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ADVANCED POLYMER SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 9, 2001
-------------------------------
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 May 9, 2001, at 10:00 a.m. local time, for the following
purposes:
1. To elect seven directors to hold office until the next annual meeting of
stockholders and until their successors are elected.
2. To approve an amendment to Advanced Polymer System's Certificate of
Incorporation to change the name of Advanced Polymer Systems, Inc. to AP
Pharma, Inc.
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 March 14, 2001, are
entitled to notice of, and to vote at, the meeting and any adjournments or
postponements of the meeting. A list of such stockholders will be open to
examination by any stockholders at the Annual Meeting and for a period of ten
days prior to the Annual Meeting during ordinary business hours at the offices
of the Company located at 123 Saginaw Drive, Redwood City, California 94063.
BY ORDER OF THE BOARD OF DIRECTORS,
Julian N. Stern, Secretary
Redwood City, California
April 6, 2001
- IMPORTANT -
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD 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 May
9, 2001, 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 first being mailed to stockholders is April 6, 2001.
VOTING
Only stockholders of record at the close of business on March 14, 2001, 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 20,247,993 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 seven nominees receiving the
highest number of affirmative votes of the shares present and voting at the
Annual Meeting at which a quorum is present will be elected directors.
Approval of the amendment to APS' Certificate of Incorporation to change the
Company's name to AP Pharma, Inc. requires the affirmative vote of a majority
of the holders of outstanding shares of the Company's Common Stock as of the
record date.
Abstentions are included in the determination of whether a quorum is present
at the meeting and are counted in tabulations of the votes cast on proposals
presented to stockholders and have the same effect as negative votes. Proxies
marked to withhold authority for all directors will not be counted in the
election of directors. If a broker indicates on a proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter (a
broker non-vote), while those shares will be included in the determination of
whether a quorum is present, broker non-votes will have no effect on the
election of directors, but will have the effect of a vote against proposal
number two to change the Company's name.
REVOCABILITY OF PROXIES
Proxies which are properly executed and received by the Company before the
Annual Meeting will be voted at the Annual Meeting. Any stockholder giving a
proxy has the power to revoke the proxy at any time 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, telefax or
electronic communications. 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 fees and expenses of banks, 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.
PROPOSAL ONE--ELECTION OF DIRECTORS
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth beneficial Common Stock ownership as of March
14, 2001, by (i) each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director,
including nominees, and each executive officer named in the Summary
Compensation Table included in the Proxy Statement, and (iii) 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 PERCENT
OF OF
NAME SHARES(1) CLASS(1)
- ------------------------------------------- --------- --------
John Barr, Ph.D.(2) 45,494 *
Stephen Drury(3) 29,301 *
Paul Goddard, Ph.D.(4) 10,000 *
Michael O'Connell(5) 474,229 2.3
Peter Riepenhausen(6) 114,852 *
Toby Rosenblatt(7) 257,823 1.2
Gordon Sangster(8) 135,358 *
Gregory H. Turnbull(9) 117,708 *
Dennis Winger(10) 93,172 *
John J. Meakem, Jr.(11) 1,119,442 5.3
Carl Ehmann, M.D., F.A.C.P.(12) 83,617 *
Jorge Heller, Ph.D.(13) 95,725 *
Les Riley(14) 261,186 1.3
Subhash Saxena, Ph.D.(15) 186,156 *
Richard Spizzirri(16) 17,307 *
C. Anthony Wainwright(17) 52,852 *
Citigroup, Inc.(18) 4,399,559 21.7
388 Greenwich Street
New York, NY 10013
Wellington Management(19) 1,620,300 8.0
75 State Street
Boston, MA 02109
Officers and Directors as a group(9 persons) 1,277,937 6.3
(2)(3)(4)(5)(6)(7)(8)(9)(10)
- --------------
* Less than one percent.
(1) Assumes the exercise of all outstanding options to purchase
Common Stock held by such person or group to the extent
exercisable on or before May 14, 2001, and that no other
person has exercised any outstanding stock options.
(2) Includes 43,322 shares underlying presently exercisable stock
options.
(3) Includes 12,500 shares underlying presently exercisable
stock options.
(4) Dr. Goddard currently has no exercisable stock options. On his
appointment as chairman, he was granted 75,000 stock options of
which 25% will vest after one year. The remainder will vest
monthly for three years.
(5) Includes 445,522 shares underlying presently exercisable
stock options.
