<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [ ] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
PSYCHEMEDICS CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:
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<PAGE> 2
[PSYCHEMEDICS LETTERHEAD]
PSYCHEMEDICS CORPORATION
1280 Massachusetts Avenue
Cambridge, Massachusetts 02138
April 2, 1999
Dear Stockholders:
We cordially invite you to attend the Annual Meeting of Stockholders, which
will be held at The Boston Harbor Hotel, 70 Rowes Wharf, Boston, Massachusetts,
on Thursday, May 6, 1999, at 3:30 P.M.
The notice of the meeting and the proxy statement on the following pages
cover the formal business of the meeting. The meeting will consider the election
of directors and ratification of the appointment of auditors for 1999. I will
report on current operations and discuss our plans for growth. We will also have
plenty of time for your questions and comments.
I believe that the Annual Meeting provides an excellent opportunity for
stockholders to become better acquainted with Psychemedics and its directors and
officers. I hope that you will be able to attend.
Sincerely,
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
<PAGE> 3
PSYCHEMEDICS CORPORATION
1280 Massachusetts Avenue
Cambridge, Massachusetts 02138
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 2, 1999
The Annual Meeting of Stockholders will be held on May 6, 1999 at 3:30 p.m.
at The Boston Harbor Hotel, 70 Rowes Wharf, Boston, Massachusetts 02110, for the
following purposes:
1. To elect directors of the Company for the ensuing year and until their
respective successors are chosen and qualified;
2. To ratify the Company's selection of Arthur Andersen LLP as the
Company's independent auditors for the year ending December 31, 1999;
and
3. To consider and act upon matters incidental to the foregoing and to
transact such other business as may properly come before the meeting.
The Board of Directors has fixed the close of business on March 15, 1999 as
the record date for the determination of stockholders entitled to receive notice
of and to vote at the Annual Meeting of Stockholders.
By order of the Board of Directors,
Edward S. Brewer, Jr.,
Secretary
The Company's Annual Report for 1998 containing a copy of the Company's
Form 10-K (excluding exhibits) for the year ended December 31, 1998 is enclosed
herewith.
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PLEASE FILL IN, DATE, SIGN AND MAIL PROMPTLY THE ACCOMPANYING PROXY
IN THE RETURN ENVELOPE FURNISHED FOR THAT PURPOSE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
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<PAGE> 4
PSYCHEMEDICS CORPORATION
1280 Massachusetts Avenue
Cambridge, Massachusetts 02138
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 6, 1999
This statement is furnished to the stockholders of PSYCHEMEDICS CORPORATION
(hereinafter, the "Company") in connection with management's solicitation of
proxies to be used at the Annual Meeting of Stockholders on May 6, 1999 and at
any adjournment of that meeting. The approximate date on which this proxy
statement and accompanying proxy are being sent to stockholders of the Company
is April 2, 1999. Each proxy delivered pursuant to this solicitation is
revocable at the option of the person executing the same by written notice
delivered to the Secretary of the Company at any time before the proxy is voted.
A stockholder who attends the Annual Meeting in person may revoke his or her
proxy at that time and vote his or her shares if such stockholder so desires.
The presence in person or by proxy of stockholders entitled to cast a majority
of the outstanding shares, or 11,019,314 shares, shall constitute a quorum. With
respect to the election of Directors, the Company will treat votes withheld as
shares that are present for purposes of determining a quorum. A plurality is
required to elect Directors, so the six persons receiving the greatest number of
votes will be elected. Withheld votes will not affect the outcome of the
election. With respect to the approval of auditors, the Company will treat
abstentions as shares that are present and entitled to vote for purposes of
determining a quorum. Since a majority of the shares represented at the meeting
and entitled to vote is required for approval, abstentions will have the effect
of a vote against approval of this proposal. If a broker indicates on a proxy
that it does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will be considered as present for quorum
purposes but not as shares entitled to vote with respect to that matter.
Accordingly, broker non-votes will have no effect on such a matter.
All shares represented by a properly executed proxy will be voted unless it
is revoked and, if a choice is specified, will be voted in accordance with such
specification. If no choice is specified, the proxies will be voted FOR the
election of the six nominees named under "Election of Directors", unless
authority to do so is withheld with respect to one or more of the nominees, and
FOR the ratification of the Company's selection of Arthur Andersen LLP as
auditors for the year ending December 31, 1999. In addition, the proxy will be
voted in the discretion of the proxy holders with respect to such other business
as may properly come before the meeting. The officers and directors of the
Company as a group own beneficially (excluding options to acquire stock)
approximately 30% of the outstanding shares of Common Stock of the Company (see
"Principal Stockholders and Stockholdings of Management"). The Company expects
that its officers and directors will vote the shares owned by them FOR the
election of such six nominees, and FOR the ratification of the Company's
selection of Arthur Andersen LLP as auditors.
