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A.P. PHARMA, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 22, 2002
-------------------------------
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 22, 2002, at 9:00 a.m. local time, for the following
purposes:
1. To elect seven directors to hold office until the next Annual Meeting
of stockholders and until their successors are elected.
2. To approve adoption of the Company's 2002 Equity Incentive Plan.
3. To transact such other business as properly may come before the
meeting, or any adjournments or postponements of the meeting.
Only stockholders of record at the close of business on March 25, 2002, 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 17, 2002
- 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 22, 2002, 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 17, 2002.
VOTING
Only stockholders of record at the close of business on March 25, 2002, 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 20,365,687 shares of its Common Stock,
$.01 par value (the "Common Stock"). Holders of a majority of the
outstanding shares of Common Stock of the Company, either present in person
or by proxy, will constitute a quorum for the transaction of business at
the Annual Meeting.
Holders of Common Stock are entitled to one vote for each share of Common
Stock held. In the election of directors, the seven nominees receiving the
highest number of affirmative votes of the shares present and voting at the
Annual Meeting at which a quorum is present will be elected directors.
Abstentions are included in the determination of whether a quorum is
present at the meeting and are counted in tabulations of the votes cast on
proposals presented to stockholders and have the same effect as negative
votes. Proxies marked to withhold authority for all directors will not be
counted in the election of directors. If a broker indicates on a proxy
that it does not have discretionary authority as to certain shares to vote
on a particular matter (a broker non-vote), while those shares will be
included in the determination of whether a quorum is present, broker non-
votes will have no effect on the election of directors or proposal number
two to approve adoption of the 2002 Equity Incentive Plan.
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
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth beneficial Common Stock ownership as of
March 25, 2002, 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) 79,817 *
Stephen Drury(3) 72,622 *
Paul Goddard, Ph.D.(4) 106,389 *
Jayne Lange(5) 12,500 *
Michael O'Connell(6) 455,183 2.2
Peter Riepenhausen(7) 145,620 *
Toby Rosenblatt(8) 261,433 1.3
Gordon Sangster(9) 169,991 *
Gregory Turnbull(10) 142,837 *
Dennis Winger(11) 119,995 *
Citigroup, Inc.(12) 4,264,310 20.9
388 Greenwich Street
New York, NY 10013
Wellington Management(13) 1,620,500 8.0
75 State Street
Boston, MA 02109
Officers and Directors as a group(10 persons) 1,566,387 7.7
(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 25, 2002, and that no other
person has exercised any outstanding stock options.
(2) Includes 74,793 shares underlying exercisable stock options.
(3) Includes 38,750 shares underlying exercisable stock options.
(4) Includes 41,389 shares underlying exercisable stock options
options and 35,000 shares of restricted stock granted in
October, 2001.
(5) Represents 12,500 shares underlying exercisable stock options.
(6) Includes 421,877 shares underlying exercisable stock options.
(7) Includes 35,300 shares held in family trust and 90,000
shares underlying exercisable stock options.
(8) Includes 90,000 shares underlying exercisable stock options.
(9) Includes 165,488 shares underlying exercisable stock options.
(10) Includes 90,000 shares underlying exercisable stock options.
(11) Includes 105,000 shares underlying exercisable stock options.
(12) Based solely on information contained in a Schedule 13G
dated January 14, 2002, and includes 1,672,300 shares
held by Smith Barney Fund Management LLC and 2,578,610 shares
held by Salomon Smith Barney, Inc.
(13) Based solely on information contained in a Schedule 13G dated
February 14, 2002.
ELECTION OF DIRECTORS
Seven directors are to be elected to the Board at the Annual Meeting, each
to serve for a one year term until the Annual Meeting to be held in 2003,
and until his or her successor has been elected and qualified. 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:
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. 52 Chairman 2000
Stephen A. Drury (1) 64 Director 1999
Michael O'Connell 52 President and Chief Executive
Officer 2000
Peter Riepenhausen (2) 65 Director 1991
Toby Rosenblatt (1)(2) 63 Director 1983
Gregory Turnbull (1)(2) 63 Director 1986
Dennis Winger (1) 54 Director 1993
- ----------------
(1) Member of the Finance and Audit Committees of the Board.
