, in lieu of the basic cash
annual retainer, additional stock options equal to the basic retainer prorated
for the remainder of the five-year term.
EXECUTIVE OFFICERS
In addition to Wilbur H. Gantz and Alan R. Meyer, the Company's current
executive officers are the following (ages are as of December 31, 1997 and other
information is as of the date of this proxy statement).
<TABLE>
<S> <C>
A. Bruce Montgomery, M.D. Dr. Montgomery has been Executive Vice President--Research and
Age 44 Development since January 1998. He joined the Company in 1993 as
Executive Vice President-- Vice President of Medical and Regulatory Affairs and was promoted
Research and Development to Senior Vice President in 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 and 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 co-inventor
of two use patents related to aerosolized pentamidine, a drug for
an AIDS-related infection. Dr. Montgomery is a brother of Michael
J. Montgomery, a director of the Company.
Marc F. Wipperman Mr. Wipperman joined the Company in 1996 as Vice
Age 46 President--Manufacturing, and was promoted to Senior Vice
Senior Vice President-- President--Operations in January 1998. He oversees the development
Operations and commercialization of manufacturing processes, from the sourcing
of raw materials to production, quality control and distribution.
Before joining the Company, Mr. Wipperman was a consultant to the
pharmaceutical industry from 1993 to 1996 and was President of
Certified Manufacturing Corporation, a pharmaceutical consulting
firm, from 1995 to 1996. Previously, he held a variety of
management, manufacturing and engineering positions with Johnson &
Johnson, a pharmaceutical manufacturer.
</TABLE>
6
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation in the last three years of the
Company's chief executive officer and the Company's other two executive officers
(the "Named Executive Officers") at the end of 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Salary Bonus Underlying Options (#)
--------- -------- ----------------------
<S> <C> <C> <C> <C>
Wilbur H. Gantz 1997 $302,320 $175,000 75,000
President and 1996 290,690 116,276 60,000
Chief Executive Officer 1995 279,510 -- 68,750
A. Bruce Montgomery, M.D. 1997 201,660 85,000 80,000
Senior Vice President-- 1996 194,070 67,865 25,000
Research and Development 1995 183,057 63,665 25,000
Alan R. Meyer 1997 187,200 81,000 20,000
Senior Vice President, 1996 180,000 63,000 15,000
Chief Financial Officer, 1995 168,667 58,800 25,000
Treasurer and Assistant Secretary
</TABLE>
Option Grants in 1997
The following table shows options granted to each Named Executive Officer
during 1997.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock Price
Shares Options Appreciation for
Underlying Granted to Exercise or Option Term(2)
Options Employees in Base Price Expiration --------------------------
Name Granted(1) Fiscal Year ($/Share) Date 5% 10%
---- ---------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Wilbur H. Gantz 75,000 11% $22.25 1/08/07 $1,049,468 $2,659,558
A. Bruce Montgomery, M.D. 30,000 4 22.25 1/08/07 419,787 1,063,823
50,000 7 25.00 1/30/07 786,118 1,992,178
Alan R. Meyer 20,000 3 22.25 1/08/07 279,858 709,215
</TABLE>
(1) The exercise price of each option is the fair market value of the Common
Stock on the date of grant. Options vest in four equal annual installments
beginning on the first anniversary of the grant date.
(2) These values are calculated using assumed annual rates of appreciation of
stock price, as required by the rules of the Securities and Exchange
Commission. The actual value of the options will vary according to the
market price of the Common Stock. This table does not suggest that the
amounts shown will materialize.
7
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values for 1997
No options were exercised by any of the Named Executive Officers in 1997.
The following table shows information regarding stock options held by each Named
Executive Officer at the end of 1997.
<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 210,000 56,251 $4,954,048 $ 836,734
A. Bruce Montgomery, M.D. 75,467 88,908 1,641,119 1,462,553
Alan R. Meyer 87,500 35,000 2,240,313 693,750
</TABLE>
(1) These figures are based on a price of $37.125 per share, the closing price
of the Common Stock on December 31, 1997, as quoted on the Nasdaq National
Market, as reported by The Wall Street Journal (Midwest Edition).
Employment Agreements
Wilbur H. Gantz had an employment agreement with the Company, which expired
in May 1997. The employment agreement provided that Mr. Gantz would receive a
salary and bonus, in addition to benefits that are generally available to the
Company's employees. The agreement prohibits Mr. Gantz from competing with the
Company for one year after termination of his employment with the Company.
A. Bruce Montgomery, M.D., has a month-to-month employment agreement with
the Company, under which he is entitled to receive an annual base salary and
bonus (up to 30% of the annual base salary) as the board of directors
determines. Dr. Montgomery is also entitled to receive benefits offered to the
Company's employees generally. The agreement permits the Company to terminate
the employment of Dr. Montgomery for cause. The agreement also prohibits Dr.
Montgomery from competing with the Company for one year following termination of
his employment.
Compensation Committee Interlocks and Insider Participation
In 1997, the Compensation Committee consisted of Talat M. Othman (Chair),
Lawrence C. Hoff, a former director, and Fred Wilpon. No current or past
executive officer or employee of the Company serves on the Compensation
Committee, which since April 1, 1998 is known as the Compensation and Nominating
Committee because it also performs the functions of the nominating committee as
of that date. No executive officer of the Company serves on the board or the
compensation committee of any entity whose directors or officers serve on the
Compensation and Nominating Committee of the Company. The current members of
the committee are Talat M. Othman (Chair), John L. Gordon and Fred Wilpon.