As of March 15, 1999, the Company had outstanding 22,038,626 shares of
Common Stock. Each share of the outstanding Common Stock is entitled to one
vote. Only holders of Common Stock of record on the books of the Company at the
close of business on March 15, 1999 will be entitled to receive notice of and to
vote at the Annual Meeting.
<PAGE> 5
ELECTION OF DIRECTORS
At the Annual Meeting, directors are to be elected to hold office for the
ensuing year and until their respective successors are chosen and qualified. The
Board of Directors has fixed the size of the Board at six and has nominated six
persons, all of whom are now directors of the Company, to serve until the next
Annual Meeting of Stockholders and until their successors are elected and
qualified. If the enclosed proxy is duly executed and received in time for the
Meeting, and unless authority to do so is withheld, it will be voted to elect as
directors the following nominees: Raymond C. Kubacki, Jr., Werner A.
Baumgartner, Ph.D., A. Clinton Allen, Donald F. Flynn, John J. Melk and Fred J.
Weinert. (For a description of the business experience of such nominees, see
"Business Experience of Nominees and Executive Officers" below.) In the event
that any of the nominees become unavailable, then the proxy holders shall have
the right: (i) to vote for such substitute, if any, as the present Board of
Directors may designate; or (ii) to leave a vacancy on the Board.
The Company does not have any nominating or compensation committees of the
Board of Directors. The Audit Committee, whose members are Messrs. Flynn, Melk
and Weinert, did not meet during 1998. The Stock Option Committee, whose members
are Messrs. Flynn, Melk and Weinert, administers the 1989 Employee Stock Option
Plan, including the determination of employees who are to be granted options
under the Plan, the number of shares subject to each option, and the term of
each option. The Stock Option Committee acted by unanimous written consent in
lieu of a meeting on two occasions during 1998.
During the year ended December 31, 1998, there were three meetings of the
Board of Directors. All of the directors attended at least 75% of the meetings
of the Board, except for Mr. Melk. The directors also acted by unanimous written
consent on fourteen occasions during 1998. The directors regularly consult with
management and are kept informed of business developments and financial results
as they occur.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of copies of reports filed pursuant to Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or written representations from persons required to file such reports
("Reporting Persons"), the Company believes that all such filings required to be
made by such Reporting Persons were timely made in accordance with the
requirements of the Exchange Act.
2
<PAGE> 6
BUSINESS EXPERIENCE OF NOMINEES AND
EXECUTIVE OFFICERS
Following is a list of names, ages and positions with the Company of all
nominees for election as directors and all executive officers of the Company.
Name Age Position
---- --- --------
Raymond C. Kubacki, Jr. 54 Chief Executive Officer,
President, Director and
Nominee
Werner A. Baumgartner, Ph.D. 63 Chairman of the Board,
Director and Nominee
A. Clinton Allen 55 Vice Chairman of the
Board, Director and
Nominee
Donald F. Flynn 59 Director and Nominee
John J. Melk 62 Director and Nominee
Fred J. Weinert 51 Director and Nominee
William R. Thistle 49 Vice President,
General Counsel
Michael Lamb 49 Vice President - Sales
Peter C. Monson 43 Vice President,
Treasurer and Controller
All directors hold office until the next Annual Meeting of Stockholders or
until their successors are elected. Officers serve at the discretion of the
Board of Directors.
Mr. Kubacki has been President and Chief Executive Officer and a director
of the Company since 1991. Prior to joining the Company, he served as Vice
President-National Accounts and Director of Sales and Marketing for Reliance
COMM/TEC Corporation, a subsidiary of Reliance Electric Co.
Dr. Baumgartner, a founder of the Company, has served as Chairman of the
Board and a director of the Company since its organization in September, 1986.
Dr. Baumgartner has served as the Company's Director of Scientific and
Regulatory Affairs since May, 1989. Dr. Baumgartner received his Ph.D. in
physical chemistry in 1963 from the University of New South Wales, Sydney,
Australia, and has been engaged in physical and biophysical chemistry research
since 1960 holding research and teaching positions at University of New South
Wales; Long Beach State University; the Jet Propulsion Laboratory at the
California Institute of Technology; University of California, Los Angeles; and
University of Southern California. Dr. Baumgartner has been the director of the
Radioimmunoassay and In Vitro Laboratory of the Nuclear Medicine Service,
Veterans Administration Hospital, Wadsworth, Los Angeles, California since 1976,
serving in such capacity on a part-time basis since February, 1987.
