A.P. PHARMA, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 2003
-------------------------------
To the Stockholders of A.P. Pharma, Inc.:
The Annual Meeting of Stockholders of A.P. Pharma, Inc. (the "Company") will
be held at the corporate offices at 123 Saginaw Drive, Redwood City,
California, on May 28, 2003, at 9:00 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 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 2, 2003, 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 23, 2003
- IMPORTANT -
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN
THE ENCLOSED POSTPAID ENVELOPE OR FOLLOW THE TELEPHONE OR
INTERNET VOTING INSTRUCTIONS ON THE PROXY CARD AS SOON AS
POSSIBLE. THANK YOU FOR ACTING PROMPTLY.
A.P. PHARMA, 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 A.P. Pharma, Inc. ("APP" 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 9:00 a.m. local time on May
28, 2003, at the corporate offices at 123 Saginaw Drive, Redwood City,
California. The approximate date on which this proxy statement and the
accompanying notice and proxy are first being mailed to stockholders is April
23, 2003.
VOTING
Only stockholders of record at the close of business on April 2, 2003, 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 20,490,441 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 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.
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. On matters other than 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 those matters.
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. APP 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
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 2004, and
until his or her successor has been qualified and elected. All the nominees
presently are directors of APP. 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 AND EXECUTIVE OFFICERS:
The nominees for Directors of APP and their ages and position with the Company
are as follows:
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCE
- ----------------------- --- --------------------- --------
Paul Goddard, Ph.D. 53 Chairman 2000
Stephen A. Drury (1) 65 Director 1999
Michael O'Connell 53 President and Chief Executive
Officer 2000
Peter Riepenhausen (2)(3) 66 Director 1991
Toby Rosenblatt (1)(2)(3) 64 Director 1983
Gregory Turnbull (1)(2)(3) 64 Director 1986
Dennis Winger (1) 55 Director 1993
Robert Zerbe, M.D. 52 Director 2002
- ----------------
(1) Member of the Audit and Finance Committees of the Board.
(2) Member of the Compensation and Stock Option Committee of the
Board.
(3) Member of the Nominating and Governance Committee of the Board.
The other executive officers of APP and their ages and position with the
Company are as follows:
EXECUTIVE
NAME AGE POSITION WITH COMPANY SINCE
- ----------------------- --- ---------------------- ---------
John Barr, Ph.D. 43 Vice President of Research
and Development 1997
Jayne Lange 46 Vice President of Business
Development 2001
Gordon Sangster 50 Chief Financial Officer,
Vice President of Finance 1993
Paul Goddard, Ph.D. -- chairman of APP board of directors since November
2000. From 1998 to 2000, Dr. Goddard was president and chief executive
officer of Elan's pharmaceutical division. From 1991 to 1998 Dr. Goddard
served as chairman and chief executive officer of Neurex Corporation. In 1998,
Neurex was acquired by Elan. Prior to Neurex, Dr. Goddard held various senior
management positions at SmithKline Beecham. Dr. Goddard also serves as
chairman of the board for Alchemia, Inc. and Xenoport, Inc., and as a director
for Adolor, Inc., Molecular Devices, Inc. and Onyx Pharmaceuticals, Inc.
Stephen A. Drury -- director of APP 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 from 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 -- director since May 2001 and chief executive officer
and president of APP since August 2000; he originally joined APP 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. Mr. O'Connell is a Fellow of the Institute of Chartered
Accountants of England and Wales.
Peter Riepenhausen -- director of APP since April 1991. Mr. Riepenhausen
is a business consultant. He was chairman, Europe for Align Technology, Inc.
from 2000 until 2002 and president and chief executive officer of ReSound
Corporation from 1994 to 1998. He serves as a director of Audimed, Germany
and TRG, Inc. He also served as a director of Caradon (Europe) plc from April
1994 until September 1998.
Toby Rosenblatt -- director of APP since September 1983. Mr. Rosenblatt is
president of Founders Investments, Ltd. which is 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 Turnbull -- director of APP 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 APP 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.
Robert Zerbe, M.D. -- director of APP since December 2002. Dr. Zerbe is
the chief executive officer and founder of QuatRx Pharmaceuticals Company, a
private biopharmaceutical company. Until 2000, Dr. Zerbe was employed by
Pfizer as the senior vice president of Global Research and Development and
Director of Development Operations. From 1993 to 2000, Dr. Zerbe served at
the Parke-Davis Pharmaceutical Research Division of Warner-Lambert as senior
vice president worldwide, clinical research and development. Dr. Zerbe serves
as a director of Maxim Pharmaceuticals, Inc. and Synaptic Pharmaceuticals.