(2) Member of the Compensation and Stock Option Committee of the
Board.
Paul Goddard -- chairman of APP board of directors since November 2000.
From 1998 to 2000, Dr. Goddard was president and chief executive officer
of Elan's pharmaceutical division. From 1991 to 1998 Dr. Goddard served as
chairman and chief executive officer of Neurex. In 1998, Neurex was
acquired by Elan. Prior to Neurex, Dr. Goddard held various senior
management positions at SmithKline Beecham.
Stephen A. Drury -- director of APP since May 1999. Mr. Drury is
currently a healthcare financial advisor and a private investor. Prior to
his retirement in 1997, he was executive vice president and a director of
Owen Healthcare since 1992 and senior vice president and chief financial
officer of Integrated Health Services, Inc. from 1989 until 1992. Prior to
that, Mr. Drury served as senior vice president of Thomson McKinnon
Securities and managing director of its Healthcare Capital Markets Group
from 1985 to 1989.
Michael O'Connell -- director since May 2001 and chief executive officer
and president of APP since August 2000; he originally joined APP in July
1992 as vice president and chief financial officer. From 1980 to 1992, Mr.
O'Connell served with The Cooper Companies, Inc. (formerly CooperVision,
Inc.) in a number of financial positions including vice president and
corporate controller.
Peter Riepenhausen -- director of APP since April 1991. Mr.
Riepenhausen is currently chairman, Europe, of Align Technologies, Inc. and
a business consultant. He was president and chief executive officer of
ReSound Corporation from 1994 to 1998. He serves as a director of Audimed,
Germany and GAP AG, Germany. He also served as a director of Caradon
(Europe) plc from April 1994 until September 1998.
Toby Rosenblatt -- director of APP since September 1983. Mr. Rosenblatt
is president of Founders Investments, Ltd which is involved in private
investment activities. Mr. Rosenblatt also serves as a director of State
Street Research Mutual Funds and Met Life Metropolitan Series Mutual Funds
and is a trustee of numerous civic and educational institutions.
Gregory Turnbull -- director of APP since February 1986. Mr. Turnbull
is currently a business consultant and a director of Planar Systems, Inc.
Previously, he was a general partner of Cable & Howse Ventures, a venture
capital organization, of which he is currently a special limited partner.
Dennis Winger -- director of APP since February 1993. Mr. Winger is
senior vice president and chief financial officer of Applera Corporation.
From 1989 to 1997, Mr. Winger was senior vice president, finance and
administration and chief financial officer of Chiron Corporation. He was
also a member of Chiron's Strategy Committee.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors met four times during 2001. 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.
Winger.
The Board has a Finance Committee, an Audit Committee and a Compensation
and Stock Option Committee. The Finance and Audit Committees each met six
times during the last fiscal year, including quarterly meetings of the
Audit Committee for review of the Company's financial results, and
consisted of Messrs. Drury, Rosenblatt, Turnbull and Winger. The Audit
Committee recommends engagement of the Company's independent auditors and
reviews the scope and results of the annual independent audit of the
Company's books and records. The Committee is also responsible for
reviewing the Company's accounting principles and its system of internal
accounting controls. See the Audit Committee Report included in this Proxy
Statement. The Finance Committee is responsible for reviewing the
Company's plans for providing appropriate financial resources to sustain
the Company's operations including review of the Company's strategic plan
and annual operating budget. The Compensation and Stock Option Committee,
which met five times during the year, consisted of Messrs. Riepenhausen,
Rosenblatt and Turnbull. The function of the Compensation and Stock Option
Committee is to propose and review the compensation policies of the Company
and to administer the Company's stock option and stock purchase plans. Mr.
Turnbull joined the Compensation and Stock Option Committee in May 2001.
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
Stock Option Plan. In addition, each nonemployee director elected after
the Company's initial public offering in 1987 received a one-time grant to
acquire 25,000 shares when first elected as a director. Nonemployee
directors of the Company also receive $12,000 per year, $1,000 for each
meeting of the Board of Directors attended and $500 for each committee
meeting attended on a date other than the date of a regularly scheduled
Board meeting. Subsequent to July 1, 2000, all compensation was payable in
unregistered Common Stock of the Company valued at the closing price of the
Company's Common Stock on the last trading date of each quarter. Certain
directors of the Company have received consulting fees in prior years.
