<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PHARMCHEM LABORATORIES, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was
determined):
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
PharmChem logo
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 19, 1998
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of PharmChem
Laboratories, Inc., a California corporation (the "Company"), will be held on
May 19, 1998, at 10:00 a.m., local time, at the Four Points Sheraton Hotel, 1100
North Mathilda Avenue, Sunnyvale, California 94089 for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are duly elected and qualified.
2. To ratify the appointment of KPMG Peat Marwick LLP as independent
public accountants for the Company for the 1998 fiscal year.
3. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on April 1, 1998, are
entitled to notice of and to vote at the Annual Meeting.
All shareholders are cordially invited to attend the Annual Meeting in
person. However, to assure your representation at the Annual Meeting, you are
urged to mark, sign, date and return the enclosed proxy as promptly as possible
in the postage-prepaid envelope enclosed for that purpose. Any shareholder
attending the Annual Meeting may vote in person even if such shareholder has
returned a proxy.
THE BOARD OF DIRECTORS
Menlo Park, California
April 17, 1998
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU
ARE REQUESTED TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ENVELOPE PROVIDED.
<PAGE> 3
PHARMCHEM LOGO
1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
------------------------
PROXY STATEMENT FOR 1998
ANNUAL MEETING OF SHAREHOLDERS
------------------------
The enclosed proxy is solicited by the Board of Directors of PharmChem
Laboratories, Inc. (the "Company") for use at the Annual Meeting of Shareholders
(the "Annual Meeting") to be held on Tuesday, May 19, 1998, at 10:00 a.m., local
time, and at any adjournment thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting
will be held at the Four Points Sheraton Hotel, 1100 North Mathilda Avenue,
Sunnyvale, California 94089. The Company's principal executive offices are
located at 1505-A O'Brien Drive, Menlo Park, California 94025 and the Company's
telephone number is (650) 328-6200.
The proxy solicitation materials were mailed on or about April 17, 1998, to
all shareholders entitled to vote at the Annual Meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Secretary of the
Company a written notice of revocation or a duly executed proxy bearing a later
date or by attending the Annual Meeting and voting in person.
VOTING AND SOLICITATION; QUORUM
With respect to the election of directors, shareholders have cumulative
voting rights, which means that each shareholder has that number of votes equal
to the number of shares held multiplied by the number of directors to be
elected. Each shareholder may give all such votes to one candidate or distribute
such shareholder's votes among the candidates as the shareholder chooses.
However, the right to cumulate votes may not be exercised until the candidate or
candidates have been nominated and a shareholder has given notice at the Annual
Meeting of the shareholder's intention to vote cumulatively. If any shareholder
present at the Annual Meeting gives such notice, all shareholders may cumulate
their votes. The candidates receiving the highest number of votes of shares
entitled to vote for them, up to the number of directors to be elected, will be
elected. Votes withheld will be counted for the purposes of determining the
presence or absence of a quorum for the transaction of business at the Annual
Meeting, but will have no other legal effect upon the election of directors
under California law. The Company seeks discretionary authority to cumulate
votes in the event that additional persons are nominated at the Annual Meeting
for the election of directors. In the event that cumulative voting is invoked,
the proxy holders intend to cast the votes covered by the proxies received by
them in such a manner under cumulative voting as they believe will ensure the
election of as many of the Company's nominees as possible. While there is no
definitive statutory or case law authority in California as to the proper
treatment of abstentions and broker non-votes, the Company believes that both
abstentions and broker non-votes should be counted for purposes of determining
whether a quorum is present at the Annual Meeting. Abstentions and broker
non-votes will not be counted for the purposes of determining the outcome of the
vote on the election of directors or the proposal to ratify the appointment of
the Company's independent public accountants.
<PAGE> 4
An automated system administered by the Company's transfer agent tabulates
the proxies received prior to the date of the Annual Meeting. Proxies received
on the date of the Annual Meeting at or prior to the time of voting are
tabulated manually by a representative of the transfer agent.
A majority of the shares outstanding on the record date constitutes the
quorum required to transact business at the Annual Meeting.
The cost of soliciting proxies will be borne by the Company. In addition,
the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. Proxies may be solicited by certain of the
Company's directors, officers and regular employees, without additional
compensation, personally or by telephone, telegram or facsimile. The Company may
also retain a professional solicitor to assist in the solicitation of proxies,
at a cost estimated not to exceed $4,000 plus out-of-pocket expenses.
RECORD DATE
Shareholders of record at the close of business on April 1, 1998, are
entitled to notice of the Annual Meeting and to vote at the Annual Meeting. At
the record date, 5,751,998 shares of the Company's Common Stock were issued and
outstanding.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company which are intended to be presented
by such shareholders at the Company's 1999 Annual Meeting of Shareholders must
be received by the Company no later than December 18, 1998 in order to be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting.
