<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))
NAME OF COMPANY
(Name of Registrant as Specified In Its Charter)
PSYCHEMEDICS
(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]
April 4, 2000
Dear Stockholders:
We cordially invite you to attend the Annual Meeting of Stockholders,
which will be held at The Charles Hotel in Harvard Square, 1 Bennett Street,
Cambridge, Massachusetts, on Thursday, May 11, 2000, at 2:00 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, ratification of the Company's 2000 Stock Option Plan and
ratification of the appointment of auditors for 2000. 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,
/s/ Raymond C. Kubacki, Jr.
-------------------------------------
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 4, 2000
The Annual Meeting of Stockholders will be held on May 11, 2000 at 2:00
p.m. at The Charles Hotel in Harvard Square, 1 Bennett Street, Cambridge,
Massachusetts 02138, 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 consider and act upon a proposal to ratify the Company's 2000
Stock Option Plan;
3. To ratify the Company's selection of Arthur Andersen LLP as the
Company's independent auditors for the year ending December 31,
2000; and
4. 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, 2000
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 1999 containing a copy of the Company's
Form 10-K (excluding exhibits) for the year ended December 31, 1999 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 11, 2000
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
11, 2000 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 4, 2000. 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 10,641,339 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 ratification of the Company's 2000 Stock Option Plan,
and 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 these proposals. 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, FOR
ratification of the Company's 2000 Stock Option Plan, and FOR the ratification
of the Company's selection of Arthur Andersen LLP as auditors for the year
ending December 31, 2000. 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 21% 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, FOR ratification of the Company's 2000 Stock Option Plan, and FOR the
ratification of the Company's selection of Arthur Andersen LLP as auditors.
As of March 15, 2000, the Company had outstanding 21,282,676 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, 2000 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, Walter S. Tomenson, Jr.
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,
Tomenson and Weinert, did not meet during 1999. The Stock Option Committee,
whose members are Messrs. Flynn, Tomenson and Weinert, administers the Company's
stock option plans, including the determination of persons who are to be granted
options under such plans, the number of shares subject to each option, and the
term of each option. The Stock Option Committee held one meeting in 1999 and
acted by unanimous written consent in lieu of a meeting on one occasion during
1999.
During the year ended December 31, 1999, there was one meeting of the
Board of Directors which all of the directors attended. The directors also acted
by unanimous written consent on ten occasions during 1999. 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.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Raymond C. Kubacki, Jr. 55 Chief Executive Officer,
President, Director and
Nominee
Werner A. Baumgartner, Ph.D. 64 Chairman of the Board,
Director and Nominee
A. Clinton Allen 56 Vice Chairman of the
Board, Director and Nominee
Donald F. Flynn 60 Director and Nominee
Walter S. Tomenson, Jr. 53 Director and Nominee
Fred J. Weinert 52 Director and Nominee
William R. Thistle 50 Vice President, General Counsel
Michael Lamb 50 Vice President, Sales
Peter C. Monson 44 Vice President,
Treasurer and Controller
Michael I. Schaffer, Ph.D. 55 Vice President,
Laboratory Operations
</TABLE>
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 the Company's President and Chief Executive Officer
and has served as 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, Steinway
Musical Instruments, 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. a
venture capital hedging and consulting firm based in Chicago, Illinois since its
inception in 1988. He has also served as Chairman of the Board of LKQ
Corporation, a company engaged in the automobile recycling business, since
February, 1999, and served as its sole director from February 1998 until
February, 1999. He was Vice Chairman of Blue Chip Casino, Inc., an owner and
operator of a river boat gaming vessel in Michigan City, Indiana, from February,
1997 until November, 1999, when it was sold to Boyd Gaming Corporation. 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. Tomenson is Managing Director and Chairman of Client Development of
Marsh, Inc. In addition, he is a member of the Board of Directors of Marsh, Inc.
Mr. Tomenson is a Director of Ronald McDonald House and a Trustee of the
Children's Oncology Society of New York, Inc. He is a Director of the Trinity
College School Fund, Inc. He also serves on the Executive Council of the
Inner-City Scholarship Fund.
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 the last 15 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 has been the Company's Vice President, Sales since June, 1997.
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 has been the Company's Vice President, Treasurer and
Controller since March, 1998. 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.
Dr. Schaffer joined the Company in April 1999 as Vice President of
Laboratory Operations. Prior to joining the Company, he served as Director of
Toxicology, Technical Manager and Responsible Person for the Leesburg, Florida
laboratory of SmithKline Beecham Clinical Laboratories, from 1990 to 1999. Dr.
Schaffer has been an inspector for the Substance Abuse and Mental Health
Services Administration's National Laboratory Certification Program since 1989.
Dr. Schaffer was also a member of the Board of Directors of the American Board
of Forensic Toxicologists from 1990 to 1999.