COMPENSATION COMMITTEE REPORT
The Compensation Committee, composed entirely of independent directors, is
responsible for the administration of the compensation program for the Company's
executive officers, including the Named Executive Officers. The Committee
annually reviews the compensation of the Company's executive officers. It makes
recommendations to the board of directors as to the compensation of the Chief
8
<PAGE>
Executive Officer and determines the specific salary amounts and other
compensation awards for the other Named Executive Officers. In its review of
compensation matters, the Committee consults data derived from compensation
surveys and other advisory services provided by an independent consultant and
other publicly available competitive compensation data.
Compensation Philosophy
The Company's executive compensation program reflects the philosophy that
compensation should reward executives for outstanding individual performance
and, at the same time, align the interests of executives closely with those of
shareholders. To implement that philosophy, the Company offers each of its
executives a combination of base salary, short-term incentive in the form of
annual cash bonuses and long-term incentive in the form of stock options, with
emphasis on pay-for-performance by placing a progressively greater portion of
total compensation on the incentive-based elements as the position level
advances. Through this compensation structure, the Company aims to (i) attract
and retain highly qualified and talented executives, (ii) provide appropriate
incentives to motivate those individuals to maximize shareholder returns by
producing sustained superior performance, and (iii) reward them for outstanding
individual contributions to the achievement of the Company's near-term and long-
term business objectives.
Base Salary
Base salaries reflect individual positions, responsibilities, experience,
leadership and potential contribution to the success of the Company. Actual
salaries vary according to the Compensation Committee's subjective assessment of
a number of factors in its review of base salaries of Company executives. The
Committee conducts annual reviews to ensure that base salaries are competitive,
that they reflect the specific responsibilities of individual executives and
that they appropriately reward individual executives for their contributions to
the Company's performance.
Annual Cash Incentives
Each executive officer is eligible to receive cash bonuses based on the
Compensation Committee's assessment of his or her individual performance and the
performance of the Company. In its evaluation of the performance of the officer
and the determination of incentive bonuses, the Committee does not assign
quantitative relative weights to different factors or follow mathematical
formulas. Rather, the Committee makes its determination in each case after
considering the factors it deems relevant at the time. The factors considered
by the Compensation Committee in its determination of incentive bonuses for 1997
included several Company performance milestones: the successful conclusion of
the TOBI clinical trials, the timely submission of the New Drug Application to
the Food and Drug Administration to market TOBI and that agency's subsequent
approval of TOBI, as well as the individual contributions of key employees to
each of those milestones and overall Company performance.
Stock Options
Stock options are currently the Company's sole long-term compensation
vehicle. Options are granted at the fair market value of the Common Stock on
the date of grant and vest in four equal annual installments beginning on the
first anniversary of the grant date. Stock options are intended to provide
executives with a stake in the future success of the Company, thereby giving the
executives sufficient incentive to manage the Company from the perspective of an
owner with equity at risk.
9
<PAGE>
In determining the size of each individual option grant, the Compensation
Committee considers the aggregate number of shares available for grant, the
number of individuals to be considered for awards, and the range of potential
compensation levels that the option awards may yield. The Committee decides on
the number and timing of stock option grants to executive officers based on its
assessment of the performance of each executive. The Committee weighs any
factors it considers relevant and gives such factors the relative weight it
considers appropriate under the prevailing circumstances. The Committee, when
determining the amount of stock options to award to any specific executive, does
not consider the amount of stock already owned by that executive. The Committee
believes that to do so could have the effect of inappropriately or inequitably
penalizing or rewarding executives based upon their personal decisions
concerning stock ownership and option exercises.
Compensation of the Chief Executive Officer
The Compensation Committee increased Mr. Wilbur H. Gantz's base salary for
1997 to $302,320 from $290,690 in 1996, an increase of 4%. In recognition of
Mr. Gantz's leadership and contributions during 1997 as the Company's Chief
Executive Officer, the Committee recommended that he receive a cash bonus of
$175,000 and an option to purchase 75,000 shares, which were approved by the
board of directors unanimously. Among Mr. Gantz's achievements in 1997 were his
outstanding contribution to the Company's development of its drug candidates and
the preparation for the marketing of TOBI. Mr. Gantz was instrumental in moving
the Company from a development stage enterprise to a commercial enterprise; his
active participation in the development of TOBI, the Company's first drug,
culminated in the drug receiving FDA approval for marketing in late 1997. In
addition, Mr. Gantz has maintained and enhanced the Company's strong record in
product development, technology, innovation, quality and management efficiency,
provided strong leadership to the Company's management team and aggressively
pursued new growth opportunities.
Deductibility of Compensation
Section 162(m) of the Internal Revenue Code generally disallows tax
deductions to publicly owned companies for compensation in excess of $1 million
paid to any of its named executive officers. Performance-based compensation is
not subject to the deduction limit if certain requirements are met. The
Compensation Committee believes that options granted under the Company's stock
option plans qualify as performance-based compensation. Currently, none of the
Named Executive Officers earns more than $1 million in salary and bonus (which
are not performance-based compensation for purposes of section 162(m)).
Therefore, the Committee has not adopted an explicit policy relating to the
deductibility of executive compensation.
Submitted by the Compensation Committee of the Board of Directors
Talat M. Othman (Chairman)
Lawrence C. Hoff
Fred Wilpon
10
<PAGE>
PERFORMANCE GRAPH*
The graph below compares the cumulative total return on the Common Stock
since November 22, 1995 (the date the Common Stock began trading on Nasdaq
National Market) through December 31, 1997 with the cumulative total return of
the Nasdaq Stock Market Total Return Index and the Nasdaq Pharmaceuticals Stocks
Index. Cumulative total return values were calculated assuming an investment of
$100 on November 22, 1995 and reinvestment of dividends. The historical stock
price performance is not necessarily indicative of future results.
