<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PathoGenesis Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
<PAGE>
[LOGO]
PathoGenesis Corporation
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Date: Wednesday, June 2, 1999
Time: 4:00 p.m., Pacific Time
Place: 201 Elliott Avenue West
Seattle, Washington 98119
Purpose: 1. Elect three Class I directors
2. Approve the PathoGenesis Corporation 1999 Stock Plan
3. Ratify the selection of KPMG LLP as the company's independent
auditors for 1999
4. Transact any other business that may properly come before the
meeting
If you are a shareholder of record at the close of business on April 3,
1999, you 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 19, 1999
<PAGE>
PathoGenesis Corporation
____________________
PROXY STATEMENT
____________________
We are sending you these proxy materials because PathoGenesis' board of
directors is soliciting your proxy to vote your shares at the 1999 annual
meeting of shareholders. We began mailing these proxy materials to shareholders
on or about April 19, 1999.
ABOUT THE MEETING
What is the purpose of the meeting? At the meeting, we will ask you to:
. elect three directors
. approve a proposed 1999 Stock Plan
. ratify the selection of KPMG LLP as our independent auditors.
Who may vote at the meeting? Only shareholders of record at the close of
business on April 3, 1999 are entitled to vote at the meeting. You are entitled
to one vote for each share of PathoGenesis common stock you 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 vote by proxy, your proxy (one of the individuals named on
your proxy card) will vote your shares as you specify. If you do not otherwise
indicate, your proxy will vote your shares for the board's nominees for
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 PathoGenesis and to 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 sending a written revocation
to Marvin B. Tepper, the company's Secretary, by providing a later-dated proxy,
or by voting in person at the meeting.
What constitutes a quorum? The presence at the meeting, in person or by
proxy, of the holders of a majority of the common stock entitled to vote will
constitute a quorum for the transaction of business at the meeting. As of the
record date, 16,393,094 shares of common stock were outstanding. Abstentions and
broker non-votes are counted as shares present for determining if a quorum is
present.
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 1999 Stock Plan and ratification of the selection of
KPMG LLP as independent auditors will require the vote of a majority of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the matter. Abstentions and broker non-votes will have no effect on the
election of directors. On approval of the PathoGenesis Corporation 1999 Stock
Plan and ratification of the selection of independent auditors,
<PAGE>
abstentions will have the effect of a no vote, while broker non-votes will not
be counted as shares entitled to vote on either proposal and thus have no effect
on the outcome of the vote.
PROPOSAL 1
ELECTION OF DIRECTORS
Our board of directors currently consists of 10 members, who are divided
into three classes having three-year terms that expire in successive years. As
authorized by our by-laws, the board of directors reduced the board size to
eight after the resignation of Lawrence C. Hoff in March 1998. In June 1998,
the board increased its size to nine and elected Authur W. Nienhuis, M.D. to
fill the newly created vacancy. In January 1999, the board increased its size
to 10 and elected James R. Tobin to fill that newly created vacancy.
You are asked to elect three Class I directors at the meeting. Class II
and Class III 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, 1998.
The board of directors has nominated Alan R. Meyer, Elizabeth M. Greetham
and Michael A. Montgomery, each of whom is a current Class I director, for re-
election to serve until the annual meeting in 2002 or until his or her 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 recommends a vote FOR the election of each nominee for director.
- --------------------------------------------------------------------------------
Nominees for Election at the Meeting (Class I)
Elizabeth M. Greetham Ms. Greetham has been President of ACCL Financial
Age 49 Consultants Ltd. and Chief Financial Officer of
Director since 11/96 Drug Abuse Sciences Inc. (a pharmaceutical company)
since April 1999. Previously, she was a Portfolio
Manager for Weiss, Peck & Greer, L.L.C. (investment
adviser). She is a director of various
pharmaceutical companies, including CliniChem
Development Corporation (a Canadian corporation),
Guilford Pharmaceuticals Inc. and SangStat Medical
Corporation.
Alan R. Meyer Mr. Meyer joined PathoGenesis in 1992 as Vice
Age 45 President and Chief Financial Officer and a
Director since 12/92 director. He became Senior Vice President and
Executive Vice President, Chief Financial Officer in July 1995, when he also
Chief Financial assumed the office of Assistant Secretary, and
Officer and became Executive Vice President in January 1998.
Assistant Secretary Previously, he was chief financial officer for
several development stage healthcare companies,
held corporate finance and corporate development
positions with Baxter Healthcare Corporation (maker
and distributor of healthcare products) and was a
management consultant with Arthur Andersen & Co.
(public accounting firm).
2
<PAGE>
Michael J. Montgomery Mr. Montgomery is the President and Chief Executive
Age 44 Officer (Chief Operating Officer until May 1998)
Director since 7/95 of Sega GameWorks L.L.C. (entertainment company),
which he joined in September 1996. He was a senior
executive of DreamWorks SKG (entertainment company)
from 1995 to 1996; Executive Vice President and
Chief Financial Officer of Euro Disney SCA (theme
park operator) from 1993 to 1994; and, previously,
Vice President and Treasurer of The Walt Disney
Company (entertainment company). Mr. Montgomery is
a brother of A. Bruce Montgomery, M.D., our
Executive Vice President-Research and Development.
Continuing Directors Whose Terms Expire in 2000 (Class II)
Wilbur H. Gantz Mr. Gantz, a founder of PathoGenesis, has been our
Age 61 Chief Executive Officer and President since 1992
Director since 3/92 and Chairman since January 1998. Previously, he was
President of Baxter International Inc. (healthcare
Chairman, Chief Executive products company). He is a director of The
Officer and President 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 former trustee of
Princeton University.
John L. Gordon Mr. Gordon is chairman and founder of Quercus
Age 54 Management Limited, a biotechnology support company
Director since 11/97 based in Oxford, England. He was Chief Executive
Officer of Neures Limited (biotechnology company)
from 1994 to 1996, and previously was Director of
Research of Neures' parent company, British Biotech
plc. He is a director of Reabourne Merlin Life
Sciences Investment Trust PLC, a publicly held
company in the UK.
Arthur W. Nienhuis, M.D. Dr. Nienhuis has been Director of St. Jude
Age 57 Children's Research hospital since 1993.
Previously, he was chief of the Clinical Hematology
Director since 7/98 Branch at the National Heart, Lung & Blood
Institute at the National Institutes of Health and
held appointments at Boston's Massachusetts General
Hospital and Harvard Medical School. Dr. Nienhuis
is a director of the American Association of Cancer
Institutes and the author of more than 230
published scientific papers.
3
<PAGE>
Continuing Directors Whose Terms Expire in 2001 (Class III)
Talat M. Othman Mr. Othman has been Chairman and Chief Executive
Age 62 Officer of Grove Financial, Inc. (investment
management company) since September 1995.
Director since 9/92 Previously, he was Chairman, President and Chief
Executive Officer of Dearborn Financial, Inc.
(investment management company). He is a director
of the Middle East Policy Council in Washington,
D.C., a member of the Board of Governors of St.
Jude Children's Research Hospital and a trustee for
the Center for Excellence in Education in
Washington, D.C. Previously, he was a director of
Harken Energy Corporation (oil and gas exploration
company) 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
Age 69 and a member of the Executive Committee of Eli
Director since 4/92 Lilly and Company (pharmaceutical company) and
President of its Pharmaceutical Division prior to
his retirement in 1992. Since his retirement, Mr.
Step has been a private investor. He is a former
Chairman of the Pharmaceutical Manufacturers
Association (now PhRMA) and former President of the
International Pharmaceutical 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 Inc. (biotechnology company).
James R. Tobin Mr. Tobin is President, Chief Executive Officer and
Age 54 a director of Boston Scientific Corporation
Director since 1/99 (medical device manufacturer). He was Chief
Executive Officer of Biogen, Inc.
(biopharmaceutical company) from 1997 to 1998, and
its President and Chief Operating Officer from 1994
to 1997. Previously, he was President and Chief
Operating Officer of Baxter International, Inc.
(healthcare products company). He is a director of
Creative BioMolecules Inc. (biopharmaceutical
company).
Fred Wilpon Mr. Wilpon, a founder of PathoGenesis, was Chairman
Age 62 of the Board from May 1995 to January 1998. He is
Director since 1/92 co-founder of and Chairman of the Board of Sterling
Equities, Inc. (real estate developer) and is
President and Chief Executive Officer of the New
York Mets baseball team. He is a director of Bear,
Stearns & Co. Inc. (investment bank).
How often did our board meet in 1998? Our full board met seven times in
1998. 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
1998.
4
<PAGE>
What committees has the board established? Our board 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 recommends the appointment of our independent
auditors. In addition, it reviews auditing arrangements with the independent
auditors, the scope and results of their audits, any problems they may identify
regarding internal accounting controls and their recommendations. It also meets
with our Chief Financial Officer to review our programs, policies and procedures
on financial controls and internal auditing. The Audit/Finance Committee also
reviews with our Chief Financial Officer our 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 auditors 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. The committee met
once in 1998.
