<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
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
__________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Preferred Stock Purchase Rights (currently traded with Common Stock)
(Title of Each Class)
__________________
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
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the Registrant was approximately
$169,823,069 on March 23, 1999 (based on the closing price quoted on the Nasdaq
National Market on March 23, 1999, as reported by The Wall Street Journal). On
March 23, 1999, the Registrant had issued and outstanding an aggregate of
16,390,785 shares of common stock.
Documents Incorporated by Reference
Those portions of the Registrant's proxy statement to be filed pursuant to
Regulation 14A for the annual meeting of stockholders to be held on June 2,
1999, described in Part III hereof, are incorporated by reference in this
report.
===============================================================================
<PAGE>
PART 1
In addition to historical information, this annual report on Form 10-K
contains forward-looking statements. You may identify these forward-looking
statements by the use of such words as "believe," "anticipate," "expect," "plan"
and "intend." Since these statements are based on factors that involve risks
and uncertainties, they do not necessarily indicate what our actual future
results will be. Factors that could cause or contribute to 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" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Form 10-K, and in Exhibit 99.1 to
this 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, third party reimbursement and product pricing,
government regulation, drug development and clinical trials, competition and
alternative therapies. 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.
Item 1. Business
Summary
PathoGenesis Corporation develops and markets novel drugs to treat serious,
chronic human infectious diseases where there is a significant need for improved
therapy. In December 1997, the U. S. Food and Drug Administration approved our
first drug, TOBI (tobramycin solution for inhalation). TOBI is indicated for
the management of cystic fibrosis (CF) patients with Pseudomonas aeruginosa
lung infections. We began marketing TOBI in 1998 in the U.S., and generated
$60.7 million in sales during the year. TOBI was approved for sale in Canada
and Argentina in February 1999. We have filed for regulatory approvals in
Europe and Australia. Applications in other countries are pending. Industry
data indicate that pseudomonal bacteria infect the lungs of about 60% of the
70,000 people worldwide with CF.
PathoGenesis is pursuing other indications for TOBI. In 1998, we completed
a double-blind, placebo-controlled, randomized Phase II clinical trial of TOBI
in patients with bronchiectasis, a form of severe chronic bronchitis. Trial
results showed that bacterial levels in the sputum decreased more than 99.999%
on average in the TOBI treatment group at 28 days, compared to no change on
average in the placebo group. Due to the strength of these results, we believe
TOBI holds promise for treating a broader patient group, people with other
serious lung infections due to P. aeruginosa and other bacteria that may be
treatable with TOBI. This group includes hospitalized patients with nocosomial
pneumonia and ventilator-dependent patients. In addition, we believe many
patients with severe chronic bronchitis have bacterial lung infections
susceptible to TOBI. In the U.S., about 100,000 people have bronchiectasis and
two million have severe chronic bronchitis, according to internal estimates. We
believe the incidence of both bronchiectasis and severe chronic bronchitis may
be higher in other countries, due to less aggressive treatment with antibiotics,
a higher incidence of smoking and other factors.
In addition, we have two antibiotics in preclinical testing as follow-on
drug candidates to TOBI. Each drug candidate has a different mechanism of
action from the other and from TOBI, which could provide physicians with
alternative or alternating treatments. In 1999, we intend to begin human
clinical trials of PA-1420 (polymyxin E1), and to continue preclinical
development of PA-1806, a monobactam antibiotic licensed from Bristol-Myers
Squibb in 1998.
PathoGenesis was formed in 1991 as a Delaware corporation. Our executive
offices are located at 201 Elliott Avenue West, Seattle, Washington 98119; our
telephone number is (206) 467-8100.
Aerosolized Drug Development Program: TOBI
The goal of PathoGenesis' aerosolized drug development program is to
develop drug candidates that can provide significant benefit to people with
difficult-to-treat lung infections, including those in cystic fibrosis,
bronchiectasis, severe chronic bronchitis, ventilator, organ transplant and AIDS
patients. Many of these serious infections are caused by P. aeruginosa. Our
first drug, TOBI, was developed to treat pseudomonal lung infections. Two other
drug candidates with anti-pseudomonal activity are in preclinical testing. In
addition, we have collaborated with the University of Washington Genome Center
and the Cystic Fibrosis Foundation to research the genetic makeup of
P. aeruginosa.
2
<PAGE>
PathoGenesis began researching the use of inhaled antibiotics in order to
deliver drugs directly to the site of infection in the lungs, rather than
systemically through the blood. Our researchers believed a much larger dose
could be safely delivered to the lungs if systemic absorption could be limited.
Antibiotics administered intravenously or orally (in tablet or capsule form)
must travel through the bloodstream and lung tissue to reach the site of most
lung infections. In the case of intravenous tobramycin, higher levels of drug
in the bloodstream lead to adverse side effects-hearing loss and kidney damage.
TOBI is the first aerosolized antibiotic solution to be approved by the
Food and Drug Administration. To achieve that, we had to find a suitable
nebulizer (device used to produce an antibiotic aerosol mist) and develop a
compatible preservative-free sterile formulation of tobramycin. We chose the
Pari LC Plus nebulizer for use with TOBI because it could efficiently deliver
the correct particle size of drug to the lungs. Antibiotic particles that are
too large can get caught in the back of the throat and the upper airways.
Particles that are too small are deposited predominantly in the alveoli (air
sacs), which increases systemic absorption and does not allow the drug to reach
the site of infection in the airways of the lung.
TOBI was designated an orphan drug by the FDA, which gives us seven years
of marketing exclusivity in the U.S. from the time of TOBI's approval in late
1997. TOBI also is covered by U.S. and Australian formulation patents. Patent
applications are pending in other countries. PathoGenesis has an exclusive
worldwide license from Children's Hospital and Medical Center in Seattle (based
on Phase II research done there and in other clinics) for patents, research and
technology relating to the use of an aerosol tobramycin solution or any other
aerosol aminoglycoside solution for the treatment of bronchopulmonary
infections.
Cystic Fibrosis Lung Infections
Cystic fibrosis is the most common life-shortening inherited disease in the
U.S., affecting about 30,000 Americans. According to the Cystic Fibrosis
Foundation, CF is diagnosed in one of every 3,300 newborns in the U.S. The
median survival age is 31.3 years. About two-thirds of CF patients in the U.S.
are treated at 113 centers accredited by the Cystic Fibrosis Foundation.
About 40,000 CF patients live outside the U.S. The disease is most
prevalent in Europe, Canada, Australia and other countries where Caucasians have
immigrated, because CF is primarily a Caucasian genetic disease. Although the
incidence of CF in these countries is similar to the U.S., life expectancy can
vary from country to country depending on the caliber of care. Most countries
have CF centers comparable to those in the U.S.
Cystic fibrosis is characterized by the production of unusually thick,
sticky mucus that obstructs the airways of the lungs, the bronchial tubes and
bronchioles. Early in life, cystic fibrosis patients typically have bacterial
infections comparable to other children. While the majority of their early lung
infections are treated effectively, the accumulation of mucus in the lungs
usually leads to life-long infections. This results in gradual destruction of
lung tissue, and eventually, respiratory failure. P. aeruginosa is the dominant
bacterium and infects the lungs of about 60% of all people with CF in the U.S.
Infection with pseudomonal bacteria is increasingly likely as the patient ages.
Furthermore, P. aeruginosa is rarely if ever permanently eradicated after
antibiotic treatment.
An estimated 90% of all illnesses associated with CF are related to the
respiratory system. Periodic flare-ups of pseudomonal infection can cause
life-threatening episodes and hospitalization, which increases treatment costs,
exposes the patient to potential hospital-acquired infections, and disrupts
education and family life. For more than 20 years, the standard treatment for
these flare-ups was intravenous tobramycin, typically for periods of 10-14 days.
However, cumulative systemic exposure to intravenous tobramycin increases the
risk of adverse side effects, such as significant kidney damage and hearing
loss.
TOBI for Cystic Fibrosis Lung Infections
TOBI is a stable, premixed, proprietary formulation of the antibiotic
tobramycin for delivery by inhalation using a nebulizer. Each ready-to-use
ampule of TOBI contains 300 milligrams of tobramycin in a 5 milliliter solution.
TOBI is aerosolized and administered using a Pari LC Plus reusable nebulizer and
a DeVilbiss Pulmo-Aide air compressor. It is inhaled in two daily sessions
requiring an average of about 15 minutes per treatment. The TOBI treatment
regimen consists of repeated cycles of 28 days on drug, followed by 28 days off
drug, which was proven safe and effective in clinical trials.
3
<PAGE>
Tobramycin is a fermentation product isolated from Streptomyces tenebrarius
in 1967. It is a water-soluble compound belonging to the group of antibiotics
called aminoglycosides. Like other aminoglycosides, tobramycin inhibits
bacterial protein synthesis and is most active against gram-negative bacteria.
Compared with other aminoglycosides, tobramycin is more active against P.
aeruginosa by at least two- to four-fold and is generally less toxic.
Intravenous tobramycin has been approved for marketing for more than 20 years.
As an antibiotic specifically formulated for inhalation, TOBI is delivered
directly to the lungs where the infection resides. The drug is formulated to
minimize its absorption into the bloodstream, thereby reducing the risk of
adverse effects. On average, 100-fold greater concentrations of tobramycin can
be delivered to the actual site of infection by directly depositing the
antibiotic on the airway lining as compared with intravenous delivery.
Treatment of pseudomonal infection using TOBI would be expected to begin at the
first detection of pseudomonal bacteria and may continue throughout the
patient's lifetime. We believe the market for TOBI is significant and growing.
Industry data indicate that pseudomonal bacteria infect the lungs of about 60%
of the 70,000 people worldwide with CF. Market growth may occur as new patients
are diagnosed and improved therapy extends the lives of patients.
In an article on research on TOBI published in The New England Journal of
Medicine, Jan. 7, 1999, the authors wrote that "Our study shows that long-term,
intermittent administration of inhaled tobramycin in conjunction with standard
therapy for cystic fibrosis improves pulmonary function, decreases the density
of P. aeruginosa in expectorated sputum, and reduces the need for intravenous
antipseudomonal antibiotics and hospitalization." The article described the
Phase III clinical trials of TOBI, which comprised the largest study of inhaled
antibiotics to date. TOBI or an inhaled placebo was administered to 520 cystic
fibrosis patients with Pseudomonas aeruginosa lung infections. TOBI or placebo
was inhaled at home twice a day in repeated cycles of 28 days on drug, 28 days
off drug, for three on-off cycles over 24 weeks. In both groups, patients were
also allowed to receive standard treatment recommended for the management of
cystic fibrosis, which may have included oral or intravenous antibiotics. The
results:
. Improved and maintained lung function: Results at week 20 (the end of the
third period of drug administration) showed that patients treated with TOBI
had an average increase in lung function of 10%, versus an average 2% decline
in the placebo group. Pulmonary function is the best predictor of disease
progression in people with cystic fibrosis. To put this into perspective: A
CF patient's pulmonary function declines 2% to 4% a year on average, with the
median age of death currently at 31 years. Thus, a 10% improvement in lung
function typically represents a return to what the patient's lung function
was three to four years earlier.
. Fewer days in the hospital: Patients on TOBI were 26% less likely to be
hospitalized than those in the placebo group. On average, TOBI-treated
patients were hospitalized three fewer days than patients receiving standard
cystic fibrosis therapy-5.1 days for TOBI patients, compared with 8.1 days
for placebo patients.
. Fewer days requiring anti-pseudomonal antibiotics: TOBI patients were 36%
less likely to require intravenous antipseudomonal antibiotics than patients
taking placebo.
. Safety: Overall adverse events were comparable but less severe in the TOBI
group than in the placebo group. Tinnitis (ringing in the ears) and voice
alteration (e.g., hoarseness) were the only adverse events reported by more
patients in the TOBI group than in the placebo group. Tinnitis was reported
by eight TOBI patients (3.1%) and by no placebo-treated patients. It was
transient and appeared mild or moderate in severity. Voice alteration was
reported by 33 TOBI patients (12.8%) and 17 placebo-treated patients (6.5%).
Four patients in the placebo group and none in the TOBI group died during the
studies.
. Reduction in bacterial counts: Patients taking TOBI had significantly
decreased P. aeruginosa density in their sputum during the on-drug periods.
Sputum bacterial density returned to baseline during the off-drug periods.
Reductions in sputum bacterial density were smaller in each successive cycle.
The New England Journal of Medicine article also reported that all patient
subgroups experienced a benefit in lung function following TOBI treatments, as
measured by forced expiratory volume at one
4
<PAGE>
second (FEV1). In particular, patients who were 13 to 17 years old or who were
female demonstrated a significantly larger treatment effect than those in the
other groups.
All patients who completed the Phase III clinical trials were eligible for
a follow-on program, allowing them to continue receiving TOBI. After 18 months
of the chronic intermittent TOBI treatment regimen, CF patients continued to
maintain improved lung function above baseline values. Previously published
literature suggests that these patients might otherwise have lost, on average,
about 3% to 6% of lung function relative to baseline had they not been taking
TOBI. Furthermore, the data showed that delay of TOBI therapy led to loss of
lung function. Patients who were in the placebo group for six months before
beginning TOBI therapy did not achieve absolute lung function values comparable
to those achieved by patients who were treated with TOBI throughout the 18-month
study. We plan to announce 24-month TOBI data in 1999.
One concern with long-term administration of any antibiotic is the
emergence of drug-resistant bacteria. However, intravenous tobramycin therapy
for acute flare-ups of pseudomonal infection in CF patients is usually
efficacious, even though resistant pseudomonal bacteria are frequently found.
Treatment for six months with TOBI in the clinical trials did not affect the
susceptibility of the majority of P. aeruginosa isolates tested. However,
microbiological measures of increased drug resistance were noted in some
patients. The relationship of in vitro (laboratory) susceptibility test results
and clinical outcome with TOBI therapy has not been established. In fact, the
18-month data on TOBI show positive clinical responses in most patients with
pseudomonal bacteria considered resistant by traditional intravenous measures.
Bronchiectasis and Severe Chronic Bronchitis
Bronchiectasis is a chronic infection of the bronchi that either induces or
follows abnormal enlargement of the bronchi.] The airways frequently contain
large amounts of thick, pus-containing mucus, causing patients to complain of
incessant coughing and difficulty in breathing. Often, many of the more distant
airways are blocked by secretions or completely destroyed and replaced by
fibrous tissue. Inflammation is caused by persistent bacterial infection in the
lungs' air passages most frequently with P. aeruginosa. In turn, this
inflammation leads to progressive lung damage. Damage may occur in both lungs
or only one lung. While a small percentage of patients have localized damage
that can be treated successfully through surgery, most treatment is with oral or
intravenous antibiotics, including macrolides, quinolones and aminoglycosides.
Patients may require a significant number of hospitalizations to treat
complications of the condition.
Causes of bronchiectasis include viral or bacterial pneumonia, primary
ciliary disorders, exposure to toxic substances and lung cancer. As an
anatomical condition, bronchiectasis can be definitively diagnosed through CT
scans. While the late-stage clinical manifestations of bronchiectasis are
similar to cystic fibrosis lung disease, bronchiectasis patients are usually
older than age 50. The condition affects about 100,000 people in the U.S.,
based on hospital discharge records. However, we believe bronchiectasis is
significantly underdiagnosed, in part, because there are no treatments for the
condition that would require a diagnosis that is more specific than severe
chronic bronchitis or severe chronic obstructive pulmonary disease (COPD). We
believe that 30% to 50% of bronchiectasis patients are infected with P.
aeruginosa. About 10% have fungal infections, and the remaining patients are
infected with other bacteria (such as Haemophilus influenzae, Streptococcus
pneumoniae and Staphylococcus aureus).
Clinically, severe chronic bronchitis is defined by the presence and
accumulation of chronic bronchial secretions in the airways that are enough to
cause expectoration on most days, for a minimum of three months of the year for
two consecutive years. This accumulation of secretions results from
inflammation of the airways and is often associated with smoking, which causes
structural and functional damage to the cilia and the mucus secretion process.
Other suspected causes are severe viral or bacterial infections, air pollution
and toxins.
Once chronic bronchitis has been established, repeated infections
exacerbate airflow obstruction and tend to speed up the decline of lung
function. However, chronic bronchitis cannot be diagnosed with CT scans because
it does not usually involve the degree of permanent damage to lung cell walls
that bronchiectasis does. The type of lung infection present depends on the
severity of the condition. P. aeruginosa is only common in the most severely
ill patients, while H. influenzae and S. pneumoniae are the most common
pathogens overall. Tobramycin has in vitro activity against P. aeruginosa and
H. influenzae
5
<PAGE>
but not S. pneumoniae. We believe about two million people in the U.S. have
severe chronic bronchitis, and that the incidence of both bronchiectasis and
severe chronic bronchitis may be higher in other countries, due to less
aggressive treatment with antibiotics, a higher incidence of smoking and other
factors.
TOBI for Bronchiectasis and Severe Chronic Bronchitis
In 1998, PathoGenesis reported the primary endpoint results of a double-
blind, placebo-controlled, randomized Phase II clinical trial of TOBI in
patients with bronchiectasis. We enrolled 74 subjects age 18 or older who had
been diagnosed with bronchiectasis and P. aeruginosa airway infections. The 28-
day trial was conducted in 15 medical centers in the U.S. The principal
endpoint was microbiological response, as measured by changes in observed
bacterial levels in the sputum. This endpoint was chosen because the most
clinically important symptoms, cough and sputum production, are principally due
to the ongoing airway infection.
Trial results showed that bacterial levels in the sputum decreased more
than 99.999% on average in the TOBI treatment group at 28 days, compared to no
change on average in the placebo group. This difference was statistically
significant. The percent of patients with at least one adverse experience was
comparable between the two treatment groups. The TOBI and placebo groups were
comparable at baseline in respect to age, gender, and disease severity.
PathoGenesis intends to report these results in greater detail in April 1999 at
the American Lung Association/American Thoracic Society international
conference, and to pursue later publication of a peer-reviewed scientific
journal article. The FDA Modernization Act may allow us to promote such an
article to physicians under certain conditions.
Due to the strength of TOBI's Phase II results in bronchiectasis, we
believe our drug holds promise for treating patients with severe chronic
bronchitis. Some of these patients have non-pseudomonal bacterial lung
infections that also may be treatable with tobramycin. Because we believe the
optimum duration of therapy will be different for bronchiectasis than for severe
chronic bronchitis, we plan to proceed with a Phase III clinical trial of TOBI
in bronchiectasis patients with P. aeruginosa and other bacterial lung
infections potentially susceptible to TOBI, and to do a separate clinical trial
in patients with severe chronic bronchitis.
Tuberculosis
For the past 25 years, development of anti-tuberculosis drugs has been
limited. In fact, patents have expired on all four drugs in the current
standard regimen of therapy to treat tuberculosis. However, TB is one of the
world's most serious infectious diseases because of its highly contagious
nature, prevalence and increasing levels of drug resistance. Worldwide, more
than a billion people are infected with Mycobacterium tuberculosis, the
bacterium that causes TB. The vast majority of these infections are latent
(inactive) cases, which may exist for decades before the lung disease manifests
itself in an active form. An estimated eight million active tuberculosis cases
are diagnosed and more than two million deaths occur worldwide each year. In
the U.S., the Centers for Disease Control and Prevention report an average of
25,000 new active TB cases per year and more than 10 million latent cases.
TOBI for Tuberculosis
Tuberculosis bacteria, including multi-drug-resistant strains, have been
killed by high concentrations of TOBI in in vitro testing. PathoGenesis is
conducting an open-label Phase II clinical trial of TOBI in patients with
contagious pulmonary TB. The study is examining whether TOBI decreases
bacterial counts in the sputum more rapidly than standard systemic therapies.
Results are expected to be announced in 1999. In April 1996, PathoGenesis filed
a provisional patent application with the U.S. Patent and Trademark Office for
use of the TOBI formulation for the treatment of tuberculosis.
Aerosolized Drug Development Program: Follow-On Drug Candidates to TOBI
PathoGenesis has two antibiotics in preclinical testing as follow-on drug
candidates to TOBI. Each drug candidate has a different mechanism of action
from the other and from TOBI, which could provide physicians with alternative or
alternating treatments. Like TOBI, these candidates are being formulated for
aerosol delivery using a nebulizer and compressor. Because drugs are delivered
directly to the site of infection in the lungs, rather than systemically, we
believe a larger dose can be safely delivered by aerosol. As a result, we
believe delivery by inhalation holds promise for treating a number of serious
6
<PAGE>
lung infections, including those in bronchiectasis, severe chronic bronchitis,
ventilator, organ transplant and AIDS patients.
PA-1420
PA-1420 (polymyxin E1) is a highly purified component of the antibiotic
colistin, a member of a group of antibiotics known as polymyxins. As a class,
polymyxins are among the most potent peptide antibiotics ever isolated.
Colistins have activity against a broad range of gram-negative bacteria,
including P. aeruginosa. PathoGenesis has been granted a U.S. patent for PA-
1420 and intends to file for patents in other countries.
The term "colistin" refers to the fermentation products of the bacterium
Bacillus polymyxa. The bacterium generates two main products and several minor
products. Colistin has been sold for several decades in its prodrug form (Coly-
Mycin(R) M, Monarch) for intravenous or intramuscular injection to treat certain
gram-negative infections. Coly-Mycin is less than 60% pure drug by weight, and
as an inactive prodrug of colistin, must hydrolyze in the bloodstream over time
to release active antibiotic. This same process must occur if the powdered
Coly-Mycin is put into solution and aerosolized, which leads to a lack of
consistency in the amount of drug that is delivered to the lungs. Foaming and
sputtering are commonly reported when Coly-Mycin is nebulized.
In preclinical testing, PA-1420 demonstrated greater potency than
aerosolized Coly-Mycin against P. aeruginosa, as well as faster aerosolization
times. In addition, PA-1420 has shown activity against drug-resistant strains
of P. aeruginosa. We believe that bacterial resistance to colistin has not
developed in the overall population because the drug was developed decades ago
and is not widely used today.
In 1999, we intend to begin a Phase I clinical trial of PA-1420 in cystic
fibrosis patients. Research is being funded in part by a Therapeutics
Development Grant from the Cystic Fibrosis Foundation.
PA-1806
In 1998, PathoGenesis obtained an exclusive worldwide license for the
aerosol use of PA-1806 from Bristol-Myers Squibb. PA-1806 is a new chemical
entity in the monobactam class of antibiotics. A patent on the drug candidate
(originally BMS-180680) was issued in 1994 and will expire in 2011. PA-1806
demonstrates potent activity against P. aeruginosa, Burkholderia cepacia,
Stenotrophomonas maltophilia and other gram-negative bacteria. PA-1806 has high
potency against P. aeruginosa, in part because it is transported into the
bacterial cells via the same metabolic pathway that is used to import iron.
In 1999, we plan to formulate PA-1806 for nonsystemic aerosolized delivery
and conduct other preclinical testing on the drug candidate.
Research and Development
We focus our research and development on drug candidates with potentially
unique therapeutic profiles, as well as those we believe we can develop
relatively quickly. We seek to shorten drug discovery and development time by
involving our clinical and regulatory personnel in the early stages of drug
discovery and development. This allows us to choose drug candidates that are of
significant interest to physicians and regulators and that have readily
measurable effects in clinical trials. We intend to focus on drug candidates we
believe we can develop through our own resources, although we may also sell,
license, joint venture or otherwise collaborate where we determine such an
approach is preferable.
Our three major technical programs are:
. a molecular genetics program to discover new approaches to the treatment of
pathogens
. a molecular microbiology program that focuses on discovering new approaches
to treating pathogens and using "smart screens" or reporter gene technology
to facilitate drug candidate testing
. a pharmaceutical chemistry program that uses combinatorial chemistry to
create new drug candidates.
We also have internal capabilities in functional genomics and molecular
target discovery, assay development for compound screening, technology and
informatics to accelerate drug discovery, medicinal chemistry and Rapid Analog
Matrix (RAM(R)) synthesis, compound evaluation in animal infection models,
7
<PAGE>
and preclinical development capabilities. In addition, we have developed
specialized expertise in the drug mechanisms of action and resistance, aerosol
drug delivery, surrogate markers and assays for clinical trials, and clinical
microbiology. We spent approximately $33.0 million, $28.0 million and $20.7
million on research and development of proposed drug candidates in 1998, 1997
and 1996, respectively. The amount for 1998 includes the $4.0 million initial
fee to license PA-1806.
