FORM 11-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
ANNUAL REPORT
PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(X) Annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2001
OR
( ) Transition report pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to ________
Commission file number 0-16109
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
AP PHARMA 401(k) PLAN
(formerly Advanced Polymer Systems, Inc. Salary
Reduction Profit Sharing Plan)
123 SAGINAW DRIVE
REDWOOD CITY, CA 94063
B. Name of issuer of the securities held pursuant to the plan
and the address of its principal executive office:
A.P. PHARMA, INC.
123 SAGINAW DRIVE
REDWOOD CITY, CA 94063
TELEPHONE (650) 366-2626
SIGNATURE
The Plan. Pursuant to the requirements of the Securities
Exchange Act of 1934, the administrator has duly caused this
annual report to be signed on its behalf by the undersigned
hereunto duly authorized.
AP PHARMA 401(k) PLAN
(formerly Advanced
Polymer Systems, Inc.
Salary Reduction Profit
Sharing Plan)
Date: June 27, 2002 By: /s/Gordon Sangster
-------------- -----------------------
Gordon Sangster
Chief Financial Officer
AP Pharma 401(k) Plan
(formerly Advanced Polymer Systems,
Inc. Salary Reduction Profit Sharing Plan)
Financial Statements
December 31, 2001 and 2000
--------------------------
AP PHARMA 401(k) PLAN
(formerly Advanced Polymer Systems,
Inc. Salary Reduction Profit Sharing Plan)
Financial Statements
December 31, 2001 and 2000
Table of Contents
- -----------------
Independent Accountants' Report as of and
for the year ended December 31, 2001
Independent Auditors' Report as of and
for the year ended December 31, 2000
Financial Statements:
Statements of Net Assets Available for Benefits
as of December 31, 2001 and 2000
Statements of Changes in Net Assets Available for Benefits
for the years ended December 31, 2001 and 2000
Notes to Financial Statements
Consent of Independent Accountants
Consent of Independent Auditors
INDEPENDENT ACCOUNTANTS' REPORT
To the Participants and
Plan Administrator of the
AP Pharma 401(k) Plan
(formerly Advanced Polymer Systems,
Inc. Salary Reduction Profit Sharing
Plan)
We have audited the financial statements of the AP Pharma 401(k)
Plan (formerly Advanced Polymer Systems, Inc. Salary Reduction
Profit Sharing Plan) (the Plan) as of December 31, 2001, and for
the year then ended, as listed in the accompanying table of
contents. 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 audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 the
Plan's management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 of the Plan as of December 31, 2001, and
the changes in net assets available for benefits for the year
then ended, in conformity with accounting principles generally
accepted in the United States of America.
By /s/ Mohler, Nixon & Williams
----------------------------
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
May 23, 2002
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of A.P. Pharma, Inc. (formerly Advanced Polymer Systems, Inc.)
and the Trustees and Participants of the
AP Pharma 401(k) Plan (formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan):
We have audited the accompanying statement of net assets
available for benefits of the AP Pharma 401(k) Plan (formerly
Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing
Plan)(the Plan) as of December 31, 2000, and the related
statement of changes in net assets available for benefits for the
year 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
audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 audit provides 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 of the Plan as of December 31, 2000 and
the changes in net assets available for benefits for the year
then ended in conformity with accounting principles generally
accepted in the United States of America.
