<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27150
__________________
PathoGenesis Corporation
(Exact name of Registrant as specified in its charter)
Delaware 91-1542150
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
201 Elliott Avenue West, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 467-8100
__________________
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
On May 14, 1999, the registrant had an aggregate of 16,393,094 shares of
Common Stock issued and outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
PATHOGENESIS CORPORATION
Condensed Consolidated Balance Sheets
Item 1. Financial statements
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 1,913,903 $ 8,139,153
Investment securities.................................................. 49,230,967 46,868,390
Accounts receivable, net............................................... 4,926,478 10,961,242
Interest receivable.................................................... 516,011 427,618
Inventories............................................................ 12,418,093 9,907,916
Other.................................................................. 1,889,519 3,480,022
-------------- -----------------
Total current assets.............................................. 70,894,971 79,784,341
-------------- -----------------
Restricted investment....................................................... 675,000 675,000
Property and equipment, at cost:
Land................................................................... 3,194,923 3,194,923
Building and improvements.............................................. 1,515,543 1,515,543
Leasehold improvements................................................. 9,654,738 9,367,898
Furniture and equipment................................................ 13,997,257 13,263,162
-------------- -----------------
28,362,461 27,341,526
Less accumulated depreciation and amortization......................... 10,529,687 9,704,385
-------------- -----------------
Net property and equipment........................................ 17,832,774 17,637,141
-------------- -----------------
License rights, net......................................................... 14,319,427 14,562,129
Other assets................................................................ 945,865 107,136
-------------- -----------------
Total assets........................................................... $ 104,668,037 $ 112,765,747
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 846,539 $ 1,180,909
Compensation and benefits.............................................. 1,232,546 2,580,790
Clinical development costs............................................. 526,829 199,869
Accrued royalties...................................................... 260,974 827,739
License payable........................................................ -- 2,000,000
Other accrued expenses................................................. 2,315,782 2,691,572
Current portion of long-term liability................................. 5,259,939 5,149,847
-------------- -----------------
Total current liabilities......................................... 10,442,609 14,630,726
-------------- -----------------
Long-term liability, net of current portion................................ 4,825,632 4,724,630
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
1,000,000 shares; none issued and outstanding....................... -- --
Common stock, $0.001 par value.
Authorized 60,000,000 shares; 16,390,835 shares and
16,328,580 shares issued and outstanding at March 31, 1999
and December 31, 1998, respectively................................. 16,391 16,329
Additional paid-in capital............................................ 193,932,525 193,188,363
Deferred compensation................................................. (871,916) (987,156)
Accumulated other comprehensive income --
unrealized gain on investment securities............................ 721 133,117
Accumulated deficit................................................... (103,677,925) (98,940,262)
-------------- -----------------
Total stockholders' equity............................................ 89,399,796 93,410,391
-------------- -----------------
Total liabilities and stockholders' equity............................ $ 104,668,037 $ 112,765,747
============== =================
</TABLE>
See accompanying notes.
1
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PATHOGENESIS CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Sales................................... $ 10,056,135 $ 14,527,031
Grants and royalties.................... 204,263 137,866
-------------- --------------
Total revenues..................... 10,260,398 14,664,897
Operating expenses:
Cost of sales........................... 2,202,061 2,669,816
Research and development................ 6,840,469 6,575,404
Selling, general and administrative..... 6,537,571 5,533,230
-------------- --------------
Total operating expenses........... 15,580,101 14,778,450
-------------- --------------
Operating loss (5,319,703) (113,553)
-------------- --------------
Other income (expense):
Investment income, net.................. 827,200 1,131,643
Interest expense........................ (218,380) --
Other expense........................... (26,780) (33,500)
-------------- --------------
Net other income................... 582,040 1,098,143
-------------- --------------
Net income (loss).................. $ (4,737,663) $ 984,590
============== ==============
Income (loss) per common share:
Basic................................... $ (0.29) $ 0.06
============== ==============
Diluted................................. $ (0.29) $ 0.06
============== ==============
Weighted average common shares outstanding:
Basic................................... 16,378,828 16,243,147
Diluted................................. 16,378,828 17,146,495
</TABLE>
See accompanying notes.