-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 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, 1999 and 2000. The November 12, 1997 loan was renewed for
additional one-year term in 1998 and 1999. Mr. Kubacki made principal and
interest payments in the aggregate amount of approximately $27,800 under the two
loans in 1999. As of March 21, 2000, the aggregate amount of principal and
accrued interest under the loans was $393,780.67. 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,
1999, 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 four 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 ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING COMPEN-
POSITION YEAR $ $ $ OPTIONS(#) SATION($)
- -------- ---- ------- ----- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Raymond C.Kubacki, Jr. 1999 221,824 0 (1) 75,000 5,062(3)
President & CEO 1998 199,439 0 (1) 70,000 4,031(3)
1997 180,208 0 (1) 0 0
Werner A. Baumgartner 1999 121,718 0 (1) 20,000 2,309(2)
Chairman 1998 118,207 0 (1) 15,000 2,309(2)
1997 121,018 0 (1) 0 2,309(2)
A. Clinton Allen 1999 169,039 0 (1) 50,000 5,071(3)
Vice Chairman 1998 145,673 0 (1) 75,000 3,000(3)
1997 140,625 0 (1) 0 0
William R. Thistle 1999 139,212 8,500 (1) 30,000 4,176(3)
Vice President 1998 120,606 8,500 (1) 15,000 2,400(3)
& General Counsel 1997 111,209 0 (1) 0 0
Michael Lamb, 1999 120,000 0 (1) 8,800 3,600(3)
Vice President 1998 116,538 0 (1) 10,000 2,400(3)
Sales 1997 66,409 0 (1) 50,000 0
</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
$50,000 or 10% of the individual's cash compensation).
(2) Represents life insurance premiums paid by the Company on behalf of Dr.
Baumgartner.
(3) Employer contribution under a 401(k) Retirement Plan.
-6-
<PAGE> 10
STOCK OPTION GRANT TABLE
The following table contains information concerning the grant of stock
options to the named executive officers of the Company during the Company's
fiscal year ended December 31, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF TOTAL OF ASSUMED ANNUAL RATE
OPTIONS EXERCISE OF STOCK APPRECIATION
GRANTED TO OR BASE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED(1) FISCAL YEAR ($/SH)(6) DATE 0% 5%($) 10%($)
- ---- ---------- ------------ --------- ----------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond C. Kubacki, Jr. 75,000(2)(3) 24.6 4.50 5-6-09 0 212,251 537,888
Werner A. Baumgartner 20,000(4) 6.6 4.50 5-6-09 0 56,600 143,437
A. Clinton Allen 50,000(5) 16.4 4.50 5-6-09 0 141,501 358,592
William R. Thistle 30,000(3)(4) 9.8 4.50 5-6-09 0 84,901 215,155
Michael Lamb 8,800(7) 2.9 4.50 5-6-09 0 24,904 63,112
</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 23,750 shares are incentive
stock options and vest with respect to 2,500 shares on May 6, 2001, with
respect to 2,500 shares on May 6, 2002 and with respect to 18,750 shares
on May 6, 2003; options with respect to 51,250 shares are non-qualified
stock options and vest with respect to 18,750 shares on May 6, 2000, and
with respect to 16,250 on each of the two anniversary dates thereafter.
(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 6, 2000, and with respect to an
additional 25% on each of the three anniversary dates thereafter.
(5) Of these options, options with respect to 14,700 shares are incentive
stock options and vest with respect to 1,100 shares on May 6, 2001 and
May 6, 2002, and with respect to 12,500 shares on May 6, 2003; options
with respect to 35,300 shares are non-qualified stock options and vest
with respect to 12,500 shares on May 6, 2000, and with respect to 11,400
shares on each of the two anniversary dates thereafter.
(6) Represents the market value on the date of grant.
(7) Of these options, options with respect to 4,400 shares are incentive
stock options and vest with respect to 2,200 shares May 6, 2002 and 2003;
options with respect to an additional 4,400 shares are non-qualified
stock options and vest with respect to 2,200 shares on May 6, 2000 and
May 6, 2001.
-7-
<PAGE> 11
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, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES VALUE YEAR-END(#) FISCAL YEAR-END($)(2)
ACQUIRED REALIZED --------------------------- ---------------------------
NAME ON EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raymond C. Kubacki, Jr. 0 0 518,502 140,000 897,328 39,500
Werner A. Baumgartner 0 0 56,200 35,000 89,816 10,000
A. Clinton Allen 0 0 109,550 118,750 296,949 25,000
William R. Thistle 0 0 62,000 43,500 0 15,000
Michael Lamb 0 0 27,500 41,300 0 4,400
</TABLE>
(1) Value realized represents the difference between the closing price of the
Common Stock on 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, 1999 ($5.00 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.
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 1999, 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, 1999, participated in deliberations of the Board of
Directors during such year concerning executive officer compensation.
-8-
<PAGE> 12
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 1999 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.
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 1999 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.
-9-
<PAGE> 13
STOCK OPTIONS
In May, 1999, the Stock Option Committee granted options under the
Company's 1989 Employee Stock Option Plan (the "1989 Employee Plan") to
executive officers and other key employees as a result of 1998 operating
results. The 1989 Employee Plan expired in 1999. In March, 2000, the Board of
Directors adopted the Company's 2000 Stock Option Plan, subject to shareholder
approval at the 2000 Annual Meeting of Stockholders. Under both the 1989
Employee Plan (prior to its termination) and the 2000 Stock Option 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.