(6) Includes 21,050 shares held in family trust and 80,000
shares underlying presently exercisable stock options.
(7) Includes 85,000 shares underlying presently exercisable
stock options.
(8) Includes 131,876 shares underlying presently exercisable
stock options.
(9) Includes 85,000 shares underlying presently exercisable
stock options.
(10) Includes 85,000 shares underlying presently exercisable stock
options.
(11) Includes 830,414 shares underlying presently exercisable
stock options. Mr. Meakem left the Company in November 2000.
(12) Includes 75,000 shares underlying presently exercisable stock
options. Dr. Ehmann is not standing for re-election.
(13) Includes 80,000 shares underlying presently exercisable stock
options. Dr. Heller is not standing for re-election.
(14) Includes 240,000 shares underlying presently exercisable
stock options. Mr. Riley left the Company in July 2000.
(15) Includes 184,250 shares underlying presently exercisable
stock options. Dr. Saxena left the Company in July 2000.
(16) Includes 12,500 shares underlying presently exercisable
options. Mr. Spizzirri is not standing for re-election.
(17) Includes 45,000 shares underlying presently exercisable stock
options. Mr. Wainwright is not standing for re-election.
(18) Based solely on information contained in a Schedule 13G
dated January 17, 2001, and includes 1,666,600 shares
held by SSB Citi Fund Management LLC and 2,732,959 shares
held by Salomon Smith Barney, Inc.
(19) Based solely on information contained in a Schedule 13G dated
February 14, 2001.
ELECTION OF DIRECTORS
Seven 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 2002, and
until his or her successor has been elected and qualified. All the nominees
presently are directors of APS with the exception of Michael O'Connell who has
served as President and Chief Executive Officer since August 2000. 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
- ----------------------- --- --------------------- --------
Paul Goddard, Ph.D. 51 Chairman 2000
Stephen A. Drury (1) 63 Director 1999
Michael O'Connell 51 President and Chief Executive
Officer ----
Peter Riepenhausen (2)(3) 64 Director 1991
Toby Rosenblatt (1)(2)(3) 62 Director 1983
Gregory H. Turnbull (1) 62 Director 1986
Dennis Winger (1)(3) 53 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 Strategic Alternatives Committee
Paul Goddard -- chairman of APS board of directors since November 2000.
From 1998 to 2000, Dr. Goddard was president and chief executive officer of
Elan Pharmaceuticals. From 1991 to 1998 Dr. Goddard served as chairman and
chief executive officer of Neurex. In 1998, Neurex was acquired by Elan.
Prior to Neurex, Dr. Goddard held various senior management positions at
SmithKline Beecham.
Stephen A. Drury -- director of APS since May 1999. Mr. Drury is currently
a healthcare financial advisor and a private investor. Prior to his
retirement in 1997, he was executive vice president and a director of Owen
Healthcare since 1992 and senior vice president and chief financial officer of
Integrated Health Services, Inc. from 1989 until 1992. Prior to that, Mr.
Drury served as senior vice president of Thomson McKinnon Securities and
managing director of its Healthcare Capital Markets Group from 1985 to 1989.
Michael O'Connell -- chief executive officer and president of APS since
August, 2000; president of the Company's Pharmaceutical Sciences division from
July 1998; he originally joined APS in July 1992 as vice president and chief
financial officer. From 1980 to 1992, Mr. O'Connell served with The Cooper
Companies, Inc. (formerly CooperVision, Inc.) in a number of financial
positions including vice president and corporate controller.
Peter Riepenhausen -- director of APS since April 1991. Mr. Riepenhausen
is currently chairman, Europe of Align Technologies, Inc. and a business
consultant. He was president and chief executive officer of ReSound
Corporation from 1994 to 1998. He serves as a director of Audimed, Germany
and GAP AG, Germany. He also served as a director of Caradon (Europe) plc
from April 1994 until September 1998.
Toby Rosenblatt -- director of APS since September 1983. Mr. Rosenblatt is
president of The Glen Ellen Company and 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
Met Life Metropolitan Series Mutual Funds and is a trustee of numerous civic
and educational institutions.
Gregory H. Turnbull -- director of APS since February 1986. Mr. Turnbull
is currently a business consultant and a director of Planar Systems, Inc.
Previously, he was a general partner of Cable & Howse Ventures, a venture
capital organization, of which he is currently a special limited partner.