3
<PAGE> 7
Mr. Allen has served as Vice Chairman and a director of the Company since
1989. He is also Chairman and Chief Executive Officer of A.C. Allen & Company,
Inc., an investment banking consulting firm located in Cambridge, Massachusetts.
He is a director of Response USA, Inc., the Legal Club of America, Image Guided
Technologies, Inc., Diversified Corporate Resources, Inc., Swiss Army Brands,
Inc., and The DeWolfe Companies, Inc., where he serves as Vice Chairman.
Mr. Flynn has been the sole stockholder of Flynn Enterprises, Inc. since
March, 1992, and Flynn Financial Corporation since November, 1998, financial
advisory and venture capital firms. Since February, 1997 he has been the Vice
Chairman of Blue Chip Casino, Inc., an owner and operator of a river boat gaming
vessel in Michigan City, Indiana. Mr. Flynn also was Chairman of the Board from
July, 1992 until February, 1996 and Chief Executive Officer from July, 1992
until May, 1995 of Discovery Zone, Inc., an operator of indoor entertainment and
fitness facilities for children. On March 25, 1996, Discovery Zone, Inc. filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Discovery Zone
emerged from bankruptcy with a Plan of Reorganization which was approved by the
Bankruptcy Court in July, 1997. From 1972 to 1990, Mr. Flynn served in various
positions with Waste Management, Inc. including Senior Vice President and Chief
Financial Officer. Mr. Flynn serves as a director of Extended Stay America,
Inc., an owner and operator of extended-stay lodging facilities. Mr. Flynn has
been a director of the Company since 1989.
Mr. Melk currently serves as Chairman of H20 Plus, L.P. which develops and
manufactures health and beauty aid products and distributes them through a
company-owned chain of specialty retail stores. He is also Chairman of MW
Partners, an investor in commercial and residential real estate developments.
From 1987 to 1989, he was Vice Chairman of the Board of Blockbuster
Entertainment Corporation. From 1971 to 1975, Mr. Melk was Vice President of
Corporate Development for Waste Management, Inc. and from 1975 to 1984 held the
position of President of WMI International, Ltd. based in London, England. He is
a director of Republic Industries, Inc. and Extended Stay America, Inc. In
August, 1998, he assumed the position of Chairman of Fisher Island Holdings,
LLC, of Miami, Florida. Mr. Melk has been a director of the Company since 1991.
Mr. Weinert is the majority shareholder and serves as Chief Executive
Officer of San Telmo, Inc. (investment group), Barrington Services Group (a
commercial real estate developer), San Telmo, L.L.C. (a distributor of
fragrances and cosmetics) and H20 Plus, SRL (a distributor and retailer of
cosmetics, bath products and fragrances in Argentina, Brazil, Chile and
Uruguay). From 1989 to 1995 he was President of H20 Plus L.P., MW Partners, and
Century Entertainment Ltd. Previous to that he was President of Waste Management
International, Inc. from 1983 to 1989. For over 13 years he has served on the
Business Advisory Council for the University of Dayton. Mr. Weinert has been a
director of the Company since 1991.
Mr. Thistle has been Vice President and General Counsel of the Company
since 1995. From 1993 to 1995 he served as Associate General Counsel for MGM
Grand in Las Vegas. From 1989 to 1993, Mr. Thistle was Associate General Counsel
for Harrah's Casino Resorts.
Mr. Lamb joined the Company in June 1997 as Vice President, Sales. Prior to
joining the Company, he served as Director, Sales and Marketing for Polaroid
Corporation, located in Cambridge, Massachusetts, from 1990 to 1996. From 1986
to 1990, Mr. Lamb was Director, National Accounts for Polaroid Corporation,
U.S.A.
Mr. Monson joined the Company effective March 30, 1998 as Vice President,
Treasurer and Controller. From November 1996 until joining the Company, Mr.
Monson was a financial consultant to several different companies, most recently
with GTE Internetworking. From 1994 to 1996, Mr. Monson was Chief Financial
Officer of Bet Systems, Inc. From 1991 to 1994, Mr. Monson was the Corporate
Controller and Treasurer of Gamma International, Ltd., a publicly traded gaming
company.
4
<PAGE> 8
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 6, 1997 and on November 12, 1997, the Company made term loans to
Mr. Kubacki in connection with of the exercise of stock options granted to him
in 1992. The original principal amounts of the loans were $209,892, and $211,232
and each was repayable in one year with interest at the federal short-term rate
in effect on such date plus one quarter percentage point. The principal amount
of the January 6, 1997 loan was renewed for additional one-year terms in 1998
and 1999. On November 12, 1998, the aggregate amount of the indebtedness under
both loans was approximately $432,000. As of such date, $199,500 of the
principal amount of the November 12, 1997 loan was renewed for an additional
one-year term. Mr. Kubacki made principal and interest payments in the aggregate
amount of approximately $40,000 under the two loans in 1998. As of March 31,
1999, the aggregate amount of principal and accrued interest under the loans was
$409,209. Each loan is secured by the shares of common stock acquired upon such
exercise.