2
<PAGE> 5
PRINCIPAL SHARE OWNERSHIP
The following table sets forth the beneficial ownership of the Company's
Common Stock as of January 31, 1998, by all persons known to the Company to be
the beneficial owners of more than 5% of the Company's Common Stock, by each
director, by the Chief Executive Officer, by each of the four most highly
compensated executive officers other than the Chief Executive Officer, and by
all directors and executive officers as a group. Such figures are based upon
information furnished by the persons named.
<TABLE>
<CAPTION>
NUMBER PERCENT OF
NAME OF SHARES TOTAL
---- --------- ----------
<S> <C> <C>
Palo Alto Investors(1).................................. 942,400 16.4%
431 Florence Street, Suite 200
Palo Alto, CA 94301
Richard D. Irwin(2)..................................... 655,794 11.3%
c/o Grumman Hill Associates, Inc.
191 Elm Street
New Canaan, CT 06840
Grumman Hill Investments, L.P.(3)....................... 535,545 9.3%
c/o Grumman Hill Associates, Inc.
191 Elm Street
New Canaan, CT 06840
Prism Partners I, L.P.(4)............................... 568,400 9.9%
909 Montgomery Street, No. 400
San Francisco, CA 94133
Banner Partners(5)...................................... 456,183 7.9%
c/o Palo Alto Investors
431 Florence Street, Suite 200
Palo Alto, CA 94301
Dimensional Fund Advisors Inc.(6)....................... 344,300 6.0%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Donald R. Stroben....................................... 0 0%
Thomas S. Volpe(7)...................................... 79,408 1.4%
Edward V. Collom, Jr.(8)................................ 10,000 *
Neil A. Fortner(9)...................................... 39,583 *
Joseph W. Halligan(10).................................. 162,447 2.8%
David A. Lattanzio(11).................................. 47,917 *
Elizabeth M. Lison(12).................................. 6,167 *
All executive officers and directors as
a group (7 persons)(13)............................... 991,316 17.2%
</TABLE>
- - ---------------
* Less than 1.0%
(1) William L. Edwards, the president and sole shareholder of Palo Alto
Investors, may be deemed to be a beneficial owner of the shares of which
Palo Alto Investors is deemed to be a beneficial owner. Palo Alto Investors
is deemed a beneficial owner by virtue of its voting and dispositive power
with respect to such shares, as an investment adviser managing
discretionary accounts for the benefit of third persons or as a general
partner of partnerships holding such shares. Palo Alto Investors and Mr.
Edwards have shared voting and dispositive power with respect to all of
such shares. These shares include 11,000 shares held by Mr. Edwards
individually. Of these shares, 319,100 shares are held and managed for the
benefit of Banner Partners and have also been included in the number of
shares beneficially owned by Banner Partners. See footnote 5 below.
(2) The number of shares shown for Mr. Irwin is based in part on his beneficial
ownership interest in the shares of the Company held by Grumman Hill
Investments, L.P. (see footnote 3 below) and also includes 20,000 shares
held by a partnership of which Mr. Irwin is the general partner, 50,000
shares held in the Virginia Irwin Charitable Remainder Unitrust of which
Mr. Irwin is the trustee, and 46,249
3
<PAGE> 6
shares purchasable by Mr. Irwin within 60 days of January 31, 1998,
pursuant to outstanding options. Mr. Irwin is a director of the Company.
Mr. Irwin has shared voting and dispositive power with respect to 555,545
of these shares (i.e., the shares held by Grumman Hill Investments, L.P.
and such partnership) and sole voting and dispositive power with respect to
the balance of such shares.
(3) Mr. Irwin, as the manager of Grumman Hill Company, L.L.C., the general
partner of Grumman Hill Investments, L.P., may be deemed to be a beneficial
owner of the shares held by Grumman Hill Investments, L.P. Mr. Irwin is a
director of the Company. See footnote 2 above. Grumman Hill Investments,
L.P. has shared voting and dispositive power with respect to such shares.
(4) Weintraub Capital Management, an investment adviser to and general partner
of Prism Partners I, and Jerald M. Weintraub, managing general partner of
Weintraub Capital Management, may be deemed to be beneficial owners of the
shares held by Prism Partners I, L.P. Prism Partners I, L.P., Jerald M.
Weintraub and Weintraub Capital Management have shared voting and
dispositive power with respect to all of such shares.
(5) Of these shares, 319,100 shares are held and managed for the benefit of
Banner Partners by Palo Alto Investors. Banner Partners has shared voting
and dispositive power with respect to such shares. Such shares have also
been included in the number of shares beneficially owned by Palo Alto
Investors. See footnote 1 above. Independently of Palo Alto Investors,
Banner Partners owns an additional 137,083 shares of the Company. Banner
Partners has sole voting and dispositive power with respect to such shares.
As general partners of Banner Partners, William C. Edwards and Alan R.
Brudos may be deemed to be beneficial owners of shares beneficially owned
by Banner Partners.