Executive Officers
John Barr, Ph.D. -- vice president, research and development, joined A.P.
Pharma in 1997 as director of Pharmaceutical Sciences. He was promoted to his
current position in August 2000. Prior to joining A.P. Pharma, he worked as
the director of Biopharmaceutics for Cortech, Inc. a Denver-based biotech firm
focused on the development of novel anti-inflammatory agents. In that
capacity, he was involved with both the research and development aspects of
the company's intravenous and oral programs. Dr. Barr received his Ph.D. in
pharmacology from the University of Glasgow in Scotland, after which he
pursued postdoctoral studies at the University of Arizona.
Jayne Lange -- vice president, business development, joined A.P. Pharma in
May 2001. Ms. Lange has more than 13 years of experience in business
development with a number of leading firms including Novartis, COR
Therapeutics and SmithKline Beecham, both in the U.S. and overseas. Most
recently, she served as vice president, marketing and business development for
Discovery Partners International, Inc., ChemRx Advanced Technologies Division,
a medicinal chemistry firm spun out from Axys Pharmaceuticals. Prior to that,
she was executive director, business development for Novartis Pharmaceuticals,
a world leader in healthcare with operations in 142 countries. Ms. Lange
received an MBA from Harvard Business School.
Gordon Sangster -- chief financial officer, joined A.P. Pharma in 1993 as
corporate controller. He became vice president of finance in 1994 and chief
financial officer in August 2000. Prior to joining A.P. Pharma, Mr. Sangster
spent five years in a variety of corporate and international financial roles
of Raychem, Inc. Previously, Mr. Sangster held financial positions at the
Cooper Companies and at CooperVision, where he was international controller.
Mr. Sangster is a member of the Institute of Chartered Accountants of England
and Wales.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors met five times during 2002. 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. The Board has an Audit
Committee, a Finance Committee, a Nominating and Governance Committee and a
Compensation and Stock Option Committee. Each committee is served exclusively
by independent directors.
The Audit Committee met five times during the last fiscal year, including
quarterly meetings of the Audit Committee for review of the Company's
financial results, and consisted of Messrs. Drury, Rosenblatt, Turnbull and
Winger. The 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 Audit Committee is
also responsible for reviewing the Company's accounting principles and its
system of internal accounting controls. See the Audit Committee Report
included in this Proxy Statement.
The Finance Committee met two times during 2002 and consists of Messrs. Drury,
Rosenblatt, Turnbull and Winger. The Finance Committee is responsible for
reviewing the Company's plans for providing appropriate financial resources to
sustain the Company's operations including review of the Company's strategic
plan and annual operating budget.
The Compensation and Stock Option Committee, which met two times during the
year, consisted of Messrs. Riepenhausen, Rosenblatt and Turnbull. 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 Nominating and Governance Committee is responsible for determining the
composition of the Board and its committees, recommending the nomination of
all directors to be elected at the company Annual Meeting of stockholders,
identifying qualified individuals to become directors and reviewing corporate
governance matters. The committee met two times during the year and consists
of Messrs. Riepenhausen, Rosenblatt and Turnbull.
COMPENSATION OF DIRECTORS
Each nonemployee director of the Company annually has been granted an option
to acquire 10,000 shares of Common Stock, under the Company's 1992 and 2002
Stock Option Plans. In addition, each nonemployee director elected after the
Company's initial public offering in 1987 received a one-time grant to acquire
25,000 shares when first elected as a director. Nonemployee directors of the
Company also receive $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.
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, 2002 all Section 16(a) filing
requirements applicable to its officers and directors were satisfied.
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth beneficial Common Stock ownership as of April
2, 2003, 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) 113,178 *
Stephen Drury(3) 101,217 *
Paul Goddard, Ph.D.(4) 169,722 *
Jayne Lange(5) 27,969 *
Michael O'Connell(6) 516,308 2.5
Peter Riepenhausen(7) 197,035 1.0
Toby Rosenblatt(8) 283,953 1.4
Gordon Sangster(9) 176,038 *
Gregory Turnbull(10) 176,541 *
Dennis Winger(11) 116,479 *
Robert Zerbe, M.D.(12) 1,000 *
Citigroup, Inc.(13) 2,815,197 13.7
388 Greenwich Street
New York, NY 10013
Wellington Management(14) 1,620,500 7.9
75 State Street
Boston, MA 02109
Officers and Directors as a group(11 persons) 1,879,440 9.2
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)
- --------------
* 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 June 2, 2003, and that no other
person has exercised any outstanding stock options.
