FORM 11-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
ANNUAL REPORT
PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(X) Annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
( ) Transition report pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to ________
Commission file number 000-16109
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
AP PHARMA 401(k) PLAN
123 SAGINAW DRIVE
REDWOOD CITY, CA 94063
B. Name of issuer of the securities held pursuant to the plan
and the address of its principal executive office:
A.P. PHARMA, INC.
123 SAGINAW DRIVE
REDWOOD CITY, CA 94063
TELEPHONE (650) 366-2626
SIGNATURE
The Plan. Pursuant to the requirements of the Securities
Exchange Act of 1934, the administrator has duly caused this
annual report to be signed on its behalf by the undersigned
hereunto duly authorized.
AP PHARMA 401(k) PLAN
Date: June 17, 2004 By /s/Gordon Sangster
---------------- --------------------
Gordon Sangster
Chief Financial Officer
AP Pharma 401(k) Plan
Financial Statements
December 31, 2003 and 2002
--------------------------
AP PHARMA 401(k) PLAN
Financial Statements and Supplemental Schedule
December 31, 2003 and 2002
Table of Contents
- -----------------
Independent Accountants' Report
Financial Statements:
Statements of Net Assets Available for Benefits
Statements of Changes in Net Assets Available for Benefits
Notes to Financial Statements
Supplemental Schedule as of December 31, 2003
Schedule H, Line 4i - Schedule of Assets (Held at End of Year)
Consent of Independent Accountants
INDEPENDENT ACCOUNTANTS' REPORT
To the Participants and
Plan Administrator of the
AP Pharma 401(k) Plan
We have audited the financial statements of the AP Pharma 401(k)
Plan (the Plan) as of December 31, 2003 and 2002, and for the
years then ended, as listed in the accompanying table of
contents. These financial statements are the responsibility of
the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the
Plan's management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the net assets
available for benefits of the Plan as of December 31, 2003 and
2002, and the changes in net assets available for benefits for
the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion
on the basic financial statements taken as a whole. The
supplemental schedule, as listed in the accompanying table of
contents, is presented for the purpose of additional analysis and
is not a required part of the basic financial statements but is
supplementary information required by the Department of Labor's
Rules and Regulations for Reporting and Disclosure under the
Employee Retirement Income Security Act of 1974. The
supplemental schedule is the responsibility of the Plan's
management. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial
statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a
whole.
By /s/ MOHLER, NIXON & WILLIAMS
-----------------------------
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
April 28, 2004
AP PHARMA 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
- ----------------------------------------------
DECEMBER 31,
2003 2002
---- ----
ASSETS:
Investments, at fair value $2,457,446 $1,912,670
Participant loans 9,209 15,938
--------- ---------
Assets held for investment
purposes 2,466,655 1,928,608
Employer's contribution receivable 23,494 17,755
Participants' contribution
receivable -- 5,024
--------- ---------
Net assets available for benefits $2,490,149 $1,951,387
========= =========
See notes to financial statements.
AP PHARMA 401(k) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
- ----------------------------------------------------------
YEARS ENDED
DECEMBER 31,
2003 2002
---- ----
Additions to net assets attributed to:
Investment income (loss):
Dividends and interest $ 1,086 $ 1,838
Net realized and unrealized
appreciation (depreciation) in fair
value of investments 515,699 (453,581)
--------- ---------
516,785 (451,743)
--------- ---------
Contributions:
Participants' 187,585 243,957
Employer's 72,902 80,441
--------- ---------
260,487 324,398
--------- ---------
Total additions 777,272 (127,345)
--------- ---------
Deductions from net assets attributed to:
Withdrawals and distributions 238,510 261,143
--------- ---------
Total deductions 238,510 261,143
--------- ---------
Net increase (decrease) in net
assets 538,762 (388,488)
Net assets available for benefits:
Beginning of year 1,951,387 2,339,875
End of year $2,490,149 $1,951,387
========= =========
See notes to financial statements.
AP PHARMA 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
- -----------------------------
NOTE 1 - THE PLAN AND ITS SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
General - The following description of the AP Pharma 401(k) Plan
(the Plan) provides only general information. Participants
should refer to the Plan document for a more complete description
of the Plan's provisions.