By /s/KPMG LLP
------------
KPMG LLP
San Francisco, California
June 22, 2001
AP PHARMA 401(k) PLAN
(formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan)
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31,
2001 2000
---- ----
ASSETS:
Investments, at fair value $2,301,405 $3,087,958
Participant loans 21,193 52,081
Assets held for investment
purposes 2,322,598 3,140,039
Employer's contribution receivable 17,277 13,354
Participant's contribution
receivable -- 4,576
--------- ---------
Net assets available for benefits $2,339,875 $3,157,969
========= =========
See notes to financial statements
AP PHARMA 401(k) PLAN
(formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan)
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
YEARS ENDED
DECEMBER 31,
2001 2000
---- ----
Deductions/Additions to net assets
attributed to:
Investment income:
Dividends and interest $ 3,757 $ 5,409
Net realized and unrealized
depreciation in fair value of
investments (404,295) (376,115)
--------- ---------
Total investment (loss) income (400,538) (370,706)
--------- ---------
Contributions:
Participants' 190,173 309,314
Employer's 63,583 97,567
--------- ---------
253,756 406,881
Total deductions/additions (146,782) 36,175
--------- ---------
Deductions from net assets attributed to:
Withdrawals and distributions 671,312 849,891
--------- ---------
Total deductions 671,312 849,891
--------- ---------
Net decrease in net assets (818,094) (813,716)
Net assets available for benefits:
Beginning of year 3,157,969 3,971,685
End of year $2,339,875 $3,157,969
========= =========
See notes to financial statements.
AP PHARMA 401(k) PLAN
(formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- -----------------------------
Note 1 The Plan and its significant accounting policies
- --------------------------------------------------------
General - The following description of the AP Pharma 401(k) Plan
(formerly Advanced Polymer Systems, Inc. Salary Reduction Profit
Sharing Plan) (the Plan) provides only general information.
Participants should refer to the Plan document for a more
complete description of the Plan's provisions.
The Plan is a defined contribution plan that was established in
1986 to provide benefits to eligible employees as defined in the
Plan document. Formerly known as the Advanced Polymer Systems,
Inc. Salary Reduction Profit Sharing Plan, the Plan was amended
in May 2001 to change the Plan name in conjunction with the
change in the name of the employer and Plan sponsor from Advanced
Polymer Systems, Inc. to A.P. Pharma, Inc. (the Company).
In June 2000, the Company sold certain technology rights, product
lines and other assets to R.P. Scherer Corporation, a subsidiary
of Cardinal Health, Inc. The majority of affected employees was
hired by R.P. Scherer and had the option of taking a distribution
from the Plan or maintaining their account balance in the Plan.
The Plan administrator believes that the Plan is currently
designed and operated in compliance with the applicable
requirements of the Internal Revenue Code (the Code) and
provisions of the Employee Retirement Income Security Act of 1974
(ERISA), as amended.
Administration - The Company has appointed an Administrative
Committee (the Committee) to manage the operation and
administration of the Plan. A third-party administrator, CMG
Consulting, Inc. (CMG), processes and maintains the records of
participant data. The Company has contracted with Eastern Bank
and Trust Company to act as the trustee. Substantially all
expenses incurred for administering the Plan are paid by the
Company.
Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, and changes therein, and disclosure of contingent
assets and liabilities. Actual results could differ from those
estimates.
Basis of accounting - The financial statements of the Plan are
prepared on the accrual method of accounting in accordance with
accounting principles generally accepted in the United States of
America.
Investments - Investment options include various mutual funds
offered through D-Access, an affiliate of CMG, and a fund
invested in shares of A.P. Pharma, Inc. common stock (Company
Stock Fund). The Plan's investments in mutual funds and the
Company Stock Fund are valued at fair value as of the last day of
the Plan year, as measured by quoted market prices. Participant
loans are valued at cost, which approximates fair value.
Effective January 1, 2000, the Company Stock Fund was frozen by
the Committee. As a result, participants are permitted to
transfer their investments from the Company Stock Fund, but no
new contributions or transfers into the fund are permitted.
Income taxes - The Plan has been amended since receiving its
latest favorable determination letter dated September 19, 1991.
The Company believes that the Plan is operated in accordance
with, and continues to qualify under, the applicable requirements
of the Code and related state statutes, and that the trust, which
forms a part of the Plan, is exempt from federal income and state
franchise taxes.
Risks and uncertainties - The Plan provides for various
investment options in any combination of mutual funds and Company
stock offered by the Plan. Investment securities are exposed to
various risks, such as interest rate, market fluctuations and
credit risks. Due to the level of risk associated with certain
investment securities, it is at least reasonably possible that
changes in risks in the near term would materially affect
participants' account balances and the amounts reported in the
statements of net assets available for benefits and the
statements of changes in net assets available for benefits.
