SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
________________________________________________________________________________
NEOPATH, INC.
(Name of Registrant as Specified in Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
________________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
________________________________________________________________________________
(5) Total fee paid:
________________________________________________________________________________
[ ] Fee paid previously with preliminary materials:
________________________________________________________________________________
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
________________________________________________________________________________
(2) Form, Schedule or Registration Statement no.:
________________________________________________________________________________
(3) Filing Party:
________________________________________________________________________________
(4) Date Filed:
________________________________________________________________________________
<PAGE>
[LOGO OF NEOPATH, INC.]
Redmond, Washington
April 19, 1999
Dear Shareholders:
On behalf of the Board of Directors and management, I cordially
invite you to attend the NeoPath, Inc. 1999 Annual Meeting of
Shareholders (the "Annual Meeting") to be held on Thursday, May 20,
1999 at 8:30 a.m. (Pacific daylight time) at NeoPath's corporate
headquarters, 8271 - 154th Avenue NE, Redmond, Washington.
At the Annual Meeting, you will be asked to elect two directors
to NeoPath's Board of Directors and to consider and vote upon a
proposal to adopt the NeoPath, Inc. 1999 Stock Incentive Compensation
Plan (the "1999 Plan"). Your attention is directed to the
accompanying Notice of Annual Meeting of Shareholders and accompanying
Proxy Statement for further information with respect to matters to be
acted upon at the Annual Meeting.
NeoPath's Board of Directors recommends that you vote for the
election of the nominees for director and for the adoption of the 1999
Plan.
Whether or not you plan to attend the Annual Meeting, it is
important that your shares be represented. Please sign, date and mail
the enclosed proxy card as soon as possible in the enclosed postage
prepaid envelope to ensure that your vote is counted. If you attend
the meeting, you will, of course, have the right to vote your shares in
person.
Very truly yours,
Ronald R. Bromfield
President and Chief Executive Officer
Please complete, sign, date and return
the enclosed proxy card
<PAGE>
[LOGO OF NEOPATH, INC.]
8271 - 154th Avenue NE
Redmond, Washington 98052
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1999
To the Shareholders:
The 1999 Annual Meeting of Shareholders (the "Annual Meeting") of
NeoPath, Inc., a Washington corporation, will be held at NeoPath's
corporate headquarters, 8271 - 154th Avenue NE, Redmond, Washington,
on Thursday, May 20, 1999 at 8:30 a.m. (Pacific daylight time) for the
following purposes:
1. To elect two Class 2 directors to NeoPath's Board of
Directors for terms expiring in 2002.
2. To consider and vote upon a proposal to adopt the NeoPath,
Inc. 1999 Stock Incentive Compensation Plan (the "1999 Plan").
3. To transact such other business as may properly come
before the Annual Meeting or any adjournments or
postponements thereof.
The record date for the Annual Meeting was March 24, 1999. Only
shareholders of record at the close of business on that date are
entitled to notice of, and to vote at, the Annual Meeting and any
adjournments or postponements thereof.
The affirmative vote of the holders of a plurality of the shares
of Common Stock present, in person or by proxy, at the Annual Meeting
is required for the election of directors. The affirmative vote of
the holders of shares representing a majority of the shares of Common
stock present, in person or by proxy, and entitled to vote thereon at
the Annual Meeting is required to adopt the 1999 Plan.
By Order of the Board of Directors
Ronald R. Bromfield
President and Chief Executive Officer
Redmond, Washington
April 19, 1999
Whether or not you plan to attend the Annual Meeting, please sign
and date the enclosed proxy card and return it as promptly as possible
in the enclosed stamped and addressed envelope in order that the
presence of a quorum may be assured. Your stock will be voted in
accordance with the instructions you have given in the proxy. Your
proxy may be revoked at any time before it is voted by signing and
returning a later-dated proxy with respect to the same shares, by
filing with the Secretary of the Company a written revocation bearing a
later date, or by attending and voting in person at the Annual Meeting.
<PAGE>
[LOGO OF NEOPATH, INC.]
8271 - 154th Avenue NE
Redmond, Washington 98052
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1999
General
This Proxy Statement is furnished by the Board of Directors of
NeoPath, Inc., a Washington corporation (the "Company" or "NeoPath"),
to the holders of Common Stock, $.01 par value, of the Company (the
"Common Stock"), in connection with the solicitation of proxies by the
Board of Directors for use at the 1999 Annual Meeting of Shareholders
(the "Annual Meeting"), to be held at 8:30 a.m. (Pacific daylight
time) on Thursday, May 20, 1999, at NeoPath's corporate headquarters,
8271 - 154th Avenue NE, Redmond, Washington, and at any adjournments
or postponements thereof.
This Proxy Statement and the enclosed proxy card are first being
mailed to shareholders on or about April 19, 1999.
Revocability of Proxies
A proxy delivered pursuant to this solicitation is revocable at
the option of the person giving the same at any time before it is
exercised. A proxy may be revoked, prior to its exercise, by
executing and delivering a later-dated proxy card with respect to the
same shares prior to the Annual Meeting, by delivering written notice
of revocation to the Secretary of the Company at any time prior to the
vote, or by attending and voting at the Annual Meeting. Attendance at
the Annual Meeting, in and of itself, will not constitute a revocation
of a proxy. Unless previously revoked, the shares represented by the
enclosed proxy will be voted in accordance with the shareholder's
directions if the proxy is duly executed and returned prior to the
Annual Meeting. If no directions are specified, the shares will be
voted (i) "for" the election of the Directors recommended by the Board
of Directors, (ii) "for" the approval to adopt the NeoPath, Inc. 1999
Stock Incentive Compensation Plan (the "1999 Plan"), and (iii) in
accordance with the discretion of the named proxies on other matters
properly brought before the Annual Meeting.
Record Date; Shares Entitled to Vote; Vote Required
The close of business on March 24, 1999 (the "Record Date") has
been fixed as the record date for determining the holders of shares of
Common Stock who are entitled to notice of and to vote at the Annual
Meeting. As of the Record Date, there were 17,412,900 shares of
Common Stock outstanding and entitled to vote. The holders of record
on the Record Date of shares of Common Stock are entitled to one vote
per share of Common Stock. The presence, in person or by proxy, of
the holders of shares representing a majority of the voting power of
the shares of Common Stock entitled to vote is necessary to constitute
a quorum for the transaction of business at the Annual Meeting.
Under Washington law and the Company's Articles of Incorporation,
if a quorum is present at the Annual Meeting, (a) the two nominees for
election as directors who receive the greatest number of votes cast
for the election of directors at the Annual Meeting by the shares
present in person or represented by proxy at the Annual Meeting and
entitled to vote shall be elected directors, and (b) the proposal to
adopt the 1999 Plan will be approved if the votes cast in favor of the
proposal by the shares present in person or represented by proxy at
the Annual Meeting and entitled to vote exceed the votes cast against
the proposal. Abstention from voting will have no effect on the
election of directors since they will not represent votes cast at the
Annual Meeting for the purpose of electing directors. For the
proposal to approve the 1999 Plan, abstentions are counted as votes
present at the Annual Meeting and thus have the effect of a vote cast
against the proposal. Because brokers have discretion to vote shares
of Common Stock held on behalf of beneficial owners if no instructions
for voting such shares are received as to the matters to be voted upon
at the Annual Meeting, there will be no "broker nonvotes."
Page 1
<PAGE>
Solicitation of Proxies
The accompanying Proxy is being solicited by and on behalf of the
Company's Board of Directors. The expense of preparing, printing, and
mailing this Proxy Statement and the proxies solicited hereby will be
borne by the Company. In addition to the use of the mails, proxies may
be solicited by directors, officers, and other employees of the
Company, without additional remuneration, in person, or by telephone,
or facsimile transmission. The Company will also request brokerage
firms, bank nominees, custodians, and fiduciaries to forward proxy
materials to the beneficial owners of Common Stock as of the Record
Date and will provide reimbursement for the cost of forwarding the
proxy materials in accordance with customary practice. Your
cooperation in promptly signing and returning the enclosed proxy card
will help avoid additional expense.
1. ELECTION OF DIRECTORS AND MANAGEMENT INFORMATION
The Company's Articles of Incorporation provide that the members
of the Board of Directors be divided into three classes, as nearly
equal as possible. Each class is elected for a three-year term. At
each annual meeting of shareholders, one class of the Board of
Directors is elected for a three-year term, and directors in the other
classes remain in office until their respective three-year terms
expire. The Company's Board of Directors presently consists of eight
members, with two members in Class 1, and three members in each of
Classes 2 and 3. At the expiration of each class' term, continuing
directors are to be elected to serve for a term of three years or
until their respective successors have been elected and qualified.
Gail R. Wilensky, Ph.D., whose term expires in 1999, is leaving the
Board of Directors effective May 20, 1999.
The two nominees, Ronald R. Bromfield and David A. Thompson,
comprise the class to be elected at the Annual Meeting for three-year
terms expiring at the 2002 annual meeting. Unless otherwise directed,
the persons named in the proxy intend to cast all proxies in favor of
Ronald R. Bromfield and David A. Thompson to serve as directors of the
Company. It is intended that votes will be cast pursuant to the
accompanying proxy for the election of these nominees unless contrary
instructions are received. If any nominee should become unavailable
for any reason, it is intended that votes will be cast for a
substitute nominee as designated by the Company's Board of Directors.
The Board of Directors has no reason to believe that either of the
nominees named will be unavailable to stand for election.
Information About the Director Nominees
Ronald R. Bromfield (age 46) joined NeoPath in March 1999 as
President and Chief Executive Officer and was later named to NeoPath's
Board of Directors. From July 1997 to November 1998, Mr. Bromfield
was Senior Vice President and General Manager, U.S. Monitoring, of
SpaceLabs Medical. From October 1993 to December 1996, Mr. Bromfield
was President and Chief Executive Officer of Cardiotronics Systems,
Inc., a publicly-traded manufacturer of disposable external
stimulation electrodes used to defibrillate and pace the heart. From
1982 to 1993, Mr. Bromfield held a variety of management positions at
Physio-Control Corporation.
David A. Thompson, (age 57), has been a Director of the Company
since June 1995. Mr. Thompson retired in June 1995 from Abbott
Laboratories ("Abbott"), a manufacturer and distributor of
pharmaceutical and nutritional products, where he served in various
capacities since 1964. From August 1983 to July 1990, he was Abbott's
Vice President, Diagnostic Operations and President, Diagnostics
Division; from July 1990 to June 1994, he was Abbott's Senior Vice
President, Diagnostic Operations and President, Diagnostics Division;
and from June 1994 until his retirement, he was Abbott's Senior Vice
President, Strategic Improvement Processes. Mr. Thompson is currently
Chief Executive Officer of Diagnostic Marketing Strategies, a private
consulting firm. Mr. Thompson is also a director of HYCOR Biomedical,
Inc., NABI, LifeCell Corporation, and St. Jude Medical, Inc.