2
<PAGE>
PATHOGENESIS CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ (4,737,663) $ 984,590
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization....................................... 825,302 621,281
Amortization of license rights...................................... 242,702 --
Amortization of discount on long-term liability..................... 211,094 --
Compensation expense from stock options............................. 115,240 99,626
Change in certain assets and liabilities:
Accounts receivable............................................ 6,034,764 (10,001,529)
Interest receivable............................................ (88,393) 3,564
Inventories.................................................... (2,510,177) (1,134,938)
Other current assets........................................... 1,590,503 770,735
Other assets................................................... (838,729) 8,775
Accounts payable............................................... (334,370) (243,685)
Compensation and benefits...................................... (1,348,244) (568,174)
Clinical development costs..................................... 326,960 (1,957,766)
Accrued royalties.............................................. (566,765) 726,352
License payable................................................ (2,000,000) --
Other accrued expenses......................................... (375,790) 620,166
-------------- --------------
Net cash used in operating activities..................... (3,453,566) (10,071,003)
-------------- --------------
Cash flows from investing activities:
Purchases of investment securities....................................... (13,437,697) (24,455,090)
Sales of investment securities........................................... 10,942,724 32,063,978
Purchase of property and equipment....................................... (1,020,935) (1,336,458)
-------------- --------------
Net cash provided by (used in) investing activities....... (3,515,908) 6,272,430
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock in connection
with an employee stock purchase plan................................... 325,876 --
Stock option and warrant exercises....................................... 418,348 94,247
-------------- --------------
Total cash provided by financing activities............... 744,224 94,247
-------------- --------------
Net decrease in cash and cash equivalents................. (6,225,250) (3,704,326)
Cash and cash equivalents at beginning of period.............................. 8,139,153 5,171,591
-------------- --------------
Cash and cash equivalents at end of period.................................... $ 1,913,903 $ 1,467,265
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE>
PATHOGENESIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999 AND 1998
(1) BASIS OF PRESENTATION
We have prepared the accompanying condensed consolidated financial
statements of PathoGenesis Corporation and subsidiaries and these notes in
accordance with Securities and Exchange Commission rules and regulations for
interim financial statements. As permitted by those rules and regulations, we
have condensed or omitted certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles. You should read the accompanying condensed consolidated
financial statements and these notes in conjunction with our audited
consolidated financial statements for 1998 included in our annual report on Form
10-K.
The information furnished reflects, in the opinion of our management,
all adjustments necessary for a fair presentation of the results for the interim
periods presented. Interim results are not necessarily indicative of results for
a full year.
(2) INVENTORIES
Inventories are stated at the lower of cost, as determined by the
first-in, first-out method, or market. Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Finished goods $ 5,280,231 $ 4,174,206
Work in progress 1,498,495 2,747,380
Raw materials and supplies 5,639,367 2,986,330
-------------- -----------------
$ 12,418,093 $ 9,907,916
============== =================
</TABLE>
(3) COMPUTATION OF PER SHARE INCOME (LOSS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Basic income (loss) per share computation:
Numerator:
Net income (loss) $ (4,737,663) $ 984,590
------------ ------------
Denominator:
Weighted average common shares 16,378,828 16,243,147
------------ ------------
Basic income (loss) per share $ (0.29) $ 0.06
============ ============
Diluted income (loss) per share computation:
Numerator:
Net income (loss) $ (4,737,663) $ 984,590
------------ ------------
Denominator:
Weighted average common shares 16,378,828 16,243,147
Effect of dilutive securities:
Common stock warrants -- 35,318
Stock options -- 868,030
------------ ------------
Dilutive potential common shares -- 903,348
------------ ------------
Denominator for diluted income
(loss) per share 16,378,828 17,146,495
------------ ------------
Diluted income (loss) per share $ (0.29) $ 0.06
============= ============
</TABLE>
4
<PAGE>
We have not included options and warrants to purchase 2,960,357 and 102,905
shares of common stock that were outstanding during the first quarter of 1999
and 1998, respectively, in the computation of diluted income (loss) per share
because the representative share increments would be antidilutive.