Comparison of Cumulative Total Return
<TABLE>
<CAPTION>
PathoGenesis Nasdaq Nasdaq Pharmaceuticals
Date Corporation Stock Market Stock
---- ------------ ------------ ----------------------
<S> <C> <C> <C>
11/22/95 100.000 100.000 100.000
12/29/95 110.000 103.294 120.875
03/29/96 163.750 108.112 125.763
06/28/96 155.000 116.937 122.162
09/30/96 177.500 121.097 124.955
12/31/96 217.500 127.049 121.226
03/31/97 250.000 120.163 115.126
06/30/97 291.250 142.188 124.281
09/30/97 355.000 166.243 139.425
12/31/97 371.250 155.903 125.270
</TABLE>
<TABLE>
CRSP Total Returns for: 11/22/95 12/29/95 12/31/96 12/31/97
- ----------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
PathoGenesis Corporation 100.00 110.00 217.50 371.25
Nasdaq Stock Market 100.00 103.30 127.00 156.00
Nasdaq Pharmaceuticals Stocks 100.00 120.90 121.20 125.30
</TABLE>
*Source: Center for Research in Security Prices (CRSP)
11
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information regarding beneficial
ownership of the Common Stock as of February 24, 1998, 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 director, (iii) each Named Executive Officer, and
(iv) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
----------------------------
Name Number Percent(2)
- ---- ------ ----------
<S> <C> <C>
The Capital Group Companies, Inc.(3)....... 1,035,000 6.4
Wilbur H. Gantz(4)......................... 557,575 3.4
John L. Gordon(5).......................... 11,616 *
Elizabeth M. Greetham(6)................... 210,000 1.3
Alan R. Meyer(7)........................... 91,500 *
Michael J. Montgomery(8)................... 26,648 *
Talat M. Othman(9)......................... 32,116 *
Eugene L. Step(10)......................... 35,500 *
Fred Wilpon(11)............................ 763,116 4.7
A. Bruce Montgomery, M.D.(12).............. 86,117 *
Marc F. Wipperman(13)...................... 17,500 *
All directors and executive officers
as a group of ten persons (4)(5)(6)(7)
(8)(9)(10)(11)(12)(13)................... 1,814,188 10.9
</TABLE>
- ---------
*Less than 1%.
(1) Unless otherwise indicated, the persons named in the table above have sole
voting and investment power over all shares beneficially owned by them,
subject to applicable community property laws. Beneficially owned shares
include shares subject to options exercisable within 60 days of February
24, 1998.
(2) Based on 16,245,077 shares outstanding as of February 24, 1998. In
computing the percentages shown in the table, shares subject to options
exercisable within 60 days of February 24, 1998 are treated as outstanding.
(3) Based on Schedule 13G filed by The Capital Group Companies Inc., Capital
Research and Management Company and SMALLCAP World Fund, Inc. on February
11, 1998. The Schedule 13G states that (i) SMALLCAP World Fund, Inc., an
investment company, and Capital Research and Management Company, an
investment adviser that serves as investment adviser to the SMALLCAP World
Fund, Inc., are the beneficial owners of the 1,035,000 shares, (ii)
SMALLCAP World Fund, Inc. has sole voting power over those shares; (iii)
Capital Research and Management Company has sole dispositive power over
these shares, and (iv) The Capital Group Companies, Inc., which owns
Capital Research and Management Company, may be deemed to beneficially own
the shares but disclaims beneficial ownership of the shares. The address
of The Capital Group Companies, Inc., Capital Research and Management
Company and SMALLCAP World Fund, Inc. is 333 South Hope Street, Los
Angeles, California 90071.
12
<PAGE>
(4) Includes: (i) 18,750 shares held by The Wilbur H. Gantz 1992 Irrevocable
GST Trust, of which Mr. Gantz is Trustee; (ii) 112,500 shares held by The
Wilbur H. Gantz 1992 Irrevocable Children's Trust; and (iii) options to
purchase 210,000 shares. Mr. Gantz disclaims beneficial ownership of the
shares held by the trusts named in clauses (i) and (ii) of the preceding
sentence. Also includes 1,875 shares held by Mr. Gantz's wife and 25,850
shares held by a trust for her benefit, although Mr. Gantz disclaims
beneficial ownership of shares held by Mrs. Gantz and that trust.
(5) Represents options to purchase 11,616 shares.
(6) Represents (i) options to purchase 18,000 shares and (ii) 192,000 shares
held by WPG Life Science Fund, L.P., and WPG Institutional Life Sciences
Fund, L.P., of which Ms. Greetham is the portfolio manager. She may be
deemed to share voting and investment power over such 192,000 shares but
disclaims beneficial ownership of such shares.
(7) Includes options to purchase 87,500 shares.
(8) Includes (i) options to purchase 19,866 shares and (ii) 532 shares owned by
Mr. Montgomery's minor children. Does not include shares beneficially
owned by A. Bruce Montgomery.
(9) Represents options to purchase 32,116 shares.
(10) Includes options to purchase 30,500 shares.
(11) Represents (i) options to purchase 44,366 shares and (ii) 718,750 shares
held by Sterling PathoGenesis Company, of which Mr. Wilpon is managing
partner; he disclaims beneficial ownership of such 718,750 shares except to
the extent of his pecuniary interest.
(12) Includes (i) 4,400 shares owned by Dr. Montgomery's wife as custodian for
minor children, as to which Dr. Montgomery disclaims beneficial ownership,
and (ii) options to purchase 75,467 shares. Does not include shares
beneficially owned by Michael J. Montgomery.
(13) Represents options to purchase 17,500 shares.