Page 2
<PAGE>
Information About Directors Whose Terms of Office Continue After the
Annual Meeting
Terms expire 2000:
Walter L. Robb, Ph.D., (age 70), has been a Director of the
Company since July 1993 and served as NeoPath's Chairman of the Board
from June 1994 to August 1998. From 1986 to 1993, when he retired, Dr.
Robb was Senior Vice President and Director of Corporate Research and
Development of General Electric Corporation. From 1973 to 1986, he was
Senior Vice President and General Manager of GE Medical Systems, a
division of General Electric Corporation. Dr. Robb serves as a
director of Celgene Corp., Cree Research, Inc., Mechanical Technology,
Inc., and is owner of Capital District Sports and Vantage Management,
Inc., a private consulting firm.
Cristina H. Kepner, (age 52), has been a Director of the Company
since April 1994. Ms. Kepner has been a Director, Executive Vice
President, and Corporate Finance Director of Invemed Associates, Inc.,
an investment-banking firm, since February 1978. Invemed Associates,
Inc. served as underwriter for the Company's initial public offering
in February 1995 and for the Company's second public offering in
January 1996. Invemed also assisted NeoPath in a private equity
transaction completed in February 1999. Ms. Kepner is also a director
of Quipp, Inc.
William L. Scott, (age 55), served as the Company's Vice
President and Chief Financial Officer from March 1997 to July 1998,
and has been a Director of the Company since May 1997. Mr. Scott was
Vice President and General Manager of Boston Scientific Corporation's
Northwest Technology Center, Inc. from January 1996 through December
1996. Prior to Boston Scientific's acquisition of Heart Technology,
Inc., Mr. Scott was Heart Technology's Vice Present, Finance and
Administration and Chief Financial Officer from January 1992 through
December 1995. Mr. Scott served as Vice President and Chief Financial
Officer at various other companies, including Pentzer Corporation from
1990 through 1991, Flow International from 1989 through 1990, and
Physio-Control Corporation from 1975 through 1982.
Terms expire 2001:
Alan C. Nelson, Ph.D., (age 49), the Company's founder and
Chairman of the Board, has been a Director since May 1989. He was the
Company's Chairman of the Board from March 1991 until June 1994, when
he became President and Chief Executive Officer, a position he held
until March 1999 when Mr. Bromfield joined the Company as its
President and Chief Executive Officer. In August 1998, Dr. Nelson was
again appointed Chairman of the Board. From September 1986 to
September 1992, Dr. Nelson was an associate professor at the Center
for Bioengineering and an adjunct professor in the Departments of
Pathology, Radiology, and Electrical Engineering at the University of
Washington, where he directed that university's Center for Imaging
Systems Optimization from 1990 to 1991. Since 1991, Dr. Nelson has
held an affiliate professorship with the Center for Bioengineering at
the University of Washington.
Thomas A. Bonfiglio, M.D., (age 56) serves as Senior Attending
Pathologist and Head, Division of Pathology, at The Genesee Hospital
in Rochester, New York. Dr. Bonfiglio is also a Clinical Professor at
the University of Rochester's Department of Pathology and Laboratory
Medicine, where he has maintained various academic positions since
1971. Since 1969, Dr. Bonfiglio has held pathology positions at
various hospitals, most recently as Pathologist in Chief at Strong
Memorial Hospital from 1989 to 1997. He is a past president of the
American Society of Clinical Pathologists and the American Society of
Cytopathology and has authored numerous medical publications.
Compensation of Directors
Nonemployee directors receive $1,000 per board meeting attended
and $600 per committee meeting attended, plus out-of-pocket expenses.
In addition, nonemployee directors receive an annual retainer fee of
$10,000, which is paid in $2,500 installments at the end of each
calendar quarter.
Page 3
<PAGE>
The NeoPath, Inc. Stock Option Plan for Nonemployee Directors, as
amended and restated on February 27, 1997 (the "Nonemployee Directors
Plan") automatically grants each nonemployee director an option to
purchase 7,000 shares of Common Stock annually during his or her term
of office. Such options are granted to nonemployee directors on the
last business day prior to each annual meeting of shareholders
(excluding any director whose term expires on the date of the annual
meeting prior to which an option is to be granted and who has not been
nominated for re-election at such annual meeting). Such options vest
and become exercisable in full on the day immediately prior to the
annual meeting next following the date of grant (disregarding the
annual meeting being held immediately after the date of grant).
Information on Committees of the Board of Directors
The Company's Board of Directors has standing Compensation, Audit
and Nominating Committees. Each of these committees is responsible to
the full Board of Directors, and its activities are therefore subject
to approval of the Board of Directors. The members of each Committee
and the functions performed thereby are described below:
Compensation Committee. During 1998, the Compensation Committee
was comprised of Mr. Thompson and Dr. Wilensky, who were members
throughout 1998, and Ms. Kepner, who became a member effective May 21,
1998. Alan D. Frazier, who left the Board of Directors effective May
21, 1998, was a member of the Compensation Committee in 1998 prior to
his departure. The Compensation Committee establishes salaries,
incentives and other forms of compensation for directors and officers
of the Company, administers the Company's stock option plans, and
recommends policies relating to the Company's benefit plans. The
Compensation Committee met four times in 1998.
Audit Committee. During 1998, the Audit Committee was comprised
of Ms. Kepner, who was a member throughout the year, Mr. Thompson, who
became a member effective May 21, 1998, and Mr. Scott, who became a
member effective August 19, 1998. Mr. Frazier was a member of the
Audit Committee in 1998 prior to his departure. The Audit Committee
oversees the engagement of the Company's independent auditors and,
together with the Company's independent auditors, reviews the
Company's accounting practices, internal accounting controls and
financial results. The Audit Committee met three times in 1998.
Nominating Committee. During 1998, the Nominating Committee was
comprised of Dr. Robb, who was a member throughout the year, and Dr.
Bonfiglio, who became a member effective May 21, 1998. Ms. Kepner was
a member of the Committee from January to May 21, 1998. The
Nominating Committee makes recommendations to the Board of Directors
concerning prospective candidates to fill vacancies on the Board of
Directors. The Nominating Committee met one time in 1998. The
Nominating Committee will consider the names and qualifications of
candidates for the Board of Directors submitted by shareholders in
accordance with the procedures referred to in "Proposals of
Shareholders" in this Proxy Statement.
During 1998 there were five meetings of the Board of Directors,
one of which was held telephonically. Each director attended at least
75 percent of all board meetings and meetings of committees on which
they served.
Page 4
<PAGE>
Executive Officers
The executive officers of the Company, and their ages as of March
15, 1999, are as follows:
Name Age Position
____ ___ ________
Alan C. Nelson 49 Chairman of the Board (former President and
Chief Executive Officer)
Ronald R. Bromfield 46 President and Chief Executive Officer
Robert C. Bateman 36 Vice President and Chief Financial Officer
Shih-Jong James Lee 43 Vice President and Chief Technical Officer
Larry A. Nelson 53 Vice President, Intellectual Property and
New Business Development
Mary K. Norton 36 Vice President, Regulatory/Government
Affairs & Quality Assurance
David H. Robison 49 Vice President, Operations
For information regarding Alan C. Nelson see "--Information About
Directors Whose Terms of Office Continue After Annual Meeting."
For information regarding Ronald R. Bromfield see "--Information
About the Director Nominees."
Robert C. Bateman, Vice President and Chief Financial Officer,
joined NeoPath in March 1996 as the Company's Corporate Controller and,
in May 1997, was named Treasurer. Mr. Bateman was named Vice President
and Chief Financial Officer in July 1998 and also currently serves as
NeoPath's Corporate Secretary. From May 1987 to March 1996, Mr.
Bateman was employed by Ernst & Young LLP. Mr. Bateman currently
serves as chairman of the High Technology Industries Committee of the
Washington Society of Certified Public Accountants.
Shih-Jong James Lee, Ph.D., Vice President and Chief Technical
Officer, joined NeoPath in March 1989. Dr. Lee served as the Company's
Chief Scientist beginning March 1993 and Vice President, Chief
Scientist in February 1995. In 1997, Dr. Lee was named Vice President
and Chief Technical Officer. Dr. Lee was Principal Engineer for the
High Technology Center of the Boeing Company from 1986 to 1989, and
founded its Image Analysis Group. He currently serves on the Editorial
Board of the Pattern Recognition Journal.
Larry A. Nelson, Vice President, Intellectual Property and New
Business Development, joined NeoPath in October 1992. Mr. Nelson was
NeoPath's Vice President, Research and Engineering until 1997, when he
was named Vice President, Intellectual Property and New Business
Development. Mr. Nelson was employed at Honeywell, Inc. as Senior
Fellow from 1990 to 1992, and as Senior Staff Engineer from 1986 to
1990.
Mary K. Norton, Vice President, Regulatory/Government Affairs and
Quality Assurance, joined NeoPath in August 1996 as the Company's
Director of Regulatory and Clinical Affairs. In May 1998, Ms. Norton
was named Vice President, Regulatory Affairs and Quality Assurance, and
in January 1999, was named Vice President, Regulatory/Government
Affairs & Quality Assurance. Prior to joining NeoPath, Ms. Norton
managed Regulatory Affairs and Quality Assurance from July 1994 through
May 1996 at Bioject, Inc., a company that develops, manufactures and
markets advanced needle-free drug delivery systems. Ms. Norton was
employed by Siemens Medical Systems, Ultrasound Group, as Senior
Biomedical Engineer from August 1992 to June 1994. From September 1987
to October 1990, Ms. Norton was employed by Advanced Technology
Laboratories.
David H. Robison, Vice President, Operations, joined NeoPath in
May 1996. Prior to joining NeoPath, Mr. Robison was employed by Abbott
Laboratories in various positions from February 1978 through May 1996.
From February 1995 to May 1996, Mr. Robison was Research and
Development Director for Abbott's Diagnostic Division, and from May
1990 to February 1995 he was Director, Customer Satisfaction.
Page 5
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more
than 10% of the Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of beneficial ownership and
reports of changes in beneficial ownership of Common Stock and other
equity securities of the Company. Officers, directors, and greater
than 10% shareholders of the Company are required by SEC regulations
to furnish to the Company copies of all Section 16(a) reports that
they file. To the best of the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
written representations that no other reports were required, all
Section 16(a) filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with
during 1998.