(6) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 344,300 shares as of
January 31, 1998, all of which shares are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment company
(the "Fund"), or in series of the DFA Investment Trust Company, a Delaware
business trust (the "Trust"), or the DFA Group Trust and DFA Participating
Group Trust, investment vehicles for qualified employee benefit plans, for
all of which Dimensional serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares. Dimensional has sole
voting power with respect to 226,700 shares and sole dispositive power with
respect to all of such shares. Persons who are officers of Dimensional also
serve as officers of the Fund and the Trust, each an open-end management
investment company registered under the Investment Company Act of 1940. In
their capacity as officers of the Fund and the Trust, these persons vote
48,300 shares owned by the Fund and 69,300 shares owned by the Trust (all
of which shares are included in the 344,300 shares with respect to which
Dimensional has sole dispositive power).
(7) Includes 46,249 shares purchasable by Mr. Volpe within 60 days of January
31, 1998, pursuant to outstanding options. Mr. Volpe is a director of the
Company but is not standing for re-election.
(8) These shares are purchasable by Mr. Collom within 60 days of January 31,
1998, pursuant to outstanding options. Mr. Collom was formerly an executive
officer of the Company.
(9) These shares are purchasable by Mr. Fortner within 60 days of January 31,
1998, pursuant to outstanding options. Mr. Fortner is an executive officer
of the Company.
(10) These shares are purchasable by Mr. Halligan within 60 days of January 31,
1998, pursuant to outstanding options. Mr. Halligan is a director and chief
executive officer of the Company.
(11) These shares are purchasable by Mr. Lattanzio within 60 days of January 31,
1998, pursuant to outstanding options. Mr. Lattanzio is an executive
officer of the Company.
(12) These shares are purchasable by Ms. Lison within 60 days of January 31,
1998, pursuant to outstanding options. Ms. Lison is an executive officer of
the Company.
(13) Includes 348,612 shares purchasable within 60 days of January 31, 1998,
pursuant to outstanding options. Includes 535,545 shares held by Grumman
Hill Investments, L.P. as noted in footnotes (2) and (3). Shares held by
Mr. Collom have not been included for purposes of this calculation as Mr.
Collom was not an executive officer of the Company on January 31, 1998.
4
<PAGE> 7
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and the holders of 10% or more of
the Company's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Elizabeth M. Lison's Form 3 was filed approximately
one month late. Based upon a review of Forms 3, 4 and 5, and written
representations of the Company's directors, executive officers, and 10%
shareholders as to whether Forms 5 were required to be filed by them, the
Company believes that all other reports required pursuant to Section 16(a) with
respect to the 1997 fiscal year were timely filed.
REPORT OF THE OFFICERS COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
The Officers Compensation Committee of the Board of Directors reviews and
approves salaries, bonuses and other benefits payable to the Company's executive
officers and administers the Company's 1988 Incentive Stock Plan, 1997 Equity
Incentive Plan and 1992 Director Option Plan with respect to officers and
directors. The Officers Compensation Committee is composed of two non-employee
directors.
The philosophy used by the Officers Compensation Committee in establishing
compensation for executive officers, including the Chief Executive Officer, is
to attract and retain key personnel through the payment of competitive base
salaries, annual bonuses and stock ownership. Where appropriate, relocation
benefits are paid to attract key individuals.
Salaries of executive officers have been negotiated between the Company and
each executive officer, and were influenced by such factors as salaries paid by
similar companies for similar positions, the skills, training and experience of
the individual executive officer, the availability of persons with similar
abilities and the geographic location of the Company's offices. The companies
that the Officers Compensation Committee considers to be similar to the Company
for purposes of making such determination are principally those companies
against which the Company competes for executive personnel, namely, other
companies (three of which comprise the peer group index on page 10) in the
business of providing drug testing, clinical testing and related services. The
Committee also reviews salaries of executive officers of companies outside the
industry whose size approximates that of the Company. The Officers Compensation
Committee believes that it has an adequate knowledge of the compensation levels
of such other companies as a result of information gathered through information
available to the public, recruitment efforts and compensation negotiations
directed at candidates employed by such other companies, as well as data
gathered from time to time by independent consultants and as a result of
interactions between the Company's personnel and the personnel of such other
companies. Based on the information it has been able to gather with respect to
companies in the business of providing drug testing, clinical testing and
related services, the Officers Compensation Committee believes that the salaries
of the Company's executive officers are slightly below the mean of the executive
salary levels of such other companies. However, when bonuses are added to the
Company's executive officers' salaries, such total compensation approximates the
mean of salaries at companies with which the Company competes for executive
personnel. The Company's headquarters and main laboratory are located in the
Silicon Valley of Northern California. This area's unemployment rate ranks below
that of the nation as well as that of the entire State of California.
Furthermore, the cost of living is one of the highest in the United States.
Accordingly, the recruitment and retention of key employees (including executive
officers) is subject to intense competition which often makes it quite difficult
to locate, hire and/or retain qualified personnel. The Committee, therefore,
also takes these factors into consideration when evaluating salary increases and
bonus awards.