The Compensation and Nominating Committee administers the compensation and
benefit programs for our officers, employees and consultants, including our
stock option and stock purchase plans. It determines stock option grants to our
Chief Executive Officer and makes recommendations to the full board on the
compensation of our Chief Executive Officer and non-employee members of the
board. It also makes recommendations to the board of directors on any proposed
plan or program that would benefit the senior executives and regarding
candidates for the board and executive offices. The committee would consider
candidates for director suggested by shareholders who comply with the procedures
established in our by-laws. The procedures are described later in this proxy
statement under "Additional Information How can a shareholder proposal be
submitted for the 2000 annual meeting?" Talat M. Othman (chair), John L. Gordon
and Fred Wilpon are members of this committee. The committee held four meetings
and acted by written consent twice during 1998.
The Executive Committee has the authority to take any action that the board
of directors may take, subject to some restrictions imposed by law. Fred Wilpon
(chair), Wilbur H. Gantz, Talat M. Othman and Eugene L. Step are members of this
committee. The committee met on five occasions in 1998.
What compensation do directors receive? Under the PathoGenesis
Corporation 1998 Compensation Program for Non-Employee Directors for the years
1998-2002, each non-employee director is compensated in cash and options to
purchase common stock as follows:
Annual Retainer: Basic $15,000
Executive Committee chair supplement 10,000
Other committee chair supplement 5,000
Instead of receiving the basic annual retainer for the years
1998-2002 in cash, each non-employee director may elect, on
January 1, 1998 or, if later, upon initial election to the
board, to receive an additional stock option having an
aggregate exercise price equal to four times the amount of cash
retainer waived. The options will vest on the first day of each
year (or portion of a year) through 2002 in which the optionee
was a director, to the extent of a fraction of the entire
option whose numerator is the amount of the basic retainer for
such year represented by the option and whose denominator is
the amount of base retainer for all years during the term of
the
5
<PAGE>
program. Each option granted to a director has a ten-year term
and is granted at an exercise price equal to the fair market
value of the common stock on the grant date.
Meeting Fee: For each board meeting attended in $ 1,000
person or by telephone (no separate
compensation for committee meetings)
Option Grant: Initial Grant
10,000 shares upon initial election to the board
Subsequent Annual Grant
Basic 6,000 shares
Executive Committee chair supplement 2,000 shares
Other committee chair supplement 1,000 shares
Each such option is fully vested on date of grant.
During 1998, our non-employee directors received grants of
fully vested options to purchase an aggregate of 50,000 shares
of common stock at a weighted average exercise price of $32.59
per share.
EXECUTIVE OFFICERS
In addition to Wilbur H. Gantz and Alan R. Meyer, our current executive
officers are as follows. (Ages are as of December 31, 1998 and other
information is as of the date of this proxy statement.)
A. Bruce Montgomery, M.D. Dr. Montgomery has been Executive Vice President-
Age 45 Research and Development since January 1998. He
Executive Vice President joined PathoGenesis in 1993 as Vice President of
Research and Development Medical and Regulatory Affairs and was promoted
to Senior Vice President in July 1995. From 1989 to
November 1993, he was Associate Director of
Clinical Research at Genentech, Inc. (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, he
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 member of our board.
6
<PAGE>
Marc F. Wipperman Mr. Wipperman joined PathoGenesis in 1996 as Vice
Age 47 President-Manufacturing, and was promoted to Senior
Senior Vice President- Vice President-Operations in January 1998. He
Operations oversees the development and commercialization of
manufacturing processes, from the sourcing of raw
materials to production, quality control and
distribution. From 1995 to 1996, he was President
of Certified Manufacturing Corporation
(pharmaceutical consulting firm) and from 1993 to
1995, he was a consultant to the pharmaceutical
industry. Previously, he held a variety of
management, manufacturing and engineering positions
with Johnson & Johnson (pharmaceutical company).
REPORT OF COMPENSATION AND NOMINATING COMMITTEE
ON EXECUTIVE COMPENSATION
Our Compensation and Nominating Committee is responsible for the
administration of our executive compensation program. The committee is composed
entirely of independent, non-employee directors. In reviewing compensation
matters, the committee uses information from compensation surveys and other
advisory services provided by an independent consultant, as well as other
publicly available competitive compensation data.
What is our compensation philosophy?
The philosophy of our executive compensation program is that compensation
should reward executives for outstanding individual performance and, at the same
time, provide incentives for executives to maximize shareholder value. To
implement that philosophy, we offer each of our 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. We emphasize 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, we aim to:
. attract and retain highly qualified and talented executives
. provide appropriate incentives to motivate them to produce sustained
superior performance
. reward them for outstanding individual contributions to the
achievement of our near-term and long-term business objectives.
How do we determine base pay?
We believe base salaries should reflect each individual's position,
responsibilities, experience, leadership and potential contributions to the
company's success. The committee conducts annual reviews to ensure that base
salaries are competitive with similar companies, that they reflect the specific
responsibilities and unique skills of individual executives, and that they
appropriately reward individual executives for their contributions to our
performance. Actual salaries vary according to the committee's subjective
assessment of those factors. A significant factor in the committee's
determination of 1998 base salaries for our executive officers was our
transition from a development stage company to an operating company and the
future challenges we will face as a young commercial enterprise. Three of the
four named executive officers (excluding our Senior Vice President-Operations)
hold offices for which comparable data among peer companies are available.
Before 1998, the fixed compensation
7
<PAGE>
components of those three officers were below the median level of our peer group
of 17 other emerging biopharmaceutical companies. The committee also considered
that factor in determining 1998 salary increases for our named executive
officers.
How are annual cash incentives determined?
Each executive officer is eligible to receive cash bonuses based on the
committee's assessment of his or her individual performance and the performance
of the company. The committee establishes a target bonus level, ranging from
25% to 50% of base pay, for each participating executive at the beginning of
each year. At the beginning of the following year, the committee determines the
actual bonus award for each executive, which may be above, equal to or below the
target level for that executive, based on the committee's subjective evaluation
of individual and overall company performance. Specifically, the committee
determines whether in the past year PathoGenesis met the goals previously
established by the full board and examines the executive's contribution to the
company's performance. In determining incentive bonuses for 1998 for our
executive officers in January 1999, the committee considered such company
achievements as the successful launch of TOBI(R) (tobramycin solution for
inhalation) in the United States, our pursuit of TOBI's regulatory approval in
other markets, and our continued effort to expand our product line. 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.
How do we use long-term incentives to motivate our executives?
We provide long-term incentive awards to our executives through stock
options. We believe stock options should be an integral part of compensation,
because they help align employee interests with those of our shareholders. We
grant options to our executives at the market value of the common stock on the
date of grant. An optionee will receive value only if the common stock's market
value increases above the option exercise price and the option is exercised, in
which case shareholders also will benefit from the increased value of their
stock. Because these options generally vest over a period of four years after
the grant date and have ten-year terms, executives have an incentive to increase
long-term shareholder value.
In determining the size of each individual option grant, the 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 each executive's performance. The committee weighs any factors it considers
relevant and gives such factors the relative weight it considers appropriate
under the prevailing circumstances. When determining the amount of stock
options to award to any specific executive, the committee does not consider the
amount of stock already owned by that executive. The committee believes that
doing so could have the effect of inappropriately or inequitably penalizing or
rewarding executives based on their personal decisions concerning stock
ownership and option exercises.
How did we compensate our Chief Executive Officer?
The determination of Wilbur H. Gantz's compensation followed all the
policies and evaluation procedures described above. In recommending Mr. Gantz's
base salary and bonus and determining the stock option grant to Mr. Gantz, the
committee considered the critical job responsibilities of the chief executive
officer and Mr. Gantz's contribution to TOBI's successful launch in the United
States in 1998.
8
<PAGE>
Under Mr. Gantz's leadership, we generated a small operating profit (excluding a
$4 million license fee expensed in the year) in our first year of commercial
sales operations. He also guided our product and market development program and
pursued new growth opportunities, in each case with a view to making us a leader
in the market for inhaled drugs to treat lung infections. In recognition of Mr.
Gantz's accomplishments in leadership, financial performance, operations,
strategic planning, human resources, innovation and management efficiency, the
committee in January 1998 recommended, and the board of directors approved, an
increase in Mr. Gantz's base salary for 1998 to $370,000 from $302,320 in 1997,
and the committee in January 1998 awarded to Mr. Gantz an option to purchase
100,000 shares. In addition, in January 1999 the committee recommended, and the
board approved, a cash bonus award to Mr. Gantz of $185,000 for 1998.
Are we subject to limits on tax deductibility of compensation?
Under Section 162(m) of the Internal Revenue Code, we generally cannot
deduct compensation in excess of $1 million per year for any of our named
executive officers, except for payments made under qualifying performance-based
plans. 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)). We believe that options granted under our present
stock option plans qualify as performance-based compensation. The committee's
present intention is to comply with Section 162(m) to maximize tax deductibility
to the extent compatible with the company's strategic goals.
Compensation and Nominating Committee
Talat M. Othman, Chair
John L. Gordon
Fred Wilpon
9
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1998, the Compensation and Nominating Committee was composed of Talat M.
Othman (Chair), John L. Gordon (since April 1998), Lawrence C. Hoff (a former
director who served until March 1998) and Fred Wilpon. None of our current or
past executive officers or employees serves on the Compensation and Nominating
Committee. None of our executive officers serves on the board or the
compensation committee of any entity whose directors or officers serve on our
Compensation and Nominating Committee.
