FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
At April 30, 1998, the number of outstanding shares of the Company's
common stock, par value $.01, was 19,812,912.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
BALANCE SHEETS (UNAUDITED)
- --------------------------
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,423,352 $ 8,672,021
Trade accounts receivable, net 4,766,673 3,388,665
Inventory 2,978,494 2,639,129
Prepaid expenses and other 677,149 541,151
---------- ----------
Total current assets 14,845,668 15,240,966
Property and equipment, net 7,781,346 6,771,173
Deferred loan costs, net 287,877 353,693
Prepaid license fees, net 62,162 82,880
Goodwill and other intangible
assets 1,432,176 1,477,542
Other long-term assets 214,172 254,180
---------- ----------
$ 24,623,401 $ 24,180,434
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,740,587 $ 1,636,189
Accrued expenses 2,005,662 2,832,299
Accrued melanin purchase
commitments 1,800,000 1,800,000
Deferred revenues 2,084,640 2,091,869
Current portion - long-term debt 4,565,878 2,523,389
---------- ----------
Total current liabilities 12,196,767 10,883,746
Long-term debt 392,193 3,055,460
---------- ----------
Total liabilities 12,588,960 13,939,206
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 84,271,787 82,505,394
Accumulated deficit (72,237,346) (72,264,166)
---------- ----------
Total shareholders' equity 12,034,441 10,241,228
---------- ----------
$ 24,623,401 $ 24,180,434
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ----------------------------------------------------------
Three Months Ended March 31,
----------------------------
1998 1997
------ ------
Product and technology revenues $ 4,571,898 $ 3,547,132
Milestone payment -- 1,500,000
---------- ----------
Total revenues 4,571,898 5,047,132
Cost of sales 1,749,611 1,491,515
Operating expenses:
Research & development, net 1,038,752 932,474
Selling & marketing 875,830 1,173,812
General & administration 726,686 843,294
---------- ----------
Total operating expenses 2,641,268 2,949,580
---------- ----------
Operating income 181,019 606,037
Interest income 83,457 79,300
Interest expense (228,780) (271,392)
Other income (expense), net (8,876) 4,978
---------- ----------
Net income $ 26,820 $ 418,923
========== ==========
Basic earnings per common share $ 0.00 $ 0.02
========== ==========
Diluted earnings per common share $ 0.00 $ 0.02
========== ==========
Weighted average common shares
outstanding-basic 19,577,247 18,406,134
========== ==========
Weighted average common shares
outstanding-diluted 20,358,114 19,692,958
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the three months ended March 31,
------------------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $ 26,820 $ 418,923
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 269,853 251,947
Amortization of deferred loan costs 65,816 65,816
Provision for deferred compensation 30,000 45,000
Changes in operating assets and
liabilities:
Trade accounts receivable (1,378,008) (426,109)
Inventory (339,365) (622,655)
Prepaid expenses and other (135,998) (26,660)
Other long-term assets 40,008 (94,177)
Accounts payable and accrued expenses (752,239) (750,835)
Deferred revenues (7,229) 1,475,000
--------- ---------
Net cash provided by (used in)
operating activities (2,180,342) 336,250
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,213,942) (136,067)
Purchases of marketable securities - (1,596,617)
Proceeds from assets held for sale - 1,449,698
--------- ---------
Net cash used in investing activities (1,213,942) (282,986)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 1,766,393 275,114
Repayment of long-term debt (620,778) (286,187)
Net cash provided by (used in) --------- ---------
financing activities 1,145,615 (11,073)
--------- ---------
Net increase (decrease) in cash and
cash equivalents (2,248,669) 42,191
Cash and cash equivalents, beginning
of the period 8,672,021 5,394,509
--------- ---------
Cash and cash equivalents, end
of the period $ 6,423,352 $ 5,436,700
========= =========
Supplemental disclosure:
Cash paid for interest $ 164,472 $ 205,633
========= =========
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
MARCH 31, 1998 AND DECEMBER 31, 1997 (UNAUDITED)
- ------------------------------------------------
(1) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present
fairly the financial position of Advanced Polymer Systems, Inc.
and subsidiaries ("the Company" or "APS") as of March 31, 1998 and
the results of their operations and cash flows for the three
months ended March 31, 1998 and 1997.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the years ended December 31, 1997, 1996 and 1995
included in the Company's Annual Report on Form 10-K.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiaries, Premier,
Inc. ("Premier") and APS Analytical Standards, Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The Company considers all short-term investments which have
original maturities of less than three months to be cash
equivalents. Investments which have original maturities longer
than three months are classified as marketable securities in the
accompanying balance sheets.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 1998.