(4) COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) amounted to $(4,870,059) for the first
quarter of 1999 and $1,037,208 for the first quarter of 1998. Our other
comprehensive income (loss) is comprised of unrealized gains and losses on
available-for-sale securities.
(5) BUSINESS SEGMENTS
In 1998, we adopted Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). Our operations are confined to one business segment, the development
of drugs to treat chronic infectious diseases.
(6) FACILITY AGREEMENT
On February 22, 1999, we entered into a facility agreement with Harris
Trust and Savings Bank. The agreement provides us with a $10.0 million revolving
line of credit in the form of short-term demand loans. The loans may bear
interest at floating rates based on LIBOR (London Interbank Offered Rate), the
bank's prime commercial rate or a combination of both, and may be converted from
one basis to another from time to time in accordance with the terms of the
agreement. The credit facility, subject to annual review, will be available to
us on an uncommitted basis. We have not drawn funds under this facility
agreement to date.
(7) CONTINGENCY
PathoGenesis Corporation, its chief executive officer and its chief
financial officer are named as defendants in eight purported class action
lawsuits pending in the United States District Court for the Western District of
Washington. These suits purport to allege claims on behalf of all purchasers of
PathoGenesis common stock and purchasers and/or sellers of related derivative
securities during the period January 25-26, 1999 to March 22, 1999. The suits
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 under that Act, in connection with certain announcements by
the company regarding its expected 1999 results and seek unspecified damages.
The company intends to defend the lawsuits vigorously.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements. You may identify these forward-looking
statements by the use of such words as "believe," "anticipate," "expect," "plan"
and "intend," among others. Since these statements are based on factors that
involve risks and uncertainties, they do not necessarily indicate what our
actual future results will be, and results may vary from quarter to quarter.
Important factors that could cause or contribute to material differences between
our actual results and the results expressed or implied by the forward-looking
statements include, but are not limited to, those discussed in "Item 1.
Business," "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our annual report on Form 10-K for 1998, and in
Exhibit 99.1 to the Form 10-K. These factors include, but are not limited to,
uncertainties related to the fact that PathoGenesis began commercial operations
only recently, its dependence on TOBI(R) (tobramycin solution for inhalation),
the degree of penetration of its markets, the frequency of TOBI's use by
patients, third party reimbursement and product pricing, seasonal impacts on
hospitalizations or exacerbations experienced by cystic fibrosis patients,
variability in wholesaler ordering patterns, government regulation, drug
development and clinical trials, competition and alternative therapies, and the
potential impact of litigation. We cannot assure you that TOBI -- which is
currently our only product -- will penetrate markets as planned, that our
development of TOBI for other uses will succeed or occur within anticipated time
frames, or that we will develop any of our other drug candidates successfully.
Overview
We continued our efforts to expand the market for TOBI in the first quarter
of 1999. In February 1999, we received regulatory approval to market TOBI in
Canada, and we began marketing TOBI in that country in the second quarter of
1999. Also in February 1999, we received marketing clearance for TOBI from
regulatory authorities in Argentina. We filed for regulatory approval in the
U.K. in the third quarter of 1998 and the application is under active review. If
we receive U.K. approval, we intend to seek regulatory approvals in other
European Union countries under the mutual recognition process. In addition, our
application for regulatory approval of TOBI in Australia has been granted a
priority review.
On March 22, 1999, we announced that first quarter 1999 sales would be
lower than originally expected due to fluctuations in ordering patterns for
TOBI. Other factors also may have affected sales. We continue to believe that
TOBI's sales potential in the U.S. cystic fibrosis market remains highly
promising based on our clinical trial data. In order to further penetrate this
market, we added seven sales people to our 24-person sales force in the first
quarter. We plan to have this sales force focus on convincing doctors to
prescribe TOBI for more patients and on increasing the number of prescriptions
written for chronic TOBI use -- 28 days on drug, 28 days off drug as specified
in the TOBI label. We also intend to present 24-month data about TOBI's efficacy
and safety in June and October at upcoming scientific meetings.