5
<PAGE> 9
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the three year period ended December 31,
1998, the cash compensation paid by the Company as well as certain other
compensation paid or accrued for such year, to the Company's Chief Executive
Officer and the Company's five other most highly compensated executive officers
(collectively the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
------------------------------------------------ ----------
Name and Other Annual Securities
Principal Salary Bonus Compensation Underlying All Other
Position Year $ $ $ Options(#) Compensation ($)
- -------- ---- ------- ----- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Raymond C. 1998 199,439 0 (1) 70,000 4,031(4)
Kubacki, Jr. 1997 180,208 0 (1) 0 0(4)
President & 1996 175,000 0 (1) 50,000 0
CEO
Werner A. 1998 118,207 0 (1) 15,000 2,309(2)
Baumgartner 1997 121,018 0 (1) 0 2,309(2)
Chairman 1996 119,086 0 (1) 15,000 2,309(2)
A. Clinton Allen 1998 145,673 0 (1) 75,000 3,000(4)
Vice Chairman 1997 140,625 0 (1) 0 0(4)
1996 125,000 0 (1) 50,000 0
Donald J. 1998 116,538 0 (1) 9,000 825(4)
Kippenberger(3) 1997 105,000 0 (1) 0 0
Vice President 1996 102,500 0 (1) 6,000 0
Laboratory
Operations
William R. Thistle 1998 120,606 8,500 (1) 15,000 2,400(4)
Vice President 1997 111,209 0 (1) 0 0(4)
& General 1996 102,300 0 (1) 9,000 0
Counsel
Michael Lamb, 1998 116,538 0 (1) 10,000 2,400(4)
Vice President 1997 66,409 0 (1) 50,000 0(4)
Sales
</TABLE>
- ----------
(1) Any perquisites or other personal benefits received from the Company by the
named executive were substantially less than the reporting thresholds
established by the Securities and Exchange Commission (the lesser of
$50,000 or 10% of the individual's cash compensation).
6
<PAGE> 10
(2) Represents life insurance premiums paid by the Company on behalf of Dr.
Baumgartner.
(3) Dr. Kippenberger served as Vice President - Laboratory Operations through
December 18, 1998.
(4) Employer contribution under a 401(k) Retirement Plan.
STOCK OPTION GRANT TABLE
The following table contains information concerning the grant of stock
options to the named executive officers of the Company during the Company's
fiscal year ended December 31, 1998:
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
% of Total of Assumed Annual Rate
Options Exercise of Stock Appreciation
Granted to or Base for Option Term
Options Employees in Price Expiration ---------------------------
NAME Granted Fiscal Year ($/sh)(6) Date 0% 5%($) 10%($)
---- ------- ------------ --------- ---------- -- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond C. Kubacki, Jr. 70,000(1)(2)(3) 28.6 5.06 5-4-08 0 222,600 564,200
Werner A. Baumgartner 15,000(1)(4) 6.1 5.06 5-4-08 0 47,700 120,900
A. Clinton Allen 75,000(5) 30.6 5.06 5-4-08 0 238,500 604,500
Donald J. Kippenberger 9,000(1)(4) 3.7 5.06 5-4-08 0 28,640 72,579
William R. Thistle 15,000(1)(3)(7) 6.1 5.06 5-4-08 0 47,700 120,900
Michael Lamb 10,000(1)(8) 4.1 5.06 5-4-08 0 31,800 80,600
</TABLE>
- ----------
(1) These options were granted pursuant to the Company's 1989 Employee Stock
Option Plan as amended.
(2) Of these options, options with respect to 39,940 shares are incentive stock
options and vest with respect to 4,940 shares on May 4, 2000, and with
respect to 17,500 on each of the two anniversary dates thereafter; options
with respect to 30,060 shares are non-qualified stock options and vest with
respect to 17,500 shares on May 4, 1999, and with respect to 12,560 on May
4, 2000.
(3) Notwithstanding the foregoing vesting schedule, these options become
exercisable in full upon a "change of control" of the Company. See
"Employment Contracts and Change-in-Control Arrangements".
(4) These options are all incentive stock options and vest with respect to 25%
of the shares covered thereby on May 4, 1999, and with respect to an
additional 25% on each of the three anniversary dates thereafter.