Dennis Winger -- director of APS since February 1993. Mr. Winger is senior
vice president and chief financial officer of Applera Corporation. From 1989
to 1997, Mr. Winger was senior vice president, finance and administration and
chief financial officer of Chiron Corporation. He was also a member of
Chiron's Strategy Committee.
Messrs. Carl Ehmann, Jorge Heller, Richard Spizzirri and C. Anthony Wainwright
decided not to run for re-election. The Company thanks them for their
service.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors met eight times during 2000. All 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, except for Mr. Spizzirri.
The Board has a Finance and Audit Committee, a Compensation and Stock Option
Committee, a Science Oversight Committee and a Committee on Strategic
Alternatives. The Finance and Audit committee, which met five times during
the last fiscal year, consisted of Messrs. Drury, 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 ten times during the
year, consisted of Messrs. Riepenhausen, Rosenblatt and Wainwright. 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. The Science Oversight
Committee, which met twice during the year, consisted of Dr. Ehmann and Dr.
Heller (neither of whom is standing for re-election). The function of the
Science Oversight Committee is to review the Company's research and
development activities. Dr. Heller will continue in his capacity as Principal
Scientist. The Committee on Strategic Alternatives met once during the year
and consisted of Messrs. Riepenhausen, Rosenblatt, Spizzirri and Winger. The
function of the Committee on Strategic Alternatives was to review with the
Company's outside advisors, management and Board of Directors the progress of
the Company's process for evaluating and pursuing strategic alternatives for
maximizing stockholder value, including review of any proposed transactions
involving the sale of all or any material part of the Company. The committee
was disbanded upon the sale of the Company's cosmeceutical and toiletry
product lines and certain technology rights for topical pharmaceuticals to
R.P. Scherer in July 2000.
COMPENSATION OF DIRECTORS
Under the Company's 1992 Stock Option Plan, each nonemployee director of the
Company was automatically granted an option to acquire 10,000 shares of Common
Stock annually and received a one-time automatic grant to acquire 25,000
shares when first elected as a director. In addition, nonemployee directors
of the Company received $12,000 per year, $1,000 for each meeting of the Board
of Directors attended and $500 for each committee meeting attended on a date
other than the date of a regularly scheduled Board meeting. Subsequent to
July 1, 2000, all compensation was payable in unregistered Common Stock of the
Company valued at the closing price of the Company's Common Stock on the last
trading date of each quarter. Certain directors of the Company have received
consulting fees. See "Certain Transactions."
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, 2000, 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 2000, 1999 and 1998 of the chief executive officer and the other
most highly compensated executive officers whose salary exceeded $100,000 in
2000.
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------ -------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL
SALARY BONUS AWARDS OPTIONS OTHER
NAME AND POSITION YEAR ($) ($) ($)(1) (#) COMPENSATION
- ----------------- ---- ------ ------- ------ ------- ------------
Michael O'Connell 2000 261,769 133,000 0 150,000 5,100(2)
President and 1999 242,423 33,000 0 0 4,800(2)
Chief Executive 1998 235,616 0 119,800 110,000 4,800(2)
Officer
John Barr, Ph.D. 2000 146,385 10,000 0 50,000 4,469(2)
Vice President, 1999 125,142 0 0 0 3,741(2)
Research and 1998 116,231 0 0 0 3,588(2)
Development
Gordon Sangster 2000 182,183 65,000 0 50,000 5,100(2)
Chief Financial 1999 161,281 0 0 0 4,800(2)
Officer 1998 152,031 0 0 0 4,800(2)
John J. Meakem, Jr. 2000 223,596 100,000 0 27,000 663,302(3)
Former Chairman, 1999 381,789 0 0 0 4,800(2)
President and Chief 1998 373,654 0 359,400 198,000 4,800(2)
Executive Officer
Les Riley 2000 140,359 30,000 0 0 348,250(4)
Former Senior Vice 1999 242,423 30,000 0 0 4,800(2)
President, President 1998 235,616 0 119,800 75,000 4,800(2)
of Dermatology and
Skin Care
Subhash Saxena, Ph.D. 2000 112,858 20,000 0 0 103,097(5)
Former Senior Vice 1999 194,942 20,000 0 0 4,800(2)
President, Head, 1998 188,077 0 0 70,000 4,800(2)
Research and
Development
- ---------------
(1) The dollar value of restricted stock awards, net of consideration paid by
the named executive officer, was calculated using the closing market price
of the Company's Common Stock on the date the restricted stock award was
granted. Each restricted stock award provides that for a period of three
years after the award of restricted stock, the recipient may not sell,
assign, transfer, pledge or otherwise encumber the shares of restricted
stock. Any cash dividends with respect to shares of restricted stock are
automatically reinvested in additional shares of restricted stock. Each
restricted stock award provides that if the employee should leave the
employ of the Company prior to three years from the date of award, unless
waived by the administrator of the plan under certain circumstances, the
Company will have the right to repurchase the restricted stock at their
original purchase price of $.01 per share. As of December 31, 2000, the
Company had a total of 80,000 shares of restricted stock outstanding with
an aggregate value of $190,000 based on the value of the Company's shares
at December 31, 2000.