In 1999, PathoGenesis, the Cystic Fibrosis Foundation and the University of
Washington Genome Center expect to complete a two-year genetic research project
on the genetic makeup of P. aeruginosa, a bacterium that affects cystic
fibrosis, burn and cancer patients. Greater knowledge of the bacterial genome
(DNA or genetic code) has provided new insights into how P. aeruginosa causes
infection and defends itself against antibiotics, which in turn is assisting our
researchers in developing new anti-pseudomonal therapies. In addition, we may
seek to patent certain gene sequences that may help us develop and test drug
candidates.. The genetic data derived from this project are published on the
Internet at www.pseudomonas.com. From this site, researchers can download gene
sequences to their own computers or use resident software to search for
similarities between a given gene and the sequences contained in the growing
P. aeruginosa database.
Manufacturing
We currently do not intend to establish internal manufacturing
capabilities. Instead, we have entered or will enter into contracts with third
parties for the production and packaging of our products. Contract
manufacturing is monitored by our manufacturing and distribution support
operation in Annandale, New Jersey, which had 20 employees as of year-end 1998.
All manufacturing facilities used by PathoGenesis are subject to inspection by
the FDA or regulatory authorities in other countries.
We source bulk powdered tobramycin from two of the principal worldwide
suppliers of the drug, and anticipate that either one of these suppliers alone
will be able to supply sufficient quantities to meet our current needs.
Formulation and packaging of TOBI occurs at a U.S. facility that also packages
other drugs for inhalation for other pharmaceutical companies. The powdered
tobramycin is mixed with water and excipients, then injected into plastic
ampules (vials) using a form-fill-seal technology in a sterile environment.
Each ampule has a snap-top access port, simplifying the action of delivering
TOBI directly into a nebulizer for inhalation. Other contract manufacturers
handle final packaging of the drug into aluminum foil pouches and cartons.
We have designated the Pari LC Plus nebulizer to deliver TOBI. This
nebulizer is manufactured and distributed in the U.S. by Pari Corporation of
Germany. The nebulizer has a useful life of about six months and costs about
$15 U.S. at retail. Our research shows that this nebulizer efficiently
aerosolizes the TOBI solution and delivers the optimal drug particle size to the
lung airways, minimizing the amount of drug that is absorbed systemically or
coughed out.
Sales and Marketing
Cystic fibrosis is a focused market segment that involves a small group of
physicians and treating institutions in the U.S. and abroad. Many of these
pulmonologists also treat patients with bronchiectasis, severe chronic
bronchitis and related conditions.
In the U.S., about two-thirds of the 30,000 cystic fibrosis patients are
treated by institutions or physicians associated with the 113 cystic fibrosis
care centers sponsored by the Cystic Fibrosis Foundation. Of those centers, 69
sites participated in our Phase III clinical trials for TOBI. Consequently, in
1998 we achieved $60.7 million of TOBI sales in the drug's first year on the
market with a sales force of 24. In the first quarter of 1999, we hired seven
additional sales people and three management and direct sales support personnel
to broaden our sales and marketing efforts to a targeted group of 2,000
pulmonologists.
In the U.S., PathoGenesis sells TOBI to drug wholesalers and mail order
pharmacies. In 1998, sales to the three largest wholesale distributors
accounted for 65% of total sales. Pharmacies that sell TOBI accept assignment
of benefits and help patients request reimbursement from third party payors.
TOBI has achieved high reimbursement levels from third party payors, including
private insurance plans and Medicaid, which covers about 20% of CF patients.
Our revenue per carton of TOBI for patients covered by Medicaid are less than
our revenues per carton for other patients. If government and third-party
payors do not provide adequate coverage and reimbursement for TOBI, its market
acceptance would be likely to decline.
8
<PAGE>
Because TOBI has been on the market only since January 1998, we do not know
with certainty how sales may be affected by a number of factors and whether such
factors are sporatic, cyclical or have determinable trends. These factors
include: the seasonality arising from business cycles, weather, geographic
factors, or cold and flu outbreaks, the impact of hospitalization or
exacerbations experienced by CF patients, compliance with chronic therapy (28
days on drug, 28 days off drug), physician and patient concerns about potential
bacterial resistance to TOBI, insurance reimbursement factors, variability in
ordering patterns by drug wholesalers, and the effect of price increases and
changes in credit terms and the approval, availability, efficacy and popularity
of alternative treatments. The interplay of these factors may cause fluctuations
in quarter to quarter sales. In addition the effect these factors may have on
sales is likely to change as TOBI sales increase and our drug is introduced in
other countries. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In February 1999, we received approval to market TOBI to cystic fibrosis
patients in Canada and Argentina, where there are about 4,000 CF patients in
total. We plan to begin selling TOBI in those countries in the second quarter
of 1999. In Canada, we intend to rely on three dedicated sales people and a
marketing manager employed by a third party to market TOBI to physicians, CF
treatment centers and hospitals. We are working with a distributor in
Argentina.
In 1998, we filed for regulatory approvals in Europe and Australia, where
there are a total of about 32,500 CF patients. In Europe, the U. K. is the lead
country for seeking regulatory approval of TOBI in the European Union. If and
when TOBI is approved in the U. K., the other European Union countries will be
asked to approve our inhaled drug through a mutual recognition process.
Regulatory approvals do not necessarily indicate pricing or reimbursement
approvals. We plan to market TOBI using our own sales force in several northern
European countries, which have centralized cystic fibrosis centers similar to
those in the U.S. In other markets, we have entered or intend to enter into
exclusive distribution arrangements for the sale and distribution of TOBI.
In 1999, we plan to begin enrolling 120 cystic fibrosis patients in a 28-
day open-label, randomized clinical trial in up to 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, it will give European clinicians hands-on experience with
TOBI and provide valuable data for our marketing efforts in Europe. As of year-
end 1998, compassionate use programs for TOBI had begun in the U. K., Ireland
and Germany.
Licenses and Other Agreements
We have licensed from Children's Hospital and Medical Center in Seattle
exclusive worldwide rights to patents, research and technology relating to the
use of an aerosolized tobramycin solution or any other aerosolized
aminoglycoside solution for the treatment of bronchopulmonary infections.
PathoGenesis pays a royalty under the license based on net sales. The licensing
agreement continues in effect until the expiration of any patent rights under
the license, and may be terminated earlier upon a material breach by either
party.
In 1998, we purchased all rights in TOBI owned by the Cystic Fibrosis
Foundation under a similar license for $16.0 million.
In September 1998, PathoGenesis obtained exclusive worldwide rights from
Bristol-Myers Squibb to PA-1806, a patented chemical compound in the monobactam
class of antibiotics. These rights cover the aerosolized, non-systemic
administration of PA-1806 for the treatment or prophylaxis of respiratory tract
infectious diseases. We agreed to make initial payments totaling $4.0 million,
with subsequent payments to be made upon completion of certain milestones and a
royalty on net sales of products using this chemical compound.
In 1998, we completed a Phase II clinical trial of PA-1648 (rifalazil) in
tuberculosis patients. At that time, we decided not to conduct additional Phase
II testing of PA-1648 for tuberculosis treatment. We have exclusive rights
licensed from Kaneka Corporation to develop, market and sell PA-1648 for use in
the treatment of tuberculosis and other infections for the U.S., Canada and
Mexico. Under the agreement with Kaneka, we are responsible for the clinical
development, regulatory affairs, marketing and sales of PA-1648 and we have
agreed to pay Kaneka certain clinical and regulatory milestone payments of
substantial amounts. In addition, we have agreed to pay Kaneka a royalty based
on net sales for 15 years from the date of commercial production of PA-1648.
After that 15-year period, the license is fully paid and remains in effect as a
non-exclusive license. Kaneka has an option to convert the license to a
non-exclusive license should PathoGenesis fail to achieve certain milestones. In
addition, the license may terminate should PathoGenesis fail to achieve certain
other milestones. As partial consideration for the license, we paid $500,000 in
cash and issued 50,000 shares of common stock to Kaneka. In addition, in lieu of
a cash milestone payment in 1995,
9
<PAGE>
we issued an additional 50,000 shares of common stock to Kaneka. Under a related
supply agreement, Kaneka is responsible for providing bulk powdered PA-1648 for
our clinical trials.
In 1996, we entered into a license and distribution agreement with Bohdan
Automation, Inc. Under this agreement, Bohdan manufactures and sells the RAM(R)
Synthesizer, a patented combinatorial chemistry system invented by PathoGenesis
and Bohdan scientists.
We engage in other research and development collaborations and licensing
arrangements with various academic institutions, government and commercial
research groups, and other companies. For example, we entered into a contract
with the Cystic Fibrosis Foundation and the University of Washington to sequence
the P. aeruginosa genome as described under "Research and Development." We
believe that none of the licenses under these other arrangements is currently
material in relation to our business as a whole. We expect to pursue additional
license agreements and research collaboration arrangements.
Patents
PathoGenesis generally applies for patents for its proprietary compounds,
formulations or technologies. We have nine patents, including those covering
TOBI and PA-1420. In addition, we are the exclusive licensee in the U.S.,
Canada and Mexico of rights under three issued patents relating to PA-1648. We
have 10 patent applications pending.
Government Regulation and Product Testing
In order to conduct clinical trials and to manufacture and market products
for therapeutic use, PathoGenesis must comply with regulation by governmental
authorities in the U.S. and other countries. We also are subject to various
federal, state and local laws, regulations and recommendations, including
environmental laws and regulations.
Before a drug may be commercially distributed in the U.S., its developer
must complete the following steps:
. conduct the appropriate preclinical laboratory and animal tests
. submit an Investigational New Drug application ("IND") that must be approved
before clinical trials may begin
. conduct controlled human clinical trials that establish the safety and
efficacy of the drug candidate
. file a New Drug Application ("NDA") with the FDA
. comply with FDA inspection of drug manufacturing facilities to ensure
compliance with the applicable requirements
. obtain FDA approval of the NDA prior to any commercial sale or shipment of
the drug.
Clinical trials involve the administration of an investigational drug
product to human subjects. In Phase I, the drug candidate is first tested in
humans for safety, side effects, dosage tolerance, metabolism and clinical
pharmacology. Phase II trials help determine efficacy, optimal dosage and
possible side effects in specific indications. Phase III trials are undertaken
to gather additional information about efficacy and safety in order to evaluate
the drug candidate's risks and benefits and to provide an adequate basis for
product labeling.
Upon approval in the U.S., a drug may be marketed only for the approved
indications in the approved dosage forms and dosages. The FDA may require post-
marketing testing and surveillance to monitor the safety and efficacy history of
an approved product and continued compliance with regulatory requirements. The
FDA also may require an additional review of manufacturing facilities if a
material change is made to manufacturing equipment, locations or processes.
To market our products outside the U.S., we must comply with the varying
regulations of international markets. In the European Union, marketing
authorizations from non-European Union companiesare approved at the national
level, although certain registration procedures are available to companies
wishing to market a product in more than one country in the Union. If a
regulatory authority is satisfied that adequate evidence of safety, quality and
efficacy has been presented, marketing authorization is usually granted. The
U.K. is the lead country for seeking regulatory approval of TOBI in the European
Union. If and when TOBI is approved in the U.K., we will ask the other European
Union countries to approve
10
<PAGE>
the inhaled drug under a mutual recognition process. Approval by the FDA does
not ensure approval by other countries.
Competition
PathoGenesis competes with pharmaceutical companies and specialized
biotechnology firms that produce and market products in the United States,
Europe and elsewhere. Many pharmaceutical companies have focused their
development efforts in the therapeutics areas we are pursuing and may have
substantially greater financial, research and development resources. Certain of
these competitors have secured supply arrangements with other healthcare
companies, which may give them a competitive advantage. We expect to encounter
significant competition for the principal products we plan to develop.
The use of antibiotics to treat pseudomonal, mycobacterial and other
bacterial infections is well-established. In cystic fibrosis patients with
pseudomonal lung infections, tobramycin is the most commonly used intravenous
antibiotic. Medical therapies for patients with CF include antibiotics, anti-
inflammatory drugs, oral replacement enzymes to maintain nutrition, physical
therapy to the chest to loosen lung secretions, and mucolytics to clear
pulmonary secretions, such as Pulmozyme(R) (dornase alpha, Genentech). We
believe those CF therapies complement TOBI. However, the optimal combination may
vary among patients. In addition, the potential high cost of combination therapy
may limit the use of TOBI in conjunction with other therapies. There can be no
assurance that alternative formulations of tobramycin, other antibiotics or
different approaches to therapy will not prove to be more efficacious, safer or
more cost-effective than TOBI.
Human Resources
As of December 31, 1998, PathoGenesis had 273 employees, of which 158 were
engaged in research and development and 47 in sales and marketing. A
significant number of our management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical products companies.
None of our employees are covered by collective bargaining agreements. We have
entered into confidentiality agreements with all of our employees.
Item 2. Properties
Our principal facility consists of approximately 70,000 square feet of
leased laboratory and office space in Seattle, Washington. The lease expires in
March 2003. We have subleased a portion of this space to a third party. We
have also leased about 30,000 square feet of additional office space in Seattle
to accommodate our growth into a commercial enterprise. This lease also expires
in March 2003.
We also lease an administrative and sales and marketing office of
approximately 13,000 square feet in Skokie, Illinois. This lease expires in
March 2003. Additional leased laboratory and office space in Annandale, New
Jersey consists of approximately 18,000 square feet and houses manufacturing and
distribution support operations. The lease expires in December 2001.
In 1998, we purchased an office building consisting of approximately 8,000
square feet in Cranford, Middlesex, England to house the operations of
PathoGenesis Limited. This wholly owned subsidiary of PathoGenesis Corporation
is leading our European expansion efforts.
Item 3. Legal Proceedings
PathoGenesis Corporation, its chief executive officer and its chief
financial officer were named as defendants in two purported class action
lawsuits. Lipton v. PathoGenesis et al., C99-0419, and Green v. PathoGenesis et
al., C99-9439, were filed in the U.S. District Court for the Western District of
Washington on March 24, 1999 and March 26, 1999, respectively. The suits were
purportedly filed on behalf of all purchasers of PathoGenesis common stock
during the periods January 26, 1999 to March 22, 1999 and January 25, 1999 to
March 22, 1999, respectively. Plaintiffs in both suits allege claims for
violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule
10b-5 under that Act in connection with changes in the company's expected 1999
results and seek compensatory damages in unspecified amounts. Plaintiffs are
essentially alleging that the company and its officers made knowingly false
statements in January 1999 about anticipated 1999 results. The company believes
the allegations against it and its officers in these lawsuits are without merit
and intends to contest the allegations vigorously.
11
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matter to a vote of security holders during the
fourth quarter of 1998.
12
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
PathoGenesis' common stock trades on the Nasdaq National Market System
under the symbol PGNS. As of March 23, 1999, there were approximately 163
holders of record of common stock. However, we believe the actual number of
beneficial holders is substantially greater. The company has not paid any cash
dividends on the common stock to date, and currently intends to retain any
earnings for the development and growth of its business.
The following table shows the range of high and low closing sales prices of
the common stock as quoted on the Nasdaq National Market System for each quarter
in 1998 and 1997. On March 23, 1999, the last reported sale price for the
common stock was $11.3125.
<TABLE>
<CAPTION>
High Low
1999:
<S> <C> <C>
First Quarter (through March 25)................................. $ 59.00 $10.063
1998:
Fourth Quarter................................................... $59.375 $32.125
Third Quarter.................................................... 36.25 22.50
Second Quarter................................................... 39.75 27.00
First Quarter.................................................... 39.938 33.125
1997:
Fourth Quarter................................................... 40.75 33.625
Third Quarter.................................................... 38.00 27.50
Second Quarter................................................... 30.50 22.50
First Quarter.................................................... 33.00 20.75
</TABLE>
13
<PAGE>
Item 6. Selected Financial Data
In the table below, we present selected financial data for each of the five
years ended December 31, 1998, 1997, 1996, 1995 and 1994. We derived this
information from our consolidated financial statements. Please read the data
below in conjunction with the audited consolidated financial statements, related
notes and the other financial information included in this report.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ----------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales................................. $60,684 $ -- $ -- $ -- $ --
Grants and royalties.................. 368 442 440 -- --
------- -------- -------- -------- --------
Total revenues...................... 61,052 442 440 -- --
Operating expenses:
Cost of sales......................... 9,555 -- -- -- --
Research and development.............. 28,993 28,018 20,673 15,668 12,789
Selling, general and administrative... 20,074 10,582 4,241 3,609 3,215
License fee........................... 4,000 -- -- -- --
------- -------- -------- -------- --------
Total operating expenses............ 62,622 38,600 24,914 19,277 16,004
------- -------- -------- -------- --------
Operating loss...................... (1,570) (38,158) (24,474) (19,277) (16,004)
------- -------- -------- -------- --------
Other income (expense):
Investment income, net................ 4,056 5,278 3,294 1,287 1,285
Interest expense...................... (493) -- -- -- --
Other expense......................... (110) (158) (84) (34) (43)
------- -------- -------- -------- --------
Net other income.................... 3,453 5,120 3,210 1,253 1,242
------- -------- -------- -------- --------
Net income (loss)................... $ 1,883 $(33,038) $(21,264) $(18,024) $(14,762)
======= ======== ======== ======== ========
Net income (loss) per common share:
Basic................................. $ 0.12 $ (2.10) $ (1.66) $ (2.20) $ (1.95)
======= ======== ======== ======== ========
Diluted............................... $ 0.11 $ (2.10) $ (1.66) $ (2.20) $ (1.95)
======= ======== ======== ======== ========
Weighted average common shares outstanding:
Basic.................................. 16,265 15,704 12,829 8,210 7,585
Diluted................................ 17,156 15,704 12,829 8,210 7,585
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------ -------------- -------------- ------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents
and investment securities $ 55,007 $79,041 $60,688 $37,447 $25,994
Total current assets...... 79,784 87,190 61,809 38,884 26,694
Total assets.............. 112,766 97,596 69,999 46,963 36,086
Total current liabilities. 14,631 8,107 2,974 3,453 2,925
Long-term liability....... 4,725 -- 98 462 --
Total stockholders' equity 93,410 89,489 66,926 43,048 33,161
</TABLE>
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Below, we review our operations for 1998, 1997 and 1996, with particular
focus on 1998, our first year of commercial operation. We also discuss some of
our current plans for 1999. In reading the discussion below, you should keep in
mind that it contains forward-looking statements involving risks and
uncertainties that affect our future operating results. Those factors include,
but are not limited to, uncertainties related to the fact that PathoGenesis
began commercial operations only recently, its dependence on TOBI, third party
reimbursement and product pricing, government regulation, drug development and
clinical trials, competition and alternative therapies. A discussion of some of
those factors is included in Exhibit 99.1 of this report.
We began marketing our first drug, TOBI(R) (tobramycin solution for
inhalation), in the U.S. in January 1998. In our first year of operation, our
24-person sales force sold $60.7 million of TOBI in the U.S. In March 1998, we
filed for approval to market TOBI to cystic fibrosis patients in Canada. That
approval was received in February 1999, and we expect to begin marketing TOBI in
Canada in the second quarter of 1999. Also in February 1999, we received
marketing clearance for TOBI from regulatory authorities in Argentina. We
applied for regulatory approval in the U. K. in August 1998, and currently
expect clearance in the third quarter of 1999. Following the U. K. approval, we
will seek regulatory approvals in other European Union countries under the
mutual recognition process. In addition, we applied for regulatory approval of
TOBI in Australia, and have 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. Our analysis in late March suggested that in the fourth quarter of 1998,
some patients and wholesalers for insurance or business reasons accelerated TOBI
purchases that might otherwise have occurred in the first quarter of 1999.
Other factors, including those referred to in "Sales and Marketing," also may
have affected sales. In addition, our surveys led us to believe growth had
slowed in the number of new patients who began taking TOBI in the first
quarter. Therefore, we also lowered our expectations of sales in 1999 and
2000. However, 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 have added seven sales
people to our 24-person sales force in the first quarter. This sales force will
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.
In preparation for a second quarter 1999 launch of TOBI in Canada, we are
establishing sales and marketing capability to be headquartered in Montreal.
Also beginning in the second quarter, we plan 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 the third quarter of 1999.
In 1999, we plan to begin enrolling 120 cystic fibrosis patients in a 28-
day open-label, randomized clinical trial in up to 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, it will give clinicians in Europe hands-on experience with
TOBI. As of year-end 1998, compassionate use programs for TOBI had begun in the
U.K., Ireland and Germany.
In October 1998, we reported 18-month clinical trial data on TOBI at the
North American Cystic Fibrosis Conference. One important finding demonstrated
that cystic fibrosis patients continued to maintain improved lung function above
baseline values after 18 months of the chronic intermittent TOBI treatment
regimen. The data also established that delay of TOBI therapy led to
irreversible loss of lung function. We intend to present 24-month data about
TOBI's efficacy and safety at future scientific meetings.
We conducted the following Phase II clinical trials in 1998:
. TOBI for bronchiectasis
. Rifalazil (PA-1648) for tuberculosis
. TOBI for tuberculosis (in progress as of the first quarter of 1999)
15
<PAGE>
In January 1999, we reported positive results from the bronchiectasis trial.
Bacterial levels in the sputum decreased more than 99.999% on average in the
TOBI treatment group at 28 days, compared to no change on average in the placebo
group. This difference was statistically significant. Because of the strength
of these results, we intend to pursue a Phase III clinical trial on
bronchiectasis and additional clinical work in severe chronic bronchitis and
ventilator-dependent patients. The Phase II results from the clinical trial of
rifalazil showed that the drug was well tolerated. However, there were 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 1999, we received
a two-year grant totaling $1.5 million from the Cystic Fibrosis Foundation to
help support the development of PA-1420. In 1999, we plan to begin a Phase I
clinical trial of this drug candidate. In September 1998, we acquired an
exclusive worldwide license from Bristol-Myers Squibb 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 strategy of developing a portfolio of aerosolized
antibiotics.
In May 1998, we acquired all rights of the Cystic Fibrosis Foundation in
TOBI. The foundation's rights in TOBI were acquired in return for three annual
payments to the foundation totaling $16.0 million.
Results of Operations
Years Ended December 31, 1998 and 1997
We had an operating loss in 1998, primarily due to the licensing of PA-1806
from Bristol-Myers Squibb. Excluding the $4.0 million initial license fee for
the aerosolized drug candidate, we would have reported income from operations of
$2.4 million for the year. The 1998 operating results reflected a planned
increase in operating expenses and costs incurred in manufacturing and marketing
TOBI, compared to 1997, when the drug was not on the market. In addition, we
continued to engage in research and development of potential new products.
Based on our current sales expectations for TOBI and planned increased
expenditures relating to the launch of TOBI in other markets, we anticipate that
we will incur a loss in 1999.
Revenues. Revenues in 1998 totaled $61.1 million, including $60.7 million
from TOBI sales. Research grants and royalties generated the balance of
$368,000. Revenues for 1997 were $442,000, which were entirely generated by
research grants and royalties. We now know that sales in the fourth quarter of
1998 were not as indicative of first quarter 1999 sales as we had anticipated
and in fact, first quarter 1999 sales will be below our earlier expectations. To
increase TOBI sales and further penetrate the U.S. cystic fibrosis market, we
are working 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 also intend to introduce TOBI in international
markets, such as Canada and the U. K. However, there can be no assurance that
our efforts will be successful.
Operating Expenses. We incurred total operating expenses of $62.6 million
in 1998, an increase of $24.0 million from $38.6 million in 1997. The costs of
manufacturing and marketing TOBI accounted for the majority of the increase. The
$4.0 million license fee to Bristol-Myers Squibb also represents a significant
portion 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 production and marketing of TOBI expand further and
research and development efforts progress.
Cost of sales was $9.6 million in 1998. We did not incur such costs in
1997 because sales did not begin until 1998. We expect cost of sales as a
percentage of sales to rise in 1999 as production volume is
16
<PAGE>
adjusted for revised sales expectations and as we introduce TOBI in markets
outside the U. S. Our research and development expense for 1998 increased by
$1.0 million to $29.0 million from $28.0 million in 1997. Selling, general and
administrative expenses increased to $20.1 million in 1998 from $10.6 million in
1997. The increase in those expenses primarily reflects the costs associated
with supporting our sales and marketing effort, adding administrative staff and
developing a sales and marketing program in Europe.