In its annual review and adjustment of executive officers' salaries, the
Officers Compensation Committee takes into account primarily the performance of
the individual executive officer during the prior year, increases in the cost of
living, and the executive officer's participation in strategic projects of
long-term benefit to the Company such as improvement of laboratory process flow,
turn around time, results reporting and cost reduction programs. In determining
the Company's ability to increase salaries paid to its executive officers, the
Officers Compensation Committee also takes into account the operating results
and overall operations of the Company as a whole. In determining the salary
increase and bonus of any particular executive officer, the
5
<PAGE> 8
Officers Compensation Committee takes into account those elements of the
Company's operations within the scope of authority of the particular executive.
The emphasis placed on any particular element of the Company's operations
depends on the nature of the executive officer's responsibilities. For example,
revenues are scrutinized more closely in setting the compensation level of an
officer in charge of sales or customer service functions than an officer in
charge of laboratory operations or scientific matters. The consideration of
additional factors and the weight given to any particular factor are within the
discretion of the Officers Compensation Committee.
The Officers Compensation Committee believes that, because the Chief
Executive Officer is responsible for the overall operations of the Company, his
personal performance should be judged based on the performance of the Company as
a whole, determined primarily by reference to the Company's operating results
and net income, and his contributions to the long-term success of the Company.
Adjustments to the Chief Executive Officer's salary are influenced accordingly.
The Officers Compensation Committee has traditionally taken a conservative
approach to salary increases, choosing to provide incentives to executive
officers primarily through the Company's bonus plan and the 1988 Incentive Stock
Plan. Total annualized compensation to executive officers in 1997, based on the
"salary," "bonus," "other annual compensation" and "all other compensation"
captions in the Summary Compensation Table which follows, decreased 5.2% from
the prior year (which included total compensation to individuals who occupied
similar positions with the Company in 1996 but who are no longer employed). The
total compensation paid to Mr. Halligan in 1997 represented a 1.0% decrease in
1997 with respect to the compensation paid to Mr. Halligan in 1996. When Mr.
Halligan was hired in November 1995, his 1996 salary and a minimum bonus
commitment for 1996 of $50,000 were negotiated with the Officers Compensation
Committee. Mr. Halligan was not paid a bonus for 1995. The salaries of Messrs.
Halligan and Lattanzio have not been changed since they were hired in November
1995 and April 1996, respectively.
Under the Company's bonus plan, employees, including executive officers,
are eligible to receive an annual bonus at the end of each year if financial
targets relating to operating income, cash flow and return on invested capital
and other non-financial targets set annually by the Officers Compensation
Committee are achieved. In the past, the Officers Compensation Committee has
authorized the payment of bonuses even when these targets were not fully met and
may decide to do so again in the future, particularly when such payments are
deemed appropriate to retain key personnel as described above. Since these
targets for 1997 were not achieved, bonuses were paid at a reduced level as
determined by the Officers Compensation Committee. The portion of the bonus pool
set aside for executive officers, and the allocation of that amount among the
executive officers, is set by the Officers Compensation Committee after
considering the report of the Chief Executive Officer regarding individual
performance and contribution. In 1997, the aggregate amount paid under the bonus
plan to executive officers was 16.6% of the aggregate base salaries paid to
executive officers compared to 21.0% in 1996. Bonus payments to executive
officers for 1997 were based upon each individual's performance as well as the
overall results of the Company. The latter include the ongoing installation of a
new infrastructure to position the Company to move forward and seize upon sales
opportunities more quickly and efficiently, the introduction of process-flow
operations to the laboratories, the installation of integrated order entry and
printing systems and the automation of results reporting. Bonuses for 1995
performance were paid in 1996 to the two executive officers who continued in the
Company's employ from 1995 to 1996 as a result of their achievement of their
1995 operating objectives and are presented as 1995 payments in the Summary
Compensation Table. Based upon the information available to the Company with
respect to companies in the business of providing drug testing, clinical testing
and related services, the Officers Compensation Committee believes that the
total compensation (including salaries and bonuses) of the Company's executive
officers is below the mean of total compensation levels of such other companies.
Options and stock purchase rights are granted under the Company's 1988
Incentive Stock Plan and 1997 Equity Incentive Plan (the "Plans") in order to
give employees a stake in the long term success of the Company. Awards to
executive officers are generally made at the time of their employment with the
Company, and from time to time thereafter within the discretion of the Officers
Compensation Committee. The factors considered by the Officers Compensation
Committee in determining the timing of grants under the Plans, and the number of
shares subject thereto, are similar to the factors considered by the Officers
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<PAGE> 9
Compensation Committee in adjusting base salary. No options were granted to
executive officers in 1997. Option grants under the Company's 1992 Director
Option Plan are automatic and nondiscretionary.
The Company provides relocation assistance to certain executive officers
upon their employment with the Company, when necessary to attract those
personnel. Eligibility for and the terms of relocation benefits are determined
on a case by case basis. No relocation assistance was provided in 1997.