(5) Of these options, options with respect to 42,440 shares are incentive stock
options granted under the Company's 1989 Employee Stock Option Plan as
amended and vest with respect to
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<PAGE> 11
4,940 shares on May 4, 2000, and with respect to 18,750 shares on each of
the two anniversary dates thereafter; options with respect to 32,560 shares
are non-qualified stock options granted under the Company's 1991
Non-Qualified Stock Option Plan as amended and vest with respect to 18,750
shares on May 4, 1999, and with respect to 13,810 shares on May 4, 2000.
(6) Represents the market value on the date of grant.
(7) Of these options, options with respect to 12,500 shares are incentive stock
options and vest with respect to 1,250 shares on May 4, 1999, and with
respect to 3,750 on each of the three anniversary dates thereafter; options
with respect to 2,500 shares are non-qualified stock options and vest in
full on May 4, 1999.
(8) Of these options, options with respect to 4,750 shares are incentive stock
options and vest with respect to 750 shares on May 4, 1999 and on each of
the two anniversary dates thereafter and with respect to 2,500 shares on
May 4, 2002; options with respect to 5,250 shares are non-qualified stock
options and vest with respect to 1,750 on May 4, 1999 and each of the two
anniversary dates thereafter.
(9) All options held by Mr. Kippenberger expired on December 18, 1998.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information with respect to the named
executives concerning each exercise of stock options during the fiscal year and
the number and value of unexercised options held as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Value Number of unexercised Value of unexercised
Acquired Realized options at fiscal in-the-money options at
on Exercise ($)(1) year-end(#) fiscal year-end ($) (2)
----------- -------- ---------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raymond C
Kubacki, Jr 103,000 310,330(3) 424,127 159,375 862,436 93,580
Werner A
Baumgartner 51,500 133,643 38,400 32,800 71,225 24,717
A. Clinton Allen 0 0 122,850 115,450 275,500 40,487
Donald J
Kippenberger 36,148 97,684 0 0 0 0
William R. Thistle 0 0 43,125 32,375 0 975
Michael Lamb 0 0 12,500 47,500 0 650
</TABLE>
- ----------
(1) Value realized represents the difference between the closing price of the
Common Stock on
8
<PAGE> 12
the date of exercise and the exercise price, multiplied by the number of
shares acquired on exercise.
(2) Represents the fair market value of the Company's Common Stock on December
31, 1998 ($5.125 per share based on the closing price on the American Stock
Exchange) minus the exercise price per share, of the in-the-money options,
multiplied by the number of shares subject to each option.
(3) As of the date of this proxy statement, Mr. Kubacki had not resold in the
open market or otherwise any shares acquired by him upon the exercise of
options during 1998, except for shares tendered to the Company to cover the
exercise price of options (in accordance with the plan) and the withholding
of shares to cover withholding taxes.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with the grants by the Company to Mr. Kubacki and to Mr.
Thistle of options to acquire shares of the Company's Common Stock, the Company
agreed that notwithstanding the vesting schedule stated in the applicable option
agreement, such options would become exercisable in full upon a
change-in-control of the Company. The following events constitute a
change-in-control for purposes of the option agreements: (a) the aggregate
number of shares beneficially owned by the group of investors which purchased
securities of the Company on May 15, 1989 is less than the number held by any
other person or group, (b) the Company sells, leases or transfers all or
substantially all of its assets, or (c) the Company merges or consolidates with
another company and the existing stockholders of the Company end up owning less
than 50% of the combined company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1998, Dr. Baumgartner, and Messrs. Kubacki and Allen,
each of whom was both a director and an executive officer of the Company during
the year ended December 31, 1998, participated in deliberations of the Board of
Directors during such year concerning executive officer compensation.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation program is designed to attract, retain
and reward executives who are responsible for leading the company in achieving
its business objectives. This report is submitted by the Board of Directors and
addresses the compensation policies for fiscal 1998 as they affected Mr.
Kubacki, in his capacity as Chief Executive Officer of the Company, and the
other executive officers of the Company.
COMPENSATION PHILOSOPHY
The Company's executive compensation philosophy is based on the belief that
competitive compensation is essential to attract, motivate and retain highly
qualified and industrious employees. The Company's policy is to provide total
compensation that is competitive for comparable work and comparable corporate
performance. The compensation program is also designed to link the interests of
the Company's executives to the interests of the Company's shareholders.
At present, the executive compensation program is comprised of salary, cash
incentive opportunities, long-term incentive opportunities in the form of stock
options, and benefits typically offered to executives by major corporations. As
an executive's level of responsibility increases, the greater the mix of
compensation shifts to reliance on the value of the Common Stock through
stock-based awards.
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<PAGE> 13
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a public company for compensation over $1 million paid to its chief
executive officer and its four other most highly compensated executive officers.