Net Income (Loss). We had an operating loss of $1.6 million in 1998, a
decrease of $36.6 million from the operating loss of $38.2 million in 1997.
This decline in operating loss was due to TOBI sales revenues in 1998.
Including net other income (primarily income from investment securities), our
net income for 1998 was $1.9 million, compared to a net loss of $33.0 million in
1997. In 1998, net investment income decreased by $1.2 million to $4.1 million
from $5.3 million in 1997. The decrease was primarily due to lower average
invested cash balances. Interest expense in 1998 totaled $493,000, 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
1997.
Years Ended December 31, 1997 and 1996
Revenues from grants and royalties were $442,000 in 1997, an increase of
$2,000 from 1996. Revenues were comprised of income received from a two-year
competitive grant from the FDA and royalties from sales of a proprietary
combinatorial chemistry system invented by PathoGenesis and Bohdan Automation,
Inc.
Research and development expense increased by $7.3 million to $28.0 million
in 1997 from $20.7 million in 1996. This increase was primarily due to
increases in personnel and professional costs relating to clinical development,
filing of a New Drug Application in the U.S., and costs related to registration
of TOBI in Europe. General and administrative expense increased by $6.4 million
to $10.6 million in 1997 from $4.2 million in 1996. Such increase was due to
higher personnel and professional costs relating to marketing and recruiting.
We implemented a sales and marketing program in the second half of 1997.
Investment income, net increased by $2.0 million to $5.3 million in 1997
from $3.3 million in 1996. This increase was due to higher invested balances.
Liquidity and Capital Resources
Prior to 1998, we relied principally on equity financing to fund our
operations and capital expenditures.
Our combined cash, cash equivalents and investment securities totaled $55.0
million at December 31, 1998, a decrease of $24.0 million from the balance of
$79.0 million at December 31, 1997. 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 obtained a $10.0 million revolving line of
credit from Harris Trust and Savings Bank. We expect a net cash inflow from
operations of approximately $1.0 million to $3.0 million for 1999. We expect to
incur capital expenditures of approximately $6.0 million to $7.0 million in
1999. In addition, the second installment payment of $5.3 million to the Cystic
Fibrosis Foundation will be due in May 1999. This cash flow projection does not
include the effects of any licensing or collaboration agreements which we may
enter into in 1999.
The primary uses of cash and investments during 1998 were to finance our
operations and working capital requirements. Accounts receivable and
inventories increased by $11.0 million and $5.0 million, respectively, in 1998.
Net cash used in operating activities totaled $9.6 million for 1998, compared to
$32.6 million in 1997. The decrease in net cash used resulted principally from
cash generated from sales of TOBI, which was launched at the beginning of 1998.
In addition, we made the first installment payment of $5.3 million for the
rights in TOBI acquired from the Cystic Fibrosis Foundation, and purchased
property and equipment totaling $10.6 million in 1998. At December 31, 1998,
our working capital was $65.2 million and current ratio was 5.45 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
17
<PAGE>
less. We do not invest in derivative financial instruments, as defined by
Statement of Financial Accounting Standards No. 119 (SFAS 119), Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments.
At December 31, 1998, we had tax net operating loss carryforwards of
approximately $90.0 million and research and experimentation tax credit
carryforwards of approximately $1.2 million, which will begin to expire in 2007.
We also have orphan drug credits of approximately $5.0 million, which will
expire beginning in 2007.
Year 2000
Many computer systems may experience difficulty in 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.
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
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.
Item 7A. 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.
Interest Rate Risk
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 issuers. 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 December 31,
1998, we owned $3.1 million in government debt instruments and $43.8 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.
18
<PAGE>
Item 8. Consolidated Financial Statements
The consolidated financial statements for the fiscal year ended
December 31, 1998 appear beginning on page F-1 of this annual report on
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of Registrant
The information appearing under the captions "Election of Directors,"
"Executive Officers" and "Security Ownership of Certain Beneficial Owners and
Management -- Did directors and executive officers comply with Section 16(a)
beneficial ownership report requirements in 1998?" in the proxy statement for
the annual meeting of stockholders to be held on June 2, 1999, is incorporated
in this report by reference.
Item 11. Executive Compensation
Information appearing under the caption "Executive Compensation" in the
proxy statement for the 1999 annual meeting is incorporated in this report by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information included under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the proxy statement for the 1999 annual
meeting is incorporated in this report by reference.
Item 13. Certain Relationships and Related Transactions
None.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed As a Part of This Report
(1) Financial Statements. PathoGenesis' consolidated balance sheets as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998, together with the
report of its Independent Auditors, appear beginning on page F-1.
(2) Financial Statement Schedule. The following schedule supporting the
foregoing consolidated financial statements for the year ended
December 31, 1998, is filed as part of this Form 10-K.
Schedule II. Valuation and Qualifying Accounts -- page 22.
Report of Independent Auditors on Schedule -- page 23
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits. The exhibits to this report are listed in the Exhibit Index
included at the end of this report. Included in the exhibits listed
in the Index are the following exhibits which constitute management
contracts or compensatory plans or arrangements:
10.3 Employment Agreement between the Company and A. Bruce
Montgomery, dated September 19, 1995
10.4 Employment Agreement between the Company and Marc F. Wipperman,
effective as of July 1, 1996
10.26 1992 Stock Option Plan
10.27 1996 Non-Employee Director Plan
10.28 1997 Stock Option Plan
10.32 Form of Change in Control Employment Agreement for certain key
employees
(b) Reports on Form 8-K
PathoGenesis filed a report on Form 8-K on October 15, 1998, upon entering
into a license agreement with Bristol-Myers Squibb.
(c) Exhibits
The exhibits to this report are listed in the Exhibit Index which appears
after the signature page of this report and is hereby incorporated by reference.
21
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
Valuation and Qualifying Accounts
Year Ended December 31, 1998
Balance at Additions
beginning of charged to Balance at end
year product sales Deductions of year
------------------------------------------------------------------------------------
Year ended December 31, 1998
<S> <C> <C> <C> <C>
Allowance for discounts, returns,
bad debts, chargebacks and rebates $ -- $3,554,436 $2,003,572 $1,550,864
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON SCHEDULE
The Board of Directors and Stockholders
PathoGenesis Corporation:
Under the date of January 25, 1999 except as to note 11 which is as of March 29,
1999, we reported on the consolidated balance sheets of PathoGenesis Corporation
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, as contained in the 1998
annual report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the consolidated financial
statement schedule of valuation and qualifying accounts for the year ended
December 31, 1998. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Seattle, Washington
January 25, 1999
23
<PAGE>
PathoGenesis Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
-------------
<S> <C>
Independent Auditors' Report....................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997....................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996................................................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996..................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996................................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PathoGenesis Corporation:
We have audited the accompanying consolidated balance sheets of PathoGenesis
Corporation and subsidiaries (Company) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PathoGenesis
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Seattle, Washington
January 25, 1999,
except as to note 11,
which is as of
March 29, 1999
F-2
<PAGE>
PATHOGENESIS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
Assets 1998 1997
Current assets: ------------------ ------------------
<S> <C> <C>
Cash and cash equivalents $ 8,139,153 $ 5,171,591
Investment securities 46,868,390 73,869,541
Accounts receivable, net 10,961,242 --
Interest receivable 427,618 656,396
Inventories 9,907,916 4,935,758
Other current assets 3,480,022 2,556,409
------------------ ------------------
Total current assets 79,784,341 87,189,695
------------------ ------------------
Restricted investment 675,000 675,000
Property and equipment, at cost:
Land 3,194,923 --
Building and improvements 1,515,543 --
Leasehold improvements 9,367,898 7,941,149
Furniture and equipment 13,263,162 8,805,566
------------------ ------------------
27,341,526 16,746,715
Less accumulated depreciation and amortization 9,704,385 7,138,050
------------------ ------------------
Net property and equipment 17,637,141 9,608,665
------------------ ------------------
License rights, net 14,562,129 --
Other assets 107,136 122,189
------------------ ------------------
$ 112,765,747 $ 97,595,549
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,180,909 $ 1,168,865
Compensation and benefits 2,580,790 1,461,167
Clinical development costs 199,869 2,885,107
Accrued royalties 827,739 --
License payable 2,000,000 --
Other accrued expenses 2,691,572 2,591,660
Current portion of long-term liability 5,149,847 --
------------------ ------------------
Total current liabilities 14,630,726 8,106,799
------------------ ------------------
Long-term liability, net of current portion 4,724,630 --
Commitments and subsequent events
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;
16,328,580 shares and 16,238,649 shares issued and outstanding
at December 31, 1998 and 1997, respectively 16,329 16,239
Additional paid-in capital 193,188,363 191,613,454
Deferred compensation (987,156) (1,295,145)
Accumulated other comprehensive income (loss) - unrealized gain (loss) on
investment securities 133,117 (22,635)
Accumulated deficit (98,940,262) (100,823,163)
------------------ ------------------
Total stockholders' equity 93,410,391 89,488,750
------------------ ------------------
$ 112,765,747 $ 97,595,549
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PATHOGENESIS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -------------------
Revenues:
<S> <C> <C> <C>
Sales $ 60,684,091 $ -- $ --
Grants and royalties 367,673 441,880 439,880
------------------ ----------------- -------------------
Total revenues 61,051,764 441,880 439,880
------------------ ----------------- -------------------
Operating expenses:
Cost of sales 9,555,213 -- --
Research and development 28,992,714 28,017,738 20,673,049
Selling, general and administrative 20,073,736 10,582,072 4,241,339
License fee 4,000,000 -- --
------------------ ----------------- -------------------
Total operating expenses 62,621,663 38,599,810 24,914,388
------------------ ----------------- -------------------
Operating loss (1,569,899) (38,157,930) (24,474,508)
------------------ ----------------- -------------------
Other income (expense):
Investment income, net 4,055,821 5,278,098 3,293,782
Interest expense (492,551) -- --
Other expense (110,470) (157,898) (83,504)
------------------ ----------------- -------------------
Net other income 3,452,800 5,120,200 3,210,278
------------------ ----------------- -------------------
Net income (loss) $ 1,882,901 $ (33,037,730) $ (21,264,230)
================== ================= ===================
Income (loss) per common share:
Basic $ 0.12 $ (2.10) $ (1.66)
================== ================= ===================
Diluted $ 0.11 $ (2.10) $ (1.66)
================== ================= ===================
Weighted average common shares outstanding:
Basic 16,265,452 15,704,151 12,829,386
Diluted 17,155,691 15,704,151 12,829,386
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PATHOGENESIS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Number of
common Additional
shares Common paid-in Deferred
Description outstanding stock capital compensation
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 10,897,715 $ 10,898 $ 89,520,221 $ --
Redemption of fractional shares (48) -- (576) --
Common stock issued in payment of license fees 6,250 6 62,494 --
Repurchase of common stock for cash (45,000) (45) (3,555) --
Sale of common stock, net of issue costs of $3,213,410 2,875,000 2,875 43,502,465 --
Exercise of options and warrants 196,843 197 1,646,871 --
Comprehensive loss -- -- -- --
Net loss -- -- -- --
Unrealized loss on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
----------- ----------- ------------ -------------
Balances at December 31, 1996 13,930,760 13,931 134,727,920 --
Shares issued for cash, net of issue costs of $3,546,639 2,100,000 2,100 53,151,262 --
Exercise of options and warrants 207,889 208 2,140,248 --
Deferred compensation from granting of stock options -- -- 1,594,024 (1,594,024)
Compensation expense for stock options -- -- -- 298,879
Comprehensive loss -- -- -- --
Net loss -- -- -- --
Unrealized gain on investment securities -- -- -- --
Total comprehensive loss -- -- -- --
----------- ----------- ------------ -------------
Balances at December 31, 1997 16,238,649 16,239 191,613,454 (1,295,145)
Exercise of stock options 89,931 90 1,373,827 --
Deferred compensation from granting of stock options -- -- 201,082 (201,082)
Compensation expense from stock options -- -- -- 509,071
Comprehensive income -- -- -- --
Net income -- -- -- --
Unrealized gain on investment securities -- -- -- --
Total comprehensive income -- -- -- --
----------- ----------- ------------ -------------
Balances at December 31, 1998 16,328,580 $ 16,329 $193,188,363 $ (987,156)
=========== =========== ============ =============
Accumulated
other
comprehensive Total
income Accumulated stockholders'
Description (loss) deficit equity
----------- ----------- ------------
Balances at December 31, 1995 $ 38,458 $(46,521,203) $ 43,048,374
Redemption of fractional shares -- -- (576)
Common stock issued in payment of license fees -- -- 62,500
Repurchase of common stock for cash -- -- (3,600)
Sale of common stock, net of issue costs of $3,213,410 -- -- 43,505,340
Exercise of options and warrants -- -- 1,647,068
Comprehensive loss -- -- --
Net loss -- (21,264,230) (21,264,230)
Unrealized loss on investment securities (68,662) -- (68,662)
------------
Total comprehensive loss -- -- (21,332,892)
----------- ----------- ------------
Balances at December 31, 1996 (30,204) (67,785,433) 66,926,214
Shares issued for cash, net of issue costs of $3,546,639 -- -- 53,153,362
Exercise of options and warrants -- -- 2,140,456
Deferred compensation from granting of stock options -- -- --
Compensation expense for stock options -- -- 298,879
Comprehensive loss -- -- --
Net loss -- (33,037,730) (33,037,730)
Unrealized gain on investment securities 7,569 -- 7,569
-----------
Total comprehensive loss -- -- (33,030,161)
----------- ----------- ------------
Balances at December 31, 1997 (22,635) (100,823,163) 89,488,750
Exercise of stock options -- -- 1,373,917
Deferred compensation from granting of stock options -- -- --
Compensation expense from stock options -- -- 509,071
Comprehensive income -- -- --
Net income -- 1,882,901 1,882,901
Unrealized gain on investment securities 155,752 -- 155,752
-----------
Total comprehensive income -- -- 2,038,653
----------- ----------- ------------
Balances at December 31, 1998 $ 133,117 $(98,940,262) $ 93,410,391
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PATHOGENESIS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,882,901 $(33,037,730) $ (21,264,230)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,566,335 2,076,900 1,618,982
Amortization of license rights 153,131 -- --
Amortization of discount on long-term liability 492,551 -- --
Amortization of investment premiums (discounts) -- 33,082 (33,083)
Compensation expense from stock options 509,071 298,879 --
Common stock issued in payment of license fees -- -- 62,500
Loss on sale of property and equipment -- 42,643 315
Changes in certain assets and liabilities:
Accounts receivable (10,961,242) -- --
Interest receivable 228,778 (357,959) 466,779
Inventories (4,972,158) (4,935,758) --
Other current assets (923,613) (1,733,317) (151,381)
Other assets 15,053 (21,819) (92,612)
Accounts payable 12,044 356,606 (823,452)
Compensation and benefits 1,119,623 686,909 (85,204)
Clinical development costs (2,685,238) 2,066,478 (57,503)
Accrued royalties 827,739 -- --
License payable 2,000,000 -- --
Other accrued expenses 99,912 2,022,592 487,595
Other -- (98,273) (363,713)
------------- ------------- -------------
Net cash used in operating activities (9,635,113) (32,600,767) (20,235,007)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of investment securities (47,736,796) (177,646,664) (116,498,821)
Sales of investment securities 74,893,699 149,653,588 106,757,801
Purchases of property and equipment (10,594,811) (4,370,202) (961,784)
Proceeds from sale of property and equipment -- 56,000 100
Purchase of license rights (5,333,334) -- --
------------- ------------- -------------
Net cash provided by (used in)
investing activities 11,228,758 (32,307,278) (10,702,704)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 53,153,362 43,505,340
Repurchase of common stock -- -- (4,176)
Stock option and warrant exercises 1,373,917 2,140,456 1,647,068
------------- ------------- -------------
Net cash provided by financing activities 1,373,917 55,293,818 45,148,232
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 2,967,562 (9,614,227) 14,210,521
Cash and cash equivalents at beginning of year 5,171,591 14,785,818 575,297
------------- ------------- -------------
Cash and cash equivalents at end of year $ 8,139,153 $ 5,171,591 $ 14,785,818
============= ============= =============
Supplemental schedule of noncash investing and
financing activities -
Seller-financed acquisition of license rights $ 9,381,926 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PATHOGENESIS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, December 31, 1998 and 1997
(1) Organization and Summary of Significant Accounting Policies
Business
PathoGenesis Corporation is a pharmaceutical company that develops drugs to
treat chronic infectious diseases where there is a significant need for
improved therapy. Before 1998, the company was in the development stage. We
market TOBI(R) (tobramycin solution for inhalation), an inhaled antibiotic,
in the U.S. for management of P. aeruginosa lung infections in patients
with cystic fibrosis. In addition, PathoGenesis is developing other drug
candidates to treat serious chronic lung infections, including those common
in cystic fibrosis, bronchiectasis and tuberculosis patients.
Concentrations of Risk
Substantially all our revenue is currently generated through sales of TOBI.
Our drug candidates other than TOBI are not expected to be commercially
available for at least several years, if at all. Therefore, a significant
change in demand or pricing for TOBI, or a dramatic change in technology
could have a material impact on our operations.
PathoGenesis uses wholesale distributors of pharmaceutical products as the
principal means of distributing TOBI to clinics, hospitals and pharmacies.
For the year ended December 31, 1998, sales to three large wholesale
distributors were 65% of total sales. At December 31, 1998, accounts
receivable from these distributors were 63% of total accounts receivable.
We purchase our primary basic raw material, bulk powdered tobramycin, from
two of the principal worldwide suppliers of the drug. We anticipate that
either one of these suppliers alone will be able to supply sufficient
quantities to meet current needs. However, there can be no assurance that
these suppliers will be able to meet future demand in a timely and
cost-effective manner. Our operations could be adversely affected by an
interruption or reduction in the supply of raw material.
PathoGenesis has entered into contracts with third parties for the
production and packaging of TOBI. Our reliance on external sources of
production and packaging can be shifted, over time, to alternative sources
should such changes be necessary. However, if the contract manufacturers
become unable to produce or package sufficient quantities of TOBI due to
work stoppages or other factors beyond our control, our operations could be
disrupted until alternative sources are secured.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the company and its wholly owned subsidiaries, PathoGenesis Limited and
PathoGenesis Canada Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
All investments in debt instruments with a contractual maturity of three
months or less at the date of purchase are considered to be cash
equivalents. Cash equivalents totaled $3,990,527 at December 31, 1997.
There were no cash equivalents at December 31, 1998.
Investment Securities
Our investment securities are classified as available-for-sale and carried
at market value, with unrealized gains and losses excluded from the
consolidated statements of operations and reported in
F-7
<PAGE>
other comprehensive income (loss). Realized gains and losses on the sales of
investment securities are determined on the specific identification method
and included in investment income, net.
Inventories
Inventories are stated at the lower of cost, as determined by the first-in,
first-out method, or market.
Depreciation and Amortization
Improvements, furniture and equipment are depreciated using the straight-line
method over the assets' estimated useful lives of 5 to 10 years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the assets' estimated useful lives or the remaining term of the lease. Our
building in England is depreciated using the straight-line method over its
estimated useful life of 40 years.
Revenues
Product sales are recognized upon shipment. We perform ongoing credit
evaluations of our customers and generally do not require collateral.
Product sales are recorded net of reserves for estimated chargebacks,
returns, discounts and rebates. Allowances for discounts, returns, bad
debts, chargebacks and rebates, which are netted against accounts receivable,
totaled $1,550,864 at December 31, 1998.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Income Taxes
Deferred income taxes are provided based on the estimated future tax effects
of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for net
operating loss and research and experimentation credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Fair Value of Financial Instruments
Our financial instruments other than investments consist of cash and cash
equivalents, accounts receivable, interest receivable, accounts payable and a
long-term contract payable. The fair value of these financial instruments
approximates their carrying amount due to their short-term nature or current
market indicators.
F-8
<PAGE>
Comprehensive Income (Loss)
As of January 1, 1998, we adopted Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, which establishes new rules
for the reporting and display of comprehensive income and its components.
SFAS No. 130 requires companies to report, in addition to net income, other
components of comprehensive income, including unrealized gains or losses on
available-for-sale securities. Unrealized gain on investment securities
included in comprehensive income for 1998 is net of the reclassification
adjustment for losses included in net income of approximately $24,700.
Adoption of this standard had no effect on our results of operations or
financial position as reported in the financial statements.
Business Segments
In 1998, we adopted 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.
Stock-Based Compensation
We account for stock option plans for employees in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense related to employee stock options is recorded if, on the
date of grant, the fair value of the underlying stock exceeds the exercise
price. We apply the disclosure-only requirements of SFAS No. 123, Accounting
for Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees, and to
provide pro forma results of operations disclosures for employee stock option
grants made in 1995 and subsequent years as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to those transactions.
Income (Loss) Per Share
Basic income (loss) per share is computed on the basis of the weighted
average number of shares of common stock outstanding for the year. Diluted
income (loss) per share is computed on the basis of the weighted average
number of shares of common stock plus dilutive potential shares outstanding
using the treasury stock method. Potential dilutive shares of common stock
consist of shares issuable to holders of unexercised employee stock options
and warrants outstanding.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of their carrying amount
or fair value less costs to sell.
F-9
<PAGE>
(2) Investment Securities
The following summarizes our investment securities at December 31:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------------- ----------------- ---------------- ------------
1998:
<S> <C> <C> <C> <C>
Federal mortgage notes 2,629,558 12,350 (4,034) 2,637,874
Municipal bonds $ 452,362 $ 52 $ -- $ 452,414
Corporate obligations 43,653,353 182,268 (57,519) 43,778,102
--------------- -------------- --------------- ------------
$ 46,735,273 $ 194,670 $ (61,553) $ 46,868,390
================ ============== =============== ============
1997:
U.S. Treasury notes $ 6,165,367 $ 5,856 $ -- $ 6,171,223
Federal mortgage notes 7,255,781 19,958 (4,707) 7,271,032
Municipal bonds 1,199,960 400 -- 1,200,360
Corporate obligations 59,271,068 76,132 (120,274) 59,226,926
---------------- -------------- ---------------- -----------
$ 73,892,176 $ 102,346 $ (124,981) $ 73,869,541
================ ============== ================ ===========
</TABLE>
Amortized cost and market value of investment securities at December 31,
1998, by contractual maturity are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Market
Maturities cost value
-------------------- --------------------
<S> <C> <C>
Due in 1 year or less $ 7,949,469 $ 7,928,646
Due between 1 year to 5 years 26,830,016 26,925,399
Due between 5 years to 10 years 8,004,626 8,064,220
Due after 10 years 3,951,162 3,950,125
-------------------- --------------------
$ 46,735,273 $ 46,868,390
==================== ====================
</TABLE>
Investment income, net includes interest of $4,098,440, $5,216,693 and
$3,412,097 earned on investments and gains (losses) of $(42,619), $61,405
and $(118,315) realized upon the sale of investments for 1998, 1997 and
1996, respectively.
(3) Inventories
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Finished goods $ 4,174,206 $ 2,096,300
Work in progress 2,747,380 733,068
Raw materials and supplies 2,986,330 2,106,390
------------- ------------
$ 9,907,916 $ 4,935,758
============= ============
</TABLE>
F-10
<PAGE>
(4) License Agreement
Effective September 30, 1998, we entered into a license agreement with
Bristol-Myers Squibb to obtain exclusive worldwide rights to PA-1806, a
patented chemical compound in the monobactam class of antibiotics.
PathoGenesis obtained the rights to PA-1806 for inhalation, non-systemic
administration of the compound for the treatment or prophylaxis of
respiratory tract infectious diseases. The initial payment obligation for
this license of $4.0 million was charged to expense as license fee. Payment
of $2.0 million was made in October 1998, with the $2.0 million balance
paid in January 1999. Subsequent payments totaling $4.0 million could be
made upon accomplishment of certain milestones. We will pay a royalty on
net sales of products using the chemical compound.
(5) Acquisition of License Rights
Effective May 29, 1998, we entered into an agreement with the Cystic
Fibrosis Foundation to acquire all the foundation's rights in TOBI. In
1994, we entered into license agreements with the foundation and another
party to obtain worldwide rights to TOBI. Pursuant to our license agreement
with the foundation, we were required to make royalty payments of 2.5% on
net product sales through the patent expiration date of TOBI. We have
acquired the foundation's rights in TOBI for payment of $16.0 million, to
be made in three equal annual installments. The first payment was made on
May 29, 1998, the closing date of the agreement.