Page 6
<PAGE>
Executive Compensation
Summary of Compensation
The following table sets forth certain information with respect to
compensation paid by the Company for the fiscal year ended December 31,
1998 and for the two prior fiscal years to (i) the Company's Chief
Executive Officer and (ii) the Company's four other most highly
compensated executive officers whose salary and bonus exceeded $100,000
for services performed during the fiscal year ended December 31, 1998
(collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION> Long-Term
Compensation
Annual Compensation Awards
_________________________________________________ ______
Securities
Name and Principal Other Annual Underlying
Position Year Salary($)(5) Bonus($)(6) Compensation($)(7) Options(#)(8)
_____________________ ____ ____________ ___________ __________________ _____________
<S> <C> <C> <C> <C> <C>
Alan C. Nelson (1)(2) 1998 $ 314,500 $ -- $ 57,251 288,780
Chairman of the 1997 $ 300,014 $ -- $ 1,400 62,160
Board (former 1996 $ 257,022 $ 102,150 $ 750 100,000
President and
Chief Executive
Officer)
Shih-Jong James Lee 1998 $ 193,769 $ -- $ 52,166 105,813
Vice President 1997 $ 182,000 $ -- $ 8,836 26,000
and Chief Technical 1996 $ 166,985 $ 54,146 $ 1,500 27,793
Officer
Larry A. Nelson(1) 1998 $ 159,346 $ -- $ 343 78,250
Vice President, 1997 $ 145,616 $ -- $ 1,400 16,570
Intellectual 1996 $ 139,365 $ 38,744 $ -- 41,250
Property and New
Business Development
Mary K. Norton(3) 1998 $ 118,529 $ 13,472 $ -- 56,850
Vice President, 1997 $ 93,558 $ 2,478 $ -- 11,150
Regulatory/ 1996 $ 38,585 $ -- $ -- 12,000
Government Affairs &
Quality Assurance
David H. Robison(4) 1998 $ 169,969 $ -- $ -- 89,470
Vice President, 1997 $ 155,616 $ -- $ -- 17,680
Operations 1996 $ 87,692 $ 28,652 $ -- 50,000
</TABLE>
____________________
(1) Alan C. Nelson and Larry A. Nelson are not related.
(2) Dr. Nelson was President and Chief Executive Officer until March 1999.
(3) Mary K. Norton joined the Company as Director, Regulatory Affairs
in August 1996, and became a corporate officer in May 1998.
(4) David H. Robison joined the Company as Vice President, Operations
in May 1996.
(5) Salary amounts in 1998 include 27 bi-weekly pay periods instead of
the normal 26 pay periods; therefore, amounts shown are approximately
4% higher than actual annual salary.
(6) Bonuses were earned by achievement of specified corporate goals
approved by the Compensation Committee of the Board of Directors.
Payment of such bonuses was made within 60 days following the
respective year-end. No bonus was paid to any person for services as
an officer in 1997 and 1998.
Page 7
<PAGE>
(7) Represents compensation paid in connection with the filing of
patent applications. In 1998, amounts also include $56,251 paid to Dr.
Nelson and $44,623 paid to Dr. Lee for accrued vacation, as approved by
NeoPath's Compensation Committee of the Board of Directors.
(8) 1998 awards include options granted in exchange for previously
granted options pursuant to a repricing of options.
Grants of Stock Options
The following table sets forth certain information regarding stock
options granted during the fiscal year ended December 31, 1998 to the
Named Executive Officers.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
________________________________________________________________________
Potential Realizable
Value at
Percent of Assumed Annual
Total Rates of
Number of Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Expira- Option Term(3)
Options in Price tion _______________________________
Name Granted(#) Fiscal Year ($/Sh) Date 5%($) 10%($)
____ __________ ___________ _______ ________ _______________ ______________
<S> <C> <C> <C> <C> <C> <C>
Alan C. Nelson
(1) 76,620 4.4% $ 13.00 5/21/08 $ 626,417 $ 1,587,463
(2) 212,160 12.0 13.00 6/2/08 1,626,546 4,223,704
Shih-Jong James Lee
(1) 32,020 1.8 13.00 5/21/08 261,784 663,411
(2) 73,793 4.2 13.00 6/2/08 565,742 1,469,079
Larry A. Nelson
(1) 20,430 1.2 13.00 5/21/08 167,028 423,282
(2) 57,820 3.2 13.00 6/2/08 443,283 1,151,086
Mary K. Norton
(1) 16,850 1.0 13.88 5/5/08 147,032 372,607
(2) 40,000 2.4 13.00 6/2/08 306,663 796,324
David H. Robison
(1) 21,790 1.2 13.00 5/21/08 178,147 451,459
(2) 67,680 3.9 13.00 6/2/08 518,876 1,347,381
</TABLE>
_________________
(1) Represents annual stock option grant using a formula-based model
applied to all eligible NeoPath employees. One-quarter of the
options vest on each anniversary of the date of grant. All such
stock options had an exercise price per share equal to the per share
market price of the Common Stock on the date of grant.
(2) Represents options issued pursuant to a repricing of previously
issued options. These options retained the vesting schedules of the
original options.
(3) Based on the exercise price per share on the date of grant. There
can be no assurance that the actual value per share realized by a Named
Executive Officer will approximate the potential realizable values set
forth in the table.
Page 8
<PAGE>
Option Repricing
The following table sets forth information with respect to
repriced stock options held by any Named Executive Officer:
10-Year Option Repricings
<TABLE>
<CAPTION>
Length (in
Years) of
Original
Exercise Price Option Term
Number of Market Price of of Stock at New Remaining at
Options Stock at Time of Time of Exercise Date of
Name Date Repriced(#) Repricing($/Sh) Repricing($/Sh) Price($/Sh) Repricing
____ ____ ___________ _______________ _______________ ___________ _________
<S> <C> <C> <C> <C> <C> <C>
Alan C. Nelson 6/2/98 50,000 $ 12.69 $ 16.25 $ 13.00 7.07
6/2/98 100,000 12.69 23.50 13.00 7.98
6/2/98 62,160 12.69 18.00 13.00 8.97
_______
212,160
=======
Shih-Jong James Lee 6/2/98 20,000 12.69 14.00 13.00 6.74
6/2/98 27,793 12.69 23.50 13.00 7.98
6/2/98 26,000 12.69 18.00 13.00 8.97
______
73,793
======
Larry A. Nelson 6/2/98 41,250 12.69 23.50 13.00 7.98
6/2/98 16,570 12.69 18.00 13.00 8.97
______
57,820
======
Mary K. Norton 6/2/98 12,000 12.69 23.75 13.00 8.20
6/2/98 4,840 12.69 18.00 13.00 8.97
6/2/98 6,310 12.69 14.88 13.00 9.52
6/2/98 16,850 12.69 13.88 13.00 9.93
______
40,000
======
David H. Robison 6/2/98 35,000 12.69 22.00 13.00 7.95
6/2/98 15,000 12.69 23.50 13.00 7.98
6/2/98 17,680 12.69 18.00 13.00 8.97
______
67,680
======
</TABLE>
The Board of Directors approved the option repricing because it
believes that options are a significant factor in the Company's ability
to retain key employees that are important to the Company's long-term
success.
Page 9
<PAGE>
Exercise of Stock Options and Year-End Values
The following table sets forth certain information regarding stock
options exercised during the fiscal year ended December 31, 1998 and
options held at December 31, 1998 by the Named Executive Officers.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Fiscal Options at Fiscal
Acquired Value Year-End(#) Year-End($)(2)
on Realized ____________________________ _____________________________
Name Exercise(#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
____ ___________ _________ ___________ _____________ ___________ _____________
<S> <C> <C> <C> <C> <C> <C>
Alan C. Nelson -- $ -- 217,273 164,908 $ 330,453 $ --
Shih-Jong James Lee 3,645 54,402 43,614 62,199 -- --
Larry A. Nelson -- -- 30,782 47,468 -- --
Mary K. Norton -- -- 9,788 30,212 -- --
David H. Robison -- -- 36,710 52,760 -- --
</TABLE>
__________
(1) Based on the closing price of the Company's Common Stock on
the date of exercise.
(2) Based on the closing price of the Company's Common Stock on
December 31, 1998 of $5.94 per share as reported by The Nasdaq
Stock Market.
Compensation Committee Interlocks and Insider Participation
During 1998, the Compensation Committee was comprised of Mr.
Thompson and Dr. Wilensky, who were members throughout 1998, and Ms.
Kepner, who became a member effective May 21, 1998. Alan D. Frazier,
who left the Board of Directors effective May 21, 1998, was a member of
the Compensation Committee in 1998 prior to his departure. Ms. Kepner
is a principal at Invemed Associates, Inc., which assisted NeoPath in a
private equity placement transaction completed in February 1999.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors is
responsible for establishing the compensation for the Company's
executive officers and making recommendations concerning such
compensation to the Board of Directors. In addition, the Compensation
Committee is responsible for administering the Company's stock option
plans. The Compensation Committee is composed of nonemployee
directors. During 1998, the Compensation Committee was comprised of
Mr. Thompson and Dr. Wilensky, who were members throughout 1998, and
Ms. Kepner, who became a member effective May 21, 1998. Alan D.
Frazier, who left the Board of Directors effective May 21, 1998, was a
member of the Compensation Committee in 1998 prior to his departure.
The Compensation Committee utilizes compensation survey data to
ensure that the Company's executive compensation program is
competitive and that it supports NeoPath's strategies and objectives.
The Committee intends to provide overall compensation to each
executive at the 50th percentile of competitive survey data; this is
accomplished through targeting executive salaries at five percent
below the 50th percentile and targeting annual incentives at five
percent above the 50th percentile of surveyed competitive data.
Page 10
<PAGE>
The underlying objectives of the Company's compensation strategy
are to attract and retain the best possible executive talent, to
motivate those executives to achieve optimum operating performance for
the Company, to link executive and shareholder interests through
equity-based plans, and to provide a compensation package that
recognizes individual contributions as well as overall business
results. The Compensation Committee believes that the overall
compensation philosophy should be to allow for total executive
compensation in the upper quartiles of the competitive survey data
described below for exceptional performance in achieving corporate
goals, and that compensation in the lower quartiles should be used, as
appropriate, for less-than-expected achievement of goals. There are
three components to the Company's executive compensation program:
base salary, incentive (bonus) payments, and long-term incentives in
the form of stock options.
Base Salary. Base salary for each executive officer is based
primarily on competitive survey data for comparable positions at
medical products, biotechnology and high technology companies,
supplemented by an assessment of each officer's sustained performance,
advancement potential, experience, responsibility, and scope and
complexity of management position. The companies in this survey
include some but not all of the companies in the Hambrecht & Quist
Healthcare Section Excluding Biotech Index included in the Stock
Performance Graph.
Annual Incentives. The Compensation Committee believes that
executives' performance is most appropriately measured based on
progress toward achieving operating goals that are formulated to
promote advancement of key aspects of the Company's business. The
Board of Directors and Compensation Committee approved NeoPath's
corporate goals for 1998 and approved management's establishment of
specified minimum corporate goals for officers to receive bonuses.