EXECUTIVE COMPENSATION
The following table shows the compensation in the last three years of our
executive officers (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------- ------------
Securities
Salary Bonus Underlying Options (#)
------ ----- ----------------------
<S> <C> <C> <C> <C>
Wilbur H. Gantz 1998 $370,000 $185,000 100,000
Chairman, Chief Executive 1997 302,320 175,000 75,000
Officer and President 1996 290,690 116,276 60,000
A. Bruce Montgomery, M.D. 1998 265,000 106,000 30,000
Executive Vice President-- 1997 201,660 85,000 80,000
Research and Development 1996 193,900 67,865 25,000
Alan R. Meyer 1998 220,000 88,000 30,000
Executive Vice President, 1997 187,200 81,000 20,000
Chief Financial Officer 1996 180,000 63,000 15,000
and Assistant Secretary
Marc F. Wipperman 1998 215,000 72,550 20,000
Senior Vice President-- 1997 190,000 66,000 --
Operations 1996 154,640 (1) 25,000 55,000
</TABLE>
(1) Mr. Wipperman became a full-time employee on July 1, 1996. Until then, he
received compensation (which is included in the 1996 information) based on
his service as a part-time employee.
10
<PAGE>
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock Price
Shares Options Appreciation for
Underlying Granted to Exercise or Option Term(2)
Options Employees in Base Price Expiration ------------------
Name Granted(1) Fiscal Year ($/Share) Date 5% 10%
- ------------------------------ ------------ ------------ ------------ ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Wilbur H. Gantz 100,000 17.69% $36.000 1/30/08 $2,264,021 $5,737,473
A. Bruce Montgomery, M.D. 30,000 5.31 35.625 1/26/08 672,131 1,703,312
Alan R. Meyer 30,000 5.31 35.625 1/26/08 672,131 1,703,312
Marc F. Wipperman 20,000 3.54 35.625 1/26/08 448,087 1,135,542
</TABLE>
(1) The exercise price of each option is the fair market value of the common
stock on the date of grant. These options vest cumulatively in four equal
annual installments beginning on the first anniversary of the grant date.
(2) These values are calculated using assumed annual rates of stock price
appreciation 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 be realized.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values for 1998
No options were exercised by our Named Executive Officers in 1998. The
following table shows information regarding stock options held by each Named
Executive Officer at the end of 1998.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised In-The-Money Options
Options at Fiscal Year-End At Fiscal Year-End(1) At March 31, 1999(2)
-------------------------- -------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wilbur H. Gantz 209,999 156,251 $9,337,777 $4,210,973 $297,266 $ 0
A. Bruce Montgomery, M.D. 85,624 108,751 3,683,714 3,522,536 107,244 8,206
Alan R. Meyer 93,750 58,750 4,354,375 1,808,125 231,641 8,203
Marc F. Wipperman 27,500 47,500 1,178,125 1,625,625 0 0
</TABLE>
(1) These figures are based on a price of $58.00 per share, the closing price of
the common stock on December 31, 1998, as quoted on the Nasdaq Stock Market,
as reported by The Wall Street Journal (Midwest Edition).
(2) These two columns show the value of unexercised in-the-money options held by
the Named Executive Officers at fiscal year-end, based on the closing price
of $13.31 per share of common stock on March 31, 1999, as quoted on the
Nasdaq Stock Market, as reported by The Wall Street Journal (Midwest
Edition).
Employment Agreements
The company has a month-to-month employment agreement with A. Bruce
Montgomery, M.D., under which Dr. Montgomery 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 also is entitled to receive benefits
offered to our employees generally. The agreement permits the company to
terminate Dr.
11
<PAGE>
Montgomery's employment for cause. The agreement also prohibits Dr. Montgomery
from competing with PathoGenesis for one year following termination of his
employment.
The company has an employment agreement with Marc F. Wipperman, under which
Mr. Wipperman is entitled to receive an annual base salary and bonus (up to 25%
of the annual base salary) as the board of directors determines. Mr. Wipperman
also is entitled to receive benefits offered to our employees generally. The
agreement permits the company to terminate Mr. Wipperman's employment for cause.
The agreement also prohibits Mr. Wipperman from competing with PathoGenesis for
one year following termination of his employment. The agreement will remain in
effect until June 20, 2000, after which it will be automatically renewed for
successive quarterly terms unless either party gives notice of termination at
least 60 days before the expiration of the then current term.
In February 1999, PathoGenesis entered into employment agreements with each
of our senior executives, including the Named Executive Officers. Each such
agreement provides for the payment of compensation and benefits if the
executive's employment is terminated following a change in control of
PathoGenesis. Each executive whose employment is terminated within two years
following a change in control will receive compensation under the agreement only
if the termination was by the company without cause or by the executive for good
reason. Once effective, the agreements provide, in addition to unpaid ordinary
compensation and benefits, a lump sum cash payment equal to two times (three
times in the case of the Chief Executive Officer) the executive's annual
compensation and certain other benefits, including assistance in outplacement.
12
<PAGE>
PERFORMANCE COMPARISON*
The graph below compares the cumulative total return on PathoGenesis common
stock since November 22, 1995 (the date the common stock began trading on the
Nasdaq Stock Market) through December 31, 1998 with the cumulative total return
of the Nasdaq Stock Market Total Return Index and the Nasdaq Pharmaceuticals
Stock 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.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Nasdaq
Pathogenesis Nasdaq Pharmaceuticals
Date Corporation Stock Market Stock Index
<S> <C> <C> <C>
11/29/1995 100.000 100.000 100.000
12/29/1995 110.000 103.294 120.877
03/29/1996 163.750 108.107 125.772
06/28/1996 155.000 116.930 122.179
09/30/1996 177.500 121.073 124.983
12/31/1996 217.500 127.022 121.253
03/31/1997 250.000 120.133 115.156
06/30/1997 291.250 142.208 124.317
09/30/1997 355.000 166.284 139.449
12/31/1997 371.250 155.789 125.205
03/31/1998 335.000 182.305 137.633
06/30/1998 290.000 187.278 127.367
09/30/1998 333.750 169.175 120.160
12/31/1998 580.000 219.515 159.277
</TABLE>
<TABLE>
CRSP Total Returns for: 11/22/95 12/29/95 12/31/96 12/31/97 12/31/98
- --------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PathoGenesis Corporation $ 100.00 $ 110.00 $ 217.50 $ 371.25 $ 580.00
Nasdaq Stock Market 100.00 103.30 127.02 155.79 219.52
Nasdaq Pharmaceuticals Stock Index 100.00 120.88 121.25 125.21 159.28
</TABLE>
Cumulative total return, assuming an investment of $100 on November 22,
1995, for PathoGenesis common stock through March 31, 1999 was $133.10.
*Source: Center for Research in Security Prices (CRSP)
13
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information on beneficial ownership of
the common stock as of April 3, 1999, by (i) each of our directors and Named
Executive Officers, (ii) our Corporate Secretary, (iii) all of the foregoing
individuals as a group, and (iv) other owners, known to us as of February 15,
1999 (unless otherwise indicated), of more than 5% of the outstanding
PathoGenesis common stock.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)(2)
-------------------------------
Name Number Percent(3)
- ---- --------- ----------
<S> <C> <C>
Wilbur H. Gantz(4)................................... 727,824 4.34%
John L. Gordon....................................... 19,232 *
Elizabeth M. Greetham(5)............................. 26,771 *
Alan R. Meyer........................................ 116,662 *
Michael J. Montgomery(6)............................. 36,264 *
Arthur W. Nienhuis, M.D.............................. 10,000 *
Talat M. Othman...................................... 40,732 *
Eugene L. Step....................................... 42,500 *
James R. Tobin....................................... 23,650 *
Fred Wilpon(7)....................................... 872,982 5.31
A. Bruce Montgomery, M.D.(8)......................... 132,290 *
Marc F. Wipperman.................................... 37,466 *
Marvin B. Tepper(9).................................. 847,732 5.16
All foregoing persons
as a group (thirteen persons) (4)(5)(6)(7)(8)(9).. 2,134,105 12.33
Saul B. Katz(10)..................................... 855,000 5.22
Marsh & McLennan Companies, Inc.(11)................. 1,702,730 10.40
Morgan Stanley Dean Witter & Co.(12)................. 890,339 5.46
Rainier Investment Management, Inc.(13).............. 893,908 5.50
Scudder Kemper Investments, Inc.(14)................. 1,163,000 7.10
T. Rowe Price Associates, Inc.(15)................... 984,725 6.00
</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 after April 3,
1999.
(2) Includes shares subject to options that were exercisable within 60 days of
April 3, 1999 as follows: Mr. Gantz--378,749; Mr. Gordon--19,232; Ms.
Greetham--24,000; Mr. Meyer--110,000; Mr. M. Montgomery--27,482; Dr.
Nienhuis--10,000; Mr. Othman--40,732; Mr. Step--37,500; Mr. Tobin--11,500;
Mr. Wilpon--53,982; Dr. A. B. Montgomery-- 119,374; Mr. Tepper--47,732; Mr.
Wipperman--36,250.
14
<PAGE>
(3) Based on 16,393,094 shares outstanding as of April 3, 1999, unless
otherwise indicated. In computing the percentages shown in the table,
shares subject to options held by a named person that are exercisable
within 60 days after April 3, 1999 are treated as outstanding in
determining the percentage ownership of that person.
