[CHIRON CORPORATION LOGO] [PATHOGENESIS CORPORATION LOGO]
EMPLOYEE QUESTIONS AND ANSWERS REGARDING
EMPLOYEE STOCK PURCHASE PLAN (ESPP) AND 401K PLAN
Q: WHAT HAPPENS TO MY PARTICIPATION IN THE PATHOGENESIS ESPP (SHAREPATH) AS A
RESULT OF THE CHIRON TRANSACTION?
A: You will be permitted to make new deposits into SharePath only through the
Acceptance Date (which is the date of Chiron's acceptance for payment of shares
of PathoGenesis stock under its tender offer). The balance in your account as of
that date will be used to purchase additional PathoGenesis shares. At the time
PathoGenesis becomes a wholly owned subsidiary of Chiron ("Effective Time"),
SharePath will terminate.
Q: WHEN CAN I PARTICIPATE IN CHIRON'S ESPP?
A: Eligible PathoGenesis employees will be given the opportunity to enroll in
the Chiron ESPP during the next quarter's enrollment campaign following the
Effective Time. Information describing the Chiron ESPP and enrollment procedures
will be distributed at a later date.
Q: AS A RESULT OF THE CHIRON TRANSACTION, WHAT HAPPENS TO ANY PATHOGENESIS STOCK
I HOLD OUTRIGHT, INCLUDING STOCK PURCHASED THROUGH THE ESPP?
A: Generally, if you tender shares that you hold outright, they will be
purchased at the Acceptance Date for $38.50 per share. If you do not tender your
shares, but continue to hold your shares you will have the right to receive in
cash the Offer Price ($38.50), without interest at the Effective Time. The
PathoGenesis stock will automatically be cancelled and will cease to exist at
the Effective Time. As soon as practicable after the Effective Time you will
receive a packet of information from Chiron's paying agent including
instructions for use in surrendering your PathoGenesis stock in exchange for the
Offer Price per share. Those instructions will include information on what
steps you should take regarding shares held for you by a broker in "street name"
as well as lost, stolen or destroyed stock certificates.
Q. WHAT IMPACT DOES THE CHIRON TRANSACTION HAVE ON ANY PATHOGENESIS STOCK
HELD IN MY 401(K) ACCOUNT?
A: At the Effective Time, any shares of PathoGenesis stock held in your
PathoGenesis 401(k) Plan account will be converted to cash (at the Offer Price
of $38.50). You will be given the opportunity to determine an alternative fund
in which to invest those monies. Since 401(k) plans are tax-deferred plans, the
conversion to cash of your PathoGenesis shares will not be a taxable event.
On-going employer match contributions after the Effective Time will be invested
in a fund (or funds) as determined by the Plan Sponsor.
Q: HAVE PLANS BEEN MADE TO INTEGRATE PATHOGENESIS AND CHIRON BENEFITS
PROGRAMS SUCH AS 401(K), PAID TIME OFF, MEDICAL INSURANCE, DENTAL INSURANCE,
LIFE INSURANCE AND DISABILITY INSURANCE?
A: At some point in the future, the programs of the two companies will be
merged. Full details will be communicated to you in advance.
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[CHIRON CORPORATION LOGO] [PATHOGENESIS CORPORATION LOGO]
EMPLOYEE QUESTIONS AND ANSWERS
REGARDING PATHOGENESIS EMPLOYEE STOCK OPTIONS
As described below under "Cash Out Right", at the time PathoGenesis becomes a
wholly owned subsidiary of Chiron ("Effective Time"), you are entitled to cash
out your PathoGenesis stock options. The Chiron/PathoGenesis agreement also
provides an alternative to cashing out which is described below under
"Conversion Alternative". Please review this information carefully. In the
future, you will receive more detailed materials describing these alternatives
and the steps you must take to elect the alternative you prefer.
CASH OUT RIGHT
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Q: WHAT HAPPENS TO MY PATHOGENESIS STOCK OPTIONS AS A RESULT OF THE CHIRON
TRANSACTION?
A: CASH OUT RIGHT: All options vest at the date of Chiron's acceptance for
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payment of shares of PathoGenesis stock under its tender offer ("Acceptance
Date") and you are entitled to cash out your options at the Effective Time. If
you do nothing, under the terms of your options, at the Acceptance Date, each
option will become fully vested and at the Effective Time you will be entitled
to receive the value in cash of each option, less applicable withholding taxes
(the "Cash Out Right"). This will be calculated as the excess, if any, of the
Offer Price ($38.50) over the exercise price of your option(s) multiplied by the
number of shares of PathoGenesis stock subject to the option.