The 1998 corporate goals included achieving defined financial
performance, obtaining U.S. Food and Drug Administration approval for
use of the AutoPap System as a Primary Pap Smear Screening System,
developing manufacturing capacity, and developing specific product
enhancements. Certain defined minimum financial goals were not met;
therefore, no bonuses were paid to officers. The Compensation
Committee intends to continue to base future annual incentives for
officers on the achievement of defined goals and milestones, with the
range of potential awards based primarily on competitive survey data.
Long-Term Incentives. The long-term performance-based
compensation of executive officers takes the form of option awards
under the Company's stock option plans. The Compensation Committee
believes that this equity-based compensation ensures that the Company's
executive officers have a continuing stake in the long-term success of
the Company. Since the Company's initial public offering, all options
granted by the Company have been granted with an exercise price equal
to or in excess of the market price of the Company's Common Stock.
Accordingly, stock options will have value only if the Company's stock
price increases. Vesting is used to encourage employees to continue in
the employ of the Company.
Option Repricing. In May 1998, NeoPath's Board of Directors
approved a plan to allow all Company personnel the opportunity to
surrender previously granted stock options in exchange for a new stock
option at the current market price. In total, 1,357,836 options were
surrendered and canceled; a corresponding number of new options were
issued at an exercise price of $13.00 per share. Many outstanding
options were exercisable at prices that exceeded the market price of
the Common Stock at that time, thereby substantially impairing the
effectiveness of such options as performance incentives. The Board of
Directors considered the significant and sustained reduction in the
Company's Common Stock price, which reached $30.25 in September 1996,
yet has traded at much lower levels since that time. The Board also
considered the Company's increased personnel turnover rate, and the
need to retain Company personnel in a competitive labor market.
Consistent with the Company's philosophy of utilizing equity incentives
to motivate and retain management and employees, the Board of Directors
determined that it was important to restore the performance incentives
intended to be provided by options through the repricing of options
with exercise prices in excess of the market price at the time of
repricing. The exercise price of the repriced options was set at
$13.00 per share; the fair market value of the Company's Common Stock
on the effective date of the repricing was $12.69.
Page 11
<PAGE>
1998 Compensation for the Chief Executive Officer
In determining Dr. Nelson's salary for 1998, the Committee
considered competitive compensation data for chief executive officers
of similar companies within the medical device, biotechnology and high
technology industries, taking into account Dr. Nelson's experience and
knowledge as well as overall Company performance. Dr. Nelson's salary
was increased 1.6% to $304,950 in 1998. As further described under
"--Long-Term Incentives," long-term performance-based compensation of
executive officers takes the form of stock option grants. During 1998,
Dr. Nelson was awarded a new grant to purchase 76,620 shares of the
Company's Common Stock. In addition, Dr. Nelson was awarded grants to
purchase 212,160 shares as a result of stock option repricing. All
stock option grants were issued with the exercise price of the options
equal to or greater than the market price of NeoPath's Common Stock on
the date of grant. Dr. Nelson's new grant to purchase 76,620 shares of
the Company's Common Stock was based on the Committee's use of a
formula-based model applied to all eligible NeoPath employees. No
bonus was paid to Dr. Nelson.
Section 162(m) Limitations on Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended,
makes certain nonperformance-based compensation in excess of
$1 million paid to executives of public companies nondeductible by
such companies. Certain performance-based compensation that has been
approved by shareholders is not subject to the deduction limit. The
Company's stock option plans are structured to qualify options granted
as performance-based compensation under Section 162(m). At this time,
no executive officer of the Company has received, nor is it
anticipated that any executive officer will receive, any such
compensation in excess of this limit. Therefore, no action was
required to comply with the limit. The Compensation Committee will
continue to monitor the situation and will take appropriate action if
it is warranted in the future.
Compensation Committee
David A. Thompson
Cristina H. Kepner
Gail R. Wilensky, Ph.D.
Page 12
<PAGE>
Stock Performance Graph
The following graph compares the cumulative total shareholder
return on the Company's Common Stock with the cumulative total return
of The Nasdaq Stock Market and the Hambrecht & Quist Healthcare
Section Excluding Biotech Index for the period beginning on January
26, 1995, the Company's first day of trading after its initial public
offering, and ending on December 31, 1998.
Comparison of Cumulative Total Return Among
NeoPath, Inc.,
The Nasdaq Stock Market and
Hambrecht & Quist Healthcare Section Excluding Biotechnology Index
(Period Ended December 31, 1998)
Measurement
Period
(Quarterly
from
January 26, The Nasdaq Hambrecht &
1995) NeoPath, Inc. Stock Market Index Quist Index
______________________________________________________________________________
Jan-26-95 $ 100.00 $ 100.00 $ 100.00
Mar-31-95 122.92 107.98 110.88
Jun-30-95 137.50 123.51 113.90
Sep-30-95 220.83 138.39 142.48
Dec-31-95 193.75 140.07 158.05
Mar-31-96 193.75 146.60 169.08
Jun-30-96 210.42 158.56 158.91
Sep-30-96 160.42 164.18 174.39
Dec-31-96 152.08 172.25 175.47
Mar-31-97 114.58 162.90 166.68
Jun-30-97 158.33 192.76 199.54
Sep-30-97 162.50 225.36 209.14
Dec-31-97 108.33 211.32 209.11
Mar-31-98 114.58 247.25 237.77
Jun-30-98 59.92 254.41 242.26
Sep-30-98 41.17 230.32 213.85
Dec-30-98 49.50 297.06 254.08
Assumes $100 invested in the Company's Common Stock, The Nasdaq
Stock Market and the Hambrecht & Quist Healthcare Section
Excluding Biotech Index, with all dividends reinvested. Stock
performance shown in the above chart for the Common Stock is
historical and not necessarily indicative of future price
performance.
Page 13
<PAGE>
Employment Contracts and Termination of Employment and Change-in-Control
Agreements
In December 1996, the Compensation Committee approved a Senior
Management Employment Agreement (the "Agreement") for officers
(including the Named Executive Officers) and key management personnel
that provides for continued employment terms equivalent to those
applicable immediately prior to a change in control for the two years
following a change in control. A one-time cash payment equal to two
times the executive's annual salary and bonus is immediately triggered
if, following a change in control, employment is terminated by (i) the
employee for "good reason" or (ii) the employer for any reason other
than death, disability or for "cause." The Agreement was approved by
the Company's Board of Directors in February 1997. The Committee
believes that the Agreement enables NeoPath management to focus their
efforts on the long-term achievement of Company goals.
The NeoPath, Inc. 1989 Stock Option Plan and the 1999 Plan provide
optionees with the right to exercise all stock options, whether or not
the vesting requirements have been met, immediately prior to defined
changes in the Company's ownership.
Page 14
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of February 25, 1999, except as
otherwise noted, certain information with respect to the beneficial
ownership of the Common Stock by (i) each person known by the Company
to beneficially own more than 5% of the Common Stock, (ii) each
director and nominee for director of the Company, (iii) the Named
Executive Officers, and (iv) all directors and executive officers of
the Company as a group. As of February 25, 1999, Mr. George Soros was
deemed to have beneficial ownership in excess of 5% of NeoPath's Common
Stock; however, based on a Form 13G filed March 31, 1999, his ownership
interest no longer requires disclosure in the table below. Except as
otherwise indicated, the Company believes that the beneficial owners of
the Common Stock listed below, based on information furnished by such
owners, have sole voting and investment power with respect to such
shares.
Shares Percent
Beneficially of
Name and Address Owned Class
________________ _____ _____
Alan C. Nelson(1) 567,455 3.2%
Shih-Jong James Lee(2) 71,910 *
Larry A. Nelson(3) 52,525 *
Mary K. Norton(4) 10,788 *
David H. Robison(5) 42,271 *
Thomas A. Bonfiglio(6) 1,000 *
Cristina H. Kepner(7) 67,152 *
Walter L. Robb(8) 201,104 1.2%
William L. Scott(9) 37,500 *
David A. Thompson(10) 34,166 *
Gail R. Wilensky(11) 13,666 *
Ronald R. Bromfield -- *
Zesiger Capital Group LLC Investors(12) 2,252,300 12.9%
320 Park Avenue
New York, NY 10022
The Kaufmann Fund, Inc.(13) 2,071,000 11.9%
140 East 45th Street, 43rd Floor
New York, NY 10017
Trustees of General Electric Pension Trust(14) 1,526,463 8.8%
3033 Summer Street
Stamford, CT 06904-7900
Capital Research and Management Company, and
SMALLCAP World Fund, Inc.(15) 1,121,400 6.4%
333 South Hope Street
Los Angeles, CA 90071
All Directors and Executive Officers as a group
(13 persons)(16) 1,123,907 6.2%
______________________
* Less than 1%
(1) Includes 335,682 outstanding shares, 229,773 shares issuable upon
exercise of options that are exercisable within 60 days, and 2,000
shares held by Dr. Nelson's wife for the benefit of her nephew. Dr.
Nelson disclaims beneficial ownership of the 2,000 shares held by his
wife for the benefit of her nephew.
(2) Includes 25,145 outstanding shares and 46,765 shares issuable upon
exercise of options that are exercisable within 60 days.
(3) Includes 18,305 outstanding shares and 34,220 shares issuable upon
exercise of options that are exercisable within 60 days.
(4) Consists of shares issuable upon exercise of options that are
exercisable within 60 days.
(5) Includes 1,394 outstanding shares and 40,877 shares issuable upon
exercise of options that are exercisable within 60 days.
Page 15
<PAGE>
(6) Consists of outstanding shares.
(7) Includes 29,068 outstanding shares, 21,666 shares issuable upon
exercise of options that are exercisable within 60 days, and 16,418
shares issuable upon exercise of warrants held by Ms. Kepner.
(8) Includes 128,000 outstanding shares and 73,104 shares issuable
upon exercise of options that are exercisable within 60 days.
(9) Consists of shares issuable upon exercise of options that are
exercisable within 60 days.
(10) Includes 5,000 outstanding shares and 29,166 shares issuable upon
exercise of options that are exercisable within 60 days.
(11) Consists of shares issuable upon exercise of options that are
exercisable within 60 days.
(12) Consists of outstanding shares per NeoPath's filing on Form S-3 on
February 12, 1999. Zesiger Capital Group ("ZCG") disclaims beneficial
ownership of these securities. Such securities are held in
discretionary accounts, which ZCG manages.
(13) Consists of outstanding shares per NeoPath's filing on Form S-3 on
February 12, 1999.
(14) Consists of shares outstanding as of December 31, 1998 per filing
on Schedule 13G.
(15) Consists of outstanding shares per NeoPath's filing on Form S-3 on
February 12, 1999. SMALLCAP World Fund, Inc. is the beneficial owner
of the shares. Capital Research and Management Company may be deemed
to have beneficial ownership of the shares, but specifically disclaims
beneficial ownership.