The Officers Compensation Committee has considered the potential future
effects of Section 162(m) of the Internal Revenue Code of 1986, as amended,
which limits the deductibility by corporations of executive compensation in
excess of $1 million per executive per year. The Officers Compensation Committee
currently does not intend to adopt a policy attempting to qualify any portion of
the compensation paid to its executive officers for an exemption from the
deductibility limitations of Section 162(m). The non-equity based compensation
paid to the Chief Executive Officer and the four highest paid other executive
officers in fiscal year 1997, and expected to be paid in fiscal year 1998, does
not exceed $1 million for any individual.
Richard D. Irwin
Thomas S. Volpe
EXECUTIVE OFFICERS AND COMPENSATION
EXECUTIVE OFFICERS OF PHARMCHEM
Information listed under the caption "Executive Officers of PharmChem" at
the end of Part I of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, as filed with the Securities and Exchange
Commission, is incorporated in this Proxy Statement by reference.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Officers Compensation Committee of the Company's Board of Directors is
composed of two non-employee directors, Richard D. Irwin and Thomas S. Volpe. No
interlocking relationship exists between the Company's Board of Directors or
Officers Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
CERTAIN TRANSACTIONS
In connection with his relocation at the time of accepting employment with
the Company in July 1991, the Board approved a loan from the Company to Neil A.
Fortner, Vice President, Laboratory Operations, in the amount of $109,000 (the
"Fortner Loan") for the purpose of purchasing a primary residence. In lieu of
interest payments on the Fortner Loan, the Company is entitled to 25% of the net
proceeds upon the sale of such residence. The Fortner Loan is evidenced by a
loan agreement and promissory note, and is secured by a Deed of Trust on the
primary residence. During 1997, the maximum principal amount outstanding under
the Fortner Loan was $109,000, and the amount outstanding as of December 31,
1997, was $109,000. The Board also approved payment of monthly housing
allowances to Mr. Fortner and Elizabeth Lison, Vice President, Customer Service,
designed to compensate Mr. Fortner and Ms. Lison for the excess of certain
housing expenses over the level of such expenses at their previous locations.
Such allowances during 1997 totaled $35,237 for Mr. Fortner and $15,000 for Ms.
Lison.
7
<PAGE> 10
CASH COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation paid, with respect to
the three most recent fiscal years, to the Chief Executive Officer and the four
most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers at the end of fiscal 1997.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
---------------
NUMBER OF
ANNUAL COMPENSATION SHARES OF
----------------------------------------- COMMON STOCK
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS GRANTED COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
--------------------------- ---- ------- ------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph W. Halligan 1997 250,000 55,000 0 0 2,386(1)
President, Chief 1996 250,000 60,000 0 0 492(2)
Executive Officer 1995 36,932 0 0 278,480 0
Edward V. Collom, Jr.(3) 1997 115,000 0 0 0 1,029(4)
Vice President, Business 1996 95,833 12,000 0 20,000 1,205(5)
Development
Neil A. Fortner 1997 104,845 15,000 35,237(6) 0 4,145(7)
Vice President, Laboratory 1996 100,000 14,000 35,237(6) 0 3,920(8)
Operations 1995 100,000 8,214(9) 35,237(6) 50,000 2,251(10)
David A. Lattanzio 1997 135,000 35,000 0 0 3,306(11)
Vice President, 1996 107,548 40,000 0 100,000 25,839(12)
Chief Financial Officer and
Secretary
Elizabeth M. Lison 1997 118,654 15,000 15,000(6) 0 2,375(13)
Vice President, Customer
Service
</TABLE>
- - ---------------
(1) Includes $1,800, $504 and $82 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively.
(2) Includes $302, $122 and $68 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively.
(3) Mr. Collom resigned from the Company effective December 31, 1997.
(4) Includes $450, $386 and $82 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively,
and $111 for the Company matching contribution to the 401(k) plan.
(5) Includes $1,069, $88 and $48 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively.
(6) Housing allowance.
(7) Includes $3,132, $356 and $82 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively,
and $575 for the Company matching contribution to the 401(k) plan.
(8) Includes $3,171, $104 and $81 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively,
and $564 for the Company matching contribution to the 401(k) plan.
(9) Includes $8,114 paid in 1996 as a bonus for 1995 performance.
(10) Includes $1,548 for the Company portion of health insurance premiums and
$703 for the Company matching contribution to the 401(k) plan.
(11) Includes $2,645, $454 and $82 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively,
and $125 for the Company matching contribution to the 401(k) plan.
8
<PAGE> 11
(12) Includes $1,351, $95 and $41 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively,
and $24,352 in consulting fees paid to Mr. Lattanzio for services from
January 31, 1996 through March 31, 1996.
(13) Includes $1,805, $386 and $82 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively,
and $102 for the Company matching contribution to the 401(k) plan.