(4) Includes (i) 18,750 shares held by The Wilbur H. Gantz 1992 Irrevocable GST
Trust, of which Mr. Gantz is Trustee and (ii) 112,500 shares held by The
Wilbur H. Gantz 1992 Irrevocable Children's Trust, as to all such shares
Mr. Gantz disclaims beneficial ownership. 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) Includes 2,771 shares held through an investment fund.
(6) Includes 532 shares owned by Mr. Montgomery's minor children. Does not
include shares beneficially owned by A. Bruce Montgomery.
(7) Includes (i) 800,000 shares held by Sterling PathoGenesis Company, of which
Mr. Wilpon is managing partner; (ii) 9,000 shares held jointly with Mr.
Wilpon's wife; and (iii) 10,000 shares held jointly with a partner in
Sterling PathoGenesis Company. Mr. Wilpon disclaims beneficial ownership of
such 819,000 shares except to the extent of his pecuniary interest.
(8) Includes 6,400 shares owned by Dr. Montgomery's wife as custodian for minor
children, as to which Dr. Montgomery disclaims beneficial ownership. Does
not include shares beneficially owned by Michael J. Montgomery.
(9) Includes 800,000 shares held by Sterling PathoGenesis Company, of which Mr.
Tepper is a partner. Mr. Tepper disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest.
(10) Based on Schedule 13G filed on September 3, 1998 by Saul B. Katz, c/o
Sterling PathoGenesis Company, 575 Fifth Avenue, New York, New York 10017,
reporting beneficial ownership as of August 20, 1998 and includes (i) 5,000
shares owned jointly with such individual's spouse, (ii) 800,000 shares
held by Sterling PathoGenesis Company, of which such individual is a
partner (of which Fred Wilpon, one of our directors, and Marvin B. Tepper,
our Corporate Secretary, are also partners), and (iii) 10,000 shares held
jointly with a partner in Sterling PathoGenesis Company, as to all such
shares he disclaims beneficial ownership except to the extent of his
pecuniary interest.
(11) Based on Schedule 13G filed on March 10, 1999 by Marsh & McLennan
Companies, Inc., 1166 Avenue of the Americas, New York, New York 10036,
reporting beneficial ownership as of December 31, 1998. The Schedule 13G
states that: (i) Putnam Investment Management, Inc. ("PIM"), an investment
adviser, beneficially owns 1,637,230 shares and has shared investment power
and no voting power over all such shares; (ii) The Putnam Advisory Company,
Inc. ("PAC"), an investment adviser, beneficially owns 65,500 shares and
has shared voting power over 25,700 shares and shared investment power over
all 65,500 shares; (iii) Putnam Investments, Inc., a wholly-owned
subsidiary of Marsh & McLennan Companies, Inc. and the parent company of
PIM and PAC, may be deemed to beneficially own the shares beneficially
owned by PIM and PAC and to have shared voting power and shared investment
power over the shares to same extent as PIM or PAC, and (iv) Marsh &
McLennan Companies, Inc. and Putnam Investments, Inc. disclaim beneficial
ownership of all such shares.
15
<PAGE>
(12) Based on Schedule 13G filed on February 2, 1999 by Morgan Stanley Dean
Witter & Co., 1585 Broadway, New York, New York 10036, reporting beneficial
ownership as of December 31, 1998. The Schedule 13G states that Morgan
Stanley Dean Witter & Co., an investment adviser, has shared voting power
over 829,600 shares and shared investment power over 890,339 shares.
(13) Based on Schedule 13G filed on July 8, 1998 by Rainier Investment
Management, Inc., 601 Union Street, Suite 2801, Seattle, Washington 98101.
The Schedule 13G states that Rainier Investment Management, Inc., an
investment adviser, has sole voting power over 795,477 shares and sole
investment power over 893,908 shares.
(14) Based on Schedule 13G filed on February 11, 1999 by Scudder Kemper
Investments, Inc., 345 Park Avenue, New York, New York 10154, reporting
beneficial ownership as of December 31, 1998. The Schedule 13G states that
Scudder Kemper Investments, Inc., an investment adviser, has sole voting
power over 582,100 shares, shared voting power over 388,300 shares and
shared investment power over 1,163,000 shares.
(15) Based on Schedule 13G filed on February 10, 1999 by T. Rowe Price
Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202,
reporting beneficial ownership as of December 31, 1998. The Schedule 13G
states that T. Rowe Price Associates, Inc., an investment adviser, has sole
voting power over 88,725 shares and shared investment power over 984,725
shares, but T. Rowe Price Associates, Inc. disclaims beneficial ownership
of such shares.
Did directors and executive officers comply with
Section 16(a) beneficial ownership reporting requirements in 1998?
Based on our review of filings with the Securities and Exchange Commission
and written representations furnished to us, we believe that in 1998 our
directors and executive officers filed reports required under section 16(a) of
the Securities Exchange Act of 1934 on a timely basis except for the late filing
of the initial report on Form 3 of Arthur W. Nienhuis.
PROPOSAL 2
APPROVAL OF THE PATHOGENESIS CORPORATION
1999 STOCK PLAN
We ask for your approval of the PathoGenesis Corporation 1999 Stock Plan,
which we shall refer to as the 1999 Plan in the remainder of this discussion.
We expect that our pool of shares for stock option grants under our earlier
plans will be exhausted before year-end. In view of our emphasis on pay for
performance, it is crucial that we give employees incentives to increase return
to shareholders. We grant stock options to buy our stock at the current market
price on the grant date. As a result, an optionee will benefit when our share
price increases above the option exercise price and the option is exercised, in
which case shareholders also will benefit from the increased value of their
stock. We make every effort to balance potential dilution to shareholders with
motivation to employees. Although stock options are potentially dilutive, they
help us compete for talent in our fiercely competitive industry. We believe that
the potential reward offered by
16
<PAGE>
stock options enables us to attract and retain employees who otherwise would not
be willing to provide their services at the level of fixed compensation and
benefits we can offer. The fact that our employees are willing to accept stock
options as part of their compensation demonstrates their commitment to the
company's long-term success. For these reasons, the board believes that it is in
the best interests of PathoGenesis and our shareholders to adopt a new stock-
based incentive plan at this time. The board adopted the 1999 Plan on April 13,
1999, subject to your approval at the annual meeting.
We intend to continue our practice of granting options to employees upon
employment and, depending on individual and company performance, periodically
thereafter. The board has adopted a separate broad-based plan in which employees
(other than officers) may participate and under which options for up to 600,000
shares of common stock may be granted. We expect to make grants under the 1999
Plan principally to executive officers and directors. For the same reasons it
adopted the 1999 Plan, the board believes that the potential dilution resulting
from stock option grants under the broad-based plan should be outweighed by
increases in the value of our common stock above the option exercise price.
We summarize below certain key features of the 1999 Plan. Because it is a
summary, it may not contain all the information that is important to you. Please
read the full text of the 1999 Plan, which we have included as Appendix A,
before you decide how to vote.
Description of the 1999 Plan
Purpose and Eligibility We believe the 1999 Plan will help us attract,
retain and motivate employees, officers, directors,
consultants, independent contractors and other
agents of the company and our subsidiaries by
providing them with the opportunity to earn
incentive compensation directly linked to the long-
term value of our common stock. If the market value
of our common stock increases, optionees will
receive value, as will our shareholders.
Shares Available: Our board has authorized a total of 800,000 shares
Overall Limit of common stock for issuance under the 1999 Plan.
Shares covered by awards granted under the 1999 Plan
that wholly or in part are not earned, or that
expire or are forfeited, terminated, cancelled,
settled in cash, payable solely in cash or exchanged
for other awards, do not count toward the overall
limit.
If our capitalization changes or if there is a
merger or a similar transaction, we will adjust the
number of shares and the kind of shares available
for issuance and the other limits under the 1999
Plan. In addition to new shares, we may issue
treasury shares (previously issued shares which we
subsequently repurchased and hold in our treasury).
17
<PAGE>
Special Limits Limit on Incentive Stock Options. Under the 1999
Plan, we may not grant incentive stock options for
more than 800,000 shares. If an incentive stock
option is not exercised, the unissued shares will be
available for other incentive stock options. We can
only grant incentive stock options to individuals
who at the time of grant are employees of
PathoGenesis or a subsidiary. "Incentive stock
options" are options described in Section 422 of the
Internal Revenue Code which provide certain tax
advantages for participants who receive such
options.
Stock Award Limit. We may not issue more than
500,000 shares under the 1999 Plan in connection
with awards of restricted stock or restricted stock
units.
Individual Limit. In any period of three consecutive
fiscal years of the company, no individual may
receive (i) stock options and stand-alone stock
appreciation rights that total more than 500,000
shares or (ii) more than 500,000 shares (or their
cash equivalent) relating to awards, other than
stock options and stock appreciation rights, that
are subject to "qualified performance-based
criteria," as described below.
Administration The Compensation and Nominating Committee of our
board will administer the 1999 Plan. In general, the
committee has full discretion to select
participants, determine the forms, terms and
conditions of awards, and adopt rules, regulations
and guidelines for the proper administration of the
1999 Plan. The committee may delegate certain of its
duties, power and authority to our officers.
Awards: The 1999 Plan permits the grant of any form of
General award, including, but not limited to, stock options,
stock appreciation rights (either in tandem with
stock options or on a stand-alone basis), stock
awards, stock bonuses, and other awards valued in
whole or in part by reference to, or otherwise based
on, our common stock.