(2) Includes 102,449 shares underlying exercisable stock options.
(3) Includes 55,000 shares underlying exercisable stock options.
(4) Includes 104,722 shares underlying exercisable stock options.
(5) Represents 27,969 shares underlying exercisable stock options.
(6) Includes 472,293 shares underlying exercisable stock options.
(7) Includes 67,031 shares held in family trust and 100,000
shares underlying exercisable stock options.
(8) Includes 100,000 shares underlying exercisable stock options.
(9) Includes 170,886 shares underlying exercisable stock options.
(10) Includes 100,000 shares underlying exercisable stock options.
(11) Includes 90,000 shares underlying exercisable stock options.
(12) Dr. Robert Zerbe currently has no exercisable stock options.
(13) Based solely on information contained in a Schedule 13G
dated December 9, 2002, and includes 1,672,300 shares
held by Smith Barney Fund Management LLC, 1,132,897 shares
held by Salomon Smith Barney, Inc. and 10,000 shares held by the
other reporting persons.
(14) Based solely on information contained in a Schedule 13G dated
December 31, 2002.
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the total compensation for
fiscal years 2002, 2001 and 2000 of the chief executive officer and the other
most highly compensated executive officers whose salary exceeded $100,000 in
2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING ALL
SALARY BONUS OPTIONS OTHER
NAME AND POSITION YEAR ($) ($) (#) COMPENSATION
- ----------------- ---- ------ ------- ------ ------------
Michael O'Connell 2002 303,269 29,190 100,000 5,500(1)
President and 2001 291,058 67,500 25,000 5,100(1)
Chief Executive 2000 261,769 125,000 150,000 5,100(1)
Officer
John Barr, Ph.D. 2002 198,269 19,083 12,500 5,500(1)
Vice President, 2001 182,288 94,750(2) 35,000 5,100(1)
Research and 2000 146,385 13,000 50,000 4,469(1)
Development
Jayne Lange (3) 2002 197,615 16,303 12,500 5,391(1)
Vice President, 2001 120,750 24,000 50,000 3,060(1)
Business and 2000 N/A N/A N/A N/A
Development
Gordon Sangster 2002 198,500 16,376 12,500 5,500(1)
Chief Financial 2001 193,542 38,500 20,000 5,100(1)
Officer 2000 182,183 65,000 50,000 5,100(1)
- ---------------
(1) The stated amounts are Company matching contributions to the A.P.
Pharma 401K Plan. The Company made matching cash
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 $5,500, $5,100
and $5,100 for the years 2002, 2001 and 2000, respectively.
(2) Dr. Barr was paid $52,500 in January 2001 as a retention bonus in
accordance with a prior agreement, based on Dr. Barr's continuing
employment with the Company following the sale of the Company's
cosmeceutical business to RP Scherer on July 25, 2000.
(3) Ms. Lange joined the Company in May 2001.
The following table sets forth certain information with respect to options
granted during 2002 to the executive officers named in the Summary
Compensation Table.
STOCK OPTION GRANTS IN 2002
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------- --------------------
%
OF
TOTAL
OPTIONS
NUMBER OF GRANTED
SHARES TO
UNDERLYING EMPLOYEES
OPTIONS IN EXERCISE
GRANTED FISCAL PRICE EXPIRATION
NAME (#)(2) YEAR ($/SH) DATE 5%($) 10%($)
- -------------------- --------- ---- ------ -------- ------- ------
Michael O'Connell 100,000 39.4 $2.450 02/13/12 154,079 390,467
John Barr, Ph.D. 12,500 4.9 $1.440 08/22/12 11,320 28,687
Jayne Lange 12,500 4.9 $1.440 08/22/12 11,320 28,687
Gordon Sangster 12,500 4.9 $1.440 08/22/12 11,320 28,687
- ---------------
(1) Potential realizable value is based on an assumption that the price of
the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten year option
term. The numbers are calculated based on the requirements promulgated
by the Securities and Exchange Commission ("SEC") and do not reflect
the Company's estimate of future stock price growth.
(2) The options granted under the Company's 1992 Stock Plan and the 2002
Equity Incentive Plan typically vest over 4 years at 25% annually.
Payments on exercise, including any taxes the Company is required to
withhold, may be made in cash, by a full recourse promissory note or
by tender of shares. Options are granted at fair market value on the
date of grant.
