A.P. PHARMA, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 25, 2004
-------------------------------
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 25, 2004, 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 amend the Company's 1997 Employee Stock Purchase Plan to increase by
100,000 the number of shares of common stock reserved for issuance under the
Plan.
3. To amend the Company's 2002 Equity Incentive Plan to increase by 400,000
the number of shares of common stock reserved for issuance under the Plan.
4. To approve Ernst & Young LLP as A.P. Pharma's independent public
accountants.
5. 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 30, 2004, 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 20, 2004
- 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
25, 2004, 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
20, 2004.
VOTING
Only stockholders of record at the close of business on March 30, 2004, 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 20,675,693 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 2005, 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. 54 Chairman 2000
Stephen A. Drury (1)(2) 66 Director 1999
Michael O'Connell 54 President and Chief Executive
Officer 2000
Peter Riepenhausen (3)(4) 67 Director 1991
Toby Rosenblatt (1)(2)(3)(4) 65 Director 1983
Gregory Turnbull (1)(2)(3)(4) 65 Director 1986
Dennis Winger (1)(2) 56 Director 1993
Robert Zerbe, M.D. 53 Director 2002
- ----------------
(1) Member of the Audit Committee of the Board.
(2) Member of the Finance Committee of the Board.
(3) Member of the Compensation and Stock Option Committee of the
Board.
(4) 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. 44 Vice President of Research
and Development 1997
Gordon Sangster 51 Chief Financial Officer,
Vice President of Finance 1993
Paul Goddard, Ph.D. -- chairman of A.P. Pharma 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 ARYx Therapeutics, Inc. and Xenoport,
Inc., and as a director for Adolor, Inc., Molecular Devices, Inc. and Onyx
Pharmaceuticals, Inc.
Stephen A. Drury -- director of A.P. Pharma 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 A.P. Pharma since August 2000; he originally joined A.P.
Pharma 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 A.P. Pharma 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 served as a director of
Caradon (Europe) plc from April 1994 until September 1998. He serves as a
director of Audimed Gmbh and The Resource Group (TRG).
Toby Rosenblatt -- director of A.P. Pharma 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 Series Mutual Funds and is a
trustee of numerous civic and educational institutions.
Gregory Turnbull -- director of A.P. Pharma since February 1986. Mr.
Turnbull is currently a business consultant. Previously, he was a general
partner of Cable & Howse Ventures, a venture capital firm, and also served as
an investment banker with Morgan Stanley & Co. and White, Weld & Co. Mr.
Turnbull serves as a director of Planar Systems, Inc.
Dennis Winger -- director of A.P. Pharma 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
currently serves as a director of Cell Genesys and Cephalon, Inc.
Robert Zerbe, M.D. -- director of A.P. Pharma 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.
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.
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
at 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.
There are no family relationships between any of the Company's directors and
executive officers.
DIRECTOR NOMINATION
Criteria for Nomination to the Board. The nominating and governance committee
considers the appropriate balance of experience, skills and characteristics
required of the Board of Directors, and seeks to insure that at least a
majority of the directors are independent under the rules of the NASDAQ Stock
Market, and that members of the Company's audit committee meet the
independence and financial literacy requirements under the rules of the NASDAQ
Stock Market. Nominees for director are selected on the basis of their depth
and breadth of experience, integrity, ability to make independent analytical
inquiries, understanding of the Company's business environment, and
willingness to devote adequate time to Board duties.
Stockholder Proposals for Nominees. The nominating and governance committee
will consider written proposals from stockholders for nominees for director.
Any such nominations should be submitted to the nominating and governance
committee c/o the Secretary of the Company and should include the following
information: (a) all information relating to such nominee that is required to
be disclosed pursuant to Regulation 14A under the Securities Exchange Act of
1934 (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b) the
name(s) and address(es) of the stockholder(s) making the nomination and the
number of shares of the Company's Common Stock which are owned beneficially
and of record by such stockholder(s); and (c) appropriate biographical
information and a statement as to the qualification of the nominee. Any such
nomination should be submitted no later than the date described under the
caption, "Stockholder Proposals for 2005 Annual Meeting" below.
Process for Identifying and Evaluating Nominees. The process for identifying
and evaluating nominees to the Board of Directors is initiated by identifying
a slate of candidates who meet the criteria for selection as a nominee and
have the specific qualities or skills being sought based on input from members
of the Board and, if the nominating committee deems appropriate, a third-party
search firm. These candidates are evaluated by the nominating committee by
reviewing the candidates' biographical information and qualification and
checking the candidates' references, and qualified nominees are interviewed by
at least one member of the nominating and governance committee. The committee
evaluates which of the prospective candidates is qualified to serve as a
director and whether the committee should recommend to the Board that the
Board nominate any of these final prospective candidates. Candidates
recommended by the nominating and governance committee are presented to the
Board for selection as nominees to be presented for the approval of the
stockholders or for election to fill a vacancy.
The nominating and governance committee expects that a similar process will be
used to evaluate nominees recommended by stockholders.
BOARD COMMITTEES
The Board of Directors has standing audit, finance, compensation and stock
option, and nominating and governance committees.
Audit Committee. The audit committee currently consists of Messrs. Drury,
Rosenblatt, Turnbull (chairman) and Winger. The Board has determined that all
members of the audit committee are independent directors under the rules of
the NASDAQ Stock Market and each of them is able to read and understand
fundamental financial statements. The Board has determined that Messrs.
Drury, Turnbull and Winger qualify as "audit committee financial experts" as
defined by the rules of the Securities and Exchange Commission. The purpose
of the audit committee is to oversee the accounting and financial reporting
processes of the Company and audits of its financial statements. The
responsibilities of the audit committee include appointing and providing the
compensation of the independent accountants to conduct the annual audit of our
accounts, reviewing the scope and results of the independent audits, reviewing
and evaluating internal accounting policies, and approving all professional
services to be provided to the Company by its independent accountants. The
audit committee operates under a written charter adopted by the Board of
Directors, a copy of which is attached to this Proxy Statement as Appendix D.
Finance Committee. The finance committee currently consists of Messrs. Drury,
Rosenblatt, Turnbull (chairman) and Winger. The Board has determined that all
members of the finance committee are independent directors under the rules of
the NASDAQ Stock Market. 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.
Compensation and Stock Option Committee. The compensation and stock option
committee currently consists of Messrs. Riepenhausen, Rosenblatt (chairman)
and Turnbull. The Board has determined that all members of the compensation
and stock option committee are independent directors under the rules of the
NASDAQ Stock Market. The compensation and stock option committee administers
the Company's benefit plans, reviews and administers all compensation
arrangements for executive officers, and establishes and reviews general
policies relating to the compensation and benefits of our officers and
employees.
Nominating and Governance Committee. The nominating and governance committee
currently consists of Messrs. Riepenhausen, Rosenblatt (chairman) and
Turnbull, each of whom the Board has determined is an independent director
under the rules of the NASDAQ Stock Market. The nominating and governance
committee's responsibilities include recommending to the Board of Directors
nominees for possible election to the Board of Directors and providing
oversight with respect to corporate governance. The nominating and governance
committee operates under a written charter adopted by the Board of Directors,
a copy of which is attached to this Proxy Statement as Appendix E.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors met six times during 2003. The audit committee met six
times, the finance committee met four times, the compensation and stock option
committee met three times and the nominating and governance committee met
three times during fiscal 2003. 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. Drury who attended 69% of the meetings of
the Board and of the committees on which he served.
COMMUNICATIONS WITH DIRECTORS
Stockholders who wish to communicate with our Directors may do so using the
procedures to be provided on our website at www.appharma.com which we expect
to put in place by the Annual Meeting.
The Company encourages its directors to attend its annual meetings. Seven
directors attended the Company's 2003 Annual Meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists, or in the past fiscal year has existed,
between any member of our compensation committee and any member of any other
company's board of directors or compensation committee.
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 or other committee meeting.
Since July 1, 2000, all compensation is 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, 2003, all Section 16(a) filing
requirements applicable to its officers and directors were satisfied except
for Dr. Paul Goddard and Mr. Peter Riepenhausen for each of whom a Form 4 was
filed late.
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth beneficial Common Stock ownership as of March
30, 2004, 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) 148,931 *
Stephen Drury(3) 122,985 *
Paul Goddard, Ph.D.(4) 243,056 1.2
Michael O'Connell(5) 561,376 2.7
Peter Riepenhausen(6) 219,047 1.1
Toby Rosenblatt(7) 329,141 1.6
Gordon Sangster(8) 187,914 *
Gregory Turnbull(9) 190,886 *
Dennis Winger(10) 138,023 *
Robert Zerbe, M.D.(11) 18,786 *
Citigroup, Inc.(12) 1,233,368 6.0
399 Park Avenue
New York, NY 10043
Heartland Advisors, Inc.(13) 1,322,800 6.4
789 North Water Street
Milwaukee, WI 53202
Wellington Management Company, LLP(14) 1,632,200 7.9
75 State Street
Boston, MA 02109
Officers and Directors as a group(10 persons) 2,160,145 10.4
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
- --------------
* 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 30, 2004, and that no other
person has exercised any outstanding stock options.
(2) Includes 130,157 shares underlying exercisable stock options.
(3) Includes 65,000 shares underlying exercisable stock options.
(4) Includes 178,056 shares underlying exercisable stock options.
(5) Includes 505,209 shares underlying exercisable stock options.
(6) Includes 98,144 shares held in family trust and 100,000
shares underlying exercisable stock options.
(7) Includes 160,000 shares held in family partnership and 100,000
shares underlying exercisable stock options.
(8) Includes 182,762 shares underlying exercisable stock options.
(9) Includes 100,000 shares underlying exercisable stock options.
(10) Includes 100,000 shares underlying exercisable stock options.
(11) Includes 6,250 shares underlying exercisable stock options.
(12) Based solely on information contained in a Schedule 13G
dated January 20, 2004, and includes 1,222,148 held by Citigroup
Global Markets Holdings, Inc. and 11,220 shares held by other
reporting persons.
(13) Based solely on information contained in a Schedule 13G dated
February 13, 2004.
(14) Based solely on information contained in a Schedule 13G dated
February 12, 2004.
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the total compensation for
fiscal years 2003, 2002 and 2001 of the Chief Executive Officer and the other
most highly compensated executive officers whose salary exceeded $100,000 in
2003.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING ALL
SALARY BONUS OPTIONS OTHER
NAME AND POSITION YEAR ($) ($) (#) COMPENSATION
- ----------------- ---- ------ ------- ------ ------------
Michael O'Connell 2003 313,269 32,893 40,000 6,000(1)
President and 2002 303,269 29,190 100,000 5,500(1)
Chief Executive 2001 291,058 67,500 25,000 5,250(1)
Officer
John Barr, Ph.D. 2003 207,615 21,800 7,500 4,332(1)
Vice President, 2002 198,269 19,083 12,500 5,500(1)
Research and 2001 182,288 94,750(2) 35,000 5,250(1)
Development
Gordon Sangster 2003 204,500 18,405 7,500 6,000(1)
Chief Financial 2002 198,500 16,376 12,500 5,500(1)
Officer 2001 193,542 38,500 20,000 5,250(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 $6,000, $5,500 and
$5,250 for the years 2003, 2002 and 2001, respectively.
(2) Dr. Barr was paid $52,500 in January 2001 as a retention bonus in
accordance with a prior agreement, based on Dr. Barr's continuing
employment with the Company following the sale of the Company's
cosmeceutical business to RP Scherer on July 25, 2000.
The following table sets forth certain information with respect to options
granted during 2003 to the executive officers named in the Summary
Compensation Table.
STOCK OPTION GRANTS IN 2003
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------- ----------------
%
OF
TOTAL
OPTIONS
NUMBER OF GRANTED
SHARES TO
UNDERLYING EMPLOYEES
OPTIONS IN EXERCISE EXPIR-
GRANTED FISCAL PRICE ATION
NAME (#)(2) YEAR ($/SH) DATE 5%($) 10%($)
- -------------------- --------- ---- ------ -------- ------- ------
Michael O'Connell 40,000 32.0 $1.070 01/23/13 26,917 68,212
John Barr, Ph.D. 7,500 6.0 $1.070 01/23/13 5,047 12,790
Gordon Sangster 7,500 6.0 $1.070 01/23/13 5,047 12,790
- ---------------
(1) Potential realizable value is based on an assumption that the price of
the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten year option
term. The numbers are calculated based on the requirements promulgated
by the Securities and Exchange Commission ("SEC") and do not reflect
the Company's estimate of future stock price growth.
(2) The options granted under the Company's 1992 Stock Plan and the 2002
Equity Incentive Plan typically vest over 4 years at 25% annually.
Payments on exercise, including any taxes the Company is required to
withhold, may be made in cash, by a full recourse promissory note or
by tender of shares. Options are granted at fair market value on the
date of grant.
The following table sets forth certain information with respect to the value
of options held at fiscal year-end by the executive officers named in the
Summary Compensation Table. No options were exercised during 2003 by any of
the named executive officers.