The committee will determine vesting,
exercisability, payment and other restrictions
applicable to an award.
18
<PAGE>
Stock Options Stock options may be incentive stock options or non-
qualified stock options. The exercise price of any
stock option must be at least equal to the fair
market value of our common stock on the grant date.
Stock options typically will have terms of no more
than ten years, and incentive stock options may not
have terms longer than ten years. Although the
committee has the discretion to determine otherwise,
we expect that most stock options will vest over a
period of four years after the grant date and will
become fully vested upon a change in control of
PathoGenesis.
The exercise price of a stock option must be paid in
full in cash at the time of exercise or, if
permitted by law and as permitted by the committee,
by (i) tendering common stock (which, if not
purchased on the open market, the optionee must have
held for at least six months) and/or surrendering
another award, (ii) cashless exercise, or (iii) any
combination of (i) and (ii). Cashless exercise
allows employees to sell immediately some or all of
the shares to be issued upon exercise to pay the
exercise price and to satisfy tax withholding
obligations.
Replenishment Options In order to increase and encourage employee stock
ownership, the committee may authorize the grant of
replenishment options in connection with stock
options, subject to availability of shares.
Replenishment options will provide the optionee who
surrenders shares of common stock in payment of the
exercise price of an option (and, if permitted by
law and the committee, to satisfy tax withholding
obligations) with an option to purchase a number of
shares equal to the number surrendered. The
replenishment option will have an exercise price
equal to the fair market value on the date such
replenishment option is granted and will have a term
equal to the remaining term of the original option.
Stock Appreciation Rights Stock appreciation rights entitle an employee to
receive the excess, if any, of the fair market value
on the date of exercise over the exercise price of
the stock appreciation right or, in the case of a
tandem stock appreciation right, the option exercise
price of the related stock option.
Stock Awards Stock awards are rights to receive shares of our
common stock (or their cash equivalent or a
combination of both). The committee may impose
restrictions on transfer, vesting conditions and
other conditions in its discretion. An award made in
stock or denominated in units to acquire common
stock that is subject to restrictions on transfer
and/or forfeiture provisions may be referred to as
an award of restricted stock, restricted stock units
or long-term performance incentive units.
Other Awards The committee may grant other awards valued in whole
or in part by reference to our common stock, which
may be granted either alone or in addition to other
awards under the 1999 Plan.
19
<PAGE>
Qualified Performance- Awards intended to qualify as performance-based
Based Criteria compensation under Section 162(m) of the Internal
Revenue Code (see "Federal Income Tax Consequences"
below) may be made subject to "qualified performance-
based criteria." The committee shall establish
objective performance goals for such awards, which
shall require the achievement by the company as a
whole, by a division or unit of the company, or by the
participant individually, of goals based on one or
more of the following: (i) any profit-related return
ratio, (ii) earnings per share of common stock, (iii)
net income (before or after interest, taxes,
depreciation and/or amortization), (iv) total
shareholder return, (v) return on assets, (vi) market
share, (vii) cost reduction goals, (viii) cash flow,
(ix) stock price, (x) margins, (xi) increase in
revenue, and (xii) any combination of, or a specified
increase in, any of the foregoing, in each case, as
determined in accordance with generally accepted
accounting principles.
The goals for qualified performance-based awards must
be established by the committee before one-quarter of
the performance period has passed (e.g., by the end of
the third month of our fiscal year in the case of an
award based on performance during the fiscal year).
The committee must certify that the performance goal
has been met before the award can be paid.
A participant may not receive awards subject to
qualified performance-based criteria covering more
than 500,000 shares over three consecutive fiscal
years. For purposes of applying that limit, an award
payable in cash is treated as a payment of the number
of shares based on which the payment is computed. If a
cash award is not computed on the basis of a specific
number of shares, it is converted into shares by
dividing the amount of the award by the fair market
value of the stock on the last day of the award's
performance period.
Amendment We may amend, suspend or terminate the 1999 Plan at
any time. The committee may amend the terms of any
outstanding award. However, we will not amend the 1999
Plan without shareholder approval if that would
preclude the 1999 Plan from qualifying for or
complying with any tax or regulatory requirement that
our board determines to be necessary or desirable. The
committee may not amend the terms of any option to
reduce the exercise price. Also, we may not amend,
suspend or terminate the 1999 Plan, nor can the
committee amend any outstanding award, without a
participant's consent if it would adversely affect the
participant's rights under such award.
20
<PAGE>
Effectiveness and Term The 1999 Plan shall take effect only upon your
approval at the annual meeting. Section 162(m) of
the Internal Revenue Code requires shareholder
approval of "qualified performance-based
criteria" every five years. Therefore, we expect
to submit the 1999 Plan to shareholders for
reapproval at the 2004 annual meeting. Subject to
such shareholder reapproval, the 1999 Plan will
remain in effect until the tenth anniversary of
the date on which it is originally approved.
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
1999 Plan.
Grant of Awards The grant of a stock option, stock appreciation
right or restricted stock award has no immediate
federal income tax consequences. The participant
will not recognize any income and the company
will not be entitled to any tax deduction.
However, in the case of a restricted stock award,
the participant may elect to recognize income at
the time the award is granted as described under
"Awards Payable in Restricted Stock" below.
Exercise of Non-Qualified The optionee will generally recognize ordinary
Stock Options income in an amount equal to the excess of the
fair market value of the shares on the exercise
date over the option exercise price.
Exercise of Stock The participant will generally recognize ordinary
Appreciation Rights income on the exercise date in an amount equal to
any cash and the fair market value of any
unrestricted shares received.
Awards Payable in Restricted In the case of an exercise of a stock option or
Restricted Stock stock appreciation right payable in restricted
stock, or in the case of an award of restricted
stock, the immediate federal income tax effect
for the recipient will depend on the nature of
the restrictions. Generally, the fair market
value of the stock will not be taxable to the
recipient as ordinary income until the year in
which his or her interest in the stock is freely
transferable or is no longer subject to a
substantial risk of forfeiture. However, the
recipient may elect to recognize income when the
stock is received, rather than when his or her
interest in the stock is freely transferable or
is no longer subject to a substantial risk of
forfeiture. If the recipient makes this election,
the amount taxed to the recipient as ordinary
income is determined as of the date of receipt of
the restricted stock.
21
<PAGE>
Exercise of Incentive There is generally no income tax liability at the
Stock Options time of exercise of an incentive stock option,
unless the participant exercises the option more
than three months (one year if the participant is
disabled) after terminating employment. However,
the excess of the fair market value of the stock
on the exercise date over the option exercise
price is included in the optionee's income for
purposes of the alternative minimum tax. The
optionee will realize a long-term capital gain or
loss upon a sale of the stock, equal to the
difference between the option price and the sale
price, if he or she does not sell the stock
before one year from the date of the exercise or
two years from the date of the stock option
grant, whichever is later. If the optionee has
not held the stock for the required period,
ordinary income tax treatment will apply to the
excess of the fair market value of the stock on
the date of exercise over the option exercise
price (or, if less, the amount of gain realized
on the disposition of the stock), and the balance
of any gain or any loss will be treated as
capital gain or loss (long-term or short-term,
depending on whether the optionee has held the
shares for more than one year).
Tax Deductions by the Upon the exercise of a non-qualified stock
Company option, the exercise of a stock appreciation
right, the award of unrestricted stock, the
recognition of income on restricted stock, or the
disqualifying sale of shares (within one year
after acquisition or two years after the option
grant) acquired on exercise of an incentive stock
option, we generally will be allowed an income
tax deduction equal to the ordinary income
recognized by a participant. We will not receive
an income tax deduction as a result of the
exercise of an incentive stock option, regardless
of whether the participant recognizes income at
the time of exercise. When a cash payment is made
pursuant to an award, the recipient will
recognize the amount of the cash payment as
ordinary income, and we will generally be
entitled to a deduction in the same amount,
subject to the restrictions described on the next
page.
22
<PAGE>
Tax Deductions by the We may be unable to deduct amounts that would
Company (cont'd) otherwise be deductible under the rules described
above (a) if it is determined that the amount
paid does not constitute reasonable compensation;
(b) if the amount paid constitutes part of the
acquisition price of another business or is
otherwise required to be capitalized; (c) if we
fail to comply with requirements relating to the
proper reporting of compensation and tax
withholding; (d) if the services with respect to
which the compensation is paid are rendered to an
affiliate of the company that does not file a
consolidated federal income tax return with the
company; or (e) if Section 162(m) of the Internal
Revenue Code applies. Section 162(m) provides in
general that a publicly traded company may not
deduct more than $1 million in compensation paid
in any one calendar year to its chief executive
officer or to any other executive officer whose
compensation is required to be disclosed in its
proxy statement. Certain types of compensation,
including qualified performance-based
compensation, are exempt from this limitation. We
believe that the following types of income will
constitute qualified performance-based
compensation for purposes of Section 162(m):
income realized upon the exercise of stock
options and stock appreciation rights granted by
the Compensation and Nominating Committee, and
other awards that are made by the committee
subject to "qualified performance-based criteria"
as described on page 20.
Adoption of the 1999 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 1999
Plan.
- --------------------------------------------------------------------------------
The board recommends a vote FOR the approval of the PathoGenesis Corporation
1999 Stock Plan.
- --------------------------------------------------------------------------------
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
Our board of directors has selected KPMG LLP as independent auditors for
1999. We ask you to ratify that selection at the annual meeting.
We expect representatives of KPMG LLP to be available at the meeting to
answer appropriate questions, and may make a statement if they desire to do so.