To support our second quarter 1999 launch of TOBI in Canada, we have
established an initial sales team of four people. In the second quarter of 1999,
we began to market TOBI in Argentina through a distributor. In addition, we have
hired four salespeople in the U.K. in anticipation of receiving regulatory
approval in that country.
In April 1999, we began enrolling 120 cystic fibrosis patients in a 28-day
open-label, randomized clinical trial at 14 cystic fibrosis centers in the U.K.
and Ireland. This is expected to be the largest study of nebulized antibiotics
conducted in Europe to date. While this study is not required for regulatory
approval, we believe it will give clinicians in Europe hands-on experience with
TOBI. Compassionate use programs for TOBI began in the U.K., Ireland and Germany
in the latter half of 1998.
In December 1998, we reported positive results from the Phase II
clinical trial of TOBI for bronchiectasis. In April 1999, we announced new
clinical findings at the American Lung Association/American Thoracic Society
International Conference. Important findings included a more than 99.999 percent
reduction on average in density of Pseudomonas aeruginosa bacteria in the sputum
(phlegm) at 14 and 28 days, as well as eradication of Pseudomonas aeruginosa in
the sputum in 32% of patients as of two weeks after
6
<PAGE>
stopping TOBI therapy. TOBI's ability to reduce or eliminate pseudomonal
bacteria in the sputum was correlated with improvement in the patients' general
health. Because of the strength of these results, we intend to pursue a Phase
III clinical trial of TOBI in bronchiectasis.
The Phase II results from the clinical trial of rifalazil showed that the
drug was well tolerated. However, there was an insufficient number of patients
in each arm of the trial to provide conclusive indication of efficacy. We have
decided not to pursue additional clinical trials of rifalazil for the treatment
of tuberculosis at this time.
We are developing two other inhaled drug candidates for lung infections:
. PA-1420 (polymyxin E1)
. PA-1806
We have a patent for PA-1420, the second entry in our planned portfolio of
aerosolized antibiotics to treat chronic lung infections. In the first quarter
of 1999, we received a two-year grant totaling $1.5 million from the Cystic
Fibrosis Foundation to help support the development of PA-1420. We plan to begin
a Phase I clinical trial of this drug candidate later this year. In September
1998, we acquired an exclusive worldwide license to develop and market PA-1806,
an antibiotic. We plan to formulate PA-1806 for non-systemic aerosolized
delivery for the treatment or prophylaxis of respiratory tract infectious
diseases, consistent with our goal of developing a portfolio of aerosolized
antibiotics.
Results of Operations
Revenues. Revenues in the first quarter of 1999 totaled $10.3 million,
including $10.1 million from TOBI sales. Research grants and royalties generated
the balance of $204,000. Revenues for the corresponding period in 1998 were
$14.7 million, including $14.5 million from TOBI sales in the quarter of the
drug's launch. Research grants and royalties generated the balance of $138,000
in the first quarter of 1998. Since the first quarter of 1998 represented the
first period of sales of TOBI, its sales may not be readily comparable due to
the impact of initial purchases of stock to fill the components of the
distribution chain. As part of our plan to increase TOBI sales and further
penetrate the U.S. cystic fibrosis market, we intend to have our sales force
work to convince physicians to prescribe TOBI for more patients and to increase
the number of prescriptions they write for chronic use (28 days on drug, 28 days
off drug). We have also introduced TOBI in Canada and Argentina, and intend to
introduce the drug in other international markets, such as Australia and the
U.K. However, there can be no assurance that our efforts will be successful.
Operating Expenses. We incurred total operating expenses of $15.6 million
in the first quarter of 1999, an increase of $802,000 from $14.8 million in the
first quarter of 1998. The increased selling, general and administrative
expenses associated with the planned expansion of our sales force in the U.S,
Canada and the U.K. accounted for the majority of the increase. In addition,
research and development expenses rose as we continued to develop new drug
candidates and pursue regulatory approval of TOBI in Canada, Europe and other
markets. We expect operating expenses to continue to rise in 1999 as marketing
of TOBI expands further and research and development efforts progress.