(2) The stated amounts are Company matching contributions to the Advanced
Polymer Systems Salary Reduction Profit Sharing Plan. In 2000, 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 $5,100.
(3) Mr. Meakem resigned from the Company as president and CEO in August 2000
and as chairman in November 2000. The stated amount includes contractual
obligations amounting to $658,202, and $5,100 in Company matching
contribution to the Advanced Polymer Systems Salary Reduction Profit
Sharing Plan. See note (2) above.
(4) This amount consists of $300,000 under the retention incentive plan which
was payable upon the sale of the cosmeceutical and toiletry product lines
in July 2000, $45,027 in relocation costs that were taxable to
Mr. Riley in 2000 and $3,223 in Company matching contribution to the
Advanced Polymer Systems Salary Reduction Profit Sharing Plan. See note
(2) above.
(5) This amount consists of $100,000 under the retention incentive plan which
was payable upon the sale of the cosmeceutical and toiletry product
lines business in July 2000 and $3,097 in Company matching contribution
to the Advanced Polymer Systems Salary Reduction Profit Sharing Plan.
See note (2) above.
The following table sets forth certain information with respect to options
granted during 2000 to the executive officers named in the Summary
Compensation Table.
STOCK OPTION GRANTS IN 2000
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------- --------------------
%
OF
TOTAL
OPTIONS
NUMBER OF GRANTED
SECURITIES TO
UNDERLYING EMPLOYEES
OPTIONS IN EXERCISE
GRANTED FISCAL PRICE EXPIRATION
NAME (#)(2) YEAR ($/SH) DATE 5%($) 10%($)
- -------------------- --------- ---- ------ -------- ------- ------
Michael O'Connell 150,000 36.0 $3.125 08/08/10 294,794 747,067
John Barr,Ph.D. 30,000 7.2 $3.344 08/01/10 63,091 159,884
20,000 4.8 $2.875 10/27/10 36,161 91,640
Gordon Sangster 30,000 7.2 $3.344 08/01/10 63,091 159,884
20,000 4.8 $2.875 10/27/10 36,161 91,640
John J. Meakem, Jr.(3) 27,000 6.5 $4.000 01/12/10 67,921 172,124
- ---------------
(1) Potential realizable value is based on an assumption that the price of the
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten year option term. The
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission ("SEC") and do not reflect the
Company's estimate of future stock price growth.
(2) The options granted under the Company's 1992 Stock Plan typically vest
over 4 years at 25% annually. Payments on exercise, including any taxes
the Company is required to withhold, may be made in cash, by a full
recourse promissory note or by tender of shares. Options are granted at
fair market value on the date of grant.
(3) The options granted in 2000 were in lieu of a performance cash bonus
relating to 1999.
The following table sets forth certain information with respect to options exercised during 2000
and the value of options held at fiscal year end by the executive officers named in the Summary
Compensation Table.
AGGREGATED OPTION EXERCISES IN 2000 AND 2000 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 2000 YEAR-END AT FISCAL YEAR-END (2)
SHARES ------------------------- --------------------------
ACQUIRED
UPON
OPTION VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)(1) (#) (#) ($) ($)
- --------------------- -------- -------- ----------- ------------- ----------- ------------
Michael O'Connell 0 0 416,249 183,751 0 0
John Barr, Ph.D. 0 0 36,240 63,760 0 0
Gordon Sangster 0 0 122,639 72,361 0 0
John J. Meakem, Jr. 0 0 799,858 78,056 0 0
Les Riley(3) 0 0 240,000 0 0 0
Subhash Saxena,
Ph.D.(3) 0 0 210,500 0 0 0
- ---------------
(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.