AGGREGATED 2003 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 2003 YEAR-END AT FISCAL YEAR-END (1)
------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) ($) ($)
- ------------------ ----------- ------------- ----------- -------------
Michael O'Connell 518,229 116,771 12,650 42,550
John Barr, Ph.D. 117,136 37,864 15,769 22,956
Gordon Sangster 183,386 31,614 11,831 20,144
- ---------------
(1) Market value of underlying securities at fiscal year-end minus the
exercise price of "in-the-money" options.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our directors and
executive officers. Such agreements require us, among other things, to
indemnify our officers and directors, other than for liabilities arising from
willful misconduct of a culpable nature, and to advance their expenses
incurred as a result of any proceedings against them as to which they could be
indemnified.
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 the NASDAQ
Stock Market 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 control. The Audit Committee also
oversees and evaluates the performance of the Company's independent auditors
and provides an open avenue of communication among the independent auditors,
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 including the system of internal control. The Company's independent
auditors 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 2003 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 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, as amended by Statement on Auditing Standards No. 90,
Communication with Audit Committees;
* met with the independent auditors, with and without management present, to
discuss the results of their audit and the overall quality of the Company's
financial reporting;
* reviewed the written disclosures and the letter from the independent
auditors required by Independence Standard Board Standard No. 1,
"Independence Discussions with Audit Committees," and discussed with the
auditors their independence from the Company, and concluded that the non-
audit services performed by the independent auditors 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, 2003 be included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003, for filing with the SEC, and the Board of Directors approved such
inclusion. The Audit Committee has also selected the Company's independent
auditors, subject to stockholder ratification. A representative from Ernst &
Young LLP will be present at the Annual Meeting.
Audit Committee
Stephen Drury
Toby Rosenblatt
Gregory Turnbull
Dennis Winger
AUDITOR FEES AND SERVICES
The aggregate fees billed for professional services relating to fiscal 2003
and 2002 for each of the following categories of services are as follows:
2003 2002
---- ----
Audit fees(1) $149,745 $144,466
Tax fees(2) 25,000 18,500
All other fees -- --
- ------------
(1) Audit fees include fees for the audit of our consolidated financial
statements and interim reviews of our quarterly financial statements,
consents and other services related to SEC matters.
(2) Tax fees consist of fees for tax consultation and tax compliance services.
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 and independent under the NASDAQ Stock Market rules.
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, 2003.
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 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. Related bonuses are paid in the subsequent year.
Bonuses earned by the executive officers for achieving a percentage of the
2003 corporate goals were paid in January 2004.
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.
The Company's 2002 Equity Incentive Plan permits the awards of restricted
stock. No restricted stock awards were granted to executive officers in 2003.
COMPENSATION PAYABLE TO CHIEF EXECUTIVE OFFICER
The 2003 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 $310,000 to
$320,000 effective September 1, 2003. In 2003, the Compensation Committee and
Board of Directors approved the grant to Mr. O'Connell of stock options to
acquire an aggregate of 40,000 shares of Common Stock. As of March 30, 2004,
Mr. O'Connell held presently exercisable stock options to purchase 540,001
shares and, including options, beneficially owns as of that date 596,168
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, 1998, 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]
12/98 12/99 12/00 12/01 12/02 12/03
----- ----- ----- ------ ----- -----
A.P. PHARMA, INC. . 100 64 44 52 19 46
S&P 500 100 121 110 97 76 97
RUSSELL 2000 100 121 118 121 96 141
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 2003, consulting fees totaling $1,000 were paid to Dr. Robert Zerbe.
PROPOSAL TWO
AMENDMENT TO THE 1997 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors has approved an amendment, subject to stockholder
approval, to the 1997 Employee Stock Purchase Plan ("Purchase Plan"). The
following description of the Purchase Plan is a summary and so qualified by
reference to the complete text of the purchase plan which is attached as
Appendix B. The Purchase Plan permits the Company's employees to purchase the
Company's Common Stock at a discounted price. This plan is designed to
encourage and assist employees of the Company to acquire an equity interest in
the Company through the purchase of shares of Company Common Stock.
Approximately 36 employees of the Company are eligible to participate in the
Purchase Plan. A copy of the 1997 Employee Stock Purchase Plan is available by
writing to the Company to the attention of Marea Fabrique, Investor Relations.
The Board of Directors has approved an increase in the number of shares,
subject to stockholder approval, in the Purchase Plan of 100,000 shares from
400,000 to 500,000 shares issuable under the plan. Management expects these
shares to be sufficient for all stock purchases under the plan for
approximately two years. As of March 31, 2004, 307,407 shares have been issued
under the Purchase Plan.
DESCRIPTION OF THE 1997 PLAN
All employees, including executive officers, customarily employed more than 20
hours per week and more than five months per year by the Company are eligible
to participate in the Purchase Plan as of the first semi-annual enrollment date
following employment. However, employees who hold, directly or through
options, five percent or more of the stock of the Company are not eligible to
participate. Participants may elect to make contributions up to a maximum of
10% of base earnings. On the last trading date of April and October, the
Company applies the funds then in each participant's account to the purchase of
shares. The cost of each share purchased is 85% of the lower of the closing
prices for Common Stock on: (i) the first trading day in the enrollment period
in which the purchase is made; and (ii) the purchase date. The length of the
enrollment period may not exceed a maximum of 24 months. Enrollment dates are
the first business day of May and November. The Board may limit the maximum
number of shares that may be purchased by a participant during any enrollment
period, and no participant's right to acquire shares may accrue at a rate
exceeding $25,000 of fair market value of Common Stock (determined as the lower
of the fair market value on the first trading day in an enrollment period or
the fair market value on the purchase date) in any calendar year.
The Board of Directors may administer the Purchase Plan or the Board may
delegate its authority to a committee of the Board. The Board of Directors may
amend or terminate the Purchase Plan at any time and may provide for an
adjustment in the purchase price and the number and kind of securities
available under the plan in the event of a reorganization, recapitalization,
stock split, or other similar event. However, amendments that would increase
the number of shares reserved for purchase, or would otherwise require
stockholder approval in order to comply with certain federal tax laws, require
stockholder approval. Shares available under the plan may be either
outstanding shares repurchased by the Company or newly issued shares.
The following table shows the "Dollar Value" and number of shares applicable to
the named individuals and groups under the 1997 Employee Stock Purchase Plan
during the year ended December 31, 2003, purchased on the April and October
2003 purchase dates under the Purchase Plan at a purchase price of $0.80 and
$0.94, respectively. These amounts represent 85% of the closing price on the
first trading date of the enrollment period of November, 2002 or May, 2003.
The "Dollar Value" is the difference between the fair market value of the
Common Stock on the purchase date of April 30, 2003 or October 31, 2003 and the
participant's purchase price of $0.80 or $0.94 per share.
Since purchase rights are subject to discretion, including an employee's
decision not to participate in the Purchase Plan, awards under the Purchase
Plan for the current fiscal year are not determinable. No purchase rights have
been granted with respect to the additional 100,000 shares for which approval
is requested.
Plan Benefits
1997 Employee Stock Purchase Plan
Dollar Number
Name and Position Value ($) of Shares
- ----------------- --------- ---------
Michael O'Connell 11,773 12,152
President and Chief Executive Officer
John Barr, Ph.D. 7,801 8,045
Vice President, Research and Development
Gordon Sangster -- --
Chief Financial Officer
Executive Officers as a Group 19,574 20,197
Non-Executive Director Group (1) -- --
Non-Executive Officer Employee Group 57,029 54,549
- ---------------
(1) Members of the Board of Directors are ineligible to participate in this
plan, unless they are also an employee of the Company.
FEDERAL INCOME TAX CONSEQUENCES
In general, participants will not have taxable income or loss under the
Purchase Plan until they sell or otherwise dispose of shares acquired under the
plan (or die holding such shares). If the shares are held, as of the date of
sale or disposition, for longer than both: (i) two years after the beginning of
the enrollment period during which the shares were purchased; and (ii) one year
following purchase, a participant will have taxable ordinary income equal to
15% of the fair market value of the shares on the first day of either the
enrollment period on purchase date, whichever is lower (but not in excess of
the gain on the sale). Any additional gain from the sale will be long-term
capital gain. The Company is not entitled to an income tax deduction if the
holding periods are satisfied.
If the shares are disposed of before the expiration of both of the foregoing
holding periods (a "disqualifying disposition"), a participant will have
taxable ordinary income equal to the excess of the fair market value of the
shares on the purchase date over the purchase price. In addition, the
participant will have a taxable capital gain (or loss) measured by the
difference between the sale price and the participant's purchase price plus the
amount of ordinary income recognized, which gain (or loss) will be long-term if
the shares have been held as of the date of sale for more than one year. The
Company is entitled to an income tax deduction equal to the amount of ordinary
income recognized by a participant in a disqualifying disposition.
PROPOSAL
At the Annual Meeting, the Company's stockholders will be asked to approve the
increase to the 1997 Employee Stock Purchase Plan. Such approval will require
the affirmative vote of a majority of the shares present and voting at the
Annual Meeting. The Board of Directors recommends a vote "FOR" the proposal.
PROPOSAL THREE
APPROVAL OF AMENDMENT TO THE
COMPANY'S 2002 EQUITY INCENTIVE PLAN
The Company's 2002 Equity Incentive Plan is intended to strengthen the Company
by providing added incentive to officers, directors, employees and consultants
for high levels of performance and unusual efforts to increase the earnings of
the Company through the opportunity for stock ownership. Subject to
stockholder approval, the Board has approved to increase by 400,000 shares the
number of shares of Common Stock reserved for issuance under the Plan. The
following description of the 2002 Equity Incentive Plan is a summary and so
qualified by reference to the complete text of the purchase plan which is
attached as Appendix C. A copy of the 2002 Equity Incentive Plan is available
by writing to the Company to the attention of Marea Fabrique, Investor
Relations.
The Board of Directors believes it would be in the best interest of the Company
to approve the amendment to the 2002 Equity Incentive Plan to increase the
number of shares by 400,000. The 2002 Equity Incentive Plan, currently the
only plan pursuant to which the Company grants options, has only 48,356 shares
available for grant as of March 31, 2004. As a consequence, without approval
of an increase in the number of shares of Common Stock reserved for issuance
under the 2002 Equity Incentive Plan, the Company anticipates it will no longer
have shares available for grant after 2004. The grant of stock options has
been an important component of the compensation of Company directors, officers
and other key employees and an important means of providing an opportunity for
stock ownership to such personnel. As of March 31, 2004, directors, officers,
employees and consultants held unexercised options under the 2002 Equity
Incentive Plan covering 433,733 shares of Common Stock with an average exercise
price of $1.80.
DESCRIPTION OF THE 2002 EQUITY INCENTIVE PLAN
The following is a general summary of the principal provisions of the 2002
Equity Incentive Plan. The 2002 Equity Incentive Plan authorizes the granting
of Incentive Stock Options ("ISOs") to employees (including employees who are
officers and directors) and Nonstatutory Options ("NSOs") to officers,
directors, employees and consultants to purchase authorized, but unissued
shares of the Company's Common Stock. Subject to stockholder approval, the
2002 Equity Incentive Plan provides for grants of restricted stock awards and
the number of shares reserved for issuance under the 2002 Equity Incentive Plan
will be 900,000. The 2002 Equity Incentive Plan is administered by the
Administrator which determines the terms of options granted under the 2002
Equity Incentive Plan, including the exercise price, number of shares subject
to the option, whether the option is an ISO or an NSO, and the schedule
pursuant to which the option shall become exercisable. No option may be
granted under the 2002 Equity Incentive Plan after April, 2012, but outstanding
options may extend beyond that date.
The Company pays directors for services in Company stock, and uses NSOs as a
way to compensate nonemployee directors and to provide incentives to them
through an equity interest in the Company. A 10 year NSO to purchase 25,000
shares of the Company's Common Stock will be granted to each person who is
neither an officer nor an employee of the Company when such person is first
elected or appointed director. Each such option vests at the rate of 25% per
year, so long as the individual is serving as a director, with full vesting
over four years. A nonemployee director also receives a grant of a ten year
NSO to purchase 10,000 shares of Common Stock on the date of each annual
meeting of stockholders of the Company held more than 12 months after a
nonemployee director is first elected or appointed to the Board of Directors.
These options fully vest one year after the date of grant.
The exercise price of each option granted under the 2002 Equity Incentive Plan
must be at least equal to 100% of the fair market value of the underlying
shares of Common Stock on the date of grant. The 2002 Equity Incentive Plan
provides that the maximum term of an option is ten years. With respect to any
participant then owning stock possessing more than ten percent (10%) of the
voting power of the Company's outstanding capital stock, the exercise price of
any ISO must be at least 110% of fair market value of the underlying shares of
Common Stock on the date of grant, and the term may be no longer than five
years. The 2002 Equity Incentive Plan permits the exercise of options for
cash, a check, or with the approval of the Administrator, tender to the Company
of shares of the Company's Common Stock owned by the optionee and having a fair
market value not less than the option exercise price or delivery of full
recourse promissory notes.
The 2002 Equity Incentive Plan limits to $100,000 the value of option stock
(measured at the time of the option grant) with respect to which ISOs granted
to any one employee after 1986 under any Company plan may vest in any calendar
year.
At the time an option is exercised, in whole or in part, or at any time
thereafter as requested by the Company, the optionee is required to make
adequate provision for federal and state income and employment tax withholding
obligations of the Company, if any, resulting from the exercise. Subject to
certain limitations, an optionee may elect, subject to the terms of the 2002
Equity Incentive Plan and the approval of the Administrator, to have shares of
Common Stock issuable on exercise of the options withheld or to tender shares
then owned by the optionee to provide for these taxes.