The purchase amount has been recorded on our consolidated balance sheet at
the net present value of the required cash payments, using a discount rate
of 9%. The value of the license rights is being amortized to cost of sales
over the remaining life of the TOBI patent. Accumulated amortization
totaled $153,131 at December 31, 1998.
A corresponding discounted liability has been recorded for the remaining
installment payment obligations to the foundation. The discount is being
amortized to interest expense over the two-year installment term, using the
effective interest method. The $10,666,666 portion of the purchase price
payable after the closing date is secured by an irrevocable standby letter
of credit issued by a bank. This letter of credit is secured by our
investment securities.
(6) Stockholders' Equity
Common Stock
Effective June 25, 1997, our stockholders approved an increase in the
authorized number of shares of PathoGenesis' $0.001 par value common stock
to 60,000,000 shares.
Stock Option Plans
In 1992, we adopted the 1992 Stock Option Plan, under which 1,500,000
shares of common stock were authorized to be reserved for grants. At
December 31, 1998, 29,345 shares remained available for future awards.
Options granted under that plan may be designated as qualified incentive
stock options or nonqualified incentive stock options at the discretion of
the compensation and nominating committee of the board of directors.
In 1997, we adopted the 1997 Stock Option Plan, under which 2,000,000
shares of common stock were reserved for grants. At December 31, 1998,
724,081 shares remained available for future awards. Options granted under
that plan may be designated as qualified incentive stock options or
nonqualified incentive stock options at the discretion of the compensation
and nominating committee of the board of directors. A number of options
were granted in 1997 under the plan before the plan received stockholder
approval. This resulted in deferred compensation of approximately
$1,594,000, based on the excess of the fair market value of the stock at
the time of plan approval (measurement date) over the exercise price,
F-11
<PAGE>
which was based on the fair value of the stock at the time of option grant.
Deferred compensation of approximately $201,000 was recognized in 1998 as a
result of option grants to consultants. Deferred compensation is being
amortized on the straight-line method over the vesting period of the options.
In 1996, we adopted the 1996 Directors Stock Option Plan (Directors Plan) for
nonemployee directors, under which 300,000 shares of common stock were
reserved for grants. Upon adoption of the 1997 Stock Option Plan, the
Directors Plan was terminated with no further grants to be made.
Generally, options vest over a four-year period in installments of 25% each
year beginning one year from the date of grant. However, certain options can
vest upon granting. Vested options may be exercised at any time before their
expiration date. All options expire not later than 10 years from the date of
grant. Qualified stock options are exercisable at not less than the fair
market value of the stock at the date of grant and nonqualified stock options
are exercisable at prices determined at the discretion of the board of
directors, but not less than 85% of the fair market value of the stock at the
date of grant.
A summary of stock options follows:
<TABLE>
Weighted
average
1992 Directors 1997 exercise
Stock Plan Plan Stock Plan price
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 1,025,653 - - $ 10.83
Granted 438,850 42,000 - $ 16.18
Canceled (69,941) - - $ 11.17
Exercised (169,787) - - $ 10.11
---------------- -------------- -------------- --------------
Balances at December 31, 1996 1,224,775 42,000 - $ 12.73
Granted 134,205 - 658,995 $ 26.04
Canceled (33,108) - (19,150) $ 18.52
Exercised (169,543) (8,000) - $ 12.10
---------------- -------------- -------------- --------------
Balances at December 31, 1997 1,156,329 34,000 639,845 $ 18.51
Granted - - 683,597 $ 34.95
Canceled (20,125) - (47,523) $ 27.23
Exercised (74,766) - (15,165) $ 15.28
---------------- -------------- -------------- --------------
Balances at December 31, 1998 1,061,438 34,000 1,260,754 $ 23.15
================ ============== ============== ==============
</TABLE>
The weighted average fair value of options granted was $17.76, $14.06 and
$8.87 in 1998, 1997 and 1996, respectively.
F-12
<PAGE>
Had compensation cost for our stock option plans been determined consistent
with FASB Statement No. 123, our net income (loss) and income (loss) per
share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Net income (loss) - as reported $ 1,882,901 $ (33,037,730) $ (21,264,230)
Net loss - pro forma (7,745,344) (38,075,062) (23,930,975)
Income (loss) per share - as reported:
Basic .12 (2.10) (1.66)
Diluted .11 (2.10) (1.66)
Loss per share - pro forma:
Basic (.48) (2.42) (1.87)
Diluted (.48) (2.42) (1.87)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions used for
grants in 1998, 1997 and 1996: dividend yield of 0.0% for all years;
expected volatility of 56% to 59% for 1998, 58% to 64% for 1997 and 57% to
67% for 1996; risk-free interest rate of 4.31% to 5.72% for 1998, 5.72% to
6.44% for 1997 and 5.18% to 6.85% for 1996; expected lives from three to six
years for all years.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Total Options Exercisable Options
----------------------------------------------------------------------------------- -----------------------------------
Weighted
average Weighted Weighted
Range of exercise remaining average average
prices Number of contractual life exercise Number of exercise
shares price shares price
-------------------- ---------------- ------------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ 10.00 260,375 4.3 years $ 10.00 260,375 $ 10.00
12.00 339,981 6.3 years 12.00 309,033 12.00
13.75 to 14.75 120,199 7.5 years 14.54 58,375 14.55
16.13 to 16.75 227,478 7.1 years 16.26 157,154 16.26
22.00 to 22.50 331,350 8.0 years 22.23 124,548 22.20
25.00 to 26.88 214,487 8.2 years 25.52 85,874 25.58
27.00 to 28.75 135,275 8.7 years 28.27 25,637 28.37
29.00 to 30.25 59,692 9.5 years 29.94 16,614 29.94
32.63 to 34.25 108,950 9.4 years 33.78 48,000 33.25
35.00 to 36.81 450,600 9.0 years 35.76 13,250 35.76
37.13 to 38.00 77,805 9.0 years 37.54 24,455 37.71
39.00 to 54.88 30,000 9.8 years 41.91 -- --
---------------- ----------------
$ 10.00 to 54.88 2,356,192 7.7 years $ 23.15 1,123,315 $ 16.82
================ ================
</TABLE>
F-13
<PAGE>
Common Stock Warrants
As of December 31, 1998, we had outstanding warrants, with expiration terms
ranging from April 22, 2000 to February 6, 2001, to purchase 58,223 shares of
common stock which are fully exercisable at the following per share prices:
<TABLE>
<CAPTION>
Per share
Shares price
-------- ---------
<S> <C>
3,375 $ 12.00
54,848 14.40
--------------------------------------
58,223 $ 12.00-14.40
--------------------------------------
</TABLE>
Shareholder Rights Plan
The board of directors adopted a Shareholder Rights Plan in 1997 and declared
a dividend of one right for each outstanding share of common stock. Such
rights only become exercisable after a person or group, whose action has not
received prior approval from the board of directors, acquires beneficial
ownership of, or commences a tender or exchange offer for, 15% or more of our
common stock. Each right then may be exercised to acquire one one-thousandth
of a share of preferred stock, designated as Series A Junior Preferred Stock,
at an exercise price of $250, subject to adjustment. We may redeem the
rights at $0.01 per right at any time until the 10th day following the public
announcement that a 15% position has been acquired. The rights expire on
June 26, 2007.
Employee Stock Purchase Plan
On June 3, 1998, we adopted an employee stock purchase plan, effective
July 1, 1998, for all eligible employees. Under the plan, shares of
PathoGenesis common stock may be purchased semi-annually at 85% of the fair
market value on the first or on the last day of each semi-annual period,
whichever is less. The aggregate price for shares purchased by an employee
may not exceed $25,000 annually (subject to limitations imposed by the
Internal Revenue Code). The plan expires on June 30, 2008 and a total of
200,000 shares are available for purchase under the plan. In January 1999,
13,079 shares of common stock were issued under the plan pursuant to the
semi-annual period ended December 31, 1998.
F-14
<PAGE>
(7) Income (Loss) Per Share
The following table sets forth the computation of basic and diluted income
(loss) per share of common stock:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ------------------------
<S> <C> <C> <C>
Basic income (loss) per share computation:
Numerator:
Net income (loss) $ 1,882,901 $(33,037,730) $(21,264,230)
Denominator:
Weighted-average common shares 16,265,452 15,704,151 12,829,386
--------------------- --------------------- ------------------------
Basic income (loss) per share $ 0.12 $ (2.10) $ (1.66)
===================== ===================== ========================
Diluted income (loss) per share computation:
Numerator:
Net income (loss) $ 1,882,901 $(33,037,730) $(21,264,230)
--------------------- --------------------- ------------------------
Denominator:
Weighted-average common shares 16,265,452 15,704,151 12,829,386
Effect of dilutive securities:
Common stock warrants 35,146 - -
Stock options 855,093 - -
--------------------- --------------------- ------------------------
Dilutive potential common shares 890,239 - -
--------------------- --------------------- ------------------------
Denominator for diluted income (loss) per
Share 17,155,691 15,704,151 12,829,386
--------------------- --------------------- ------------------------
Diluted income (loss) per share $ 0.11 $ (2.10) $ (1.66)
===================== ===================== ========================
</TABLE>
Options and warrants to purchase 253,705, 2,118,198 and 1,618,163 shares of
common stock during 1998, 1997, and 1996, respectively, were not included in
the computation of diluted income (loss) per share because the representative
share increments would be antidilutive.
(8) Income Taxes
Our 1998 reported federal income taxes differ from the amount computed by
applying the U.S. federal income tax rate of 34% to pretax income due to the
utilization of net operating loss carryforwards previously offset by a
valuation allowance. Taxes reported in 1997 and 1996 differ due to expected
limitations on utilizing net operating losses.
F-15
<PAGE>
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- ------------------
Deferred tax assets:
<S> <C> <C>
Orphan drug credit carryforwards $ 5,010,532 $ 5,010,532
License agreements 1,571,066 411,894
Research and experimentation credit carryforwards 1,238,499 970,285
Net operating loss carryforwards 30,482,177 32,293,864
Other 1,482,073 1,037,985
-------------------- ------------------
Total gross deferred tax assets 39,784,347 39,724,560
Less valuation allowance 39,784,347 39,724,560
-------------------- ------------------
Net deferred tax assets $ -- $ --
==================== ==================
</TABLE>
The valuation allowance for deferred tax assets increased by $59,787 and
$14,035,244 in 1998 and 1997, respectively.
At December 31, 1998, we had net operating loss carryforwards of
approximately $89,653,000, research and experimentation credit
carryforwards of approximately $1,238,000 and orphan drug credit
carryforwards of approximately $5,011,000, which are available to offset
future federal taxable income and income taxes, respectively, if any, and
expire beginning in 2007.
(9) Commitments
Leases
We lease various office and research facilities under noncancelable
operating leases which expire between 2001 and 2003. With respect to one
lease, we are required to maintain collateral on a letter of credit in the
amount of a $675,000 certificate of deposit which is recorded as a
restricted investment.
Minimum lease payments under noncancelable operating leases and related
sublease income as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Lease payments Sublease income
----------------- -----------------
<S> <C> <C>
1999 2,469,000 333,000
2000 2,474,000 333,000
2001 2,440,000 --
2002 1,819,000 --
2003 312,000 --
---------------- -----------------
$ 9,514,000 $ 666,000
================= =================
</TABLE>
Rent expense for operating leases was approximately $2,531,000, $2,002,000
and $1,026,000 for 1998, 1997 and 1996, respectively.
Included in rent expense for 1997 and 1996 are payments to a partnership in
which a member of the board of directors and the corporate secretary are
partners of approximately $37,500 and $36,200, respectively.
F-16
<PAGE>
Employment and Consulting Agreements
We have employment and consulting agreements with certain key executives,
research scientists and advisors. The terms of these agreements range from
two to five years, provide for discretionary bonuses, as determined by our
board of directors, and provide for annual increases in compensation to be
determined at the discretion of the board of directors.
Approximate minimum compensation payments due pursuant to these employment
and consulting agreements are as follows:
<TABLE>
<S> <C>
1999 $ 465,000
2000 333,000
2001 100,000
---------
$ 898,000
=========
</TABLE>
(10) Collaboration Agreements
In 1997, we entered into a two-year research agreement with the Cystic
Fibrosis Foundation and the University of Washington to sequence the P.
aeruginosa genome to assist in the drug discovery process. Under that
agreement, we paid $1.0 million over the two-year period. As of
December 31, 1998, we had fulfilled our obligation under that agreement.
In May 1996, we entered into a distribution agreement with Bohdan
Automation, Inc., allowing Bohdan to manufacture and sell a proprietary
combinatorial chemistry system invented by PathoGenesis and Bohdan
scientists. We earned royalties of $86,000, $206,000 and $238,000 from this
arrangement during 1998, 1997 and 1996, respectively.
In 1994, we entered into license agreements with the Cystic Fibrosis
Foundation and Children's Hospital and Medical Center in Seattle to obtain
worldwide rights to TOBI. In 1998, we paid a total of $1.5 million in
milestone payments after TOBI received approval for marketing by the Food
and Drug Administration. We are responsible for sales, marketing,
manufacturing and regulatory affairs related to the product. Under the
license agreement with Children's Hospital and Medical Center, we pay a
2.5% royalty on net product sales. We acquired all the rights of the Cystic
Fibrosis Foundation in TOBI in 1998 (see Note 5).
(11) Subsequent Events
PathoGenesis Corporation, its chief executive officer and its chief
financial officer were named as defendants in two purported class action
lawsuits. Lipton v. PathoGenesis et al., C99-0419, and Green v.
PathoGenesis et al., C99-9439, were filed in the U.S. District Court for
the Western District of Washington on March 24, 1999 and March 26, 1999,
respectively. The suits were purportedly filed on behalf of all purchasers
of PathoGenesis common stock during the periods January 26, 1999 to March
22, 1999 and January 25, 1999 to March 22, 1999, respectively. Plaintiffs
in both suits allege claims for violation of Sections 10(b) and 20(a) of
the Securities Exchange Act and Rule 10b-5 under that Act in connection
with changes in the company's expected 1999 results and seek compensatory
damages in unspecified amounts. Plaintiffs are essentially alleging that
the company and its officers made knowingly false statements in January
1999 about anticipated 1999 results. We believe the allegations against
PathoGenesis and its officers in these lawsuits are without merit and
intend to contest the allegations vigorously.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Seattle, State of Washington, on March 30, 1999.
PathoGenesis Corporation
By: /s/ Wilbur H. Gantz
-------------------
Wilbur H. Gantz
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
- ------------------------------------------------- ------------------------------
<S> <C>
/s/ Wilbur H. Gantz Chairman, Chief Executive )
- ------------------------------------------------- Officer, President and )
Wilbur H. Gantz Director )
(Principal Executive Officer) )
)
/s/ Alan R. Meyer Executive Vice President, )
- ------------------------------------------------- Chief Financial Officer and )
Alan R. Meyer Director (Principal Financial )
and Accounting Officer) )
)
/s/ John L. Gordon Director )
- ------------------------------------------------- )
John L. Gordon )
)
/s/ Elizabeth Greetham Director )
- ------------------------------------------------- )
Elizabeth Greetham ) March 30,. 1999
)
/s/ Michael J. Montgomery Director )
- ------------------------------------------------- )
Michael J. Montgomery )
)
/s/ Arthur W. Nienhuis Director )
- ------------------------------------------------- )
Arthur W. Nienhuis )
)
/s/ Talat M. Othman Director )
- ------------------------------------------------- )
Talat M. Othman )
)
/s/ Eugene L. Step Director )
- ------------------------------------------------- )
Eugene L. Step )
)
/s/ James R. Tobin Director )
- ------------------------------------------------- )
James R. Tobin )
)
/s/ Fred Wilpon Director )
- ------------------------------------------------- )
Fred Wilpon )
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description of Exhibit
- --------- ------------------------------------------------------------------------------------------------
<C> <S>
3.1(a) Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 333-22297).
3.1(b) Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 4.1(b) to the Company's Registration Statement on Form S-8, Registration
No. 333-45571).
3.1(c) Certificate of Designations (incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8, Registration No. 333-45571).
3.1(d) Composite Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1(d)
to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 1998).
3.2 By-Laws, as amended through March 29, 1999.
4.1(a) Form of Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-97070).
4.1(b) Rights Agreement dated as of June 25, 1997 between the Company and Harris Trust and Savings
Bank, as Rights Agent, including the form of Right Certificate as Exhibit B (incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-K filed on July 10, 1997).
4.1(bb) First Amendment, dated as of March 8, 1998, to Rights Agreement between the Company and Harris Trust
and Savings Bank, as Rights Agent. (incorporated by reference to Exhibit 4.1(bb) to the Company's Annual
Report on Form 10-k for 1997)
4.1(c) Form of Right (included in Exhibit 4.1(b)).
4.2 PathoGenesis Corporation 1992 Stock Option Plan (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-1, Registration No. 33-97070).
4.3 1996 Non-Employee Director Plan (incorporated by reference to Exhibit 4.3 to the Company's
Annual Report on Form 10-K for 1995).
4.4 PathoGenesis Corporation 1997 Stock Option Plan (incorporated by reference to Annex A to the
Company's proxy statement dated April 29, 1997).
10.3 Form of Employment Agreement between the Company and A. Bruce Montgomery, dated September 19,
1995 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form
S-1, Registration No. 33-97070).
10.4 Employment Agreement between the Company and Marc F. Wipperman, effective as of July 1, 1996
(incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1,
Registration No. 333-22297).
10.6 Consulting Agreement between the Company and Sidney Altman, dated March 10, 1992 (incorporated
by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, Registration
No. 333-2956).
10.7 Consulting Agreement between the Company and Stephen Benkovic, dated March 26, 1992
(incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1,
Registration No. 33-97070).
10.8 Consulting Agreement between the Company and Lucy Shapiro, dated as of August 1, 1995
(incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1,
Registration No. 33-97070).
10.10 Consulting Agreement between the Company and Arnold Smith, dated October 1, 1996 (incorporated
by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, Registration
No. 333-22297).
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.11 Licensing Agreement between the Company and Kaneka Corporation, dated October 25, 1993 and amendment thereto, dated March
3, 1995 (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, Registration No.
33-97070).*
10.12 Supply Agreement between the Company and Kaneka Corporation, dated as of October 25, 1993 (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-1, Registration No. 33-97070).*
10.16 License Agreement between the Company and Children's Hospital and Medical Center, dated January 1, 1994 (incorporated by
reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, Registration No. 33-97070).*
10.17 License Agreement between the Company and the Cystic Fibrosis Foundation, dated January 1, 1994 (incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, Registration No. 33-97070).*
10.21(a) Lease for laboratory in Seattle, Washington, between David A. Sabey and Sandra L. Sabey and the Company, dated June 8,
1992 (the "Laboratory Lease"), as amended by the Second Amendment, dated November 16, 1992 (incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1, Registration No. 33-97070).
10.21(b) Third Amendment to the Laboratory Lease, dated August 1, 1996 (incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1, Registration No. 333-22297).
10.23(a) Lease for the Skokie, Illinois facility, between The Equitable Life Assurance Society of the United States and the
Company, dated October 1992 (the "Skokie Lease"), as amended, dated March 31, 1995 (incorporated by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-1, Registration No. 33-97070).
10.23(b) Amendment to Skokie Lease, dated April 30, 1996 (incorporated by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1, Registration No. 333-22297).
10.24 Lease for Annandale, New Jersey Facility, between Exxon Research and Engineering Company and the Company, dated November
25, 1996 (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1, Registration
No. 333-22297).
10.25 Rights Agreement dated as of June 25, 1997 between PathoGenesis Corporation and Harris Trust and Savings Bank, as Rights
Agent, including the form of Right Certificate as Exhibit B, and the First Amendment to Rights Agreement, dated as of
March 8, 1998 (included in Exhibits 4.1(b) and 4.1 (bb)).
10.26 1992 Stock Option Plan (included in Exhibit 4.2).
10.27 1996 Non-Employee Director Plan (included in Exhibit 4.3).
10.28 1997 Stock Option Plan (included in Exhibit 4.4).
10.29 Processing Services Agreement dated as of May 5, 1998, between PathoGenesis Corporation and Automatic Liquid Packaging,
Inc. (incorporated by reference to Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998).*
10.30 Agreement dated as of May 29, 1998, between PathoGenesis Corporation and the Cystic Fibrosis Foundation (incorporated by
reference to Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the Three Months Ended June 30, 1998).
10.31 License Agreement between Bristol-Myers Squibb Company and PathoGenesis Corporation dated September 30, 1998
(incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for the Three Months Ended
September 30, 1998).*
10.32 Form of Change in Control Employment Agreement for certain key employees.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
No Description of Exhibit
- ----- ----------------------
<C> <S>
10.33 Facility Agreement dated as of February 22, 1999 between PathoGenesis Corporation and Harris Trust and Savings Bank.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
99.1 Important Information on Forward-Looking Statements.
99.2 Press Release of PathoGenesis Corporation dated March 22, 1999.
</TABLE>
* Contains confidential material omitted and filed separately with the
Securities and Exchange Commission. Brackets denote such omissions.
3
<PAGE>
EXHIBIT 3.2
PathoGenesis Corporation
BY-LAWS
[as amended through March 29, 1999]
Section 1
Offices
The principal office of the corporation shall be located at its principal
place of business or such other place as the Board of Directors ("Board") may
designate. The corporation may have such other offices, either within or
without the State of Delaware, as the Board may designate or as the business of
the corporation may require from time to time.
Section 2
Stockholders
2.1 Annual Meeting. An annual meeting of stockholders for the purposes of
electing Directors and of transacting such other business as may properly be
brought before it shall be held each year at such date, time, and place, either
within or without the State of Delaware, as may be specified by the Board. At
any time prior to the commencement of the annual meeting, the Board may postpone
the annual meeting for a period of up to 120 days from the date fixed for such
meeting in accordance with this subsection 2.1.
Any nomination of a person to serve on the Board and any proposal of
business to be considered by stockholders at an annual meeting of stockholders
may be made (a) pursuant to the Company's notice of such meeting, (b) by or at
the direction of the Board or (c) by any stockholder of the corporation who was
a stockholder of record at the time such person gave the notice provided for in
this By-Law, who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this By-Law.
For a nomination or other proposal to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) of the foregoing paragraph of
this By-Law, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice shall be
delivered to and received at the principal office of the corporation not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than 30 days or delayed by more
than 60 days from such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the 90th day prior to such annual meeting
and not later than the close of business on the later of (i) the 60th day prior
to such annual meeting or (ii) the 10th day following the day on which public
announcement of the date of such meeting is first made. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be described in
<PAGE>
solicitations of proxies for election of directors, or is otherwise required, in
each case in accordance with Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a director
if elected); (b) as to any business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such stockholder,
as they appear on the corporation's books, and of such beneficial owner and (ii)
the class and number of shares of the corporation which are owned beneficially
and of record by such stockholder and such beneficial owner.
Only such persons who are nominated in accordance with the procedures set
forth in these By-Laws shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this By-Law. The chairman of the meeting shall have the power and duty to
determine whether any business proposed to be brought before the meeting was
made in accordance with the procedures set forth in this By-Law and, if any
proposed business is not in compliance with this By-Law, to declare that such
defective proposal shall be disregarded.
For purposes of this By-Law, "public announcement" shall mean disclosure in
a press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
By-Law. Nothing in this By-Law shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act. [amended 3/29/99]
2.2 Special Meetings. Special meetings of stockholders for any purpose or
purposes may be held at any time upon call of the Chairman of the Board, if any,
the Chief Executive Officer, the Secretary, or a majority of the Board, at such
time and place either within or without the State of Delaware as may be stated
in the notice. A special meeting of stockholders shall be called by the
President or the Secretary upon the written request, stating time, place, and
the purpose or purposes of the meeting, of stockholders who together own of
record not less than 66-2/3% of the outstanding stock of all classes entitled to
vote at such meeting. Any action which would be taken at any special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall (a) be signed by stockholders who together own of record not less than 66-
2/3% of the outstanding stock of all classes entitled to vote with respect to
the subject matter thereof (as determined in accordance with subsection 2.6.2
hereof) and (b) be delivered to the corporation by delivery to its registered
office in the State of Delaware, its principal place of business, or an officer
or agent of the corporation having custody of the records of proceedings of
meetings of stockholders. Delivery made to the corporation's registered office
shall be by hand or by certified mail or registered mail, return
2
<PAGE>
receipt requested. Every written consent shall bear the date of signature of
each stockholder who signs the consent and no written consent shall be effective
to take the corporate action referred to therein unless written consents signed
by stockholders entitled to vote with respect to the subject matter thereof are
delivered to the corporation, in the manner required by this section, within
sixty days of the earliest dated consent delivered to the corporation in the
manner required by this section. Any such consent shall be inserted in the
minute book as if it were the minutes of a meeting of the stockholders.
