SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment no. 1)
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
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
ADVANCED POLYMER SYSTEMS, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
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(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)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
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(2) Aggregate number of securities to which transactions applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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ADVANCED POLYMER SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 10, 1998
----------
To the Stockholders of Advanced Polymer Systems, Inc.:
The Annual Meeting of Stockholders of Advanced Polymer Systems, Inc. (the
"Company") will be held at the Garden Court Hotel, 520 Cowper Street, Palo Alto,
California, on June 10, 1998, at 10:00 a.m. local time, for the following
purposes:
1. To elect eight directors to hold office until the next annual meeting of
stockholders and until their successors are elected.
2. To amend the Company's 1992 Stock Plan (i) to increase by 750,000 the
number of shares of common stock reserved for issuance under the plan; and (ii)
to provide for grants of restricted stock awards under the plan.
3. To transact such other business as properly may come before the meeting,
or any adjournments or postponements of the meeting.
Only stockholders of record at the close of business on April 23, 1998, are
entitled to notice of, and to vote at, the meeting and any adjournments or
postponements of the meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
Julian N. Stern, Secretary
Redwood City, California
May 14, 1998
-- IMPORTANT --
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN
AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE ENCLOSED
POSTPAID ENVELOPE. THANK YOU FOR ACTING PROMPTLY.
ADVANCED POLYMER SYSTEMS, INC.
123 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 366-2626
PROXY STATEMENT
The enclosed proxy is solicited on behalf of the Board of Directors (the
"Board") of Advanced Polymer Systems, Inc. ("APS" or the "Company"), a Delaware
corporation. The proxy is solicited for use at the Annual Meeting of
Stockholders (the "Annual Meeting") to be held at 10:00 a.m. local time on June
10, 1998, at the Garden Court Hotel, 520 Cowper Street, Palo Alto, California.
The approximate date on which this proxy statement and the accompanying notice
and proxy are being mailed to stockholders is May 14, 1998.
VOTING
Only stockholders of record at the close of business on April 23, 1998, are
entitled to notice of, and to vote at, the Annual Meeting and any adjournments
or postponements thereof. At the close of business on that date, the Company had
outstanding 19,803,911 shares of its Common Stock, $.01 par value (the "Common
Stock"). Holders of a majority of the outstanding shares of Common Stock of the
Company, either present in person or by proxy, will constitute a quorum for the
transaction of business at the Annual Meeting. Holders of Common Stock are
entitled to one vote for each share of Common Stock held. In the election of
directors, the eight (8) candidates receiving the highest number of affirmative
votes of the shares present and voting at the Annual Meeting will be elected
directors. An affirmative vote of a majority of the shares present and voting at
the meeting is generally required for approval of any other items submitted to
the stockholders for their consideration. Abstentions and broker non-votes are
each included in the determination of whether a quorum is present at the
meeting. Each is tabulated separately; abstentions are counted in tabulations of
the votes cast on proposals presented to stockholders and have the same effect
as negative votes, while broker non-votes are not counted for purposes of
determining whether a proposal has been approved or not.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy has the power to revoke the proxy prior to its
exercise. A proxy can be revoked by an instrument of revocation delivered prior
to the Annual Meeting to the Secretary of the Company, by a duly executed proxy
bearing a later date or time than the date or time of the proxy being revoked,
or at the Annual Meeting if the stockholder is present and elects to vote in
person. Mere attendance at the Annual Meeting will not serve to revoke a proxy.
SOLICITATION OF PROXIES
Solicitation of proxies may be made by directors, officers and other
employees of the Company by personal interview, telephone, telegraph or telefax.
No additional compensation will be paid for any such services. Costs of
solicitation will be borne by the Company. APS will, upon request, reimburse the
reasonable charges and expenses of brokerage houses or other nominees or
fiduciaries for forwarding proxy materials to, and obtaining authority to
execute proxies from, beneficial owners for whose accounts they hold shares of
Common Stock.
1
PROPOSAL ONE--ELECTION OF DIRECTORS
Eight directors are to be elected to the Board at the Annual Meeting, each to
serve for a one year term until the Annual Meeting to be held in 1999, and until
his or her successor has been elected and qualified. All the nominees presently
are directors of APS. It is intended that proxies received will be voted "FOR"
the election of the nominees, unless marked to the contrary. The Board has no
reason to believe that any of the nominees will be unable or unwilling to serve
as a director if elected. If any nominee should become unavailable prior to the
election, the accompanying proxy will be voted for the election of any nominee
who is designated by the present Board of Directors to fill the vacancy.
INFORMATION CONCERNING THE BOARD OF DIRECTORS:
The nominees for Directors of APS and their ages and position with the
Company are as follows:
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCE
- ------------------------ ----- --------------------------- ----------
John J. Meakem, Jr. 61 Chairman, President and CEO 1991
Carl Ehmann, M.D.(3) 55 Director 1994
Jorge Heller, Ph.D.(3) 70 Director 1991
Peter Riepenhausen(2) 61 Director 1991
Toby Rosenblatt(1)(2) 59 Director 1983
Gregory H. Turnbull(1) 59 Director 1986
C. Anthony Wainwright(2) 64 Director 1996
Dennis Winger(1) 50 Director 1993
- ----------
(1) Member of the Finance and Audit Committee of the Board.
(2) Member of the Compensation and Stock Option Committee of the Board.
(3) Member of the Science Oversight Committee of the Board.
John J. Meakem, Jr.--chief executive officer and president of APS since June,
1991, director since July, 1991; chairman of APS board of directors since March,
1993; chairman of Premier, Inc., a privately held company, from 1986 until its
acquisition by APS in 1993. From 1970 to 1986, Mr. Meakem was corporate
executive vice president and president of Combe, North America and Combe, Inc.
Prior to that Mr. Meakem was vice president of Richardson-Vicks, Inc.
Carl Ehmann, M.D., F.A.C.P.--director of APS since June, 1994. Dr. Ehmann
currently serves as a director of Reckitt & Colman plc. Formerly, he was
executive vice president-research and development of R.J. Reynolds Tobacco
Company where he also served as a member of the executive and operating
committee from 1992 until 1996. From 1987 until 1992, he was executive vice
president of Research and Development at Johnson & Johnson Consumer Products,
Inc.
Jorge Heller, Ph.D.--director of APS since April, 1991. Dr. Heller was
director of the controlled release and biomedical polymers program at SRI
International until January, 1994, where he was a staff member since 1974. He is
also adjunct professor of pharmacy at the University of California, San
Francisco, and at the University of Utah. He is editor of the Journal of
Controlled Release and past president of the Controlled Release Society.
Peter Riepenhausen--director of APS since April, 1991. Mr. Riepenhausen is
currently a business consultant. He was president and chief executive officer of
ReSound Corporation from 1994 to 1998. He serves as a director of Caradon
(Europe) plc. and Weru A.G. He served as vice chairman of the board of directors
of The Cooper Companies, Inc. from January, 1987 until September, 1989, and from
January, 1984 until December, 1986 he was executive vice president of The Cooper
Companies, Inc. Mr. Riepenhausen has also held executive positions with
Blendax-Werke R. Schneider GmbH & Co. of West Germany and Pepsico, Inc.
Toby Rosenblatt--director of APS since September, 1983. Mr. Rosenblatt is
president of The Glen Ellen Company and vice president of Founders Investments,
Ltd. Both companies are involved in private investment activities. Mr.
Rosenblatt also serves as a director of State Street Research Mutual Funds and
is a trustee of numerous civic and educational institutions.
