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, 1999 or
[ ] Transition report pursuant to Section 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from to
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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
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
ASSETS:
Cash $ 223 $ 854
Investments (note 3):
Pooled separate accounts 3,403,101 2,637,592
Fixed dollar annuities 398,887 411,290
Company stock 60,756 71,568
Participant loans 59,096 8,245
--------- ---------
Total investments 3,921,840 3,128,695
--------- ---------
Contributions receivable:
Participant 21,340 9,910
Employer 28,282 29,924
--------- ---------
Total contributions receivable 49,622 39,834
--------- ---------
Net assets available for benefits $3,971,685 $3,169,383
========= =========
See accompanying notes to the financial statements.
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
Additions to net assets attributed to:
Investment income:
Net appreciation in fair value of
investments (note 3) $ 567,627 $ 443,498
Interest 25,436 22,879
Dividends 31 205
--------- ---------
Total investment income 593,094 466,582
Contributions:
Employee 344,650 351,047
Employer 120,664 124,860
Rollovers -- 11,154
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Total additions 465,314 487,061
--------- ---------
Deductions from net assets attributed to:
Benefit payments (256,106) (113,261)
--------- ---------
Total deductions (256,106) (113,261)
--------- ---------
Net increase 802,302 840,382
Net assets at beginning of year 3,169,383 2,329,001
--------- ---------
Net assets available for benefits $3,971,685 $3,169,383
========= =========
See accompanying notes to the financial statements.
Notes to Financial Statements
December 31, 1999 and 1998
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. Participants should refer to the 401(k) Plan
document for a more complete description of the Plan's provisions.
(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").
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 1999 and 1998.
(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 participant's annual compensation, or $4,800 per
calendar year. The Company may also contribute additional discretionary
amounts as it may determine. No employer discretionary contributions have
been made to the Plan since its inception.
(d) Participant Accounts
Each participant's account is credited with the participant's contribution
and allocations of (i) the employers' contribution and (ii) plan earnings.
Allocations are based on participant earnings or account balances, as
defined in the plan document. The benefit to which a participant is
entitled is the amount that can be provided from the participant's vested
account.
(e) Vesting
The 401(k) Plan provides that the allocated contribution and income of both
the employee contribution and the employer matching contribution 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) Payment of Benefits
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.
(g) Rollovers
The 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 Plan is administered by the Company. A Trustee is responsible for
investing the assets of the Plan which are held in Trust. The trustee at
December 31, 1999 was Michael O'Connell, Chief Financial Officer of
Advanced Polymer Systems, Inc. On January 1, 2000, the trustee was changed
to Eastern Bank and Trust.
The Trustee has retained CMG Consulting, Inc. ("CMG") to provide
recordkeeping services for 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 their vested account balance. The
Plan will allow a participant to borrow up to the lesser of 50% of his/her
vested 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. Principal and interest are paid ratably through payroll
deductions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Investment Valuation
The Plan's investments are stated at fair value except for its investment
in the fixed dollar annuities which is valued at contract value, which
approximates fair value. Contract value represents contributions made
under the contract, plus interest earned, less funds withdrawn. The
contract is included in the financial statements at contract value because
it is fully benefit responsive. For example, participants may ordinarily
direct the withdrawal or transfer of all or a portion of their investment
in the investment contract. Guaranteed interest rates were 5.7% and 5.9%
in 1999 and 1998, respectively. Pooled Separate Accounts are valued based
on quoted market prices which represent the net asset value of the
underlying investments held by the Plan in the Pooled Separate Accounts at
year-end. Common Stock is valued at quoted market price at year-end.
Participant loans are valued at cost which approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis.
(b) 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 years
ended December 31, 1999 and 1998, all such expenses were paid by the
Company.
(c) Forfeitures
If a Participant terminates employment with APS prior to completing six
years of service, the unvested portion of such member's employer
discretionary contribution 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.
(d) Basis of Accounting
The financial statements are prepared on the accrual basis of accounting.
(e) 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. Actual results could
differ from those estimates.
3. INVESTMENTS
In September 1999, the American Institute of Certified Public Accountants
issued Statement of Position 99-3, Accounting for and Reporting of Certain
Defined Contribution Plan Investments and Other Disclosure Matters (SOP 99-
3). SOP 99-3 simplifies the disclosure for certain investments and is
effective for plan years ending after December 15, 1999 with earlier
application encouraged. The Plan adopted SOP 99-3 during the plan year
ending December 31, 1999. Accordingly, information previously required to
be disclosed about participant-directed fund investment programs is not
presented in the Plan's 1999 financial statements. The Plan's accompanying
1998 financial statements have been reclassified to conform with the current
year's presentation.