2.3 Place of Meeting. All meetings shall be held at the principal office
of the corporation or at such other place within or without the State of
Delaware designated by the Board, by any persons entitled to call a meeting
hereunder or in a waiver of notice signed by all of the stockholders entitled to
notice of the meeting.
2.4 Notice of Meeting. The Chairman, the President, any Vice-President,
the Secretary, the Board, or stockholders calling an annual or special meeting
of stockholders as provided for herein, shall cause to be delivered to each
stockholder entitled to notice of or to vote at the meeting either personally or
by mail, not less than ten nor more than sixty days before the meeting, written
notice stating the place, day and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. At
any time, upon written request of the holders of not less than the number of
outstanding shares of the corporation specified in subsection 2.2 and entitled
to vote at the meeting, it shall be the duty of the Secretary to give notice of
a special meeting of stockholders to be held on such date and at such place and
hour as the Secretary may fix, not less than ten nor more than sixty days after
receipt of said request, and if the Secretary shall neglect or refuse to issue
such notice, the person making the request may do so and may fix the date for
such meeting. If such notice is mailed, it shall be deemed delivered when
deposited in the official government mail properly addressed to the stockholder
at his or her address as it appears on the stock transfer books of the
corporation with postage prepaid. If the notice is telegraphed, it shall be
deemed delivered when the content of the telegram is delivered to the telegraph
company. [amended 1/30/98]
2.5 Waiver of Notice.
2.5.1 Whenever any notice is required to be given to any stockholder under
the provisions of these By-Laws, the Certificate of Incorporation or the General
Corporation Law of Delaware, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
2.5.2 The attendance of a stockholder at a meeting shall constitute a
waiver of notice of such meeting, except when a stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
2.6. Fixing of Record Date for Determining Stockholders.
2.6.1 Meetings. For the purpose of determining stockholders entitled to
notice of and to vote at any meeting of stockholders of any adjournment thereof,
the Board may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board, and
which record date shall not be more than sixty nor less than
3
<PAGE>
ten days before the date of such meeting. If no record date is fixed by the
Board, the record date for determining stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of and to vote at the meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
2.6.2 Consent to Corporate Action Without a Meeting. For the purpose of
determining stockholders entitled to consent to corporate action in writing
without a meeting, the Board may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is required by Chapter 1 of the
General Corporation Law of the State of Delaware, as now or hereafter amended,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made to
a corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the Board
and prior action by the Board is required by Chapter 1 of the General
Corporation Law of the State of Delaware, as now or hereafter amended, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the Board adopts the resolution taking such prior action.
2.6.3 Dividends, Distributions and Other Rights. For the purpose of
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise
any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board adopts the resolution relating thereto.
2.7 Voting List. At least ten days before each meeting of stockholders, a
complete list of the stockholders entitled to vote at such meeting, or any
adjournment thereof, shall be made, arranged in alphabetical order, with the
address of and number of shares held by each stockholder. This list shall be
open to examination by any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. This list shall also be produced and
kept at such meeting for inspection by any stockholder who is present.
4
<PAGE>
2.8 Quorum. A majority of the outstanding shares of the corporation
entitled to vote, present in person or represented by proxy at the meeting,
shall constitute a quorum at a meeting of the stockholders; provided, that where
a separate vote by a class or classes is required, a majority of the outstanding
shares of such class or classes, present in person or represented by proxy at
the meeting, shall constitute a quorum entitled to take action with respect to
that vote on that matter. If less than a majority of the outstanding shares
entitled to vote are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
If a quorum is present or represented at a reconvened meeting following such an
adjournment, any business may be transacted that might have been transacted at
the meeting as originally called. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
2.9 Manner of Acting. In all matters other than the election of
Directors, if a quorum is present, the affirmative vote of the majority of the
outstanding shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders,
unless the vote of a greater number is required by these By-Laws, the
Certificate of Incorporation or the General Corporation Law of Delaware. Where
a separate vote by a class or classes is required, if a quorum of such class or
classes is present, the affirmative vote of the majority of outstanding shares
of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class or classes. Directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of Directors.
2.10 Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholders by proxy executed in writing by the stockholder or by his or her
attorney-in-fact. Such proxy shall be filed with the Secretary of the
corporation before or at the time of the meeting. A proxy shall become invalid
three years after the date of its execution, unless otherwise provided in the
proxy. A proxy with respect to a specified meeting shall entitle the holder
thereof to vote at any reconvened meeting following adjournment of such meeting
but shall not be valid after the final adjournment thereof.
2.11 Voting of Shares. Each outstanding share entitled to vote with
respect to the subject matter of an issue submitted to a meeting of stockholders
shall be entitled to one vote upon each such issue.
2.12 Voting for Directors. Each stockholder entitled to vote at an
election of Directors may vote, in person or by proxy, the number of shares
owned by such stockholder for as many persons as there are Directors to be
elected and for whose election such stockholder has a right to vote.
5
<PAGE>
Section 3
Board of Directors
3.1 General Powers. The business and affairs of the corporation shall be
managed by the Board.
3.2 Number and Tenure. The Board shall be composed of not less than three
nor more than 10 Directors, the specific number to be set by resolution of the
Board or the stockholders. The number of Directors may be changed from time to
time by amendment to these By-Laws, but no decrease in the number of Directors
shall have the effect of shortening the term of any incumbent Director. The
Directors, other than those who may be elected by the holders of any series of
Preferred Stock, will be classified with respect to the time for which they
severally hold office into three classes, as nearly equal in number as possible,
designated Class I, Class II and Class III. The Directors appointed to Class I
will hold office for a term expiring at the annual meeting of stockholders to be
held in 1996; the Directors appointed to Class II will hold office for a term
expiring at the annual meeting of stockholders to be held in 1997; and the
Directors appointed to Class III will hold office for a term expiring at the
annual meeting of stockholders to be held in 1998, with the members of each
class to hold office until their respective successors are elected and
qualified. At each succeeding annual meeting the stockholders of the
Corporation, the successors of the class of Directors whose terms expire at that
meeting will be elected by plurality vote of all votes cast at such meeting to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. Election of Directors of
the Corporation need not be by written ballot unless requested by the Chairman
or by the holders of a majority of the outstanding stock present in person or
represented by proxy at a meeting of the stockholders at which Directors are to
be elected. Directors need not be stockholders of the corporation or residents
of the State of Delaware.
3.3 Annual and Regular Meetings. An annual Board meeting shall be held
without notice immediately after and at the same place as the annual meeting of
stockholders. By resolution, the Board or any committee designated by the Board
may specify the time and place either within or without the State of Delaware
for holding regular meetings thereof without other notice than such resolution.
3.4 Special Meetings. Special meetings of the Board or any committee
appointed by the Board may be called by or at the request of the Chairman, the
President, the Secretary or, in the case of special Board meetings, any one
Director and, in the case of any special meeting of any committee appointed by
the Board, by the Chairman thereof. The person or persons authorized to call
special meetings may fix any place either within or without the State of
Delaware as the place for holding any special Board or committee meeting called
by them. [amended 1/30/98]
3.5 Meetings by Telephone. Members of the Board or any committee
designated by the Board may participate in a meeting of such Board or committee
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
6
<PAGE>
3.6 Notice of Special Meetings. Notice of a special Board or committee
meeting stating the place, day and hour of the meeting shall be given to a
Director in writing or orally by telephone or in person. Neither the business
to be transacted at, nor the purpose of, any special meeting need be specified
in the notice of such meeting.
3.6.1 Personal Delivery. If notice is given by personal delivery, the
notice shall be effective if delivered to a Director at least two days before
the meeting.
3.6.2 Delivery by Mail. If notice is delivered by mail, the notice shall
be deemed effective if deposited in the official government mail properly
addressed to a Director at his or her address shown in the records of the
corporation with postage prepaid at least five days before the meeting.
3.6.3 Delivery by Telecopy. If notice is delivered by telecopy, the
notice shall be deemed effective if it is transmitted to a facsimile number
provided by a Director for that purpose from time to time and successful
transmission thereof is confirmed by telephone with the operator of the
receiving equipment at least three days before the meeting.
3.6.4 Oral Notice. If notice is delivered orally, by telephone or in
person, the notice shall be deemed effective if personally given to the Director
at least two days before the meeting.
3.7 Waiver of Notice.
3.7.1 In Writing. Whenever any notice is required to be given to any
Director under the provisions of these By-Laws, the Certificate of Incorporation
or the General Corporation Law of Delaware, a waiver thereof in writing, signed
by the person or persons entitled to such notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board or any committee appointed by the Board need be
specified in the waiver of notice of such meeting.
3.7.2 By Attendance. The attendance of a Director at a Board or committee
meeting shall constitute a waiver of notice of such meeting, except when a
Director attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
3.8 Quorum. A majority of the total number of Directors fixed by or in
the manner provided in these By-Laws shall constitute a quorum for the
transaction of business at any Board meeting but, if less than a majority are
present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.9 Manner of Acting. The act of the majority of the Directors present at
a Board meeting at which there is a quorum shall be the act of the Board, unless
the vote of a greater number is required by these By-Laws, the Certificate of
Incorporation or the General Corporation Law of Delaware.
3.10 Presumption of Assent. A Director of the corporation present at a
Board or committee meeting at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless his or her dissent
is entered in the minutes of the meeting,
7
<PAGE>
or unless such Director files a written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof, or
forwards such dissent by registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. A Director who voted in favor
of such action may not dissent.
3.11 Action by Board or Committees Without a Meeting. Any action which
could be taken at a meeting of the Board or of any committee appointed by the
Board may be taken without a meeting if a written consent setting forth the
action so taken is signed by each of the Directors or by each committee member.
Any such written consent shall be inserted in the minute book as if it were the
minutes of a Board or a committee meeting.
3.12 Resignation. Any Director may resign at any time by delivering
written notice to the Chairman, the President, the Secretary or the Board, or to
the registered office of the corporation. Any such resignation shall take
effect at the time specified therein, or if the time is not specified, upon
deliver thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. [amended 1/30/98]
3.13 Removal. At a meeting of stockholders called expressly for that
purpose, one or more members of the Board (including the entire Board) may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote on the election of Directors. If the Certificate
of Incorporation provides for cumulative voting in the election of Directors,
then if less than the entire Board is to be removed, no one of the Directors may
be removed if the votes cast against his or her removal would be sufficient to
elect such Director if then cumulatively voted at an election of the entire
Board.
3.14 Vacancies. Any vacancy occurring on the Board whether by reason of
removal, resignation, death or otherwise shall be filled exclusively by the
affirmative vote of a majority of the remaining Directors though less than a
quorum of the Board. A Director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office. Any directorship to be
filled by reason of an increase in the number of Directors may be filled by the
board.
3.15 Executive and Other Committees.
3.15.1 Creation and Authority of Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
Board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the Certificate of Incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board pursuant to
authority expressly granted to the
8
<PAGE>
Board by the Certificate of Incorporation, fix any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of the assets of the Corporation, or the conversion into, or the exchange of
such shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the Corporation), adopting an
agreement of merger or consolidation under Section 251 or 252 of the General
Corporation Law of the State of Delaware, recommending to the stockholders the
sale, lease, or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of dissolution, or amending these By-Laws; and,
unless such resolution or resolutions expressly so provided, no such committee
shall have the power or authority to declare a dividend, to authorize the
issuance of stock, or to adopt a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law of the State of Delaware. Each
committee which has been established by the Board pursuant to these By-Laws may
fix its own rules and procedures. The Board may designate one or more Directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any such absent or disqualified
member.
3.15.2 Minutes of Meetings. All committees so appointed shall keep
regular minutes of their meetings and shall cause them to be recorded in books
kept for that purpose.
3.15.3 Quorum and Manner of Acting. A majority of the number of Directors
composing any committee of the Board, as established and fixed by resolution of
the Board, shall constitute quorum for the transaction of business at any
meeting of such committee but, if less than a majority are present at a meeting,
a majority of such Directors present may adjourn the meeting from time to time
without further notice. The act of a majority of the members of a committee
present at a meeting at which a quorum is present shall be the act of such
committee.
3.15.4 Resignation. Any member of any committee may resign at any time by
delivering written notice thereof to the Chairman, the President, the Secretary,
the Board or the Chairman of such committee. Any such resignation shall take
effect at the time specified therein, or if the time is not specified, upon
delivery thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. [amended 1/30/98]
3.15.5 Removal. The Board may remove from office any member of any
committee elected or appointed by it or by an Executive Committee, but only by
the affirmative vote of not less than a majority of the number of Directors
fixed by or in the manner provided in these By-Laws.
3.16 Compensation. By Board resolution, Directors and committee members
may be paid their expenses, if any, of attendance at each Board or committee
meeting, or a fixed sum for attendance at each Board or committee meeting, or a
stated salary as Director or a committee member, or a combination of the
foregoing. No such payment shall preclude any Director or committee member from
serving the corporation in any other capacity and receiving compensation
therefor.
9
<PAGE>
Section 4
Officers
4.1 Number. The officers of the corporation shall be a Chairman, a
President, a Secretary and a Treasurer, each of whom shall be elected by the
Board. One or more Vice Presidents and such other officers and assistant
officers may be elected or appointed by the Board, such officers and assistant
officers to hold office for such period, have such authority and perform such
duties as are provided in these By-Laws or as may be provided by resolution of
the Board. Any officer may be assigned by the Board any additional title that
the Board deems appropriate. The Board may delegate to any officer or agent the
power to appoint any such subordinate officers or agents and to prescribe their
respective terms of office, authority and duties. Any two or more offices may
be held by the same person. [amended 1/30/98]
4.2 Election and Term of Office. The officers of the corporation shall be
elected annually by the Board at the Board meeting held after the annual meeting
of the stockholders. If the election of officers is not held at such meeting,
such election shall be held as soon thereafter as a Board meeting conveniently
may be held. Unless an officer dies, resigns, or is removed from office, he or
she shall hold office until the next annual meeting of the Board or until his or
her successor is elected.
4.3 Resignation. Any officer may resign at any time by delivering written
notice to the Chairman, the President, a Vice President, the Secretary or the
Board. Any such resignation shall take effect at the time specified therein, or
if the time is not specified, upon delivery thereof and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. [amended 1/30/98]
4.4 Removal. Any officer or agent elected or appointed by the Board may
be removed by the Board whenever in its judgment the best interests of the
corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the persons so removed.
4.5 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification, creation of a new office or any other cause may be
filled by the Board for the unexpired portion of the term, or for a new term
established by the Board.
4.6 Chairman. The Chairman shall be the chief executive officer of the
corporation, shall preside over meetings of the Board and stockholders, and,
subject to the Board's control, shall supervise and control all of the assets,
business and affairs of the corporation. The Chairman may sign certificates for
shares of the corporation, deeds, mortgages, bonds, contracts or other
instruments, except when the signing and execution thereof have been expressly
delegated by the Board of these By-Laws to some other officer or agent of the
corporation or are required by law to be otherwise signed or executed by some
other officer or in some other manner. In general, the Chairman shall perform
all duties incident to the office of the chief executive officer and such other
duties as are prescribed by the Board from time to time. [amended 1/30/98]
10
<PAGE>
4.7 President. The President shall be the chief operating officer of the
corporation. In the event of the death of the Chairman or his or her inability
to act, the President shall perform the duties of the Chairman, except as may be
limited by resolution of the Board, with all the powers of and subject to all
the restrictions upon the Chairman. The President may sign with the Secretary
or any Assistant Secretary certificates for shares of the corporation. The
President shall have, to the extent authorized by the Chairman or the Board, the
same powers as the Chairman to sign deeds, mortgages, bonds, contracts or other
instruments. The President shall perform such other duties as from time to time
may be assigned by the Chairman or the Board. [amended 1/30/98]
4.8 Vice President. In the event of the death of the President or his or
her inability to act, the Vice President (or if there is more than one Vice
President, the Vice President who was designated by the Board as the successor
to the President, or if no Vice President is so designated, the Vice President
first elected to such office) shall perform the duties of the President, except
as may be limited by resolution of the Board, with all the powers of and subject
to all the restrictions upon the President. Any Vice President may sign with
the Secretary or any Assistant Secretary certificates for shares of the
corporation. Any Vice President shall have, to the extent authorized by the
Chairman, the President or the Board, the same powers as the President to sign
deeds, mortgages, bonds, contracts or other instruments. Each Vice President
shall perform such other duties as from time to time may be assigned by the
Chairman, the President or the Board. [amended 1/30/98]
4.9 Secretary. The Secretary shall: (a) keep minutes of meetings of the
stockholders and the Board in one or more books provided for that purpose; (b)
see that all notices are duly given in accordance with the provisions of these
By-Laws or as required by law; (c) be custodian of the corporate records and
seal of the corporation; (d) keep registers of the post office address of each
stockholder and Director; (e) sign certificates for shares of the corporation;
(f) have general charge of the stock transfer books of the corporation; (g)
sign, with the Chairman, the President or other officer authorized by the
Chairman, the President or the Board, deeds, mortgages, bonds, contracts or
other instruments; and (h) in general perform all duties incident to the office
of the Secretary and such other duties as from time to time may be assigned by
the Chairman, the President or the Board. In the absence of the Secretary, an
Assistant Secretary may perform the duties of the Secretary. [amended 1/30/98]
4.10. Treasurer. If required by the Board, the Treasurer shall give a
bond for the faithful discharge of his or her duties in such amount and with
such surety or sureties as the Board shall determine. The Treasurer shall have
charge and custody of and be responsible for all funds and securities of the
corporation; receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in banks, trust companies or other depositories selected in
accordance with the provisions of these By-Laws; sign certificates for shares of
the corporation; and in general perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
or her by the Chairman, the President or the Board. In the absence of the
Treasurer, an Assistant Treasurer may perform the duties of the Treasurer.
[amended 1/30/98]
11
<PAGE>
4.11 Salaries. The salaries of the officers shall be fixed from time to
time by the Board or by any person or persons to whom the Board has delegated
such authority. No officer shall be prevented from receiving such salary by
reason of the fact that he or she is also a Director of the corporation.
Section 5
Contracts, Loans, Checks and Deposits
5.1 Contracts. The Board may authorize any officer or officers, or agent
or agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the corporation. Such authority may be general or
confined to specific instances.
5.2 Loans to the Corporation. No loans shall be contracted on behalf of
the corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board. Such authority shall be
confined to specific instances.
5.3 Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers, or agent or agents,
of the corporation and in such manner as is from time to time determined by
resolution of the Board.
5.4 Deposits. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as the Board may select.
Section 6
Certificates for Shares and Their Transfer
6.1 Issuance of Shares. No shares of the corporation shall be issued
unless authorized by the Board, which authorization shall include the maximum
number of shares to be issued and the consideration to be received for each
share.
6.2 Certificates for Shares. Certificates representing shares of the
corporation shall be signed by the Chairman or the President or the Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary. Any or all the signatures on the certificate may be a
facsimile. All certificates shall include on their face written notice of any
restrictions which may be imposed on the transferability of such shares and
shall be consecutively numbered or otherwise identified. [amended 1/30/98]
6.3 Stock Records. The stock transfer books shall be kept at the
registered office or principal place of business of the corporation or at the
office of the corporation's transfer agent or registrar. The name and address
of each person to whom certificates for shares are issued, together with the
class and number of shares represented by each such certificate and the date of
issue thereof, shall be entered on the stock transfer books of the corporation.
The person in whose name shares stand on the books of the corporation shall be
deemed by the corporation to be the owner thereof for all purposes.
12
<PAGE>
6.4 Restriction on Transfer. Except to the extent that the corporation
has obtained an opinion of counsel acceptable to the corporation that transfer
restrictions are not required under applicable securities laws, or has otherwise
satisfied itself that such transfer restrictions are not required, all
certificates representing shares of the corporation shall bear a legend on the
face of the certificate, or on the reverse of the certificate if a reference to
the legend is contained on the face, which reads substantially as follows:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 or any applicable state law, and no
interest therein may be sold, distributed, assigned, offered, pledged or
otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering any
such transaction involving said securities or (b) this corporation receives
an opinion of legal counsel for the holder of these securities (concurred
in by legal counsel for this corporation) stating that such transaction is
exempt from registration or this corporation otherwise satisfies itself
that such transaction is exempt from registration. Neither the offering of
the securities nor any offering of materials have been reviewed by any
administrator under the Securities Act of 1933 or any applicable state
law."
6.5 Transfer of Shares. The transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation pursuant to
authorization or document of transfer made by the holder of record thereof or by
his or her legal representative, who shall furnish proper evidence of authority
to transfer, or by his or her attorney-in-fact authorized by power of attorney
duly executed and filed with the Secretary of the corporation. All certificates
surrendered to the corporation for transfer shall be canceled and no new
certificate shall be issued until the former certificates for a like number of
shares shall have been surrendered and canceled.
6.6 Lost or Destroyed Certificates. In the case of a lost, destroyed or
mutilated certificate, a new certificate may be issued therefor upon such terms
and indemnity to the corporation as the Board may prescribe.
Section 7
Books and Records
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its stockholders
and Board and such other records as may be necessary or advisable.
Section 8
Accounting Year
The accounting year of the corporation shall be the calendar year, provided
that if a different accounting year is at any time selected for purposes of
federal income taxes, the accounting year shall be the year so selected.
13
<PAGE>
Section 9
Seal
The seal of the corporation shall consist of the name of the corporation,
the state of its incorporation and the year of its incorporation.
Section 10
Indemnification
10.1 Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved (including, without
limitation, as a witness) in any actual or threatened action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or that, being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a Director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as such a Director, officer, employee or agent or
in any other capacity while serving as such a Director, officer, employee or
agent, shall be indemnified and held harmless by the corporation to the full
extent permitted by the General Corporation Law of Delaware, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than permitted prior thereto), or by other applicable law
as then in effect, against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators; provided,
however, that except as provided in subsection 10.2 of this Section with respect
to proceedings seeking to enforce rights to indemnification, the corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized or ratified by the Board. The right to indemnification conferred
in this subsection 10.1 shall be a contract right and shall include the rights
to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that if the General Corporation Law of Delaware
requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a Director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this subsection 10.1 or otherwise.
14
<PAGE>
10.2 Right of Indemnitee to Bring Suit. If a claim under subsection 10.1
of this Section is not paid in full by the corporation within sixty days after a
written claim has been received by the corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If successful in whole
or in part in any such suit, or in a suit brought by the corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. The indemnitee shall be presumed to be entitled to
indemnification under this Section upon submission of a written claim (and, in
an action brought to enforce a claim for an advancement of expenses, where the
required undertaking, if any is required, has been tendered to the corporation),
and thereafter the corporation shall have the burden of proof to overcome the
presumption that the indemnitee is not so entitled. Neither the failure of the
corporation (including its Board, independent legal counsel or its stockholders)
to have made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances not an actual
determination by the corporation (including its Board, independent legal counsel
or its stockholders) that the indemnitee is not entitled to indemnification
shall be a defense to the suit or create a presumption that the indemnitee is
not so entitled.
10.3 Nonexclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
agreement, vote of stockholders or disinterested Directors, provisions of the
Certificate of Incorporation or By-Laws of the corporation or otherwise.
10.4 Insurance, Contracts and Funding. The corporation may maintain
insurance, at its expense, to protect itself and any Director, officer, employee
or agent of the corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of Delaware. The
corporation, without further stockholder approval, may enter into contracts with
any Director, officer, employee or agent in furtherance of the provisions of
this Section and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure that payment
of such amounts as may be necessary to effect indemnification as provided in
this Section.
10.5 Indemnification of Employees and Agents of the Corporation. The
corporation may, by action of the Board, grant rights to indemnification and
advancement of expenses to employees or agents or groups of employees or agents
of the corporation with the same scope and effects as the provisions of this
Section with respect to the indemnification and advancement of expenses of
Directors and officers of the corporation; provided, however, that an
undertaking shall be made by an employee or agent only if required by the Board.