COMPENSATION TO THE CHIEF EXECUTIVE OFFICER
Mr. Kubacki's annual base salary was last adjusted in May, 1999. In
establishing the rate of salary, 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 26% in 1997 and
15% in 1998. Based on the Company's performance and on the fact that his salary
had not been increased since 1997, Mr. Kubacki's salary was therefore increased
in 1999 by 15%. In May, 1999, Mr. Kubacki was granted options to acquire up to
75,000 shares of Common Stock based on the Company's 1998 financial performance.
A. Clinton Allen
Donald F. Flynn
Fred J. Weinert
Walter S. Tomenson
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. The Company's outside
(non-employee) directors each receive cash compensation in the amount of $5,000
for each meeting attended.
Under the Company's 1989 Non-Qualified Stock Option Plan (the "1989
Non-Employee Director Plan"), until it was discontinued on March 21, 2000, each
outside director automatically received a grant of an option for 25,750 shares
upon his appointment to the Board. 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 ten 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 1989 Non-Employee Director Plan, each outside
director also automatically received, effective March 15, of each year, a grant
of an option for 20,600 shares. Each such option was for a term of ten years,
became exercisable in full twelve (12) months after the date of grant, and had
an exercise price equal to the market value per share of the Company's Common
Stock on the automatic grant date.
Options under the 1989 Non-Employee Director Plan were not transferable
by the optionee otherwise than by will or the laws of descent and distribution
and terminated if the optionee ceased 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 became exercisable in full and the optionee or his heirs,
legatees or legal
-10-
<PAGE> 14
representatives could exercise the option during the following one year period
or the remainder of the option term, whichever period is shorter.
In 1999, each outside director waived his rights under the 1989
Non-Employee Director Plan to receive an automatic option grant on March 15,
1999, but was instead granted in September, 1999 an option to acquire 20,000
shares at an exercise price of $4.37 per share, representing the market price on
the date of grant.
Directors are also eligible to receive the grant of discretionary options
under the Company's 2000 Stock Option Plan. See "Approval of 2000 Stock Option
Plan" below.
Options to acquire an aggregate of 85,750 shares at an exercise prices
ranging from $4.28 to $4.375 were granted to outside directors in 1999,
including options to acquire 25,750 shares granted to Mr. Tomenson, options to
acquire 20,000 shares granted to Mr. Weinert and options to acquire 20,000
shares granted to Mr. Flynn.
-11-
<PAGE> 15
STOCK PRICE PERFORMANCE GRAPH(1)
ASSUMES $100 INVESTED ON JAN. 1, 1995
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1999
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PSYCHEMEDICS CORPORATION 100.00 170.37 183.09 185.84 162.28 164.00
RUSSELL 2000 INDEX (2) 100.00 128.44 149.77 183.23 178.09 212.98
AMEX MARKET INDEX (3) 100.00 128.90 136.01 163.66 161.44 201.27
</TABLE>
(1) The above graph assumes a $100 investment on January 1, 1995, through the
end of the 5-year period ended December 31, 1999 in the Company's Common
Stock, the Russell 2000 Index and the AMEX Market Value Index. The prices
all assume the reinvestment of dividends.
(2) 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.
(3) The AMEX Market Value Index includes companies whose shares are traded on
the American Stock Exchange.
-12-
<PAGE> 16
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS
OF MANAGEMENT
The following table shows, as of March 15, 2000, 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) 11.1%
450 E. Las Olas Blvd. Suite 1500
Fort Lauderdale, Florida 33301
Donald F. Flynn 2,099,280(4)(5) 9.8%
676 North Michigan Avenue
Suite 4000
Chicago, Illinois 60611
John J. Melk(6) 2,085,122 9.8%
676 North Michigan Avenue
Suite 3900
Chicago, Illinois 60611
Richard T. Christoph 1,708,050 8.0%
1156 Lynnette Drive
Lake Forest, Illinois 60045
Werner A. Baumgartner, Ph.D. 1,105,270 5.2%
Psychemedics Corporation
5832 Uplander Way
Culver City, California 90230
Raymond C. Kubacki, Jr. 902,155(4) 4.1%
A. Clinton Allen 770,149(4) 3.6%
Fred J. Weinert 457,937(4)(7) 2.1%
William Thistle 73,250(4) *
Michael Lamb 32,200(4) *
Walter S. Tomenson 5,360(4) *
All Executive Officers and 5,468,101(8) 24.4%
Directors as a group (10 persons)
</TABLE>
* denotes ownership of less than 1%
(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
-13-
<PAGE> 17
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 - 200,800; Dr. Baumgartner - 64,950; Mr. Kubacki -
554,752; Mr. Flynn - 61,800; Mr. Weinert - 66,200; Mr. Thistle - 73,250;
Mr. Lamb - 32,200; and Mr. Tomenson - 5,360.
(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) Mr. Melk resigned as a director of the Company on November 1, 1999.
(7) Includes: (i) 840,320 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.
(8) 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.
(9) Includes 1,081,812 shares which the executive officers and directors have
the right to acquire within 60 days pursuant to the exercise of options.