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of filings with the Securities and Exchange Commission
and written representations that no other reports were required, the Company
believes that its directors and executive officers complied during 1997 with the
reporting requirements of section 16(a) of the Securities Exchange Act of 1934
with the exception of one report filed after the applicable deadline by Michael
J. Montgomery with respect to a purchase of shares.
CERTAIN TRANSACTIONS
During 1997, the Company rented office space in New York, New York, from an
affiliate of Sterling PathoGenesis Company, a founding shareholder of the
Company, pursuant to an oral lease, at an annual rental of $37,500. The Company
believes this annual rate to be comparable to a rate which would be charged by
an independent third party. In addition, in 1997 the Company reimbursed such
affiliate of Sterling PathoGenesis approximately $19,400 for out-of-pocket
expenses incurred on behalf of the
13
<PAGE>
Company in 1996 and 1997 relating to the Company's use of the leased space.
Fred Wilpon, a director of the Company, and Marvin Tepper, the Company's
Secretary, are two of the partners of Sterling PathoGenesis Company.
PROPOSAL 2
APPROVAL OF THE PATHOGENESIS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
The board of directors on April 1, 1998 adopted the PathoGenesis
Corporation Employee Stock Purchase Plan (the "Plan"), subject to approval by
the shareholders. A copy of the Plan is included as Appendix A to this Proxy
Statement.
The purpose of the Plan is to benefit the Company and its subsidiaries by
offering eligible employees a favorable opportunity to purchase Common Stock
over a period of years, thereby giving them a proprietary interest in the
anticipated growth and prosperity of the Company and encouraging the continuance
of their dedicated services to the Company and its subsidiaries. A summary of
the principal features of the Plan follows.
Summary. Under the Plan, the Company may offer up to 200,000 shares of
Common Stock for sale to eligible employees through periodic offerings to be
made in the ten-year period commencing July 1, 1998. Each employee of the
Company or a subsidiary on the date of any offering will be eligible to
participate in the Plan, except (i) an employee whose customary employment is
for five or fewer months in any calendar year, (ii) an employee who either owns,
or immediately after the grant of an option would own, five percent or more of
the shares of Common Stock (including shares that the employee may purchase
under outstanding options under the Plan and otherwise), and (iii) an employee
of a subsidiary that is excluded from participation (generally any foreign
subsidiary).
The Plan will be administered by the Compensation and Nominating Committee
of the board of directors, or such other committee or subcommittee of the board
as the board determines (the "Administrator"). The Administrator may delegate
to any officer, who in turn may delegate to other officers or employees, the
authority to determine all issues regarding the Plan (other than the timing of
offerings) and to interpret the Plan, subject to review by the Administrator,
whose decision will be final and binding.
The Company may make one or more offerings to eligible employees. No
offering may last more than two years. During each offering period, the Company
will give each participating employee an option to purchase shares of Common
Stock with a portion (from 1% to 15%, as selected by the employee) of the
employee's cash compensation during that period (or any shorter period of
participation elected by the employee). No employee may be granted an option
that permits the employee's rights to purchase Common Stock under the Plan (or
under any other stock purchase plan of the Company established pursuant to
Section 423 of the Internal Revenue Code) to accrue at a rate exceeding $25,000
of fair market value of such stock (determined as of the first day of the
offering) in any calendar year in which the option is outstanding at any time.
The Company will establish a payroll deduction account for each
participating employee and will deduct the elected portion of cash compensation
from the employee's pay. The employee may change his or her payroll deduction
by complying with the procedures and limitations established by the
Administrator under the Plan, but not more often than once in any month. The
employee may cease
14
<PAGE>
participating at any time and may withdraw his or her entire account balance
when he or she ceases to participate. An employee who has stopped participating
(whether or not he or she has withdrawn the account balance) may only resume
participation once during any offering period.
Under the Plan, each participating employee will receive an option to buy
as many whole shares of Common Stock as may be purchased by the amount elected
by the employee to be deducted from his or her pay, plus the balance (if any)
carried forward from the employee's payroll deduction account from the preceding
offering period.
On the last day of each six-month period during any offering, and at
termination of each offering or of the Plan, the account of the employee shall
be totaled. If the account has sufficient funds to buy one or more full shares,
the employee will be deemed to have exercised the option to buy such share or
shares as of that date. Any balance remaining in the account at the end of an
offering period will be carried forward in the account for the next offering
period under the Plan or under a succession Plan or, if there is none, will be
paid to the employee as soon as practicable. The balance carried forward may
not exceed the purchase price of one share on the last day of the offering
period.
The purchase price for each share purchased under the Plan pursuant to a
particular offering will be the lesser of (i) 85% of the fair market value of
the Common Stock at the beginning of the offering or (ii) 85% of the fair market
value at the time when the employee is deemed to have exercised the option to
purchase such share.
If a participating employee retires, dies or terminates employment with the
Company or a subsidiary for any reason, payroll deduction will cease and no
further shares of Common Stock will be purchased for the employee. If a
custodian has been appointed, the number of shares of Common Stock in the
employee's account will be registered in the name of the employee, and the
remaining cash balance in the account will be paid to the employee as soon as
practicable.
A participating employee's right to purchase shares subject to an
outstanding option under the Plan will become exercisable immediately prior to
(i) the Company's merger or consolidation with, or transfer of all or
substantially all of its assets to, another entity, unless the successor entity
assumes the Plan, or (ii) termination of the Plan following certain change-in-
control events.
If shares of Common Stock are changed by a stock dividend, stock split or
combination, merger or consolidation with any other corporation or corporations,
or any other relevant change in the capitalization of the Company, a
proportionate or equitable adjustment will be made to the number or kind of
shares subject to the Plan and the purchase price.