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, 2001, except for
Mr. Peter Riepenhausen who was delayed in filing a Form 4, all Section
16(a) filing requirements applicable to its officers and directors were
satisfied.
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the total compensation for
fiscal years 2001, 2000 and 1999 of the chief executive officer and the
other most highly compensated executive officers whose salary exceeded
$100,000 in 2001.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING ALL
SALARY BONUS OPTIONS OTHER
NAME AND POSITION YEAR ($) ($) (#) COMPENSATION
- ----------------- ---- ------ ------- ------ ------------
Michael O'Connell 2001 291,058 67,500 25,000 5,100(1)
President and 2000 261,769 125,000 150,000 5,100(1)
Chief Executive 1999 242,423 33,000 0 4,800(1)
Officer
John Barr, Ph.D. 2001 182,288 94,750(2) 35,000 5,100(1)
Vice President, 2000 146,385 13,000 50,000 4,469(1)
Research and 1999 125,142 10,000 0 3,741(1)
Development
Jayne Lange (3) 2001 120,750 24,000 50,000 3,060(1)
Vice President, 2000 N/A N/A N/A N/A
Business and 1999 N/A N/A N/A N/A
Development
Gordon Sangster 2001 193,542 38,500 20,000 5,100(1)
Chief Financial 2000 182,183 65,000 50,000 5,100(1)
Officer 1999 161,281 15,000 0 4,800(1)
- ---------------
(1) The stated amounts are Company matching contributions to the A.P.
Pharma
401K Plan. In 2001, the Company made matching cash contributions equal
to
50% of each participant's contribution during the plan year up to a
maximum amount equal to the lesser of 3% of each participant's annual
compensation or $5,100.
(2) Dr. Barr was paid $52,500 in January 2001 as a retention bonus in
accordance with a prior agreement, based on Dr. Barr's continuing
employment with the Company following the sale of the Company's
cosmeceutical business to RP Scherer on July 25, 2000.
(3) Ms. Lange joined the Company in May 2001 and is compensated at an
annual
rate of $195,000.
The following table sets forth certain information with respect to options
granted during 2001 to the executive officers named in the Summary
Compensation Table.
STOCK OPTION GRANTS IN 2001
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------- -----------------
- ---
%
OF
TOTAL
OPTIONS
NUMBER OF GRANTED
SHARES TO
UNDERLYING EMPLOYEES
OPTIONS IN EXERCISE
GRANTED FISCAL PRICE EXPIRATION
NAME (#)(2) YEAR ($/SH) DATE 5%($)
10%($)
- -------------------- --------- ---- ------ -------- ------- -----
- -
Michael O'Connell 25,000 6.8 $3.125 01/25/11 18,591
75,878
John Barr, Ph.D. 35,000 9.5 $2.000 08/21/11 44,022
111,562
Jayne Lange 50,000 13.5 $3.090 05/21/11 97,164
246,233
Gordon Sangster 20,000 5.4 $2.000 08/21/11 25,156
63,749
- ---------------
(1) Potential realizable value is based on an assumption that the price of
the
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten year option term. The
numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission ("SEC") and do not reflect the
Company's estimate of future stock price growth.
(2) The options granted under the Company's 1992 Stock Plan typically vest
over 4 years at 25% annually. Payments on exercise, including any
taxes
the Company is required to withhold, may be made in cash, by a full
recourse promissory note or by tender of shares. Options are granted
at
fair market value on the date of grant.
The following table sets forth certain information with respect to the value of options held
at fiscal year-end by the executive officers named in the Summary Compensation Table. No
options were exercised during 2001 by any of the named executive officers.