2
Gregory H. Turnbull--director of APS since February, 1986. Mr. Turnbull is
currently a self- employed consultant and a director of Planar Systems. He was
managing director of Kemper Securities from mid-1992 to April, 1993. Prior to
that, he was a partner of Cable & Howse Ventures, a venture capital organization
which he first joined in 1983, and of which he is currently a special limited
partner.
Charles Anthony Wainwright--director of APS since November, 1996. Mr.
Wainwright is currently vice chairman of McKinney & Silver, a national
advertising agency and a director of the following companies: Gibson Greetings,
American Woodmark Corp., Del Webb Corp., Caribiner Corp., and Marketing Services
Group, Inc. He was the chairman of Harris Drury Cohen from 1995 until early 1997
and from 1990 to 1995, he was the chairman of Compton Partners, Saatchi &
Saatchi. He was also the president and chief operating officer of the Bloom
Companies from 1980 until 1989.
Dennis Winger--director of APS since February, 1993. Mr. Winger is senior
vice president, chief financial officer and treasurer of Perkin-Elmer. From 1989
to 1997, Dennis was senior vice president, finance and administration and chief
financial officer of Chiron Corporation. He was also a member of Chiron's
Strategy Committee. Prior to joining Chiron, Mr. Winger held a series of
financial positions at The Cooper Companies, Inc., including chief financial
officer.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors met 4 times during 1997. Each of the directors
participated in at least 75% of the total number of meetings of the Board and of
the committees of the Board on which each served.
The Board has a Finance and Audit Committee, a Compensation and Stock Option
Committee and a Science Oversight Committee. The Finance and Audit committee,
which met 2 times during the last fiscal year, consisted of Messrs. Rosenblatt,
Turnbull and Winger. The Finance and Audit Committee recommends engagement of
the Company's independent auditors and reviews the scope and results of the
annual independent audit of the Company's books and records. The Committee is
also responsible for reviewing and evaluating the Company's accounting
principles and its system of internal accounting controls, and reviewing its
plans for providing appropriate financial resources to sustain the Company's
operations. The Compensation and Stock Option Committee, which met 5 times
during the year, consisted of Messrs. Rosenblatt and Riepenhausen. The function
of the Compensation and Stock Option Committee is to propose and review the
compensation policies of the Company and to administer the Company's stock
option and stock purchase plans. Mr. Wainwright was elected a member of the
Compensation and Stock Option Committee on December 17, 1997. The Science
Oversight Committee, which met 3 times during the year, consisted of Dr. Ehmann
and Dr. Heller. The function of the Science Oversight Committee is to review the
Company's research and development activities.
COMPENSATION OF DIRECTORS
Under the Company's 1992 Stock Option Plan, each nonemployee director of the
Company is automatically granted an option to acquire 10,000 shares of Common
Stock annually and receives a one-time automatic grant to acquire 25,000 shares
when first elected as a director. The Company paid no other Directors' fees for
the fiscal year ended December 31, 1997. Certain directors of the Company have
received consulting fees. See "Certain Transactions."
3
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth beneficial Common Stock ownership as of April
23, 1998, (i) by each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) by each director,
including nominees, and each executive officer named in the Summary Compensation
Table included in the Proxy Statement and (iii) by all executive officers and
directors as a group. Each person has sole investment and voting power with
respect to the shares indicated, subject to community property laws where
applicable and except as otherwise set forth in the footnotes to the table.
NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(1)
- ---------------------------------------------- ----------- ------------
Robert Albus(2) ............................... 360,552 1.8
Carl Ehmann, M.D., F.A.C.P.(3) ................ 57,000 *
Jorge Heller, Ph.D.(4) ........................ 90,000 *
John J. Meakem, Jr.(5) ........................ 760,813 3.7
Sergio Nacht(6) ............................... 153,132 *
Michael O'Connell(7) .......................... 285,467 1.4
Peter Riepenhausen(8) ......................... 83,000 *
Les Riley(9) .................................. 84,389 *
Toby Rosenblatt (10) .......................... 255,526 1.3
Gregory H. Turnbull(11) ....................... 65,000 *
C. Anthony Wainwright(12) ..................... 7,250 *
Dennis Winger(13) ............................. 65,000 *
Johnson & Johnson Development Corporation ....1,422,101 7.2
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Travelers Group, Inc.(14) .....................4,957,893 25.0
388 Greenwich Street
New York, NY 10013
Officers and Directors as a group (12 persons)
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13) ....2,267,129 10.6
* Less than one percent.
(1) Assumes the exercise of all outstanding options and warrants to purchase
Common Stock held by such person or group to the extent exercisable on or
before June 23, 1998, and that no other person has exercised any
outstanding stock options.
(2) Includes 197,813 shares underlying presently exercisable stock options.
(3) Includes 55,000 shares underlying presently exercisable stock options.
(4) Consists of 80,000 shares underlying presently exercisable stock options.
(5) Includes 557,081 shares underlying presently exercisable stock options.
(6) Includes 136,875 shares underlying presently exercisable stock options.
(7) Includes 283,749 shares underlying presently exercisable stock options.
(8) Includes 8,000 shares held as joint tenant with Mr. Riepenhausen's spouse
and 75,000 shares underlying presently exercisable stock options.
(9) Includes 83,750 shares underlying presently exercisable stock options.
(10) Includes 65,000 shares underlying presently exercisable stock options.
(11) Consists of 65,000 shares underlying presently exercisable stock options.
(12) Includes 6,250 shares underlying presently exercisable stock options.
(13) Consists of 65,000 shares underlying presently exercisable stock options.
(14) Based solely on information contained in a Schedule 13G dated April 8,
1998, and includes 1,599,500 shares held by Mutual Management Corporation
and 3,358,393 shares held by Smith Barney, Inc.
4
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, as well as any holders of more than 10% of the Company's
Common Stock, to file with the Securities and Exchange Commission certain
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Based solely on review of such reports
and certain representations furnished to it, the Company believes that during
the fiscal year ended December 31, 1997, all Section 16(a) filing requirements
applicable to its officers and directors were complied with.
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the total compensation for
fiscal years 1997, 1996 and 1995 of the chief executive officer and each of the
other four most highly compensated executive officers whose salary exceeded
$100,000 in 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL --------------
COMPENSATION AWARDS
------------------- --------------
SALARY BONUS OPTIONS ALL OTHER
NAME AND POSITION YEAR ($) ($) (#) COMPENSATION
- -------------------------------------- ------ --------- --------- -------------- --------------
John J. Meakem, Jr. 1997 339,635 100,000 50,000 4,569 (1)
Chairman, President and 1996 324,693 0 0 4,500 (1)
Chief Executive Officer 1995 310,962 0 150,000 4,500 (1)
Robert Albus 1997 200,000 37,500 15,000 3,161 (1)
Senior Vice President, 1996 200,000 0 0 3,000 (1)
President of OTC and Specialty 1995 200,000 0 25,000 3,082 (1)
Sergio Nacht, Ph.D. 1997 173,962 30,000 10,000 4,533 (1)
Senior Vice President of 1996 172,000 0 10,000 4,480 (1)
Dermatology and Skin Care 1995 170,115 0 20,000 4,433 (1)
Michael O'Connell 1997 211,769 56,000 40,000 4,750 (1)
Executive Vice President, Chief 1996 195,962 10,000 40,000 4,500 (1)
Financial and Administrative Officer 1995 182,308 0 30,000 4,500 (1)
Les Riley 1997 211,769 56,000 40,000 169,799 (2)
Senior Vice President, 1996 190,769 10,000 125,000 3,249 (1)
President of Dermatology and Skin Care 1995 0 0 0 0
- ------------------
(1) The stated amounts are Company matching contributions to the Advanced
Polymer Systems Salary Reduction Profit Sharing Plan. In 1997, the Company
made matching contributions equal to 50% of each participant's contribution
during the plan year up to a maximum amount equal to the lesser of 3% of
each participant's annual compensation or $4,750.