The board of directors may amend the Plan in any respect, except that the
approval of the holders of a majority of the outstanding shares of Common Stock
is required for any amendment to increase or decrease the number of shares
approved for the Plan or to reduce the purchase price per share other than the
adjustments described in the last paragraph.
Federal Income Tax Consequences. The following discussion is only a
summary of general federal income tax consequences to the Company and
participating employees, and does not cover all possible federal, state or local
income tax consequences of participation in the Plan.
15
<PAGE>
The Company understands that under existing law no income will be
recognized to an employee for federal income tax purposes solely by reason of
being granted the right to purchase shares of Common Stock under the Plan or by
reason of purchasing such shares. The amount deducted from the employee's pay
and used to purchase shares in the Plan will, however, be subject to income tax.
The tax consequences to an employee of selling or disposing of the shares
generally depends on how long he or she has held the shares. If the employee
sells or disposes of the shares (other than by death) before the later of (i)
two years after the beginning of the offering period or (ii) one year after the
purchase of shares, the employee will recognize ordinary income to the extent
the fair market value of the shares at the time they were purchased exceeded the
purchase price. Any additional gain is capital gain. The Company will receive
a tax deduction equal to the amount of ordinary income recognized to the
employee.
If, however, the employee sells or disposes of the shares after the later
of (i) two years after the beginning of the offering period or (ii) one year
after the purchase of shares, the employee will recognize ordinary income only
to the extent of the 15% discount in the purchase price of the shares at the
beginning of the offering period (not to exceed the gain recognized in the sale
or disposition). Any additional gain is capital gain. In this case, the
Company will not receive any tax deduction for the income recognized to the
employee.
If the employee dies while holding shares acquired under the Plan, there
will be included in the employee's taxable income for the year of death the
amount of ordinary income described in the preceding paragraph, regardless of
whether the holding periods described above have been met.
In each case, the amount of ordinary income recognized to the employee will
increase the tax basis of the shares, reducing the amount of capital gain
realized (or producing a capital loss) upon taxable disposition of the shares.
Adoption of the Plan. The affirmative vote of the holders of a majority of
the shares of Common Stock present in person or by proxy and entitled to vote at
the meeting is necessary to approve the adoption of the Plan.
The board believes that the Plan is in the best interests of the Company.
By offering employees an attractive opportunity to buy Common Stock, the board
believes the Plan provides incentives for participating employees to maximize
shareholder value. Moreover, the Plan is an attractive addition to existing
employee benefits offered by the Company and should help the Company to attract
and retain qualified employees. For these reasons, the board of directors
recommends a vote FOR approval of the PathoGenesis Corporation Employee Stock
Purchase Plan.
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The board of directors of the Company has selected KPMG Peat Marwick LLP as
independent accountants for 1998. That selection is being submitted to
shareholders for ratification.
Representatives of KPMG Peat Marwick LLP are expected to be available at
the meeting to answer appropriate questions, and may make a statement if they
desire to do so.
16
<PAGE>
The board of directors recommends a vote FOR the ratification of the
appointment of KPMG Peat Marwick LLP as independent accountants of the Company
for 1998.
OTHER MATTERS
As of the date of this proxy statement, the board of directors does not
know of any matter to be acted on at the meeting other than those discussed in
this proxy statement. If any other matter is presented, the proxy holders will
vote on the matter according to their best judgment.
ADDITIONAL INFORMATION
Who pays for this proxy solicitation? The Company will bear the cost of
this proxy solicitation. In addition to mailing proxy solicitation material,
officers and employees of the Company may solicit proxies in person or by
facsimile, telephone or other electronic means. They will not receive any
special compensation for that service, but the Company will reimburse them for
any out-of-pocket expenses. The Company will ask banks, brokers and other
institutions, nominees and fiduciaries to forward the proxy material to the
beneficial owners to obtain authority to execute proxies, and will reimburse
those entities for reasonable expenses. The Company has engaged Morrow & Co. to
assist in the solicitation of proxies from shareholders for a fee estimated at
approximately $5,000, plus reimbursement of out-of-pocket expenses.
How can a shareholder proposal be submitted for the 1999 annual meeting?
Any proposal for inclusion in the proxy statement for the Company's 1999 annual
meeting of shareholders must be received by the Company at 201 Elliott Avenue
West, Seattle, Washington 98119 on or before December 20, 1998, and must comply
with applicable rules of the Securities and Exchange Commission.
If you would like a copy of the Company's annual report to the Securities
and Exchange Commission on Form 10-K for 1997, please write to: Investor
Relations, PathoGenesis Corporation, 201 Elliott Avenue West, Seattle,
Washington 98119. The company will provide a copy of the report to you at no
charge.
Marvin B. Tepper
Secretary
17
<PAGE>
APPENDIX A
PathoGenesis Corporation
EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Employee Stock Purchase Plan (the "Plan") is to benefit
PathoGenesis Corporation, a Delaware corporation (the "Company") and its
subsidiaries by offering eligible employees a favorable opportunity to become
shareholders of the Company over a period of years, thereby giving them a
proprietary interest in the anticipated growth and prosperity of the Company and
encouraging the continuance of their dedicated services to the Corporation and
its subsidiaries. Pursuant to the Plan, 200,000 shares of common stock, $0.001
par value per share, of the Company (the "Stock") may be offered for sale to
eligible employees through periodic offerings to be made during the ten-year
period commencing July 1, 1998.
The Plan is intended to qualify as an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations promulgated thereunder.