Generally, options are exercisable not upon grant, but in cumulative increments
over time, typically 25% per year over four years. Options may be exercised
for ninety days after the optionee leaves the Company and, if the optionee's
employment is terminated by reason of death or permanent disability, for one
year after the optionee's death or disability, but in either case not beyond
the original term of the option.
In the event of a merger of the Company, sale of substantially all of its
assets or similar transaction, the Administrator may, among other things,
accelerate the expiration date and the exercisability of all options
outstanding under the 2002 Equity Incentive Plan.
Under the 2002 Equity Incentive Plan, the Administrator also may grant to
participants a direct right to purchase shares by notifying the grantee of the
terms, conditions and restrictions relating to the purchase right.
The 2002 Equity Incentive Plan also provides for the grants of restricted stock
awards. A restricted stock award is an award of shares of Common Stock which
are subject to restrictions on transfer for a period of time specified by the
Administrator (the "Restriction Period") provided, that the Restriction Period
may not exceed 10 years and may not be less than three years. During the
Restriction Period, the recipient of the restricted stock award may not sell,
assign, transfer, pledge or otherwise encumber shares of restricted stock.
Within these limits, the Administrator may provide for the lapse of such
restrictions in installments, but other than in the case of acquisition of the
Company, may not waive or accelerate the restrictions.
The recipient of the restricted stock award must pay a purchase price
determined by the Administrator, which shall not be less than the par value
($.01 per share) for all shares of restricted stock awarded. In the event the
holder of the restricted stock ceases to be employed by (or to act as a
director of or consultant to) the Company prior to the end of the Restriction
Period, all shares still subject to restriction are forfeited and repurchased
by the Company for the price paid by the participant. Before the Restriction
Period expires, unless otherwise determined by the Administrator, cash
dividends, if any with respect to the restricted stock awards will be
automatically reinvested in additional restricted stock, and dividends payable
in stock will be in the form of restricted stock.
The 2002 Plan expires in February, 2012, unless terminated earlier by the Board
of Directors. The Board may at any time terminate or amend the 2002 Equity
Incentive Plan, provided that without approval of stockholders there will be no
increase in the total number of shares covered by the 2002 Equity Incentive
Plan. In any case, no amendment may adversely affect any then-outstanding
option or unexercised portion thereof without the optionee's consent unless
such amendment is required to enable the option to qualify as an ISO.
The following table shows the number of options granted to the named
individuals and groups under the 2002 Equity Incentive Plan during 2003.
Because the grants under the 2002 Equity Incentive Plan are discretionary,
benefits for the current fiscal year are not determinable. No awards have been
granted with respect to the additional 400,000 shares for which approval is
requested.
Plan Benefits
2002 Equity Incentive Plan
Name and Position Number of Options (1)
- ----------------- ---------------------
Michael O'Connell 40,000
President and Chief Executive Officer
John Barr, Ph.D. 7,500
Vice President, Research and Development
Gordon Sangster 7,500
Chief Financial Officer
Executive Officers as a Group 55,000
Non-Executive Director Group 70,000
Non-Executive Officer Employee Group 30,000
- ---------------
(1) All options granted at fair market value on the date of the grant.
FEDERAL INCOME TAX CONSEQUENCES OF STOCK AWARDS
The following general description of federal income tax consequences is based
upon current statutes, regulations and interpretations thereof. Because the
applicable rules are complex and because income tax consequences may vary
depending upon the individual circumstances of each participant, participants
should consult their personal tax advisors concerning federal, state, local and
foreign income tax consequences associated with their participation in the 2002
Equity Incentive Plan.
ISOs granted under the 2002 Equity Incentive Plan are intended to constitute
"incentive stock options" within the meaning of the Section 422 of the Code.
ISOs may be granted only to employees of the Company (including directors who
are also employees). An optionee does not recognize taxable income upon either
the grant or exercise of an ISO. However, the excess of the fair market value
of the shares purchased upon exercise over the option exercise price (the
"Option Spread") is includible in the optionee's "alternative minimum tax
income" ("AMTI"), used to calculate the "alternative minimum tax". The Option
Spread is measured on the date of exercise and is generally includible in AMTI
in the year of exercise.
If an optionee holds shares which result from the exercise of an ISO for at
least two years from the date the ISO was granted, and for at least one year
from the date the ISO was exercised, any gain from a sale of the shares should
be taxable as long-term capital gain. Under these circumstances, the Company
would not be entitled to a tax deduction at the time the ISO is exercised or at
the time the stock is sold. If an optionee were to dispose of stock acquired
pursuant to an ISO before the end of the required holding periods (a
"Disqualifying Disposition"), the amount by which the market value of the stock
at the time the ISO was exercised exceeds the exercise price (or, if less, the
amount of gain realized on the sale) would be taxable as ordinary income, and
the Company should be entitled to a corresponding tax deduction. A gain in a
Disqualifying Disposition, in excess of the amount required to be recognized as
ordinary income, if any, would be a capital gain.
An optionee is not taxed upon the grant of an NSO. Generally, the optionee
will recognize as ordinary income the Option Spread on the date of exercise.
The Company is entitled to a deduction equal to the amount of ordinary income
recognized by an optionee who is an employee. Such income is subject to income
tax withholding by the Company.
Generally, a participant should not have taxable income upon the grant of
restricted stock but would have taxable income upon the lapse of any
restrictions in an amount equal to the fair market value of the restricted
stock when the restrictions lapse. A participant receiving restricted stock
may, however, make an election to be taxed at grant on any excess of fair
market value over the amount paid, in which case the lapse of any restrictions
will not be a taxable event. If shares are held at least one year after the
date the optionee has taxable income from acquiring them, then upon sale of the
shares the employee will have long-term capital gain or loss equal to the
difference between the sale price and the fair market value of the shares of
the date income is recognized.
EQUITY COMPENSATION PLAN INFORMATION
The table below discloses the following information as of December 31, 2003
with respect to A.P. Pharma's equity compensation plans that have been
approved by stockholders and plans that have not been approved by
stockholders.
(c) Number of securities
remaining available for
future issuance under
(a)Number of (b)Weighted- equity compensation
securities to be average exercise plans (excluding
issued upon exercise price of outstanding securities reflected in
Plan Category of outstanding options options column (a))
- ------------- ---------------------- -------------------- ------------------------
Equity compensation plans
approved by security holders 1,948,605 $4.13 199,169
Equity compensation plans
not approved by security holders 160,000 1.99 87,500
Total 2,108,605 3.97 286,669
In October 2000, the Company adopted the Non-Qualified Stock Plan, which has
not been approved by A.P. Pharma's stockholders. The Non-Qualified Stock Plan
will expire in 2010. Under the Non-Qualified Stock Plan, awards may be
granted as a material inducement to any person accepting employment or
consultancy with the Company or an employee of the Company who is not an
officer or director of the Company at the time of the award. The Non-
Qualified Stock Plan provides for the discretionary award of options,
restricted stock and stock purchase rights or any combination of these awards
to an eligible person, provided, however, that only NQOs may be granted under
the plan. Under the Non-Qualified Stock Plan, the term of any NQO granted may
not exceed 10 years, and the exercise price of any such NQO must be at least
85% of the fair market value of the Common Stock at the date of grant.
Options generally vest on a monthly basis over a period of four years.
PROPOSAL
At the Annual Meeting, stockholders will be asked to approve amendments to the
Company's 2002 Equity Incentive Plan to increase by 400,000 the number of
shares of common stock reserved for issuance under the Plan. Such approval
will require the affirmative vote of a majority of shares present and voting at
the Annual Meeting. The Board of Directors recommends a vote "FOR" the
proposal.
PROPOSAL FOUR
RATIFICATION OF INDEPENDENT AUDITORS
Subject to stockholder ratification, the Audit Committee has selected Ernst &
Young LLP as independent public accountants to audit the financial statements
of the Company for the fiscal year ending December 31, 2004.
At the Annual Meeting, the stockholders will be asked to ratify the appointment
of Ernst & Young LLP as the Company's independent auditors for the fiscal year
ending December 31, 2004. Representatives of Ernst & Young LLP are expected to
be present at the Annual Meeting and will have the opportunity to make
statements if they desire to do so. Such representatives are also expected to
be available to respond to appropriate questions.
The Board of Directors recommends a vote "FOR" the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending December 31, 2004.
FINANCIAL STATEMENTS
The Company's annual report to stockholders for the fiscal year ended December
31, 2003, 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.
STOCKHOLDER PROPOSALS FOR 2005 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 2005 must submit such proposal in writing to the
Secretary of the Company at the Company's principal executive offices no later
than December 22, 2004. 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 20, 2004
You Are Cordially Invited To Attend The Meeting In Person.
1
1
APPENDIX A
A.P. PHARMA, INC.
Proxy Solicited by the Board of Directors
for the Annual Meeting of Stockholders
to be held May 25, 2004
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 25, 2004, 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.
A.P. PHARMA, INC.
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
Your vote is important. Please vote immediately.
VOTE-BY-INTERNET VOTE-BY-TELEPHONE
- ---------------- -----------------
Log on to the Internet and go to Call toll-free
http://www.eproxyvote.com/appa 1-877-PRX-VOTE (1-877-779-8683)
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. To amend the Company's 1997 Employee Stock Purchase Plan to increase by
100,000 the number of shares of common stock reserved for issuance under
the Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To amend the Company's 2002 Equity Incentive Plan to increase by
400,000 the number of shares of common stock reserved for issuance under
the Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To approve Ernst & Young LLP as A.P. Pharma's independent public
accountants.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. 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 BELOW
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
Appendix B
ADVANCED POLYMER SYSTEMS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. This Advanced Polymer Systems, Inc. 1997 Employee Stock
Purchase Plan is designed to encourage and assist employees of Advanced
Polymer Systems, Inc. and participating subsidiaries to acquire an equity
interest in the Company through the purchase of shares of Company common
stock.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "Administrator" shall mean the entity, either the Board or
the committee of the Board, responsible for administering this Plan, as
provided in Section 3.
(b) "Board" shall mean the Board of Directors of the Company, as
constituted from time to time.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute.
(d) "Company" shall mean Advanced Polymer Systems, Inc., a
Delaware corporation, and Participating Subsidiaries.
(e) "Common Stock" shall mean the Common Stock, $.01 par value,
of the Company.
(f) "Employee" shall mean any individual who is an employee of
the Company or a Participating Subsidiary within the meaning of Section
3401(c) of the Code and the Treasury Regulations thereunder.
(g) "Enrollment Date" shall have the meaning set forth in
Section 6.
(h) "Fair market value" means as of any given date: (i) the
closing price of the Common Stock on the Nasdaq National Market as reported in
the Wall Street Journal; or (ii) if the Common Stock is no longer quoted on
the Nasdaq National Market, but is listed on an established stock exchange or
quoted on any other established interdealer quotation system, the closing
price for the Common Stock on such exchange or system, as reported in the Wall
Street Journal; or (iii) in the absence of an established market for the
Common Stock, the fair market value of the Common Stock as determined by the
Administrator in good faith.
(i) "Lower Price Enrollment Date" shall have the meaning set
forth in Section 6.
(j) "Option Period" shall have the meaning set forth in Section
7(b).
(k) "Participating Subsidiary" shall mean a Subsidiary which has
been designated by the Administrator as covered by the Plan.
(l) "Plan" shall mean this Advanced Polymer Systems, Inc. 1997
Employee Stock Purchase Plan, as it may be amended from time to time.
(m) "Purchase Date" shall have the meaning set forth in Section
9(a).
(n) "Section" unless the context clearly indicates otherwise,
shall refer to a Section of this Plan.
(o) "Subsidiary" shall mean a "subsidiary corporation" of the
Company, whether now or hereafter existing, within the meaning of Section
424(f) of the Code, but only for so long as it is a "subsidiary corporation."
(p) "Trading Day" means any day on which regular trading occurs
on any established stock exchange or market system on which the Common Stock
is traded.
3. ADMINISTRATION.
(a) Administrator. The Plan shall be administered by the Board
or, upon delegation by the Board, by a committee of the Board (in either case,
the "Administrator"). In connection with the administration of the Plan, the
Administrator shall have the powers possessed by the Board. The Administrator
may act only by a majority of its members. The Administrator may delegate
administrative duties to such employees of the Company as it deems proper, so
long as such delegation is not otherwise prohibited by Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or other applicable law. The
Board at any time may terminate the authority delegated to any committee of
the Board pursuant to this Section 3(a) and revest in the Board the
administration of the Plan.
(b) Administrator Determinations Binding. The Administrator may
adopt, alter and repeal administrative rules, guidelines and practices
governing the Plan and the options granted under it as it shall deem advisable
from time to time, may interpret the terms and provisions of the Plan and the
Options granted under it, may correct any defect, omission or inconsistency in
the Plan or in any Option; and may otherwise supervise the administration of
the Plan and the Options granted under it. The Administrator may establish,
under guidelines from the Board, limits on the number of shares which may be
purchased by each participant on an annual or other periodic basis or on the
number of shares which may be purchased on any Purchase Date. All decisions
made by the Administrator under the Plan shall be binding on all persons,
including the Company and all participants in the Plan. No member of the
Administrator shall be liable for any action that he or she has in good faith
taken or failed to take with respect to this Plan.