Qualifying performance-based compensation is not subject to the deduction limit
if certain requirements are met. It is the Board's objective to maximize
deductibility under Section 162(m) with minimal sacrifices in flexibility and
corporate objectives. Accordingly, with respect to compensation payable to an
applicable executive officer which would otherwise be nondeductible, it is the
Company's policy that such amounts be deferred until the limitation on
deductibility no longer applies with respect to such person.
COMPENSATION ELEMENTS
BASE SALARY
At the executive officer level, base salaries are conservative when
compared with companies of similar size and financial performance. Salary ranges
are assigned to each position based on a comparison of the Company's positions
with similar positions in companies of similar size in the Company's industry,
with range midpoints established at the average of the marketplace. Actual
salaries within the appropriate range depend upon individual performance,
experience and internal equity and are reviewed and may be adjusted annually by
the Company. Salary levels for executives other than the Chief Executive Officer
were determined for 1998 by Mr. Kubacki, the Chief Executive Officer, based on
the foregoing criteria.
INCENTIVE COMPENSATION
The Company has generally not paid cash bonuses to executive officers as
rewards for superior performance, preferring instead to reward executive
officers with equity-based compensation in the form of stock options.
STOCK OPTIONS
The Company's current stock option plan for executive officers and other
employees has been in existence since 1989. The 1989 Employee Stock Option Plan
was last amended on December 17, 1996. Under the plan, the Stock Option
Committee of the Board of Directors may grant options with terms of up to ten
years. The options generally become exercisable with respect to 25% of the
shares covered thereby on the first anniversary of the date of grant and with
respect to an additional 25% on each of the next three anniversary dates
thereafter. In granting the stock options to executives, the Stock Option
Committee of the Board of Directors takes into account the practices of other
companies of comparable size as well as the executive's level of responsibility
and past contributions to the Company, particularly in light of the Company's
practice not to award cash bonuses. In May, 1998, the Stock Option Committee
granted options to executive officers and other key employees as a result of
1997 operating results.
COMPENSATION TO THE CHIEF EXECUTIVE OFFICER
Mr. Kubacki's annual base salary was last adjusted in October, 1997. In
establishing the rate of salary at that time, the Board considered the Company's
financial performance for the prior year and over an extended period of time,
Mr. Kubacki's individual performance, and his long-term contributions to the
success of the Company. The Board compared Mr. Kubacki's base salary and total
compensation to the base salaries and total compensation of chief executive
officers at comparator companies. The Company's revenues grew by 21% in 1996 and
net income for the Company increased in calendar year 1996 from 1995 by over
60%. Mr. Kubacki's salary was therefore increased in 1997 by 14%. Although Mr.
Kubacki's salary level was not reviewed by the Board of Directors in 1998, his
next increase is also expected to be based on these factors. In
10
<PAGE> 14
May, 1998, Mr. Kubacki was granted options to acquire up to 70,000 shares of
Common Stock based on the Company's 1997 financial performance.
A. Clinton Allen
Donald F. Flynn
Fred J. Weinert
John J. Melk
Werner A. Baumgartner, Ph.D.
Raymond C. Kubacki, Jr.
COMPENSATION OF DIRECTORS
Messrs. Kubacki, Baumgartner and Allen receive no additional compensation
for serving on the Company's Board of Directors. As non-employee ("outside")
directors, Messrs. Flynn, Melk and Weinert participate in the Non-Employee
Director Plan. Under the Non-Employee Director Plan, each outside director
automatically received a grant of an option for 25,750 shares upon the adoption
of the Plan. Each such option had an exercise price equal to the market value
per share of the Company's Common Stock on the automatic grant date, had a term
of five years and became exercisable over a period of twenty-four months from
the date of grant in equal monthly installments on a cumulative basis.
Under the Non-Employee Director Plan as amended on March 15, 1996 each
outside director automatically received, effective March 15, 1996, a grant of an
option for 20,600 shares. In addition, each person serving as an outside
director as of March 15 of each calendar year thereafter receives an additional
automatic grant of an option to acquire 20,600 shares. All of such options are
for terms of ten years, and are exercisable in full twelve (12) months after the
date of grant. Each newly appointed outside director automatically receives a
grant of an option to acquire 25,750 shares upon the date of appointment. All
such options to newly appointed directors are for terms of ten years but become
exercisable over a period of twenty-four months from the date of grant in equal
cumulative monthly installments. All options granted under the Non-Employee
Director Plan have exercise prices equal to the market value per share of the
Company's Common Stock on the automatic grant date.