1. Administration. The Plan will be administered by the Compensation and
Nominating Committee of the Board of Directors, or such other committee or
subcommittee of the Board of Directors as the Board shall determine (in either
case, the "Committee"). Notwithstanding the foregoing, an officer of the
Company designated by the Committee, or such other officers or employees as he
or she may designate, shall have the authority to determine all issues with
respect to the administration of the Plan (other than the timing of offerings),
and to interpret the provisions of the Plan and resolve all issues of
eligibility or participation, subject to the oversight of the Committee. Any
determination or interpretation made by the officer so designated may be
appealed to the Committee, and the Committee's decision with respect thereto
shall be final and binding on all parties.
2. Eligibility. All employees of the Company and its subsidiaries on the
date of any offering (as hereinafter described) shall be eligible to participate
in the Plan, except that the following classes of employees shall not be
eligible:
(a) employees whose customary employment is for five or fewer months in
any calendar year;
(b) employees who either own, or immediately after the grant of an option
under the Plan would own, stock of the Company possessing 5% or more
of the total combined voting power or value of all classes of stock of
the Company or its subsidiaries (for purposes of this subparagraph
(b), an employee shall be deemed to own any stock owned, directly or
indirectly, by or for his siblings, spouse, ancestors and lineal
descendants, and stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust, shall be deemed to be owned
proportionately by its shareholders, partners, or beneficiaries, all
in accordance with the Section 424(d) of the Code, and stock that the
employee may purchase under outstanding, options, whether under this
Plan or otherwise, shall be treated as stock owned by the employee);
and
(c) employees who are employed by a subsidiary that is excluded from
participation in the Plan (all subsidiaries shall participate provided
that, unless the Committee otherwise determines, subsidiaries
substantially all of whose employees are
A-1
<PAGE>
neither citizens nor resident aliens of the United States shall not
participate; for all purposes of this Plan, a subsidiary of the
Company shall mean a "subsidiary corporation" as defined in Section
424(f) of the Code).
3. Offerings. The Company will make one or more offerings to employees to
purchase Stock under this Plan. Each offering period shall be not more than two
years in duration, and shall commence and end at such times as the Committee may
determine. During each offering period (or during such portion thereof as an
employee may elect to participate), each participating employee shall be given
the option to purchase shares of Stock, with a portion of such employee's
compensation as set forth in more detail below. For all purposes of this Plan,
"compensation" shall mean the employee's regular or basic compensation for
employment with the Company or its subsidiaries, including wage or salary
payments, commission payments, extra cash payments of overtime premium, and
shift pay for Saturday, Sunday or holiday work. Compensation shall not include
irregular payments such as incentive bonuses and discretionary cash incentives,
noncash payments, welfare or fringe benefits, or employer contributions to
pension, profit-sharing or retirement plans.
4. Participation. Subject to the last sentence of Section 7, an employee
eligible on the effective date of any offering may participate in such offering
on such effective date or on the first day of any calendar quarter commencing
within the offering period (an "enrollment date") by completing the enrollment
process prescribed by the Company. The enrollment process will authorize a
regular payroll deduction from the employee's compensation, and will take effect
on the next payroll date after the enrollment date (or such later payroll date
as the Committee may determine by uniform rules).
5. Payroll Deductions. The Company will maintain a payroll deduction
account for each participating employee. With respect to any offering made
under this Plan, an employee may authorize a payroll deduction in terms of whole
number percentages from a minimum of 1% up to a maximum of 15% of the
compensation received by the employee during the offering period (or during such
portion thereof as an employee may elect to participate). Notwithstanding any
other provision of the Plan, no employee may be granted an option that permits
the employee's rights to purchase Stock under this Plan and any other stock
purchase plan (as defined in Section 423 of the Code) of the Company and any
subsidiary of the Company to accrue at a rate that exceeds $25,000 in any
calendar year in which the option is outstanding at any time, with rights being
valued at the fair market value of such underlying Stock (determined on the
effective date of the offering). For purposes of the preceding sentence, an
employee's right to purchase Stock accrues when the employee's option first
becomes exercisable, and the rules set forth in Section 423(b)(8) of the Code
shall apply.
6. Deduction Changes. An employee may at any time increase or decrease
the employee's payroll deduction by filing a new payroll deduction authorization
form, subject to limitations on the number, frequency or timing of changes
established by the Committee, which shall apply uniformly to all participants.
Unless and until a different rule is established by the Committee, an employee
may not change his or her payroll deduction more than once in any month. A
change will not become effective sooner than the next pay period after receipt
of the form by the Company. An employee may suspend his or her payroll
deduction completely pursuant to this Section 6, but the employee's right to
resume participation during the same offering period shall be governed by the
last sentence of Section 7.
A-2
<PAGE>
7. Withdrawal of Funds. An employee may at any time and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an offering. An employee who ceases to
participate in an offering, either by withdrawing his or her funds pursuant to
this Section 7 or by suspending his or her payroll deductions pursuant to
Section 6, may thereafter resume participation only once during the remainder of
the offering period.
8. Purchase of Shares. Each employee participating in any offering under
this Plan will be granted an option, upon the effective date of such offering
(or of the employee's participation), to purchase as many whole shares of Stock
as may be purchased with the following amounts:
(a) the compensation of the employee withheld during the applicable
offering period pursuant to Sections 5 and 6; and
(b) the balance (if any) in the employee's account carried forward from
the preceding offering period pursuant to the final paragraph of this
Section 8.