The Plan is a defined contribution plan that was established in
1986 by Advanced Polymer Systems, Inc. to provide benefits to
eligible employees of the Company and its affiliates, as defined
in the Plan document. Formerly known as the Advanced Polymer
Systems, Inc. Salary Reduction Profit Sharing Plan, the Plan was
amended in May 2001 to change the Plan name in conjunction with
the change in the name of the employer and Plan sponsor from
Advanced Polymer Systems, Inc. to A.P. Pharma, Inc. (the
Company).
The Plan was amended and restated effective January 1, 2002. The
Plan is currently designed to be qualified under the applicable
requirements of the Internal Revenue Code (the Code), as amended,
and the provisions of the Employee Retirement Income Security Act
of 1974 (ERISA), as amended.
Administration - The Company has appointed an Administrative
Committee (the Committee) to manage the operation and
administration of the Plan. The Company has contracted with a
third-party administrator, CMG Consulting, Inc. (CMG), through
May 31, 2003 and Bisys Retirement Services (BISYS) effective June
1, 2003, to process and maintain the records of participant data.
Substantially all expenses incurred for administering the Plan
are paid by the Company. Eastern Bank was the third-party
trustee of the Plan through May 2002. Sterling Trust Company
served as trustee from May through July 2002, and Matrix Capital
Bank (Matrix) succeeded Sterling as trustee in August 2002.
Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, and changes therein, and disclosure of contingent
assets and liabilities. Actual results could differ from those
estimates.
Basis of accounting - The financial statements of the Plan are
prepared on the accrual method of accounting in accordance with
accounting principles generally accepted in the United States of
America.
Forfeited accounts - Forfeitures of terminated participants'
employer profit sharing contribution accounts, if any, are
allocated among participants based on eligible employee
compensation.
Investments - Investment options include various mutual funds
offered through Matrix and a fund invested in shares of A.P.
Pharma, Inc. common stock (Company Stock Fund). The Plan's
investments in mutual funds and the Company Stock Fund are valued
at fair value as of the last day of the Plan year, as measured by
quoted market prices. Participant loans are valued at cost,
which approximates fair value.
Effective January 1, 2000, the Company Stock Fund was frozen by
the Committee. As a result, participants are permitted to
transfer their investments from the Company Stock Fund, but no
new contributions or transfers into the fund are permitted.
Income taxes - The Plan has adopted a prototype plan that has
received an opinion letter from the Internal Revenue Service.
The Company believes that the Plan is operated in accordance
with, and qualifies under, the applicable requirements of the
Code and related state statutes, and that the trust, which forms
a part of the Plan, is exempt from federal income and state
franchise taxes.
Risks and uncertainties - The Plan provides for various
investment options in any combination of investment securities
offered by the Plan. In addition, Company common stock is
included in the Plan. Investment securities are exposed to
various risks, such as interest rate, market fluctuations and
credit risks. Due to the level of risk associated with certain
investment securities, it is at least reasonably possible that
changes in market values, interest rates or other factors in the
near term would materially affect participants' account balances
and the amounts reported in the statements of net assets
available for benefits and the statements of changes in net
assets available for benefits.
NOTE 2 - PARTICIPATION AND BENEFITS
- -----------------------------------
Participant contributions - Participants may elect to have the
Company contribute their eligible pre-tax compensation to the
plan up to the amount allowable under current income tax
regulations. Participants who elect to have the Company
contribute a portion of their compensation to the Plan agree to
accept an equivalent reduction in taxable compensation.
Contributions withheld are invested in accordance with the
participant's direction.
Participants are also allowed to make rollover contributions of
amounts received from other tax-qualified employer-sponsored
retirement plans. Such contributions are deposited in the
appropriate investment funds in accordance with the participant's
direction and the Plan's provisions.
Employer contributions - The Company is allowed to make matching
contributions as defined in the Plan and as approved by the Board
of Directors. The Company matched 50% of each eligible
participant's contribution up to a maximum amount equal to the
lesser of 3% of each participant's annual compensation or $6,000
and $5,500 in 2003 and 2002, respectively. The Plan also allows
for a discretionary profit sharing contribution. No
discretionary contribution has been made since inception of the
Plan.
Vesting - Participants are immediately vested in their
contributions and employer matching contribution. Participants
are fully vested in the employer's profit sharing contributions
allocated to their account after six years of credited service.
Participant accounts - Each participant's account is credited
with the participant's contribution, Plan earnings or losses and
an allocation of the Company's contribution. Allocation of the
Company's contribution is based on participant contributions or
eligible employee compensation, as defined in the Plan.