4. NUMBER OF SHARES.
(a) The Company has reserved for sale under the Plan 500,000
shares of Common Stock. Shares sold under the Plan may be newly issued shares
or shares reacquired in private transactions or open market purchases, but all
shares sold under the Plan, regardless of source, shall be counted against the
500,000 share limitation. If at any Purchase Date, the shares available under
the Plan are less than the number all participants would otherwise be entitled
to purchase on such date, purchases shall be reduced proportionately to
eliminate the deficit. If, at any Purchase Date, the shares which may be
purchased by a participant are restricted on account of a limit on the
aggregate shares which may be purchased per employee, purchases under each
option shall be reduced proportionately. Any funds that cannot be applied to
the purchase of shares due to such reductions shall be refunded to
participants as soon as administratively feasible.
(b) In the event of any reorganization, recapitalization, stock
split, reverse stock split, stock dividend, combination of shares, merger,
consolidation, offering of rights, or other similar change in the capital
structure of the Company, the Board may make such adjustment, if any, as it
deems appropriate in the number, kind, and purchase price of the shares
available for purchase under the Plan and in the maximum number of shares
subject to any option under the Plan.
5. ELIGIBILITY REQUIREMENTS.
(a) Each Employee of the Company, except those described in the
next paragraph, shall become eligible to participate in the Plan in accordance
with Section 6 on the first Enrollment Date on or following commencement of
his or her employment by the Company or following such period of employment as
is designated by the Administrator from time to time. Participation in the
Plan is entirely voluntary.
(b) The following Employees are not eligible to participate in
the Plan:
(i) Employees who would, immediately upon enrollment
in the Plan, own directly or indirectly, or hold options or rights to acquire
stock possessing, five percent (5%) or more of the total combined voting power
or value of all classes of stock of the Company or any subsidiary of the
Company; and
(ii) Employees who are customarily employed by the
Company fewer than twenty (20) hours per week or fewer than five (5) months in
any calendar year.
6. ENROLLMENT. Any eligible employee may enroll or re-enroll in the
Plan each year as of the close of the first trading day of: (a) May and
November of each such year; or (b) such other days as may be established by
the Board from time to time (the "Enrollment Dates"); provided, that the first
Enrollment Date shall be April 30, 1997. In order to enroll, an eligible
employee must complete, sign, and submit to the Company an enrollment form.
Any enrollment form received by the Company by the 20th day of the month
preceding an Enrollment Date (or by the Enrollment Date in the case of
employees hired after such 20th day or in the case of the first Enrollment
Date), or such other date established by the Administrator from time to time,
will be effective on that Enrollment Date. In addition, the Administrator may
re-enroll existing participants in the Plan on any Enrollment Date (the "Lower
Price Enrollment Date") on which the fair market value of the Common Stock is
lower than the fair market value on such participant's existing Enrollment
Date. A participant may elect not to re-enroll on a Lower Price Enrollment
Date by filing a written statement with the Company declaring such election
prior to the Lower Price Enrollment Date.
7. GRANT OF OPTION ENROLLMENT.
(a) Enrollment or re-enrollment by a participant in the Plan on
an Enrollment Date will constitute the grant by the Company to the participant
of an option to purchase shares of Common Stock from the Company under the
Plan. Any participant whose option expires and who has not withdrawn from the
Plan will automatically be re-enrolled in the Plan and granted a new option on
the Enrollment Date immediately following the date on which the option
expires.
(b) Except as provided in Section 10, each option granted under
the Plan shall have the following terms:
(i) the option will have a term of not more than
twenty-four (24) months or such shorter option period as may be established by
the Board from time to time (the "Option Period"). Notwithstanding the
foregoing, however, whether or not all shares have been purchased thereunder,
the option will expire on the earlier to occur of: (A) the completion of the
purchase of shares on the last Purchase Date occurring within twenty-four (24)
months after the Enrollment Date for such option, or such shorter option
period as may be established by the Board before an Enrollment Date for all
options to be granted on such date; or (B) the date on which the employee's
participation in the Plan terminates for any reason;
(ii) payment for shares purchased under the option
will be made only through payroll withholding in accordance with Section 8;
(iii) purchase of shares upon exercise of the option
will be effected only on the Purchase Dates established in accordance with
Section 9;
(iv) the option, if not altered, amended or revoked
by the Company prior to the relevant Purchase Date, may be accepted only by
(x) there having been withheld from the compensation of the employee in
accordance with the terms of the Plan amounts sufficient to purchase the
Common Stock intended to be purchased under the option, and (y) the employee
being employed by the Company and not having withdrawn from the Plan on the
relevant Purchase Date.
(v) the price per share under the option will be
determined as provided in Section 9;
(vi) the maximum number of shares available for
purchase under an option for each one percent (1%) of compensation designated
by an employee in accordance with Section 8 will, unless otherwise established
by the Board before an Enrollment Date for all options to be granted on such
date, be determined by dividing $25,000 by the fair market value of a share of
Common Stock on the Enrollment Date, dividing the result by the maximum number
of percentage points that an employee may designate under Section 8 at the
time such option is granted, and multiplying the result by the number of
calendar years included in whole or in part in the period from grant to
expiration of the option;
(vii) the option (taken together with all other
options then outstanding under this and all other similar stock purchase plans
of the Company and any subsidiary of the Company, collectively "Options") will
in no event give the participant the right to purchase shares at a rate per
calendar year which accrues in excess of $25,000 of fair market value of such
shares, less the fair market value of any shares accrued and already purchased
during such year under Options which have expired or terminated, determined at
the applicable Enrollment Dates; and
(viii) the option will in all respects be subject to
the terms and conditions of the Plan, as interpreted by the Administrator from
time to time.
8. PAYROLL AND TAX WITHHOLDING; USE BY COMPANY.
(a) Each participant shall elect to have amounts withheld from
his or her compensation paid by the Company during the Option Period, at a
rate equal to any whole percentage up to a maximum of ten percent (10%), or
such lesser percentage as the Board may establish from time to time before an
Enrollment Date. Compensation includes regular salary payments, annual and
quarterly bonuses, hire-on bonuses, cash recognition awards, commissions,
overtime pay, shift premiums, and elective contributions by the participant to
qualified employee benefit plans, but excludes all other payments including,
without limitation, long-term disability or workers compensation payments, car
allowances, employee referral bonuses, relocation payments, expense
reimbursements (including but not limited to travel, entertainment, and moving
expenses), salary gross-up payments, and non-cash recognition awards. The
participant shall designate a rate of withholding in his or her enrollment
form and may elect to increase or decrease the rate of contribution effective
as of any Enrollment Date, by delivery to the Company, not later than ten (10)
days before such Enrollment Date, of a written notice indicating the revised
withholding rate.
(b) Payroll withholdings shall be credited to an account
maintained for purposes of the Plan on behalf of each participant, as soon as
administratively feasible after the withholding occurs. The Company shall be
entitled to use the withholdings for any corporate purpose, shall have no
obligation to pay interest on withholdings to any participant, and shall not
be obligated to segregate withholdings.
(c) Upon disposition of shares acquired by exercise of an
option, the participant shall pay, or make provision adequate to the Company
for payment of, all federal, state, and other tax (and similar) withholdings
that the Company determines, in its discretion, are required due to the
disposition, including any such withholding that the Company determines in its
discretion is necessary to allow the Company to claim tax deductions or other
benefits in connection with the disposition. A participant shall make such
similar provisions for payment that the Company determines, in its discretion,
are required due to the exercise of an option, including such provisions as
are necessary to allow the Company to claim tax deductions or other benefits
in connection with the exercise of the option.
9. PURCHASE OF SHARES.
(a) On the last Trading Day immediately preceding an Enrollment
Date (other than the first Enrollment Date), or on such other days as may be
established by the Board from time to time prior to an Enrollment Date for all
options to be granted on such Enrollment Date (each a "Purchase Date"), the
Company shall apply the funds then credited to each participant's payroll
withholdings account to the purchase of whole shares of Common Stock. The
cost to the participant for the shares purchased under any option shall be not
less than eighty-five percent (85%) of the lower of:
(i) the fair market value of the Common Stock on the
Enrollment Date for such option; or
(ii) the fair market value of the Common Stock on the
date such option is exercised.
(b) Any funds in an amount less than the cost of one share of
Common Stock left in a participant's payroll withholdings account on a
Purchase Date shall be carried forward in such account for application on the
next Purchase Date.
(c) Notwithstanding the terms of Section 9(a), no funds credited
to any employee's payroll withholdings account shall be used to purchase
Common Stock on any date prior to the date that the Plan has been approved by
the stockholders of the Company, as noted in Section 21. If such approval is
not forthcoming within one year from the date that the Plan was approved by
the Board of Directors, all amounts withheld shall be distributed to the
participants as soon as administratively feasible.
10. WITHDRAWAL FROM THE PLAN. A participant may withdraw from the
Plan in full (but not in part) at any time, effective after written notice
thereof is received by the Company. Unless the Administrator elects to permit
a withdrawing participant to invest funds credited to his or her withholding
account on the Purchase Date immediately following notice of withdrawal, all
funds credited to a participant's payroll withholdings account shall be
distributed to him or her without interest within sixty (60) days after notice
of withdrawal is received by the Company. Any eligible employee who has
withdrawn from the Plan may enroll in the Plan again on any subsequent
Enrollment Date in accordance with the provisions of Section 6.
11. TERMINATION OF EMPLOYMENT. Participation in the Plan terminates
immediately when a participant ceases to be employed by the Company for any
reason whatsoever (including death or disability) or otherwise becomes
ineligible to participate in the Plan. As soon as administratively feasible
after termination, the Company shall pay to the participant or his or her
beneficiary or legal representative, all amounts credited to the participant's
payroll withholdings account; provided, however, that if a participant ceases
to be employed by the Company because of the commencement of employment with a
Subsidiary of the Company that is not a Participating Subsidiary, funds then
credited to such participant's payroll withholdings account shall be applied
to the purchase of whole shares of Common Stock at the next Purchase Date and
any funds remaining after such purchase shall be paid to the participant.
12. DESIGNATION OF BENEFICIARY.
(a) Each participant may designate one or more beneficiaries in
the event of death and may, in his or her sole discretion, change such
designation at any time. Any such designation shall be effective upon receipt
in written form by the Company and shall control over any disposition by will
or otherwise.
(b) As soon as administratively feasible after the death of a
participant, amounts credited to his or her account shall be paid in cash to
the designated beneficiaries or, in the absence of a designation, to the
executor, administrator, or other legal representative of the participant's
estate. Such payment shall relieve the Company of further liability with
respect to the Plan on account of the deceased participant. If more than one
beneficiary is designated, each beneficiary shall receive an equal portion of
the account unless the participant has given express contrary written
instructions.
13. ASSIGNMENT.
(a) The rights of a participant under the Plan shall not be
assignable by such participant, by operation of law or otherwise. No
participant may create a lien on any funds, securities, rights, or other
property held by the Company for the account of the participant under the
Plan, except to the extent that there has been a designation of beneficiaries
in accordance with the Plan, and except to the extent permitted by the laws of
descent and distribution if beneficiaries have not been designated.
(b) A participant's right to purchase shares under the Plan
shall be exercisable only during the participant's lifetime and only by him or
her, except that a participant may direct the Company in the enrollment form
to issue share certificates to the participant and his or her spouse in
community property, to the participant jointly with one or more other persons
with right of survivorship, or to certain forms of trusts approved by the
Administrator.
14. ADMINISTRATIVE ASSISTANCE. If the Administrator in its discretion
so elects, it may retain a brokerage firm, bank, or other financial
institution to assist in the purchase of shares, delivery of reports, or other
administrative aspects of the Plan. If the Administrator so elects, each
participant shall (unless prohibited by the laws of the nation of his or her
employment or residence) be deemed upon enrollment in the Plan to have
authorized the establishment of an account on his or her behalf at such
institution. Shares purchased by a participant under the Plan shall be held
in the account in the name in which the share certificate would otherwise be
issued pursuant to Section 13(b).
15. COSTS. All costs and expenses incurred in administering the Plan
shall be paid by the Company, except that any stamp duties or transfer taxes
applicable to participation in the Plan may be charged to the account of such
participant by the Company. Any brokerage fees for the purchase of shares by
a participant shall be paid by the Company, but brokerage fees for the resale
of shares by a participant shall be borne by the participant.
16. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have
equal rights and privileges with respect to the Plan so that the Plan
qualifies as an "employee stock purchase plan" within the meaning of Section
423 of the Code and the related Treasury Regulations. Any provision of the
Plan which is inconsistent with Section 423 of the Code shall without further
act or amendment by the Company or the Board be reformed to comply with the
requirements of Section 423. This Section 16 shall take precedence over all
other provisions of the Plan.
17. APPLICABLE LAW. The Plan shall be governed by the substantive
laws (excluding the conflict of laws rules) of the State of California.
18. MODIFICATION AND TERMINATION.
(a) The Board may amend, alter, or terminate the Plan at any
time, including amendments to outstanding options. No amendment shall require
stockholder approval, except:
(i) for an increase in the number of shares reserved
for purchase under the Plan;
(ii) to the extent required for the Plan to comply
with Section 423 of the Code;
(iii) to the extent required by other applicable laws,
regulations or rules; or
(iv) to the extent the Board otherwise concludes that
stockholder approval is advisable.