(3) Under the terms of their employment agreements, the stock options granted
to Mr. Riley and Dr. Saxena were fully vested on the date they left the
Company.
APS did not make any awards during 2000 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.
REPORT OF THE FINANCE AND AUDIT COMMITTEE
The Finance and Audit Committee of the Board of Directors serves as the
representative of the Board of the Directors for general oversight of the
Company's financial accounting and reporting process, system of internal
controls, audit process, and process for monitoring compliance with laws and
regulations. Each of the members of the Finance and Audit Committee is
independent, as defined under the listing standards of NASDAQ. The Committee
operates under a written charter adopted by the Board of Directors and
attached to this Proxy Statement as Appendix A. The Company's management has
primary responsibility for preparing the Company's financial statements and
for the Company's financial reporting process. The Company's independent
auditors, KPMG LLP, are responsible for expressing an opinion on the
conformity of the Company's audited financial statements to generally accepted
accounting principles in the United States of America.
In this context and in connection with the audited financial statements
contained in the Company's Annual Report on Form 10-K, the Audit Committee:
reviewed the audited financial statements with the Company's management;
discussed with KPMG LLP, the Company's independent auditors, certain matters
related to the conduct of the audit, as required by Statement of Auditing
Standards No. 61, Communication with Audit Committees;
met with the independent auditors, with and without management present, to
discuss the results of their audit, their evaluations of the Company's
internal controls, and the overall quality of the Company's financial
reporting;
reviewed the written disclosures and the letter from KPMG LLP required by
Independence Standard Board Standard No. 1, "Independence Discussions with
Audit Committees," discussed with the auditors their independence from the
Company, and concluded that the non-audit services performed by KPMG LLP are
compatible with maintaining their independence;
instructed the independent auditors that the Committee expects to be advised
if there are any subjects that require special attention.
Based on the review and discussions described above, the Audit Committee
recommended to the Board of Directors that the Company's audited consolidated
financial statements for the fiscal year ended December 31, 2000 be included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000, for filing with the SEC, and the Board of Directors approved such
inclusion. Based on the Audit Committee's recommendation, the Board has also
selected KPMG LLP as the Company's independent auditors for the fiscal year
ending December 31, 2001.
The Finance and Audit Committee of
Stephen Drury
Toby Rosenblatt
Gregory Turnbull
Dennis Winger
Relationship with Independent Accountants
- -----------------------------------------
KPMG LLP and its predecessors have acted as the Company's independent
accountants since the inception of the Company. In accordance with standard
policy, KPMG LLP periodically changes the individuals who are responsible for
the Company's audit.
In addition to performing the audit of the Company's consolidated financial
statements for the year 2000, KPMG LLP provided various other services during
such year. The aggregate fees billed for 2000 for each of the following
categories of services are as follows:
Audit and review of the Company's 2000
financial statements $111,000
All other services $ 91,000
KPMG LLP did not provide any services related to financial information systems
and implementation during 2000.
"All other services" includes (i) tax planning and review of tax returns of
the Company, and (ii) evaluation of the effects of various accounting issues
and changes in professional standards.
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, Toby Rosenblatt and C. Anthony Wainwright, each of whom is a
nonemployee director of the Company. In determining compensation policies,
the committee has access to compensation surveys for regional technology-based
companies which compete with the Company in the recruitment and retention of
senior executives as well as other executive compensation information and
data. The following report relates to compensation payable to the Company's
executive officers for the year ended December 31, 2000.
COMPONENTS OF COMPENSATION
There are three components of compensation payable to the Company's executive
officers: base salary, equity-based incentive compensation in the form of
stock options and restricted stock awards 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 companies of similar size, with whom the
company must compete in the recruitment of senior personnel. The Committee
also seeks to tie incentive cash bonuses to the achievement of a pre-
established performance objectives for the Company approved by the Committee,
and to use stock options and restricted stock awards 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.
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 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 portion of the target bonus is discretionary and a
portion is payable if pre-established performance objectives are achieved.
The percentage of the bonus which is payable increases as base performance
objectives are exceeded.
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Company's compensation policies recognize the importance of stock
ownership by senior executives and equity-based incentive compensation is 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 options 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.