Cost of sales was $2.2 million in the first quarter of 1999, a decrease of
$468,000 from $2.7 million in the first quarter of 1998. This decline was a
direct result of lower TOBI sales in the first quarter of 1999, with cost of
sales as a percentage of sales rising as sales volumes decreased. Our research
and development expenses for the first quarter of 1999 increased by $265,000 to
$6.8 million from $6.6 million for the corresponding period in 1998.
7
<PAGE>
Selling, general and administrative expenses increased to $6.5 million in the
first quarter of 1999 from $5.5 million for the corresponding period in 1998.
The increase in those expenses primarily reflects the costs associated with the
planned expansion of our sales force in the U.S., Canada and the U.K.
Net Income (Loss). We had an operating loss of $5.3 million in the first
quarter of 1999, an increase of $5.2 million from the operating loss of $114,000
for the corresponding period in 1998. This increase in operating loss was due
primarily to a decline in TOBI sales revenues in the first quarter of 1999.
Including net other income (primarily income from investment securities), our
net loss for the first quarter of 1999 was $4.7 million, compared to net income
of $985,000 for the first quarter of 1998. In the first quarter of 1999, net
investment income decreased by $304,000 to $827,000 from $1.1 million for the
corresponding period in 1998. The decrease was primarily due to lower average
invested cash balances. Interest expense in the first quarter of 1999 totaled
$218,000, which represents the amortization of the discount on the remaining
installments of the obligation to the Cystic Fibrosis Foundation. We had no
interest expense in the corresponding period in 1998.
Liquidity and Capital Resources
Our combined cash, cash equivalents and investment securities totaled $51.1
million at March 31, 1999, a decrease of $3.9 million from the balance of $55.0
million at December 31, 1998. We expect that these funds, in combination with
expected revenues from sales of TOBI, should be sufficient to meet our operating
expenses and capital requirements for the foreseeable future. In addition, on
February 22, 1999, we secured a $10.0 million revolving line of credit from
Harris Trust and Savings Bank. The primary uses of cash and investments during
the three months ended March 31, 1999 were to finance our operations. Net cash
used in operating activities totaled $3.5 million for the three months ended
March 31, 1999, compared to $10.1 million in the three months ended March 31,
1998. The decrease in net cash used resulted principally from changes in working
capital components. Accounts receivable decreased by $6.0 million in the three
months ended March 31, 1999, as compared to an increase of $10.0 million in the
first quarter of 1998. At March 31, 1999, our working capital was $60.5 million
and current ratio was 6.79 to 1.
We plan to continue our policy of investing excess funds in government
securities and investment grade, interest-bearing securities, primarily those
with an expected maturity of one-and-one-half years or less.
Certain purported class action lawsuits have been filed against
PathoGenesis and certain of its officers, alleging claims on behalf of all
purchasers of PathoGenesis common stock and purchasers and/or sellers of related
derivative securities during the period January 25-26, 1999 to March 22, 1999
(see "Item 1. Legal Proceedings" in Part II of this report on Form 10-Q for
further information). The company intends to vigorously defend the actions.
Although we cannot ascertain the ultimate outcome of these actions at this time
and we cannot predict with certainty the results of legal proceedings, we
currently believe that the resolution of those actions will not have a material
adverse effect on the company's financial position or results of operations.
YEAR 2000
Many computer systems may experience difficulty processing dates beyond the
year 1999 and will need to be modified before the year 2000. Failure to make
such modifications could result in system failures or miscalculations,
disrupting operations. Most of our information technology purchases were made
after January 1997. Since our systems are relatively new and there were no
legacy systems to integrate, and based on the program described below, we
believe our internal software and hardware systems will function properly when
the year 2000 arrives. Therefore, we do not expect our year 2000 compliance
costs to exceed $50,000 in 1999, excluding the costs of technology upgrades made
in the ordinary course of business.