(b) In the event the Plan is terminated, the Board may elect to
terminate all outstanding options either immediately or upon completion of the
purchase of shares on the next Purchase Date, or may elect to permit options
to expire in accordance with their terms (and participation to continue
through such expiration dates). If the options are terminated prior to
expiration, all funds contributed to the Plan that have not been used to
purchase shares shall be returned to the participants as soon as
administratively feasible.
(c) In the event of the sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, or the dissolution or liquidation of the Company, each option
outstanding under the Plan shall be assumed by any purchaser of all or
substantially all of the assets of the Company or by a successor by merger to
the Company (or the parent company of such purchaser or successor) in
compliance with Section 424 of the Code, unless otherwise provided by the
Board in its sole discretion, in which event, a Purchase Date shall occur
immediately before the effective date of such event.
19. RIGHTS AS AN EMPLOYEE. Nothing in the Plan shall be construed to
give any person the right to remain in the employ of the Company or to affect
the Company's right to terminate the employment of any person at any time with
or without cause.
20. RIGHTS AS A SHAREHOLDER; DELIVERY OF CERTIFICATES. Unless
otherwise determined by the Board, certificates evidencing shares purchased on
any Purchase Date shall be delivered to a participant only if he or she makes
a written request to the Administrator. Participants shall be treated as the
owners of their shares effective as of the Purchase Date.
21. BOARD AND SHAREHOLDER APPROVAL. The Plan was approved by the
Board of Directors on March 5, 1997, and by the holders of a majority of the
votes cast at a duly held shareholders' meeting on June 18, 1997, at which a
quorum of the voting power of the Company was represented in person or by
proxy.
Amended by the Board on: March 25, 2004
-------------
Approved by the stockholders on:
------------
Effective date of this Plan:
------------
Appendix C
2002 Equity Incentive Plan
of
A.P. Pharma, Inc.,
A Delaware corporation
Purpose of this Plan
- --------------------
The purpose of this 2002 Equity Incentive Plan of A.P. Pharma, Inc., a
Delaware corporation (the "Company") is to enhance the long-term
stockholder value of the Company by offering opportunities to eligible
individuals to participate in the growth in value of the equity of the
Company.
Definitions and Rules of Interpretation
- ---------------------------------------
Definitions. This Plan uses the following defined terms:
"Administrator" means the Board, the Committee, or any officer or
employee of the Company to whom the Board or the Committee delegates
authority to administer this Plan.
"Affiliate" means a "parent" or "subsidiary" (as each is defined in
Section 424 of the Code) of the Company and any other entity that the Board
or Committee designates as an "Affiliate" for purposes of this Plan.
"Applicable Law" means any and all laws of whatever jurisdiction,
within or without the United States, and the rules of any stock exchange or
quotation system on which Shares are listed or quoted, applicable to the
taking or refraining from taking of any action under this Plan, including
the administration of this Plan and the issuance or transfer of Awards or
Award Shares.
"Award" means a Restricted Stock Award or Option granted in accordance
with the terms of the Plan.
"Award Agreement" means the document evidencing the grant of an Award.
"Award Shares" means Shares covered by an outstanding Award or
purchased under an Award.
"Board" means the board of directors of the Company.
"Change of Control" means any transaction or event that the Board
specifies as a Change of Control under Section 10.4.
"Code" means the Internal Revenue Code of 1986.
"Committee" means a committee composed of Company Directors appointed
in accordance with the Company's charter documents and Section 4.
"Company Director" means a member of the Board.
"Consultant" means an individual who, or an employee of any entity
that, provides bona fide services to the Company or an Affiliate not in
connection with the offer or sale of securities in a capital-raising
transaction, but who is not an Employee.
"Director" means a member of the board of directors of the Company or
an Affiliate.
"Divestiture" means any transaction or event that the Board specifies
as a Divestiture under Section 10.5.
"Employee" means a regular employee of the Company or an Affiliate,
including an officer or Director who is treated as an employee in the
personnel records of the Company or an Affiliate, but not individuals who
are classified by the Company or an Affiliate as: (i) leased from or
otherwise employed by a third party, (ii) independent contractors, or (iii)
intermittent or temporary workers. The Company's or an Affiliate's
classification of an individual as an "Employee" (or as not an "Employee")
for purposes of this Plan shall not be altered retroactively even if that
classification is changed retroactively for another purpose as a result of
an audit, litigation or otherwise. A Recipient shall not cease to be an
Employee due to transfers between locations of the Company, or between the
Company and an Affiliate, or to any successor to the Company or an
Affiliate that assumes the Recipient's Options under Section 10. Neither
service as a Director nor receipt of a director's fee shall be sufficient
to make a Director an "Employee".
"Exchange Act" means the Securities Exchange Act of 1934.
"Executive" means an individual who is subject to Section 16 of the
Exchange Act or who is a "covered employee" under Section 162(m) of the
Code, in either case because of the individual's relationship with the
Company or an Affiliate.
"Expiration Date" means, with respect to an Award, the date stated in
the Award Agreement as the expiration date of the Award or, if no such date
is stated in the Award Agreement, then the last day of the maximum exercise
period for the Award, disregarding the effect of a Recipient's Termination
or any other event that would shorten that period.
"Fair Market Value" means the value of Shares as determined under
Section 17.2.
"Fundamental Transaction" means any transaction or event described in
Section 10.3.
"Grant Date" means the date the Administrator approves the grant of an
Award. However, if the Administrator specifies that an Award's Grant Date
is a future date or the date on which a condition is satisfied, the Grant
Date for such Award is that future date or the date that the condition is
satisfied.
"Incentive Stock Option" means an Option intended to qualify as an
incentive stock option under Section 422 of the Code and designated as an
Incentive Stock Option in the Award Agreement for that Option.
"Listed Security" means any Share listed or approved for listing upon
notice of issuance on a national securities exchange or other market system
that meets the requirements of Section 25100(o) of the California
Securities Law of 1968, as amended.
"Nonstatutory Option" means any Option other than an Incentive Stock
Option.
"Objectively Determinable Performance Condition" shall mean a
performance condition (i) that is established (x) at the time an Award is
granted or (y) no later than the earlier of (1) 90 days after the beginning
of the period of service to which it relates, or (2) before the elapse of
25% of the period of service to which it relates, (ii) that is uncertain of
achievement at the time it is established, and (iii) the achievement of
which is determinable by a third party with knowledge of the relevant
facts. Examples of measures that may be used in Objectively Determinable
Performance Conditions include net order dollars, net profit dollars, net
profit growth, net revenue dollars, revenue growth, individual performance,
earnings per share, return on assets, return on equity, and other financial
objectives, objective customer satisfaction indicators and efficiency
measures, each with respect to the Company and/or an individual business
unit.
"Officer" means an officer of the Company as defined in Rule 16a-1
adopted under the Exchange Act.
"Option" means a right to purchase Shares of the Company granted under
this Plan.
"Option Price" means the price payable under an Option for Shares, not
including any amount payable in respect of withholding or other taxes.
"Option Shares" means Shares covered by an outstanding Option or
purchased under an Option.
"Plan" means this 2002 Equity Incentive Plan of A.P. Pharma, Inc.
"Purchase Price" means the price payable under a Restricted Stock Award
for Shares, not including any amount payable in respect of withholding or
other taxes.
"Qualified Domestic Relations Order" means a judgment, order, or decree
meeting the requirements of Section 414(p) of the Code.
"Recipient" means: (i) a person to whom an Award has been granted,
including a holder of a Substitute Award, (ii) a person to whom an Award
has been transferred in accordance with all applicable requirements of
Sections 6.5, 7(h) and 16, and (iii) a person who holds Option Shares
subject to any right of repurchase under Section 15.2.
"Restricted Stock Award" means an offer by the Company to sell shares
subject to certain restrictions pursuant to the Award Agreement as
described in Section 8.
"Reverse Vesting" means, with respect to an Option, that an Option is
or was fully exercisable but that, subject to a "reverse" vesting schedule,
the Company has a right to repurchase the Option Shares as specified in
Section 15.2(a), with the Company's right of repurchase expiring in
accordance with the "forward" vesting schedule that would otherwise have
applied to the Option under which the Option Shares were purchased or other
vesting schedule described in the Award Agreement. With respect to a
Restricted Stock Award, Reverse Vesting means that the Company has a right
to repurchase the Award Shares purchased pursuant to the Restricted Stock
Award, as specified in Section 15.2(a), with the Company's right of
repurchase expiring in accordance with the vesting schedule in the Award
Agreement.
"Rule 16b-3" means Rule 16b-3 adopted under Section 16(b) of the
Exchange Act.
"Securities Act" means the Securities Act of 1933.
"Share" means a share of the common stock of the Company or other
securities substituted for the common stock under Section 10.
"Substitute Option" means an Option granted in substitution for, or
upon the conversion of, an option granted by another entity to purchase
equity securities in the granting entity.
"Substitute Restricted Stock Award" means a Restricted Stock Award
granted in substitution for, or upon the conversion of, a stock award
granted by another entity to purchase equity securities in the granting
entity.
"Ten Percent Stockholder" means any person who, directly or by
attribution under Section 424(d) of the Code, owns stock possessing more
than ten percent of the total combined voting power of all classes of stock
of the Company or of any Affiliate on the Grant Date.
"Termination" means that the Recipient has ceased to be, with or
without any cause or reason, an Employee, Director or Consultant. However,
unless so determined by the Administrator, "Termination" shall not include
a change in status from an Employee, Consultant or Director to another such
status. An event that causes an Affiliate to cease being an Affiliate
shall be treated as the "Termination" of that Affiliate's Employees,
Directors, and Consultants.
Rules of Interpretation. Any reference to a "Section", without more, is
to a Section of this Plan. Captions and titles are used for convenience in
this Plan and shall not, by themselves, determine the meaning of this Plan.
Except when otherwise indicated by the context, the singular includes the
plural and vice versa. Any reference to a statute is also a reference to
the applicable rules and regulations adopted under that statute. Any
reference to a statute, rule or regulation, or to a section of a statute,
rule or regulation, is a reference to that statute, rule, regulation, or
section as amended from time to time, both before and after the effective
date of this Plan and including any successor provisions.
Shares Subject to this Plan; Term of this Plan
- ----------------------------------------------
Number of Award Shares. Subject to adjustment under Section 10, the
maximum number of Shares that may be issued under this Plan is 900,000.
Source of Shares. Award Shares may be authorized but unissued Shares or
treasury Shares. If an Award is terminated, expires, or otherwise becomes
unexercisable without having been exercised in full, the unpurchased Shares
that were subject to the Award shall revert to this Plan and shall again be
available for future issuance under this Plan. Shares actually issued
under this Plan shall not be available for regrant even if repurchased by
the Company.
Term of this Plan
This Plan shall be effective on the date it is approved by the Board.
However, no Award may be exercised unless and until the Company's
stockholders approve this Plan within 12 months after the Board approves
this Plan.
Subject to Section 13, this Plan shall continue in effect for a period
of ten years from the earlier of the date on which the Plan was adopted by
the Board and the date on which the Plan was approved by the Company's
stockholders.
Administration
- --------------
General
The Board shall have ultimate responsibility for administering this
Plan. The Board may delegate certain of its responsibilities to a
Committee, which shall consist of at least two members of the Board. The
Board or the Committee may further delegate its responsibilities to any
Employee of the Company or any Affiliate. Where this Plan specifies that
an action is to be taken or a determination made by the Board, only the
Board may take that action or make that determination. Where this Plan
specifies that an action is to be taken or a determination made by the
Committee, only the Committee may take that action or make that
determination. Where this Plan references the "Administrator", the action
may be taken or determination made by the Board, the Committee, or other
Administrator. However, only the Board or the Committee may approve grants
of Awards to Executives, and an Administrator other than the Board or the
Committee may grant Awards only within guidelines established by the Board
or Committee. Moreover, all actions and determinations by any
Administrator are subject to the provisions of this Plan.
So long as the Company has registered and outstanding a class of equity
securities under Section 12 of the Exchange Act, the Committee shall
consist of Company Directors who are "Non-Employee Directors" as defined in
Rule 16b-3 and, after the expiration of any transition period permitted by
Treasury Regulations Section 1.162-27(h)(3), who are "outside directors" as
defined in Section 162(m) of the Code.
Authority of Administrator. Subject to the other provisions of this
Plan, the Administrator shall have the authority:
to grant Awards, including Substitute Awards;
to determine the Fair Market Value of Shares;
to determine the Option Price and the Purchase Price under Awards;
to select the Recipients;
to determine the times Awards are granted;
to determine the number of Shares subject to each Award;
to determine the types of payment that may be used to purchase Award
Shares;
to determine the types of payment that may be used to satisfy
withholding tax obligations;
to determine the other terms of each Award, including but not limited
to the time or times at which Awards may be exercised, whether and under
what conditions an Award is assignable, and whether an Option is a
Nonstatutory Option or an Incentive Stock Option;
to modify or amend any Award;
to authorize any person to sign any Award Agreement or other document
related
to this Plan on behalf of the Company;
to determine the form of any Award Agreement or other document
related to this Plan, and whether that document, including signatures, may
be in electronic form;
to interpret this Plan and any Award Agreement or document related to
this Plan;
to correct any defect, remedy any omission, or reconcile any
inconsistency in this Plan, any Award Agreement or any other document
related to this Plan;
to adopt, amend, and revoke rules and regulations under this Plan,
including rules and regulations relating to sub-plans and Plan addenda;
to adopt, amend, and revoke rules and procedures relating to the
operation and administration of this Plan to accommodate non-U.S.