In 1998, the Company's 1992 Stock Plan was amended to also permit the awards
of restricted stock. The restricted stock awards provide that each recipient
of restricted stock shall pay the purchase price of the stock, which may not
be less than the par value of the stock, within 15 days of grant of the award,
and that for a period of three years after the award of restricted stock, the
recipient may not sell, assign, transfer, pledge or otherwise encumber the
shares of restricted stock. Any cash dividends with respect to shares of
restricted stock are automatically reinvested in additional shares of
restricted stock and any stock dividends are paid in the form of restricted
stock. Unless waived by the administrator of the Company's 1992 Stock Plan in
the event of a sale of or a merger involving the Company, if a recipient's
employment is terminated during the three-year restriction period, all shares
of restricted stock are forfeited and are repurchased by the Company at their
original purchase price.
RETENTION AND STAY BONUS PLANS
The Compensation and Stock Option Committee of the Board approved a Retention
Incentive Plan ("Retention Plan") for certain key employees, including the
executive officers of the Company named in the Summary Compensation Table
above. See the discussion under Certain Transactions below.
The Compensation and Stock Option Committee of the Board also approved an
Executive Stay Bonus Plan covering key executives, including the named
executive officers. See the discussion under Certain Transactions below.
COMPENSATION PAYABLE TO CHIEF EXECUTIVE OFFICER
The 2000 salary for Mr. O'Connell, the Company's president and chief executive
officer, was determined principally from the terms of the amended and restated
retention and non-competition agreement with the Company dated August 1, 2000.
The Compensation Committee and Board of Directors increased the base salary of
$245,000 to $285,000 effective August 1, 2000, concurrent with Mr. O'Connell
assuming the roles of president and chief executive officer. Based on Mr.
O'Connell's position with the Company, the Compensation Committee and Board of
Directors also approved the grant to Mr. O'Connell of stock options to acquire
an aggregate of 175,000 shares of Common Stock. 150,000 options were issued
in 2000 and the remaining 25,000 were issued in 2001. As of March 14, 2001,
Mr. O'Connell held presently exercisable stock options to purchase 432,397
shares, 20,000 shares of restricted stock, and including options and
restricted stock awards, beneficially owns as of that date 461,104 shares of
the Company's Common Stock. Mr. O'Connell's base salary and stock grants were
based on competitive compensation levels for comparable companies in the
region, his performance in his prior leadership role in the Company and his
contributions in refocusing the strategic direction of the Company.
Compensation and Stock Option Committee
Peter Riepenhausen
Toby Rosenblatt
Charles Anthony Wainwright
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 a broad based equity index and a published
industry index. The Company selected the S&P 500 Stock Index and Russell 2000
for purposes of the comparison which appears below. The graph assumes that
$100 was invested in APS stock and each index on December 31, 1995, 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]
12/95 12/96 12/97 12/98 12/99 12/00
----- ----- ----- ------ ----- -----
ADVANCED POLYMER SYSTEMS INC. 100 139 120 98 63 43
S&P 500 100 123 164 211 255 232
RUSSELL 2000 100 116 143 139 168 163
CERTAIN TRANSACTIONS
The Compensation and Stock Option Committee of the Board approved a Retention
Incentive Plan ("Retention Plan") for certain key employees, including the
executive officers of the Company named in the Summary Compensation Table
above. The purpose of the Retention Plan was to encourage key employees to
continue their employment with the Company, enhance their ability to perform
effectively and provide the Company with the benefit of their continued
service. Under the Retention Plan, the Company entered into individual
retention agreements with the covered executives providing that the executive
will be eligible for certain benefits if his or her employment is terminated
under specified circumstances. If the executive's full-time employment with
the Company is terminated by the Company (other than for cause) or by the
executive for good reason (due to material reduction in the executive's
authority or responsibility, base salary or other compensation or employee
benefits), the executive will be retained as a part-time employee for a
period ranging from a minimum of 12 months to a maximum of 24 months (the
"Retention Period"). During the Retention Period, the executive will receive
continuation of salary, payable one-half in a lump sum following termination
of full-time employment and the remainder ratable over the Retention Period
and an annual bonus equal to the bonus paid during the immediately preceding
12-month period.
As a result of the Company's sale of its cosmeceutical business, Mr. Riley and
Dr. Saxena left the Company and under their severance agreements, Mr. Riley
and Dr. Saxena were paid $300,000 and $100,000 respectively. Mr. Riley will
receive a comparable benefit in July 2001 and Dr. Saxena will receive a
comparable benefit in July 2001 and July 2002. Under the Retention Incentive
Plan, each executive also agreed not to compete with the Company during the
Retention Period.