This is complicated, so consider this example:
Mary Smith has the following PathoGenesis stock options at the
Effective Time:
Grant Date # of Shares Granted Exercise Price # of Shares Vested
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1/26/1999 400 $50.25 100
5/7/1999 800 $13.50 200
6/1/2000 400 $16.50 0
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TOTAL 1,600
Under the Cash Out Right, at the Acceptance Date, the unvested shares Mary Smith
holds would vest and at the Effective Time she would be eligible to cash out all
options that have an exercise price less than the Offer Price. She would receive
the following, less applicable withholding taxes:
800 X ($38.50 - $13.50) = $20,000.00
400 X ($38.50 - $16.50) = $ 8,800.00
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Total $28,800.00
Because the option granted January 26, 1999 has a higher exercise price than the
Offer Price, it would have no cash out value and would expire.
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[CHIRON CORPORATION LOGO] [PATHOGENESIS CORPORATION LOGO]
CONVERSION ALTERNATIVE
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Q: WHAT IS THE CONVERSION ALTERNATIVE?
A: Instead of cashing out your options, you may elect to convert all of your
PathoGenesis options into options on Chiron stock and also receive an additional
option on Chiron stock, provided you waive the acceleration of vesting and cash
payment described above under the heading "Cash Out Right". If you choose to
convert, all of your PathoGenesis options will be converted into options on
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Chiron stock at the Effective Time. This would include vested and unvested
PathoGenesis options whether they are in the money or "under water". Your Chiron
conversion options will have the same vesting schedule and life as your
underlying PathoGenesis options.
As an incentive for you to convert your PathoGenesis options into options on
Chiron stock, at the Effective Time Chiron will grant you an additional option
on Chiron stock calculated to be 30% of your unvested PathoGenesis options that
are converted. This new Chiron option will be granted at the Fair Market Value
(FMV) of Chiron stock, as defined under the Chiron Option Plan, at the Effective
Time, with a four year vesting schedule and ten year life consistent with that
of other Chiron employee stock options.
INFORMATION DESCRIBING THE PROCESS FOR MAKING AN ELECTION TO CONVERT YOUR
PATHOGENESIS OPTIONS WILL BE DISTRIBUTED AS SOON AS PRACTICABLE.
Q: WHAT ARE THE ADVANTAGES OF THE CONVERSION ALTERNATIVE?
A: The Conversion Alternative offers you the ability to:
a. Convert your PathoGenesis options to Chiron options to enable you to
plan for potential tax implications.
b. Obtain potential future value in your PathoGenesis options that have a
higher exercise price than the Offer Price (your 'underwater' options). If
not converted, these options would expire with no value under the Cash Out
Right.
c. Become a Chiron optionee upon the Effective Time and participate from day
one in the potential success of the combined organization.
d. Receive an additional new Chiron option as described below.
Q: WHAT DO I GET IF I CONVERT MY OPTIONS?
A: For each PathoGenesis option you hold at the Effective Time, you will
receive, a Chiron "Conversion Option." The Conversion Option will be a Chiron
option that will have the same life as your PathoGenesis option and will be
unvested to the same extent that your PathoGenesis option was unvested. In
addition, at the Effective Time you will be granted a New Chiron Option (a "New
Option") for an additional 30% of the shares represented by the unvested
portions of your Conversion Options. Here is the formula:
CONVERSION OPTION:
NUMBER OF CHIRON SHARES UNDER CONVERSION OPTION = (number of shares under
converted PathoGenesis option) X (Conversion Ratio)
[The CONVERSION RATIO is defined as ($38.50)/(average closing price of
Chiron stock for 5 days before Effective Time.)]
EXERCISE PRICE OF CONVERSION OPTION PER CHIRON SHARE = (exercise price
under converted PathoGenesis option) / (Conversion Ratio)
NEW OPTION:
NUMBER OF CHIRON SHARES UNDER NEW OPTION = number of shares under
unvested portions
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[CHIRON CORPORATION LOGO] [PATHOGENESIS CORPORATION LOGO]
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of all Conversion Options x .3
EXERCISE PRICE OF NEW OPTION = fair market value of Chiron shares at
Effective Time
THE CONVERSION ALTERNATIVE IS ALSO COMPLICATED SO PLEASE REVIEW THE FOLLOWING
EXAMPLE CAREFULLY:
If Mary Smith chooses the Conversion Alternative, her three options on
PathoGenesis stock would be converted into Conversion Options on Chiron stock
and she would also be granted an additional New Option on Chiron stock based on
30% of her unvested PathoGenesis options that are converted.
