UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) [X] Annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1998 or [ ] Transition report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to ---------- ---------- Commission File Number 0-16109 ADVANCED POLYMER SYSTEMS, INC. SALARY REDUCTION PROFIT SHARING PLAN ADVANCED POLYMER SYSTEMS, INC. 123 Saginaw Drive Redwood City, California 94063 Telephone: (650) 366-2626 FINANCIAL STATEMENTS AND EXHIBITS ADVANCED POLYMER SYSTEMS, INC. SALARY REDUCTION PROFIT SHARING PLAN STATEMENT OF FINANCIAL CONDITION at December 31, 1998 Dreyfus Twentieth Warburg Nationwide American Bond Templeton S&P 500 Fidelity Century Pincus Guaranty APS Parti- Total Balanced Fund of Foreign Index Magellan Growth Emerging and Savings Common cipant All Fund America Fund Fund Fund Fund Growth Fund Stock Loans Funds ------------------------------------------------------------------------------------------------------- ASSETS: Cash account $ - - - - - - - 854 - - 854 Investments at fair value Mutual funds (cost $1,494,768) 556,567 202,083 66,578 127,304 491,243 1,072,368 121,449 - - - 2,637,592 Fixed dollar annuities (cost $306,811) - - - - - - - 411,290 - - 411,290 Company stock (cost $82,844) - - - - - - - - 71,568 - 71,568 Participant loans - - - - - - - - - 8,245 8,245 Participant contributions receivable 1,247 569 350 1,139 2,108 2,199 447 1,499 352 - 9,910 Employer contribution receivable 3,785 1,759 1,524 3,120 6,117 6,673 1,694 5,252 - - 29,924 ------- ------- ------ ------ ------- --------- ------- ------- ------ ----- --------- TOTAL ASSETS $561,599 204,411 68,452 131,563 499,468 1,081,240 123,590 418,895 71,920 8,245 3,169,383 ======= ======= ====== ======= ======= ========= ======= ======= ====== ===== ========= LIABILITIES: Benefit claims Payable - - - - - - - - 31 - 31 ------- ------- ------ ------- ------- --------- ------- ------- ------ ----- --------- TOTAL LIABILITIES - - - - - - - - 31 - 31 PLAN EQUITY: Salary reduction accounts 461,550 166,333 55,180 103,166 392,831 871,279 95,623 327,302 56,461 8,245 2,537,970 Employer matching accounts 100,049 38,078 13,272 28,397 106,637 209,961 27,967 91,593 15,428 - 631,382 ------- ------- ------ ------- ------- --------- ------- ------- ------ ----- --------- TOTAL EQUITY 561,599 204,411 68,452 131,563 499,468 1,081,240 123,590 418,895 71,889 8,245 3,169,352 TOTAL LIABILITIES AND EQUITY $561,599 204,411 68,452 131,563 499,468 1,081,240 123,590 418,895 71,920 8,245 3,169,383 ======= ======= ====== ======= ======= ========= ======= ======= ====== ===== =========
See accompanying notes to the financial statements. ADVANCED POLYMER SYSTEMS, INC. SALARY REDUCTION PROFIT SHARING PLAN STATEMENT OF FINANCIAL CONDITION at December 31, 1997 Dreyfus Twentieth Warburg Nationwide American Bond Templeton S&P 500 Fidelity Century Pincus Guaranty APS Parti- Total Balanced Fund of Foreign Index Magellan Growth Emerging and Savings Common cipant All Fund America Fund Fund Fund Fund Growth Fund Stock Loans Funds ------------------------------------------------------------------------------------------------------- ASSETS: Cash account $ - - - - - - - 15 - - 15 Investments at fair value Mutual funds (cost $1,152,104) 502,840 187,269 49,594 25,179 300,003 729,857 55,663 - - - 1,850,405 Fixed dollar annuities (cost $284,955) - - - - - - - 370,675 - - 370,675 Company stock (cost $72,552) - - - - - - - - 75,406 - 75,406 Participant loans - - - - - - - - - 8,451 8,451 Employer contributions receivable 3,971 2,041 1,864 891 3,533 4,961 1,520 4,071 1,197 - 24,049 ------- ------- ------ ------ ------- ------- ------ ------- ------ ----- --------- TOTAL ASSETS $506,811 189,310 51,458 26,070 303,536 734,818 57,183 374,761 76,603 8,451 2,329,001 ======= ======= ====== ====== ======= ======= ====== ======= ====== ===== ========= PLAN EQUITY: Salary reduction accounts 420,174 152,056 41,508 24,988 240,260 597,337 47,216 295,076 59,801 8,451 1,886,867 Employer matching accounts 86,637 37,254 9,950 1,082 63,276 137,481 9,967 79,685 16,802 - 442,134 ------- ------- ----- ------ ------- ------- ------ ------- ------ ------ --------- TOTAL EQUITY $506,811 189,310 51,458 26,070 303,536 734,818 57,183 374,761 76,603 8,451 2,329,001 ======= ======= ====== ====== ======= ======= ====== ======= ====== ===== =========