10.6 Persons Serving Other Entities. Any person who is or was a Director,
officer or employee of the corporation who is or was serving as a Director or
officer of another corporation of which a majority of the shares entitled to
vote in the election of its Directors is held by the corporation shall be deemed
to be so serving at the request of the corporation and entitled to
indemnification and advancement of expenses under subsection 10.1 of this
Section.
15
<PAGE>
Section 11
Amendments
These By-Laws may be amended or repealed and new By-Laws may be adopted by
the Board. The stockholders may also amend and repeal these By-Laws or adopt
new By-Laws. All By-Laws made by the Board may be amended or repealed by the
stockholders. Notwithstanding the foregoing and anything contained in the
Certificate of Incorporation of the Corporation or these By-Laws to the
contrary, Sections 2.2, 3.2, 3.14 and this Section 11 of the By-Laws of the
Corporation may not be amended or repealed by the stockholders, and no provision
inconsistent therewith may be adopted by the stockholders, without the
affirmative vote of the holders of at least 66-2/3% of the outstanding stock of
all classes entitled to vote thereon.
16
<PAGE>
EXHIBIT 10.32
FORM OF CHANGE IN CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between PathoGenesis Corporation, a Delaware corporation
(the "Company"), and _______________________ ("Executive"), dated as of
_____________, 199___ (the "Agreement Date").
Recitals
A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of Executive,
notwithstanding the possibility, threat, or occurrence of a Change in Control
(as defined below) of the Company.
B. The Board believes it is imperative to diminish the inevitable
distraction of Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change in Control, to encourage Executive's
full attention and dedication to the Company, and to provide Executive with
compensation and benefits arrangements upon a Change in Control which (i) will
satisfy Executive's compensation and benefits expectations and (ii) are
competitive with those of other public corporations.
Agreement
In consideration of the mutual agreements contained herein, the Company and
Executive hereby agree as follows:
1. Certain Definitions. The terms set forth below have the following
meanings (such meanings to be applicable to both the singular and plural forms):
"Accrued Annual Bonus" means the amount of any Annual Bonus of Executive
accrued but not yet paid as of the Date of Termination.
"Accrued Base Salary" means the amount of any Annual Base Salary of
Executive accrued but not yet paid as of the Date of Termination.
"Accrued Obligations" -- see Section 4(a)(i)(A)(1).
"Affiliated Company" means a corporation, limited liability company,
partnership or other business entity controlled by, controlling or under common
control with the Company.
"Agreement Term" means the period commencing on the Agreement Date and
ending on the third anniversary of such date or, if later, such later date to
which the Agreement Term is extended pursuant to the following sentence. On each
day after the second anniversary of the Agreement Date, the Agreement Term shall
be automatically extended by one day to create a new one-year term until, at any
time on or after the second anniversary of the Agreement Date, the Company
delivers a written notice (an "Expiration Notice") to Executive stating that
this Agreement shall expire on a date specified in the Expiration Notice (the
"Expiration Date") that is at least 12 months after the date the Expiration
Notice is delivered to Executive; provided,
<PAGE>
however, that if a Change in Control occurs before the Expiration Date specified
in an Expiration Notice, then (a) such Expiration Notice shall automatically be
cancelled and of no further effect and (b) the Company shall not give Executive
any additional Expiration Notice prior to the date which is 24 months after the
Effective Date.
"Annual Base Salary" -- see Section 2(b)(i).
"Annual Bonus" -- see Section 2(b)(ii).
"Board" means the board of directors of the Company.
"Cause" -- see Section 3(b).
"Change in Control" means any one or more of the following events:
(A) consummation of:
(i) any merger, reorganization or consolidation of the Company
or any Affiliated Company with or into any corporation or other Person
if Persons who were the beneficial owners (as such term is used in
Rule 13d-3 under the Exchange Act) of Voting Securities of the Company
immediately before such merger, reorganization or consolidation are
not, immediately thereafter, the beneficial owners, directly or
indirectly, of at least 51% of the Voting Power of the corporation or
other Person surviving or resulting from such merger, reorganization
or consolidation (or the parent corporation thereof) in substantially
the same respective proportions as their beneficial ownership,
immediately before the consummation of such merger, reorganization or
consolidation, of the then-outstanding Common Stock and Voting Power
of the Company; or
(ii) the sale or other disposition of all or substantially all of
the consolidated assets of the Company, other than a sale or other
disposition by the Company of all or substantially all of its
consolidated assets to an entity of which at least 51% of the then-
outstanding common shares and the Voting Power immediately after such
sale or other disposition are beneficially owned (as such term is used
in Rule 13d-3 under the Exchange Act) by shareholders of the Company
in substantially the same respective proportions as their beneficial
ownership of Common Stock and Voting Power of the Company immediately
before the consummation of such sale or other disposition; or
(B) approval by Company shareholders of a complete liquidation or
dissolution of the Company; or
(C) the following individuals cease for any reason to constitute a
majority of the directors of the Company then serving: individuals who, on
the Agreement Date, constitute the Board and any subsequently-appointed or
elected director of the Company (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest, including a consent solicitation, relating to the election or
removal of one or more directors of the Company) whose appointment or
election by the Board or nomination for election by the Company's
shareholders was approved or recommended by a vote of at least two-thirds
of the Company's directors
2
<PAGE>
then in office whose appointment, election or nomination for election was
previously so approved or recommended or who were directors on the
Agreement Date; or
(D) the acquisition or holding by any person, entity or "group"
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act),
other than by any Exempt Person, the Company, any Affiliated Company, any
employee benefit plan of the Company or an Affiliated Company, of
beneficial ownership (as such term is used in Rule 13d-3 under the Exchange
Act) of 20% or more of the Company's then-outstanding Voting Securities;
provided, however, that:
(i) no such person, entity or group shall be deemed to own
beneficially any securities held by the Company or an Affiliated
Company or any employee benefit plan (or any related trust) of the
Company or an Affiliated Company;
(ii) no Change in Control shall be deemed to have occurred
solely by reason of any such acquisition if both (x) after giving
effect to acquisition, such person, entity or group has beneficial
ownership of less than 30% of the then-outstanding Voting Securities
of the Company and (y) prior to such acquisition, at least two-thirds
of the directors described in (and not excluded from) paragraph (C) of
this definition vote to adopt a resolution of the Board to the
specific effect that such acquisition shall not be deemed a Change in
Control; and
(iii) no Change in Control shall be deemed to have occurred
solely by reason of any such acquisition or holding in connection with
any merger, reorganization or consolidation of the Company or any
Affiliated Company which is not a Change in Control within the meaning
of paragraph (A)(i) of this definition.
Notwithstanding the occurrence of any of the foregoing events, (a) no Change in
Control shall occur if at least two-thirds of the directors described in (and
not excluded from) paragraph (C) of this definition, in their sole and absolute
discretion, vote to adopt a resolution of the Board to the specific effect that
the occurrence of such event shall not be deemed a Change in Control and (b) no
Change in Control shall occur with respect to Executive if (x) the event which
otherwise would have been a Change in Control (or the transaction which resulted
in such event) was initiated by Executive or was discussed by him with any third
party, in either case without the approval of the Board with respect to
Executive's initiation or discussion, as applicable, or (y) Executive is, by
written agreement, a participant on Executive's own behalf in a transaction in
which the persons (or their affiliates) with whom Executive has the written
agreement cause the Change in Control to occur and, pursuant to the written
agreement, Executive has an equity interest (or a right to acquire such equity
interest) in the resulting entity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Date of Termination" means the effective date of any termination of
Executive's employment for any or no reason, whether by the Company or by
Executive, as specified in the Notice of Termination; provided, however, that if
Executive's employment is terminated by reason of Executive's death or
Disability, the Date of Termination shall be the date of death of or the
Disability Effective Date, as the case may be.
3
<PAGE>
"Disability" -- see Section 3(a).
"Disability Effective Date" -- see Section 3(a).
"Effective Date" means the first date during the Agreement Term on which a
Change in Control occurs.
"Employment Period" means the period commencing on the Effective Date and
ending on the second anniversary of such date.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Person" means any underwriter temporarily holding securities
pursuant to an offering of such securities.
"Good Reason" -- see Section 3(c).
"including" means including without limitation.
"Non-Employee Director" means a director of the Company who is not an
employee of (i) the Company, (ii) any Affiliated Company or (iii) any Person who
beneficially owns more than 30% of the Common Stock then outstanding.
"Person" means any individual, corporation, partnership, limited liability
company, sole proprietorship, trust or other entity.
"Policies" means policies, practices and programs.
"Prorated Annual Bonus" means (i) the product of the amount of the Annual
Bonus to which Executive would have been entitled (based on target-level
performance) if he had been employed by the Company on the last day of the
Company's fiscal year that includes the Date of Termination and if performances
were achieved at the target level for such fiscal year, multiplied by (ii) a
fraction of which (x) the numerator is the number of days that have elapsed in
such fiscal year through the Date of Termination and (y) the denominator is 365.
"Taxes" means the incremental United States federal, state and local
income, excise and other taxes payable by Executive with respect to any
applicable item of income.
"Voting Power" of an issuer means the combined voting power of the then-
outstanding Voting Securities of the issuer.
"Voting Securities" of an issuer means all securities of the issuer
entitled to vote generally in the election of directors.
2. Terms of Employment. The Company hereby agrees to continue Executive
in its employ during the Employment Period on the following terms and
conditions:
4
<PAGE>
(a) Position and Duties.
(i) During the Employment Period, (A) Executive's position (including
status, offices and titles), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant
of those held or exercised by or assigned to Executive at any time during
the 90-day period immediately preceding the Effective Date and (B)
Executive's services shall be performed at the location where Executive was
employed immediately preceding the Effective Date or any office or location
less than 50 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation, sick leave and disability to which Executive is entitled,
Executive shall devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent
necessary to discharge the responsibilities assigned to Executive
hereunder, to use Executive's reasonable best efforts to perform faithfully
and efficiently such responsibilities. During the Employment Period,
Executive may (A) serve on corporate, civic or charitable boards or
committees, (B) deliver lectures, fulfill speaking engagements or teach at
educational institutions and (C) manage personal investments, so long as
such activities are consistent with the policies of the Company at the
Effective Date and do not significantly interfere with the performance of
Executive's responsibilities (as set forth in this Agreement) as an
employee of the Company. To the extent that any such activities have been
conducted by Executive prior to the Effective Date and were consistent with
the policies of the Company at the Effective Date, the continued conduct of
such activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of Executive's responsibilities to the
Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, Executive shall
receive an annual base salary in cash ("Annual Base Salary"), which shall
be paid in a manner consistent with the Company's payroll practices
immediately preceding the Effective Date at a rate at least equal to 12
times the monthly base salary (unreduced by any salary reductions or
deferrals pursuant to a plan maintained under Section 401(k) of the Code or
any similar plan) paid or payable to Executive by the Company for the
calendar month immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Company shall review the Annual
Base Salary at least annually and shall increase Annual Base Salary at any
time and from time to time as shall be substantially consistent with
increases in base salary awarded in the ordinary course of business to peer
executives of the Company. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to Executive under this
Agreement. Annual Base Salary shall not be reduced after any such increase
and the term "Annual Base Salary" shall refer to Annual Base Salary as so
increased.
(ii) Annual Bonus. In addition to Annual Base Salary, Executive shall
be awarded, for each fiscal year part or all of which is included in the
Employment Period, an annual bonus (the "Annual Bonus") in cash which is at
least equal to the greater of
5
<PAGE>
(A) the amount of annual bonus actually paid to Executive during the
fiscal year immediately preceding the Effective Date or (B) the target
bonus for the Executive for the fiscal year that includes the Effective
Date (or, if not yet determined for the current fiscal year, for the
immediately preceding fiscal year) previously determined by the Board or
the compensation committee of the Board (in either case (A) or (B), any
such annual bonus amount to be annualized for any fiscal year consisting of
less than 12 full months or with respect to which Executive has been
employed by the Company for less than 12 full months). The Company shall
pay each such Annual Bonus in cash no later than 90 days after the end of
the fiscal year for which the Annual Bonus is awarded, unless Executive
shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Other Plans. In addition to Annual Base
Salary and Annual Bonus payable as hereinabove provided, Executive shall be
entitled to participate during the Employment Period in all incentive,
stock option, savings and other plans and Policies applicable to peer
executives of the Company, but in no event shall such plans and Policies
provide Executive with incentive or other benefits opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company for Executive under such plans and Policies as in
effect at any time during the 90-day period immediately preceding the
Effective Date.
(iv) Welfare Benefit Plans. During the Employment Period, Executive
and/or Executive's family, as the case may be, shall be eligible to
participate in and shall receive all benefits under welfare benefit plans
and Policies provided by the Company and applicable to peer executives of
the Company, but in no event shall such plans and Policies provide benefits
which are less favorable, in the aggregate, than the most favorable of such
plans and Policies in effect at any time during the 90-day period
immediately preceding the Effective Date.
(v) Expenses. During the Employment Period, Executive shall be
entitled to prompt reimbursement for all reasonable expenses incurred by
Executive in accordance with the most favorable Policies of the Company in
effect at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to Executive, as in effect at any time
thereafter with respect to peer executives of the Company.
(vi) Fringe Benefits. During the Employment Period, Executive shall
be entitled to fringe benefits in accordance with the most favorable plans
and Policies of the Company in effect at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to
Executive, as in effect at any time thereafter with respect to peer
executives of the Company.
(vii) Office; Support Staff. During the Employment Period, Executive
shall be entitled to an office or offices of a size and with furnishings
and other appointments, and to personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to Executive
by the Company at any time during the 90-day period immediately preceding
the Effective Date or, if more favorable to Executive, as provided at any
time thereafter with respect to peer executives of the Company.
(viii) Vacation. During the Employment Period, Executive shall be
entitled to paid vacation in accordance with the most favorable plans and
Policies of the Company
6
<PAGE>
as in effect at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to Executive, as in effect at any time
thereafter with respect to peer executives of the Company.
(ix) Affiliated Companies. To the extent that, immediately prior to
the Effective Date, Executive has been on the payroll of, and participated
in the bonus, incentive or employee benefit plans of, an Affiliated
Company, the references to the Company contained in Sections 2(b)(i)
through 2(b)(viii) and elsewhere in this Agreement referring to benefits to
which Executive may be entitled shall also refer to such Affiliated
Company.
3. Termination of Employment.
(a) Death or Disability. Executive's employment shall terminate
automatically upon Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of Executive has occurred
during the Employment Period, it may give to Executive written notice of its
intention to terminate Executive's employment. In such event, Executive's
employment with the Company shall terminate as of the 30th day after Executive's
receipt of such notice (the "Disability Effective Date"); provided that, within
the 30 days after such receipt, Executive shall not have returned to full-time
performance of Executive's duties. "Disability" means the absence of Executive
from Executive's duties with the Company on a full-time basis for a period of
time equal to the Waiting Period as a result of incapacity due to mental or
physical illness that is determined to be total and permanent by a physician
selected by the Company or its insurers and reasonably acceptable to Executive
or Executive's legal representative. "Waiting Period" means the waiting period
under a long-term disability plan of the Company that is applicable to Executive
and satisfies the requirements of Section 2(b)(iv).
(b) Cause. The Company may terminate Executive's employment for Cause
during the Employment Period. "Cause" means the occurrence of any one or more of
the following actions or failures to act as determined by the Board in its
reasonable judgment and in good faith:
(i) embezzlement, fraud or theft by Executive with respect to the
property of the Company or a conviction of Executive for any felony
involving moral turpitude or causing material harm, financial or otherwise,
to the Company;
(ii) habitual neglect in the performance of Executive's significant
duties (other than on account of incapacity due to physical or mental
illness or Disability); or
(iii) a demonstrably deliberate act or failure to act of Executive,
including a violation of the rules or policies of the Company, which causes
a material financial or other loss, damage or injury to the property,
reputation or employees of the Company; provided, however, that, unless
such act or failure to act was done by Executive in bad faith or without a
reasonable belief that Executive's act or failure to act, as the case may
be, was in the best interest of the Company or was required by applicable
law, such act or failure to act shall not constitute Cause if, within 20
days after the Board or the Chief Executive Officer of the Company gives
Executive written notice of such act or failure to act that specifically
refers to this Section, Executive cures such act or failure to act to the
fullest extent that it is curable;
7
<PAGE>
provided, however, that:
(A) "Cause" shall not mean (x) bad judgment or negligence other than
habitual neglect of significant duties or (y) any act or omission in
respect of which the Board could have properly determined that Executive
met the applicable standard of conduct for the indemnification or
reimbursement under the by-laws of the Company or applicable law, in each
case as in effect at the time of such act or omission; and
(B) a termination of Executive's employment shall not be deemed to be
for Cause unless each of the following conditions is satisfied:
(1) The Company provides Executive a written notice (a "Notice
of Intent to Terminate") not less than 30 days prior to the Date of
Termination setting forth the Company's intention to consider
terminating Executive's employment. Such Notice shall include a
statement of the intended Date of Termination and a detailed
description of the specific facts that the Company believes to
constitute Cause.
(2) Any act or omission of Executive alleged to constitute Cause
shall have occurred not more than 12 months before the earliest date
on which any member of the Board who is not a party to the act or
omission knew or in the reasonable exercise of his or her duties as a
director should have know of such act or omission.
(3) Executive is offered an opportunity to respond to such
Notice of Intent to Terminate by appearing in person, together with
Executive's legal counsel, before the Board on a date specified in the
Notice of Intent to Terminate, which date shall be at least 25 days
after Executive's receipt of the Notice of Intent to Terminate and, in
any event, at least five days prior to the Date of Termination
proposed in such Notice.
(4) By a vote of the Board that includes the affirmative vote of
at least 75% of the Non-Employee Directors, the Board determines that
the actions of Executive specified in the Notice of Intent to
Terminate constitute Cause and that Executive's employment should
accordingly be terminated for Cause.
(5) The Company provides Executive with a copy of the Board's
written determination pursuant to clause (4) setting forth in detail
(a) the specific basis for such termination for Cause and (b) the Date
of Termination (which date shall be not more than 15 days after the
giving of such notice).
By determination of the Board, the Company may suspend Executive from
Executive's duties for a period of up to 30 days with full pay and benefits
thereunder during the period of time in which the Board is determining whether
to terminate Executive for Cause. Any purported termination for Cause by the
Company that does not satisfy each substantive and procedural requirement of
this Section 3(b) shall be treated for all purposes under this Agreement as a
termination by the Company without Cause.
8
<PAGE>
(c) Good Reason. Executive may terminate Executive's employment at any
time during the Employment Period for Good Reason. "Good Reason" means any one
or more of the following:
(i) the assignment to Executive of any duties inconsistent in any
respect with Executive's position (including status, offices and titles),
authority, duties or responsibilities as contemplated by Section 2(a), or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 2(b), other than an isolated, insubstantial and inadvertent
failure not occurring in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by Executive;
(iii) any requirement that Executive be based at any office or
location other than the location specified in Section 2(a)(i)(B);
(iv) any purported termination by the Company of Executive's
employment otherwise than as expressly permitted by this Agreement (it
being understood that any such purported termination shall not be effective
for any other purpose of this Agreement); or
(v) any failure by the Company to comply with Section 10(c).
Any good faith determination of Good Reason made by Executive shall be
conclusive.
(d) Notice of Termination. Any termination of Executive's employment by
the Company or by Executive shall be communicated by Notice of Termination to
the other party hereto. "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so indicated
and (iii) specifies the Date of Termination (which date shall be not more than
15 days after the giving of such notice). The failure by Executive to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason shall not waive any right of Executive hereunder or
preclude Executive from asserting such fact or circumstance in enforcing
Executive's rights thereunder.
4. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability.
(i) If, during the Employment Period, Executive's employment shall
be terminated by the Company other than for Cause, or by reason of death or
Disability, or by Executive for Good Reason, then the Company shall have
all of the following obligations:
9
<PAGE>
(A) The Company shall pay to Executive the following amounts in
a lump sum in cash within 10 days after the Date of Termination:
(1) an amount equal to the sum of the Accrued Base Salary,
the Accrued Annual Bonus, any compensation previously deferred by
Executive under any non-qualified deferred compensation plan or
arrangement (together with any accrued interest or earnings
thereon) and accrued but unpaid vacation pay (collectively, the
"Accrued Obligations"),
(2) the Prorated Annual Bonus, and
(3) the product of [two] [three] times the sum of (x) the
Annual Base Salary and (y) the Annual Bonus.
(B) Any stock options or similar equity incentive rights
previously granted to Executive that are not then fully vested and
exercisable pursuant to their terms shall become fully vested and
immediately exercisable on the Date of Termination and, together with
any stock options or similar equity incentive rights that vested on
the Effective Date (to the extent such options or rights have not
expired pursuant to their terms and are unexercised), remain
exercisable until the earlier of (x) expiration in accordance with
their terms or (y) the first anniversary of the Date of Termination.
As to any other types of equity-based incentive awards previously
granted to Executive under any equity-based incentive compensation
plan or arrangement of the Company, any restrictions on exercise,
payment or transfer shall immediately lapse, and (unless waived or
deferred by Executive) Executive shall be paid any cash or property
underlying such award, within 10 days after the Date of Termination,
in all respect as though any vesting requirements or any corporate or
individual performance goals associated with such awards had been met
as of the Date of Termination.
(C) (1) During the period commencing on the Date of Termination
and continuing thereafter for two years, or such longer period as
provided in any plan or Policy in which Executive is a
participant as of the Date of Termination (such eligibility to be
determined based on the terms of such plan or Policy as in effect
on the Effective Date or, if more favorable to Executive, the
terms of such plan or Policy as in effect on the Date of
Termination), the Company shall continue to provide, at no cost
to Executive, medical, dental and similar health care benefits
(or, if such benefits are not available, the after-tax economic
value thereof determined pursuant to paragraph (3) of this
Section 4(a)(i)(C)) to Executive and Executive's family.
(2) The terms of such benefits shall be at least as
favorable to Executive as the terms of the most favorable plans
or Policies of the Company applicable to peer executives at
Executive's Date of Termination, but in no event less favorable
to Executive than the most favorable plans or Policies of the
Company applicable to peer executives during the 90-day period
immediately preceding the Effective Date.
10
<PAGE>
(3) The after-tax economic value of any benefit to be
provided pursuant to paragraph (i) above shall be deemed to be
the present value of the premiums expected to be paid for all
such benefits that are to be provided on an insured basis. The
after-tax economic value of all other benefits shall be deemed to
be the present value of the expected net cost to the Company of
providing such benefits.
(D) The Company shall cause Executive to receive, at the
Company's expense, standard outplacement services from a nationally-
recognized firm selected by Executive; provided that the cost to the
Company of such services shall not exceed 15% of the sum of (x) Annual
Base Salary and (y) the Annual Bonus in effect on the Date of
Termination.
(ii) If the present value as of the Effective Date, determined in
accordance with Sections 280G(b)(2)(ii) and 280G(d)(4) of the Code (the
"Present Value"), of the payments and distributions by the Company to or
for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) in
connection with, or arising out of, Executive's employment with the Company
or a change in ownership or effective control of the Company or a
substantial portion of its assets ("Payments") exceeds 110% of the greatest
Present Value of Payments (the "Safe Harbor Cap") that could be paid to
Executive such that the receipt thereof would not give rise to any excise
tax, then at Executive's option the Company shall reduce the maximum
amounts payable under this Agreement to the maximum amount that could be
paid to Executive such that the Present Value of the Payments does not
exceed the Safe Harbor Cap. The reduction of the amounts payable hereunder,
if applicable, shall be made by reducing the payments as elected by
Executive. For purposes of reducing the Payments to the Safe Harbor Cap,
only amounts payable under this Agreement (and no other Payments) shall be
reduced. If the reduction of the amounts payable hereunder would not result
in a reduction of the Present Value of the Payments to the Safe Harbor Cap,
no amounts payable under this Agreement shall be reduced pursuant to this
paragraph.