As of the last day of every sixth month period during any offering, and
upon termination of the Plan, the account of each participating employee shall
be totaled. If the account contains sufficient funds to purchase one or more
full shares as of that date, the employee shall be deemed to have exercised an
option to purchase such share or shares as of that date. The employee's account
shall be charged for the amount of the purchase price and ownership of such
share or shares shall be appropriately entered in the books of the Company in
the name of the employee (unless a custodian is appointed as provided in Section
10). A participating employee may not purchase a share in any offering beyond
the end of the applicable offering period. Any balance remaining in an
employee's account at the end of an offering period will be carried forward in
the account for the following offering period or, if there is none, shall be
paid to the employee as soon as practicable. In no event will the balance
carried forward exceed the purchase price of one share on the last day of the
last month of the offering period.
9. Purchase Price of Shares. The purchase price for each share purchased
will be the lesser of 85% of the fair market value (as defined in Section 11) on
the effective date of the offering or 85% of the fair market value at the time
the option is exercised.
10. Appointment of Custodian. The Committee may, but shall not be
obligated to, appoint a custodian who shall hold the Stock purchased under the
Plan and maintain records showing the number of shares of Stock owned by each
participating employee. Either the Committee or, with the Committee's consent,
the custodian, may also designate one or more broker/dealers (any one of which
may be the custodian or an affiliate of the custodian) to sell shares of Stock
credited to an employee's account at the employee's direction and distribute the
proceeds, net of commissions and other applicable expenses, to the employee.
The custodian shall distribute as soon as practicable all dividends or other
distributions received with respect to the Stock to the participating employees
in proportion to the number of shares credited to each of their accounts as of
the record date for such distributions, except for distributions of Stock which
shall be held by the Custodian and credited to the participating employees'
accounts. The custodian shall exercise all voting, tender and similar rights
with respect to the Stock in accordance with the instructions of the
participating employees or, in the absence of instructions, as directed by the
Committee. Upon an employee's termination of employment for any reason, the
shares of Stock credited to his or her account shall be registered on the books
of the Company in the name of the employee (or of the beneficiary appointed
pursuant to Section 13.) Any Stock registered in the name
A-3
<PAGE>
of an employee may be registered only in the name of the employee, or, if the
employee so indicates on the employee's payroll deduction authorization form, in
the employee's name jointly with a member of the employee's family, with right
of survivorship.
11. Fair Market Value. The "fair market value" for any day shall be the
average of the high bid and low asked prices as quoted by the National
Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq") or
such other system then in use; provided that if the Stock shall become listed on
one or more national securities exchanges, the fair market value shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to the principal exchange on which the Stock is so listed. If such prices are
not available on a given day, then the Committee may use the prices of such
Stock on the next preceding trading day for which such prices are available.
The Committee may revise the method of determining the fair market value of
Stock, provided that such revisions are uniformly applied and consistent with
the requirements of Section 423 of the Code.
12. Rights as a Stockholder. None of the rights or privileges of a
stockholder of the Company shall exist with respect to shares purchased under
this Plan unless and until the Stock is registered in the name of the employee,
or the custodian on behalf of the employee, on the records of the Company.
13. Rights on Retirement, Death or Termination of Employment. In the
event of a participating employee's retirement, death or termination of
employment for any reason, all payroll deductions shall cease and no further
shares of Stock shall be purchased for such employee. If a custodian has been
appointed to hold the Stock, the number of shares of Stock in the employee's
account shall be registered in the name of the employee, and the remaining cash
balance in the employee's account shall be paid to the employee as soon as
practicable thereafter. Each employee may designate one or more beneficiaries
who shall be entitled to receive the balance in the employee's account upon his
or her death, in accordance with procedures established, and subject to
limitations determined, by the Committee. An employee may change any of his or
her beneficiaries at any time without the consent of such beneficiary, provided
that no designation or change of a beneficiary shall have any effect or be
binding upon the Company until actually received, in writing, on the form
prescribed by the Committee. If a deceased employee has no surviving
beneficiary, or if the Committee is unable to determine the identity of his or
her beneficiary or to locate the beneficiary, the balance in the account shall
be paid instead to his or her estate.
14. Rights Not Transferable. Rights under this Plan are not transferable
by a participating employee other than by will or the laws of the descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
15. Application of Funds. All funds received or held by the Company under
this Plan may be used for any corporate purpose.
16. Adjustment in Case of Changes Affecting Stock. The number of shares
subject to the Plan and to options granted under the Plan shall be adjusted as
follows: (a) in the event that the Company's outstanding Stock is changed by any
stock dividend, stock split or combination of shares, the number of shares
subject to the Plan and to options theretofore granted thereunder shall be
proportionately adjusted; (b) in the event of any merger or consolidation of the
Company with any other corporation or corporations, there shall be substituted
for each share of the Company then subject to the
A-4
<PAGE>
Plan, whether or not at the time subject to outstanding options, the number and
kind of shares of common stock or other voting securities to which the holders
of Stock will be entitled pursuant to the transaction; and (c) in the event of
any other relevant change in the capitalization of the Company, the Board of
Directors shall provide for an equitable adjustment in the number of shares of
Stock subject to the Plan, whether or not then subject to outstanding options.
In the event of any such adjustment, the purchase price per share shall be
adjusted appropriately.
17. Amendment of the Plan. The Board of Directors may at any time, or
from time to time, amend this Plan in any respect, except that, without the
approval of a majority of the shares of Stock then issued and outstanding and
entitled to vote, no amendment shall be made (i) increasing or decreasing the
number of shares approved for issuance pursuant to this Plan (other than as
provided in Section 16) or (ii) decreasing the purchase price per share (other
than as provided in Section 16).
18. Termination of the Plan.
(a) This Plan and all rights of employees under any offering pursuant to
the Plan hereunder shall terminate:
(i) on the day that participating employees become entitled to purchase a
number of shares equal to or greater than the number of shares
remaining available for purchase (and if the number of shares so
purchasable is greater than the shares remaining available, the
available shares shall be allocated by the Committee on a pro rata
basis among the participants in proportion to their respective account
balance on that date); or
(ii) at any time, at the discretion of the Board of Directors.