(14) Includes $1,706, $58 and $82 for the Company portion of health insurance,
group term life insurance and long-term disability premiums, respectively.
OPTIONS
The following table sets forth, as to the executive officers named in the
Summary Compensation Table, certain information relating to options for the
purchase of Common Stock held at the end of fiscal 1997. No stock options were
granted to executive officers or exercised by executive officers in 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#): AT FY-END ($)
NAME EXERCISABLE/UNEXERCISABLE* EXERCISABLE/UNEXERCISABLE**
---- -------------------------- ---------------------------
<S> <C> <C>
Joseph W. Halligan............. 145,042/133,438 $ 0/$ 0
Edward V. Collom, Jr........... 8,750/ 11,250 $ 0/$ 0
Neil A. Fortner................ 36,458/ 13,452 $22,786/$8,408
David A. Lattanzio............. 41,667/ 58,333 $ 0/$ 0
Elizabeth M. Lison............. 5,542/ 4,458 $ 1,823/$ 677
</TABLE>
- - ---------------
* On March 24, 1998, the Compensation Committee of the Board of Directors
recommended to the Board of Directors that the holders of incentive stock
options issued under the 1988 Incentive Stock Option Plan (the "Plan") be
provided the opportunity to have such options "repriced." Options held as of
March 24, 1998 with exercise prices below the closing price of the Company's
common stock on March 24, 1998 ($2.375) would be canceled and new options
granted for the same number canceled at the closing market price on March 24,
1998. The Board approved the recommendation of the Compensation Committee,
the terms of which would include the commencement of a new four-year vesting
period beginning March 24, 1998. Assuming that the named executive officers
elect to reprice all options with exercise prices in excess of $2.375, the
number of exercisable/unexercisable options as of March 24, 1998 would be
0/278,480 for Mr. Halligan, 0/100,000 for Mr. Lattanzio and 2,917/7,083 for
Ms. Lison. Mr. Collom, who was formerly an executive officer of the Company,
is not eligible for a repricing election.
** Assuming that the named executive officers elect to reprice all options with
exercise prices in excess of $2.375, the value of unexercised in-the-money
options exercisable/unexercisable as of March 24, 1998 would be $0/$0 for
Messrs. Halligan and Lattanzio and $1,556/$344 for Ms. Lison (which figures
for Ms. Lison include the value as of March 24, 1998 of an unexercised
in-the-money option with an exercise price of less than $2.375).
9
<PAGE> 12
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the cumulative total returns for
the five years ended December 31, 1997 of a $100 investment on December 31, 1992
in the Company's Common Stock, the Standard & Poors 500 Composite Index, the
Standard & Poors Small Cap 600 Composite Index and a peer group of companies
selected by the Company. The graph assumes that all dividends, if any, were
reinvested. Effective with this Proxy Statement, the Company has changed from
the Standard & Poors 500 Composite Index, which it has used since 1992, to the
Standard & Poors Small Cap 600 Composite Index because it believes that the
companies included in the Small Cap 600 Composite Index provide a better
comparison based on the Company's size. The information based on the Standard &
Poors 500 Composite Index is displayed for comparative purposes as required by
the Securities and Exchange Commission's rules and will not be provided in the
future. The companies comprising the peer group are Psychemedics Corporation,
Medtox Scientific, Inc. and Laboratory Specialists of America, Inc., which the
Company believes are the only companies providing substantially comparable
services to those of the Company. The peer group in the Company's Proxy
Statement for the May 20, 1997 annual meeting of shareholders was comprised of
Unilab Corporation and Universal Standard Healthcare, Inc. (formerly Universal
Standard Medical Laboratories, Inc.), which no longer provide services
comparable to those of the Company, and Substance Abuse Technologies Inc., whose
common stock has not traded publicly since September 1997 and was delisted in
December 1997.
<TABLE>
<CAPTION>
PHARMCHEM S & P SMALL
Measurement Period LABORATORIES S & P 500 CAP 600
(Fiscal Year Covered) INC. INDEX INDEX PEER GROUP
<S> <C> <C> <C> <C>
Dec. 92 100.00 100.00 100.00 100.00
Dec. 93 60.53 110.08 118.79 50.06
Dec. 94 42.11 111.53 113.12 70.44
Dec. 95 94.74 153.45 147.01 96.08
Dec. 96 113.16 188.68 178.35 86.85
Dec. 97 55.26 251.53 223.96 86.47
</TABLE>
10
<PAGE> 13
PROPOSAL ONE:
ELECTION OF DIRECTORS
NOMINEES
A board of three (3) directors is to be elected at the Annual Meeting. The
Board of Directors has nominated two of the Company's current directors, Joseph
W. Halligan and Richard D. Irwin, to stand for re-election. Thomas Volpe, the
third member of the current Board of Directors, has declined to stand for re-
election due to competing time commitments. The Board of Directors has nominated
Donald R. Stroben in Mr. Volpe's stead. Unless otherwise instructed, the proxy
holders will vote the proxies received by them for the Company's three (3)
nominees named below. In the event that any nominee of the Company is unable or
declines to serve as a director at the time of the Annual Meeting, the proxies
will be voted for any nominee who is designated by the present Board of
Directors to fill the vacancy. It is not expected that any nominee will be
unable or will decline to serve as a director. The term of office of each person
elected as a director will continue until the next Annual Meeting of
Shareholders or until a successor has been elected and qualified.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE PRINCIPAL OCCUPATION
---- --- -------- --------------------
<S> <C> <C> <C>
Joseph W. Halligan 53 1995 President and Chief Executive Officer of the
Company
Richard D. Irwin 62 1987 Chairman of the Board of Directors of the
Company, and President of Grumman Hill
Associates, Inc.