Recipients and the requirements of Applicable Law such as: (i) rules and
procedures regarding the conversion of local currency, withholding
procedures and the handling of stock certificates to comply with local
practice and requirements, and (ii) sub-plans and Plan addenda for non-U.S.
Recipients; and
to make all other determinations the Administrator deems necessary or
advisable for the administration of this Plan.
Scope of Discretion. Subject to the specific provisions and specific
limitations of this Plan, as well as all rights conferred on specific
Recipients by Award Agreements and other agreements, (i) on all matters for
which this Plan confers the authority, right or power on the Board, the
Committee, or other Administrator to make decisions, that body may make
those decisions in its sole and absolute discretion and (ii) in making
those decisions, the Board, Committee or other Administrator need not treat
all persons eligible to receive Awards, all Recipients, all Awards or all
Award Shares the same way.
Persons Eligible to Receive Awards
- ----------------------------------
Eligible Individuals. Awards (including Substitute Awards) may be
granted to, and only to, Employees, Directors and Consultants, including
prospective Employees, Directors and Consultants conditioned on the
beginning of their service for the Company or an Affiliate.
Section 162(m) Limitation.
Options. So long as the Company is a "publicly held corporation"
within the meaning of Section 162(m) of the Code: (a) no Employee or
prospective Employee may be granted one or more Options within any fiscal
year of the Company to purchase more than 250,000 Shares under Options,
subject to adjustment under Section 10, and (b) Options may be granted to
an Executive only by the Committee (and, notwithstanding Section 4.1(a),
not by the Board). If an Option is cancelled without being exercised or if
the Option Price of an Option is reduced, that cancelled or repriced Option
shall continue to be counted against the limit on Shares under this Section
5.2.
Restricted Stock Awards. Any Restricted Stock Award intended as
"qualified performance-based compensation" within the meaning of Section
162(m) of the Code must vest or become exercisable contingent on the
achievement of one or more Objectively Determinable Performance Conditions,
the Restricted Stock Award may be granted only by the Committee, and the
material terms of the Award, including the maximum amount of the Award and
the Award formula, must be approved by the stockholders of the Company
before the Award Shares under such Restricted Stock Award are issued.
Terms and Conditions of Options
- -------------------------------
The following rules apply to all Options:
Price. No Option intended as "qualified incentive-based compensation"
within the meaning of Section 162(m) of the Code may have an Option Price
less than 100% of the Fair Market Value of the Shares on the Grant Date.
In no event will the Option Price of any Option be less than the par value
of the Shares issuable under the Option if that is required by Applicable
Law.
Term. No Option shall be exercisable after its Expiration Date. No
Option may have an Expiration Date that is more than ten years after its
Grant Date.
Vesting. Options shall be exercisable: (a) on the Grant Date, or (b)
in accordance with a schedule related to the Grant Date, the date the
Recipient's directorship, employment or consultancy begins, or a different
date specified in the Option Agreement. If so provided in the Option
Agreement, an Option may be exercisable subject to the application of
Reverse Vesting to the Option Shares.
Form of Payment.
The Administrator shall determine the acceptable form and method of
payment for exercising an Option.
Acceptable forms of payment for all Option Shares are cash, check or
wire transfer, denominated in U.S. dollars except as specified by the
Administrator for non-U.S. Employees or non-U.S. sub-plans.
In addition, the Administrator may permit payment to be made by any
of the following methods:
other Shares, or the designation of other Shares, which (A) in the
case of Shares acquired upon exercise of an option (whether or not under
this Plan) have been owned by the Recipient for more than six months on the
date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the Option Price of the Shares as to which the Option is
being exercised;
provided that a public market exists for the Shares, through a
"same day sale" commitment from the Recipient and a broker-dealer that is a
member of the National Association of Securities Dealers (an "NASD Dealer")
under which the Recipient irrevocably instructs the NASD Dealer promptly to
forward an amount equal to the Option Price directly to the Company (a
"Cashless Exercise").
one or more full recourse promissory notes bearing interest at a
fair market value rate that is at least sufficient to avoid imputation of
interest under Sections 483, 1274 and 7872 of the Code and with such other
terms as the Administrator specifies, except that Consultants may not
purchase Shares with a promissory note unless the note is adequately
secured by collateral other than the Shares, the portion of the Option
Price equal to the par value of the Shares must be paid in cash or other
lawful consideration, other than the note, if that is required by
Applicable Law, and the Company shall at all times comply with any
applicable margin rules of the Federal Reserve; and
any combination of the methods of payment permitted by any
paragraph of this Section 6.4.
Nonassignability of Options. Except as set forth in any Option
Agreement, no Option shall be assignable or otherwise transferable by the
Recipient except by will or by the laws of descent and distribution.
However, Options may be transferred and exercised in accordance with a
Qualified Domestic Relations Order.
Substitute Options. The Board may cause the Company to grant
Substitute Options in connection with the acquisition by the Company or an
Affiliate of equity securities of any entity (including by merger) or all
or a portion of the assets of any entity. Any such substitution shall be
effective when the acquisition closes. Substitute Options may be
Nonstatutory Options or Incentive Stock Options. Unless and to the extent
specified otherwise by the Board, Substitute Options shall have the same
terms and conditions as the options they replace, except that (subject to
Section 10) Substitute Options shall be Options to purchase Shares rather
than equity securities of the granting entity and shall have an Option
Price that, as determined by the Board in its sole and absolute discretion,
properly reflects the substitution.
Incentive Stock Options
- -----------------------
The following rules apply only to Incentive Stock Options and only to the
extent these rules are more restrictive than the rules that would otherwise
apply under this Plan. With the consent of the Recipient, or where this
Plan provides that an action may be taken notwithstanding any other
provision of this Plan, the Administrator may deviate from the requirements
of this Section, notwithstanding that any Incentive Stock Option modified
by the Administrator will thereafter be treated as a Nonstatutory Option.
The Expiration Date of an Incentive Stock Option shall not be later
than ten years from its Grant Date, with the result that no Incentive Stock
Option may be exercised after the expiration of ten years from its Grant
Date.
No Incentive Stock Option may be granted more than ten years from the
date this Plan was approved by the Board.
Options intended to be incentive stock options under Section 422 of
the Code that are granted to any single Recipient under all incentive stock
option plans of the Company and its Affiliates, including incentive stock
options granted under this Plan, may not vest at a rate of more than
$100,000 in Fair Market Value of stock (measured on the grant dates of the
options) during any calendar year. For this purpose, an option vests with
respect to a given share of stock the first time its holder may purchase
that share, notwithstanding any right of the Company to repurchase that
share. Unless the Administrator specifies otherwise in the related
agreement governing the option, this vesting limitation shall be applied
by, to the extent necessary to satisfy this $100,000 rule, treating certain
stock options that were intended to be incentive stock options under
Section 422 of the Code as Nonstatutory Options. The stock options or
portions of stock options to be reclassified as Nonstatutory Options are
those with the highest option prices, whether granted under this Plan or
any other equity compensation plan of the Company or any Affiliate that
permits that treatment. This Section 7(c) shall not cause an Incentive
Stock Option to vest before its original vesting date or cause an Incentive
Stock Option that has already vested to cease to be vested.
In order for an Incentive Stock Option to be exercised for any form
of payment other than those described in Section 6.4(b), that right must be
stated in the Option Agreement relating to that Incentive Stock Option.
Any Incentive Stock Option granted to a Ten Percent Stockholder, must have
an Expiration Date that is not later than five years from its Grant Date,
with the result that no such Option may be exercised after the expiration
of five years from the Grant Date.
The Option Price of an Incentive Stock Option shall never be less
than the Fair Market Value of the Shares at the Grant Date. The Option
Price for the Shares covered by an Incentive Stock Option granted to a Ten
Percent Stockholder shall never be less than 110% of the Fair Market Value
of the Shares at the Grant Date.
Incentive Stock Options may be granted only to Employees. If a
Recipient changes status from an Employee to a Consultant, that Recipient's
Incentive Stock Options become Nonstatutory Options if not exercised within
the time period described in Section 7(i).
No rights under an Incentive Stock Option may be transferred by the
Recipient, other than by will or the laws of descent and distribution.
During the life of the Recipient, an Incentive Stock Option may be
exercised only by the Recipient. The Company's compliance with a Qualified
Domestic Relations Order, or the exercise of an Incentive Stock Option by a
guardian or conservator appointed to act for the Recipient, shall not
violate this Section 7(h).
An Incentive Stock Option shall be treated as a Nonstatutory Option
if it remains exercisable after, but is not exercised within, the three-
month period beginning with the Recipient's Termination for any reason
other than the Recipient's death or disability (as defined in Section 22(c)
of the Code). In the case of Termination due to death or disability, an
Incentive Stock Option shall be treated as a Nonstatutory Option if it
remains exercisable after, but is not exercised within, one year after the
Recipient's Termination.
Restricted Stock Awards
- -----------------------
The following rules apply to all Restricted Stock Awards:
Price; Payment. The Purchase Price for the Award Shares issuable under
a Restricted Stock Award shall be determined by the Administrator; provided
that in no event shall such Purchase Price be less than the par value of
the Award Shares issuable under the Restricted Stock Award.
Term. No Restricted Stock Award shall be exercisable after its
Expiration Date. No Restricted Stock Award may have an Expiration Date
that is more than ten years after its Grant Date.
Vesting. Restricted Stock Awards shall be exercisable: (a) on the
Grant Date, or (b) in accordance with a schedule related to the Grant Date,
the date the Recipient's directorship, employment or consultancy begins, or
a different date specified in the Award Agreement.
Restriction Period. Subject to this Plan and the Award Agreement,
during a period set by the Administrator, commencing with the Grant Date of
the Restricted Stock Award and ending not less than three (3) years and not
more than ten (10) years from such Grant Date, the Recipient shall not be
permitted to sell, assign, transfer, pledge or otherwise encumber the Award
Shares of a Restricted Stock Award. Within these limits, the Administrator
may provide for the lapse of such restrictions in installments, but,
subject to Sections 10.3 and 10.4, may not accelerate or waive such
restrictions.
Right of Repurchase. If so provided in the Award Agreement, Award Shares
acquired pursuant to a Restricted Stock Award may be subject to Reverse
Vesting.
Form of Payment. The Administrator shall determine the acceptable form
and method of payment for exercising a Restricted Stock Award.
Acceptable forms of payment for all Award Shares are cash, check or
wire transfer, denominated in U.S. dollars except as specified by the
Administrator for non-U.S. Employees or non-U.S. sub-plans.
In addition, the Administrator may permit payment to be made by any
of the methods permitted with respect to the exercise of Options pursuant
to Section 6.4.
Nonassignability of Restricted Stock Awards. Except as set forth in
any Award Agreement, no Restricted Stock Award shall be assignable or
otherwise transferable by the Recipient except by will or by the laws of
descent and distribution. However, Restricted Stock Awards may be
transferred and exercised in accordance with a Qualified Domestic Relations
Order.
Substitute Restricted Stock Award. The Board may cause the Company to
grant Substitute Restricted Stock Awards in connection with the acquisition
by the Company or an Affiliate of equity securities of any entity
(including by merger) or all or a portion of the assets of any entity.
Unless and to the extent specified otherwise by the Board, Substitute
Restricted Stock Awards shall have the same terms and conditions as the
options they replace, except that (subject to Section 10) Substitute
Restricted Stock Awards shall be Restricted Stock Awards to purchase Shares
rather than equity securities of the granting entity and shall have a
Purchase Price that, as determined by the Board in its sole and absolute
discretion, properly reflects the substitution.
Exercise of Awards
- ------------------
In General. An Award shall be exercisable in accordance with this Plan,
the Award Agreement under which it is granted, and as prescribed by the
Administrator.
Time of Exercise. Options and Restricted Stock Awards shall be
considered exercised when the Company receives: (a) written notice of
exercise from the person entitled to exercise the Option or Restricted
Stock Award, (b) full payment, or provision for payment, in a form and
method approved by the Administrator, for the Shares for which the Option
or Restricted Stock Award is being exercised, and (c) with respect to
Nonstatutory Options, payment, or provision for payment, in a form approved
by the Administrator, of all applicable withholding taxes due upon
exercise. An Award may not be exercised for a fraction of a Share.
Issuance of Award Shares. The Company shall issue Award Shares in the
name of the person properly exercising the Award. If the Recipient is that
person and so requests, the Award Shares shall be issued in the name of the
Recipient and the Recipient's spouse. The Company shall endeavor to issue
Award Shares promptly after an Award is exercised. However, until Award
Shares are actually issued, as evidenced by the appropriate entry on the
stock books of the Company or its transfer agent, no right to vote or
receive dividends or other distributions, and no other rights as a
stockholder, shall exist with respect to the Award Shares, even though the
Recipient has completed all the steps necessary to exercise the Award. No
adjustment shall be made for any dividend, distribution, or other right for
which the record date precedes the date the Award Shares are issued, except
as provided in Section 10.
