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, 2000 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
AP PHARMA, 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, 2000 AND 1999
2000 1999
---- ----
ASSETS:
Cash $ -- $ 223
Investments (note 3):
Mutual Funds 3,053,781 --
Pooled separate accounts -- 3,403,101
Fixed dollar annuities -- 398,887
Company stock 34,177 60,756
Participant loans 52,081 59,096
--------- ---------
Total investments 3,140,039 3,921,840
--------- ---------
Contributions receivable:
Participant 4,576 21,340
Employer 13,354 28,282
--------- ---------
Total contributions receivable 17,930 49,622
--------- ---------
Net assets available for benefits $3,157,969 $3,971,685
========= =========
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, 2000 AND 1999
2000 1999
---- ----
Additions to net assets attributed to:
Investment income:
Net (depreciation) appreciation in
fair value of investments (note 3) $ (376,115) $ 567,627
Interest 5,383 25,436
Dividends 26 31
--------- ---------
Total investment (loss) income (370,706) 593,094
Contributions:
Employee 302,518 344,650
Employer 97,567 120,664
Rollovers 6,796 --
--------- ---------
Total additions 406,881 465,314
--------- ---------
Deductions from net assets attributed to:
Benefit payments (849,891) (256,106)
--------- ---------
Total deductions (849,891) (256,106)
--------- ---------
Net (decrease) increase (813,716) 802,302
Net assets at beginning of year 3,971,685 3,169,383
--------- ---------
Net assets available for benefits $3,157,969 $3,971,685
========= =========
See accompanying notes to the financial statements.
Notes to Financial Statements
December 31, 2000 and 1999
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
AP Pharma, Inc. and subsidiaries ("Company"). In May 2001, the Company
changed its name from Advanced Polymer Systems, Inc. to AP Pharma, Inc.
(Note 7). The 401(k) Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"). In June of 2000, the
Company sold 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 majority of the
affected employees were hired by R.P. Scherer and had the option of taking
a distribution from the Plan or leaving their account in the Plan.
(b) Contributions - Employee
Eligible domestic employees may contribute up to 15% of their total
compensation for each calendar year, limited to $10,500 in 2000 and $10,000
in 1999.
(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 $5,100 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. The assets of the Plan are held
in Trust. Prior to January 1, 2000, Michael O'Connell, Chief Financial
Officer of the Company, was the trustee. Effective January 1, 2000 the
current trustee is Eastern Bank and Trust.
The Company has retained CMG Consulting, Inc. ("CMG") to provide
recordkeeping services for the 401(k) Plan. CMG invests Plan assets in
various investment options as directed by the participants. Prior to
January 1, 2000, the Plan's investment options included pooled separate
accounts and a fixed dollar annuity offered through Nationwide Life
Insurance Company. Effective January 1, 2000, investment options include
various mutual funds offered through D-Access, an affiliate of CMG.
The Company has engaged Securities America to invest Plan assets, as
directed by the participants, in AP Pharma 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 1%. 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. At December 31, 2000 the interest rate on loans ranged from 8%
to 10.25%.
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 was valued at contract value, which
approximated 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. The guaranteed interest rate was 5.7% in 1999.
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. Investments in mutual
funds and company common stock are 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, 2000 and 1999, all such expenses were paid by the
Company.
(c) Forfeitures
If a Participant terminates employment with the Company 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 accounting
principles generally accepted in the United States of America 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.
(f) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires that an entity recognize all derivatives and
measure those instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
Pursuant to SFAS No. 137, the Plan is required to adopt SFAS No. 133
effective January 1, 2001. Management has not yet determined the impact of
SFAS No. 133 on the Plan financial statements.