AGGREGATED 2001 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 2001 YEAR-END AT FISCAL YEAR-END (1)
------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) ($) ($)
- ------------------ ----------- ------------- ----------- -------------
Michael O'Connell 388,645 136,355 0 0
John Barr, Ph.D. 62,708 72,292 2,334 25,666
Jayne Lange 0 50,000 0 0
Gordon Sangster 153,055 61,945 1,334 14,666
- ---------------
(1) Market value of underlying securities at fiscal year-end minus the
exercise price of "in-the-money" options.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors operates under a written charter
adopted by the Board of Directors. The Audit Committee, on behalf of the
Board of the Directors, provides general oversight of the Company's financial
accounting and reporting process, including the system of internal controls.
The Audit Committee also reviews and appraises the audit effort of the
Company's independent accountants and provides an open avenue of communication
among the independent accountants, financial and senior management and the
Board of Directors. Each of the members of the Audit Committee is
independent, as defined under the listing standards of NASDAQ.
The Company's management has primary responsibility for preparing the
Company's financial statements and for the Company's financial reporting
process. The Company's independent auditors, Ernst & Young LLP, are
responsible for expressing an opinion on the conformity of the Company's
audited financial statements to accounting principles generally accepted in
the United States of America.
In this context and in connection with the audited financial statements
contained in the Company's 2001 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 on a quarterly basis, to review
the quarterly financial statements prior to their release;
discussed with Ernst & Young LLP, the Company's independent auditors, their
judgment as to the quality of the Company's accounting principles, as well as
certain matters related to the conduct of the audit, as required by Statement
of Auditing Standards No. 61, Communication with Audit Committees;
met with the independent auditors, with and without management present, to
discuss the results of their audit, their evaluations of the Company's
internal controls, and the overall quality of the Company's financial
reporting;
reviewed the written disclosures and the letter from Ernst & Young LLP
required by Independence Standard Board Standard No. 1, "Independence
Discussions with Audit Committees," discussed with the auditors their
independence from the Company, and concluded that the non-audit services
performed by Ernst & Young LLP are compatible with maintaining their
independence;
instructed the independent auditors that the Committee expects to be advised
if there are any subjects that require special attention.
Based on the review and discussions described above, the Audit Committee
recommended to the Board of Directors that the Company's audited consolidated
financial statements for the fiscal year ended December 31, 2001 be included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001, for filing with the SEC, and the Board of Directors approved such
inclusion. Based on the Audit Committee's recommendation, the Board has also
selected Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending December 31, 2002.
Audit Committee
Stephen Drury
Toby Rosenblatt
Gregory Turnbull
Dennis Winger
Relationship with Independent Accountants
- -----------------------------------------
As reported on Form 8-K, dated December 12, 2001, the Audit Committee of the
Board of Directors authorized the termination of KPMG LLP as auditors of the
Company effective December 13, 2001 and engaged Ernst & Young LLP as the
Company's independent auditors to replace KPMG LLP. A representative from
Ernst & Young LLP will be present at the Annual Meeting.
The reports of KPMG LLP on the Company's financial statements for the past two
fiscal years did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles.
In connection with the audits of the Company's financial statements for each
of the two fiscal years ended December 31, 2000 and December 31, 1999, there
were no disagreements with KPMG LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of KPMG LLP, would have caused KPMG
LLP to make reference to the matter in their report.
Prior to its termination, KPMG performed the review of the Company's quarterly
consolidated financial statements for the year 2001. Ernst and Young
performed the year-end audit of the Company's consolidated financial
statements for the year 2001. The aggregate fees billed for 2001 for each of
the following categories of services are as follows:
Review of the Company's 2001
quarterly financial statements - KPMG $28,735
All other services - KPMG $ 5,700
Year-end audit - Ernst and Young $60,000
All other services - Ernst and Young $20,000
"All other services" includes tax planning and review of tax returns of the
Company.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation and Stock Option Committee of the Board of Directors (the
"Committee") is responsible for establishing compensation policies applicable
to the Company's executive officers and, pursuant to such policies,
determining the compensation payable to the Company's chief executive officer
and other executive officers of the Company. The Committee consists of Peter
Riepenhausen, Toby Rosenblatt and Greg Turnbull, each of whom is a nonemployee
director of the Company. In determining compensation policies, the Committee
has access to compensation surveys for companies which compete with the
Company in the recruitment and retention of senior executives as well as other
executive compensation information and data. The following report relates to
compensation payable to the Company's executive officers for the year ended
December 31, 2001.