Termination
In General. Except as provided by the Administrator, including in an
Award Agreement, and as otherwise provided in Sections 9.4(b), (c), (d),
(e), (f) and (g), after a Recipient's Termination, the Recipient's Awards
shall be exercisable to the extent (but only to the extent) they are vested
on the date of that Termination and only during the period ending three
months after the Termination, but in no event after the Expiration Date.
To the extent the Recipient does not exercise an Award within the time
specified for exercise, the Award shall automatically terminate. With
respect to Restricted Stock Awards, except to the extent otherwise provided
by the Administrator, including in the Award Agreement and in accordance
with Section 10, upon termination of a Recipient's employment for any
reason during the restriction period provided for in Section 8(d), all
Award Shares of a Restricted Stock Award still subject to such restriction
period shall be forfeited by the Recipient and to the extent previously
purchased by the Recipient shall be repurchased by the Company for an
amount equal to the original Purchase Price.
Leaves of Absence. Unless otherwise provided in the Award Agreement,
no Award may be exercised more than three months after the beginning of a
leave of absence, other than a personal or medical leave approved by the
Administrator with employment guaranteed upon return. Awards shall not
continue to vest during a leave of absence, other than an approved personal
or medical leave with employment guaranteed upon return.
Death or Disability. Unless otherwise provided in the Award Agreement,
if a Recipient's Termination is due to death or disability (as determined
by the Administrator with respect to all Awards other than Incentive Stock
Options and as defined by Section 22(e) of the Code with respect to
Incentive Stock Options), all Awards of that Recipient to the extent
exercisable at the date of that Termination may be exercised for one year
after that Termination, but in no event after the Expiration Date. In the
case of Termination due to death, an Award may be exercised as provided in
Section 16. In the case of Termination due to disability, if a guardian or
conservator has been appointed to act for the Recipient and been granted
this authority as part of that appointment, that guardian or conservator
may exercise the Award on behalf of the Recipient. In the case of a
Recipient who dies or become disabled within three months after
Termination, if the Termination was not due to Cause, the Recipient's
Awards may be exercised for one year after that Termination. To the extent
an Award is not so exercised within the time specified for its exercise,
the Award shall automatically terminate.
Divestiture. If a Recipient's Termination is due to a Divestiture, the
Board may take any one or more of the actions described in Section 10.3 or
10.4.
Retirement. Unless otherwise provided in the Award Agreement by the
Administrator, if a Recipient's Termination is due to the Recipient's
retirement in accordance with the Company's or an Affiliate's retirement
policy, all Awards of that Recipient to the extent exercisable at the
Recipient's date of retirement may be exercised for one year after the
Recipient's date of retirement, but in no event after the Expiration Date.
To the extent the Recipient does not exercise an Option within the time
specified for exercise, the Award shall automatically terminate.
Severance Programs. Unless otherwise provided in the Award Agreement
by the Administrator, if a Recipient's Termination results from
participation in a voluntary severance incentive program of the Company or
an Affiliate approved by the Board, all Awards of that Employee to the
extent exercisable at the time of that Termination shall be exercisable for
one year after the Recipient's Termination, but in no event after the
Expiration Date. If the Recipient does not exercise an Award within the
time specified for exercise, the Award shall automatically terminate.
Termination for Cause. If a Recipient's Termination is due to cause,
all of the Recipient's Awards shall automatically terminate and cease to be
exercisable at the time of Termination and all Awards exercised after the
first event constituting cause may be rescinded by the Administrator.
"Cause" means dishonesty, fraud, misconduct, disclosure or misuse of
confidential information, conviction of, or a plea of guilty or no contest
to, a felony or similar offense, habitual absence from work for reasons
other than illness, or intentional conduct that could cause significant
injury to the Company or an Affiliate, in each case as determined by the
Administrator.
Reverse Vesting. Under any circumstances stated in this Section 9.4 in
which all unvested Options of a Recipient immediately vest, the Company's
repurchase rights shall lapse on all Option Shares held by that Recipient
that are subject to Reverse Vesting.
Consulting or Employment Relationship. Nothing in this Plan or in any
Award Agreement, and no Award or the fact that Award Shares remain subject
to repurchase rights, shall: (a) interfere with or limit the right of the
Company or any Affiliate to terminate the employment or consultancy of any
Recipient at any time, whether with or without cause or reason, and with or
without the payment of severance or any other compensation or payment, or
(b) interfere with the application of any provision in any of the Company's
or any Affiliate's charter documents or Applicable Law relating to the
election, appointment, term of office, or removal of a Director.
Certain Transactions and Events
- -------------------------------
In General. Except as specifically provided in this Section 10, no
change in the capital structure of the Company, merger, sale or other
disposition of assets or a subsidiary, change of control, issuance by the
Company of shares of any class of securities convertible into shares of any
class, conversion of securities, or other transaction or event shall
require or be the occasion for any adjustments of the type described in
this Section 10.
Changes in Capital Structure. In the event of any stock split, reverse
stock split, recapitalization, combination or reclassification of stock,
stock dividend, spin-off, or similar change to the capital structure of the
Company (not including a Fundamental Transaction or Change of Control), the
Board shall make whatever adjustments it concludes are appropriate to: (a)
the number and type of Awards that may be granted under this Plan, (b) the
number and type of Options that may be granted to any individual under this
Plan, (c) the Purchase Price of any Restricted Stock Award, (d) the Option
Price and number and class of securities issuable under each outstanding
Option, and (e) the repurchase price of any securities substituted for
Option Shares that are subject to repurchase rights. The specific
adjustments shall be determined by the Board in its sole and absolute
discretion. Unless the Board specifies otherwise, any securities issuable
as a result of any such adjustment shall be rounded to the next lower whole
security.
Fundamental Transactions. If the Company merges with another entity in a
transaction in which the Company is not the surviving entity or if, as a
result of any other transaction or event, other securities are substituted
for the Shares or Shares may no longer be issued (each a "Fundamental
Transaction"), then, notwithstanding any other provision of this Plan, the
Board shall do one or more of the following contingent on the closing or
completion of the Fundamental Transaction: (a) arrange for the
substitution of options or other compensatory awards on equity securities
other than Shares (including, if appropriate, equity securities of an
entity other than the Company) in exchange for Awards, (b) accelerate the
vesting and termination of outstanding Awards, in whole or in part, so that
Awards can be exercised before or otherwise in connection with the closing
or completion of the transaction or event but then terminate, (c) cancel
Awards in exchange for cash payments to Recipients, (d) either arrange for
any repurchase rights of the Company with respect to Award Shares to apply
to the securities issued in substitution for Shares or terminate repurchase
rights on Award Shares. The Board need not adopt the same rules for each
Award or each Recipient.
Changes of Control. The Board may also, but need not, specify that other
transactions or events constitute a "Change of Control". The Board may do
that either before or after the transaction or event occurs. Examples of
transactions or events that the Board may treat as Changes of Control are:
(a) the Company or an Affiliate is a party to a merger, consolidation,
amalgamation, or other transaction in which the beneficial stockholders of
the Company, immediately before the transaction, beneficially own
securities representing 50% or less of the total combined voting power or
value of the Company immediately after the transaction, (b) any person or
entity, including a "group" as contemplated by Section 13(d)(3) of the
Exchange Act, acquires securities holding 30% or more of the total combined
voting power or value of the Company, or (c) as a result of or in
connection with a contested election of Company Directors, the persons who
were Company Directors immediately before the election cease to constitute
a majority of the Board. In connection with a Change of Control,
notwithstanding any other provision of this Plan, the Board may take any
one or more of the actions described in Section 10.3. In addition, the
Board may extend the date for the exercise of Awards (but not beyond their
original Expiration Date). The Board need not adopt the same rules for
each Award or each Recipient.
Divestiture. If the Company or an Affiliate sells or otherwise transfers
equity securities of an Affiliate to a person or entity other than the
Company or an Affiliate, or leases, exchanges or transfers all or any
portion of its assets to such a person or entity, then the Board, in its
sole and absolute discretion, may specify that such transaction or event
constitutes a "Divestiture". In connection with a Divestiture,
notwithstanding any other provision of this Plan, the Board may take one or
more of the actions described in Section 10.3 or 10.4 with respect to
Awards or Award Shares held by, for example, Employees, Directors or
Consultants for whom that transaction or event results in a Termination.
The Board need not adopt the same rules for each Award or each Recipient.
Dissolution. If the Company adopts a plan of dissolution, the Board may,
in its sole and absolute discretion, cause Awards to be fully vested and
exercisable (but not after their Expiration Date) before the dissolution is
completed but contingent on its completion and may cause the Company's
repurchase rights on Award Shares to lapse upon completion of the
dissolution. To the extent not exercised before the earlier of the
completion of the dissolution or their Expiration Date, Awards shall
terminate just before the dissolution is completed. The Board need not
adopt the same rules for each Award or each Recipient.
Cut-Back to Preserve Benefits. If the Administrator determines that the
net after-tax amount to be realized by any Recipient, taking into account
any accelerated vesting, termination of repurchase rights, or cash payments
to that Recipient in connection with any transaction or event addressed in
this Section 10 would be greater if one or more of those steps were not
taken with respect to that Recipient's Awards or Award Shares, then and to
the extent determined by the Administrator, one or more of those steps
shall not be taken.
Withholding and Tax Reporting
- -----------------------------
Tax Withholding Alternatives
General. Whenever Award Shares are issued or become free of
restrictions, the Company may require the Recipient to remit to the Company
an amount sufficient to satisfy any applicable tax withholding requirement,
whether the related tax is imposed on the Recipient or the Company. The
Company shall have no obligation to deliver Award Shares or release Award
Shares from an escrow until the Recipient has satisfied those tax
withholding obligations. Whenever payment in satisfaction of Awards is
made in cash, the payment will be reduced by an amount sufficient to
satisfy all tax withholding requirements.
Method of Payment. The Recipient shall pay any required withholding
using the forms of consideration described in Section 6.4(b), except that,
in the discretion of the Administrator, the Company may also permit the
Recipient to use any of the forms of payment described in Section 6.4(c).
The Administrator may also permit Award Shares to be withheld to pay
required withholding. If the Administrator permits Award Shares to be
withheld, the Fair Market Value of the Award Shares withheld shall not
exceed the amount determined by the applicable minimum statutory
withholding rates, and shall be determined as of the date that the amount
of tax to be withheld or tendered for this purpose is to be determined.
Reporting of Dispositions. Any holder of Option Shares acquired under an
Incentive Stock Option shall promptly notify the Administrator in writing
of the sale or other disposition of any of those Option Shares if the
disposition occurs during: (a) the longer of two years after the Grant
Date of the Incentive Stock Option and one year after the date the
Incentive Stock Option was exercised, or (b) such other period as the
Administrator has established.
Compliance with Law
- -------------------
Applicable Law. The grant of Awards and the issuance and subsequent
transfer of Award Shares shall be subject to compliance with all Applicable
Law, including all applicable securities laws. Awards may not be
exercised, and Award Shares may not be transferred, in violation of
Applicable Law. Thus, for example, Awards may not be exercised unless:
(a) a registration statement under the Securities Act is then in effect
with respect to the related Award Shares, or (b) in the opinion of legal
counsel to the Company, those Award Shares may be issued in accordance with
an applicable exemption from the registration requirements of the
Securities Act and any other applicable securities laws. The failure or
inability of the Company to obtain from any regulatory body the authority
considered by the Company's legal counsel to be necessary or useful for the
lawful issuance of any Award Shares or their subsequent transfer shall
relieve the Company of any liability for failing to issue those Award
Shares or permitting their transfer. As a condition to the exercise of any
Award or the transfer of any Award Shares, the Company may require the
Recipient to satisfy any requirements or qualifications that may be
necessary or appropriate to comply with or evidence compliance with any
Applicable Law.
Amendment or Termination of this Plan or Outstanding Awards
- -----------------------------------------------------------
Amendment and Termination. The Board may at any time amend, suspend, or
terminate this Plan.
Stockholder Approval. The Company shall obtain the approval of the
Company's stockholders for any amendment to this Plan if stockholder
approval is necessary or desirable to comply with any Applicable Law or
with the requirements applicable to the grant of Awards intended to be
Incentive Stock Options. The Board may also, but need not, require that
the Company's stockholders approve any other amendments to this Plan.
Effect. No amendment, suspension, or termination of this Plan, and no
modification of any Award even in the absence of an amendment, suspension,
or termination of this Plan, shall impair any existing contractual rights
of any Recipient unless the affected Recipient consents to the amendment,
suspension, termination, or modification. However, no such consent shall
be required if the Administrator determines, in its sole and absolute
discretion, that the amendment, suspension, termination, or modification:
(a) is required or advisable in order for the Company, the Plan or the
Award to satisfy Applicable Law or to meet the requirements of any
accounting standard; or (b) in connection with any transaction or event
described in Section 10, is in the best interests of the Company or its
stockholders. The Administrator may, but need not, take the tax
consequences to affected Recipients into consideration in acting under the
preceding sentence. Termination of this Plan shall not affect the
Administrator's ability to exercise the powers granted to it under this
Plan with respect to Awards granted before the termination, or Award Shares
issued under such Awards, even if those Award Shares are issued after the
termination.