(16) Includes 546,130 outstanding shares, 561,359 shares issuable upon
exercise of options that are exercisable within 60 days, and 16,418
shares issuable upon exercise of warrants.
2. PROPOSED ADOPTION OF NEOPATH, INC. 1999 STOCK INCENTIVE COMPENSATION PLAN
The proposed 1999 Plan provides a means whereby selected persons
may be granted stock awards, incentive stock options ("ISOs"), or
nonqualified stock options ("NSOs") to purchase shares of Common Stock.
A copy of the 1999 Plan, as proposed, is attached to this Proxy
Statement as Appendix A. The 1999 Plan replaces the NeoPath, Inc. 1989
Stock Option Plan (the "Prior Plan"), which expires on May 23, 1999.
The following description of the 1999 Plan is a summary and is not
intended to be fully descriptive. See Appendix A for more detailed
information. Approximately 150 persons are eligible for participation
in the 1999 Plan. Subject to adjustment required in the event of any
recapitalization of the Company, the aggregate number of shares of
Common Stock that may be issued upon exercise of all options granted
under the 1999 Plan may not exceed 2,750,000 (including approximately
710,000 authorized shares available for grant and approximately
1,840,000 shares represented by outstanding grants under the Prior
Plan). On March 29, 1999, the Board approved the adoption of the 1999
Plan effective May 19, 1999 (the "Effective Date") that, subject to
shareholder approval, would authorize an additional 200,000 shares to
be available for grant under NeoPath's employee stock option plans.
Any authorized shares not issued or subject to outstanding awards under
the Prior Plan on the Effective Date and any shares subject to
outstanding awards under the Prior Plan on the Effective Date that
cease to be subject to such awards (other than by reason of exercise or
payment of the awards to the extent they are exercised for or settled
in shares) shall no longer be available for grant and issuance under
the Prior Plan, but shall be available for issuance under the 1999
Plan.
The Board of Directors believes that the 1999 Plan would, among
other things, promote the interests of the Company and its shareholders
by assisting the Company in attracting, retaining and stimulating the
performance of officers and key employees. The Board believes that the
existing options granted under the Prior Plan have contributed
substantially to the successful achievement of these objectives.
The Compensation Committee of the Board of Directors is the
administrator of the 1999 Plan (the "Plan Administrator"). Subject to
the terms of the 1999 Plan, the Plan Administrator determines the terms
and conditions of options granted under the 1999 Plan, including the
exercise price. The 1999 Plan provides that the Plan Administrator
must establish an exercise price for ISOs that is not less than the
fair market value per share at the date of grant. Each ISO must expire
within 10 years of the date of grant. However, if ISOs are granted to
persons owning more than 10% of the Company's voting stock, the 1999
Plan provides that the exercise price shall not be less than 110% of
the fair market value per share at the date of grant and that the term
of the ISOs shall not exceed five years. NSOs expire 10 years from the
date of grant, unless otherwise established by the Plan Administrator.
Unless otherwise provided by the Plan Administrator, one-quarter of the
options vest on the first anniversary of the day of grant (for options
granted to new employees, the first vesting period is from grant date
to one year after hire date) and the remainder vest in equal annual
installments at the end of the three succeeding years.
Page 16
<PAGE>
No option may be transferred by the optionee other than by will or
the laws of descent or distribution. Notwithstanding the foregoing, to
the extent permitted by Section 422 of the Internal Revenue Code, the
Plan Administrator may permit an Optionee to (i) during the Optionee's
lifetime, designate a person who may exercise the option after the
Optionee's death by giving written notice of such designation to the
Company or (ii) transfer the option and the rights and privileges
conferred hereby; provided, however, that any option so assigned or
transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the award. An optionee whose
relationship with the Company or any related corporation ceases for any
reason (other than termination for cause, death or total disability)
may exercise options in the three-month period following such
cessation, (unless such options terminate or expire sooner by their
terms), or in such longer period determined by the Plan Administrator.
If the optionee is terminated for cause, the options terminate upon the
Company's discovery of such cause. If the optionee dies or becomes
totally disabled, options vested at the date of death or total
disability may be exercised prior to the earlier of the options'
specified expiration date or one year from the date of the optionee's
death or disability.
Unexercised options granted under the 1999 Plan terminate upon the
occurrence of certain events, including mergers (other than a merger of
the Company in which the holders of shares of Common Stock immediately
before the merger have the same proportionate ownership of shares of
Common Stock in the surviving corporation immediately after the
merger). In such event, the optionee has the right immediately before
a merger to exercise the optionee's option in whole or in part whether
or not the vesting requirements have been satisfied.
Federal Income Tax Consequences
The following discussion summarizes the material federal income
tax consequences of participation in the 1999 Plan. The discussion is
general in nature and does not address issues related to the tax
circumstances of any particular optionee. The discussion is based on
federal income tax laws in effect on the date hereof and is, therefore,
subject to possible future changes in law. The discussion does not
address state, local or foreign consequences.
There are no tax consequences to the Company or the optionee upon
the grant of an NSO under the 1999 Plan. Upon exercise of an NSO, the
optionee recognizes ordinary income equal to the difference between the
exercise price of the shares and the fair market value of the shares on
the date of exercise. The Company is entitled to a tax deduction equal
to the income recognized by the optionee, provided that the deduction
is not otherwise disallowed by the Internal Revenue Code.
Upon grant or exercise of an ISO, an optionee does not recognize
income, except that the excess of the fair market value of the shares
at the time of exercise (with adjustments in certain circumstances)
over the option price will be alternative minimum taxable income for
purposes of calculating the optionee's alternative minimum tax, if any.
If an optionee does not make a "disqualifying disposition" (defined
below) of an ISO, the gain, if any, upon a subsequent sale (i.e., the
excess of the proceeds received over the option price) will be a long-
term capital gain for income tax purposes.
For shares acquired through the exercise of an ISO, a
"disqualifying disposition" is a transfer of the shares (i) within two
years after the grant of the ISO or (ii) within one year after the
transfer of the shares to the optionee pursuant to the ISO's exercise.
If the optionee makes a disqualifying disposition, the optionee
generally will recognize income in the year of the disqualifying
disposition equal to the excess of the amount received for the shares
over the option price. If, however, the optionee sells the shares to an
unrelated party at a price that is below the fair market value of the
shares at the time the ISO was exercised, and the sale is a
disqualifying disposition, the amount of ordinary income will be
limited to the amount realized on the sale over the option price.
While the position of the Internal Revenue Service on this issue is
presently unclear, any ordinary income recognized on a disqualifying
disposition of an option may be subject to payroll taxes and
withholding.
The Company is entitled to a deduction with respect to an ISO only
if a disqualifying disposition occurs. In that event, the deduction
would be equal to the ordinary income, if any, recognized by the
optionee upon disposition of the shares, provided that the deduction is
not otherwise disallowed under the Internal Revenue Code.
The Board of Directors recommends a vote for the adoption of the
1999 Plan.
Page 17
<PAGE>
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the Company's independent
public accountants, will be present at the Annual Meeting and will
have an opportunity to make a statement and to respond to appropriate
questions from shareholders.
PROPOSALS OF SHAREHOLDERS
Shareholder proposals to be presented at the Company's 2000
Annual Meeting of Shareholders and included in the Company's Proxy
Statement relating to such meeting must be received by the Company no
later than December 21, 1999. Such proposals should be directed to
the Corporate Secretary of the Company, 8271 - 154th Avenue NE,
Redmond, Washington 98052.
OTHER BUSINESS
The Board of Directors does not intend to bring any other
business before the meeting, and so far as is known to the Board, no
matters are to be brought before the meeting except as specified in
the notice of the meeting. However, as to any other business which
may properly come before the meeting, it is intended that proxies, in
the form enclosed, will be voted in respect thereto, in accordance
with the judgment of the persons voting such proxies.
ANNUAL REPORT AND FORM 10-K
A copy of the Company's 1998 Annual Report is enclosed.
Shareholders not receiving a copy of such Annual Report may obtain
one, without charge, upon request to the Company by writing or calling
the Company's investor relations representative, NeoPath, Inc.,
8721 - 154th Avenue NE, Redmond, WA 98052, 1-800-NEOPATH.
A copy of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, as filed with the Securities and Exchange
Commission, will be provided without charge to each shareholder of
record who submits a written request addressed to the Company's
investor relations representative, NeoPath, Inc., 8721 - 154th Avenue NE,
Redmond, WA 98052.
By Order of the Board of Directors
Ronald R. Bromfield
President and Chief Executive Officer
Redmond, Washington
April 19, 1999
Page 18
<PAGE>
APPENDIX A
NEOPATH, INC.
1999 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the NeoPath, Inc. 1999 Stock Incentive Compensation Plan
(the "Plan") is to enhance the long-term shareholder value of NeoPath,
Inc., a Washington corporation (the "Company"), by offering
opportunities to selected persons to participate in the Company's
growth and success, and to encourage them to remain in the service of
the Company and its Related Corporations (as defined in Section 2) and
to acquire and maintain stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set
forth below:
"Award" means an award or grant made pursuant to the Plan, including,
without limitation, awards or grants of Stock Awards and Options, or
any combination of the foregoing.
"Board" means the Board of Directors of the Company.
"Cause" means dishonesty, fraud, misconduct, unauthorized use or
disclosure of confidential information or trade secrets, or conviction
or confession of a crime punishable by law (except minor violations),
in each case as determined by the Plan Administrator, and its
determination shall be conclusive and binding.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company
with or into another corporation; or
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially
all of the Company's assets, other than a transfer of the Company's
assets to a majority-owned subsidiary corporation (as defined in
Section 8.3) of the Company.
"Disability," unless otherwise defined by the Plan Administrator, means
a mental or physical impairment of the Participant that is expected to
result in death or that has lasted or is expected to last for a
continuous period of 12 months or more and that causes the Participant
to be unable, in the opinion of the Company, to perform his or her
duties for the Company or a Related Corporation and to be engaged in
any substantial gainful activity.
"Effective Date" means the date on which the Plan is adopted by the
Board, so long as it is approved by the Company's shareholders at any
time within 12 months of such adoption.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
A-1
<PAGE>
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq
National Market, the closing sales price for the Common Stock as
reported by the Nasdaq National Market for a single trading day or
(b) if the Common Stock is listed on the New York Stock Exchange or the
American Stock Exchange, the closing sales price for the Common Stock
as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then
such price on the last preceding date for which such price exists shall
be determinative of Fair Market Value.
"Grant Date" means the date on which the Plan Administrator completes
the corporate action relating to the grant of an Award and all
conditions precedent to the grant have been satisfied, provided that
conditions to the exercisability or vesting of Awards shall not defer
the Grant Date.
"Incentive Stock Option" means an Option to purchase Common Stock
granted under Section 7 with the intention that it qualify as an
"incentive stock option" as that term is defined in Section 422 of the
Code.