See accompanying notes to the financial statements. ADVANCED POLYMER SYSTEMS, INC. SALARY REDUCTION PROFIT SHARING PLAN STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY for the year ended December 31, 1998 Dreyfus Twentieth Warburg Nationwide American Bond Templeton S&P 500 Fidelity Century Pincus Guaranty APS Total Balanced Fund of Foreign Index Magellan Growth Emerging and Savings Common Participant All Fund America Fund Fund Fund Fund Growth Fund Stock Loans Funds ----------------------------------------------------------------------------------------------------- Investment income: Interest $ - - - - - - - 22,073 - 806 22,879 Dividends - - - - - - - 205 - - 205 ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ -------- Total investment income - - - - - - - 22,278 - 806 23,084 ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ -------- Net realized and unrealized gains (losses) on investments 49,966 7,278 (4,123) 17,137 110,575 271,544 6,096 - (14,975) - 443,498 ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ -------- Contributions: Employee 56,612 20,432 20,411 30,971 62,193 77,684 22,872 44,855 15,017 - 351,047 Employer 16,975 8,788 8,371 7,910 18,520 26,517 7,988 18,447 11,344 - 124,860 Rollovers - - - 3,154 3,154 - 3,679 - 1,167 - 11,154 ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ -------- Total Contributions 73,587 29,220 28,782 42,035 83,867 104,201 34,539 63,302 27,528 - 487,061 ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ --------- Withdrawals, transfers and distributions: Member accounts withdrawn & distributed (18,318) (1,498) (2,267) - (23,271) (51,797) (698) (9,736) (5,676) - (113,261) Member accounts transferred-in (out) (50,447) (19,899) (5,398) 46,321 24,761 22,474 26,470 (31,710)(11,560) (1,012) - ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ --------- Net withdrawals, transfers and distributions (68,765) (21,397) (7,665) 46,321 1,490 (29,323) 25,772 (41,446)(17,236) (1,012) (113,261) ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ --------- Net increase (decrease) in plan equity 54,788 15,101 16,994 105,493 195,932 346,422 66,407 44,134 (4,683) (206) 840,382 Plan equity: Beginning of the year 506,811 189,310 51,458 26,070 303,536 734,818 57,183 374,761 76,603 8,451 2,329,001 ------- ------- ------ ------- ------- --------- ------- ------- ------ ------ --------- End of the year $561,599 204,411 68,452 131,563 499,468 1,081,240 123,590 418,895 71,920 8,245 3,169,383 ======= ======= ====== ======= ======= ========= ======= ======= ====== ====== =========
See accompanying notes to the financial statements. ADVANCED POLYMER SYSTEMS, INC. SALARY REDUCTION PROFIT SHARING PLAN STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY for the year ended December 31, 1997 Dreyfus Twentieth Warburg Nationwide American Bond Templeton S&P 500 Fidelity Century Pincus Guaranty APS Total Balanced Fund of Foreign Index Magellan Growth Emerging and Savings Common Participant All Fund America Fund Fund Fund Fund Growth Fund Stock Loans Funds ----------------------------------------------------------------------------------------------------- Net investment income: Interest $ - - - - - - - 21,994 - 957 22,951 ------- ------- ----- ------ ------- ------- ------ -------- ------ ------ --------- Total net investment income - - - - - - - 21,994 - 957 22,951 ------- ------- ----- ------ ------- ------- ------ -------- ------ ------ --------- Net realized and unrealized gains (losses) on investments 76,490 13,351 (1,018) 342 64,320 156,385 4,874 - (12,292) - 302,452 ------- ------- ----- ------ ------- ------- ------ -------- ------ ------ --------- Contributions: Employee 53,808 20,236 27,326 4,001 52,972 70,311 23,561 46,971 15,994 - 315,180 Employer 17,058 8,529 9,077 891 15,340 24,762 7,176 17,209 5,470 - 105,512 Rollovers - - - 3,206 - - 962 3,690 - - 7,858 ------- ------- ----- ------ ------- ------- ------ -------- ------ ------ --------- Total Contributions 70,866 28,765 36,403 8,098 68,312 95,073 31,699 67,870 21,464 - 428,550 ------- ------- ------ ------ ------- ------- ------ -------- ------ ------ --------- Withdrawals, transfers and distributions: Member accounts withdrawn & distributed (56,754) (27,276) - - (84,299)(146,576) - (43,985) (1,984) - (360,874) Member accounts transferred-in (out) 18,691 (10,177) 14,241 17,630 8,542 6,457 19,405 (71,703) 548 (3,634) - ------- ------- ------ ------ ------- ------- ------ -------- ------ ------ --------- Net withdrawals, transfers and distributions (38,063) (37,453) 14,241 17,630 (75,757)(140,119) 19,405 (115,688) (1,436) (3,634) (360,874) ------- ------- ------ ------ ------- ------- ------ ------- ------ ------ --------- Net increase (decrease) in plan equity 109,293 4,663 49,626 26,070 56,875 111,339 55,978 (25,824) 7,736 (2,677) 393,079 Plan equity: Beginning of the year 397,518 184,647 1,832 - 246,661 623,479 1,205 400,585 68,867 11,128 1,935,922 ------- ------- ------ ------ ------- ------- ------ ------- ------ ------ --------- End of the year $506,811 189,310 51,458 26,070 303,536 734,818 57,183 374,761 76,603 8,451 2,329,001 ======= ======= ====== ====== ======= ======= ====== ======= ====== ====== =========