Reserved Rights
- ---------------
Nonexclusivity of this Plan. This Plan shall not limit the power of the
Company or any Affiliate to adopt other incentive arrangements including,
for example, the grant or issuance of stock options, stock, or other
equity-based rights under other plans or independently of any plan.
Unfunded Plan. This Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Recipients, any such accounts
will be used merely as a convenience. The Company shall not be required to
segregate any assets on account of this Plan, the grant of Awards, or the
issuance of Award Shares. The Company and the Administrator shall not be
deemed to be a trustee of stock or cash to be awarded under this Plan. Any
obligations of the Company to any Recipient shall be based solely upon
contracts entered into under this Plan, such as Award Agreements. No such
obligation shall be deemed to be secured by any pledge or other encumbrance
on any assets of the Company. Neither the Company nor the Administrator
shall be required to give any security or bond for the performance of any
such obligation.
Special Arrangements Regarding Award Shares
- -------------------------------------------
Escrows and Pledges. To enforce any restrictions on Award Shares
including restrictions related to Reverse Vesting, the Administrator may
require their holder to deposit the certificates representing Award Shares,
with stock powers or other transfer instruments approved by the
Administrator endorsed in blank, with the Company or an agent of the
Company to hold in escrow until the restrictions have lapsed or terminated.
The Administrator may also cause a legend or legends referencing the
restrictions to be placed on the certificates. Any Recipient who delivers
a promissory note as partial or full consideration for the purchase of
Award Shares will be required to pledge and deposit, with the Company, some
or all of the Award Shares as collateral to secure the payment of the note.
However, the Administrator may require or accept other or additional forms
of collateral to secure the note and, in any event, the Company will have
full recourse against the maker of the note, notwithstanding any pledge or
other collateral, unless stated otherwise in the Award Agreement and the
note.
Repurchase Rights
Reverse Vesting. If an Option or Restricted Stock Award is subject to
Reverse Vesting, the Company shall have the right, during the seven months
after the Recipient's Termination, to repurchase any or all of the Award
Shares that were unvested as of the date of that Termination, for a price
equal to the lower of: (i) the Option Price or Purchase Price for such
Shares, minus the amount of any cash dividends paid or payable with respect
to the Award Shares for which the record date precedes the repurchase, and
(ii) the Fair Market Value of those Option Shares as of the date of the
Termination. The repurchase price shall be paid in cash or, if the Option
Shares were purchased in whole or in part for a promissory note,
cancellation of indebtedness under that note, or a combination of those
means. The Company may assign this right of repurchase.
Procedure. The Company or its assignee may choose to give the
Recipient a written notice of exercise of its repurchase rights under this
Section 15.2. However, the Company's failure to give such a notice shall
not affect its rights to repurchase Award Shares. The Company must,
however, tender the repurchase price during the period specified in this
Section 15.2 for exercising its repurchase rights in order to exercise such
rights.
Market Standoff. If requested by the Company or a representative of its
underwriters in connection with a public offering of any securities of the
Company registered under the Securities Act, Recipients or certain
Recipients shall be prohibited from selling some or all of their Award
Shares during a period not to exceed 180 days after the effective date of
any registration statement of the Company.
Dividends. Dividends on Award Shares that are subject to any
restrictions, including Reverse Vesting, shall be subject to the same
restriction, including those set forth in this Section 15, as the Award
Shares on which the dividends were paid.
Beneficiaries
- -------------
A Recipient may file a written designation of one or more beneficiaries
who are to receive the Recipient's rights under the Recipient's Awards
after the Recipient's death. A Recipient may change such a designation at
any time by written notice. If a Recipient designates a beneficiary, the
beneficiary may exercise the Recipient's Awards after the Recipient's
death. If a Recipient dies when the Recipient has no living beneficiary
designated under this Plan, the Company shall allow the executor or
administrator of the Recipient's estate to exercise the Award or, if there
is none, the person entitled to exercise the Option under the Recipient's
will or the laws of descent and distribution. In any case, no Award may be
exercised after its Expiration Date.
Miscellaneous
- -------------
Governing Law. This Plan and all determinations made and actions taken
under this Plan shall be governed by the substantive laws, but not the
choice of law rules, of the State of Delaware.
Determination of Value. Fair Market Value shall be determined as
follows:
Listed Stock. If the Shares are traded on any established stock
exchange or quoted on a national market system, Fair Market Value shall be
the closing sales price for the Shares as quoted on that stock exchange or
system for the date the value is to be determined (the "Value Date") as
reported in The Wall Street Journal or a similar publication. If no sales
are reported as having occurred on the Value Date, Fair Market Value shall
be that closing sales price for the last preceding trading day on which
sales of Shares are reported as having occurred. If no sales are reported
as having occurred during the five trading days before the Value Date, Fair
Market Value shall be the closing bid for Shares on the Value Date. If
Shares are listed on multiple exchanges or systems, Fair Market Value shall
be based on sales or bids on the primary exchange or system on which Shares
are traded or quoted.
Reservation of Shares. During the term of this Plan, the Company will at
all times reserve and keep available such number of Shares as are still
issuable under this Plan.
Electronic Communications. Any Award Agreement, notice of exercise of an
Award, or other document required or permitted by this Plan may be
delivered in writing or, to the extent determined by the Administrator,
electronically. Signatures may also be electronic if permitted by the
Administrator.
Notices. Unless the Administrator specifies otherwise, any notice to the
Company under any Option Agreement or with respect to any Awards or Award
Shares shall be in writing (or, if so authorized by Section 17.4,
communicated electronically), shall be addressed to the Secretary of the
Company, and shall only be effective when received by the Secretary of the
Company.
Adopted by the Board on: April 4, 2002
-------------
Approved by the stockholders on: May 22, 2002
------------
Effective date of this Plan: May 22, 2002
------------
Amended by the Board on: March 25, 2004
-------------
Approved by the stockholders on:
------------
Effective date of this Plan:
------------
(Footnote continued)
Appendix D
AUDIT COMMITTEE CHARTER
-----------------------
Adopted by the Board of Directors of A.P. Pharma, Inc.
Purpose
- -------
The purpose of the Audit Committee (the "Committee") of the board of directors
(the "Board") of A.P. Pharma, Inc. (the "Company") is to oversee the
accounting and financial reporting processes of the Company and audits of its
financial statements. The Committee is not responsible, however, for planning
or conducting audits, or determining whether the Company's financial
statements are complete and accurate or in accordance with generally accepted
accounting principles.
Composition
- -----------
The Committee shall be composed of three or more directors, as determined by
the Board, each of whom shall be "independent", as that term is defined in
Section 10A(m) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Rules and Regulations (the "Regulations") of the
Securities and Exchange Commission (the "Commission") under the Exchange Act,
and shall meet the independence and financial literacy requirements of Nasdaq.
At least one member of the Committee 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.
Responsibilities
- ----------------
The Committee is charged by the Board with the responsibility to:
1. Appoint and provide for the compensation of the Company's independent
auditor, oversee the work of the independent auditor (including resolution of
any disagreements between management and the independent auditor regarding
financial reporting), evaluate the performance of the independent auditor and,
if so determined by the Committee, replace the independent auditor; it being
acknowledged that the independent auditor is ultimately accountable to the
Board and the 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 Committee regarding the
auditor's independence in accordance with Independence Standards Board
Standard No. 1, discuss such reports with the auditor, oversee the
independence of the independent auditor and, if so determined by the Committee
in response to such reports, 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 to advise the Committee if there are any
subjects that require special attention.
5. Instruct the independent auditor to report to the Committee on all
critical accounting policies of the Company, all alternative treatments of
financial information within generally accepted accounting principles that
have been discussed with management, ramifications of the use of such
alternative disclosures and treatments and the treatment preferred by the
auditors, and other material written communication between the auditors and
management.
6. 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; the adequacy of internal financial controls; the adequacy of the
disclosure of off-balance sheet transactions, arrangements, obligations and
relationships in reports filed with the Commission; and the appropriateness of
the presentation of any non-GAAP financial measures (as defined in the
Regulations) included in any report filed with the Commission or in any public
disclosure or release.
7. Review the management letter delivered by the independent auditor in
connection with the audit.
8. Following such review and discussions, if so determined by the Committee,
recommend to the Board that the annual financial statements be included in the
Company's annual report.
9. Meet quarterly with management and 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 a member of the Committee.
10. Have such meetings with management and the independent auditor as the
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. Meet at least once each year in separate executive sessions with
management 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.
12. Review significant changes to the Company's accounting principles and
practices proposed by the independent auditor or management.
13. Conduct or authorize such inquiries into matters within the Committee's
scope of responsibility as the Committee deems appropriate.
14. Provide minutes of Committee meetings to the Board, and report to the
Board on any significant matters arising from the Committee's work.
15. At least annually, review and reassess this Charter and, if appropriate,
recommend changes to the Board.
16. Prepare the Committee report required by the Regulations to be included
in the Company's annual proxy statement.
17. Establish a procedure for receipt, retention and treatment of any
complaints received by the Company about its accounting, internal accounting
controls or auditing matters and for the confidential and anonymous submission
by employees of concerns regarding questionable accounting or auditing
matters.
18. Approve, in accordance with Sections 10A(h) and (i) of the Exchange Act
and the Regulations, all professional services, to be provided to the Company
by its independent auditor, provided that the Committee shall not approve any
non-audit services proscribed by Section 10A(g) of the Exchange Act in the
absence of an applicable exemption. The Committee may adopt policies and
procedures for the approval of such services which may include delegation of
authority to a designated member or members of the Committee to approve such
services so long as any such approvals are disclosed to the full Committee at
its next scheduled meeting.
19. Review and approve all related party transactions.
Authority
- ---------
By adopting this Charter, the Board delegates to the Committee full authority
in its sole discretion to:
1. Perform each of the responsibilities of the Committee described above.
2. Appoint a chair of the Committee, unless a chair is designated by the
Board.
3. Engage and obtain advice and assistance of independent counsel and other
advisers as the Committee determines necessary to carry out its
responsibilities.
4. Cause the officers of the corporation to authorize such funding as the
Committee shall determine to be appropriate for payment of compensation to the
Company's independent auditor and any legal counsel or other advisers engaged
by the Committee, and payment of ordinary administrative expenses of the audit
committee that are necessary or appropriate in carrying out its duties.
Approved by Audit Committee February 25, 2004
Approved by the Board of Directors March 25, 2004
/S/ Board of Directors March 25, 2004
- ----------------------
(continued from previous page)
Appendix E
NOMINATING AND GOVERNANCE COMMITTEE CHARTER
-------------------------------------------
Adopted by the Board of Directors of A.P. Pharma, Inc.
Purpose
- -------
The purpose of the Nominating Committee (the "Committee") of the board of
directors (the "Board") of A.P. Pharma, Inc. (the "Company") is to identify
individuals qualified to serve as members of the Board of the Company, and
determine nominees for election as directors of the Company, evaluate the
Board's performance, develop and recommend to the Board corporate governance
guidelines and provide oversight with respect to corporate governance and
ethical conduct.
Composition
- -----------
The Committee shall be composed of three or more directors, as determined by
the board of directors, each of whom shall satisfy the requirements of
Nasdaq.
Responsibilities
- ----------------
The Committee is charged by the Board with the responsibility to:
1. Identify and evaluate individuals qualified to serve as members of the
Board, and determine nominees for election as directors of the Company at the
next annual or special meeting of stockholders at which directors are to be
elected, and identify, evaluate and recommend to the Board individuals to
fill any vacancies or newly created directorships that may occur between such
meetings.
2. Recommend to the Board directors for appointment to its committees and,
as appropriate, recommend rotation or removal of directors from Board
committees.
3. Cause to be prepared and recommend to the Board the adoption of corporate
governance guidelines, and periodically review and assess the guidelines and
recommend changes for approval by the Board.
4. Cause to be prepared and recommend to the Board the adoption of a code of
ethics and a code of conduct, and periodically review and assess the codes,
and recommend changes for approval by the Board.
5. Oversee a periodic evaluation of the performance of the Board, including
individual members of the Board, and discuss the evaluation with the full
Board.
6. Provide minutes of Committee meetings to the Board, and report to the
Board on any significant matters arising from the Committee's work.
7. At least annually, review and reassess this Charter and, if appropriate,
recommend changes to the Board.
8. Make recommendations to the Board regarding issues of management
succession.
9. Perform such other duties and responsibilities as may be assigned to the
Committee by the Board.
Authority
- ---------
By adopting this Charter, the Board delegates to the Committee full authority
in its discretion to:
1. Perform each of the responsibilities of the Committee described above.
2. Delegate such of its authority and responsibilities as the Committee
deems proper to members of the Committee or a subcommittee.
3. Appoint a chair of the Committee, unless a chair is designated by the
Board.
4. Engage and terminate search firms, independent counsel and other advisers
as the Committee determines necessary to carry out its responsibilities, and
approve the fees and other terms of retention of any such search firms,
independent counsel and other advisers.
5. Cause the officers of the Company to provide such funding as the
Committee shall determine to be appropriate for payment of compensation to
any search firm or other advisers engaged by the Committee.
Approved by Nominating and Governance Committee May 28, 2003
Approved by the Board of Directors March 25, 2004
/S/ Board of Directors March 25, 2004
- ----------------------