(2) This amount consists of $165,349 in relocation costs that were taxable to
Mr. Riley in 1997 and $4,450 in Company matching contribution to the
Advanced Polymer Systems Salary Reduction Profit Sharing Plan. See note (1)
above.
5
The following table sets forth certain information with respect to options
granted during 1997 to the executive officers named in the Summary Compensation
Table.
STOCK OPTION GRANTS IN 1997
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PRICE APPRECIATION
FOR
INDIVIDUAL GRANTS OPTION TERM(1)
--------------------------------------------------- -------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#)(2) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ----------------------- ------------ -------------- ---------- ------------ --------- ---------
John J. Meakem, Jr. ... 50,000 22.2 $7.375 07/08/07 231,905 587,693
Robert Albus ........... 15,000 6.7 $7.375 05/21/07 69,571 176,308
Sergio Nacht, Ph.D. ... 10,000 4.4 $7.375 05/21/07 46,381 117,539
Michael P.J. O'Connell 40,000 17.7 $7.375 05/21/07 185,524 470,154
Les Riley .............. 40,000 17.7 $7.375 05/21/07 185,524 470,154
- ------------------
(1) Potential realizable value is based on an assumption that the price of the
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten year option term. The
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission ("SEC") and do not reflect the Company's
estimate of future stock price growth.
(2) The options granted under the Company's 1992 Stock Plan typically vest over
4 years at 25% annually. Payments on exercise, including any taxes the
Company is required to withhold, may be made in cash, by a full recourse
promissory note or by tender of shares. Options are granted at fair market
value on the date of grant.
The following table sets forth certain information with respect to options
exercised during 1997 and the value of options held at fiscal year end by the
executive officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 1997 YEAR-END AT FISCAL YEAR-END(2)
SHARES ACQUIRED ----------------------------- -----------------------------
UPON OPTION VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME EXERCISE REALIZED(1) (#) (#) ($) ($)
- ----------------------- --------------- ----------- ------------- --------------- ------------- ---------------
John J. Meakem, Jr. ... 5,000 18,125 527,081 145,833 640,879 128,645
Robert Albus ........... 0 0 192,813 22,187 155,547 12,891
Sergio Nacht, Ph.D. ... 0 0 130,416 24,584 136,666 12,396
Michael P.J. O'Connell 0 0 247,916 92,084 197,966 67,344
Les Riley .............. 0 0 61,563 103,437 17,969 19,531
(1) Market value of underlying securities at exercise less the exercise price.
(2) Market value of underlying securities at fiscal year-end minus the exercise
price of "in-the-money" options.
APS did not make any awards during 1997 to any of the executive officers
named in the Summary Compensation Table under any long-term incentive plan
providing compensation intended to serve as an incentive for performance to
occur over a period longer than one fiscal year, excluding options.
6
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation and Stock Option Committee of the Board of Directors (the
"Committee") is responsible for establishing compensation policies applicable to
the Company's executive officers and, pursuant to such policies, determining the
compensation payable to the Company's chief executive officer and other
executive officers of the Company. The committee consists of Peter Riepenhausen
and Toby Rosenblatt, each of whom is a non-employee director of the Company. The
following report relates to compensation payable to the Company's executive
officers for the year ended December 31, 1997. C. Anthony Wainwright was elected
as a member of this Committee on December 17, 1997.
COMPONENTS OF COMPENSATION
There are three (3) components of compensation payable to the Company's
executive officers; base salary, equity-based incentive compensation in the form
of stock options and annual incentive compensation in the form of cash bonuses.
COMPENSATION POLICIES
The Company's compensation policies for all employees, including executive
officers, are designed to provide targeted compensation levels that are
competitive with those of regional high technology companies of similar size,
with whom the company must compete in the recruitment of senior personnel. The
Committee also wished to tie incentive cash bonuses to the achievement of a
pre-established plan and to use stock options to promote equity-ownership in the
Company at levels deemed appropriate by the Committee for executive officers.
The goals of the Committee are to align compensation with the Company's
objectives and performance, and to enable the Company to attract, retain and
reward executives who contribute to the long-term success of the Company. The
Company does not believe that compensation payable by it will be subject to the
limitations on deductibility provided under Section 162(m) of the Internal
Revenue Code.
The Committee retained the services of a compensation consulting firm to
provide data regarding competitive levels of salary compensation and to provide
general guidance to the Committee in evaluating executive compensation.
BASE SALARIES
The salary component of executive compensation is based on the executive's
level of responsibility for meeting the Company's objectives and performance,
and comparison to similar positions in the Company and comparable companies.
Base salaries for executive officers are reviewed and adjusted annually based on
information regarding competitive salaries, including salary survey data
provided by third parties regarding regional high technology companies.
Individual increases are established by the Committee (taking into account
recommendations of the chief executive officer concerning the overall
effectiveness of each executive).
CASH BONUSES
Cash bonuses for executive officers are determined under the Company's bonus
plan applicable to management-level employees. This plan, adopted by the
Committee, establishes both performance objectives for the Company and a
target-bonus for each executive officer, which is a percentage of each
executive's base salary. A percentage of the target bonus is payable only if
budgeted results are achieved and the percentage of the bonus which is payable
increases as the Company achieves profitability and budgeted results are
exceeded.
STOCK OPTIONS
The Company's compensation policies recognize the importance of stock
ownership by senior executives and stock options are an integral part of each
executive's compensation. The Committee believes that the opportunity for stock
appreciation through stock options which vest over time promotes the
relationship between long-term interests of executive officers and stockholders.
The size of specific grants takes into account the executive officer's salary,
number of options previously granted, as well as shares of Common Stock held,
and the contributions to the Company's success.
7
COMPENSATION PAYABLE TO CHIEF EXECUTIVE OFFICER
The 1997 salary for Mr. Meakem, the Company's chairman, president and chief
executive officer, was determined principally from the terms of his employment
agreement with the Company dated May 1, 1993. The Compensation Committee and
Board of Directors increased the base salary of $330,000 to $345,000 effective
May 1, 1997. This increase in base salary corresponds to the average percentage
increase in salaries payable to all employees. Mr. Meakem is also entitled to a
bonus under the bonus plan applicable to management-level employees, although
his targeted bonus represents a greater percentage of base salary than for other
executive officers. Consequently, the Chief Executive Officer's total
compensation is more dependent on Company performance. As of April 23, 1998, Mr.
Meakem holds presently exercisable options to purchase 548,747 shares and,
including options, beneficially owns as of that date 752,479 shares of the
Company's Common Stock.
Compensation and Stock Option Committee
Peter Riepenhausen
Toby Rosenblatt
8
PERFORMANCE GRAPH
The rules of the SEC require APS to include in this Proxy Statement a line
graph presentation comparing cumulative five year stockholder returns, on a
dividend reinvested basis, with broad based equity index and a published
industry index. The Company has selected the S&P 500 Stock Index and H&Q
Technology Stock Index for purposes of the comparison which appears below. The
graph assumes that $100 was invested in APS stock and each index on December 31,
1992, with all dividends reinvested. Past stock performance is not necessarily
indicative of future results.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
12/92 12/93 12/94 12/95 12/96 12/97 3/98
------- ------- ------- ------- ------- ------- ------
ADVANCED POLYMER SYSTEMS 100 63 52 66 91 79 103
INC. ...................