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 are determined under the Company's new
bonus plan based on management by objectives ("MBO"). The MBO plan, adopted
by the Committee in January 2001, establishes annual corporate goals and a
target bonus for all employees, including for each executive officer, which is
a percentage of base salary. The percentage of the target bonus that is paid
to each officer is dependent upon the percentage achievement of corporate
goals. Achievement of corporate goals is determined at the end of the year
and related bonuses are paid in the subsequent year. Bonuses earned by the
executive officers for achieving a percentage of the 2001 corporate goals were
paid in February 2002.
EQUITY AWARDS
The Company's compensation policies recognize the importance of stock
ownership by senior executives and equity-based incentive compensation is an
integral part of each executive's compensation. The Committee believes that
the opportunity for stock appreciation through stock options which vest over
time promotes the relationship between long-term interests of executive
officers and stockholders. The size of specific options grants takes into
account the executive officer's salary, number of options previously granted,
as well as shares of Common Stock held, and the contributions to the Company's
success.
In 1998, the Company's 1992 Stock Plan was amended to also permit the awards
of restricted stock. No restricted stock awards were granted to executive
officers in 2001.
COMPENSATION PAYABLE TO CHIEF EXECUTIVE OFFICER
The 2001 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 $285,000 to
$300,000 effective September 1, 2001. In 2001, the Compensation Committee and
Board of Directors approved the grant to Mr. O'Connell of stock options to
acquire an aggregate of 25,000 shares of Common Stock. As of March 25, 2002,
Mr. O'Connell held presently exercisable stock options to purchase 407,083
shares and, including options, beneficially owns as of that date 440,389
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, 1996, with all
dividends reinvested. Past stock performance is not necessarily indicative of
future results.
12/96 12/97 12/98 12/99 12/00 12/01
----- ----- ----- ------ ----- -----
A.P. PHARMA, INC. . 100 86 70 45 31 36
S&P 500 100 133 171 208 189 166
RUSSELL 2000 100 122 119 145 140 143
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
addition, he receives compensation of $100,000 per year.
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 to $150,000 per
year beginning April 1, 2002.
During 2001, no consulting fees were paid to directors.
PROPOSAL TWO--APPROVAL OF ADOPTION OF
A.P. PHARMA 2002 EQUITY INCENTIVE PLAN
The Company's 1992 Stock Option Plan expired on March 24, 2002. This plan was
intended to strengthen the Company by providing added incentive to officers,
directors, and consultants for high levels of performance. As of March 24,
2002, directors, officers, employees and consultants held unexercised options
covering 3,325,792 shares of Common Stock with an average exercise price of
$5.33, of which options covering 722,683 shares are due to expire by July
2002.
The board believes that it is in the best interest of the Company to approve
the adoption of the 2002 Equity Incentive Plan (the "2002 Plan"). Subject to
shareholder approval, under the terms and conditions of the 2002 Plan, an
aggregate of 500,000 shares of Common Stock will be reserved for issuance
thereunder. The 2002 Plan authorizes the Company to grant options and
restricted stock (collectively, "awards") to eligible employees, directors and
consultants. The following description of the 2002 Plan is a summary and is
qualified by reference to the complete text of the 2002 Plan.
Summary Description of the 2002 Plan
- ------------------------------------
The 2002 Plan is intended to strengthen the Company by allowing selected
employees, directors and consultants to participate in the Company's future
growth and success by granting them stock options in order to retain, attract
and motivate them. The Board has ultimate responsibility for administering
the 2002 Plan, but will delegate this authority to a committee of the board or
executives of the Company (the "Committee"), subject to certain limitations.
The Committee will have broad discretion to determine the amount and type of
awards and terms and conditions of the awards. Individual grants will
generally be based on a person's present and potential contribution to the
Company.