The following table sets forth certain information with respect to the value
of options held at fiscal year-end by the executive officers named in the
Summary Compensation Table. No options were exercised during 2002 by any of
the named executive officers.
AGGREGATED 2002 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 2002 YEAR-END AT FISCAL YEAR-END (1)
------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) ($) ($)
- ------------------ ----------- ------------- ----------- -------------
Michael O'Connell 470,312 154,688 0 0
John Barr, Ph.D. 91,042 56,458 0 0
Jayne Lange 20,834 41,666 0 0
Gordon Sangster 181,042 46,458 0 0
- ---------------
(1) Market value of underlying securities at fiscal year-end minus the
exercise price of "in-the-money" options.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised solely of
independent directors as defined under the listing standards of NASDAQ and
operates under a written charter adopted by the Board of Directors. The Audit
Committee, on behalf of the Board of the Directors, provides general oversight
of the Company's financial accounting and reporting process, including the
system of internal controls. The Audit Committee also oversees and evaluates
the performance of the Company's independent accountants and provides an open
avenue of communication among the independent accountants, financial and
senior management and the Board of Directors.
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, Ernst & Young LLP, are
responsible for expressing an opinion on the conformity of the Company's
audited financial statements to accounting principles generally accepted in
the United States of America.
In this context and in connection with the audited financial statements
contained in the Company's 2002 Annual Report on Form 10-K, the Audit
Committee:
reviewed the audited financial statements with the Company's management,
including a discussion of the quality of the accounting principles. In
addition, the Committee met with management and the company's auditors on a
quarterly basis, to review the quarterly financial statements prior to their
release;
discussed with Ernst & Young LLP, the Company's independent auditors, their
judgment as to the quality of the Company's accounting principles, as well as
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 Ernst & Young 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 Ernst & Young 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, 2002 be included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002, 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 Ernst & Young LLP to continue as the Company's independent auditors.
Audit Committee
Stephen Drury
Toby Rosenblatt
Gregory Turnbull
Dennis Winger
Relationship with Independent Accountants
- -----------------------------------------
The reports of Ernst & Young LLP on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. A representative from Ernst & Young LLP will be
present at the Annual Meeting.
In connection with the audit of the Company's financial statements for the
fiscal year ended December 31, 2000, there were no disagreements with KPMG LLP
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of KPMG LLP, would have caused KPMG LLP to make reference to the
matter in their report. As reported on Form 8-K, dated December 12, 2001, the
Audit Committee of the Board of Directors authorized the termination of KPMG
LLP as auditors of the Company effective December 13, 2001 and engaged Ernst &
Young LLP as the Company's independent auditors to replace KPMG LLP.
Prior to its termination, KPMG performed the review of the Company's quarterly
consolidated financial statements for the year 2001. Ernst & Young LLP
performed reviews of the Company's quarterly consolidated financial statements
and the year-end audit of the Company's consolidated financial statements for
the year 2002. The aggregate fees billed for professional services relating
to fiscal 2002 for each of the following categories of services are as
follows:
Audit fees $123,000
All other fees $ 40,000
"All other fees" includes tax planning and review of tax returns of the
Company.
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 Greg Turnbull, each of whom is a nonemployee
director of the Company. In determining compensation policies, the Committee
has access to compensation surveys for 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, 2002.
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 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 pre-established
performance objectives for the Company approved by the Committee and the Board
of Directors, and to use equity-based compensation to promote equity-ownership
in the Company at levels deemed appropriate by the Committee for executive
officers and employees. 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 and employees 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. 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 and all other employees are determined
under the Company's bonus plan based on management by objectives ("MBO"). The
MBO plan establishes annual corporate goals and a target bonus for all
employees, including for each executive officer, which is a percentage of base
salary. The percentage of the target bonus that is paid to each officer is
dependent upon the percentage achievement of corporate goals. Achievement of
corporate goals is determined at the end of the year and approved by the
Compensation Committee and the Board of Directors. Related bonuses are paid
in the subsequent year. Bonuses earned by the executive officers for
achieving a percentage of the 2002 corporate goals were paid in February 2003.
EQUITY 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. No restricted stock awards were granted to executive
officers in 2002.