S&P 500 ................. 100 110 112 153 189 252 287
H&Q TECHNOLOGY .......... 100 117 141 211 262 307 372
CERTAIN TRANSACTIONS
The Company entered into a three-year employment agreement with Mr. Meakem in
May 1993. In 1995, the employment agreement was amended to extend the term for
an additional three years and provide for automatic yearly extensions thereafter
unless written notice of its intention not to automatically extend the agreement
is given by either party. The employment agreement provides that Mr. Meakem may
elect to terminate his employment within stated periods of a change in control
of the Company (defined to include an acquisition of more than fifty percent of
the outstanding shares of the Company) and receive an amount equal to his prior
twelve months' salary and bonus, payable over the subsequent twelve month
period. Mr. Meakem is entitled to receive an amount equal to twice his prior
twelve months' salary and bonus if the Company should terminate his employment
within stated periods of a change in control or if he elects to terminate his
employment following a change in control if his position with the Company is
reduced in terms of responsibility or indicia of status.
During 1997, the Company paid to Dr. Jorge Heller and Mr. C. Anthony
Wainwright, who are directors of the Company for consulting services in their
fields of expertise, the respective amounts of $144,999 and $2,000,
respectively. Payments for similar services in 1996 were $127,330 and $0,
respectively, and in 1995 were $48,000 and $0, respectively.
9
The Company has entered into agreements with Biosource Technologies, Inc.
("Biosource") of which Toby Rosenblatt is a stockholder and a former director.
All agreements between APS and Biosource have been, and will continue to be,
considered and approved by a vote of the disinterested directors. The agreements
provide APS with worldwide rights to use and sell Biosource's biologically
synthesized melanin in Microsponge(R) systems for all sun protection, cosmetic,
ethical dermatology and over-the- counter skin care purposes. In return, APS is
required to make annual minimum purchases of melanin, and to pay royalties on
sales of melanin-Microsponge products including certain prepayments. For
estimated losses on purchase commitments and related inventory, the Company
accrued $0, $1,400,000 and $600,000 in 1997, 1996 and 1995 respectively. All
minimum financial commitments under the current agreements have been expensed by
APS.
In 1996, APS paid Biosource the 1995 minimum purchase commitment by issuing
94,000 shares of APS common stock.
In November 1997, Biosource filed a complaint against the Company in the San
Mateo Superior Court. Biosource claims damages from the Company of an amount not
less than $1,050,000, on the grounds that the Company has failed to pay certain
minimum amounts allegedly due under a contract for the supply of melanin.
Biosource also claims interest on that sum and costs.
The Company has denied liability, basing its defense on the assertion that
obligations under the contract have been suspended, because the expected FDA
approval of the Company's melanin based product has not yet been forthcoming.
The Company is vigorously defending the action, and has cross claimed for
rescission of the contract and restitution of money paid thereunder, and for a
declaratory judgment that it is not indebted to Biosource.
The Company expects that the outcome of this legal proceeding will not have a
material adverse effect on the consolidated financial statements in light of the
amounts accrued at December 31, 1997.
PROPOSAL TWO--APPROVAL OF AMENDMENTS
TO THE COMPANY'S 1992 STOCK PLAN
The Company's 1992 Stock Plan is intended to strengthen the Company by
providing added incentive to officers, directors, employees and consultants for
high levels of performance and unusual efforts to increase the earnings of the
Company through the opportunity for stock ownership. Subject to stockholder
approval, the Board has approved the following amendments to the 1992 Stock
Plan: (i) to increase by 750,000 shares the number of shares of Common Stock
reserved for issuance under the Plan; and (ii) to provide for grants of
restricted stock awards under the Plan.
The Board of Directors believes it would be in the best interest of the
Company to approve the amendment to the 1992 Plan to increase the number of
shares by 750,000. The 1992 Plan, currently the only plan pursuant to which the
Company grants options, has only 268,389 shares available for grant as of March
31, 1998. As a consequence, without approval of an increase in the number of
shares of Common Stock reserved for issuance under the Plan, the Company
anticipates it will no longer have shares available for grant after 1998. The
grant of stock options has been an important component of the compensation of
Company officers and other key employees and an important means of providing an
opportunity for stock ownership to such personnel. In addition, the 1992 Plan
includes provisions for the automatic grant of options to non-employee
directors. As of March 31, 1998, directors, officers, employees and consultants
held unexercised options covering 3,010,849 shares of Common Stock with an
average exercise price of $6.65.
The Board of Directors also believes that it would be in the best interest of
the Company to approve the amendment to the 1992 Plan to allow grants of
restricted stock awards. A restricted stock award is an award of shares of
Common Stock which are subject to restrictions on transfer for a period of time
specified by the Board of Directors or a committee of the Board (the
"Administrator"), which may not be less than three (3) years. The participant
must pay not less than par value ($.01 per share) for all restricted stock
granted. In the event the holder of restricted stock issued under the Plan
ceases to be employed by (or to act as a director of or consultant to) the
Company prior to the end of the Restriction
10
Period, all shares still subject to restriction are forfeited and repurchased by
the Company for the price paid by the holder. The purpose of the amendment to
the Plan permitting restricted stock awards is to provide the Company greater
flexibility in providing opportunities for stock ownership, so as to help the
Company attract, retain and motivate a limited number of key employees,
directors and consultants.
DESCRIPTION OF THE 1992 PLAN
The following is a general summary of the principal provisions of the 1992
Stock Plan. The 1992 Plan authorizes the granting of Incentive Stock Options
("ISOs") to employees (including employees who are officers and directors) and
Nonstatutory Options ("NSOs") to officers, directors, employees and consultants
to purchase authorized, but unissued shares of the Company's Common Stock.
Subject to stockholder approval, the 1992 Plan will provide for grants of
restricted stock awards and the number of shares reserved for issuance under the
1992 Plan will be 4,000,000. The 1992 Plan is administered by the Administrator
which determines the terms of options granted under the 1992 Plan, including the
exercise price, number of shares subject to the option, whether the option is an
ISO or an NSO, and the schedule pursuant to which the option shall become
exercisable. No option may be granted under the 1992 Plan after March, 2002, but
outstanding options may extend beyond that date.
The 1992 Plan provides for automatic option grants to nonemployee directors
of the Company. The Company does not pay any directors fees for services as a
director, and uses NSOs as an alternative way to compensate nonemployee
directors and to provide incentives to them through an equity interest in the
Company. Under the 1992 Plan, a 10 year NSO to purchase 25,000 shares of the
Company's Common Stock will be granted to each person who is neither an officer
nor an employee of the Company when such person is first elected or appointed
director. Each such option vests at the rate of 25% per year, so long as the
individual is serving as a director, with full vesting over four years. The 1992
Plan also provides for the grant of a ten year NSO to purchase 10,000 shares of
Common Stock on the date of each annual meeting of stockholders of the Company
held more than 12 months after a nonemployee director is first elected or
appointed to the Board of Directors. These options fully vest one year after the
date of grant.
The exercise price of each option granted under the 1992 Plan must be at
least equal to 100% of the fair market value of the underlying shares of Common
Stock on the date of grant. The 1992 Plan provides that the maximum term of an
option is ten years. With respect to any participant then owning stock
possessing more than ten percent (10%) of the voting power of the Company's
outstanding capital stock, the exercise price of any ISO must be at least 110%
of fair market value of the underlying shares of Common Stock on the date of
grant, and the term may be no longer than five years. The 1992 Plan permits the
exercise of options for cash, a check, or with the approval of the
Administrator, tender to the Company of shares of the Company's Common Stock
owned by the optionee and having a fair market value not less than the option
exercise price or delivery of full recourse promissory notes.
The 1992 Plan limits to $100,000 the value of option stock (measured at the
time of the option grant) with respect to which ISOs granted to any one employee
after 1986 under any Company plan may vest in any calendar year.