As of March 29, 2002, the Company had approximately 38 employees and 6 non-
employee directors who would be eligible to participate in the 2002 Plan. The
grant of awards is based upon a determination made by the Committee after a
consideration of various factors. The Company currently cannot determine the
nature and amount of any awards that will be granted in the future to any
eligible individual or group of individuals, although the Board currently
expects each year to grant stock options for 10,000 shares of Common Stock to
each nonemployee director. In addition, the maximum number of shares that can
be granted under the 2002 Plan during any calendar year to any single optionee
is 250,000. The Company believes that with this limitation and other
provisions of the 2002 Plan, options and stock awards granted under the 2002
Plan will generate "qualified performance-based compensation" within the
meaning of section 162(m) of the Internal Revenue Code and will therefore not
be subject to the $1,000,000 cap on deductibility for federal income tax
purposes of certain compensation payments in excess of $1,000,000. See
"Federal Income Tax Consequence of Awards and Exercises under the 2002 Plan"
below.
Awards may be granted in the form of options and restricted stock. Any award
may be granted either alone or in addition to other awards granted under the
2002 Plan. The 2002 Plan will expire in 2012, but options outstanding under
the 2002 Plan may extend beyond that date.
Options
- -------
Stock options granted under the 2002 Plan may be incentive stock options under
Section 422 of the Internal Revenue Code ("ISOs") or non-qualified stock
options ("NQOs"). The exercise price of ISOs may not be less than the fair
market value of the shares subject to the option on the date of grant. The
term of any ISO or NQO granted under the plan may not exceed 10 years.
Certain other limitations are also applicable to ISOs in order to take
advantage of the favorable tax treatment that may be available for ISOs. The
consideration payable upon exercise of an option may be paid in cash, shares
of stock, or by promissory note as authorized by the Committee.
Restricted Stock
- ----------------
Restricted stock awards consist of non-transferable shares of Common Stock.
The restrictions on transfer can lapse based on service, performance or other
criteria determined by the Committee, which may not be waived or accelerated
except in the event of a change of control or a fundamental transaction such
as a merger in which the Company is not the survivor. The lapse of
restrictions on restricted stock awards cannot be less than three years or
more than ten years. The purchase price of the restricted stock must be at
least par value of the Common Stock and may be paid in cash, shares of stock,
or by promissory note as authorized by the Committee.
General
- -------
The consideration payable for, upon exercise of, or for tax payable in
connection with, an award may be paid in cash, by promissory note of the
participant, or by delivery of other property, including securities of the
Company, as authorized by the Committee. The Company generally will not
receive any consideration upon the grant of any awards. Awards generally may
be exercised at any time within three months after a participant's employment
by, or consulting relationship with, the Company terminates (but, only to the
extent exercisable or payable at the time of termination). If termination is
due to the participant's death, retirement or disability, the award may be
exercised for one year thereafter. Shares issued under an award may be
subject to a right of repurchase by the Company. Except as specifically
provided in an award agreement, no award is assignable or otherwise
transferable by a participant other than by will or by the laws of descent and
distribution.
The Board may amend, alter or discontinue the 2002 Plan or any award at any
time, but, except under limited circumstances, the consent of a participant is
required if the participant's rights under an outstanding award would be
impaired. In addition, to the extent required for the 2002 Plan to satisfy
the conditions of Rule 16b-3 under the Securities Exchange Act of 1934 or,
with respect to provisions solely as they relate to ISOs, to the extent
required for the 2002 Plan to comply with Section 422 of the Internal Revenue
Code, the stockholders of the Company must approve any amendment, alteration
or discontinuance of the 2002 Plan that would: (i) increase the total number
of shares reserved under the 2002 Plan; (ii) change the class of participants
eligible to participate in the 2002 Plan; or (iii) materially increase the
benefits accruing to participants under the 2002 Plan.
In the event of a "change in control" of the Company, as defined in the 2002
Plan, the Board may, subject to certain limitations, accelerate the vesting
provisions of awards or may cash out the awards. A "change in control" is
defined to include the acquisition by a group of 30% or more of the total
combined voting power or value of the Company; as a result of a contested
election of Company Directors, the persons who were Company Directors
immediately before the election cease to constitute a majority of the board;
or a merger, consolidation or reorganization or other change in ownership of
the Company's assets or stock 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.