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
"Option" means the right to purchase Common Stock granted under
Section 7.
"Option Term" has the meaning set forth in Section 7.3.
"Parent," except as otherwise provided in Section 8.3 in connection
with Incentive Stock Options, means any entity, whether now or
hereafter existing, that directly or indirectly controls the Company.
"Participant" means (a) the person to whom an Award is granted; (b) for
a Participant who has died, the personal representative of the
Participant's estate, the person(s) to whom the Participant's rights
under the Award have passed by will or by the applicable laws of
descent and distribution, or the beneficiary designated in accordance
with Section 11; or (c) the person(s) to whom an Award has been
transferred in accordance with Section 11.
"Plan Administrator" means the Board or any committee or committees
designated by the Board or any person to whom the Board has delegated
authority to administer the Plan under Section 3.1.
"Related Corporation" means any Parent or Subsidiary of the Company.
"Related Party Transaction" means (i) a merger of the Company in which
the holders of shares of Common Stock immediately prior to the merger
have the same proportionate ownership of shares of Common Stock in the
surviving corporation immediately after the merger, (ii) a mere
reincorporation of the Company or (iii) a transaction to create a
holding company.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Award" means shares of Common Stock or units denominated in
Common Stock granted under Section 9, the rights of ownership of which
may be subject to restrictions prescribed by the Plan Administrator.
"Subsidiary" except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or
indirectly controlled by the Company.
"Successor Corporation" has the meaning set forth in Section 12.3.
"Termination Date" has the meaning set forth in Section 7.6.
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SECTION 3. ADMINISTRATION
3.1 Plan Administrator
The Plan shall be administered by the Board and/or a committee or
committees (which term includes subcommittees) appointed by, and
consisting of two or more members of, the Board (a "Plan
Administrator"). If and so long as the Common Stock is registered
under Section 12(b) or 12(g) of the Exchange Act, the Board shall
consider in selecting the members of any committee acting as Plan
Administrator, with respect to any persons subject or likely to become
subject to Section 16 of the Exchange Act, the provisions regarding
(a) "outside directors" as contemplated by Section 162(m) of the Code
and (b) "nonemployee directors" as contemplated by Rule 16b-3 under the
Exchange Act. The Board may delegate the responsibility for
administering the Plan with respect to designated classes of eligible
persons to different committees consisting of two or more members of
the Board, subject to such limitations as the Board deems appropriate.
Committee members shall serve for such term as the Board may determine,
subject to removal by the Board at any time. To the extent consistent
with applicable law, the Board may authorize a senior executive officer
of the Company to grant Awards to specified eligible persons, within
the limits specifically prescribed by the Board.
3.2 Administration and Interpretation by Plan Administrator
Except for the terms and conditions explicitly set forth in the Plan,
the Plan Administrator shall have exclusive authority, in its
discretion, to determine all matters relating to Awards under the Plan,
including the selection of individuals to be granted Awards, the type
of Awards, the number of shares of Common Stock subject to an Award,
all terms, conditions, restrictions and limitations, if any, of an
Award and the terms of any instrument that evidences the Award. The
Plan Administrator shall also have exclusive authority to interpret the
Plan and may from time to time adopt, and change, rules and regulations
of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and
regulations, and all actions taken and determinations made by the Plan
Administrator pursuant to the Plan, shall be conclusive and binding on
all parties involved or affected. The Plan Administrator may delegate
administrative duties to such of the Company's officers as it so
determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 Authorized Number of Shares
Subject to adjustment from time to time as provided in Section 12.1,
the number of shares of Common Stock that shall be available for
issuance under the Plan shall be 2,750,000 shares.
In addition, (a) any authorized shares not issued or subject to
outstanding awards under the Company's 1989 Stock Option Plan (the
"Prior Plan") on the Effective Date and (b) any shares subject to
outstanding awards under the Prior Plan on the Effective Date that
cease to be subject to such awards (other than by reason of exercise or
payment of the awards to the extent they are exercised for or settled
in shares) shall no longer be available for grant and issuance under
the Prior Plan, but shall be available for issuance under the Plan.
Shares issued under the Plan shall be drawn from authorized and
unissued shares or shares now held or subsequently acquired by the
Company.
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4.2 Limitations
(a) Subject to adjustment from time to time as provided in
Section 12.1, not more than an aggregate of 2,750,000 shares shall be
available for issuance pursuant to grants of Stock Awards under the
Plan.
(b) Subject to adjustment from time to time as provided in
Section 12.1, not more than 400,000 shares of Common Stock may be
made subject to Awards under the Plan to any individual in the
aggregate in any one fiscal year of the Company, except that the
Company may make additional one-time grants of up to 400,000 shares
to newly hired individuals, such limitation to be applied in a
manner consistent with the requirements of, and only to the extent
required for compliance with, the exclusion from the limitation on
deductibility of compensation under Section 162(m) of the Code.
4.3 Reuse of Shares
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or
payment of the Award to the extent it is exercised for or settled in
shares) shall again be available for issuance in connection with future
grants of Awards under the Plan; provided, however, that for purposes
of Section 4.2, any such shares shall be counted in accordance with the
requirements of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Related Corporations as the Plan
Administrator from time to time selects. Awards may also be made to
consultants, agents, advisors and independent contractors
("consultants") who provide services to the Company and its Related
Corporations; provided, however, that such Participants render bona
fide services not in connection with the offer and sale of the
Company's securities in a capital-raising transaction.
SECTION 6. AWARDS
6.1 Form and Grant of Awards
The Plan Administrator shall have the authority, in its sole
discretion, to determine the type or types of Awards to be made under
the Plan. Such Awards may include, but are not limited to, Incentive
Stock Options, Nonqualified Stock Options and Stock Awards. Awards may
be granted singly or in combination.
6.2 Settlement of Awards
The Company may settle Awards through the delivery of shares of Common
Stock, cash payments, the granting of replacement Awards or any
combination thereof as the Plan Administrator shall determine. Any
Award settlement, including payment deferrals, may be subject to such
conditions, restrictions and contingencies as the Plan Administrator
shall determine. The Plan Administrator may permit or require the
deferral of any Award payment, subject to such rules and procedures as
it may establish, which may include provisions for the payment or
crediting of interest, or dividend equivalents, including converting
such credits into deferred stock equivalents. The Plan Administrator
may at any time offer to buy out, for a payment in cash or Common
Stock, an Award previously granted based on such terms and conditions
as the Plan Administrator shall establish and communicate to the
Participant at the time such offer is made.
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6.3 Acquired Company Awards
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for
awards issued under other plans, or assume under the Plan awards issued
under other plans, if the other plans are or were plans of other
acquired entities ("Acquired Entities") (or the parent of the Acquired
Entity) and the new Award is substituted, or the old award is assumed,
by reason of a merger, consolidation, acquisition of property or of
stock, reorganization or liquidation (the "Acquisition Transaction").
In the event that a written agreement pursuant to which the Acquisition
Transaction is completed is approved by the Board and said agreement
sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator
without any further action by the Plan Administrator, except as may be
required for compliance with Rule 16b-3 under the Exchange Act, and the
persons holding such awards shall be deemed to be Participants.
SECTION 7. AWARDS OF OPTIONS
7.1 Grant of Options
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as
Nonqualified Stock Options, which shall be appropriately designated.
7.2 Option Exercise Price
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100%
of the Fair Market Value of the Common Stock on the Grant Date with
respect to Incentive Stock Options and not less than 85% of the Fair
Market Value of the Common Stock on the Grant Date with respect to
Nonqualified Stock Options. For Incentive Stock Options granted to a
more than 10% shareholder, the Option exercise price shall be as
specified in Section 8.2.
7.3 Term of Options
The term of each Option (the "Option Term") shall be as established by
the Plan Administrator or, if not so established, shall be ten years
from the Grant Date. For Incentive Stock Options, the maximum Option
Term shall be as specified in Sections 8.2 and 8.4.
7.4 Exercise of Options
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which, or the installments in
which, the Option shall vest and become exercisable, which provisions
may be waived or modified by the Plan Administrator at any time. If
not so established in the instrument evidencing the Option, the Option
shall vest and become exercisable according to the following schedule,
which may be waived or modified by the Plan Administrator at any time:
<TABLE>
<CAPTION>
Period of Participant's Continuous Employment or
Service With the Company or Its Related Percent of Total Option
Corporations From the Option Grant Date That Is Vested and Exercisable
________________________________________________ ______________________________
<S> <C>
After 1 year* 25%
Each full year of continuous service completed
thereafter An additional 25%
After 4 years 100%
</TABLE>
* For Options granted to new employees, the period shall be from grant
date to 1 year after date of employment.
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<PAGE>
The Plan Administrator may adjust the vesting schedule of an Option
held by a Participant who works less than "full-time" as that term is
defined by the Plan Administrator.
To the extent that the right to purchase shares has accrued thereunder,
an Option may be exercised from time to time by delivery to the Company
of a written stock option exercise agreement or notice, in a form and
in accordance with procedures established by the Plan Administrator,
setting forth the number of shares with respect to which the Option is
being exercised, the restrictions imposed on the shares purchased under
such exercise agreement, if any, and such representations and
agreements as may be required by the Company, accompanied by payment in
full as described in Section 7.5. An Option may not be exercised as to
less than a reasonable number of shares at any one time, as determined
by the Plan Administrator.
7.5 Payment of Exercise Price
The exercise price for shares purchased under an Option shall be paid
in full to the Company by delivery of consideration equal to the
product of the Option exercise price and the number of shares
purchased. Such consideration must be paid in cash or by check or,
unless the Plan Administrator in its sole discretion determines
otherwise, either at the time the Option is granted or at any time
before it is exercised, in any combination of
(a) cash or check;
(b) tendering (either actually or, if and so long as the Common Stock
is registered under Section 12(b) or 12(g) of the Exchange Act, by
attestation) shares of Common Stock already owned by the Participant
for at least six months (or any shorter period necessary to avoid a
charge to the Company's earnings for financial reporting purposes)
having a Fair Market Value on the day prior to the exercise date equal
to the aggregate Option exercise price;
(c) if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, delivery of a properly
executed exercise notice, together with irrevocable instructions, to
(i) a brokerage firm designated by the Company to deliver promptly to
the Company the aggregate amount of sale or loan proceeds to pay the
Option exercise price and any withholding tax obligations that may
arise in connection with the exercise and (ii) the Company to deliver
the certificates for such purchased shares directly to such brokerage
firm, all in accordance with the regulations of the Federal Reserve
Board; or
(d) such other consideration as the Plan Administrator may permit.