New accounting pronouncements - In June 1998, the Financial
Accounting Standards Board issued FAS 133, " Accounting for
Derivative Instruments and Hedging Activities". FAS 133 requires
that an entity recognize all derivatives and measure those
instruments at fair value. Adoption of this statement did not
have an impact on the plan financial statements.
NOTE 2 PARTICIPATION AND BENEFITS
- ----------------------------------
Participant contributions - Participants may elect to have the
Company contribute from 1% to 15% of their eligible pre-tax
compensation not to exceed the amount allowable under current
income tax regulations. Participants who elect to have the
Company contribute a portion of their compensation to the Plan
agree to accept an equivalent reduction in taxable compensation.
Contributions withheld are invested in accordance with the
participant's direction.
Participants are also allowed to make rollover contributions of
amounts received from other tax-qualified employer-sponsored
retirement plans. Such contributions are deposited in the
appropriate investment funds in accordance with the participant's
direction and the Plan's provisions.
Employer contributions - The Company is allowed to make matching
contributions as defined in the Plan and as approved by the Board
of Directors. The Company matched 50% of each eligible
participant's contribution up to a maximum amount equal to the
lesser of 3% of each participant's annual compensation or $5,250
and $5,100 in 2001 and 2000, respectively. The Plan also allows
for a discretionary profit sharing contribution. No
discretionary contribution has been made since inception of the
Plan.
Vesting - Participants are immediately vested in their
contributions and employer matching contributions. Participants
are fully vested in the employer's profit sharing contributions
allocated to their account, if any, after six years of credited
service.
Participant accounts - Each participant's account is credited
with the participant's contribution, Plan earnings or losses and
an allocation of the Company's contribution. Allocation of the
Company's contribution is based on participant contributions or
eligible employee compensation, as defined in the Plan.
Payment of benefits - Upon termination, the participant or
beneficiary may elect to leave their account balance in the Plan,
or receive their total benefits in a lump sum amount equal to the
value of the participant's vested interest in their account, or
installments. The Plan allows for automatic lump sum
distribution of participant vested account balances that do not
exceed $5,000. Distribution of accounts invested in the Company
Stock Fund must be in a lump sum and may be made in cash or
shares of stock.
Loans to participants - The Plan allows participants to borrow
not less than $1,000 and up to the lesser of $50,000 or 50% of
their vested account balance. The loans are secured by the
participant's vested balance. Such loans bear interest at the
available market financing rates and must be repaid to the Plan
within a five-year period, unless the loan is used for the
purchase of a principal residence in which case the maximum
repayment period may exceed five years. The specific terms and
conditions of such loans are established by the Committee.
Outstanding loans at December 31, 2001 carry interest rates which
range from 9.75% to 10%.
NOTE 3 INVESTMENTS
- -------------------
The following table includes the fair values of investments and
investment funds that represent 5% or more of the Plan's net
assets at December 31:
2001 2000
---- ----
Federated Capital Preservation Fund $ 330,224 $ 474,342
Bond Fund of America 146,026 142,431
American Balanced Fund 238,683 294,964
Federated Max-Cap Fund 255,232 225,450
Fidelity Advisor Equity Growth Fund 406,610 498,053
MFS Mass Investors Growth Fund 728,958 1,132,985
Van Kampen Emerging Growth Fund 117,313 214,458
Other funds that are less than 5% of
Plan net assets 78,359 105,275
Participant loans 21,193 52,081
--------- ---------
Assets held for investment
Purposes $2,322,598 $3,140,039
========== =========
The Plan's investments (including gains and losses on investments
bought and sold, as well as held during the year) appreciated
(depreciated) in value as follows for the years ended December
31:
2001 2000
---- ----
Pooled separate accounts $ -- $(194,250)
Common stock 4,824 (15,003)
Mutual funds (409,119) (166,862)
-------- --------
$(404,295) $(376,115)
======== ========
Note 4 Party-in-interest transactions
- --------------------------------------
As summarized in Note 1, prior to January 1, 2000, participants
could elect to invest a portion of their accounts in the common
stock of the Company. Aggregate investment in A.P. Pharma, Inc.