Options under the Non-Employee Director Plan are not transferable by the
optionee otherwise than by will or the laws of descent and distribution and
terminate if the optionee ceases to serve as a member of the Company's Board of
Directors. In the event of the optionee's death or permanent disability, the
option becomes exercisable in full and the optionee or his heirs, legatees or
legal representatives may exercise the option during the following one year
period or the remainder of the option term, whichever period is shorter.
Options to acquire an aggregate of 61,800 shares at an exercise price of
$5.59 were granted in 1998 under the Non-Employee Director Plan, including
options to acquire 20,600 shares granted to Mr. Melk, options to acquire 20,600
shares granted to Mr. Weinert and options to acquire 20,600 shares granted to
Mr. Flynn.
Mr. Welnert was also granted on May 4, 1998 an option to acquire 25,000
shares of an exercise price of $5.06 per share under the Company's 1991 Non-
Qualified Stock Option Plan, as additional compensation for marketing services
rendered to the Company.
11
<PAGE> 15
PSYCHEMEDICS CORPORATION
STOCK PRICE PERFORMANCE GRAPH(1)
[PSYCHEMEDICS GRAPH]
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Psychemedics $ 100.00 $113.83 $195.74 $210.38 $212.80 $185.63
AMEX Market Value Index(2) $ 100.00 $ 90.89 $114.90 $122.24 $148.26 $150.84
Russell 2000 Index(3) $ 100.00 $ 96.82 $122.19 $140.23 $169.00 $163.18
</TABLE>
(1) The above graph assumes a $100 investment on December 31, 1993, through the
end of the 5-year period ended December 31, 1998 in the Company's Common
Stock, the AMEX Market Value Index, and the Russell 2000 Index. The prices
all assume the reinvestment of dividends.
(2) The AMEX Market Value Index includes companies whose shares are traded on
the American Stock Exchange.
(3) The Russell 2000 Index is comprised of the smallest 2,000 companies in the
Russell 3,000 Index. The Company has been unable to identify a peer group
of companies that engage in testing of drugs of abuse, except for large
pharmaceutical companies where such business is insignificant to such
companies' other lines of businesses. The Company therefore uses in its
proxy statements a peer index based on market capitalization.
12
<PAGE> 16
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS
OF MANAGEMENT
The following table shows, as of March 15, 1999, the number of shares
beneficially owned (i) by those stockholders who are known to the Company to own
beneficially more than five percent of the outstanding Common Stock of the
Company, (ii) by each director and nominee for director of the Company, (iii) by
each named executive officer, and (iv) by all directors and executive officers
as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percentage
Name Beneficial Ownership(1) Owned(2)
- ---- ----------------------- --------
<S> <C> <C>
H. Wayne Huizenga 2,356,791(3) 10.7%
450 E. Las Olas Blvd. Suite 1500
Fort Lauderdale, Florida 33301
John J. Melk 2,226,422(4) 10.1%
676 North Michigan Avenue
Suite 3900
Chicago, Illinois 60611
Donald F. Flynn 2,099,280(4)(5) 9.5%
676 North Michigan Avenue
Suite 4000
Chicago, Illinois 60611
Richard T. Christoph 1,400,250 6.4%
1156 Lynnette Drive
Lake Forest, IL 60045
Werner A. Baumgartner, Ph.D. 1,154,770(4)(6) 5.2%
Psychemedics Corporation
5832 Uplander Way
Culver City, California 90230
Raymond C. Kubacki, Jr. 827,655(4) 3.7%
A. Clinton Allen 755,903(4) 3.4%
Fred J. Weinert 457,937(4)(7) 2.1%
Donald J. Kippenberger, Ph.D. 30 *
William Thistle 46,875(4) *
Michael Lamb 15,000(4) *
All Executive Officers and 7,583,872(8) 33%
Directors as a group (9 persons)
</TABLE>
* denotes ownership of less than 1%
13
<PAGE> 17
(1) Shares are considered beneficially owned, for the purpose of this table
only, if held by the person indicated as beneficial owner, or if such
person, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares the power to vote,
to direct the voting of and/or to dispose of or to direct the disposition
of such security, or if the person has the right to acquire beneficial
ownership within sixty (60) days, unless otherwise indicated in these
footnotes.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person shown in this table.
(3) Includes: (i) 1,583,467 shares held by a limited partnership controlled by
said individual and (ii) 8,386 shares owned by said individual's spouse.
(4) Includes the following number of shares of Common Stock which the
individual has a right to acquire within 60 days pursuant to the exercise
of options: Mr. Allen - 157,050; Dr. Baumgartner - 52,450; Mr. Kubacki -
480,252; Messrs. Flynn and Melk - 61,800 each; Mr. Weinert - 66,200; Mr.
Thistle - 46,875 and Mr. Lamb - 15,000.
