<PAGE>
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, 1997 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
<TABLE>
<CAPTION>
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
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ======= ======= ====== ======= ====== ===== =========
<FN>
See accompanying notes to the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
STATEMENT OF FINANCIAL CONDITION
at 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
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash account $ - - - - - - 5,887 - - 5,887
Investments at
fair value
Mutual funds
(cost
$1,050,167) 393,452 182,926 - 241,543 617,549 - - - - 1,435,470
Fixed dollar
annuities
(cost $332,773) - - - - - - 390,911 - - 390,911
Company stock
(cost
$52,524) - - - - - - - 67,489 - 67,489
Participant
loans - - - - - - - - 11,128 11,128
Employer
contributions
receivable 4,066 1,721 1,832 5,118 5,930 1,205 3,787 1,378 - 25,037
------- ------- ----- ------- ------- ----- ------- ------ ------ ---------
TOTAL ASSETS $397,518 184,647 1,832 246,661 623,479 1,205 400,585 68,867 11,128 1,935,922
======= ======= ===== ======= ======= ===== ======= ====== ====== =========
PLAN EQUITY:
Salary reduction
accounts 332,016 154,357 - 195,405 522,137 - 323,798 55,454 11,128 1,594,295
Employer matching
accounts 65,502 30,290 1,832 51,256 101,342 1,205 76,787 13,413 - 341,627
------- ------- ----- ------- ------- ----- ------- ------ ------ ---------
TOTAL EQUITY $397,518 184,647 1,832 246,661 623,479 1,205 400,585 68,867 11,128 1,935,922
======= ======= ===== ======= ======= ===== ======= ====== ====== =========
<FN>
See accompanying notes to the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ======= ======= ====== ======= ====== ====== =========
<FN>
See accompanying notes to the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ===== ======= ======= ===== ======= ====== ====== =========
<FN>
See accompanying notes to the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADVANCED POLYMER SYSTEMS, INC.
SALARY REDUCTION PROFIT SHARING PLAN
STATEMENT OF INCOME AND CHANGES IN PLAN EQUITY
for the year ended December 31, 1995
Twentieth Nationwide
American Bond Fidelity Century Guaranty APS Total
Balanced Fund of Magellan Growth and Savings Common Participant All
Fund America Fund Fund Fund Stock Loans Funds
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment
income:
Interest $ - - - - 18,162 - 753 18,915
------- ------- ------- ------- ------- ------ ------ ---------
Total net
investment
income - - - - 18,162 - 753 18,915
------- ------- ------- ------- ------- ------ ------ ---------
Net realized and
unrealized gains
on investments 46,387 21,690 26,872 71,238 - 5,247 - 171,434
------- ------- ------- ------- ------- ------ ------ ---------
Contributions:
Employee 43,172 19,728 57,220 61,994 66,221 11,399 - 259,734
Employer 12,777 7,237 20,869 21,815 22,760 4,036 - 89,494
Rollovers 3,458 3,270 2,417 18,285 16,689 - - 44,119
------- ------- ------- ------- ------- ------ ------ ---------
Total contributions 59,407 30,235 80,506 102,094 105,670 15,435 - 393,347
------- ------- ------- ------- ------- ------ ------ ---------
Withdrawals,
transfers and
distributions:
Member accounts
withdrawn &
distributed (12,848) (20,558) (7,413) (57,690) (22,723) (2,885) - (124,117)
Member accounts
transferred-in
(out) 8,919 (9,411) 7,923 (18,312) 20,840 (5,629) (4,330) -
------- ------- ------- ------- ------- ------ ------- ---------
Net withdrawals,
transfers and
distributions (3,929) (29,969) 510 (76,002) (1,883) (8,514) (4,330) (124,117)
------- ------- ------- ------- ------- ------ ------ ---------
Net increase
(decrease) in
plan equity 101,865 21,956 107,888 97,330 121,949 12,168 (3,577) 459,579
Plan equity:
Beginning of
the year 194,624 137,245 23,372 400,805 243,723 22,894 10,108 1,032,771
------- ------- ------- ------- ------- ------ ------ ---------
End of the year $296,489 159,201 131,260 498,135 365,672 35,062 6,531 1,492,350
======= ======= ======= ======= ======= ====== ====== =========
<FN>
See accompanying notes to the financial statements.
</FN>
</TABLE>
<PAGE>
Notes to Financial Statements
December 31, 1997, 1996 and 1995
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 $9,500 in 1997 and 1996,
and $9,240 in 1995 (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 $4,750 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 6.1% in 1997, 5.85% in 1996 and 6.1% in 1995.
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) 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.
(h) 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 6.1%,
5.85% and 6.1% in 1997, 1996 and 1995, 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, 1997, 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.
(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:
<TABLE>
<CAPTION>
Fair Value
Per Unit/ Units/
1997 Share* Shares Cost Fair Value
- ---- ------- ----- ---- -----------
<S> <C> <C> <C> <C>
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
========= =========
Fair Value
Per Unit/ Units/
1996 Share* Shares Cost Fair Value
- ---- ------- ----- ---- -----------
Mutual Funds
American Balanced Fund** $2.17 181,182 $ 274,841 $ 393,452
Bond Fund of America** 2.14 85,433 140,188 182,926
Fidelity Magellan Fund** 1.95 123,698 199,992 241,543
Twentieth Century Growth Fund** 4.25 145,470 435,146 617,549
Fixed Dollar Annuities
Nationwide Guaranty and Savings
Fund** 1.12 349,325 332,773 390,911
Company Stock
APS Common Stock** 7.63 8,851 52,524 67,489
Participant Loan** 1.00 11,128 11,128 11,128
--------- ---------
$1,446,592 $1,904,998
========= =========
* Unit value is rounded
** Party in interest
</TABLE>
Investment option elections of the members of the 401(k) Plan at December
31 are summarized as follows:
<TABLE>
<CAPTION>
Number of Participants
----------------------
1997 1996
--------- --------
<S> <C> <C>
Mutual Funds
American Balanced Fund 45 46
Bond Fund of America 27 28
Templeton Foreign Fund 24 --
Dreyfus S&P 500 Index Fund 8 --
Fidelity Magellan Fund 44 44
Twentieth Century Growth Fund 54 53
Warburg Pincus Emerging Growth 20 --
Fixed Dollar Annuities
Nationwide Guaranty and Savings Fund 44 43
Company Stock
APS Common Stock 36 48
</TABLE>
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.
<PAGE>
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, 1997 and 1996, and the related statements of income and
changes in plan equity for each of the years in the three-year period ended
December 31, 1997. 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, 1997
and 1996, 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, 1997, 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 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 Peat Marwick LLP
San Francisco, California
March 13, 1998
<PAGE>
Exhibits
23 Consent of Independent Certified Public Accountants
<PAGE>
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: March 27, 1998 /s/ Michael O'Connell
---------------- -------------------------
Michael O'Connell
Trustee
<PAGE>
EXHIBIT INDEX
23 Consent of Independent Public Accountants
<PAGE>
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 13, 1998 relating
to the statements of financial condition of the Advanced Polymer Systems,
Inc. Salary Reduction Profit Sharing Plan as of December 31, 1997 and 1996
and the related statements of income and changes in Plan equity for each of
the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 11-K of the Advanced
Polymer Systems, Inc. Salary Reduction Profit Sharing Plan.
/s/KPMG Peat Marwick LLP
San Francisco, California
March 27, 1998