(iii) All determinations required to be made under the first sentence
of paragraph (ii) above shall be made by a nationally recognized certified
public accounting firm (which shall not be the firm serving as accountant
or auditor for the individual, entity or group effecting the Change in
Control) designated by Executive, which shall provide detailed supporting
calculations both to the Company and Executive within 15 business days
after delivery by Executive to the Company of a written request for
determination. All fees and expenses of said accounting firm shall be
borne solely by the Company. Any determination by the accounting firm
shall be binding upon the Company and Executive.
(b) Cause; Other than for Good Reason. If, during the Employment Period,
Executive's employment is terminated (i) by the Company for Cause or (ii) by
Executive other than for Good Reason, the Company shall pay to Executive in a
lump sum in cash within 10 days after the Date of Termination any unpaid salary
earned, and any unpaid accrued vacation pay, as of the Date of Termination.
11
<PAGE>
(c) Death or Disability. If, during the Employment Period, Executive's
employment is terminated by reason of Executive's death or Disability, the
Company shall pay an amount equal to all Accrued Obligations to Executive or
Executive's estate or beneficiary, as applicable, in cash a lump sum within 10
days after the Date of Termination.
5. Non-Exclusivity of Rights. If Executive receives payments pursuant to
Section 4(a), Executive hereby waives the right to receive severance payments
under any other plan, policy or agreement of the Company. Except as provided in
the previous sentence, nothing in this Agreement shall prevent or limit
Executive's continuing or future participation in any benefit, bonus, incentive
or other plans or Policies provided by the Company or any of its Affiliated
Companies and for which Executive may qualify, nor shall anything herein limit
or otherwise affect such rights as Executive may have under any other agreements
with the Company or any of its Affiliated Companies.
6. Conflicts. In the event of a conflict between the provisions of this
Agreement and the terms of any written agreement between the Company and
Executive evidencing any equity-based incentive awards with respect to a payment
or benefit to be made or provided to Executive this Agreement, whichever of the
provisions of this Agreement or such written agreement that are most favorable
to Executive will control.
7. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including set-off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Executive or others.
8. No Duty to Mitigate. Executive shall not be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to Executive under any of the provisions of this Agreement, nor shall the amount
of any payment hereunder be reduced by any compensation earned by Executive as
result of employment by another employer or by any retirement benefits which may
be paid or payable to Executive; provided, however, that any continued welfare
benefits provided for pursuant to Section 4(a)(i)(C) shall not duplicate any
benefits that are provided to Executive and Executive's family by such other
employer and shall be second to any coverage provided by such other employer.
9. Enforcement.
(a) Reimbursement of Expenses. If Executive incurs legal, accounting,
expert witness or other fees and expenses in an effort to establish entitlement
to compensation and benefits under this Agreement, the Company shall, regardless
of the outcome of such effort, pay or reimburse Executive for such fees and
expenses, together with an additional amount such that, after providing for the
Taxes payable by Executive in respect of such additional amount, there remains a
balance sufficient to pay the Taxes payable by Executive in respect of such
payment or reimbursement of fees and expenses by the Company. The Company shall
reimburse Executive for such fees and expenses on a monthly basis within 10 days
after its receipt of Executive's request for reimbursement accompanied by
reasonable evidence that the fees and expenses were incurred.
(b) Refund. If Executive does not prevail (after exhaustion of all
available judicial remedies), and the Company establishes before a court of
competent jurisdiction that Executive
12
<PAGE>
had no reasonable basis for bringing an action hereunder and acted in bad faith
in doing so, no further reimbursement for legal fees and expenses shall be due
to Executive and Executive shall refund any amounts previously reimbursed
hereunder with respect to such action.
(c) Interest. If the Company fails to pay any amount provided under this
Agreement when due, the Company shall pay interest on such amount at a rate
equal to 200 basis points over the prime commercial lending rate published from
time to time in The Wall Street Journal (Midwest Edition); provided, however,
that the interest rate determined in accordance with this Section shall in no
event exceed the highest legally-permissible interest rate.
10. Successors.
(a) Successors to Executive. This Agreement is personal to Executive and
without the prior written consent of the Company shall not be assignable by
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's legal
representatives.
(b) Successors to Company. The Company may not assign its rights and
obligations under this Agreement without the prior written consent of Executive
except to a successor which has satisfied the provisions of Section 10(c). This
Agreement shall inure to the benefit of the Company and such permitted assigns.
(c) Obligations of Company's Successors. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. All references to the Company shall also
refer to any such successor, and the Company and such successor shall be jointly
and severally liable for all obligations of the Company under this Agreement.
11. Miscellaneous.
(a) Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without reference to such
State's principles of conflict of laws.
(b) Notices. All notices hereunder shall be in writing and shall be given
by hand delivery, nationally-recognized courier service that provides overnight
delivery, or by registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to Executive, at Executive's most recent home address on file with
the Company.
If to the Company, to: PathoGenesis Corporation
Attention: General Counsel
5215 Old Orchard Road, Suite 900
Skokie, Illinois 60077
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice shall be effective when actually
received by the addressee.
13
<PAGE>
(c) Severability. If any part of this Agreement is declared by any court
or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any part of this Agreement not declared
to be unlawful or invalid. Any paragraph or part of a paragraph so declared to
be unlawful or invalid shall, if possible, be construed in a manner which will
give effect to the terms of such paragraph or part of a paragraph to the fullest
extent possible while remaining lawful and valid.
(d) Tax Withholding. The Company may withhold from any amounts payable
under this Agreement such federal, state or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) Amendments; Waiver. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the Company and Executive. A
waiver of any term, covenant or condition contained in this Agreement shall not
result in a waiver of any other term, covenant or condition, and any waiver of
any default shall not result in a waiver of any later default.
(f) Entire Agreement. This Agreement contains the entire understanding of
the Company and Executive with respect to the subject matter hereof, and shall
supersede all prior agreements, promises and representations of the parties
regarding employment or severance, whether in writing or otherwise.
(g) No Right to Employment. Except as may be provided under any other
agreement between Executive and the Company, the employment of Executive by the
Company is at will, and, prior to the Effective Date, may be terminated by
either Executive or the Company at any time. Upon a termination of Executive's
employment prior to the Effective Date, there shall be no further rights under
this Agreement.
(h) Sections. Except where otherwise indicated by the context, any
reference to a "Section" shall be to a section of this Agreement.
(i) Survival of Executive's Rights. All of Executive's rights hereunder
shall survive the termination of Executive's employment.
(j) Number and Gender. Wherever appropriate, the singular shall include
the plural, the plural shall include the singular, and the masculine shall
include the feminine.
(k) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
14
<PAGE>
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement
as of the date first above written.
PATHOGENESIS CORPORATION
By _________________________________
Wilbur H. Gantz
Chairman and CEO
_________________________________
[Name of Executive]
15
<PAGE>
EXHIBIT 10.33
FACILITY AGREEMENT
PathoGenesis Corporation
5215 Old Orchard Road
Suite 900
Skokie, Illinois 60077
Attention: Carla M. Pondel,
Treasurer
Gentlemen:
We are pleased to advise you that we have approved our extension to you of
a revolving line of credit in the amount of $10,000,000 and agreed to provide
you short-term loans under this line at interest rates fixed with reference to
LIBOR periods of for one, two, three or six months, all as more fully set forth
below. The line (which for convenience, we will refer to below as the
"Facility") will, subject to the terms of this letter and our annual review of
this credit, continue to be available to you on an uncommitted basis.
The terms and conditions applicable to your borrowings under the Facility
are as follows:
A. FACILITY GENERALLY.
1. Maximum Credit. Credit will be available under the Facility solely in
the form of loans. The maximum principal amount of credit outstanding under the
Facility at any one time shall not exceed $10,000,000.
2. Revolving Basis Repayable on Demand. Borrowings under the Facility
will be payable on our demand in accordance with the terms of this Agreement,
including without limitation Section F hereof. Absent such a demand, each LIBOR
Loan will mature on the last day of its Interest Period. All loans under the
Facility shall be made against and evidenced by your demand promissory note in
the form attached to this letter as Exhibit A (the "Note"). Amounts prepaid on
the Facility may, subject to the terms of this Agreement, be reborrowed.
3. Clean-Up. Unless we have already made a demand for payment of the
entire Note, you must make such prepayments on the Note as will assure that no
indebtedness is outstanding against the Note for at least thirty consecutive
calendar days at least once each calendar year.
4. Use of Proceeds. Loans under the Facility may be used solely for your
general working capital purposes and for such other legal and proper purposes as
are consistent with all applicable laws, but not in any event for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System) or for the purpose of
purchasing or carrying any such margin stock.
<PAGE>
5. No Fee. Since this is an uncommitted credit, no commitment or similar
fee will be charged.
6. Security. This Facility is unsecured.
B. INTEREST RATE OPTIONS.
1. Generally. Loans under the Facility will bear interest with reference
to our prime commercial rate ("Prime Rate Loans") or with reference to the
London interbank offered rate ("LIBOR Loans"), or a combination of the
foregoing, and loans may be converted from one basis to another from time to
time in accordance with the terms hereof. All loans made against the Note, the
status of such loans as Prime Rate Loans or LIBOR Loans, the rate of interest
and Interest Periods applicable to the LIBOR Loans, and the repayment of any
principal of the Note shall be recorded by us on our books or, at our option,
endorsed on a schedule to the Note, and the unpaid principal balance, status and
interest rates and Interest Periods at any time so recorded or endorsed shall be
prima facie evidence in any court or other proceedings brought to enforce the
Note of the amount remaining unpaid thereon, the interest rates and Interest
Periods applicable thereto and the status of the loans evidenced thereby.
2. Prime Rate. Each Prime Rate Loan shall bear interest (which you
hereby promise to pay at the times set forth below) prior to demand at a rate
per annum determined by subtracting 3/4 of 1% from the Prime Rate and shall bear
interest after demand, whether before or after judgment, until payment in full
thereof at the rate per annum determined by adding 2-3/4% to the Prime Rate as
from time to time in effect. Any change in the interest rate on the Note by
reason of a change in the Prime Rate shall become effective on the date of the
relevant change in the Prime Rate. Interest on Prime Rate Loans shall be
computed on the basis of a year of 360 days for the actual number of days
elapsed and shall be payable on demand, but if no demand then quarterly on the
last day of each calendar quarter (commencing on March 31, 1999).
3. LIBOR. Each LIBOR Loan shall bear interest (which you hereby promise
to pay at the times set forth below) for each Interest Period you select for it
at a rate per annum determined by adding 3/4 of 1% to the Adjusted LIBOR Rate
for that Interest Period. Interest on each LIBOR Loan shall be computed on the
basis of a year of 360 days for the actual number of days elapsed and shall be
payable on demand, but if no demand, then on the last day of such Interest
Period selected therefor and, with respect to any Interest Period in excess of
three months, then on the date occurring every three months after the date such
Interest Period began and at the end of such Interest Period. Each LIBOR Loan
shall be made in a minimum amount of $250,000 or such greater amount which is an
integral multiple of $50,000. You shall notify us on or before 10:00 a.m.
(Chicago time) on the date at least three Business Days preceding the end of an
Interest Period as to whether the related LIBOR Loan is to be converted into a
new LIBOR Loan (in which event you shall notify us of the new Interest Period
you select for it) and in the event you shall fail to so notify us, or in the
event you are in default with any of the terms or conditions of this Facility,
such LIBOR Loan shall automatically be converted into a Prime Rate Loan as of
and on the last day of the existing Interest Period. If any principal of a LIBOR
Loan is not paid when due (whether by demand, lapse of time or otherwise), such
principal shall bear interest (which you hereby promise to pay on demand),
whether before or after judgment, until payment
-2-
<PAGE>
in full thereof at the rate per annum equal to 2% per annum above the rate in
effect immediately prior to such due date.
4. Manner of Borrowing. You shall give telephonic, telex or telecopy
notice to us (which notice shall be irrevocable once given and, if given by
telephone, shall be promptly confirmed in writing) by no later than 10:00 a.m.
(Chicago time) on the date (i) at least three Business Days prior to the date of
each LIBOR Loan which you request us to make, continue or effect by means of
conversion and (ii) the date of each Prime Rate Loan you request us to make or
effect by means of conversion. Prior to each loan (other than a Refunding Loan),
you must provide us a certificate in the form or substantially the form of
Exhibit B hereto confirming that you are in compliance with the terms of this
Agreement as of the date of such loan. No LIBOR Loan shall be created, continued
or effected by means of conversion if at such time you are in default with any
of the terms or conditions of the Facility. You shall in any notice requesting a
loan under the Facility specify the date of the loan requested (which shall be a
Business Day), the amount of such loan or the amount to be continued or
converted, as the case may be, and whether such loan is to be in the form of a
Prime Rate Loan or LIBOR Loan and, if such loan is a LIBOR Loan, the Interest
Period applicable thereto. If you fail to give us notice of the continuation or
conversion of any LIBOR Loan pursuant to the foregoing, such LIBOR Loan shall
automatically be converted into a Prime Rate Loan as of and on the last day of
the applicable Interest Period. You agree that we may rely on any such
telephonic, telex or telecopy notice given by any person we reasonably believe
is authorized to give such notice without the necessity of independent
investigation and, in the event any notice by such means conflicts with the
written confirmation or if such written confirmation is never received by us,
such notice shall govern if we have acted in reliance thereon. At present, we
recognize that the following individuals are authorized persons for purposes of
the Facility, but in a letter to us, add or remove individuals from this list:
Alan R. Meyer or Carla M. Pondel.
5. Disbursement. The proceeds of each loan shall be made available to
you at our principal office in Chicago, Illinois, in immediately available
funds, except to the extent such loan is a Refunding Loan, in which case we
shall record such continuation or conversion on our books and records or on the
schedule to the Note.
6. Payments. All payments in respect of the Facility shall be made to us
at our offices in Chicago, Illinois in immediately available and freely
transferable funds and shall be paid in full without set-off or counterclaim and
without reduction for and free from any and all taxes, levies, imposts, duties,
fees, charges, deductions, withholdings, restrictions or conditions of any
nature imposed by any government or any political subdivision or taxing
authority thereof. Except as otherwise provided herein, no LIBOR Loan may be
voluntarily prepaid by you on a date other than the last day of an Interest
Period applicable thereto. A payment on the Note shall be deemed first applied
to the Prime Rate Loans until payment in full thereof, with any balance applied
to the LIBOR Loans in the order in which their Interest Periods expire. All
payments (whether voluntary or required) on the Note shall be accompanied by any
amount due the Bank under Section D.1. hereof, but with the Bank's acceptance of
such a payment without requiring payments of amount due under such Section shall
not preclude the Bank's later demand for any amount due under that Section in
respect to the payment.
-3-
<PAGE>
C. OTHER TERMS APPLICABLE TO FACILITY.
1. Acceptable Condition and Results. The continued availability of this
Facility to you is, of course, subject to your condition and operating results
continuing to be reasonably satisfactory to us, as well as compliance with the
other terms of this Agreement.
2. Indebtedness. You will not issue, incur, assume or have outstanding
any indebtedness for borrowed money, nor otherwise become liable, whether as
endorser, guarantor or otherwise, for any indebtedness of any other person for
borrowed money, except for (i) indebtedness that is already outstanding as of
the date of this Agreement and properly reflected on the most recent financial
statements you previously furnished us, (ii) up to $5,000,000 in obligations in
respect of a mortgage loan, sale-leaseback or similar transaction involving the
real estate commonly known as PathoGenesis House, Park Lane, Cranford, Hounslow
TW5 9RR, United Kingdom, (iii) obligations to pay the deferred purchase or
acquisition price of property or services arising in the ordinary course of
business, (iv) obligations as lessee under leases which shall have been or
should be, in accordance with generally accepted accounting principles, recorded
as capital leases, (v) obligations under direct or indirect guaranties in
respect of, and obligations (contingent or otherwise) to purchase or otherwise
acquire, or otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in clauses (iii)
and (iv) above, (vi) any and all accounts payable, accruals and other items
characterized as "indebtedness" in accordance with generally accepted accounting
principles, and (vii) indebtedness not otherwise permitted by this sentence
aggregating not more than $1,000,000 at any one time outstanding.
3. Restrictions on Withdrawals from Investment Account. You currently
have pledged to us an investment account which you maintain with us as security
for, among other things, letters of credit we have from time to time issued for
you. You must at all times maintain securities in this account which have an
aggregate market value (as we determine it) of not less than the sum of
$10,000,000 plus the aggregate amount undrawn on outstanding letters of credit
we have issued for your account plus all unreimbursed drawings on letters of
credit we have issued for your account. No withdrawals or distributions from the
account should be made unless you would be in compliance with the immediately
preceding sentence immediately after giving effect to that withdrawal or
distribution.
4. Financial Reporting. You will furnish to us such information
regarding your business affairs, operations and financial condition as we may
reasonably request, and without request, you will furnish to us: (a) as soon as
available, and in any event within 45 days after the last day of each of your
quarterly accounting periods, a copy of your interim unaudited balance sheet as
of the last day of such quarterly accounting period, as the case may be, and
your statements of income and retained earnings for the applicable quarterly
accounting period then ended and for the year-to-date period then ended, (b) as
soon as available, and in any event within 120 days after the close of each of
your fiscal years, a copy of your audited balance sheet as of the close of such
fiscal year and statements of income, retained earnings and cash flows for the
year then ended, and accompanying notes thereto, accompanied by an unqualified
opinion thereof of a firm of independent public accountants of recognized
standing selected by you and satisfactory by us to the effect that the financial
statements have been prepared in accordance
-4-
<PAGE>
with generally accepted accounting principles consistently applied throughout
the periods involved except as set forth in the notes thereto and fairly present
in accordance with such principles your financial condition as of the close of
such fiscal year and the results of operations and cash flows for the fiscal
year then ended, and (c) promptly after knowledge thereof shall have come to the
attention of any of your responsible officers written notice of any threatened
or pending litigation or governmental proceeding against you which, if adversely
determined would materially adversely affect your financial condition, business,
properties or operations or of any material noncompliance with the terms of this
Agreement.
D. FUNDING INDEMNITY; CHANGE IN CIRCUMSTANCES.
1. Funding Indemnity. In the event we shall incur any loss, cost or
expense (including, without limitation, any loss (including loss of profit),
cost or expense incurred by reason of the liquidation or re-employment of
deposits or other funds acquired by us to fund or maintain any LIBOR Loan or the
relending or reinvesting of such deposits or amounts paid or prepaid to us) as a
result of:
(i) any payment, prepayment or conversion of a LIBOR Loan on a date
other than the last day of the then applicable Interest Period for any
reason, whether before or after demand, and whether or not such payment,
prepayment or conversion is required by any other provisions hereof; or
(ii) any failure by you to borrow, continue or effect by conversion a
LIBOR Loan on the date specified in the notice given pursuant hereto;
then, promptly upon our demand, you shall pay to us such reasonable amount as
will reimburse us for such loss, cost or expense. If we make such a claim for
compensation, we shall provide to you a certificate setting forth the amount of
such loss, cost or expense in reasonable detail and such certificate shall be
conclusive and binding on you as to the amount thereof if reasonably determined.
2. Increased Costs. With respect to the LIBOR Loans, if we shall
determine in good faith any change in any applicable law, treaty, regulation or
guideline (including, without limitation, Regulation D of the Board of Governors
of the Federal Reserve System) or any new law, treaty, regulation or guideline,
or any interpretation of any of the foregoing by any governmental authority
charged with the administration thereof or any central bank or other fiscal,
monetary or other authority having jurisdiction over us or our lending branch or
the LIBOR Loans (whether or not having the force of law) (hereinafter called a
"Change in Law") shall:
(i) impose, modify or deem applicable any reserve, special deposit or
similar requirements against assets held by, or deposits in or for the
account of, or loans by, or any other acquisition of funds or disbursements
by, us;
(ii) subject us, the LIBOR Loans or the Note to any tax (including,
without limitation, any United States interest equalization tax or similar
tax however named
-5-
<PAGE>
applicable to the acquisition or holding of debt obligations and any
interest or penalties with respect thereto), duty, charge, stamp tax, fee,
deduction or withholding in respect of this Agreement, any LIBOR Loan or
the Note except such taxes as may be measured by our overall net income or
that of our lending branch and imposed by the jurisdiction, or any
political subdivision or taxing authority thereof, in which our principal
executive office or our lending branch is located;
(iii) change the basis of taxation of payments of principal and
interest due from you to us hereunder or under the Note (other than by a
change in taxation of our overall net income); or
(iv) impose on us any penalty with respect to the foregoing or any
other condition regarding this agreement, any LIBOR Loan or its
disbursement, or the Note;
and we shall determine that the result of any of the foregoing is to increase
the cost (whether by incurring a cost or adding to a cost) to us of making or
maintaining any LIBOR Loans hereunder or to reduce the amount of principal or
interest received by us (without benefit of, or credit for, any prorations,
exemptions, credits or other offsets available under any such laws, treaties,
regulations, guidelines or interpretations thereof), then you shall pay on
demand to us from time to time as specified by us such additional amounts as we
shall determine are sufficient to compensate and indemnify us for such increased
cost or reduced amount. If we make such a claim for compensation, we shall
provide to you a certificate setting forth such increased cost or reduced amount
as a result of any event mentioned herein and such certificate shall be
conclusive and binding on you as to the amount thereof if reasonably determined.
3. Illegality. Notwithstanding any other provisions hereof or the Note,
if at any time we shall determine in good faith that any change in applicable
law or regulation or in the interpretation thereof makes it unlawful or
impracticable for us to make or continue to maintain any LIBOR Rate Loan, we
shall promptly give notice thereof to you and we will no longer make, continue
or effect by conversion any such LIBOR Loans hereunder until it is no longer
unlawful or impracticable for us to make such LIBOR Loans. You, on demand, shall
promptly prepay the outstanding principal amount of the affected LIBOR Loans,
together with all interest accrued thereon and all other amounts payable to us
hereunder; provided, however, unless we have demanded repayment of the entire
Note, you may then elect to borrow the principal amount of such LIBOR Loans by
means of a Prime Rate Loan, subject to the other terms and conditions hereof.
4. Inadequacy of Rate. Notwithstanding any other provision hereof or the
Note, if prior to the commencement of any Interest Period we shall determine (i)
that United States Dollar deposits in the amount of any LIBOR Loan scheduled to
be outstanding during such Interest Period are not available to us in the London
interbank market or (ii) by reason of circumstances affecting the London
interbank market, adequate and reasonable means do not exist for ascertaining
the Adjusted LIBOR Rate, we shall promptly give notice thereof to you, and we
will no longer make, continue or effect by conversion any LIBOR Loan in such
amount and for such Interest Period until United States Dollar deposits in such
amount and for the Interest Period selected by you shall again be readily
available in the London interbank market
-6-
<PAGE>
and adequate and reasonable means exist for ascertaining the Adjusted LIBOR
Rate. Upon the giving of such notice, unless we have demanded repayment of the
entire Note, you may elect to either (i) pay or prepay, as the case may be, only
such LIBOR Loan or (ii) convert such LIBOR Loan to a Prime Rate Loan, subject to
the other terms and conditions hereof.
E. DEFINITIONS.
(a) The term "Adjusted LIBOR Rate" means the rate per annum equal to the
rate determined by dividing (i) LIBOR by (ii) 100% minus Reserve Percentage; (b)
the term "LIBOR" means, for each Interest Period, (i) the LIBOR Index Rate for
such Interest Period, if such rate is available, and (ii) if the LIBOR Index
Rate cannot be determined, the arithmetic average of the rates of interest per
annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which
deposits in U.S. Dollars in immediately available funds are offered to this Bank
at 11:00 a.m. (London, England time) two Business Days before the beginning of
such Interest Period by three (3) or more major banks in the interbank
eurodollar market selected by this Bank for a period equal to such Interest
Period and in an amount equal or comparable to the applicable LIBOR Loan
scheduled to be outstanding during such Interest Period (with the rate as so
determined by us to be conclusive provided we have acted in good faith in
connection therewith); (c) the term "LIBOR Index Rate" means, for any Interest
Period, the rate per annum (rounded upwards, if necessary, to the next higher
one hundred-thousandth of a percentage point) for deposits in U.S. Dollars for a
period equal to such Interest Period, which appears on the Telerate Page 3750 as
of 11:00 a.m. (London, England time) on the day two Business Days before the
commencement of such Interest Period; and (d) the term "Telerate Page 3750"
means the display designated as "Page 3750" on the Telerate Service (or such
other page as may replace Page 3750 on that service or such other service as may
be nominated by the British Bankers' Association as the information vendor for
the purpose of displaying British Bankers' Association Interest Settlement Rates
for U.S. Dollar deposits).