Donald R. Stroben 67 Nominee Managing General Partner of
Princeton/Montrose Partners and Chairman of
Stroben & Hahn Inc.
</TABLE>
Mr. Halligan has been President and Chief Executive Officer of the Company
since November 1995. From 1988 to 1995, Mr. Halligan was President and CEO of
E.S.I. Consulting Group, a private consulting practice, specializing in advising
and operating high growth, consumer and service oriented companies. Before
forming his consulting practice, Mr. Halligan served from 1983 to 1987 as
President and CEO of a privately-held company, Laura Scudder's, Inc. From 1969
to 1983, Mr. Halligan served as Senior Vice President of Fotomat Corporation and
President of its subsidiary, Video Services of America.
Mr. Irwin has been Chairman of the Board of Directors of the Company since
November 1995. Mr. Irwin is a co-founder and President of Grumman Hill
Associates, Inc. ("Grumman Hill"), a venture capital firm headquartered in New
Canaan, Connecticut. Prior to founding Grumman Hill in 1985, he served as a
Managing Director of Dillon, Read & Co., Inc. from 1983 to 1985. Mr. Irwin is
also a member of the board of directors of IXC Communications Inc.
Mr. Volpe is the President of Volpe Brown Whelan & Company, LLC, a private
investment banking and risk capital firm in San Francisco, California. Prior to
founding the predecessor of Volpe Brown Whelan & Company, LLC in 1986, Mr. Volpe
was employed by Hambrecht & Quist Incorporated, a venture capital and investment
banking firm, with his most recent positions being President, Chief Executive
Officer and Director. Mr. Volpe is also a member of the board of directors of
Linear Technology Corporation. Mr. Volpe is not standing for re-election.
Mr. Stroben has, since 1981, been managing General Partner of
Princeton/Montrose Partners, a venture capital partnership headquartered in
Solana Beach, California, and Chairman of Stroben & Hahn Inc., the management
company of Princeton/Montrose Partners. Mr. Stroben is also a member of the
Board of Directors of Etz Lavud Ltd. and served as a member of the Board of
Directors of Westbrae Natural Foods Inc. until October 1997.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of four meetings during
the fiscal year ended December 31, 1997. Each director attended all of the
meetings of the Board of Directors held during fiscal
11
<PAGE> 14
year 1997 and all of the meetings held by all committees of the Board of
Directors during fiscal year 1997 on which he served.
The Audit Committee, which consists of Messrs. Volpe and Irwin, met once
during fiscal year 1997. The functions of the Audit Committee are to recommend
selection of independent public accountants to the Board of Directors, to review
the scope and results of the year-end audit with management and the independent
accountants and to review the Company's accounting principles and its system of
internal accounting controls.
The Officers Compensation Committee, which consists of Messrs. Volpe and
Irwin, met three times during fiscal year 1997. The function of the Officers
Compensation Committee is to review and approve salaries, bonuses and other
benefits payable to the Company's executive officers and to administer the
Company's 1988 Incentive Stock Plan, 1997 Equity Incentive Plan and 1992
Director Option Plan. See "Report of the Officers Compensation Committee of the
Board of Directors."
The Company does not have a nominating committee.
COMPENSATION
Each Board member who is not also an employee of the Company has the right
to a fee of $1,000 per meeting attended in consideration of services as a
director. Board members are also reimbursed for their expenses for each meeting
attended. Previously, under the Company's 1992 Director Option Plan each
director annually received an option to purchase 15,000 shares of Common Stock.
The 1992 Director Option Plan was amended to provide that as of January 1, 1996,
each director annually shall receive an option to purchase 5,000 shares of
Common Stock, which grant may be voluntarily waived by a director. Mr. Halligan
waived his 1996 grant. The 1992 Director Option Plan was further amended as of
March 4, 1997 to provide that grants thereunder will be made only to
non-employee directors. The exercise price of options granted under the 1992
Director Option Plan is the fair market value at the date of grant. Except as
described above, directors do not receive additional compensation for their
services as directors of the Company or as members of committees of the Board of
Directors.