APPROVAL OF THE 2000 STOCK OPTION PLAN
On March 21, 2000 the Company adopted, subject to shareholder approval,
the 2000 Stock Option Plan (the "2000 Stock Option Plan"). Up to 2,000,000
shares of Common Stock (subject to adjustment in the event of stock splits,
stock dividends and other similar events) may be issued pursuant to options
granted under the 2000 Stock Option Plan. The 2000 Stock Option Plan is intended
to benefit the Company and its subsidiaries through offering certain present and
future key employees, directors and consultants a favorable opportunity to
become holders of stock in the Company over a period of years, thereby giving
them a permanent stake in the growth and prosperity of the Company and
encouraging the continuance of their services with the Company and/or its
subsidiaries through (a) the grant of options which qualify as "incentive stock
options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code") or (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"). A copy of the 2000 Stock Option Plan is included with
this proxy statement as Exhibit A.
The 2000 Stock Option Plan is intended to replace the Company's 1989
Employee Stock Option Plan, which expired in 1999, and the Company's 1989
Non-Qualified Stock Option Plan (the "1989 Non-Qualified Plan"). If the 2000
Stock Option Plan is approved by the stockholders, no additional options will be
granted under the 1989 Non-Qualified Plan.
-14-
<PAGE> 18
Administration
The 2000 Stock Option Plan is administered by the Stock Option Committee
of the Board of Directors. Option grants under the 2000 Stock Option Plan may be
made to employees and consultants of the Company or any subsidiary, and to
members of the Company's Board of Directors, whether or not they are employees.
Each option becomes exercisable in such installments as may be determined by the
Stock Option Committee. The maximum number of options that may be granted in a
single fiscal year to an individual is 250,000.
The Stock Option Committee has the discretion to specify the extent to
which options expire in the event of voluntary or involuntary termination of
employment or in the event of violation of any duty not to compete or not to
disclose confidential Company information. The Stock Option Committee also has
the discretion to make stock options transferable (for example, to family
members).
The exercise price of stock options granted under the 2000 Stock Option
Plan may not be less than the fair market value of the stock on the date the
option is granted, which is defined as the average of the high and low sales
prices of the Company's common stock on the American Stock Exchange on the
trading day immediately preceding the date the option is granted. An ISO granted
to a person who owns more than 10% of the Company's outstanding stock must have
an exercise price of not less than 110% of fair market value. The full exercise
price must be paid at the time of exercise either in cash, by tendering
previously acquired shares, or by a combination of the above. The Stock Option
Committee may also allow cashless exercises. In connection with the exercise of
options, the Stock Option Committee may make loans to optionees in its
discretion, subject to certain terms and conditions not inconsistent with the
2000 Stock Option Plan. Such loans shall bear interest rates, as determined by
the Stock Option Committee, which may not be below the applicable Federal rate,
as defined in the Code. No such loan may exceed the fair market value of the
shares covered by the options, or portion thereof, exercised by the optionee.
Such loans shall be secured by a pledge of shares or other collateral of the
optionee.
Options granted under the 2000 Stock Option Plan expire at such time as
the Stock Option Committee determines from time to time, but not later than the
tenth anniversary of the date of grant. Options granted under the 2000 Stock
Option Plan are exercisable at such times and be subject to such restrictions
and conditions as the Stock Option Committee may approve, which need not be the
same for each grant or for each participant. The Stock Option Committee may
impose such restrictions on shares acquired upon the exercise of an option as it
deems advisable.
The Board of Directors of the Company may further amend or terminate the
2000 Stock Option Plan in whole or in part at any time, subject to any
requirement of stockholder approval imposed by any applicable law, rule or
regulation. No amendment, modification or termination of the 2000 Stock Option
Plan shall adversely affect in any material way any option previously granted
under the plan, without the written consent of the holder of the option.
Federal Income Tax Consequences
The grant of an option has no immediate tax consequences to the optionee
or the Company. The exercise of a Non-Qualified Option requires an optionee to
include in income, as compensation, the amount by which the fair market value of
the acquired shares on the exercise date exceeds the option price. Upon a
subsequent sale or taxable exchange of shares acquired upon exercise of a
Non-Qualified Option, an optionee will recognizes long- or short-term capital
gain or loss equal to the difference between the amount realized on the sale and
the tax basis of such shares. The Company is entitled (provided applicable
withholding requirements are met) to a deduction at the same time and in the
same amount as the optionee is in receipt of income in connection with the
exercise of a Non-Qualified Option.
-15-
<PAGE> 19
If the optionee exercises an ISO and does not dispose of the acquired
shares within two years after the date of grant of the option or within one year
after the date of the transfer of such shares to him (a "disqualifying
disposition"), the optionee realizes no compensation income and any gain or loss
that the optionee realizes on a subsequent disposition of such shares is treated
as long-term capital gain or loss. For purposes of computing the alternative
minimum tax, however, the option generally will be treated as if it were a
Non-Qualified Option. If an optionee makes a disqualifying disposition, the
optionee will be required to include in income, as compensation, the lesser of
(i) the difference between the option price and the fair market value of the
acquired shares on the exercise date or (ii) the amount of gain realized on such
disposition. In addition, depending on the amount received as a result of such
disposition, the optionee may realize long-tem or short-term capital gain or
loss. The Company will be entitled to a deduction at the same time and in the
same amount as the optionee is in receipt of compensation income as a result of
a disqualifying disposition. If there is no disqualifying disposition, no
deduction will be available to the Company.