- --------------------------------------------------------------------------------
The board recommends a vote FOR the ratification of the appointment of KPMG LLP
as independent auditors of PathoGenesis for 1999.
- --------------------------------------------------------------------------------
23
<PAGE>
OTHER MATTERS
As of the date of this proxy statement, we do not know of any matter to be
acted on at the meeting other than those discussed in this proxy statement.
Under our by-laws, generally no business other than the proposals discussed in
this proxy statement may be transacted at the meeting. However, if any other
matter properly comes before the meeting, your proxies will act on the matter
according to their best judgment.
ADDITIONAL INFORMATION
Who pays for this proxy solicitation? PathoGenesis will bear the cost of
this proxy solicitation. In addition to mailing proxy solicitation material, our
officers and employees may solicit proxies in person or by facsimile, telephone
or other electronic means. They will not receive any special compensation for
that service, but PathoGenesis will reimburse them for any out-of-pocket
expenses. We 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. We have engaged Morrow & Co. to assist in the solicitation of proxies
from shareholders for a fee estimated at approximately $12,500, plus
reimbursement of out-of-pocket expenses.
How can a shareholder proposal be submitted for the 2000 annual meeting?
Under our by-laws, if you intend to present a proposal at our 2000 annual
meeting of shareholders, you must give timely written notice to the company's
Secretary. To be timely, your notice must be received at our principal office at
201 Elliott Avenue West, Seattle, Washington 98119 not less than 60 days nor
more than 90 days before June 2, 2000. If, however, we advance or delay the 2000
annual meeting by more than 60 days of that date, your notice will have to be
received at our principal office not earlier than the 90th day before the annual
meeting date and not later than the close of business on the later of (i) the
60th day before the annual meeting date or (ii) the 10th day following the day
we announce publicly the annual meeting date. (You may obtain a copy of the by-
law provisions governing the requirements for notice by writing to our Secretary
at our principal office.) However, the proposal must be received by our
Secretary no later than December 20, 1999, and comply with other applicable
rules of the Securities and Exchange Commission, in order to be included in the
proxy statement for the 2000 annual meeting.
If you would like a copy of our annual report to the Securities and
Exchange Commission on Form 10-K for 1998, 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
24
<PAGE>
APPENDIX A
PathoGenesis Corporation
1999 STOCK PLAN
1. Purpose. The PathoGenesis Corporation 1999 Stock Plan (the "Plan") is
intended to promote the interests of PathoGenesis Corporation ("PathoGenesis")
and its shareholders by providing employees, officers, directors, consultants,
independent contractors and other agents of the Company (as defined below) with
appropriate incentives and rewards to attract and retain their services and to
encourage them to acquire a proprietary interest in the long-term success of the
Company.
2. Definitions. As used in the Plan:
(a) "Agreement" shall mean a written agreement between PathoGenesis and a
Participant evidencing an Award.
(b) "Award" shall mean any stock option, stock appreciation right,
restricted stock or unit, stock bonus or other award, whether granted singly, in
combination or in tandem, to a Participant pursuant to the terms of the Plan.
(c) "Board" shall mean the Board of Directors of PathoGenesis.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder.
(e) "Committee" shall mean the Compensation and Nominating Committee of
the Board or such other committee as the Board may authorize to administer the
Company's stock option plans. If any time any member of such Committee is not
both an "outside director" (as defined in Section 162(m) of the Code) and a
"non-employee director" (as defined in Rule 16b-3), the term "Committee" shall
mean a subcommittee consisting of all members who are both outside directors
and non-employee directors.
(f) "Common Stock" shall mean common stock, par value $.001 per share, of
PathoGenesis, or any security substituted for such stock pursuant to Section
3.3.
(g) "Company" shall mean PathoGenesis Corporation and shall include (1)
any "parent" or "subsidiary" (as such terms are defined in Section 424 of the
Code) of PathoGenesis and (2) any other entity in which PathoGenesis has a
significant equity or other interest as determined by the Committee.
(h) "Effective Date" shall mean the date upon which this Plan is adopted
by the shareholders of PathoGenesis.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" per share of Common Stock shall mean (1) the
closing sale price per share of Common Stock on the national securities exchange
on which such stock is principally traded for the date in question on which
there was a reported sale of such stock on such exchange (or, if no sales of
Common Stock were made on that date, the closing sale price as reported for the
most recent
A-1
<PAGE>
preceding day on which there was a reported sale of such stock), or (2) if the
Common Stock is not then traded on a national securities exchange, the closing
sale price per share of Common Stock as reported on the Nasdaq Stock Market for
the date in question (or, if no sales of Common Stock were made on that date,
the closing sale price as reported for the most recent preceding day on which
there was a reported sale of such stock), or (3) if the shares of Common Stock
are not then listed on a national securities exchange or traded in an over-the-
counter market or the value of such shares is not otherwise readily
ascertainable, such value as determined by the Committee in good faith.
(k) "Incentive Stock Option" shall mean a stock option that is an
"incentive stock option" within the meaning of Section 422 of the Code, or any
successor provision, and that is designated by the Committee as an Incentive
Stock Option.
(l) "Non-Qualified Stock Option" shall mean a stock option other than an
Incentive Stock Option.
(m) "Participant" shall mean (1) an employee, officer, director,
consultant, independent contractor or other agent of the Company to whom an
Award is granted pursuant to the Plan and (2) upon the death of an individual
described in clause (1), his or her successors, heirs, executors or
administrators, as the case may be.
(o) "Rule 16b-3" shall mean the Rule 16b-3 promulgated under the Exchange
Act, as amended.
(p) "Securities Act" shall mean the Securities Act of 1933, as amended.
3. Shares Subject to the Plan.
3.1 Shares Available for Awards. The maximum number of shares of Common
Stock reserved for issuance under the Plan shall be equal to the sum (subject to
adjustment as provided herein) of: 800,000 shares. Such shares may be authorized
but unissued Common Stock or authorized and issued Common Stock held in
PathoGenesis' treasury. For purposes of determining the number of shares of
Common Stock issued the Plan, no shares shall be deemed issued until they are
actually delivered to a Participant, or such other person in accordance with
Section 18. Shares covered by Awards under the Plan that either wholly or in
part are not earned, or that expire or are forfeited, terminated, cancelled,
settled in cash, payable solely in cash or exchanged for other awards, shall be
available for future issuance pursuant to Awards granted under the Plan. The
grant of a tandem SAR shall not reduce the number of shares of Common Stock with
respect to which Awards may be granted pursuant to the Plan. The Committee may
direct that any stock certificate evidencing shares issued pursuant to the Plan
shall bear a legend setting forth such restrictions on transferability as may
apply to such shares pursuant to the Plan.
A-2
<PAGE>
3.2 Plan Limits. The following limits shall be in addition to the limit
in Section 3.1:
3.2.1 The maximum of shares of Common Stock that may be issued in
connection with Incentive Stock Options shall be the sum of 800,000. For
purposes of the preceding sentence, shares that are subject to an Incentive
Stock Option that is forfeited, expires unexercised, or settled by the
payment of cash (under a tandem SAR or otherwise) shall not be considered
issued.
3.2.2 The maximum number of shares of Common Stock that may be issued
in connection with Awards of restricted stock or restricted stock units
shall be 500,000.
3.2.3 The maximum number of shares of Common Stock that may be issued
to any one individual in connection with Awards that are subject to
performance goals under Section 6.6 (other than stock options and SARs)
shall not exceed 500,000 in any period of three consecutive fiscal years of
PathoGenesis. For purposes of the preceding sentence, any cash payment
shall be deemed to be the issuance of the number of shares of Common Stock
with respect to which the cash payment is calculated or, if the payment is
not so calculated, a number of shares of Common Stock equal to the amount
of such payment divided by the Fair Market Value per share of Common Stock
on the last day of the performance period with respect to which the Award
is determined.
3.2.4 No individual may receive Awards of stock options and stock
appreciation rights under the Plan with respect to more than 500,000 shares
in any period of three consecutive fiscal years of PathoGenesis. For this
purpose, a tandem SAR shall not be counted in addition to the underlying
stock option.
3.3 Adjustment to Reflect Capital Changes. In the event that the
Committee shall determine that any dividend or other distribution (whether in
the form of cash, Common Stock, or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate action or
event affects the Common Stock such that an adjustment is appropriate in order
to prevent dilution or enlargement of the rights of Participants under the Plan,
then the Committee shall make such equitable changes or adjustments as it deems
necessary or appropriate to any or all of (a) the number and kind of shares of
Common Stock that may then be issued in connection with Awards, (b) the number
and kind of shares of Common Stock issued or issuable in respect of outstanding
Awards, (c) the option exercise price, grant price or purchase price relating to
any Award, and (d) the maximum number of shares subject to Awards that may be
awarded under the Plan or to any Participant pursuant to Section 3.2; provided
that, with respect to Incentive Stock Options, such adjustment shall be made in
accordance with Section 424 of the Code.