8
<PAGE>
Our ongoing compliance program includes verification testing of our
internal information technology and information systems. According to the
vendors of those systems, all the systems purchased after January 1997 are year
2000-compliant (i.e., they support proper processing of date-sensitive
transactions after 1999). The existing systems that are not year 2000-compliant
represent a small percentage of our systems. We anticipate that almost all
noncompliant systems will be replaced as part of normal technology upgrades
before January 1, 2000. We will evaluate the remaining systems on an individual
basis. We expect upgrades and replacements to be made by mid-1999, where
necessary.
We are in contact with key third parties, such as suppliers, customers and
financial institutions, to assure no interruption of our business relationships
will occur due to year 2000 compliance issues. However, if the needed
conversions or modifications to computer or other systems are not made, or are
not completed in a timely way by these third parties, the year 2000 issue could
have a material impact on our operations.
While we believe that our hardware and software applications are or will be
year 2000-compliant, there can be no assurance that all systems will function
adequately when the year 2000 arrives, nor can there be any assurance that we
will not be adversely affected by the year 2000 problems of third parties. In
the case of internal system malfunctions, or in the event our suppliers and
vendors are not year 2000-compliant, we are developing manual backup procedures
to mitigate the risk of loss associated with the year 2000 issue.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our exposure to market rate risk for changes
in interest rates relates primarily to debt securities included in our
investment portfolio. We do not have any derivative financial instruments. We
invest in government securities and high-quality corporate obligations.
Investments in both fixed rate and floating rate interest-earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates. At March 31, 1999, we owned $4.8 million in
government debt instruments and $44.4 million in corporate debt securities. Our
exposure to losses as a result of interest rate changes is managed through
investing in securities predominantly with maturities of one-and-one-half years
or less.
9
<PAGE>
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
PathoGenesis Corporation, its chief executive officer and its chief
financial officer are named as defendants in eight purported class action
lawsuits pending in the United States District Court for the Western District of
Washington: Lipton v. PathoGenesis et al., C99-0419, filed on March 24, 1999;
Green v. PathoGenesis et al., C99-0439, filed on March 26, 1999; Gellert v.
PathoGenesis et al., C99-0452, filed on March 29, 1999; May v. PathoGenesis et
al., C99-0453, filed on March 29, 1999; Shapiro v. PathoGenesis et al., C99-
0455, filed on March 29, 1999; Bassin v. PathoGenesis et al., C99-0469, filed on
March 30, 1999; Barker v. PathoGenesis et al., C99-0503, filed on April 6, 1999;
and Kralovk v. PathoGenesis et al., C99-0506, filed on April 6, 1999. These
suits purport to allege claims on behalf of all purchasers of PathoGenesis
common stock and purchasers and/or sellers of related derivative securities
during the period January 25-26, 1999 to March 22, 1999. The suits allege
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and Rule 10b-5 under that Act, in connection with certain announcements by the
company regarding its expected 1999 results and seek unspecified damages. The
company intends to defend the lawsuits vigorously.
Item 2 Changes in Securities
On January 5, 1999, PathoGenesis issued 22,208 shares of its common stock
upon cashless exercise of outstanding warrants at an exercise price of $14.40
per share. Such shares were issued without registration under the Securities Act
of 1933, as amended, in reliance on Section 4(2) of said Act.
Item 3 Defaults Upon Senior Securities
NONE
Item 4 Submission of Matters to a Vote of Security-Holders
NONE
Item 5 Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Exhibit Number Description of Exhibit
-------------- ----------------------
4.5 PathoGenesis Corporation 1999 Employee Stock
Option Plan.
10.34 PathoGenesis Corporation 1999 Employee Stock
Option Plan (included in Exhibit 4.5).
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
10
<PAGE>
PathoGenesis filed a report on Form 8-K on March 23, 1999 announcing
anticipated first quarter 1999 results.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 14, 1999.