At the time an option is exercised, in whole or in part, or at any time
thereafter as requested by the Company, the optionee is required to make
adequate provision for federal and state income and employment tax withholding
obligations of the Company, if any, resulting from the exercise. Subject to
certain limitations, an optionee may elect, subject to the terms of the 1992
Plan and the approval of the Administrator, to have shares of Common Stock
issuable on exercise of the options withheld or to tender shares then owned by
the optionee to provide for these taxes.
Generally, options are exercisable not upon grant, but in cumulative
increments over time, typically 25% per year over four years. Options may be
exercised for thirty days after the optionee leaves the Company and, if the
optionee's employment is terminated by reason of death or permanent disability,
for one year after the optionee's death or disability, but in either case not
beyond the original term of the option.
In the event of a merger of the Company, sale of substantially all of its
assets or similar transaction, the Administrator may, among other things,
accelerate the expiration date and the exercisability of all options outstanding
under the 1992 Plan.
11
Under the 1992 Plan, the Administrator also may grant to participants a
direct right to purchase shares by notifying the grantee of the terms,
conditions and restrictions relating to the purchase right.
Subject to stockholder approval, the 1992 Plan also provides for the grants
of restricted stock awards. A restricted stock award is an award of shares of
Common Stock which are subject to restrictions on transfer for a period of time
specified by the Administrator (the "Restriction Period") provided, that the
Restriction Period may not exceed 10 years and may not be less than three years.
During the Restriction Period, the recipient of the restricted stock award may
not sell, assign, transfer, pledge or otherwise encumber shares of restricted
stock. Within these limits, the Administrator may provide for the lapse of such
restrictions in installments, but other than in the case of acquisition of the
Company, may not waive or accelerate the restrictions.
The recipient of the restricted stock award must pay a purchase price
determined by the Administrator, which shall not be less than the par value
($.01 per share) for all shares of restricted stock awarded. In the event the
holder of the restricted stock ceases to be employed by (or to act as a director
of or consultant to) the Company prior to the end of the Restriction Period, all
shares still subject to restriction are forfeited and repurchased by the Company
for the price paid by the participant. Before the Restriction Period expires,
unless otherwise determined by the Administrator, cash dividends, if any with
respect to the restricted stock awards will be automatically reinvested in
additional restricted stock, and dividends payable in stock will be in the form
of restricted stock.
The 1992 Plan expires in March, 2002, unless terminated earlier by the Board
of Directors. The Board may at any time terminate or amend the 1992 Plan,
provided that without approval of stockholders there will be no increase in the
total number of shares covered by the 1992 Plan. In any case, no amendment may
adversely affect any then-outstanding option or unexercised portion thereof
without the optionee's consent unless such amendment is required to enable the
option to qualify as an ISO.
FEDERAL INCOME TAX CONSEQUENCES OF STOCK AWARDS
The following general description of federal income tax consequences is based
upon current statutes, regulations and interpretations thereof. Because the
applicable rules are complex and because income tax consequences may vary
depending upon the individual circumstances of each participant, participants
should consult their personal tax advisors concerning federal, state, local and
foreign income tax consequences associated with their participation in the 1992
Plan.
ISOs granted under the 1992 Plan are intended to constitute "incentive stock
options" within the meaning of the Section 422 of the Code. ISOs may be granted
only to employees of the Company (including directors who are also employees).
An optionee does not recognize taxable income upon either the grant or exercise
of an ISO. However, the excess of the fair market value of the shares purchased
upon exercise over the option exercise price (the "Option Spread") is includible
in the optionee's "alternative minimum tax income" ("AMTI"), used to calculate
the "alternative minimum tax". The Option Spread is measured on the date of
exercise and is generally includible in AMTI in the year of exercise.
If an optionee holds shares which result from the exercise of an ISO for at
least two years from the date the ISO was granted, and for at least one year
from the date the ISO was exercised, any gain from a sale of the shares should
be taxable as long-term capital gain. Under these circumstances, the Company
would not be entitled to a tax deduction at the time the ISO is exercised or at
the time the stock is sold. If an optionee were to dispose of stock acquired
pursuant to an ISO before the end of the required holding periods (a
"Disqualifying Disposition"), the amount by which the market value of the stock
at the time the ISO was exercised exceeds the exercise price (or, if less, the
amount of gain realized on the sale) would be taxable as ordinary income, and
the Company should be entitled to a corresponding tax deduction. A gain in a
Disqualifying Disposition, in excess of the amount required to be recognized as
ordinary income, if any, would be a capital gain.
An optionee is not taxed upon the grant of an NSO. Generally, the optionee
will recognize as ordinary income the Option Spread on the date of exercise. The
Company is entitled to a deduction equal to the amount of ordinary income
recognized by an optionee who is an employee. Such income is subject to income
tax withholding by the Company.
12
Generally, a participant should not have taxable income upon the grant of
restricted stock but would have taxable income upon the lapse of any
restrictions in an amount equal to the fair market value of the restricted stock
when the restrictions lapse. A participant receiving restricted stock may,
however, make an election to be taxed at grant on any excess of fair market
value over the amount paid, in which case the lapse of any restrictions will not
be a taxable event. If shares are held at least one year after the date the
optionee has taxable income from acquiring them, then upon sale of the shares
the employee will have long-term capital gain or loss equal to the difference
between the sale price and the fair market value of the shares of the date
income is recognized.
The following table shows the number of options granted to the named
individuals and groups under the 1992 Stock Plan during 1997.
PLAN BENEFITS
1992 STOCK PLAN
NUMBER OF
NAME AND POSITION OPTIONS(1)
- ---------------------------------------------------- -----------
John J. Meakem, Jr. ................................ 50,000
Chairman, President and Chief Executive Officer
Robert Albus ....................................... 15,000
Senior Vice President, President of OTC and
Specialty
Sergio Nacht, Ph.D. ................................ 10,000
Senior Vice President of Dermatology and Skin Care
Michael O'Connell .................................. 40,000
Executive Vice President, Chief Financial and
Administrative Officer ............................
Les Riley .......................................... 40,000
Senior Vice President, President of Dermatology and
Skin Care
Executive Officers as a Group ...................... 155,000
Non-Executive Director Group ....................... 50,000
Non-Executive Officer Employee Group ............... 78,500
- ----------
(1) All options granted at fair market value on the date of the grant.
PROPOSAL
At the Annual Meeting, stockholders will be asked to approve amendments to
the Company's 1992 Stock Plan (i) to increase by 750,000 the number of shares of
common stock reserved for issuance under the Plan; and (ii) to provide for
grants of restricted stock awards under the Plan. Such approval will require the
affirmative vote of a majority of shares present and voting at the Annual
Meeting. Copies of the 1992 Plan are available by writing to the Company to the
attention of Traci McCarty, Investor Relations. The Board of Directors
recommends a vote "FOR" the proposal.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected KPMG Peat Marwick LLP as independent public
accountants to audit the financial statements of the Company for the fiscal year
ending December 31, 1998. KPMG Peat Marwick LLP has acted as the Company's
auditors since the Company's inception in 1983. A representative of KPMG Peat
Marwick LLP will be present at the Annual Meeting and will have an opportunity
to make a statement if such representative desires to do so. The representative
of KPMG Peat Marwick LLP also will be available to respond to questions raised
during the meeting.
13
FINANCIAL STATEMENTS
The Company's annual report to stockholders for the fiscal year ended
December 31, 1997, containing audited consolidated balance sheets as of the end
of each of the past two fiscal years and audited consolidated statements of
operations, shareholders' equity and cash flows for each of the last three
fiscal years, is being mailed with this proxy statement to stockholders entitled
to notice of the Annual Meeting.