ASSUMPTION FOR THIS CALCULATION: Chiron's 5 day average price = $48
CONVERSION RATIO = $38.50/$48 = .802
Note: The hypothetical Chiron stock prices and conversion ratio used in these
examples are not intended to predict what the actual prices and conversion
ratio may be.
CONVERSION OPTION DERIVED FROM 1/26/99 OPTION:
NUMBER OF CHIRON SHARES UNDER OPTION = 400 PathoGenesis shares
X .802 = 320 Chiron shares
EXERCISE PRICE = $50.25/.802 = $62.65
Thus, the 1/26/99 option would be converted into a Conversion Option to
purchase 320 Chiron shares at $62.65 per share. The option would be 25%
vested and would be unvested as to 240 shares.
CONVERSION OPTION DERIVED FROM 5/7/99 OPTION:
NUMBER OF CHIRON SHARES UNDER OPTION = 800 PathoGenesis shares
X .802 = 641 Chiron shares
EXERCISE PRICE = $13.50/.802 = $16.83
Thus, the 5/7/99 option would be converted into a Conversion Option to
purchase 641 Chiron shares at $16.83 per share. The option would be 25%
vested and unvested as to 480 shares.
CONVERSION OPTION DERIVED FROM 6/1/00 OPTION:
NUMBER OF CHIRON SHARES UNDER OPTION = 400 PathoGenesis shares
x .802 = 320 Chiron Shares
EXERCISE PRICE = $16.50/.802 = $20.57
Thus, the 6/1/00 option would be converted into a Conversion Option to
purchase 320 Chiron shares at $20.57 per share. The option would be 100%
unvested.
Note: All of the Conversion Options continue to vest according
to the original PathoGenesis vesting schedule and have the
original 10-year life of the underlying PathoGenesis option,
subject to earlier termination in accordance with the option
terms.
NEW OPTION: In addition, Mary would receive an additional option on
Chiron stock calculated based on a percentage (30%) of the shares
underlying her unvested Conversion Options, as follows:
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[CHIRON CORPORATION LOGO] [PATHOGENESIS CORPORATION LOGO]
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1/26/99 option (75% unvested): 320 X .75 = 240 shares of Chiron stock
5/7/99 option (75% unvested): 641 X .75 = 480 shares of Chiron stock
6/01/00 option (100% unvested): 320 x 1.00 = 320 shares of Chiron stock
Total Unvested Options 1,040 X .3 = 312 shares of Chiron stock
(the "New Option")
Thus, at the Effective Time, Mary would be granted a New Option on 312
shares of Chiron stock. The exercise price would be the FMV of Chiron
stock on the grant date and the vesting schedule and life would be set
under the terms of Chiron's option plan. Chiron employee stock options
are typically granted with a 4-year vesting schedule and a 10-year life.
NOTE: The "Conversion Ratio" and the "Exercise Price" will be calculated
to 4 decimal places.
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[CHIRON CORPORATION LOGO] [PATHOGENESIS CORPORATION LOGO]
EMPLOYEE QUESTIONS AND ANSWERS
REGARDING PATHOGENESIS STOCK OPTIONS
ADDITIONAL PROVISIONS
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Q: I UNDERSTAND THERE IS ALSO A PROVISION IN THE AGREEMENT THAT MAY PROVIDE
FOR AN ADDITIONAL PAYMENT IF I ELECTED THE CONVERSION ALTERNATIVE AND IF MY
EMPLOYMENT IS TERMINATED (UNDER CERTAIN CIRCUMSTANCES) IN THE 12 MONTHS
FOLLOWING THE EFFECTIVE TIME. CAN YOU EXPLAIN THIS?
A: The intent of this provision is to give you a "safety net" if you elect the
Conversion Alternative and your employment is terminated by Chiron in the 12
months following the Effective Time. This provision does not apply to voluntary
terminations (i.e. you resign from Chiron), or terminations for cause.
Basically, the provision provides for a payment that would represent the value
you would have received from the Cash Out Right as defined above, for any
converted PathoGenesis options that have not yet been exercised as of your
termination date. All your unexercised Chiron Conversion options, vested and
unvested, will be converted into a right to receive a cash payment equal to the
product of the amount, if any, by which the Chiron 5-day average price
calculation mentioned above exceeds the exercise price per share of each Chiron
conversion option times the number of shares subject to that option.
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