"Business Day" means a day on which we are open for business in Chicago,
Illinois and, when used with respect to LIBOR Loans, a day on which we are open
for business in Chicago dealing in U.S. Dollars in the London interbank market.
"Interest Period" means the period of one, two, three or six months
duration selected by you as the period for a LIBOR Loan provided that any
Interest Period which would otherwise end on a day which is not a Business Day
shall be extended to the next succeeding Business Day unless such Business Day
falls into another calendar month in which case such Interest Period shall end
on the next preceding Business Day.
"Prime Rate" means, for any day, the rate of interest announced by us from
time to time as our prime commercial rate, as in effect on such day. The Prime
Rate reflects market rates of interest as well as other factors, and it is not
necessarily our best or lowest rate.
"Refunding Loan" means a new loan made on the day on which an outstanding
earlier loan is maturing, if and to the extent that the proceeds of such new
loan are used entirely for the purpose of paying or prepaying the principal
amount of such outstanding earlier loan.
-7-
<PAGE>
"Reserve Percentage" means the daily arithmetic average reserve requirement
imposed by the Board of Governors of the Federal Reserve System (or any
successor) under Regulation D on Eurocurrency Liabilities (as such term is
defined in Regulation D), subject to any amendments of such reserve requirement
by such Board or its successor, taking into account any transitional adjustment
thereto (for purposes of this definition, the LIBOR Loans made hereunder shall
be deemed to be Eurocurrency Liabilities as defined in Regulation D without
benefit of or credit for prorations, exemptions or offsets under Regulation D).
F. DISCRETIONARY CREDIT REPAYABLE ON DEMAND.
The Facility is available on an uncommitted and demand basis. Accordingly,
we make loans under the Facility on a case-by-case basis at our discretion as
and when you request them and have the rights to terminate the Facility, stop
lending under it and even demand repayment of all the loans outstanding under it
in each case at any time we in good faith consider action of that magnitude
appropriate. Your compliance with this letter does not obligate us to make each
loan you request, nor does that compliance mean we cannot exercise our rights to
terminate the Facility or make a demand for repayment when we in good faith
consider that action appropriate. While your noncompliance with this letter
would certainly provide us sufficient justification to refuse to make loans you
have requested, terminate the Facility or make such a demand, such noncompliance
is not a necessary condition to our exercise of those rights. While we do have
these rights, please bear in mind a few things. First, because we have
discretion to exercise these rights, you have a fair measure of freedom as to
how you conduct your business. This Agreement need not and does not constitute
an elaborate loan agreement with a comprehensive set of restrictive covenants
with which you must comply. The Agreement's requirements are few. Second, we are
making this Facility available to you because we do value our relationship with
you and certainly do not intend to exercise these rights except to the extent we
would ever in good faith believe we need to take that action. In any event,
unless there occurs some noncompliance with this Agreement or there occurs some
change in your condition or prospects, financial or otherwise, that we
reasonably consider to be both material and adverse, we will not terminate this
Facility without first providing you thirty (30) days' written notice of our
intent to do so.
G. MISCELLANEOUS.
1. Costs. You shall reimburse us for all reasonable costs and expenses
which we may incur in connection with the maintenance and other administration
of this credit arrangement (including, without limitation, reasonable legal
fees) and any reasonable costs and expenses suffered or incurred by us in
enforcing loans under this credit arrangement.
2. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto on different counterpart signature
pages, each of which when so executed shall be an original but all of which are
to constitute one and the same instrument.
3. Governing Law and Effectiveness. This arrangement shall be construed
in accordance with and governed by the laws of Illinois and shall become
effective upon receipt at
-8-
<PAGE>
our offices in Chicago of an accepted copy of this agreement, together with such
documentation as we deem reasonably necessary.
Dated as of this 22nd day of February, 1999.
Very truly yours,
HARRIS TRUST AND SAVINGS BANK
By: /s/ Mark Piekos
-----------------------
Mark Piekos
Vice President
Accepted and agreed to at Chicago, Illinois as of the date first above
written.
PATHOGENESIS CORPORATION
By: /s/ Alan R. Meyer
------------------------
Alan R. Meyer
Executive Vice President
-9-
<PAGE>
EXHIBIT 10.33
EXHIBIT A
DEMAND NOTE
$10,000,000.00 February 22, 1999
Chicago, Illinois
UPON DEMAND, for value received, the undersigned, PATHOGENESIS CORPORATION,
a Delaware corporation (the "Borrower"), promises to pay to the order of Harris
Trust and Savings Bank (the "Bank") at its office at 111 West Monroe Street,
Chicago, Illinois, or at such other place as the holder hereof may from time to
time specify, the principal sum of Ten Million and No/100 Dollars
($10,000,000.00), or so much thereof as may be advanced to the Borrower under
the "Facility" described in the Facility Agreement referred to below.
This Note evidences "Prime Rate Loans" and "LIBOR Loans", as such terms are
defined in that certain Facility Agreement bearing even date herewith between
the Borrower and the Bank relating to a revolving credit facility extended to
the Borrower (the "Facility Agreement"), made and to be made to the Borrower by
the Bank under the Facility Agreement as the same may from time to time be
renewed or extended; and the Borrower hereby promises to pay interest on each
loan evidenced hereby at the rate and time specified therefor in the Facility
Agreement.
Each loan made under the Facility Agreement by the Bank to the Borrower,
any repayment of principal hereon and the status of each such loan as a Prime
Rate Loan or LIBOR Loan shall be endorsed by the holder hereof on a schedule to
of this Note or (so long as this note is held by Harris Trust and Savings Bank)
recorded on the books and records of the holder hereof, and the Borrower agrees
that in any action or proceeding instituted to collect or enforce collection of
this Note, the amount so endorsed on a schedule to this Note or recorded on the
books and records of Harris Trust and Savings Bank shall be prima facie evidence
of the unpaid balance of this Note and the status of each loan as a Prime Rate
Loan or LIBOR Loan as so endorsed or recorded shall be prima facie evidence of
such status.
This Note and the holder hereof are entitled to all the benefits provided
for under the Facility Agreement, to which reference is hereby made for a
statement thereof. Nothing contained in any instrument or document setting forth
terms and conditions applicable hereto shall in any manner affect or impair the
demand character of this Note, and payment hereof may be demanded irrespective
of whether or not a default has occurred under the terms of such instruments and
documents.
<PAGE>
This Note shall be construed in accordance with, and governed by, the laws
of the State of Illinois. The Borrower hereby waives presentment for payment and
demand. The Borrower agrees to pay to the holder hereof all reasonable expenses
incurred or paid by such holder, including attorneys' fees and court costs, in
connection with the collection of this Note.
PATHOGENESIS CORPORATION
By:
------------------------
Its:
------------------------
-2-
<PAGE>
EXHIBIT 10.33
EXHIBIT B
NOTICE OF BORROWING
DATE: _______________, 199___
TO: Harris Trust and Savings Bank as lender under the Facility Agreement
dated as of February __, 1999 (as extended, renewed, amended or
restated from time to time, the "Facility Agreement") among
PathoGenesis Corporation and Harris Trust and Savings Bank
Ladies and Gentlemen:
The undersigned, PathoGenesis Corporation (the "Borrower"), refers to the
Facility Agreement, the terms defined therein being used herein as therein
defined, and hereby gives you notice irrevocably, pursuant to Section B.4 of the
Facility Agreement, of the loan specified below:
1. The Business Day of the proposed Loan is _______________, 199___.
2. The aggregate amount of the proposed Loan is $__________.
3. The loan is to consist of a $__________ Prime Rate Loan/LIBOR
Loan with an Interest Period of __________ month(s).
The undersigned hereby certifies that on the date of the proposed loan,
before and after giving effect thereto and to the application of the proceeds
therefrom, the undersigned is and will be in compliance with the Facility
Agreement, including without limitation Section C thereof.
PATHOGENESIS CORPORATION
By
Name _______________________________
Title ______________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors
PathoGenesis Corporation:
We consent to incorporation by reference in the registration statements (Nos.
333-05095, 333-45571, 333-61183 and 333-63679) on Form S-8 of PathoGenesis
Corporation of our reports dated January 25, 1999, except as to note 11 which is
as of March 29, 1999, relating to the consolidated balance sheets of
PathoGenesis Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, and the consolidated financial statement schedule for the year ended
December 31, 1998, which reports appear in the December 31, 1998 annual report
on Form 10-K of Pathogenesis Corporation.
KPMG LLP
Seattle, Washington
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. STATEMENTS OF PATHOGENESIS CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,139,153
<SECURITIES> 46,868,390
<RECEIVABLES> 10,961,242
<ALLOWANCES> 0<F1>
<INVENTORY> 9,907,916
<CURRENT-ASSETS> 79,784,341
<PP&E> 27,341,526
<DEPRECIATION> 9,704,385
<TOTAL-ASSETS> 112,765,747
<CURRENT-LIABILITIES> 14,630,726
<BONDS> 0
0
0
<COMMON> 16,329
<OTHER-SE> 93,394,062
<TOTAL-LIABILITY-AND-EQUITY> 112,765,747
<SALES> 60,684,091
<TOTAL-REVENUES> 61,051,764
<CGS> 9,555,213
<TOTAL-COSTS> 62,621,663
<OTHER-EXPENSES> 110,470
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 492,551
<INCOME-PRETAX> 1,882,901
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,882,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,882,901
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
<FN>
<F1>THE AMOUNT OF RECEIVABLES REPORTED IS NET OF $1,550,864 OF ALLOWANCES.
<F2>THE TOTAL COSTS INCLUDE LOSS PROVISION OF $219,806.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.1
Important Information on Forward-Looking Statements
Our annual report on Form 10-K, news releases and other public documents,
as well as oral statements that we may make, contain "forward-looking
statements" in addition to historical information. These forward-looking
statements include statements concerning our anticipated product development
program, financial and product performance, and other non-historical events.
Since these forward-looking statements are subject to known and unknown risks
and uncertainties, our actual results may be materially different from those
expressed or implied by the forward-looking statements. You should regard all
cautionary statements made in this annual report on Form 10-K as being
applicable to all related forward-looking statements wherever they appear.
Below, we identify some important factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements.
(i) Uncertainty of Future Profitability. We began the commercial sale of our
first drug product, TOBI, in January 1998. Before then, we had no sources
of operating revenues from any of our drug candidates and limited sources
of revenue from grants and royalties. Although we reported a small profit
in 1998, we had an accumulated deficit of $98,940,262 as of December 31,
1998. Our future profitability will depend on, among other things, the
success of TOBI and our ability to develop and market other products.
Because TOBI has been on the market only since January 1998, we do not
know with certainty how sales may be affected by a number of factors and
whether such factors are sporatic, cyclical or have determinable trends.
These factors include: the seasonality arising from business cycles,
weather, geographic factors, or cold and flu outbreaks, the impact of
hospitalizations or exacerbations experienced by CF patients, compliance
with chronic therapy (28 days on drug, 28 days off drug), physician and
patient concerns about potential bacterial resistance to TOBI, insurance
reimbursement factors variability in ordering patterns by drug
wholesalers, and the effect of price increases and changes in credit
terms and the approval, availability, efficacy and popularity of
alternative treatments. The interplay of these factors may cause
fluctuations in quarter to quarter sales. In addition, the effect these
factors may have on sales is likely to change as TOBI sales increase and
our drug is introduced in other countries. There can be no assurance that
one or more of these factors, the factors discussed below or other,
unforeseen factors, will not adversely affect our future operating
results and financial condition.
(ii) Dependence on TOBI. We do not expect our drug candidates other than TOBI
to be commercially available for at least several years, if at all. We
must depend on revenues generated from TOBI sales to fund the development
of additional drug products. However, a high level of market acceptance
of TOBI for cystic fibrosis and a high level or prescriptions for chronic
use of TOBI may not be achieved, or levels of market acceptance or
prescriptions for chronic use may stagnate or even decline under certain
circumstances, such as competition from alternative therapies or adverse
pricing changes. See "Competition" and "Uncertainty over Third Party
Reimbursement and Product Pricing" below. In addition, we may not be
successful in developing other drug products commercially. We have seven
years of marketing exclusivity for TOBI in the U.S. from the time of
TOBI's approval in December 1997. However, tobramycin also has been
approved by the FDA for intravenous and intrathecal (injection into
spinal fluid) use. These generic formulations of tobramycin can be
modified by pharmacists, physicians or patients for inhalation use.
Although this practice is not approved by the FDA, it may continue and
may have a material adverse effect on reimbursement levels, sales and
market acceptance of TOBI. Furthermore, we could incur substantial costs
in asserting any rights to prevent such uses under the Orphan Drug Act.
See also the discussion under "Uncertain Ability to Protect Patents and
Proprietary Technology" below.
(iii) Uncertainty of Third Party Reimbursement and Product Pricing. One factor
that may significantly affect how successfully we can commercialize our
products is the extent to which reimbursement for the cost of such
products will be available from third party payors, such as private
health insurers or Medicaid in the U.S. Adequate reimbursement in the
U.S. or other countries may not be available for any products we have
developed or will develop. If government and third-party payors do not
provide adequate coverage and reimbursement for use of our products, the
market acceptance of those products would be likely to decline.
We intend to market TOBI in international markets as soon as we have
received the appropriate regulatory approval. The prices of our products
may be restricted by price controls imposed by local
1
<PAGE>
governments and healthcare providers in some countries. Price controls
can cause significant differences in prices between different markets.
The existence of price controls can limit the revenues from sales of our
products outside the U. S. and may adversely affect our business and
results of operations. Currency fluctuations also may cause adverse
effects.
(iv) Limited Sales and Marketing Capabilities. Our sales, marketing and
distribution capabilities in the U.S. were established relatively
recently in anticipation of TOBI's launch in 1998, so as a company, we
have limited experience in these areas. These capabilities may not be
sufficient or successful for the longer term. We are establishing sales,
marketing and distribution capabilities in other countries where we have
received, or expect to receive in the near future, regulatory approval to
market TOBI. Our efforts in those countries may not be adequate or
successful, in which case our revenue and profits could be adversely
affected.
(v) Limited Manufacturing Capability; Dependence on Suppliers. We rely on
others to supply raw materials and to manufacture TOBI according to the
FDA's requirements. Although we have a long-term contract with a bulk
supplier of tobramycin and a long-term agreement with a contract
manufacturer, there can be no assurance that we will be able to obtain
future supplies of bulk tobramycin on favorable terms, that contract
manufacturers will be able to provide us with sufficient quantities of
TOBI, or that the products supplied will meet our and the FDA's
specifications.
(vi) Uncertain Ability to Protect Patents and Proprietary Technology. Our
ability to compete effectively depends on our ability to protect our
proprietary technology in the U.S. and abroad, preserve our trade secrets
and know-how and maintain technological advantages. We intend to file
applications as appropriate for patents covering formulation, composition
of matter, uses of our drug candidates, our proprietary processes and any
significant gene sequences that our scientists discover. We can incur
substantial costs in proceedings before the U.S. Patent and Trademark
Office and other regulatory authorities, and we may not obtain any
patents we apply for. Even if obtained, these patents may be challenged,
invalidated or circumvented, or may not provide any competitive
advantage. We also rely on trade secrets, know-how and other unpatented
proprietary information in our business. We have entered into
confidentiality and invention agreements with our employees and
consultants, but there can be no assurance that each of these agreements
will be honored. Moreover, we may not be able to effectively protect our
patents or our rights to unpatented trade secrets, or others may
independently develop substantially equivalent proprietary information.
(vii) Government Regulation and Uncertainty of Regulatory Approval. Our
research, clinical trials, drug production and marketing are subject to
regulation by numerous governmental agencies in the U.S. and other
countries. The effect of government regulation, or a change in the
regulations, may be to increase product development costs, delay
marketing of our proposed products, or give a competitive advantage to
our competitors. Regulatory authorities may not approve any products we
develop on a timely basis or at all. In addition, noncompliance with
regulatory requirements could result in fines, injunctions, seizures of
products, total or partial suspension of product marketing, withdrawal of
marketing approvals, or criminal prosecution, among other outcomes.
Compliance with regulations may be burdensome.
(viii) Uncertainty of Drug Development and Clinical Trials. Before approving a
drug for commercial sale as a treatment for a disease, the FDA and other
regulatory authorities generally require that the safety and efficacy of
the drug be supported by results from clinical trials. Certain of those
authorities may require post-marketing testing and surveillance. Results
of initial studies of drug candidates are not necessarily indicative of
results that will be obtained from subsequent or more extensive
preclinical and clinical testing or long-term efficacy studies. Adverse
or inconclusive clinical trial results could significantly delay
regulatory filings or result in a filing for a narrower indication. There
can be no assurance that our research and development, preclinical
testing, clinical trials, or long-term safety and efficacy studies will
be successfully completed or, if completed, will have the desired
results. We may not obtain regulatory approvals or may obtain approvals
that are not as broad as sought. Even if we succeed in obtaining the
desired regulatory approval for a drug, we may not be able to produce the
2
<PAGE>
drug candidates in commercial quantities at reasonable costs.
Furthermore, products may not achieve market acceptance.
(ix) Technological Change. The pharmaceutical business is characterized by
extensive research efforts and rapid technological progress. New
developments in molecular biology, medicinal pharmacology, recombinant
DNA technology and other fields of biology and pharmaceutical chemistry
are expected to continue at a rapid pace in academia and industry.
Research and discoveries by others may render some or all of our programs
or drug candidates noncompetitive or obsolete.
(x) Competition. Many companies, including well-known pharmaceutical
companies, chemical companies and specialized genetic engineering
companies, are engaged in developing pharmaceuticals for human
therapeutic applications. Many of these companies have substantially
greater financial, research and development, manufacturing, marketing and
human resources than we have and represent significant competition. Such
companies may succeed in developing products that are more effective or
less costly than any that we may develop and may also be more successful
in manufacturing and marketing.
(xi) Product Liability. Our business exposes us to potential product liability
risks that are inherent in the testing, manufacturing and marketing of
human therapeutic products. We maintain insurance against product
liability and defense costs in the amount of $25 million per occurrence
and $25 million in the aggregate. There can be no assurance that product
liability claims will not occur, that we will be able to obtain or
maintain product liability insurance on acceptable terms, or that such
insurance will provide adequate coverage against any potential claims.
(xii) Use of Hazardous Materials. Our research and development involve the
controlled use of hazardous, infectious and radioactive materials. We are
subject to stringent federal, state and local laws, rules, regulations
and policies governing the use, generation, manufacture, storage, air
emission, effluent discharge, handling and disposal of certain materials
and wastes. We may incur significant costs to comply with environmental
laws, rules, regulations and policies. Our business, financial position
or results of operations may be materially and adversely affected by
current or future environmental laws, rules, regulations and policies or
by any releases or discharges of materials which could be hazardous. We
do not maintain a separate insurance policy to cover the risk of
accidental injury or contamination from these materials.
(xiii) Dependence on Qualified Personnel. In view of the intense competition for
qualified personnel in the pharmaceutical field, we may not be able to
continue to attract and retain the qualified personnel necessary for the
development of our business. The unexpected loss of the services of
existing personnel, as well as the failure to recruit additional key
scientific, technical and managerial personnel in a timely manner, would
be detrimental to our programs and business.
(xiv) Dependence on Others. Our strategy for the research, development and
commercialization of our drug candidates and proprietary technologies may
require us to enter into various arrangements with corporate and academic
collaborators, licensors, licensees and others. There can be no assurance
that any revenues or profits will be derived from such arrangements, or
that we will be able to enter into collaboration arrangements with others
in the future.
(xv) Stock Price Volatility. The market price of our common stock has
fluctuated significantly, and is likely to do so in the future, as is
typical for publicly traded emerging pharmaceutical companies. Factors
such as, the results of clinical trials, announcements of new products by
PathoGenesis or our competitors, regulatory actions, developments or
disputes concerning patent or proprietary rights and period-to-period
fluctuations in our financial results could have a significant impact on
the market price of the common stock.
(xvi) Access to Capital. We may need to raise substantial additional capital to
fund future operations. We may seek such additional funding through
public or private financings or collaborative, licensing and other
arrangements with corporate partners. If additional funds are raised by
issuing equity securities, dilution to
3
<PAGE>
existing stockholders will result and future investors may be granted
rights superior to those of existing stockholders. There can be no
assurance, however, that additional financing will be available to us on
acceptable or affordable terms when needed.
4
<PAGE>
Exhibit 99.2
[LOGO]
NEWS RELEASE
PATHOGENESIS CORPORATION 201 ELLIOTT AVENUE WEST, SEATTLE, WASHINGTON 98119
(206) 467-8100
FOR IMMEDIATE RELEASE
Contacts: Alan Meyer Maryellen Thielen
(206) 467-8100 (847) 583-5424
PATHOGENESIS CORP. ANNOUNCES
ANTICIPATED FIRST QUARTER RESULTS
---------------------------------
SEATTLE, March 22, 1999 -- PathoGenesis Corp. (Nasdaq: PGNS) announced today
that first quarter 1999 sales will be lower than originally expected due to
fluctuations in ordering patterns for TOBI(R) (tobramycin solution for
inhalation), the company's drug for managing pseudomonal lung infections in
cystic fibrosis patients.
Based on current sales levels and patient demand indicators, first quarter sales
of TOBI are expected to be about $10 million. As a result, the company expects
to report a net loss of about $4.9 million or 30 cents per share in the first
quarter, versus the First Call consensus estimate of 20 cents in earnings per
diluted share. Accordingly, 1999 sales are expected to be in the $62 million to
$63 million range and the net loss for 1999 would be about $3.3 million to $4.1
million, or 20 cents to 25 cents per share.
"Fourth quarter 1998 sales reflected stronger than normal purchases of TOBI,"
said Wilbur H. Gantz, chairman and chief executive officer. "Our current
analysis suggests that some first quarter 1999 sales were accelerated into the
fourth quarter of 1998 as patients and wholesalers increased their normal
orders. As a result, first quarter 1999 sales will not meet our earlier
expectations.
"We firmly believe TOBI's sales potential remains highly promising, because the
drug has been proven to work extremely well," Gantz added. "In particular, our
data on TOBI showed improvement in all cystic fibrosis patient subgroups, with
the strongest benefit in teenagers and females. However, now think it will take
longer to further penetrate the U.S. cystic fibrosis market and achieve the full
sales potential for TOBI.
"Our task is to convince more doctors that their patients will significantly
benefit from the chronic use of TOBI," Gantz said. To continue doing this,
PathoGenesis added seven sales people to its 24-person sales force in the first
quarter. Gantz said they will 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 expect to launch TOBI in several countries this year, including Canada in
the second quarter," Gantz added. "Moreover, our data indicate equally promising
opportunities in other indications outside cystic fibrosis. To take advantage of
these opportunities, we intend to pursue
<PAGE>
a Phase III clinical trial in bronchiectasis and additional clinical work in
severe chronic bronchitis and ventilator-dependent patients."
For the first quarter of 1998, PathoGenesis reported net income of $985,000, or
six cents per diluted share. Net revenues were $14.7 million, including TOBI
sales of $14.5 million in its first quarter on the market. For 1998,
PathoGenesis reported net earnings of $1.9 million, or 11 cents per diluted
share, and net revenues of $61.1 million, including TOBI sales of $60.7 million.
Seattle-based PathoGenesis Corp. is a pharmaceutical company that develops drugs
to treat chronic infectious diseases -- lung infections, in particular -- where
there is a significant need for improved therapy. The company markets TOBI, an
inhaled antibiotic, in the U.S. for management of Pseudomonas aeruginosa
infections in patients with cystic fibrosis. In addition, PathoGenesis is
developing other drug candidates to treat serious chronic lung infections,
including those common in cystic fibrosis, bronchiectasis and tuberculosis
patients. PathoGenesis' stock is traded on the Nasdaq National Market System
under the symbol PGNS. The company's Web site is located at
www.pathogenesis.com.
Note: This news release contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to known and unknown risks, uncertainties or other
factors that may cause the company's actual results to be materially different
from historical results or any results expressed or implied by such forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, uncertainties related to the fact that PathoGenesis began
commercial operations only recently, its dependence on TOBI, third party
reimbursement and product pricing, government regulation, drug development and
clinical trials, competition and alternative therapies, and other factors
described in PathoGenesis' filings with the Securities and Exchange Commission.