3. INVESTMENTS
The following table represents the fair value of individual investments as
of December 31, 2000 and 1999. Those which exceed 5% of the Plan's net
assets as of December 31, 2000 are separately identified: (*):
2000 1999
---- ----
Pooled Separate Accounts
American Balanced Fund* $ -- $ 575,516
Bond Fund of America -- 135,850
Templeton Foreign Fund -- 112,115
Nationwide S&P Index Fund* -- 301,049
Fidelity Magellan Fund* -- 692,216
American Century Growth* -- 1,412,082
Warburg Pincus Emerging Growth Fund -- 174,273
--------- ---------
-- 3,403,101
--------- ---------
Mutual Funds
Federated Capital Preservation Fund* 474,342 --
Bond Fund of America 142,431 --
American Balanced Fund* 294,964 --
Federated Max-Cap Fund* 225,450 --
Fidelity Advisor Equity Growth Fund* 498,053 --
MFS Mass Investors Growth Fund* 1,132,985 --
Van Kampen Emerging Growth Fund* 214,458 --
Franklin Templeton Foreign Fund 71,098 --
--------- ---------
3,053,781 --
--------- ---------
Fixed Dollar Annuities* -- 398,887
APS Common Stock 34,177 60,756
Participant Loans 52,081 59,096
--------- ---------
$3,140,039 $3,921,840
========= =========
During 2000 and 1999, the Plan's investments (including gains and losses on
investments bought and sold, as well as held during the year) depreciated
in value by $376,115 and appreciated in value by $567,627, respectively, as
follows:
2000 1999
---- ----
Mutual Funds $(166,862) $ --
Pooled Separate Accounts (194,250) 605,824
Common Stock (15,003) (38,197)
-------- -------
$(376,115) $567,627
======== =======
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.
A 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, the Company 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
There were unintentional delays by the Company in submitting 1999 employee
deferrals in the amount $13,557 to the trustee. In 2000, the Company
reimbursed the Plan for lost gains/interest in the amount of $594.
7. SUBSEQUENT EVENT
In May of 2001, the shareholders of Advanced Polymer Systems, Inc. approved
a change in the Company name to AP Pharma, Inc.
SCHEDULE I
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2000
Description of investment, including
Identity of issuer, borrower, maturity date, rate of interest, Current
lessor or similar property collateral, par or maturity value value
- ----------------------------- ------------------------------------ -------
Federated Investors 47,434 shares of Capital Preservation Fund $ 474,342
American 11,136 shares of Bond Fund of America 142,431
American 19,067 shares of Balanced Fund 294,964
Federated Investors 8,425 shares of Federated Max-Cap Fund 225,450
Fidelity 8,361 shares of Adv. Equity Growth Fund 498,053
MFS 66,102 shares of Mass Investors Growth Fund 1,132,985
Van Kampen 3,416 shares of Emerging Growth Fund 214,458
Franklin Templeton 6,876 shares of Foreign Fund 71,098
Advanced Polymer Systems* 14,381 shares of common stock 34,177
Participant loans* Participant loans (interest rates, 8% to 10.25%;
Number of loans, 6) 52,081
---------
$3,140,039
=========
* Party-in-interest
See accompanying notes to independent auditors' report.
SCHEDULE II
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
SCHEDULE G, PART III - SCHEDULE OF NONEXEMPT TRANSACTION
DECEMBER 31, 2000
(b) Relationship to (c) Description of (d) Cost of
(a) Identity of plan, employer or transactions, including asset (interest
party involved other party-in-interest rate of interest amount)
- ---------------- ----------------------- ----------------------- ---------------
Advanced Polymer Plan Sponsor 1999 employee deferrals $594.00
Systems, Inc. not deposited to Plan in
a timely manner. Annualized
interest rate of 66.6%
It was noted that there were unintentional delays by the Company in submitting 1999 employee deferrals in the
amount of $13,557 to the trustee. In July of 2000, the Company reimbursed the Plan for lost interest in the
amount of $594.00.
See accompanying notes to independent auditors' report.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of AP Pharma, 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, 2000 and 1999, 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 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 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, 2000 and 1999, and the changes in net assets available for
benefits for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplemental schedules of
Schedule H, line 4i - Schedule of assets (held at end of year) as of
December 31, 2000 and Schedule G, Part III - schedule of nonexempt
transactions for the year ended December 31, 2000 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 22, 2001
Exhibits
23 Consent of Independent Auditors
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 27, 2001 /s/ Gordon Sangster
---------------- -------------------------
Gordon Sangster
Chief Financial Officer
EXHIBIT INDEX
23 Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of AP Pharma, 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 22, 2001 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, 2000 and 1999 and the related statements of
changes in net assets available for benefits for the years then ended and
the supplemental schedules of Schedule H, line 4i - schedule of assets
(held at end of year) as of December 31, 2000 and Schedule G, Part III -
schedule of nonexempt transactions for the year ended December 31, 2000
which appears in the December 31, 2000 annual report on Form 11-K of the
Advanced Polymer Systems, Inc. Salary Reduction Profit Sharing Plan.
/s/KPMG LLP
San Francisco, California
June 27, 2001