The following table represents the fair value of individual investments as
of December 31, 1999 and 1998. Those which exceed 5% of the Plan's net
assets are separately identified: (*):
1999 1998
---- ----
Pooled Separate Accounts
American Balanced Fund* $ 575,516 $ 556,567
Bond Fund of America* 135,850 202,083
Templeton Foreign Fund 112,115 66,578
Dreyfus S&P 500 Index Fund -- 127,304
Nationwide S&P Index Fund* 301,049 --
Fidelity Magellan Fund* 692,216 491,243
American Century Growth* 1,412,082 1,072,368
Warburg Pincus Emerging Growth Fund 174,273 121,449
--------- ---------
3,403,101 2,637,592
--------- ---------
Fixed Dollar Annuities* 398,887 411,290
APS Common Stock 60,756 71,568
Participant Loans 59,096 8,245
--------- ---------
$3,921,840 $3,128,695
========= =========
During 1999 and 1998, the Plan's investments (including gains and losses on
investments bought and sold, as well as held during the year) appreciated
in value by $567,627 and $443,498, respectively, as follows:
1999 1998
---- ----
Pooled Separate Accounts $605,824 $458,473
Common Stock (38,197) (14,975)
------- -------
$567,627 $443,498
======= =======
4. INCOME TAXES
The Internal Revenue Service ("IRS") has determined and informed APS by a
letter dated September 19, 1991 that the Plan and the related trust are
designed and operated in accordance with applicable sections of the
Internal Revenue code ("IRC"). The Plan administrator believes that the
Plan is designed and is currently being operated in compliance with the
applicable requirements of the IRC.
Participant's contributions and earnings thereon do not become subject to
income taxes as a result of participation in the 401(k) Plan until assets
in the participant's 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 participants based on their respective account
balances.
6. NONEXEMPT TRANSACTIONS
It was noted that there were unintentional delays by the Company in
submitting 1999 employee deferrals in the amount $13,557 to the trustee.
In July of 2000, the Company intends to reimburse the Plan for lost
interest in the amount of $75.
7. SUBSEQUENT EVENT
On January 1, 2000, the Plan Trustee was changed to Eastern Bank and Trust.
Since the contract with Nationwide Insurance expired, beginning January 1,
2000, all contributions and Plan assets will be invested in mutual funds
offered by D-Access, the Plan's new custodian. During the first quarter of
2000, all Plan assets were transferred from investments offered by
Nationwide to D-Access.
In June of 2000, Advanced Polymer Systems, Inc. agreed to sell certain
technology rights for topical pharmaceuticals and its cosmeceutical product
lines and other assets to its partner, R.P. Scherer corporation, a
subsidiary of Cardinal Health, Inc. The effect on the Plan is not
determinable.
SCHEDULE I
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AT END OF YEAR
DECEMBER 31, 1999
Description of investment, including
Identity of issuer, borrower, maturity date, rate of interest, Current
Lessor or similar property collateral, par or maturity value value
- ----------------------------- ------------------------------------ -------
Nationwide* 194,030 shares of American Balanced Fund $ 575,516
Nationwide* 55,051 shares of Bond Fund of America 135,850
Nationwide* 61,989 shares of Templeton Foreign Fund 112,115
Nationwide* 262,563 shares of Nationwide S&P 500
Index Fund 301,049
Nationwide* 170,397 shares of Fidelity Magellan Fund 692,216
Nationwide* 141,799 shares of American Century Growth Fund 1,412,082
Nationwide* 83,581 shares of Warburg Pincus
Emerging Growth Fund 174,273
Nationwide* 292,918 shares of Nationwide Fixed Fund 398,887
Advanced Polymer Systems* 17,672 shares of common stock 60,756
Participant loans* Participant loans (interest rates, 8% to 10.25%;
Number of loans, 6) 59,096
---------
$3,921,840
=========
* Party-in-interest
See accompanying notes to independent auditors' report.
SCHEDULE II
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
SCHEDULE OF NONEXEMPT TRANSACTIONS
DECEMBER 31, 1999
(b) Relationship to (d) Cost of
(a) Identity of party plan, employer or (c) Description of transactions, asset (interest
involved other party-in-interest including rate of interest amount)
- --------------------- ----------------------- -------------------------------- ---------------
Advanced Polymer Systems Plan Sponsor 1999 employee deferrals not $75
Inc. deposited to Plan in a timely
manner. Interest rate of 40%
It was noted that there were unintentional delays by the Company in submitting 1999 employee deferrals in the
amount $13,557 to the trustee. In July of 2000, the Company intends to reimburse the Plan for lost interest in
the amount of $75.
See accompanying notes to financial statements.
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 net assets available for
benefits of the Advanced Polymer Systems, Inc. Salary Reduction Profit
Sharing Plan as of December 31, 1999 and 1998, and the related statements
of changes in net assets available for benefits for the years then ended.
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 net assets available for benefits as of
December 31, 1999 and 1998, and the changes in net assets available for
benefits for the years then ended 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 supplemental schedule of
assets held for investment purposes at end of year 1999 and schedule of
nonexempt transactions for the year ended December 31, 1999 are presented
for the purpose of additional analysis and are not a required part of the
basic financial statements but are supplementary information required by
the Department of Labor Rules and Regulations for Reporting and Disclosure
under the Employee Retirement Income Security Act and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act
of 1974. These supplemental schedules are the responsibility of the Plan's
management. The supplemental schedules have 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
June 20, 2000
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 26, 2000 /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 Advanced Polymer Systems, Inc. of our report dated
June 20, 2000 relating to the statements of net assets available for
benefits of the Advanced Polymer Systems, Inc. Salary Reduction Profit
Sharing Plan as of December 31, 1999 and 1998 and the related statements of
changes in net assets available for benefits for the years then ended and
the supplemental schedule of assets held for investment purposes at end of
year 1999 and schedule of nonexempt transactions for the year ended
December 31, 1999 which report appears in the December 31, 1999 annual
report on Form 11-K of the Advanced Polymer Systems, Inc. Salary Reduction
Profit Sharing Plan.
/s/KPMG LLP
San Francisco, California
June 20, 2000