The Compensation and Stock Option Committee of the Board also approved an
Executive Stay Bonus Plan covering key executives, including the named
executive officers. The purpose of this plan was to encourage key executives
who play a critical role in the Company to optimize the Company's previously
announced process of reviewing all strategic alternatives, including the
possible sale of all or part of the Company. In the event of the sale of all
or part of the Company at a favorable price that exceeded a specified amount,
the plan provided for payments to the covered executives up to an aggregate
total payment to all covered executives not to exceed $1 million. The right
to receive payments under the Executive Stay Bonus Plan required a covered
executive to remain with the Company through any sale unless the covered
executive's employment was terminated without cause. Under the terms of the
plan, upon the successful completion of the sale of the Company's
cosmeceutical and toiletry product lines to R.P. Scherer, Inc. payments were
made to Mr. Meakem of $100,000; to Mr. O'Connell of $100,000; and to Mr.
Sangster of $50,000.
Under the terms of his employment agreement, Mr. Meakem, who left the Company
in August 2000, was paid $658,202, which represented half of the Company's
contractual obligation. The remaining half is being paid over three years.
During 2000, the Company paid to Dr. Jorge Heller (who consults for the
Company on a full time basis and is the Company's Principal Scientist) and
Peter Riepenhausen, both directors of the Company, for consulting services in
their field of expertise, the respective amounts of $194,167 and $37,500.
Payments for similar services in 1999 were $181,250 and $20,000, respectively,
and in 1998 were $160,000 and $7,500, respectively. In the prior years, the
Company paid consulting fees to Dr. Carl Ehmann and C. Anthony Wainwright, who
were also directors of the Company, the respective amounts of $3,000 and
$4,500 in 1998.
Under the terms of the Company's agreement with Dr. Goddard, he received a
stock option grant to acquire 75,000 shares of the Company's Common Stock.
The options will vest 25% at the end of the first year and in equal monthly
installments for the next 36 months. He will receive additional option grants
each year of 20,000 shares while he serves as chairman. In addition, he will
receive compensation of $100,000 per year.
PROPOSAL TWO--APPROVAL OF AMENDMENT TO
ADVANCED POLYMER'S CERTIFICATE OF INCORPORATION TO
CHANGE THE CORPORATE NAME
At the annual meeting, stockholders of Advanced Polymer Systems will be asked
to approve an amendment to Advanced Polymer's Certificate of Incorporation to
change the corporate name from Advanced Polymer Systems, Inc. to AP Pharma,
Inc. The Board of Directors believes that this new name will better reflect
Advanced Polymer's transition from a corporation focused on skin care
applications of its Microsponge(R) delivery system to a focus on a broad-based
platform of technologies for pharmaceutical products.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected KPMG LLP ("KPMG") as independent public accountants to
audit the financial statements of the Company for the fiscal year ending
December 31, 2001. KPMG has acted as the Company's auditors since the
Company's inception in 1983. A representative of KPMG 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 also will be
available to respond to questions raised during the meeting.
FINANCIAL STATEMENTS
The Company's annual report to stockholders for the fiscal year ended December
31, 2000, 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 2002 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 2002 must submit such proposal in writing to the
Secretary of the Company at the Company's principal executive offices no later
than January 18, 2002. The applicable rules of the SEC impose certain
limitations on the content of proposals and also contain certain eligibility
and other requirements (including the requirement that the proponent must have
continuously held at least $2000 in market value or 1% of the Company's Common
Stock for at least one year before the proposal is submitted).
OTHER MATTERS
As of the date of this Proxy Statement, the Board does not intend to bring any
other business before the Annual Meeting, and so far as is known to the Board,
no other matters which will be presented to the Annual Meeting. If, however,
any other matter is properly presented at the Annual Meeting, it is intended
that proxies in the form enclosed with this Proxy Statement will be voted on
such matter in accordance with the judgment of the person or persons voting
such proxies.
BY ORDER OF THE BOARD OF DIRECTORS,
Julian N. Stern, Secretary
Redwood City, California
April 6, 2001
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.
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APPENDIX A
AUDIT COMMITTEE CHARTER
Adopted by the Board of Directors of
Advanced Polymer Systems, Inc.
Composition:
- ------------
The audit committee shall be composed of three or more directors, as
determined by the board of directors, who shall meet the independence and
financial literacy requirements of NASDAQ, and at least one of whom shall have
past employment experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or background
which results in the individual's financial sophistication, including being or
having been a chief executive officer, chief financial officer or other senior
officer with financial oversight responsibilities.