See accompanying notes to the financial statements. ADVANCED POLYMER SYSTEMS, INC. SALARY REDUCTION PROFIT SHARING PLAN STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY for the year ended December 31, 1996 Twentieth Warburg Nationwide American Bond Templeton Fidelity Century Pincus Guaranty APS Total Balanced Fund of Foreign Magellan Growth Emerging and Savings Common Participant All Fund America Fund Fund Fund Growth Fund Stock Loans Funds -------------------------------------------------------------------------------------------------- Net investment income: Interest $ - - - - - - 19,981 - 781 20,762 ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Total net investment income - - - - - - 19,981 - 781 20,762 ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Net realized and unrealized gains on investments 37,966 8,749 - 19,348 68,997 - - 13,150 - 148,210 ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Contributions: Employee 53,948 23,696 - 88,164 77,480 - 61,207 16,439 - 320,934 Employer 16,724 7,582 1,832 27,347 24,837 1,205 20,393 5,511 - 105,431 Rollovers 5,058 14 - 4,936 11,964 - 2,873 - - 24,845 ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Total contributions 75,730 31,292 1,832 120,447 114,281 1,205 84,473 21,950 - 451,210 ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Withdrawals, transfers and distributions: Member accounts withdrawn & distributed (14,487) (10,488) - (23,534) (56,696) - (66,590) (4,815) - (176,610) Member accounts transferred-in (out) 1,820 (4,107) - (860) (1,238) - (2,951) 3,520 3,816 - ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Net withdrawals, transfers and distributions (12,667) (14,595) - (24,394) (57,934) - (69,541) (1,295) 3,816 (176,610) ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- Net increase in plan equity 101,029 25,446 1,832 115,401 125,344 1,205 34,913 33,805 4,597 443,572 Plan equity: Beginning of the year 296,489 159,201 - 131,260 498,135 - 365,672 35,062 6,531 1,492,350 ------- ------- ----- ------- ------- ----- ------- ------ ------ --------- End of the year $397,518 184,647 1,832 246,661 623,479 1,205 400,585 68,867 11,128 1,935,922 ======= ======= ===== ======= ======= ===== ======= ====== ====== =========
See accompanying notes to the financial statements. Notes to Financial Statements December 31, 1998, 1997 and 1996 1. DESCRIPTION OF THE PLAN The following description of the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan (the "401(k) Plan" or the "Plan") provides only general information. Members should refer to the 401(k) Plan document for more complete information. (a) General The 401(k) Plan is a defined contribution plan covering active employees of Advanced Polymer Systems, Inc. and subsidiaries ("APS" or the "Company"). Prior to 1997, any employee who was at least 21 years old was eligible to become a voluntary member of the 401(k) Plan immediately upon employment. In 1997, the age requirement for eligibility was eliminated. The 401(k) Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). (b) Contributions - Employee Eligible domestic employees may contribute up to 15% of their total compensation for each calendar year, limited to $10,000 in 1998, $9,500 in 1997, and $9,500 in 1996 (the "Employee Contribution"). (c) Contributions - Employer The Company makes matching contributions equal to 50% of each member's Employee Contribution during a Plan year up to a maximum amount equal to the lesser of 3% of each member's annual compensation, or $4,800 per calendar year (the "Employer Matching Contribution"). The Company may also contribute additional discretionary amounts as it may determine (the "Employer Discretionary Contribution"). No Employer Discretionary Contributions have been made to the Plan since its inception. (d) Members' Accounts The Company maintains separate Employee Contribution accounts, Employer Matching Contribution accounts and Employer Discretionary Contribution accounts for each member. Contributions are