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Under the applicable rules of the Securities and Exchange Commission, a
stockholder who wishes to submit a proposal for inclusion in the proxy statement
of the Board of Directors for the annual meeting of stockholders to be held in
the spring of 1999 must submit such proposal in writing to the Secretary of the
Company at the Company's principal executive offices no later than January 19,
1999.
OTHER MATTERS
The Board knows of no other matters which will be presented to the Annual
Meeting. If, however, any other matter is properly presented at the Annual
Meeting, the proxy solicited by this Proxy Statement will be voted in accordance
with the judgment of the person or persons holding such proxy.
BY ORDER OF THE BOARD OF DIRECTORS,
Julian N. Stern, Secretary
Redwood City, California
May 14, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED POSTPAID ENVELOPE.
14
APPENDIX A
ADVANCED POLYMER SYSTEMS, INC.
1992 STOCK PLAN
1. Purpose. The purpose of the Advanced Polymer Systems, Inc., 1992
Stock Plan (the "Plan") is to attract, retain and motivate directors, officers,
key employees and consultants of Advanced Polymer Systems, Inc. (the "Company"),
and its subsidiaries by giving them the opportunity to acquire stock ownership
in the Company. Option grants under this Plan may be either incentive stock
options ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock
options ("NSOs"), and this Plan and any options granted hereunder shall be
appropriately construed to conform to such requirements. This Plan also provides
for the direct sale of shares to eligible participants, and for the award of
shares of restricted stock.
2. Effective Date and Term of Plan. This Plan was adopted by the
Company's Board of Directors (the "Board") and became effective on March 24,
1992. This Plan shall terminate automatically ten (10) years after its effective
date unless terminated earlier by the Board under Section 12. No options,
purchase rights or restricted stock awards shall be granted after termination of
this Plan but all options, purchase rights or restricted stock awards granted
prior to termination shall remain in effect in accordance with their terms.
3. Number and Source of Shares Subject to the Plan. Subject to the
provisions of Section 10, the total number of shares of stock with respect to
which options, purchase rights or restricted stock awards may be granted under
this Plan is 4,000,000 shares of Common Stock, $.01 par value, of the Company
(the "Stock"). The shares covered by any terminated or expired option or
purchase right or the unexercised portion thereof or any grant of restricted
stock forfeited pursuant to Section 9(f) shall become available again for grant
under this Plan. The shares to be issued hereunder upon exercise of an
option or purchase right or the grant of a restricted stock award may consist of
authorized and unissued shares or treasury shares.
4. Administration of the Plan. The Plan shall be administered by the
Board, or upon delegation by the Board, by a committee consisting of not less
than two directors (in either case, the "Administrator"). So long as not
otherwise required for the Plan to comply with Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, the Administrator may delegate
nondiscretionary administrative duties to such employees of the Company or a
subsidiary as it deems proper. The Administrator may also make rules and
regulations which it deems useful to administer this Plan. Any decision or
action of the Administrator in connection with this Plan or any options,
purchase rights or restricted stock awards granted or shares purchased under
this Plan shall be final and binding. No member of the Board shall be liable for
any decision, action or omission respecting this Plan, or any options or
purchase rights granted or shares issued under this Plan.
5. Persons Eligible to Participate in this Plan.
(a) ISOs may be granted under this Plan only to employees of the
Company or any subsidiary of the Company, including employees who may also be
officers or directors of the Company or any subsidiary. NSOs, purchase rights
and restricted stock awards may be granted to employees, including employees who
may also be officers or directors, directors, consultants and potential
employees (in contemplation of employment) of the Company or any subsidiary. All
grants shall be made by the Administrator. Determination by the Administrator as
to eligibility shall be conclusive.
(b) Notwithstanding any other provision of this Plan, Nonemployee
Directors shall automatically receive grants under this Plan in accordance with
this Section 5(b).
(i) Subject to the terms and conditions of this Plan, when
any Nonemployee Director who has not previously been a member of the Board is
first elected or appointed as a member of the Board, then on the effective date
of such
2
appointment or election the Company shall grant to such new Nonemployee Director
an NSO to purchase 25,000 shares at an exercise price equal to the fair market
value of such shares on the date of such option grant.
(ii) Subject to the terms and conditions of this Plan, on the
date of the first meeting of the Board immediately following the annual meeting
of stockholders of the Company (even if held on the same day as the meeting of
stockholders) which is held more than twelve (12) months after a Nonemployee
Director is first elected or appointed to the Board, commencing with the annual
meeting of stockholders held in May 1992 (or, if no annual meeting is held that
month or, in the case of any year after 1992, if no annual meeting is held
before the last business day of July of that year, then on the last business day
of July 1992 or of such other July, as the case may be), the Company shall grant
to each Nonemployee Director then in office an NSO to purchase 10,000 shares at
an exercise price equal to the fair market value of such shares on the date of
such option grant.
(iii) Subject to the other provisions of this Plan, each
option granted pursuant to this Section 5(b) shall be for a term of ten (10)
years. Each option granted under Section 5(b)(i) shall become exercisable with
respect to one-fourth of the number of shares covered by such option on the
first, second, third and fourth anniversary of the date such option was granted,
so that such option shall be fully exercisable beginning on such fourth
anniversary of the date such option was granted. Each option granted under
Section 5(b)(ii) shall be fully exercisable beginning on the first anniversary
of the date such option was granted.
6. Grant of Options. The Administrator may, in its discretion, grant
options under this Plan at any time and from time to time before the expiration
of ten (10) years from the effective date of this Plan. The Administrator shall
specify the date of grant or, if it fails to, the date of grant shall be the
date of the action taken by the Administrator to grant the option (in either
case, the "Grant Date"). If an ISO is approved in anticipation
3
of employment of any employee, the Grant Date shall be the date the intended
optionee is first treated as an employee of the Company or any subsidiary for
payroll purposes. As soon as practicable after the Grant Date, the Company will
provide the optionee a written stock option agreement in the form approved by
the Administrator (the "Option Agreement"), which designates the option as an
ISO or an NSO, and identifies the Grant Date, the number of shares of Stock
covered by the option, the option price and the other terms and conditions of
the option.
7. Terms and Conditions of Options. Options granted under this Plan
shall be subject to the following terms and conditions and such other terms and
conditions not inconsistent with this Plan as the Administrator may impose:
(a) Exercise of Option. In order to exercise all or a portion of
any option granted under this Plan, an optionee must remain as an employee (in
the case of an ISO), or as an employee, officer, director or consultant (in the
case of an NSO) of the Company or a subsidiary of the Company until the date on
which the option or portion thereof, becomes exercisable (the "Vesting Date").
The option shall be partially exercisable on or after each Vesting Date with
respect to the percentage of total shares covered by the option as set out in
the Option Agreement.
If an option (or portion thereof) is not exercised on the earliest
Vesting Date on which it becomes exercisable, it may be exercised, in whole or
in part, prior to its expiration date; provided, however, that no option granted
under this Plan may be exercised more than ten (10) years from the Grant Date.
If, at the time the Company grants an ISO, the optionee directly or by
attribution owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any subsidiary, the ISO shall
not be exercisable more than five (5) years after the Grant Date.
Notwithstanding any other provisions of this Plan, to the extent
required by Section 422 of the Code, the aggregate fair market value of Common
Stock first becoming exercisable by an optionee in any calendar year under all
ISOs granted to the
4
optionee together with all other incentive stock options granted to such
optionee covering stock of the Company (or any company which, at the time of
grant, was a parent or subsidiary of the Company) shall not exceed $100,000 (or
such other amount as may be in effect from time to time). If, by their terms
such ISOs and other incentive stock options, when taken together, would first
become exercisable at a rate which would exceed such limit then, unless
otherwise provided in the Option Agreement, the portion thereof which exceeds
such limit shall be NSOs. For this purpose, value shall be the fair market value
of the Common Stock when the options were granted and options shall be taken
into account in the order in which they were granted.