In addition, to assist a Participant (including a Participant who is an
officer or a director of the Company) in acquiring shares of Common
Stock pursuant to an Award granted under the Plan, the Plan
Administrator, in its sole discretion, may authorize, either at the
Grant Date or at any time before the acquisition of Common Stock
pursuant to the Award, (i) the payment by a Participant of a full-
recourse promissory note, (ii) the payment by the Participant of the
purchase price, if any, of the Common Stock in installments, or
(iii) the guarantee by the Company of a loan obtained by the
Participant from a third party. Subject to the foregoing, the Plan
Administrator shall in its sole discretion specify the terms of any
loans, installment payments or loan guarantees, including the interest
rate and terms of and security for repayment.
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<PAGE>
7.6 Post-Termination Exercises
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option shall continue to be
exercisable, and the terms and conditions of such exercise, if a
Participant ceases to be employed by, or to provide services to, the
Company or its Related Corporations, which provisions may be waived or
modified by the Plan Administrator at any time. If not so established
in the instrument evidencing the Option, the Option shall be
exercisable according to the following terms and conditions, which may
be waived or modified by the Plan Administrator at any time:
(a) Any portion of an Option that is not vested and exercisable on the
date of termination of the Participant's employment or service
relationship (the "Termination Date") shall expire on such date, unless
the Plan Administrator determines otherwise.
(b) Any portion of an Option that is vested and exercisable on the
Termination Date shall expire upon the earliest to occur of
(i) the last day of the Option Term;
(ii) if the Participant's Termination Date occurs for reasons other
than Cause, death or Disability, the three-month anniversary
of such Termination Date; and
(iii) if the Participant's Termination Date occurs by reason of
Disability or death, the one-year anniversary of such
Termination Date.
Notwithstanding the foregoing, if the Participant dies after the
Termination Date while the Option is otherwise exercisable, the Option
shall expire upon the earlier to occur of (y) the last day of the
Option Term and (z) the first anniversary of the date of death.
Also notwithstanding the foregoing, in case of termination of the
Participant's employment or service relationship for Cause, the Option
shall automatically expire upon first discovery by the Company of any
reason for termination for Cause, unless the Plan Administrator
determines otherwise. If a Participant's employment or service
relationship with the Company is suspended pending an investigation of
whether the Participant shall be terminated for Cause, all the
Participant's rights under any Option likewise shall be suspended
during the period of investigation.
A Participant's transfer of employment or service relationship between
or among the Company and its Related Corporations, or a change in
status from an employee to a consultant that is evidenced by a written
agreement between a Participant and the Company or a Related
Corporation, shall not be considered a termination of employment or
service relationship for purposes of this Section 7. Employment or
service relationship shall be deemed to continue while the Participant
is on a bona fide leave of absence, if such leave was approved by the
Company or a Related Corporation in writing and if continued crediting
of service for purposes of this Section 7 is expressly required by the
terms of such leave or by applicable law (as determined by the
Company). The effect of a Company-approved leave of absence on the
terms and conditions of an Option shall be determined by the Plan
Administrator, in its sole discretion.
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<PAGE>
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and
conditions:
8.1 Dollar Limitation
To the extent the aggregate Fair Market Value (determined as of the
Grant Date) of Common Stock with respect to which Incentive Stock
Options are exercisable for the first time during any calendar year
(under the Plan and all other stock option plans of the Company)
exceeds $100,000, such portion in excess of $100,000 shall be treated
as a Nonqualified Stock Option. In the event the Participant holds two
or more such Options that become exercisable for the first time in the
same calendar year, such limitation shall be applied on the basis of
the order in which such Options are granted.
8.2 More Than 10% Shareholders
If an individual owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market
Value of the Common Stock on the Grant Date and the Option Term shall
not exceed five years. The determination of more than 10% ownership
shall be made in accordance with Section 422 of the Code.
8.3 Eligible Employees
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive
Stock Options. For purposes of this Section 8.3, "parent corporation"
and "subsidiary corporation" shall have the meanings attributed to
those terms for purposes of Section 422 of the Code.
8.4 Term
Except as provided in Section 8.2, the Option Term shall not exceed 10
years.
8.5 Exercisability
An Option designated as an Incentive Stock Option shall cease to
qualify for favorable tax treatment as an Incentive Stock Option to the
extent it is exercised (if permitted by the terms of the Option) (a)
more than three months after the Termination Date for reasons other
than death or Disability, (b) more than one year after the Termination
Date by reason of Disability, or (c) after the Participant has been on
leave of absence for more than 90 days, unless the Participant's
reemployment rights are guaranteed by statute or contract.
For purposes of this Section 8.5, Disability shall mean "disability" as
that term is defined for purposes of Section 422 of the Code.
8.6 Taxation of Incentive Stock Options
In order to obtain certain tax benefits afforded to Incentive Stock
Options under Section 422 of the Code, the Participant must hold the
shares issued upon the exercise of an Incentive Stock Option for two
years after the Grant Date and one year from the date of exercise. A
Participant may be subject to the alternative minimum tax at the time
of exercise of an Incentive Stock Option. The Participant shall give
the Company prompt notice of any disposition of shares acquired by the
exercise of an Incentive Stock Option prior to the expiration of such
holding periods.
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8.7 Promissory Notes
The amount of any promissory note delivered pursuant to Section 7.5 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator, but in no case less than the rate
required to avoid imputation of interest (taking into account any
exceptions to the imputed interest rules) for federal income tax
purposes.
SECTION 9. STOCK AWARDS
9.1 Grant of Stock Awards
The Plan Administrator is authorized to make Awards of Common Stock or
Awards denominated in units of Common Stock on such terms and
conditions and subject to such restrictions, if any (which may be based
on continuous service with the Company or the achievement of
performance goals related to profits, profit growth, profit-related
return ratios, cash flow or total shareholder return, where such goals
may be stated in absolute terms or relative to comparison companies),
as the Plan Administrator shall determine, in its sole discretion,
which terms, conditions and restrictions shall be set forth in the
instrument evidencing the Award. The terms, conditions and
restrictions that the Plan Administrator shall have the power to
determine shall include, without limitation, the manner in which shares
subject to Stock Awards are held during the periods they are subject to
restrictions and the circumstances under which forfeiture of the Stock
Award shall occur by reason of termination of the Participant's
employment or service relationship.
9.2 Issuance of Shares
Upon the satisfaction of any terms, conditions and restrictions
prescribed in respect to a Stock Award, or upon the Participant's
release from any terms, conditions and restrictions of a Stock Award,
as determined by the Plan Administrator, the Company shall release, as
soon as practicable, to the Participant or, in the case of the
Participant's death, to the personal representative of the
Participant's estate or as the appropriate court directs, the
appropriate number of shares of Common Stock.
9.3 Waiver of Restrictions
Notwithstanding any other provisions of the Plan, the Plan
Administrator may, in its sole discretion, waive the forfeiture period
and any other terms, conditions or restrictions on any Stock Award
under such circumstances and subject to such terms and conditions as
the Plan Administrator shall deem appropriate; provided, however, that
the Plan Administrator may not adjust performance goals for any Stock
Award intended to be exempt under Section 162(m) of the Code for the
year in which the Stock Award is settled in such a manner as would
increase the amount of compensation otherwise payable to a Participant.
SECTION 10. WITHHOLDING
The Company may require the Participant to pay to the Company the
amount of any withholding taxes that the Company is required to
withhold with respect to the grant, vesting or exercise of any Award.
Subject to the Plan and applicable law, the Plan Administrator may, in
its sole discretion, permit the Participant to satisfy withholding
obligations (up to the maximum rate), in whole or in part, by paying
cash, by electing to have the Company withhold shares of Common Stock
or by transferring shares of Common Stock to the Company, in such
amounts as are equivalent to the Fair Market Value of the withholding
obligation. The Company shall have the right to withhold from any
Award or any shares of Common Stock issuable pursuant to an Award or
from any cash amounts otherwise due or to become due from the Company
to the Participant an amount equal to such taxes. The Company may also
deduct from any Award any other amounts due from the Participant to the
Company or a Related Corporation.
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<PAGE>
SECTION 11. ASSIGNABILITY
Awards granted under the Plan and any interest therein may not be
assigned, pledged or transferred by the Participant and may not be made
subject to attachment or similar proceedings otherwise than by will or
by the applicable laws of descent and distribution, and, during the
Participant's lifetime, such Awards may be exercised only by the
Participant. Notwithstanding the foregoing, and to the extent
permitted by Section 422 of the Code, the Plan Administrator, in its
sole discretion, may permit such assignment, transfer and
exercisability and may permit a Participant to designate a beneficiary
who may exercise the Award or receive compensation under the Award
after the Participant's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and
conditions contained in the instrument evidencing the Award.
SECTION 12. ADJUSTMENTS
12.1 Adjustment of Shares
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares,
recapitalization, merger, consolidation, distribution to shareholders
other than a normal cash dividend, or other change in the Company's
corporate or capital structure results in (a) the outstanding shares,
or any securities exchanged therefor or received in their place, being
exchanged for a different number or class of securities of the Company
or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by
the holders of shares of Common Stock of the Company, then the Plan
Administrator shall make proportional adjustments in (i) the maximum
number and kind of securities subject to the Plan as set forth in
Section 4.1 and the maximum number and kind of securities that may be
made subject to Stock Awards and to Awards to any individual as set
forth in Section 4.2, and (ii) the number and kind of securities that
are subject to any outstanding Award and the per share price of such
securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms
of any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, a dissolution or liquidation of the
Company or a Corporate Transaction shall not be governed by this
Section 12.1 but shall be governed by Sections 12.2 and 12.3,
respectively.
12.2 Dissolution or Liquidation
In the event of the proposed dissolution or liquidation of the Company,
the Plan Administrator shall notify each Participant as soon as
practicable prior to the effective date of such proposed transaction.
The Plan Administrator in its discretion may permit a Participant to
exercise an Option until ten days prior to such transaction with
respect to all vested and exercisable shares of Common Stock covered
thereby and with respect to such number of unvested shares as the Plan
Administrator shall determine. In addition, the Plan Administrator may
provide that any forfeiture provision or Company repurchase option
applicable to any Award shall lapse as to such number of shares as the
Plan Administrator shall determine, contingent upon the occurrence of
the proposed dissolution or liquidation at the time and in the manner
contemplated. To the extent an Option has not been previously
exercised, the Option shall terminate automatically immediately prior
to the consummation of the proposed action. To the extent a forfeiture
provision applicable to a Stock Award has not been waived by the Plan
Administrator, the Stock Award shall be forfeited automatically
immediately prior to the consummation of the proposed action.
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<PAGE>
12.3 Corporate Transaction
In the event of a Corporate Transaction, except as otherwise provided
in the instrument evidencing the Award, each outstanding Option shall
be assumed or an equivalent option or right substituted by the
successor corporation or its parent corporation (the "Successor
Corporation"). If the Corporate Transaction is not a Related Party
Transaction, the assumed or substituted options shall be fully vested
and exercisable whether or not the vesting requirements set forth in
the applicable option agreement have been satisfied; provided, that
such acceleration will not occur if, in the opinion of the Company's
outside accountants, such acceleration would render unavailable
"pooling of interests" accounting treatment for any reorganization,
merger or consolidation of the Company for which pooling of interests
accounting treatment is sought by the Company. If the Corporate
Transaction is a Related Party Transaction, the vesting schedule set
forth in the instrument evidencing the Option shall continue to apply
to the assumed or substituted options.