No offering hereunder shall extend beyond June 30, 2008. Upon termination
of this Plan, any amount in the account of a participating employee shall be
carried forward into the employee's payroll deduction account under a successor
Plan, if any, or refunded to the employee as soon as practicable thereafter.
(b) Notwithstanding the foregoing, in the event that either (i) the Company
enters into an agreement to merge or consolidate with, or to transfer all or
substantially all of its assets and business to, another entity, and such
agreement does not provide for the successor entity to assume the Plan (with
appropriate changes pursuant to Section 16), or (ii) the Plan is terminated
following the occurrence of an event that causes the Preferred Stock Purchase
Rights declared by the Board of Directors on June 26, 1997 to become
exercisable, then each participating employee who has an option under the Plan
shall have the right under such option to purchase for cash a number of shares
of Stock up to the total number of shares the employee could have purchased
under such option had the Plan remained in effect for the balance of the
offering during which such event occurs. Such option shall be exercisable, in
accordance with administrative procedures specified by the Committee, either
immediately prior to the closing of the transaction described in clause (i) or
immediately prior to termination of the Plan following the event described in
clause (ii). The maximum number of shares each participating employee may
purchase pursuant to this subparagraph (b) shall be determined by multiplying
the amount withheld from the employee's compensation pursuant to Section 5 in
the last payroll period prior to termination of the Plan by the number of
payroll periods remaining in the term of the offering, plus the balance in the
employee's account. Each employee's right to purchase Stock shall be subject to
the last two sentences of Section 5, and if the total number of shares that
employees elect to purchase exceeds the maximum
A-5
<PAGE>
number of shares remaining available under the Plan, the available shares shall
be divided among the electing employees in proportion to the number of shares
they elect to purchase. All other provisions of the Plan, as appropriate, shall
apply to purchases of Stock pursuant to this subparagraph (b).
19. Governmental Regulations. The Company's obligation to sell and
deliver the Stock under this Plan is subject to the approval of any governmental
authority required in connection with the authorization, issuance or sale of
such Stock.
At the time of any exercise of any option by a participating employee, the
Company may, if the Company shall determine it necessary or desirable for any
reason, require the employee as a condition of the exercise thereof, to deliver
to the Company a written representation of present intention to purchase the
shares for investment and not for distribution. In the event such
representation is required to be delivered, an appropriate legend may be placed
upon each certificate delivered to the employee upon the exercise of the option
and a stop order may be placed with the transfer agent for the shares issued
pursuant to such exercise. If at any time the Company determines, in its
discretion, that the listing, registration or qualification of the shares
subject to options under the Plan upon any securities exchange or Nasdaq stock
market or another quotation service or under any state or federal law, or the
consent or approval of any government regulatory body is necessary or desirable
as a condition of, or in connection with, the issue or purchase of shares
thereunder, no option may be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable by the Company.
20. Repurchase of Shares. The Company may repurchase outstanding shares
of Stock, upon such terms as the Company may approve, for delivery under this
Plan.
21. Approval of Shareholders. This Plan shall be submitted to the
shareholders of the Company for approval at the first annual meeting held after
approval of the Plan by the Board of Directors, or at a special meeting called
for such purpose. Anything else contained herein to the contrary
notwithstanding, no options shall be exercised until the Plan is approved by the
shareholders, and, if the Plan is not approved within 12 months after its
approval by the Board of Directors, the Plan shall be null and void and all
amounts held in the participants' accounts shall be refunded to them as soon as
practicable.
22. No Employment Guarantee. Neither the establishment of the Plan nor
any modification thereof shall be construed as giving to any participant or
other person any legal or equitable right against the Company or any other
participating employer except as herein provided. Under no circumstances shall
the terms of employment of any participant be modified or in any way affected
hereby. The maintenance of this Plan shall not constitute a contract of
employment with any participant, and participation in the Plan will not give any
participant a right to be retained as an employee of any employer.
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<PAGE>
PathoGenesis Corporation PROXY
Solicited by the Board of Directors
Annual Meeting/June 3, 1998
Wilbur H. Gantz, Alan R. Meyer and Marvin B. Tepper, or any one or more of
them, each with power of substitution, are authorized to vote the shares of the
undersigned at the annual meeting of shareholders of PathoGenesis Corporation
to be held June 3, 1998 and at any adjournment of that meeting. They shall vote
on the matters described in the proxy statement accompanying the notice of
meeting in accordance with the instructions on the reverse side of this card,
and in their discretion on such other matters as may come before the meeting.
(continued on reverse side)
<PAGE>
PathoGenesis Corporation
Mark your vote in oval using dark ink only.
___________________
Common shares
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1. Election of Directors 2. Approval of the Patho- For Against Abstain
Genesis Corporation / / / / / /
Nominees: Employee Stock
Talat M. Othman, Purchase Plan
Eugene L. Step,
Fred Wilpon 3. Ratification of the For Against Abstain
Selection of KPMG / / / / / /
FOR all nominees; For All Peat Marwick LLP as
Withhold my vote from For Withhold Except independent
nominees; or / / / / / / accountants
For all nominees except any
whose name I have crossed 4. In their discretion, on
out any other matter that may
properly come before the
meeting.
If no specific instructions are provided, this proxy
will be voted for the nominees for directors and for
proposals 2 and 3.
Dated:___________________ , 1998
Signature(s) __________________________________________
_______________________________________________________
Please sign exactly as your name appears and return this
proxy immediately in the enclosed reply envelope.
</TABLE>