(b) Option Price. The option price shall be at least 100% of the
fair market value of the shares covered by the option on the Grant Date, as
determined in good faith by the Administrator. If, at the time the Company
grants an ISO, the optionee directly or by attribution owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or any subsidiary, the option price shall be at least 110% of the fair
market value of the shares covered by the ISO on the Grant Date determined in
the same manner.
(c) Method of Exercise. To the extent the right to purchase shares
has accrued, an option (or portion thereof) may be exercised from time to time
in accordance with its terms by written notice from the optionee to the Company
stating the number of shares with respect to which the option is being exercised
and accompanied by payment in full of the exercise price of the shares. Payment
may be made in cash, by check or, at the absolute discretion of the
Administrator, by delivery of an interest-bearing, full recourse promissory note
or shares of Common Stock of the Company, endorsed in favor of the Company or
accompanied by an appropriate stock power, or by a combination of the above, or
any other form of consideration approved by the Administrator (including payment
in accordance with any cashless exercise program permitted by applicable law,
including, without limitation Regulation T promulgated by the Federal Reserve
Board, as
5
amended from time to time). Any share delivered to the Company as payment upon
exercise of an option shall be valued at the fair market value on the date of
exercise of the option determined in good faith by the Administrator.
(d) Nonassignability of Option Rights. Except as determined by the
Administrator in its absolute discretion, no option shall be transferable other
than by will or by the laws of descent and distribution and, during the lifetime
of an optionee, only the optionee may exercise an option.
(e) Exercise After Termination or Death. If, for any reason other
than permanent and total disability or death, an optionee ceases to be employed
by or to serve as a consultant to or a director of the Company or a subsidiary
(if such relationship forms the sole basis for the option grant), options held
at the date of such termination (to the extent then exercisable) may be
exercised in whole or in part at any time within thirty (30) days after the date
of such termination (but in no event after the expiration date of the option as
set forth in the Option Agreement). Notwithstanding, if an optionee becomes
permanently and totally disabled (within the meaning of Section 22(e)(3) of the
Code) or dies while employed by or serving as a consultant to or director of the
Company or a subsidiary (or, if the optionee dies within the period that the
option remains exercisable after termination of employment, consultancy or
directorship), options then held (to the extent then exercisable) may be
exercised by the optionee, the optionee's personal representative, or by the
person to whom the option is transferred by will or the laws of descent and
distribution in whole or in part, at any time within one year after the
disability or death or any lesser period specified in the Option Agreement (but
in no event after the expiration date of the option as set forth in the Option
Agreement).
(f) Compliance with Securities Laws. The Company shall not be
obligated to issue any shares upon exercise of an option unless the shares are
at that time effectively registered or exempt from registration under the
federal securities laws and the offer and sale of the shares are otherwise in
compliance with all applicable securities
6
laws. The Company shall have no obligation to register the shares under the
federal securities laws or to take any other steps necessary to enable the
shares to be offered and sold under federal or other securities laws. Upon
exercising all or any portion of an option, an optionee may be required to
furnish representations or undertakings deemed appropriate by the Company to
enable the offer and sale of the option shares or subsequent transfers of any
interest in the shares to comply with applicable securities laws. Stock
certificates evidencing shares acquired upon exercise of options shall bear any
legend required by, or useful for purposes of compliance with, applicable
securities laws, this Plan or the Option Agreement evidencing the option.
8. Purchase Rights.
(a) Grant. The Administrator may, in its discretion, permit direct
sales of Common Stock under this Plan at any time before expiration of ten (10)
years from the effective date of this Plan. Shares may be issued at a price not
less than the fair market value on the date of sale, payable at the option of
the Administrator in cash or other lawful consideration. As soon as practicable
after the grant of a purchase right, the Administrator shall advise the grantee
in writing of the terms, conditions and restrictions relating to the grant,
including the number of shares, the purchase price, the method of payment (which
may include, in the absolute discretion of the Administrator, delivery of an
interest-bearing, full recourse promissory note), the time within which the
purchase right must be exercised, and the repurchase right, if any, available to
the Company.
(b) Purchase Agreement. Each sale of shares pursuant to a purchase
right shall be evidenced by an agreement between the purchaser and the Company
in such form and containing such terms, conditions and restrictions as are
approved by the Administrator, which agreement need not be identical for
different purchasers. Stock certificates evidencing shares acquired pursuant to
a purchase right shall bear any legend required by, or useful for purposes of
compliance with, applicable securities laws, this Plan or the agreement
evidencing the purchase right.
7
9. Restricted Stock.
(a) Grant. The Administrator may, in its discretion, grant
restricted stock awards under this Plan at any time and from time to time before
the expiration of ten (10) years from the effective date of this Plan.
(b) Restricted Stock Agreement. As soon as practicable after the
grant of restricted stock, which in no event shall be later than thirty (30)
days after the Grant Date of the restricted stock, the Company will provide the
participant with a written restricted stock agreement in the form approved by
the Administrator (the "Restricted Stock Agreement"), setting forth the terms
and conditions of the grant.
(c) Price. Participants awarded restricted stock, within
fifteen (15) days of receipt of the Restricted Stock Agreement, shall pay to the
Company an amount equal to the purchase price determined by the Administrator,
which shall be no less than the par value of the Stock subject to the award. If
such payment is not made and received by the Company by such date, the grant of
restricted stock shall lapse.
(d) Restrictions. Subject to the provisions of the Plan and the
Restricted Stock Agreement, during a period set by the Administrator, commencing
with, and not less than three (3) years and not exceeding ten (10) years from,
the Grant Date of the restricted stock (the "Restriction Period"), the
participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of restricted stock. Within these limits, the
Administrator may provide for the lapse of such restrictions in installments,
but, subject to Section 12(e), may not accelerate or waive such restrictions.
(e) Dividends. Unless otherwise determined by the Administrator,
cash dividends with respect to shares of restricted stock shall be automatically
reinvested in additional shares of restricted stock, and dividends payable in
Stock shall be paid in the form of restricted stock.
(f) Termination. Except to the extent otherwise provided in the
Restricted Stock Agreement and pursuant to Section 12(e), upon termination of a
8
participant's employment for any reason during the Restriction Period, all
shares still subject to restriction shall be forfeited by the participant and
shall be repurchased by the Company for an amount equal to the original purchase
price.
10. Payment of Taxes. Regardless of the form of payment, exercise of an
option or the lapse of restrictions on a restricted stock award may be
conditioned on payment in cash, or provision satisfactory to the Administrator
for payment to the Company, of all local, state and federal withholding taxes
which, in the Administrator's judgment, are payable in connection therewith.
If and to the extent consented to by the Administrator, in its sole
discretion, an eligible participant in the Plan who has exercised an option or
received a restricted stock award may make an election to: (a) tender
previously-owned shares of Stock; or (b) have shares of Stock to be obtained
upon exercise of an option or lapse of restrictions applicable to restricted
stock withheld by the Company on behalf of the optionee, to pay the amount of
tax that the Administrator, in its discretion, determines is required to be
withheld by the Company as a result of such exercise or lapse of restrictions.