PATHOGENESIS CORPORATION
By: /s/ Wilbur H. Gantz
------------------------------------
Wilbur H. Gantz
Chairman and Chief Executive Officer
By: /s/ Alan R. Meyer
------------------------------------
Alan R. Meyer
Executive Vice President and
Chief Financial Officer
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EXHIBIT 4.5
PATHOGENESIS CORPORATION
1999 EMPLOYEE STOCK OPTION PLAN
1. Purpose. The PathoGenesis Corporation 1999 Employee Stock Option Plan
(the "Plan") is intended to promote the interests of PathoGenesis Corporation
("PathoGenesis") and its shareholders by providing employees (other than any
employee who is an officer or director of PathoGenesis), 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. This Plan provides for the granting of stock options that are not
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code.
2. Definitions. As used in the Plan:
(a) "Agreement" shall mean a written agreement between PathoGenesis and a
Participant evidencing an Option.
(b) "Board" shall mean the board of directors of PathoGenesis.
(c) "Committee" shall mean the Compensation and Nominating Committee of
the Board or such other committee as the Board may authorize to administer the
Plan.
(d) "Common Stock" shall mean common stock, par value $.001 per share, of
PathoGenesis, or any security substituted for such stock pursuant to Section
3.2.
(e) "Company" shall mean PathoGenesis and shall include any business
entity that controls, is controlled by, or is under common control with,
PathoGenesis.
(f) "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 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.
(g) "Option" shall mean a stock option to purchase shares of Common Stock
granted under the Plan and shall be "non-qualified" for purposes of Section 421
or 422 of the Internal Revenue Code.
(h) "Participant" shall mean the recipient of a grant of an Option under
the Plan or, upon such recipient's death, his or her successors, heirs,
executors or administrators, as the case may be.
(i) "Securities Act" shall mean the Securities Act of 1933, as amended.
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3. Shares Subject to the Plan.
3.1 Shares Available. 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: (i) 600,000 shares and (ii) shares (a)
purchased or acquired by PathoGenesis using amounts equivalent to the cash
proceeds received by PathoGenesis or (b) tendered to or withheld by
PathoGenesis, in either case (ii)(a) or (ii)(b) in connection with the exercise
of Options granted under this Plan. 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 under the Plan, no shares shall be deemed issued until they are actually
delivered to a Participant, or such other person in accordance with Section 13.
Shares covered by Options granted under the Plan that either wholly or in part
are not earned, or that expire or are forfeited, terminated, cancelled or
exchanged for other Options, shall be available for future issuance under the
Plan.
3.2 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 securities
that may then be issued in connection with Options, (b) the number and kind of
securities issued or issuable in respect of outstanding Options, (c) the option
exercise price relating to any Option, and (d) the maximum number of shares
issuable under the Plan.
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 Options
from time to time may be granted under the Plan, (b) determine the number of
shares of Common Stock to be covered by each Option granted, (c) determine the
terms and conditions, not inconsistent with the provisions of the Plan, of any
Option granted, (d) determine whether, to what extent and under what
circumstances Options may be cancelled or suspended, (e) interpret and
administer the Plan and any instrument or agreement entered into under the Plan,
(f) establish such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan, and (g) 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 present at a meeting 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 Options to
eligible Participants; provided, however, that no Option shall be granted
pursuant to such delegation to any person to whom the Committee could not have
granted an Option.
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5. Eligibility. The Committee shall have sole discretion to determine
persons who shall be eligible to participate in the Plan. Unless otherwise
determined by the Committee, all regular full-time employees in permanent
positions (other than any employee who is an officer or director of
PathoGenesis), consultants, independent contractors and other agents of the
Company shall be eligible to receive grants under the Plan.
6. Terms and Conditions of Options.
6.1 Agreements. Each Option 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 Option, a Participant thereby agrees
that the Option shall be subject to all of the terms and provisions of the Plan
and the applicable Agreement.
6.2 Exercise Price. Each Agreement shall set forth the option exercise
price payable by the Participant to PathoGenesis upon exercise of the Option.