In the event that the Successor Corporation refuses to assume or
substitute for the Option, the Participant shall fully vest in and have
the right to exercise the Option as to all of the shares of Common
Stock subject thereto, including shares as to which the Option would
not otherwise be vested or exercisable. If an Option becomes fully
vested and exercisable in lieu of assumption or substitution in the
event of a Corporate Transaction, the Plan Administrator shall notify
the Participant in writing or electronically that the Option shall be
fully vested and exercisable for a period of 15 days from the date of
such notice, and the Option shall terminate upon the expiration of such
period. For the purposes of this Section 12.3, the Option shall be
considered assumed if, following the Corporate Transaction, the option
or right confers the right to purchase or receive, for each share of
Common Stock subject to the Option, immediately prior to the Corporate
Transaction, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by
holders of Common Stock for each share held on the effective date of
the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the
outstanding shares); provided, however, that if such consideration
received in the Corporate Transaction is not solely common stock of the
Successor Corporation, the Plan Administrator may, with the consent of
the Successor Corporation, provide for the consideration to be received
upon the exercise of the Option, for each share of Common Stock subject
thereto, to be solely common stock of the Successor Corporation equal
in fair market value to the per share consideration received by holders
of Common Stock in the Corporate Transaction. All Options shall
terminate and cease to remain outstanding immediately following the
consummation of the Corporate Transaction, except to the extent assumed
by the Successor Corporation.
12.4 Further Adjustment of Awards
Subject to Sections 12.2 and 12.3, the Plan Administrator shall have
the discretion, exercisable at any time before a sale, merger,
consolidation, reorganization, liquidation or change in control of the
Company, as defined by the Plan Administrator, to take such further
action as it determines to be necessary or advisable, and fair and
equitable to the Participants, with respect to Awards. Such authorized
action may include (but shall not be limited to) establishing, amending
or waiving the type, terms, conditions or duration of, or restrictions
on, Awards so as to provide for earlier, later, extended or additional
time for exercise, lifting restrictions and other modifications, and
the Plan Administrator may take such actions with respect to all
Participants, to certain categories of Participants or only to
individual Participants. The Plan Administrator may take such action
before or after granting Awards to which the action relates and before
or after any public announcement with respect to such sale, merger,
consolidation, reorganization, liquidation or change in control that is
the reason for such action.
12.5 Limitations
The grant of Awards shall in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
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SECTION 13. AMENDMENT AND TERMINATION OF PLAN
13.1 Amendment of Plan
The Plan may be amended only by the Board in such respects as it shall
deem advisable; provided, however, that to the extent required for
compliance with Section 422 of the Code or any applicable law or
regulation, shareholder approval shall be required for any amendment
that would (a) increase the total number of shares available for
issuance under the Plan, (b) modify the class of persons eligible to
receive Options, or (c) otherwise require shareholder approval under
any applicable law or regulation. Any amendment made to the Plan that
would constitute a "modification" to Incentive Stock Options
outstanding on the date of such amendment shall not, without the
consent of the Participant, be applicable to such outstanding Incentive
Stock Options but shall have prospective effect only.
13.2 Termination of Plan
The Board may suspend or terminate the Plan at any time. The Plan
shall have no fixed expiration date; provided, however, that no
Incentive Stock Options may be granted more than ten years after the
later of (a) the Plan's adoption by the Board and (b) the adoption by
the Board of any amendment to the Plan that constitutes the adoption of
a new plan for purposes of Section 422 of the Code.
13.3 Consent of Participant
The amendment or termination of the Plan or the amendment of an
outstanding Award shall not, without the Participant's consent, impair
or diminish any rights or obligations under any Award theretofore
granted to the Participant under the Plan; provided, however, that
adjustments made pursuant to Section 12 shall not be subject to these
restrictions. Any change or adjustment to an outstanding Incentive
Stock Option shall not, without the consent of the Participant, be made
in a manner so as to constitute a "modification" that would cause such
Incentive Stock Option to fail to continue to qualify as an Incentive
Stock Option.
SECTION 14. GENERAL
14.1 Evidence of Awards
Awards granted under the Plan shall be evidenced by a written
instrument that shall contain such terms, conditions, limitations and
restrictions as the Plan Administrator shall deem advisable and that
are not inconsistent with the Plan.
14.2 No Individual Rights
Nothing in the Plan or any Award granted under the Plan shall be deemed
to constitute an employment contract or confer or be deemed to confer
on any Participant any right to continue in the employ of, or to
continue any other relationship with, the Company or any Related
Corporation or limit in any way the right of the Company or any Related
Corporation to terminate a Participant's employment or other
relationship at any time, with or without Cause.
14.3 Registration
Notwithstanding any other provision of the Plan, the Company shall have
no obligation to issue or deliver any shares of Common Stock under the
Plan or make any other distribution of benefits under the Plan unless
such issuance, delivery or distribution would comply with all
applicable laws (including, without limitation, the requirements of the
Securities Act), and the applicable requirements of any securities
exchange or similar entity.
A-12
<PAGE>
The Company shall be under no obligation to any Participant to register
for offering or resale or to qualify for exemption under the Securities
Act, or to register or qualify under state securities laws, any shares
of Common Stock, security or interest in a security paid or issued
under, or created by, the Plan, or to continue in effect any such
registrations or qualifications if made. The Company may issue
certificates for shares with such legends and subject to such
restrictions on transfer and stop-transfer instructions as counsel for
the Company deems necessary or desirable for compliance by the Company
with federal and state securities laws.
To the extent that the Plan or any instrument evidencing an Award
provides for issuance of stock certificates to reflect the issuance of
shares of Common Stock, the issuance may be effected on a
noncertificated basis, to the extent not prohibited by applicable law
or the applicable rules of any stock exchange.
14.4 No Rights as a Shareholder
No Option or Stock Award denominated in units shall entitle the
Participant to any cash dividend, voting or other right of a
shareholder unless and until the date of issuance under the Plan of the
shares that are the subject of such Award.
14.5 Compliance With Laws and Regulations
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator, in its sole discretion, may bifurcate the Plan so as to
restrict, limit or condition the use of any provision of the Plan to
Participants who are officers or directors subject to Section 16 of the
Exchange Act without so restricting, limiting or conditioning the Plan
with respect to other Participants. Additionally, in interpreting and
applying the provisions of the Plan, any Option granted as an Incentive
Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of
Section 422 of the Code.
14.6 Participants in Foreign Countries
The Plan Administrator shall have the authority to adopt such
modifications, procedures and subplans as may be necessary or desirable
to comply with provisions of the laws of foreign countries in which the
Company or its Related Corporations may operate to assure the viability
of the benefits from Awards granted to Participants employed in such
countries and to meet the objectives of the Plan.
14.7 No Trust or Fund
The Plan is intended to constitute an "unfunded" plan. Nothing
contained herein shall require the Company to segregate any monies or
other property, or shares of Common Stock, or to create any trusts, or
to make any special deposits for any immediate or deferred amounts
payable to any Participant, and no Participant shall have any rights
that are greater than those of a general unsecured creditor of the
Company.
14.8 Severability
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or
would disqualify the Plan or any Award under any law deemed applicable
by the Plan Administrator, such provision shall be construed or deemed
amended to conform to applicable laws, or, if it cannot be so construed
or deemed amended without, in the Plan Administrator's determination,
materially altering the intent of the Plan or the Award, such provision
shall be stricken as to such jurisdiction, person or Award, and the
remainder of the Plan and any such Award shall remain in full force and
effect.
14.9 Choice of Law
The Plan and all determinations made and actions taken pursuant hereto,
to the extent not otherwise governed by the laws of the United States,
shall be governed by the laws of the State of Washington without giving
effect to principles of conflicts of laws.
A-13
<PAGE>
SECTION 15. EFFECTIVE DATE
The Effective Date is the date on which the Plan is adopted by the
Board, so long as it is approved by the Company's shareholders at any
time within 12 months of such adoption.
A-14
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
SUMMARY PAGE
<TABLE>
<CAPTION>
Section/Effect of Date of Shareholder
Date of Board Action Action Amendment Approval
____________________ ______ _________________ ___________________
<S> <C> <C> <C>
April 12, 1999 Initial Plan Adoption, May ____, 1999
effective on May 19, 1999
</TABLE>
<PAGE>
NEOPATH, INC.
This Proxy is Solicited by the Board of Directors for the
Annual Meeting of Shareholders -- May 20, 1999
The undersigned hereby appoint(s) Ronald R. Bromfield and Robert
C. Bateman and each of them as proxies, with full power of
substitution, to represent and vote as designated all shares of Common
Stock of NeoPath, Inc. held of record by the undersigned on March 24,
1999 at the Annual Meeting of Shareholders of the Company to be held at
NeoPath's corporate headquarters, 8271 154th Avenue NE, Redmond,
Washington, at 8:30 a.m. (Pacific daylight time) on Thursday, May 20,
1999, with authority to vote upon the matters listed on the other side
of this proxy card and with discretionary authority as to any other
matters that may properly come before the meeting or any adjournment or
postponement thereof.
IMPORTANT -- PLEASE DATE AND SIGN ON THE OTHER SIDE.
<PAGE>
Please date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Shareholders
NEOPATH, INC.
May 20, 1999
A [x] Please mark your
votes as in this
example.
The Board of Directors recommends a vote "FOR all nominees" in Item 1,
and "FOR" Item 2.
WITHHOLD
FOR AUTHORITY
all Nominees to vote for all Nominees
(1) ELECTION
OF
DIRECTORS [ ] [ ]
WITHHOLD for the following only: (Write the name of the nominee(s) in
the space below)
_______________________________________________________
NOMINEES: David A. Thompson
Ronald R. Bromfield
FOR AGAINST ABSTAIN
(2) Adoption of 1999 [ ] [ ] [ ]
Stock Incentive
Compensation Plan.
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDERS IN THE SPACE PROVIDED. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR" ITEM 2.
I plan to attend the Annual Meeting [ ]
PLEASE DATE,SIGN AND RETURN PROMPTLY.
SIGNATURE(S)________________________ DATE____________
NOTE: Please sign exactly as your name appears hereon. Attorneys,
trustees, executors and other fiduciaries acting in a representative
capacity should sign their names and give their titles. An authorized
person should sign on behalf of corporations, partnerships,
associations, etc. and give his or her title. If your shares are held
by two or more persons, each person must sign. Receipt of the notice
of meeting and proxy statement is hereby acknowledged.
<PAGE>