4. Administration of the Plan.
4.1 The Committee. The Plan shall be administered by the Committee. The
Committee shall have full power and authority, subject to and not inconsistent
with the express provisions of the Plan, to (a) select persons to whom Awards
from time to time may be granted under the Plan, (b) determine the type or types
of Award to be granted to each Participant, (c) determine the number of shares
of Common Stock to be covered by each Award granted, (d) determine the terms and
conditions, not inconsistent with the provisions of the Plan, of any Award
granted, (e) determine whether, to what
A-3
<PAGE>
extent and under what circumstances Awards may be settled in cash, shares of
Common Stock or other property or cancelled or suspended, (f) determine whether,
to what extent and under what circumstances cash, shares of Common Stock and
other property and other amounts payable with respect to an Award shall be
deferred either automatically or at the election of the Participant, (g)
interpret and administer the Plan and any instrument or agreement entered into
under the Plan, (h) establish such rules and regulations and appoint such agents
as it shall deem appropriate for the proper administration of the Plan, and (i)
make any other determination and take any other action that it deems necessary
or desirable for administration of the Plan. Decisions of the Committee shall be
final, conclusive and binding upon all interested parties. A majority vote of
the members of the Committee may determine its actions. Any decision or
determination reduced to writing and signed by all of the members shall be fully
as effective as if it had been made at a meeting duly called and held.
4.2 Delegation. The Committee may delegate to the Chief Executive Officer
of the PathoGenesis (or to such other officer or officers of PathoGenesis as the
Chief Executive Officer may designate, acting under his supervision), subject to
such limitations as the Committee may determine, the right to grant Awards to
Participants who are not officers or directors of PathoGenesis; provided,
however, that no Award shall be granted pursuant to such delegation to any
person to whom the Committee could not have granted an Award.
5. Eligibility. The persons who shall be eligible to receive Awards
under the Plan shall be such employees, officers, directors, consultants,
independent contractors and other agents of the Company as the Committee shall
select from time to time; provided, however, an Incentive Stock Option may be
granted only to a person who, at the time the Incentive Stock Option is granted,
is an employee of the Company (determined without regard to Section 2(g)(2)).
6. Awards under the Plan; Agreements. The Committee shall determine the
type or types of Award(s) to be made to each Participant. The Committee may
grant Awards singly, in combination or in tandem and in such amounts and with
such terms and conditions (including vesting criteria based on continued service
and/or attainment of pre-established performance goals (which may, but need not,
be those set forth in Section 6.6)) as the Committee shall determine, subject to
the provisions of the Plan. Each Award granted under the Plan (except as
unconditional stock bonus) shall be evidenced by an Agreement which shall
contain such provisions as the Committee may in its sole discretion deem
necessary or desirable. By accepting an Award, a Participant thereby agrees that
the award shall be subject to all of the terms and provisions of the Plan and
the applicable Agreement.
6.1 Stock Options; Limitations on Incentive Stock Options; Replenishment
Options.
6.1.1 Each stock option shall be clearly identified in the applicable
Agreement as either an Incentive Stock Option or a Non-Qualified Stock
Option. Each Agreement with respect to a stock option shall set forth the
option exercise price payable by the Participant to PathoGenesis upon
exercise of the stock option. The option exercise price per share shall be
determined by the Committee; provided, however, that the option exercise
price shall in no event be less than the Fair Market Value per share of
Common Stock on the date of grant.
6.1.2 No Incentive Stock Option shall be exercisable more than 10
years after the date of grant. No Incentive Stock Option may be granted to
an individual if, at the time of the proposed grant, such individual owns
(or is deemed to own under the Code) stock possessing more than ten percent
of the total combined voting power of all classes of stock of PathoGenesis
unless (a) the option exercise price of such Incentive Stock Option is at
least 110% of the Fair
A-4
<PAGE>
Market Value of a share of Common Stock at the time such Incentive Stock
Option is granted and (b) such Incentive Stock Option has a term not
exceeding five years. To the extent that the aggregate Fair Market Value of
shares of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by a Participant during any calendar year
under the Plan and any other stock option plan of the Company (determined
without regard to Section 2(g)(2)) shall exceed $100,000, such stock
options shall be treated as Non-Qualified Stock Options. Such Fair Market
Value shall be determined as of the date of grant.
6.1.3 The Committee shall have the authority to specify, at the time
of grant or, with respect to Non-Qualified Stock Options, at or after the
time of grant, that a Participant shall be granted a new Non-Qualified
Stock Option (a "Replenishment Option") for a number of shares equal to the
number of shares surrendered by the Participant upon exercise of all or a
part of a stock option, subject to the availability of shares of Common
Stock under the Plan at the time of such exercise. Each Replenishment
Option shall cover a number of shares of Common Stock equal to the number
of shares of Common Stock surrendered in payment of the option exercise
price under the original stock option or withheld (and, if so determined by
the Committee, to satisfy tax withholding obligations) resulting from the
exercise of the original stock option, shall have an option exercise price
per share equal to the Fair Market Value per share of Common Stock on the
date of grant of such Replenishment Option, shall expire on the stated
expiration date of the original stock option, and shall be subject to such
conditions as may be specified by the Committee in its discretion, subject
to the terms of the Plan.
6.2 Stock Appreciation Rights. The Committee may grant stand-alone stock
appreciation rights ("SAR") or grant, in connection with any stock option
granted hereunder, one or more tandem SARs relating to a number of shares of
Common Stock less than or equal to the number of shares of Common Stock subject
to the related stock option. The exercise of an SAR with respect to any number
of shares of Common Stock shall entitle the Participant to a payment, for each
such share, equal to the excess of (a) the Fair Market Value per share of Common
Stock on the exercise date over (b) the exercise price of the SAR or, in the
case of a tandem SAR, the option exercise price of the related stock option.
6.2.1 A tandem SAR may be granted in connection with a stock option
only at the same time that such stock option is granted; provided, however
a tandem SAR granted in connection with a Non-Qualified Stock Option may be
granted subsequent to the time that such Non-Qualified Stock Option was
granted. A tandem SAR shall be exercisable only if and to the extent that
its related stock option is exercisable. The exercise of a tandem SAR with
respect to a number of shares of Common Stock shall cause the immediate and
automatic cancellation of its related Option with respect to an equal
number of shares. The exercise of an Option, or the cancellation,
termination or expiration of an Option (other than pursuant to this Section
6.2.1), with respect to a number of shares of Common Stock shall cause the
automatic and immediate cancellation of any related Tandem Shares to the
extent of the number of shares of Common Stock subject to such Option which
is so exercised, canceled, terminated or expired.
6.2.2 The exercise price per share of a stand-alone SAR shall be
determined by the Committee at the time of grant but shall not be less than
the Fair Market Value per share of Common Stock on the date of grant.
6.3 Stock Awards. A stock award is a right to receive shares of Common
Stock (or their cash equivalent or a combination of both). All or part of any
stock award may be subject to conditions established by the Committee, and set
forth in the Agreement, which may include, but are not limited to:
A-5
<PAGE>
(i) continuous service with the Company; (ii) increases in specified indices;
and (iii) attainment of performance goals, including but not limited to those
described in Section 6.6. An Award made in stock or denominated in units to
acquire Common Stock that is subject to restrictions on transfer and/or
forfeiture provisions may be referred to as an Award of restricted stock,
restricted stock units or long-term performance incentive units.
6.4 Stock Bonuses. In the event that the Committee grants a stock bonus,
a certificate for the shares of Common Stock comprising such stock bonus shall
be issued in the name of the Participant to whom such grant was made and
delivered to such Participant as soon as practicable after the date on which
such Stock Bonus is payable.
6.5 Other Awards. Other forms of Awards valued in whole or in part by
reference to, or otherwise based on, Common Stock may be granted either alone or
in addition to other Awards under the Plan. Subject to the provisions of the
Plan, the Committee shall have sole and complete authority to determine the
persons to whom and the time or times at which such Other Awards shall be
granted, the number of shares of Common Stock to be granted pursuant to such
Other Awards and all other conditions of such Other Awards.
6.6 Performance Based Awards. The payment or vesting of any Award may, in
the Committee's discretion, be conditioned in whole or in part upon the
attainment, or the extent of attainment, by the Company, a division or unit of
the Company, or the Participant of objective performance goals pre-established
by the Committee, based on one or more of the following criteria: (a) any
profit-related return ratio; (b) earnings per share of Common Stock; (c) net
income (before or after interest, taxes, depreciation and/or amortization); (d)
total shareholder return; (e) return on assets; (f) market share; (g) cost
reduction goals; (h) cash flow; (i) stock price; (j) margins; (k) increase in
revenues; and (l) any combination of, or a specified increase in, any of the
foregoing; in each case as is applicable determined in accordance with generally
accepted accounting principles. Such performance goals shall be established by
the Committee prior to the expiration of 25% of the time period to which the
performance goal relates, and payment or vesting of any Award subject to such
performance goals shall be conditioned upon certification by the Committee that
the performance goals have been attained. Awards that are made subject to
performance goals described in this Section 6.6 are intended to qualify as
performance based compensation under Section 162(m) of the Code, and the
provisions of this Section 6.6 shall be so interpreted and applied.
7. Payment of Awards. Payment of Awards may be made in the form of cash,
stock or combinations thereof and may include such restrictions as the Committee
shall determine. Dividends and dividend equivalent rights may be extended to
and made part of any Award denominated in stock or units stock, subject to such
terms, conditions and restrictions as the Committee may establish. Subject to
the overall limitation on the number of shares that may be delivered under the
Plan, the Committee may, in addition to granting Awards under Section 6, use
available shares as the form of payment for compensation, grants or rights
earned or due under any other compensation plans or arrangements of the Company,
including those of any entity acquired by the Company.