VOTE REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
With respect to the election of directors, shareholders have cumulative
voting rights, which means that each shareholder has that number of votes equal
to the number of shares held multiplied by the number of directors to be
elected. Each shareholder may give all such votes to one candidate or distribute
such shareholder's votes among the candidates as the shareholder chooses.
However, the right to cumulate votes may not be exercised until the candidate or
candidates have been nominated and a shareholder has given notice at the Annual
Meeting of the shareholder's intention to vote cumulatively. If any shareholder
present at the Annual Meeting gives such notice, all shareholders may cumulate
their votes. The candidates receiving the highest number of votes of shares
entitled to vote for them, up to the number of directors to be elected, will be
elected. Votes withheld will be counted for the purposes of determining the
presence or absence of a quorum for the transaction of business at the Annual
Meeting, but will have no other legal effect upon the election of directors
under California law. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
NOMINEES SET FORTH HEREIN.
PROPOSAL TWO:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
On April 7, 1997, pursuant to approval by the Board of Directors upon
recommendation by the Audit Committee, the Company selected KPMG Peat Marwick
LLP, independent public accountants, to replace Arthur Andersen LLP to audit the
consolidated financial statements of the Company for 1997. The former principal
accountant's reports on the Company's financial statements for either of the
past two fiscal years have not contained an adverse opinion or a disclaimer of
opinion, nor have its opinions been qualified or modified as to uncertainty,
audit scope or accounting principles. During the Company's two most recent
fiscal
12
<PAGE> 15
years and the subsequent interim period preceding the Company's replacement of
its principal accountant, there were no disagreements with the former accountant
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of the former accountant, would have caused it to
make a reference to the subject matter of the disagreement in connection with
its reports.
Upon recommendation of the Audit Committee, the Board of Directors has
selected KPMG Peat Marwick LLP to audit the consolidated financial statements of
the Company for 1998. Representatives of KPMG Peat Marwick LLP are expected to
be present at the Annual Meeting, will have the opportunity to make a statement,
and are expected to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION OF
THE SELECTION OF KPMG PEAT MARWICK LLP.
OTHER MATTERS
The Company knows of no other matters to be submitted to the Annual
Meeting. If any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the enclosed proxy card to vote the shares
they represent in accordance with the best judgment of such persons.
THE BOARD OF DIRECTORS
Menlo Park, California
April 17, 1998
INFORMATION LISTED UNDER THE CAPTION "EXECUTIVE OFFICERS OF PHARMCHEM" AT
THE END OF PART I OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, IS INCORPORATED IN THIS PROXY STATEMENT BY REFERENCE.
13
<PAGE> 16
PROXY
PHARMCHEM LABORATORIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF SHAREHOLDERS MAY 19, 1998
The undersigned shareholder of PharmChem Laboratories, Inc., a California
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated April 17, 1998, and hereby appoints
Joseph W. Halligan and David A. Lattanzio, and each of them individually, proxy
and attorney-in-fact, with full power of substitution, on behalf and in the name
of the undersigned, to represent the undersigned at the Annual Meeting of
Shareholders of PHARMCHEM LABORATORIES, INC., to be held on May 19, 1998, at
10:00 a.m., local time, at the Four Points Sheraton Hotel, 1100 North Mathilda
Avenue, Sunnyvale, California 94089 and at any adjournment(s) thereof, and to
vote all shares of Common Stock which the undersigned would be entitled to vote
if then and there personally present on the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL
BE VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR LISTED ON THE REVERSE
SIDE AND FOR THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY COME
BEFORE THE MEETING.
Either of such attorneys or substitutes shall have and may exercise all of
the powers of said attorneys-in-fact hereunder.
(CONTINUED AND TO BE MARKED, DATED AND SIGNED ON THE OTHER SIDE)
- - --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 17
Please mark
your votes as
indicated in
this example. [X]
FOR WITHHELD
FOR ALL
1. ELECTION OF DIRECTORS. [ ] [ ]
Nominees: Joseph W. Halligan, Richard D. Irwin,
Donald R. Stroben
WITHHELD FOR: (Write that nominee's name in
the space provided below.)
---------------------------------------------
<TABLE>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
2. PROPOSAL TO RATIFY THE APPOINTMENT OF KPMG Peat [ ] [ ] [ ]
Marwick LLP as independent public accountants for
the company for the 1998 fiscal year.
<C> <C> <C>
3. Upon such other matters as may properly come before FOR AGAINST ABSTAIN
the meeting or any adjournments or postponements [ ] [ ] [ ]
thereof.
Check here if you plan to attend the Annual Meeting. [ ]
</TABLE>
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND
RETURN IT IN THE ACCOMPANYING ENVELOPE.
Signature(s) Date
-------------------------------------- ------------------------
NOTE: Please sign exactly as your name appears on this proxy. If signing for an
estate, trust or corporation, your title and capacity should be stated. If
shares are held jointly, each holder should sign.
- - --------------------------------------------------------------------------------
FOLD AND DETACH HERE