Payment of benefits - Upon termination, the participants or
beneficiaries may elect to leave their account balance in the
Plan, or receive their total benefits in a lump sum amount or
installments equal to the value of the participant's vested
interest in their account. The Plan allows for automatic lump
sum distribution of participant vested account balances that do
not exceed $5,000. Distribution of accounts invested in the
Company Stock Fund must be in a lump sum and may be made in cash
or shares of stock.
Loans to participants - The Plan allows participants to borrow
not less than $1,000 and up to the lesser of $50,000 or 50% of
their vested account balance. The loans are secured by the
participant's vested balance. Such loans bear interest at the
available market financing rates and must be repaid to the Plan
within a five-year period, unless the loan is used for the
purchase of a principal residence in which case the maximum
repayment period may be longer. The specific terms and
conditions of such loans are established by the Committee.
Outstanding loans at December 31, 2003 carry interest rates
ranging from 9.75% to 10%.
NOTE 3 - INVESTMENTS
- --------------------
The following table presents the fair values of investments and
investment funds that represent 5% or more of the Plan's net
assets at December 31:
2003 2002
---- ----
Federated Capital Preservation Fund $ 244,363 $ 304,040
American Balanced Fund 258,510 187,357
Federated Max-Cap Fund 334,685 228,338
Fidelity Advisor Equity Growth Fund 374,878 287,043
Pimco Total Return Fund 112,637 135,380
Growth Fund of America 745,876 558,020
Fidelity Advisor Mid Cap Fund 209,022 132,968
Other Funds individually less than
5% of net assets 186,684 95,462
--------- ---------
Assets held for investment
purposes $2,466,655 $1,928,608
========= =========
The Plan's investments (including gains and losses on investments
bought and sold, as well as held during the year) appreciated
(depreciated) in value as follows for the years ended December
31:
2003 2002
---- ----
Common stock $ 17,730 $ (23,382)
Mutual funds 497,969 (430,199)
-------- -------
$ 515,699 $(453,581)
======== ========
NOTE 4 - PARTY-IN-INTEREST TRANSACTIONS
- ---------------------------------------
As summarized in Note 1, prior to January 1, 2000, participants
could elect to invest a portion of their accounts in the common
stock of the Company. Aggregate investment in A.P. Pharma, Inc.
common stock was as follows at December 31:
Date Number of shares Fair value
- ---- ---------------- ----------
2003 11,970 $29,326
2002 12,990 12,990
NOTE 5 - PLAN TERMINATION
- -------------------------
The Company intends to continue the Plan indefinitely for the
benefit of its participants; however, it reserves the right to
terminate or modify the Plan at any time by resolution of its
Board of Directors and subject to the provisions of ERISA. In
the event the Plan is terminated in the future, participants
would become fully vested in their accounts.
SUPPLEMENTAL SCHEDULE
AP PHARMA 401(K) PLAN EIN: 94-2875566
PLAN #001
Schedule H, Line 4i - Schedule of Assets (Held at End of Year)
December 31, 2003
- -------------------------------------------------------------
Description of investment
including maturity date,
Identity of issue, rate of interest,
borrower, lessor or collateral, par or maturity Current
similar party value value
- -- ------------------- --------------------------- -------
Federated Capital
Preservation Fund Mutual Fund $ 244,363
American Balanced Fund Mutual Fund 258,510
Federated Max-Cap Fund Mutual Fund 334,685
Fidelity Advisor Equity
Growth Fund Mutual Fund 374,878
Templeton Foreign Fund Mutual Fund 93,900
Pimco Total Return Fund Mutual Fund 112,637
Washington Mutual Mutual Fund 17,374
Growth Fund of America Mutual Fund 745,876
Fidelity Advisor Mid
Cap Fund Mutual Fund 209,022
Oppenheimer Global Fund Mutual Fund 36,849
* A.P. Pharma, Inc. Common
Stock Common Stock 29,326
* Participant loans Interest rates ranging from
9.75% to 10% 9,209
Cash Cash 26
---------
Total $2,466,655
=========
* Party-in-interest
12
Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-29084) of A.P. Pharma, Inc. of our report dated April 28, 2004, relating to the financial statements and schedule of the AP Pharma 401(k) Plan included in this Annual Report on Form 11-K. By /s/ Mohler, Nixon & Williams ------------------------------ MOHLER, NIXON & WILLIAMS Accountancy Corporation Campbell, California June 17, 2004