COMPENSATION PAYABLE TO CHIEF EXECUTIVE OFFICER
The 2002 salary for Mr. O'Connell, the Company's president and chief executive
officer, was determined principally by evaluating his performance in his
leadership role in the Company and his contributions in executing the
strategic and operating plan of the Company and taking into consideration
competitive compensation levels for comparable companies. The Compensation
Committee and Board of Directors increased his base salary of $300,000 to
$310,000 effective September 1, 2002. In 2002, the Compensation Committee and
Board of Directors approved the grant to Mr. O'Connell of stock options to
acquire an aggregate of 100,000 shares of Common Stock. As of April 2, 2003,
Mr. O'Connell held presently exercisable stock options to purchase 489,167
shares and, including options, beneficially owns as of that date 528,182
shares of the Company's Common Stock.
Compensation and Stock Option Committee
Peter Riepenhausen
Toby Rosenblatt
Gregory Turnbull
PERFORMANCE GRAPH
The rules of the SEC require APP 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 APP stock and each index on December 31, 1997, with all
dividends reinvested. Past stock performance is not necessarily indicative of
future results.
12/97 12/98 12/99 12/00 12/01 12/02
----- ----- ----- ------ ----- -----
A.P. PHARMA, INC. . 100 81 52 36 42 15
S&P 500 100 129 156 141 125 97
RUSSELL 2000 100 97 118 115 117 93
CERTAIN TRANSACTIONS
In 2000, the Company approved a Retention Incentive Plan ("Retention Plan")
for Mr. O'Connell. The purpose of the Retention Plan was to encourage Mr.
O'Connell to continue his employment with the Company, enhance his ability to
perform effectively and provide the Company with the benefit of his continued
service. Under the Retention Plan, the Company entered into a retention
agreement with Mr. O'Connell providing that he will be eligible for certain
benefits if his employment is terminated under specified circumstances. If
Mr. O'Connell'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), he 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, Mr.
O'Connell 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.
Under the terms of the Company's agreement with Dr. Goddard in the year 2000,
he received a stock option grant to acquire 75,000 shares of the Company's
Common Stock. Twenty-five percent of the options vested at the end of twelve
months and the balance vest in equal monthly installments for the next 36
months. The agreement provided that Dr. Goddard would receive additional
option grants each year of 20,000 shares while he serves as chairman.
In 2001, the agreement with Dr. Goddard was amended to increase his
involvement in the Company's activities. As compensation for his increased
involvement, he received a restricted stock award in October 2001 of 35,000
shares of the Company's Common Stock which vested in March 2002, and a stock
option grant to acquire 70,000 shares of the Company's Common Stock. The
options will vest monthly over a period of two years beginning in April 2002.
Additionally, Dr. Goddard's cash compensation was increased from $100,000 to
$150,000 per year beginning April 1, 2002.
During 2002, no consulting fees were paid to directors.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Ernst & Young LLP ("E&Y") as independent public
accountants to audit the financial statements of the Company for the fiscal
year ending December 31, 2003. A representative of E&Y 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 E&Y 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, 2002, 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 2004 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 2004 must submit such proposal in writing to the
Secretary of the Company at the Company's principal executive offices no later
than December 17, 2003. 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 $2,000 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 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, unless the proxy otherwise provides.
BY ORDER OF THE BOARD OF DIRECTORS,
Julian N. Stern, Secretary
Redwood City, California
April 23, 2003
You Are Cordially Invited To Attend The Meeting In Person.
1
APPENDIX A
A.P. PHARMA, INC.
Proxy Solicited by the Board of Directors
for the Annual Meeting of Stockholders
to be held May 28, 2003
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 the shares of
the Common Stock of A.P. Pharma, 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 corporate offices
at 123 Saginaw Drive, Redwood City, California at 9:00 a.m., local time, on
May 28, 2003, 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 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.
A.P. PHARMA, INC.
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
Voter Control Number
Your vote is important. Please vote immediately.
VOTE BY INTERNET VOTE BY TELEPHONE
- ---------------- -----------------
1. Log on to the Internet and go to 1. Call toll-free
http://www.eproxyvote.com/appa 1-877-PRX-VOTE (1-877-779-8683)
2. Enter your Voter Control Number 2. Enter your Voter Control Number
listed above and follow the easy listed above and follow the
steps outlined on the secured easy recorded instructions.
website.
If you vote over the internet or by telephone, please do not mail your
card.
[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 eight nominees
listed below:
Nominees: Stephen Drury, Paul Goddard, Michael O'Connell, Peter
Riepenhausen, Toby Rosenblatt, Gregory Turnbull, Dennis Winger and Robert
Zerbe
[ ] FOR [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ]
----------------------------
For all nominees, except as noted above.
2. 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:
----------- ----------- ----------- ---------
1