Unless a chair is designated by the board of directors, the committee members
may appoint their own chair by majority vote.
Responsibilities
- ----------------
1. Recommend to the board of directors the selection of the independent
auditor, evaluate the performance of the independent auditor and, if so
determined by the audit committee, recommend to the board of directors
replacement of the independent auditor; it being acknowledged that the
independent auditor is ultimately accountable to the board of directors and
the audit committee, as representatives of the stockholders.
2. Ensure the receipt of, and evaluate, the written disclosures and the
letter that the independent auditor submits to the audit committee regarding
the auditor's independence in accordance with Independence Standards Board
Standard No. 1, discuss such reports with the auditor and, if so determined by
the audit committee in response to such reports, recommend that the board of
directors take appropriate action to address issues raised by such evaluation.
3. Discuss with the independent auditor the matters required to be discussed
by SAS 61, as it may be modified or supplemented.
4. Instruct the independent auditor and the internal auditor, if any, that
the Committee expects to be advised if there are any subjects that require
special attention.
5. Meet with management and the independent auditor to discuss the annual
financial statements and the report of the independent auditor thereon, and to
discuss significant issues encountered in the course of the audit work,
including restrictions on the scope of activities, access to required
information and the adequacy of internal financial controls.
6. Review the management letter delivered by the independent auditor in
connection with the audit.
7. Following such review and discussions, if so determined by the audit
committee, recommend to the board of directors that the annual financial
statements be included in the company's annual report.
8. Meet quarterly with management and, if deemed advisable by the audit
committee, the independent auditor to discuss the quarterly financial
statements prior to the filing of the Form 10-Q; provided that this
responsibility may be delegated to the chairman of the audit committee.
9. Meet at least once each year in separate executive sessions with
management, the internal auditor, if any, and the independent auditor to
discuss matters that any of them or the committee believes could significantly
affect the financial statements and should be discussed privately.
10. Have such meetings with management, the independent auditor and the
internal auditor as the audit committee deems appropriate to discuss the
concept and design of the company's information and reporting systems and the
steps management has taken to address significant issues concerning those
matters, and to discuss significant financial risk exposures facing the
company and the steps management has taken to monitor and control such
exposures.
11. Review significant changes to the company's accounting principles and
practices proposed by the independent auditor, the internal auditor, if any,
or management.
12. Review the scope and results of internal audits.
13. Evaluate the performance of the internal auditor, if any, and, if so
determined by the audit committee, recommend replacement of the internal
auditor, if any.
14. Conduct or authorize such inquiries into matters within the committee's
scope of responsibility as the committee deems appropriate. The committee
shall be empowered to retain independent counsel and other professionals to
assist in the conduct of any such inquiries.
15. Provide minutes of audit committee meetings to the board of directors, and
report to the board of directors on any significant matters arising from the
committee's work.
16. At least annually, review and reassess this charter and, if appropriate,
recommend proposed changes to the board of directors.
17. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the company's annual proxy statement.
18. In the performance of its responsibilities, the Audit Committee is the
representative of the shareholders. However, it is not the responsibility of
the Audit Committee to plan or conduct audits, or to determine whether the
company's financial statements are complete and accurate or in accordance with
generally accepted accounting principles.
1
APPENDIX B
ADVANCED POLYMER SYSTEMS, INC.
Proxy Solicited by the Board of Directors
for the Annual Meeting of Stockholders
to be held May 9, 2001
The undersigned hereby appoints Paul Goddard and Michael O'Connell, 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 to be held at the Garden Court Hotel, 520 Cowper
Street, Palo Alto, California at 10:00 a.m., local time, on May 9, 2001, and
at any adjournments or postponements of such meeting, as follows:
The Board of Directors recommends that you vote FOR the proposals on the
reverse side. 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 PROPOSALS. 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 the next annual meeting of
stockholders and until their successors are elected, the seven nominees listed
below:
Nominees: Stephen Drury, Paul Goddard, Michael O'Connell, Peter Riepenhausen,
Toby Rosenblatt, Gregory H. Turnbull, and Dennis Winger
[ ] FOR [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ]
----------------------------
For all nominees, except as noted above.
2. To consider and vote on an amendment to Advanced Polymer's Certificate of
Incorporation to change the name of the Company to AP Pharma, Inc.
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:
----------- ----------- ----------- -----------
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