(5) Includes: (i) 19,326 shares owned by Mr. Flynn as trustee under Grantor
Trust Agreement dated April 24, 1989, as amended; (ii) 1,713,160 shares
held by DNB LP as to which said individual, as President and sole director
of the general partner, has sole dispositive and voting power; and (iii)
304,994 shares owned by said individual's spouse.
(6) Includes: (i) 850,820 shares held by said individual as trustee of the
Baumgartner Family Trust dated April 26, 1994; and (ii) 200,000 by said
individual as trustee of the Baumgartner Charitable Trust dated June 1,
1995.
(7) Includes 306,453 shares held by Mr. Weinert as trustee under the Fred J.
Weinert, Jr. Revocable Insurance Trust u/t/a dated May 17, 1982.
(8) Includes 941,427 shares which the executive officers and directors have the
right to acquire within 60 days pursuant to the exercise of options.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected as the Company's independent auditors
for the year ended December 31, 1999, the firm of Arthur Andersen LLP. A
representative of Arthur Andersen LLP is expected to be present at the Annual
Meeting and will be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the next Annual
Meeting of Stockholders must comply with Rule 14a-8 of the Securities and
Exchange Commission issued under the Securities Exchange Act of 1934, and must
be received at the principal executive offices of the Company not later than
December 3, 1999.
14
<PAGE> 18
OTHER MATTERS
The Board of Directors knows of no other matters which may come before the
Meeting. However, if any matter not now known is presented at the Meeting, it is
the intention of the persons named in the accompanying form of proxy to vote
said proxy in accordance with their judgment on such matter.
The Company will bear the cost of solicitation of proxies. Solicitations of
proxies by mail may be followed by telephone or other personal solicitation of
certain stockholders by officers or other employees of the Company.
By order of the Board of Directors,
EDWARD S. BREWER, JR.,
Secretary
April 2, 1999
15
<PAGE> 19
PSYCHEMEDICS CORPORATION
PROXY FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 6, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Werner A. Baumgartner, Ph.D. and Raymond C.
Kubacki, Jr., or either of them, attorneys or attorney of the undersigned (with
full power of substitution in them), to vote for and in the name of the
undersigned, at the 1999 Annual Meeting of Stockholders of Psychemedics
Corporation (the "Company") to be held on Thursday, May 6, 1999 at 3:30 p.m. at
The Boston Harbor Hotel, 70 Rowes Wharf, Boston Massachusetts and any
adjournments thereof, according to the number of shares and as fully as the
undersigned would be entitled to vote if personally present.
Without limiting the general authorization hereby given, said proxies are, and
each of them is, instructed to vote or act as follows on the proposals set forth
in the Company's Proxy Statement dated April 2, 1999 and on such other matters
as may properly come before the meeting.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE, AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN
ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please sign this proxy exactly as your name appears on the books of the Company.
Joint owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If the shareholder is a corporation, the signature should
be that of an authorized officer who should state his or her title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------------- ----------------------------
- ----------------------------------- ----------------------------
- ----------------------------------- ----------------------------
<PAGE> 20
/X/ Please mark votes as
in this example.
With For All
For hold Except
1.) Election of Directors. / / / / / /
WERNER A. BAUMGARTNER, PH.D.; RAYMOND C. KUBACKI, JR.; A. CLINTON ALLEN;
DONALD F. FLYNN; JOHN J. MELK AND FRED J. WEINERT
NOTE: IF YOU DO NOT WISH YOUR SHARES VOTED 'FOR' A PARTICULAR NOMINEE, MARK
THE 'FOR ALL EXCEPT' BOX AND STRIKE A LINE THROUGH THE NOMINEE'S NAME. YOUR
SHARES WILL BE VOTED FOR THE REMAINING NOMINEE(S).
For Against Abstain
2.) Selection of Arthur Andersen LLP as
the Company's independent auditors. / / / / / /
The Board of Directors recommends a vote FOR Proposals 1 and 2
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE PROPOSALS SET FORTH IN PARAGRAPHS (1) and (2).
PSYCHEMEDICS CORPORATION
RECORD DATE SHARES:
-----------------------------
Please be sure to sign and date this Proxy. Date
---------Stockholder sign here----------------Co-owner sign here-----------
Mark box at right if an address change or comment has
been noted on the reverse side of this card. / /
<PAGE> 21
DETACH CARD
PSYCHEMEDICS CORPORATION
Dear Shareholder:
Please take note of the important information enclosed with this Proxy
Ballot.
Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.
Please mark the boxes on the proxy card to indicate how your shares shall
be voted. Then sign the card, detach it and return your proxy vote in the
enclosed postage paid envelope.
Your vote must be received prior to the Annual Meeting of Stockholders, May
6, 1999.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Psychemedics Corporation