11. Adjustment for Changes in Capitalization. The existence of
outstanding options and restricted stock awards shall not affect the Company's
right to effect adjustments, recapitalizations, reorganizations or other changes
in its or any other corporation's capital structure or business, any merger or
consolidation, any issuance of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Stock, the dissolution or liquidation of the
Company's or any other corporation's assets or business or any other corporate
act whether similar to the events described above or otherwise. Subject to
Section 12, if the outstanding shares of the Stock are increased or decreased in
number or changed into or exchanged for a different number or kind of securities
of the Company or any other corporation by reason of a recapitalization,
reclassification, stock split, combination of shares, stock dividend or other
event, the number and kind of securities with respect to which options or shares
of restricted stock may be granted under
9
this Plan, the number and kind of securities as to which outstanding options may
be exercised and shares of restricted stock may be received, and the option
price at which outstanding options may be exercised, may be adjusted in the sole
discretion of the Administrator and without regard to any resulting tax
consequences to the optionee.
12. Dissolution, Liquidation, Merger. In the event of a dissolution or
liquidation of the Company, a merger or consolidation in which the Company is
not the surviving corporation, a reverse merger in which the Company is the
surviving corporation but in which more than 50% of the shares of its Common
Stock outstanding before the merger are held, after the merger, by holders
different from those immediately prior to the merger, or a sale of over 80% of
the assets of the Company, the Administrator may, in its discretion, do one or
more of the following with respect to each outstanding option or each share of
restricted stock upon not less than ten (10) days prior written notice to the
optionee:
(a) accelerate the vesting of such option (subject, in the case of
ISOs, to the limitation set forth in Section 7(a) of this Plan);
(b) cancel such option to the extent then exercisable upon payment
in cash to the optionee of the amount by which any cash and the fair market
value of any other property which the optionee would have received as
consideration for the shares issuable on exercise of the option, if such option
had been exercised before such liquidation, dissolution, merger, consolidation,
reverse merger or sale, exceeds the exercise price thereof;
(c) shorten the period during which such option is exercisable,
provided such option shall remain exercisable, to the extent otherwise
exercisable, for at least ten (10) days after the date the notice is given;
(d) arrange for new option rights or shares of restricted stock to
be substituted for such option or restricted stock award, or for the Company's
obligations as to such option or restricted stock award to be assumed by an
employer corporation other
10
than the Company or by a parent or subsidiary of such employer corporation. The
action described in this Section 11 may be taken without regard to any resulting
tax consequences to the optionee and may differ with respect to different
options; or
(e) waive the restrictions on the shares of restricted stock.
13. Rights as Shareholder; Employee. An optionee shall have no rights
as a shareholder with respect to any shares covered by an option until the stock
certificates representing the shares are actually delivered to the optionee.
Subject to Sections 11 and 12, no adjustment shall be made for dividends or
other rights for which the record date is prior to the date the certificates are
delivered. The grant of any option or shares of restricted stock shall not, by
itself, confer on any person any right or inference of continued employment by,
consultancy to or membership on the Board of Directors of the Company.
14. Disqualifying Dispositions. If Stock acquired upon exercise of an
Incentive Stock Option is disposed of in a disqualifying disposition within the
meaning of Section 422 of the Code, the holder of the Stock immediately prior to
the disposition shall notify the Company in writing of the date and the terms of
such disposition and comply with any other requirements imposed by the Company
in order to enable the Company to secure the related income tax deduction to
which it is entitled.
15. Termination or Amendment. The Board may amend, alter or discontinue
the Plan or any option grant or any restriction on restricted stock awards, but
no amendment, alteration or discontinuance shall be made which would impair the
rights of a participant under an outstanding option grant or restricted stock
award without the participant's consent. No amendment, alteration or
discontinuance shall require stockholder approval, except: (a) an increase in
the total number of shares reserved for issuance under the Plan; (b) with
respect to provisions solely as they relate to Incentive Stock Options, to the
extent required for the Plan to comply with Section 422 of the
11
Code; (c) to the extent required by other applicable laws, regulations or rules;
or (d) to the extent the Board otherwise concludes that stockholder approval is
advisable.
16. Parent and Subsidiary. As used in this Plan, "parent" and
"subsidiary" mean any corporation in an unbroken chain of corporations which
includes the Company if, at the relevant time, each of the corporations other
than the last corporation in the chain owns stock possessing more than 50% of
the total combined voting power of all classes of stock of one of the other
corporations in the chain.
17. Rule 16b-3. Notwithstanding any provision of the Plan, it is
intended that option grants shall always be granted and exercised in such a
manner as to conform to the provisions of Rule 16b-3. Notwithstanding the
foregoing, it shall be the responsibility of persons subject to Section 16 of
the Exchange Act, not of the Company or the Administrator, to comply with the
requirements of Section 16 of the Exchange Act; and neither the Company nor the
Administrator shall be liable if this Plan or any transaction under this Plan
fails to comply with the applicable conditions of Rule 16b-3, or if any such
person incurs any liability under Section 16 of the Exchange Act.
18. Governing Law. This Plan and the rights of all persons under this
Plan shall be construed in accordance with and under applicable provisions of
the Internal Revenue Code of 1986, as amended, and the laws of the State of
California.
12
Plan History
The Board originally adopted this Plan on March 24, 1992, and the
Company's shareholders approved it on May 19, 1992.
The Plan was amended to increase the number of shares available for
grant from 2,500,000 to 3,250,000 on January 11, 1996, and the Company's
shareholders approved of such amendment on June 18, 1996.
The Plan was amended to increase the number of shares available for
grant from 3,250,000 to 4,000,000, and to authorize the grant of restricted
stock awards, on April 1, 1998; the Company's shareholders approved such
amendment on _________, 1998.
13
APPENDIX B
ADVANCED POLYMER SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 10, 1998
The undersigned hereby appoints John J. Meakem, Jr., and Julian N.
Stern, or either of them, each with full power of substitution, as the
proxyholder(s) of the undersigned to represent the undersigned and vote all
shares of the Common Stock of Advanced Polymer Systems, Inc. (the "Company"),
which the undersigned would be entitled to vote if personally present at the
annual meeting of stockholders of the Company at the Garden Court Hotel, 520
Cowper Street, Palo Alto, California at 10:00 a.m. local time on June 10, 1998,
and at any adjournments or postponements of such meeting, as follows:
The Board of Directors recommends that you vote FOR the following
proposals. This proxy, when properly executed, will be voted in the manner
directed. WHEN NO CHOICE IS INDICATED THIS PROXY WILL BE VOTED FOR THE FOLLOWING
PROPOSAL. This proxy may be revoked by the undersigned at any time, prior to the
time it is voted, by any of the means described in the accompanying proxy
statement.
[ X ] Please mark
votes as in
this example.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE.
1. To elect as directors, to hold office until 1999 and until their successors
are elected, the eight nominees listed below:
Nominees: Carl Ehmann, Jorge Heller, John J. Meakem, Jr., Peter Riepenhausen,
Toby Rosenblatt, Gregory H. Turnbull, Charles Anthony Wainwright and Dennis
Winger
[ ] FOR [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ] _____________________________________
For all nominees except as noted above
2. To amend the Company's 1992 Stock Plan (i) to increase by 750,000 the number
of shares of common stock reserved for issuance under the plan; and (ii) to
provide for grants of restricted stock awards under the plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. In their discretion the proxyholders are authorized to transact such other
business as properly may come before the meeting or any adjournments or
postponements of the meeting. The Board of Directors at present knows of no
other business to be presented by or on behalf of the Company or the Board of
Directors at the meeting.
MARK HERE [ ]
FOR ADDRESS
CHANGE AND
NOTE AT LEFT
Date and sign exactly as name(s) appear(s) on this proxy. If signing for
estates, trusts, corporations or other entities, title or capacity should be
stated. If shares are held jointly, each holder should sign.
Signature:___________________________________ Date:________________
Signature:___________________________________ Date:________________