As of the date of this Proxy Statement, no options had been granted under
the 2000 Stock Option Plan. The closing price of the Company's Common Stock on
the American Stock Exchange on March 15, 2000 was $5.25 per share.
The affirmative vote of the holders of a majority of the shares of Common
Stock present in person or represented by proxy and entitled to vote at the
Annual Meeting is necessary to ratify the 2000 Stock Option Plan.
THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE 2000 STOCK
OPTION PLAN WILL CONTINUE TO PROMOTE THE LONG-TERM FINANCIAL SUCCESS OF THE
COMPANY BY AFFORDING AN ADDITIONAL OPPORTUNITY TO ALIGN THE INTERESTS OF
EMPLOYEES, DIRECTORS AND CONSULTANTS WITH THOSE OF STOCKHOLDERS.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
RATIFICATION OF THE 2000 STOCK OPTION PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected as the Company's independent auditors
for the year ended December 31, 2000, the firm of Arthur Andersen LLP and
recommends ratification of such selection by the stockholders. 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, 2000.
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.
-16-
<PAGE> 20
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 4, 2000
-17-
<PAGE> 21
PSYCHEMEDICS CORPORATION
2000 STOCK OPTION PLAN
1. Establishment, Objectives and Duration
A. ESTABLISHMENT OF THE PLAN. Effective March 21, 2000 (the
"Effective Date"), Psychemedics Corporation, a Delaware corporation (hereinafter
referred to as the "Company"), established an incentive compensation plan known
as the Psychemedics Corporation 2000 Stock Option Plan (hereinafter referred to
as the "Plan"), as set forth in this document.
B. PURPOSE. The purpose of the Plan is to encourage key employees of
the Company and of any present or future parent or subsidiary of the Company
(collectively, "Related Corporations") and other individuals who render services
to the Company or a Related Corporation, by providing opportunities to
participate in the ownership of the Company and its future growth through (a)
the grant of options which qualify as "incentive stock options" ("ISOs") under
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); or
(b) the grant of options which do not qualify as ISOs ("Non-Qualified Options").
Both ISOs and Non-Qualified Options are referred to hereafter individually as an
"Option" and collectively as "Options." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 424 of the Code.
C. PRIOR PLANS SUPERSEDED. This Plan is intended to replace and
=supercede the Company's 1989 Employee Stock Option Plan as amended, and the
Company's 1989 Non-Qualified Stock Option Plan, as amended (the "Prior Plans"),
provided, however that each outstanding option under the Prior Plans shall
remain in full force and effect in accordance with the terms of the option
agreement evidencing such option as in effect on the Effective Date.
D. DURATION OF THE PLAN. The Plan commenced on the Effective Date and
shall remain in effect, subject to the right of the Board of Directors to amend
or terminate the Plan at any time pursuant to paragraph 15 hereof, until all
shares subject to it shall have been purchased or acquired according to the
Plan's provisions.
2. Administration of the Plan.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board") or,
subject to paragraph 2(D) (relating to compliance with Section 162(m) of
the Code), by a committee appointed by the Board (the "Committee").
Hereinafter, all references in this Plan to the "Committee" shall mean
the Board if no Committee has been appointed. Subject to ratification of
the grant of each Option by the Board (if so required by applicable state
law), and subject to the terms of the Plan, the Committee shall have the
authority to (i) determine to whom (from among the class of employees
eligible under paragraph 3 to receive ISOs) ISOs shall be granted, and to
whom (from among the class of individuals and entities eligible under
paragraph 3 to receive Non-Qualified Options) Non-Qualified Options may
be granted; (ii) determine the time or times at which Options shall be
granted; (iii) determine the purchase price of shares subject to each
Option, which prices shall not be less than the minimum price specified
in paragraph 6; (iv) determine whether each Option granted shall be an
ISO or a Non-Qualified Option; (v) determine (subject to paragraph 8) the
time or times when each Option shall become exercisable and the duration
of the exercise period; (vi) extend the period during which outstanding
Options may be exercised; (vii) determine whether restrictions such as
repurchase options are to be imposed on shares subject to Options,
A-1
<PAGE> 22
and the nature of such restrictions, if any; and (viii) interpret the
Plan and prescribe and rescind rules and regulations relating to it. If
the Committee determines to issue a Non-Qualified Option, it shall take
whatever actions it deems necessary under Section 422 of the Code and the
regulations promulgated thereunder to ensure that such Option is not
treated as an ISO. The interpretation and construction by the Committee
of any provisions of the Plan or of any Option granted under it shall be
final unless otherwise determined by the Board. The Committee may from
time to time adopt such rules and regulations for carrying out the Plan
as it may deem advisable. No member of the Board or the Committee shall
be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its
members as its chairman, and shall hold meetings at such time and places
as it may determine. A majority of the Committee shall constitute a
quorum and acts of a majority of the members of the Committee at a
meeting at which a quorum is present, or acts reduced to or approved in
writing by all the members of the Committee (if consistent with
applicable state law), shall be the valid acts of the Committee. From
time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however
caused, or remove all members of the Committee and thereafter directly
administer the Plan.