credited to the member accounts each bi-weekly payroll period. In 1996, the plan trustees added the Warburg Pincus Emerging Growth Fund and the Templeton Foreign Fund to the investment options offered to the participants. In 1997, the plan trustees added the Dreyfus S&P 500 Index Fund to the investment options offered to the participants. Each member may elect from the following investment options for his/her Employee Contribution accounts: Company Common Stock: The Common Stock of APS will be purchased by the 401(k) Plan's investment manager for the member in a market transaction at the then current market price as quoted on the NASDAQ National Market System. Each member may elect to invest up to 10% of his/her Employee Contributions and Employer Matching Contributions in this option. Warburg Pincus Emerging Growth Fund: A mutual fund seeking capital appreciation by investing primarily in common stock of small and medium size companies that show positive earnings and prospects of achieving significant gains in a relatively short time period. Templeton Foreign Fund: A mutual fund seeking capital growth by investing in stock and debt securities of companies and governments outside of the United States. Dreyfus S&P 500 Index Fund: A mutual fund seeking to match investment results of the Standard and Poor's 500 Composite Stock Price Index. Fidelity Magellan Fund: A mutual fund seeking capital growth by investing primarily in common stocks and securities convertible into common stock of domestic and foreign multinational issuers of all sizes. Twentieth Century Growth Fund: A mutual fund seeking capital growth by investing primarily in common stocks that are considered by fund management to have better-than-average prospects for appreciation. American Balanced Fund: A mutual fund seeking conversion of capital, current income and long-term growth of both capital and income through investments in stocks, bonds and other fixed-income securities. Bond Fund of America: A mutual fund seeking to provide shareholders as high a level of current income as is consistent with the preservation of capital by investing primarily in bonds such as marketable corporate debt securities, U.S. Government securities, mortgage related securities and cash or money market instruments. Nationwide Guaranty and Savings Fund: Fixed dollar annuity invested in short-term securities with a guaranteed rate of 5.9% in 1998, 6.1% in 1997 and 5.85% in 1996. Members may change their investment options at any time during the Plan year as set forth in the 401(k) Plan document. Income from the selected investments of 401(k) Plan assets is allocated quarterly in the proportion that each member's investment option balance bears to the cumulative balance of each investment option. (e) Vesting The 401(k) Plan provides that the allocated contribution and income of both the Employee Contribution account and the Employer Matching Contribution account are immediately and fully vested. Employer Discretionary Contributions become vested over a period of 6 years in accordance with the following schedule: Years of Service Vested Percentage ---------------- ----------------- Less than 1 0% 1 10% 2 20% 3 40% 4 60% 5 80% 6 or more 100% (f) Withdrawal of Member Accounts Upon retirement (at 62 years of age or if later, the employee's fifth anniversary of employment with the Company), the participant can elect to receive distributions through either a single lump-sum payment or installments (for all investments except investments in the company common stock) over the participant's assumed life expectancy (or the participant and the participant's beneficiary's assumed life expectancy) determined at the time of distribution. Upon death, permanent disability or termination of employment prior to retirement (as defined above), the participant will be entitled to a distribution equal to the vested portion of his/her accounts. Members should refer to the 401(k) Plan document for a more complete description of procedures and calculations for the withdrawal of accounts. (g) Rollovers The 401(k) Plan allows certain transfers to and from eligible retirement plans. A direct rollover is a payment by the 401(k) Plan to the eligible retirement plan specified by the distributee. A distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. With the consent of the Plan Administrator, amounts may be transferred from other eligible retirement plans by participants, provided that the trust from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax exempt status of the 401(k) Plan. (h) Trustees The 401(k) Plan is administered by the Company. A Trustee is responsible for investing the assets of the Plan which are held in Trust. The current trustee is Michael O'Connell, Chief Financial Officer of Advanced Polymer Systems, Inc. The Trustee has retained CMG Consulting, Inc. ("CMG") to provide recordkeeping services to the 401(k) Plan. CMG invests Plan assets in a fixed dollar annuity and the various mutual fund options offered by Nationwide Life Insurance. The company has engaged Securities America to invest Plan assets in APS company stock. Members of the Board of Directors and employees of the Company serving as Trustees receive no additional compensation for services in connection with the administration of the 401(k) Plan. (i) Participant Loans Participants are allowed to borrow from the Plan assets. The Plan will allow a participant to borrow up to the lesser of 50% of his/her vested Plan balance or $50,000. The loan, secured by the vested Plan balance of the participant, is repayable in installments over a period up to 5 years at the prime rate plus 2%. The term of the loan can be extended for more than 5 years if the loan is used to purchase the principal dwelling of the participant. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Investment Valuation The fair value of investments in mutual funds and company stock is based upon quoted market values on the last business day of the year. The value of the Guaranteed Fund is calculated as the sum of contributions, transfers and interest income less any withdrawals and administrative expenses. The value of the Guaranteed Fund approximates fair value. There are no reserves against contract value for credit risk of the contract issuer or otherwise. The average yields of the Guaranteed Fund were 5.9%, 6.1% and 5.85% in 1998, 1997 and 1996, respectively. (b) Security Transactions and Investment Income Security transactions are recorded on a trade date basis. The difference between cost and market value of investments at the beginning and end of the period is reported as unrealized appreciation or depreciation in the market value of investments using the average cost method. Cost represents revalued cost based on prices at the beginning of the period. (c) Expenses of the 401(k) Plan Reasonable fees and expenses incurred in the establishment and administration of the 401(k) Plan, and reasonable compensation of attorneys, accountants, investment managers, actuaries, consultants or expenses of the Trustees or any agent of the Trustees if not employed by the Company will be paid out of the assets of the 401(k) Plan, except to the extent that the Company pays such expenses directly. For the three- year period ended December 31, 1998, all such expenses were paid by the Company. (d) Forfeited Funds If a Participant terminates employment with APS prior to completing six years of service, the unvested portion of such member's Employer Discretionary Contribution account will be forfeited and allocated among the remaining participants in the 401(k) Plan. No Employer Discretionary Contributions have been made to the Plan since its inception, hence there have been no forfeitures. (e) Basis of Accounting The financial statements are prepared on the accrual basis of accounting. (f) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the plan administrator to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. Changes in such estimates may affect amounts reported in the future periods. 3. INVESTMENTS Investments of the 401(k) Plan at fair value as of December 31 are as follows: Fair Value Per Unit/ Units/ 1998 Share* Shares Cost Fair Value - ---- ------- ----- ---- ----------- Mutual Funds American Balanced Fund** $2.90 191,868 $ 312,399 $ 556,567 Bond Fund of America** 2.44 82,780 139,323 202,083 Templeton Foreign Fund** 1.31 50,848 73,593 66,578 Dreyfus S&P 500 Index Fund** 3.64 34,966 114,084 127,304 Fidelity Magellan Fund** 3.31 148,245 277,904 491,243 Twentieth Century Growth Fund** 7.47 143,618 464,845 1,072,368 Warburg Pincus Emerging Growth** 1.48 81,957 112,620 121,449 Fixed Dollar Annuities Nationwide Guaranty and Savings Fund** 1.29 319,241 306,811 411,290 Company Stock APS Common Stock** 5.38 13,315 82,844 71,568 Participant Loan** 1.00 8,245 8,245 8,245 --------- --------- $1,892,668 $3,128,695 ========= ========= Fair Value Per Unit/ Units/ 1997 Share* Shares Cost Fair Value - ---- ------- ----- ---- ----------- Mutual