The exercise price per share shall be determined by the Committee; provided,
however, that the exercise price shall in no event be less than the Fair Market
Value per share of Common Stock on the date of grant.
6.3 Replenishment Options. The Committee shall have the authority to
specify, at or after the time of grant, that a Participant shall be granted a
new 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 exercise price under the original Option or
withheld (and, if so determined by the Committee, to satisfy tax withholding
obligations) resulting from the exercise of the original 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 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.
7. Exercise of An Option.
7.1 Exercising An Option; Payment of Exercise Price. A Participant may
exercise an Option for all or any portion of the shares as to which the Option
is exercisable. In its sole discretion, the Committee may establish from time
to time administrative procedures, consistent with the Plan, for the exercise of
Options. A Participant exercising an Option shall pay in full the exercise
price 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), (ii) authorizing a third
party to sell shares (or a sufficient portion thereof) acquired upon exercise of
the 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 to exercise an 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.
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7.2 Withholding Tax. Whenever cash is to be paid pursuant to an Option,
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
Option, 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, which shall not exceed the amount computed at the minimum required
withholding rate. 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 Option.
8. 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 Option until the date of issuance of a stock certificate for such shares.
Except as otherwise expressly provided in Section 3.3, no adjustment to any
Option shall be made for dividends or other rights for which the record date
occurs prior to the date such stock certificate is issued.
9. No Special Employment Rights; No Right to Option Grants. 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 Option hereunder, and there is no
obligation for uniformity of treatment for Participants. The Committee's
granting of an Option to a Participant at any time shall neither require the
Committee to grant any other Option 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.
10. Securities Law Matters.
10.1 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.
10.2 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
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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.
11. 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 the consent of the affected Participant, if
such action would impair the rights of the Participant under any outstanding
Option.
The Committee may amend the terms of any outstanding Option, 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.
12. Grants to Foreign Nationals. Options 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 grants 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 Options in order to minimize
PathoGenesis' obligation with respect to tax equalization for employees on
assignments outside their home country.
13. Transfers of Options. Unless otherwise determined by the Committee
and set forth in the Agreement, no Option granted under the Plan shall be
assignable, transferable or payable to or exercisable by anyone other than the
Participant to whom it was granted, except for transfer to the estate of or
successors to a Participant upon his or her death.
14. Expenses and Receipts. The expenses of the Plan shall be paid by
PathoGenesis. Any proceeds received by PathoGenesis in connection with any
Option will be used for general corporate purposes.
15. Effective Date and Term of Plan. The Plan shall become effective on
the date it is adopted by the Board. The Plan shall remain in effect in
accordance with its terms, unless amended or terminated by the Board. Options
outstanding at Plan termination will remain in effect according to their terms
and the provisions of the Plan.
16. 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.
17. No Fractional Shares. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan. The Committee shall determine whether
cash or other
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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.
18. 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.
Approved by the Board of Directors on April 13, 1999.
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PATHOGENESIS CORPORATION FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,913,903
<SECURITIES> 49,230,967
<RECEIVABLES> 4,926,478
<ALLOWANCES> 0<F1>
<INVENTORY> 12,418,093
<CURRENT-ASSETS> 70,894,971
<PP&E> 28,362,461
<DEPRECIATION> 10,529,687
<TOTAL-ASSETS> 104,668,037
<CURRENT-LIABILITIES> 10,442,609
<BONDS> 0
0
0
<COMMON> 16,391
<OTHER-SE> 89,383,405
<TOTAL-LIABILITY-AND-EQUITY> 104,668,037
<SALES> 10,056,135
<TOTAL-REVENUES> 10,260,398
<CGS> 2,202,061
<TOTAL-COSTS> 15,580,101
<OTHER-EXPENSES> 26,780
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 218,380
<INCOME-PRETAX> (4,737,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,737,663)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,737,663)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
<FN>
<F1>THE AMOUNT OF RECEIVABLES REPORTED IS NET OF $1,623,711 OF ALLOWANCES.
<F2>THE TOTAL COSTS INCLUDE LOSS PROVISION OF $27,587.
</FN>
</TABLE>