C. GRANT OF OPTIONS TO BOARD MEMBERS. Options may be granted
to members of the Board. All grants of Options to members of the Board
shall in all respects be made in accordance with the provisions of this
Plan applicable to other eligible persons. Members of the Board who
either (i) are eligible to receive grants of Options pursuant to the Plan
or (ii) have been granted Options may vote on any matters affecting the
administration of the Plan or the grant of any Options pursuant to the
Plan, except that no such member shall act upon the granting to himself
or herself of Options, but any such member may be counted in determining
the existence of a quorum at any meeting of the Board during which action
is taken with respect to the granting to such member of Options.
D. PERFORMANCE-BASED COMPENSATION. The Board, in its
discretion, may take such action as may be necessary to ensure that
Options granted under the Plan qualify as "qualified performance-based
compensation" within the meaning of Section 162(m) of the Code and
applicable regulations promulgated thereunder ("Performance-Based
Compensation"). Such action may include, in the Board's discretion, some
or all of the following (i) if the Board determines that Options granted
under the Plan generally shall constitute Performance-Based Compensation,
the Plan shall be administered, to the extent required for such Options
to constitute Performance-Based Compensation, by a Committee consisting
solely of two or more "outside directors" (as defined in applicable
regulations promulgated under Section 162(m) of the Code), and (ii)
Options granted under the Plan may be subject to such other terms and
conditions as are necessary for compensation recognized in connection
with the exercise or disposition of such Option or the disposition of
Common Stock acquired pursuant to such Option, to constitute
Performance-Based Compensation.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to
employees of the Company or any Related Corporation. Non-Qualified Options may
be granted to any employee, officer or director (whether or not also an
employee) or consultant of the Company or any Related Corporation. The Committee
may take into consideration a recipient's individual circumstances in
determining whether to grant an Option. The granting of any Option to any
individual or entity shall neither entitle that individual or entity to, nor
disqualify such individual or entity from, participation in any other grant of
Options.
4. STOCK. The stock subject to Options shall be authorized but
unissued shares of Common Stock, par value $.005 per share of the Company (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued
A-2
<PAGE> 23
pursuant to the Plan is 2,000,000, subject to adjustment as provided in
paragraph 13. If any Option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part or shall be repurchased by the Company,
the unpurchased shares of Common Stock subject to such Option shall again be
available for grants of Options under the Plan.
No employee of the Company or any Related Corporation may be granted Options to
acquire, in the aggregate, more than 250,000 shares of Common Stock under the
Plan during any fiscal year of the Company. If any Option granted under the Plan
shall expire or terminate for any reason without having been exercised in full
or shall cease for any reason to be exercisable in whole or in part or shall be
repurchased by the Company, the shares subject to such Option shall be included
in the determination of the aggregate number of shares of Common Stock deemed to
have been granted to such employee under the Plan.
5. GRANTING OF OPTIONS. Options may be granted under the Plan at any
time on or after the Effective Date. The date of grant of a Option under the
Plan will be the date specified by the Committee at the time it grants the
Option; provided, however, that such date shall not be prior to the date on
which the Committee acts to approve the grant.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
A. EXERCISE PRICE. The exercise price per share specified in
the agreement relating to each Option granted under the Plan shall not be
less than the fair market value per share of Common Stock on the date of
such grant. In the case of an ISO to be granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Related Corporation,
the price per share specified in the agreement relating to such ISO shall
not be less than one hundred ten percent (110%) of the fair market value
per share of Common Stock on the date of grant. For purposes of
determining stock ownership under this paragraph, the rules of Section
424(d) of the Code shall apply.
B. $100,000 ANNUAL LIMITATION ON LSO VESTING. Each eligible
employee may be granted Options treated as ISOs only to the extent that,
in the aggregate under this Plan and all incentive stock option plans of
the Company and any Related Corporation, ISOs do not become exercisable
for the first time by such employee during any calendar year with respect
to stock having a fair market value (determined at the time the ISOs were
granted) in excess of $100,000. The Company intends to designate any
Options granted in excess of such limitation as Non-Qualified Options,
and the Company shall issue separate certificates to the optionee with
respect to Options that are Non-Qualified Options and Options that are
ISOs.
C. DETERMINATION OF FAIR MARKET VALUE. The "fair market value"
of the Company's Common Stock shall be determined as of the trading day
next preceding the date of grant and shall mean (i) the average (on that
date) of the high and low prices of the Common Stock on the principal
national securities exchange on which the Common Stock is traded, if the
Common Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on that date) of the Common Stock on the
Nasdaq Stock Market, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service
for over-the-counter securities, if the Common Stock is not reported on
the Nasdaq Stock Market. If the Common Stock is not publicly traded at
the time an Option is granted under the Plan, "fair market value" shall
mean the fair value of the Common Stock as determined by the Committee
after taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of the Common
Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee,
A-3
<PAGE> 24
but not more than (i) ten years from the date of grant in the case of Options
generally and (ii) five years from the date of grant in the case of ISOs granted
to an employee owning stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Related
Corporation, as determined under paragraph 6(A).