Federal Income Tax Consequences of Option Awards and Exercises Under the 2002
- -----------------------------------------------------------------------------
Plan
- ----
The following is a general summary of the typical federal income tax
consequences of the issuance and exercise of options or awards of restricted
stock under the 2002 Plan. It does not describe state or other tax
consequences of the issuance and exercise of options or of grant of restricted
stock.
Options
- -------
The grant of an ISO has no federal income tax effect on the optionee. Upon
exercise the optionee does not recognize income for "regular" tax purposes.
However, the excess of the fair market value of the stock subject to an option
over the exercise price of such option (the "option spread") is includible in
the optionee's "alternative minimum taxable income" for purposes of the
alternative minimum tax. If the optionee does not dispose of the stock
acquired upon exercise of an ISO until more than two years after the option
grant date and more than one year after exercise of the option, any gain upon
sale of the shares will be a long-term capital gain. If shares are sold or
otherwise disposed of before both of these periods have expired (a
"disqualifying disposition"), the option spread at the time of exercise of the
option (but not more than the amount of the gain on the sale or other
disposition) is ordinary income in the year of such sale or other disposition.
If gain on a disqualifying disposition exceeds the amount treated as ordinary
income, the excess is taxable as capital gain (which will be long-term capital
gain if the shares have been held more than one year after the date of
exercise of the option). The Company is not entitled to a federal income tax
deduction in connection with ISOs, except to the extent that the optionee has
taxable ordinary income on a disqualifying disposition.
The grant of a NQO has no federal income tax effect on the optionee. Upon the
exercise of a NQO, the optionee has taxable ordinary income (and the Company
is currently entitled to a corresponding deduction) equal to the option spread
on the date of exercise. Upon the disposition of stock acquired upon exercise
of a NQO, the optionee recognizes either long-term or short-term capital gain
or loss, depending on how long such stock was held, and based on the fair
market value of the stock on date of exercise.
In the case of both ISOs and NQOs, special federal income tax rules apply if
Company Common Stock is used to pay all or part of the option price. Special
rules may also apply when a transferable option is transferred.
Stock Grants
- ------------
Upon receipt of an award of restricted stock, a recipient generally has
taxable income in the amount of the excess of the then fair market value of
the Common Stock over any consideration paid for the Common Stock (the
"spread"). However, if the Common Stock is subject to a "substantial risk of
forfeiture" (such as a requirement that the recipient continue in the employ
of the Company) and the recipient does not make an election under section
83(b) of the Internal Revenue Code, the recipient will have taxable income
upon the lapse of the risk of forfeiture, rather than at receipt, in an amount
equal to the spread on the date of lapse. The taxable income in the case of
an employee constitutes supplemental wages subject to income and employment
tax withholding, and the Company receives a corresponding income tax
deduction. If the recipient makes an election under section 83(b) of the
Internal Revenue Code, the stock received by the recipient is valued as of the
date of receipt (without taking the restrictions into account) and the
recipient has taxable income equal to any excess of that value over the amount
he or she paid for the stock. The Company would again have a deduction equal
to the income to the recipient. The consequences upon sale or disposition of
the shares awarded or sold generally are the same as for Common Stock acquired
under an NQO (see above).
Limitation on Deduction of Certain Compensation
- -----------------------------------------------
Compensation of over $1,000,000 paid in any year to one of the top five
officers of a publicly-held corporation is not deductible for tax purposes
unless the grant of the compensation meets the Internal Revenue Code's
definition of "performance-based" compensation. The Company will generally
attempt to ensure that any awards under the 2002 Plan meet these standards,
but may not be able do so in every instance.
The following table shows the number of shares covered by options awarded to
the executive officers and the identified groups in fiscal 2001. Unless
otherwise noted, each option has an exercise price equal to the fair market
value of one share of Common Stock on the date of grant.
Executive Officers Compensation for 2001
New Plan Benefits
Name and Position Number of Shares
- ----------------- ----------------
Michael O'Connell
President and Chief Executive Officer 25,000
John Barr, Ph.D.