8. Stock Option Exercise. A stock option may be exercised for all or any
portion of the shares as to which it is exercisable. The price at which shares
of Common Stock may be purchased under a stock option shall be paid in full in
cash at the time of the exercise or, to the extent permitted by law and as
permitted by the Committee from time to time, by other means, including (i)
tendering Common Stock (which, if not purchased on the open market, the
Participant must have held for at least six months) or surrendering another
Award or any combination thereof, (ii) authorizing a third party to
A-6
<PAGE>
sell shares (or a sufficient portion thereof) acquired upon exercise of a stock
option and to remit to PathoGenesis a sufficient portion of the sale proceeds to
pay for all the shares acquired through such exercise and any tax withholding
obligations resulting from such exercise, or (iii) any combination of (i) and
(ii). The Committee shall determine acceptable methods of tendering Common Stock
or other Award to exercise a stock option as it deems appropriate. For the
purpose of assisting an Optionee to exercise an option, the Company may make
loans to the Optionee on such terms and conditions as the Committee may
authorize.
9. Rights As Shareholder. No person shall have any rights as a
shareholder with respect to any shares of Common Stock covered by or relating to
any Award until the date of issuance of a stock certificate with respect to such
shares. Except as otherwise expressly provided in Section 3.3, no adjustment to
any Award shall be made for dividends or other rights for which the record date
occurs prior to the date such stock certificate is issued.
10. No Special Employment Rights; No Right to Award. Nothing contained in
the Plan or any Agreement shall confer upon any Participant any right to the
continuation of employment or engagement by the Company or interfere in any way
with the right of the Company, subject to the terms of any separate employment
or engagement agreement, at any time to terminate the relationship or to
increase or decrease the compensation of the Participant. No person shall have
any right to receive an Award hereunder, and there is no obligation for
uniformity of treatment for Participants. The Committee's granting of an Award
to a Participant at any time shall neither require the Committee to grant any
other Award to such Participant or any other person at any time, or preclude the
Committee from making subsequent grants to such Participant or any other person.
11. Securities Matters.
11.1 Registration of Securities; Issuance of Certificates. PathoGenesis
shall be under no obligation to effect the registration pursuant to the
Securities Act of any interests in the Plan or any shares of Common Stock to be
issued hereunder or to effect similar compliance under any state laws.
Notwithstanding anything herein to the contrary, PathoGenesis shall not be
obliged to cause to be issued or delivered any certificates evidencing shares of
Common Stock pursuant to the Plan unless and until PathoGenesis is advised by
its counsel that the issuance and delivery of such certificates is in compliance
with all applicable laws, regulations of governmental authority and the
requirements of any securities exchange on which shares of Common Stock are
traded. The Committee may require, as a condition of the issuance and delivery
of certificates evidencing shares of Common Stock pursuant to the terms hereof,
that the recipient of such certificates make such agreements and
representations, and that such certificates bear such legends, as the Committee,
in its sole discretion, deems necessary or desirable.
11.2 Deferred Issuance or Transfer. The transfer of any shares of Common
Stock hereunder shall be effective only at such time as counsel to PathoGenesis
shall have determined that the issuance and delivery of such shares is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Common Stock are
traded. The Committee may, in its sole discretion, defer the effectiveness of
any transfer of shares of the Common Stock hereunder in order to allow the
issuance of such shares to be made pursuant to registration or an exemption from
registration or other methods for compliance available under federal or state
securities laws. The Committee shall inform the Participant in writing of its
decision to defer the effectiveness of a transfer. During the period of such
deferral in connection with the exercise of an Option, the Participant may, by
written notice, withdraw such exercise and obtain a refund of any amount paid
with respect thereto.
A-7
<PAGE>
12. Withholding Taxes. Whenever cash is to be paid pursuant to an Award,
the Company shall have the right to deduct therefrom an amount sufficient to
satisfy any federal, state and local withholding tax requirements related
thereto. Whenever shares of Common Stock are to be delivered pursuant to an
Award, the Company shall have the right to require the Participant to remit to
the Company in cash an amount sufficient to satisfy any federal, state and local
withholding tax requirements related thereto. The Committee may require a
Participant to, or with the approval of the Committee a Participant may, satisfy
the foregoing requirement by electing to have PathoGenesis withhold from
delivery shares of Common Stock having a value equal to the amount of tax to be
withheld. Such shares shall be valued at the Fair Market Value per share of
Common Stock on the date as of which the amount of tax to be withheld is
determined. Fractional share amounts shall be settled in cash. Such a
withholding election may be made with respect to all or any portion of the
shares of Common Stock to be delivered pursuant to an Award.
13. Unfunded Plan. The Plan shall be unfunded and the Company shall not
be required to establish any special account or fund or to otherwise segregate
or encumber assets to ensure payment of any Award. With respect to any payments
not yet made to a Participant pursuant to an Award, nothing contained in the
Plan or any Agreement shall give any such Participant any rights that are
greater than those of a general creditor of the Company.
14. Notification of Election under Section 83(b) of the Code. If any
Participant shall, in connection with the acquisition of shares of Common Stock
under the Plan, make the election permitted under Section 83(b) of the Code,
such Participant shall notify PathoGenesis of such election within ten days of
filing notice of election with the Internal Revenue Service.
15. Notification upon Disqualifying Disposition under Section 421(b) of
the Code. Each Agreement with respect to an Incentive Stock Option shall
require the Participant to notify PathoGenesis of any disposition of shares of
Common Stock issued pursuant to the exercise of such Option under the
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), within ten days after disposition.
16. Amendment or Termination. The Board may, at any time, amend, suspend
or terminate the Plan, provided that no such amendment, suspension or
termination shall be made without (i) shareholder approval if such approval is
necessary to qualify for or comply with any tax or regulatory requirement for
which or with which the Board deems it necessary or desirable to qualify or
comply or (ii) the consent of the affected Participant, if such action would
impair the rights of the Participant under any outstanding Award.
The Committee may amend the terms of any outstanding Award, prospectively
or retroactively, but no such amendment shall impair the rights of any
Participant without his or her consent. Notwithstanding any provision of the
Plan, the Committee may not amend the terms of any Option to reduce the option
exercise price.
17. Awards to Foreign Nationals. Awards may be granted to employees,
consultants, independent contractors and other agents who are foreign nationals
or employed outside the United States, or both, on such terms and conditions
different from those applicable to Awards to Participants in the United States
as may, in the judgment of the Committee, be necessary or desirable in order to
recognize differences in local law or tax policy. The Committee also may impose
conditions on the exercise or vesting of Awards in order to minimize
PathoGenesis' obligation with respect to tax equalization for employees on
assignments outside their home country.
A-8
<PAGE>
18. Transfers of Awards. Unless otherwise determined by the Committee and
set forth in the Agreement, no Award granted under the Plan shall be assignable,
transferable or payable to or exercisable by anyone other than the Participant
to whom it was granted.
19. Expenses and Receipts. The expenses of the Plan shall be paid by
PathoGenesis. Any proceeds received by PathoGenesis in connection with any
Award will be used for general corporate purposes.
20. Effective Date and Term of Plan. The Plan shall become effective on
the Effective Date. The Plan shall remain in effect in accordance with its
terms unless amended or terminated by the Board, but the Plan shall be submitted
for re-approval by the shareholders of PathoGenesis at the annual meeting of
shareholders in 2004, and payment of all Awards (if any) granted in 2004 prior
to the date of such re-approval shall be contingent upon such approval. The
right to grant Awards under the Plan will terminate on the tenth anniversary of
the Effective Date. Awards outstanding at Plan termination will remain in
effect according to their terms and the provisions of the Plan.
21. Applicable Law. Except to the extent preempted by any applicable
federal law, the Plan will be construed and administered in accordance with the
laws of the State of Delaware, without reference to its principles of conflicts
of law.
22. No Fractional Shares. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan. The Committee shall determine whether
cash, other Awards, or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
23. Interpretation. The Plan is designed and intended to comply with Rule
16b-3 and, to the extent applicable, with Section 162(m) of the Code, and all
provisions hereof shall be construed in a manner to so comply.
24. Severability. If any provision of the Plan is held to be invalid or
unenforceable, the other provisions of the Plan shall not be affected but shall
be applied as if the invalid or unenforceable provision had not been included in
the Plan.
A-9
<PAGE>
PathoGenesis Corporation PROXY
Solicited by the Board of Directors
Annual Meeting/June 2, 1999
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 2, 1999 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.
1. Election of Directors
Nominees:
Alan R. Meyer Elizabeth M. Greetham Michael A. Montgomery
FOR ALL WITHHOLD ALL FOR ALL
EXCEPT*
/ / / / / /
*For all nominees except any whose name I have crossed out
2. Approval of the PathoGenesis Corporation 1999 Stock Plan
FOR AGAINST ABSTAIN
/ / / / / /
3. Ratification of the selection of KPMG LLP as independent auditors
FOR AGAINST ABSTAIN
/ / / / / /
4. In their discretion, on 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:________________, 1999
Signature(s)________________________
Please sign exactly as your name
appears and return this proxy
immediately in the enclosed reply
envelope.