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9
through 12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on
the date of grant or shall become exercisable thereafter in such
installments as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable, it shall remain exercisable until expiration or termination
of the Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be
exercised at any time or from time to time, in whole or in part, for up
to the total number of shares with respect to which it is then
exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right
to accelerate the date that any installment of any Option becomes
exercisable; provided that the Committee shall not, without the consent
of an optionee, accelerate the permitted exercise date of any installment
of any Option granted to any employee as an ISO if such acceleration
would violate the annual vesting limitation contained in Section 422(d)
of the Code, as described in paragraph 6(A).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the
agreement relating to such ISO, if an ISO optionee ceases to be employed by the
Company and all Related Corporations other than by reason of death or disability
as those terms are defined in paragraph 10, no further installments of his or
her ISOs shall become exercisable, and his or her ISOs shall terminate on the
date of termination of his or her employment. For purposes of this paragraph 9,
employment shall be considered as continuing uninterrupted during any bona fide
leave of absence (such as those attributable to illness, military obligations or
governmental service) provided that the period of such leave does not exceed 90
days or, if longer, any period during which such optionee's right to
reemployment is guaranteed by statute or by contract. A bona fide leave of
absence with the written approval of the Committee shall not be considered an
interruption of employment under this paragraph 9, provided that such written
approval contractually obligates the Company or any Related Corporation to
continue the employment of the optionee after the approved period of absence.
ISOs granted under the Plan shall not be affected by any change of employment
within or among the Company and Related Corporations, so long as the optionee
continues to be an employee of the Company or any Related Corporation. Nothing
in the Plan shall be deemed to give any grantee of any Option the right to be
retained in employment or other service by the Company or any Related
Corporation for any period of time.
10. DEATH; DISABILITY. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her death, permanent and total
disability (as defined in Section 22(c)(3) of the Code or any successor
statute), any ISO owned by such optionee may be exercised, to the extent
otherwise exercisable on the date of such death, or permanent and total
disability, by the optionee, or if he or she is not living, by his or her
estate, personal representative or beneficiary who has acquired the ISO by will
or by the laws of descent and distribution, until the earlier of (i) the
specified expiration date of the ISO or (ii) one year from the date of
termination of employment.
11. ASSIGNABILITY. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee shall be exercisable only by such optionee.
Non-Qualified Options shall be transferable to the extent set forth in the
agreement relating to such Non-Qualified Option.
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<PAGE> 25
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events,
an optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of
shares or if the Company shall issue any shares of Common Stock as a
stock dividend on its outstanding Common Stock, the number of shares of
Common Stock deliverable upon the exercise of Options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be
consolidated with or acquired by another entity in a merger or other
reorganization in which the holders of the outstanding voting stock of
the Company immediately preceding the consummation of such event, shall,
immediately following such event, hold, as a group, less than a majority
of the voting securities of the surviving or successor entity, or in the
event of a sale of all or substantially all of the Company's assets or
otherwise (each, an "Acquisition"), the Committee or the board of
directors of any entity assuming the obligations of the Company hereunder
(the "Successor Board"), shall, as to outstanding Options, either (i)
make appropriate provision for the continuation of such Options by
substituting on an equitable basis for the shares then subject to such
Options either (a) the consideration payable with respect to the
outstanding shares of Common Stock in connection with the Acquisition,
(b) shares of stock of the surviving or successor corporation or (c) such
other securities as the Successor Board deems appropriate, the fair
market value of which shall not materially exceed the fair market value
of the shares of Common Stock subject to such Options immediately
preceding the Acquisition; or (ii) upon written notice to the optionees,
provide that all Options must be exercised, to the extent then
exercisable or to be exercisable as a result of the Acquisition, within a
specified number of days of the date of such notice, at the end of which
period the Options shall terminate; or (iii) terminate all Options in
exchange for a cash payment equal to the excess of the fair market value
of the shares subject to such Options (to the extent then exercisable or
to be exercisable as a result of the Acquisition) over the exercise price
thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in subparagraph B above) pursuant to which
securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, an optionee upon
exercising an Option shall be entitled to receive for the purchase price
paid upon such exercise the securities he or she would have received if
he or she had exercised such Option prior to such recapitalization or
reorganization.