Funds American Balanced Fund** $2.64 190,271 $ 307,577 $ 502,840 Bond Fund of America** 2.35 79,677 131,500 187,269 Templeton Foreign Fund** 1.39 35,724 52,476 49,594 Dreyfus S&P 500 Index Fund** 2.87 8,766 25,728 25,179 Fidelity Magellan Fund** 2.51 119,487 192,547 300,003 Twentieth Century Growth Fund** 5.52 132,306 389,967 729,857 Warburg Pincus Emerging Growth** 1.41 39,418 52,309 55,663 Fixed Dollar Annuities Nationwide Guaranty and Savings Fund** 1.22 304,691 284,955 370,675 Company Stock APS Common Stock** 6.63 11,382 72,552 75,406 Participant Loan** 1.00 8,451 8,451 8,451 --------- --------- $1,518,062 $2,304,937 ========= ========= * Unit value is rounded ** Party in interest Investment option elections of the members of the 401(k) Plan at December 31 are summarized as follows: Number of Participants ---------------------- 1998 1997 --------- -------- Mutual Funds American Balanced Fund 40 45 Bond Fund of America 28 27 Templeton Foreign Fund 28 24 Dreyfus S&P 500 Index Fund 29 8 Fidelity Magellan Fund 59 44 Twentieth Century Growth Fund 65 54 Warburg Pincus Emerging Growth 30 20 Fixed Dollar Annuities Nationwide Guaranty and Savings Fund 46 44 Company Stock APS Common Stock 55 57 4. INCOME TAXES APS received a favorable determination from the Internal Revenue Service ("IRS") stating that the 401(k) Plan is qualified under Section 401 of the Internal Revenue Code ("Code") as amended, and is exempt from federal income taxation under Section 501 of the Code. Accordingly, the financial statements do not contain a provision for income taxes. The continued qualification is dependent on the Plan's future operation. Members do not become subject to income taxes as a result of participation in the 401(k) Plan until assets in the members' accounts are distributed. Under certain circumstances, a distribution from the 401(k) Plan is subject to income tax as ordinary income. 5. PLAN TERMINATION Although it has not expressed any intent to do so, APS has the right to terminate the 401(k) Plan at any time. In the event of termination, all accounts will become fully vested, and the plan equity will be allocated and distributed to the members based on their respective account balances.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Advanced Polymer Systems, Inc. and the Trustees and Participants in the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan: We have audited the accompanying statements of financial condition of the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan as of December 31, 1998 and 1997, and the related statements of income and changes in plan equity for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan as of December 31, 1998 and 1997, and the results of its operations and its changes in Plan equity for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The Fund Information in the statement of financial condition and the statement of income and changes in plan equity is presented for purposes of additional analysis rather than to present the statement of financial condition and the statement of income and changes in plan equity of each fund. The Fund Information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/KPMG LLP San Francisco, California March 12, 1999
Exhibits 23 Consent of Independent Certified Public Accountants
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the plan) have duly caused this annual report to be signed by the undersigned thereunto duly authorized. Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan ------------------------------------ Date: June 15, 1999 /s/ Michael O'Connell ---------------- ------------------------- Michael O'Connell Trustee
EXHIBIT INDEX 23 Consent of Independent Certified Public Accountants
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders of Advanced Polymer Systems, Inc. and the Trustees and Participants in the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan; We consent to incorporation by reference in the Registration Statement (No. 33-29084) on Form S-8 of the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan of our report dated March 12, 1999 relating to the statements of financial condition of the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan as of December 31, 1998 and 1997 and the related statements of income and changes in Plan equity for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 11-K of the Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan. /s/KPMG LLP San Francisco, California June 11, 1999