common stock was as follows at December 31, 2001 and 2000:
Date Number of shares Fair value
- ---- ---------------- ----------
2001 12,990 $36,372
2000 14,381 34,177
Note 5 Plan termination
- ------------------------
The Company intends to continue the Plan indefinitely for the
benefit of its participants; however, it reserves the right to
terminate or modify the Plan at any time by resolution of its
Board of Directors and subject to the provisions of ERISA. In
the event the Plan is terminated in the future, participants
would become fully vested in their accounts.
NOTE 6 PLAN AMENDMENT
- ----------------------
The Company amended and restated the Plan effective January 1,
2002 to conform to provisions of the Code and to adopt certain
provisions of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRAA).
NOTE 7 SUBSEQUENT EVENT
- ------------------------
In May 2002, the Company designated Sterling Trust Company to
replace Eastern Bank and Trust Company as trustee.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 33-29084) of A.P. Pharma,
Inc. (formerly Advanced Polymer Systems, Inc. Salary Reduction
Profit Sharing Plan) of our report dated May 23, 2002, relating
to the Statement of Net Assets Available for Benefits of the AP
Pharma 401(k) Plan (formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan) as of December 31, 2001,
and the related Statement of Changes in Net Assets Available for
Benefits for the year then ended included in this Annual Report
on Form 11-K.
By /s/ Mohler, Nixon & Williams
----------------------------
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
June 25, 2002
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of A.P. Pharma, Inc. (formerly Advanced Polymer Systems, Inc.)
and the Trustees and Participants of the
AP Pharma 401(k) Plan (formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan):
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-29084) of A.P. Pharma, Inc.
(formerly Advanced Polymer Systems, Inc.) of our report dated
June 22, 2001, relating to the statement of net assets available
for benefits of the AP Pharma 401(k) Plan (formerly Advanced
Polymer Systems, Inc. Salary Reduction Profit Sharing Plan) as of
December 31, 2000, and the related statement of changes in net
assets available for benefits for the year then ended, which
report appears in the December 31, 2001 Annual Report on Form 11-
K of the AP Pharma, Inc. 401(k) Plan (formerly Advanced Polymer
Systems, Inc. Salary Reduction Profit Sharing Plan).
By /s/ KPMG LLP
------------
KPMG LLP
San Francisco, California
June 25, 2002
12
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of A.P. Pharma, Inc. (formerly Advanced Polymer Systems, Inc.)
and the Trustees and Participants of the
AP Pharma 401(k) Plan (formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan):
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-29084) of A.P. Pharma, Inc.
(formerly Advanced Polymer Systems, Inc.) of our report dated
June 22, 2001, relating to the statement of net assets available
for benefits of the AP Pharma 401(k) Plan (formerly Advanced
Polymer Systems, Inc. Salary Reduction Profit Sharing Plan) as of
December 31, 2000, and the related statement of changes in net
assets available for benefits for the year then ended, which
report appears in the December 31, 2001 Annual Report on Form 11-
K of the AP Pharma, Inc. 401(k) Plan (formerly Advanced Polymer
Systems, Inc. Salary Reduction Profit Sharing Plan).
By /s/ KPMG LLP
------------
KPMG LLP
San Francisco, California
June 25, 2002
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 33-29084) of A.P. Pharma,
Inc. (formerly Advanced Polymer Systems, Inc. Salary Reduction
Profit Sharing Plan) of our report dated May 23, 2002, relating
to the Statement of Net Assets Available for Benefits of the AP
Pharma 401(k) Plan (formerly Advanced Polymer Systems, Inc.
Salary Reduction Profit Sharing Plan) as of December 31, 2001,
and the related Statement of Changes in Net Assets Available for
Benefits for the year then ended included in this Annual Report
on Form 11-K.
By /s/ Mohler, Nixon & Williams
----------------------------
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
Campbell, California
June 25, 2002