A=5
<PAGE> 26
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of
the Code) or would cause any adverse tax consequences for the holders of
such ISOs. If the Committee determines that such adjustments made with
respect to ISOs would constitute a modification of such ISOs or would
cause adverse tax consequences to the holders, it may refrain from making
such adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect,
and no adjustment by reason thereof shall be made with respect to, the
number or price of shares subject to Options. No adjustments shall be
made for dividends paid in cash or in property other than securities of
the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued
under the Plan and the optionee shall receive from the Company cash in
lieu of such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events
described in subparagraphs A, B or C above, the class and aggregate
number of shares set forth in paragraph 4 hereof that are subject to
Options which previously have been or subsequently may be granted under
the Plan shall also be appropriately adjusted to reflect the events
described in such subparagraphs. The Committee or the Successor Board
shall determine the specific adjustments to be made under this paragraph
13 and, subject to paragraph 2, its determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing interest
payable not less frequently than annually at a rate not less than 100% of the
lowest applicable Federal rate, as defined in Section 1274(d) of the Code and
secured by such collateral as may be required by the Committee, (d) at the
discretion of the Committee and consistent with applicable law, through the
delivery of an assignment to the Company of a sufficient amount of the proceeds
from the sale of the Common Stock acquired upon exercise of the Option and an
authorization to the broker or selling agent to pay that amount to the Company,
which sale shall be at the participant's direction at the time of exercise, or
(e) at the discretion of the Committee, by any combination of (a), (b), (c) and
(d) above. If the Committee exercises its discretion to permit payment of the
exercise price of an ISO by means of the methods set forth in clauses (b), (c),
(d) or (e) of the preceding sentence, such discretion shall be exercised in
writing at the time of the grant of the ISO in question. The holder of an Option
shall not have the rights of a shareholder with respect to the shares covered by
such Option until the date of issuance of a stock certificate to such holder for
such shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date such
stock certificate is issued.
A-6
<PAGE> 27
15. DURATION OF PLAN; AMENDMENT OF PLAN. This Plan was adopted by the
Board on March 21, 2000, subject to ratification by the stockholders of the
Company at the Annual Meeting of Stockholders to be held on May 11, 2000. The
Board may terminate or amend the Plan in any respect at any time, except that,
without the approval of the stockholders obtained within 12 months before or
after the Board adopts a resolution authorizing any of the following actions:
(a) the total number of shares that may be issued under the Plan may not be
increased (except by adjustment pursuant to paragraph 13); (b) the provisions of
paragraph 3 regarding eligibility for grants of ISOs may not be modified; and
(c) the provisions of paragraph 6(A) regarding the exercise price at which
shares may be offered pursuant to ISOs may not be modified (except by adjustment
pursuant to paragraph 13). Except as otherwise provided in this paragraph 15, in
no event may action of the Board or stockholders alter or impair the rights of a
grantee, without such grantee's consent, under any Option previously granted to
such grantee.
16. APPLICATION OF FUNDS. The proceeds received by the Company from
the sale of shares pursuant to Options granted and Purchases authorized under
the Plan shall be used for general corporate purposes.
17. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an
ISO granted under the Plan, each optionee agrees to notify the Company in
writing immediately after such optionee makes a Disqualifying Disposition (as
described in Sections 421, 422 and 424 of the Code and regulations thereunder)
of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
18. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option or the making of a Disqualifying Disposition (as defined in
paragraph 17), the Company may withhold taxes in respect of amounts that
constitute compensation includible in gross income. The Committee in its
discretion may condition the exercise of an Option, on the grantee's making
satisfactory arrangement for such withholding. Such arrangement may include
payment by the grantee in cash or by check of the amount of the withholding
taxes or, at the discretion of the Committee, by the grantee's delivery of
previously held shares of Common Stock or the withholding from the shares of
Common Stock otherwise deliverable upon exercise of an Option shares having an
aggregate fair market value equal to the amount of such withholding taxes.
19. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Options in connection with
the Plan.
20. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Options shall be governed by the laws of the State of
Delaware, or the laws of any jurisdiction in which the Company or its successors
in interest may be organized.
A-7
<PAGE> 28
PSYCHEMEDICS CORPORATION
PROXY FOR 2000 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 11, 2000
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 2000 Annual Meeting of Stockholders of Psychemedics
Corporation (the "Company") to be held on Thursday, May 11, 2000 at 2:00 p.m. at
The Charles Hotel in Harvard Square, 1 Bennett Street, Cambridge, Massachusetts
02138 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 4, 2000 and on such other matters
as may properly come before the meeting.
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PLEASE VOTE, DATE, AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN ENCLOSED
ENVELOPE.
- --------------------------------------------------------------------------------
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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?
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
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<PAGE> 29
[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; Walter S. Tomenson, Jr.; 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 name(s) of
the nominee(s). Your shares will be voted for the remaining nominee(s).
2.) Approval of the Company's 2000 Stock
Option Plan. [ ] For [ ] Against [ ] Abstain
3.) Selection of Arthur Andersen LLP as
the Company's independent auditors. [ ] For [ ] Against [ ] Abstain
The Board of Directors recommends a vote FOR Proposals 1, 2 and 3
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), (2) and (3).
PSYCHEMEDICS CORPORATION
Mark box at right is an address change or comment has been noted on the
reverse side of this card. [ ]
CONTROL NUMBER:
RECORD DATE SHARES:
---------------------------
Please be sure to sign and date this Proxy. Date
-------------------------------------------------------------------------
-------Stockholder sign here-------------Co-owner sign here--------------
<PAGE> 30
DETACH CARD 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 11, 2000.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Psychemedics Corporation