Vice President, Research and Development 35,000
Jayne Lange
Vice President, Business Development 50,000
Gordon Sangster
Chief Financial Officer 20,000
All executive officers as a group 130,000
All directors who are not executive
officers as a group 175,000
All employees and consultants (other
than executive officers) as a group 197,000
Stockholders are being asked to approve the adoption of the 2002 Plan. The
affirmative vote of the holders of a majority of the shares of the Common
Stock of the Company represented and voting at the Annual Meeting is required
to adopt the 2002 Plan.
THE BOARD RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE A.P. PHARMA 2002 EQUITY
INCENTIVE PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Ernst & Young LLP ("E&Y") as independent public
accountants to audit the financial statements of the Company for the fiscal
year ending December 31, 2002. A representative of E&Y will be present at the
Annual Meeting and will have an opportunity to make a statement if such
representative desires to do so. The representative of E&Y also will be
available to respond to questions raised during the meeting.
FINANCIAL STATEMENTS
The Company's annual report to stockholders for the fiscal year ended December
31, 2001, containing audited consolidated balance sheets as of the end of each
of the past two fiscal years and audited consolidated statements of
operations, shareholders' equity and cash flows for each of the last three
fiscal years, is being mailed with this proxy statement to stockholders
entitled to notice of the Annual Meeting.
SHAREHOLDER PROPOSALS FOR 2003 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 2003 must submit such proposal in writing to the
Secretary of the Company at the Company's principal executive offices no later
than December 17, 2002. The applicable rules of the SEC impose certain
limitations on the content of proposals and also contain certain eligibility
and other requirements (including the requirement that the proponent must have
continuously held at least $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 17, 2002
You Are Cordially Invited To Attend The Meeting In Person.
1
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 500,000.
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:
-------------
Effective date of this Plan:
------------
(Footnote continued)
APPENDIX
B
A.P. PHARMA, INC.
Proxy Solicited by the Board of Directors
for the Annual Meeting of Stockholders
to be held May 22, 2002
The undersigned hereby appoints Paul Goddard and Michael O'Connell, or
either of them, each with full power of substitution, as the proxyholder(s)
of the undersigned to represent the undersigned and vote all shares of the
Common Stock of 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
22, 2002, 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
P.O. BOX 43068
PROVIDENCE, RI 02940
VOTE BY TELEPHONE VOTE BY INTERNET
- ----------------- ----------------
It's fast, convenient, and immediate! It's fast, convenient, and your
Call Toll-Free on a Touch-Tone Phone vote is immediately confirmed and
1-877-PRX-VOTE (1-877-779-8683). posted.
Follow these four easy steps: Follow these four easy steps:
1. Read the accompanying Proxy 1. Read the accompanying Proxy
Statement and Proxy Card. Statement and Proxy Card.
2. Call the toll-free number 2. Go to the Website
1-877-PRX-VOTE (1-877-779-8683). http://www.eproxyvote.com/appa
3. Enter your Voter Control Number 3. Enter your Voter Control
Number
located on your Proxy Card above located on your Proxy Card
your name. above your name.
4. Follow the recorded instructions. 4. Follow the instructions
provided.
YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime! Go to
http://www.eproxyvote.com/appa
anytime!
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET
[X] Please mark
votes as in
this example
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE.
1. To elect as directors, to hold office until the next annual meeting of
stockholders and until their successors are elected, the seven nominees
listed below:
Nominees: Stephen Drury, Paul Goddard, Michael O'Connell, Peter
Riepenhausen, Toby Rosenblatt, Gregory Turnbull, and Dennis Winger
[ ] FOR [ ] WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
[ ]
----------------------------
For all nominees, except as noted above.
2. To approve adoption of the Company's 2002 Equity Incentive Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. In their discretion, the proxyholders are authorized to transact such
other business as properly may come before the meeting or any adjournments
or postponements of the meeting. The Board of Directors at present knows
of no other business to be presented by or on behalf of the Company or the
Board of Directors at the meeting.
MARK HERE
FOR ADDRESS [ ]
CHANGE AND
NOTE AT LEFT
Date and sign exactly as name(s) appear(s) on this proxy. If signing for
estates, trusts, corporations or other entities, title or capacity should
be stated. If shares are held jointly, each holder should sign.
Signature: Date: Signature: Date:
----------- ----------- ----------- --------
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