(2) Common Shares Outstanding and Earnings Per Share Information
------------------------------------------------------------
Common stock outstanding as of March 31, 1998 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1997 19,464,821
Warrants exercised after December 31, 1997 310,278
Options exercised after December 31, 1997 26,812
----------
Total shares 19,801,911
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share:
Three Months Ended
March 31,
------------------
1998 1997
---- ----
Net income available to
stockholders (numerator) $ 26,820 $ 418,923
========== ==========
Shares calculation (denominator):
Weighted average shares
outstanding - basic 19,577,247 18,406,134
Effect of dilutive securities:
Stock options and employee
stock purchase plan 501,844 752,275
Warrants 279,023 534,549
---------- ----------
Weighted average shares
outstanding - diluted 20,358,114 19,692,958
========== ==========
Earnings per share - basic $ 0.00 $ 0.02
========== ==========
Earnings per share - diluted $ 0.00 $ 0.02
========== ==========
Options to purchase 1,037,838 and 543,167 shares of Common Stock
with exercise prices ranging from $7.38 to $15.00 and $8.50 to
$15.00 per share were outstanding during the quarters ended March
31, 1998 and 1997, respectively, but were not included in the
computation of diluted earnings per share since the exercise
prices of the options were greater than the average market price
of the common shares. The options expire between May 24, 1998 and
March 6, 2008.
(3) New Accounting Standards
------------------------
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" which establishes standards for reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. For the three months ended March
31, 1998 and 1997, comprehensive income was the same as net
income.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of a Business Enterprise" which is effective for
financial statements beginning after December 15, 1997, and
establishes standards for disclosures about segments of an
enterprise. In its consolidated financial statements for the year
ending December 31, 1998, the Company will make the required
disclosures.
(4) Inventory
---------
The major components of inventory are as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Raw materials and work-
in-process $ 705,010 $ 834,496
Finished goods 2,273,484 1,804,633
--------- ---------
Total inventory $2,978,494 $2,639,129
========= =========
(5) Legal Proceedings
-----------------
In November, 1997 Biosource Technologies, Inc.
("Biosource") filed a complaint against the Company in the
San Mateo Superior Court. Biosource claims damages from
the Company of an amount not less than $1,050,000, on the
grounds that the Company has failed to pay certain minimum
amounts allegedly due under a contract for the supply of
melanin. Biosource also claims interest on that sum and
costs.
The Company has denied liability, basing its defense on
the assertion that obligations under the contract have
been suspended, because the expected FDA approval of the
Company's melanin-based product has not yet been
forthcoming. The Company is vigorously defending the
action, and has cross claimed for rescission of the
contract and restitution of money paid thereunder, and for
a declaratory judgment that it is not indebted to
Biosource.
The Company expects that the outcome of this legal
proceeding will not have a material adverse effect on the
consolidated financial statements considering amounts
accrued at March 31, 1998.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
Results of Operations for the Three Months Ended March 31, 1998 and
- -------------------------------------------------------------------
1997
- ----
Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and uncertainties
that could cause actual results to differ materially from the
statements made. These include, among others, uncertainty associated
with timely approval, launch and acceptance of new products,
establishment of new corporate alliances, progress in research and
development programs and other risks described below or identified from
time to time in the Company's Securities and Exchange Commission
filings.
The Company's revenues are derived principally from product sales,
license fees and royalties. The Company is currently manufacturing and
selling Microsponge(R) and Polytrap (R) delivery systems for use by
customers in almost 100 different personal care and cosmetic products.
Under strategic alliance arrangements entered into with certain
corporations, APS can receive an initial license fee, future milestone
payments, royalties based on third party product sales or a share of
partners' revenues, and revenues from the supply of Microsponge and
Polytrap systems.
These strategic alliances are intended to provide the Company with the
marketing expertise and/or financial strength of other companies. In
this respect, the Company's periodic financial results are dependent
upon the degree of success of current collaborations and the Company's
ability to negotiate acceptable collaborative agreements in the future.
Product and technology revenues for the three months ended March 31,
1998 totaled $4,572,000 compared to $3,547,000 in the corresponding
period of the prior year, representing an increase of $1,025,000 or
29%. This increase was due primarily to sales of various cosmeceutical
and pharmaceutical products which were launched in 1997 by Johnson &
Johnson, Avon, Medicis and Sothys and product launches in the first
quarter of 1998 by La Prairie and BioMedic. Total revenues for the
year-ago first quarter also included a milestone payment of $1,500,000
from Johnson & Johnson upon receipt of marketing approval from the FDA
for Retin-A(R) Micro(TM) in February 1997.
Gross profit for the first quarter of 1998 of $2,822,000 represented
62% of product and technology revenues, an increase of four percentage
points from the corresponding gross profit in the year-ago quarter.
This was primarily due to increased sales of higher margin proprietary
cosmeceutical products which have been launched by corporate partners
in the course of the last year.
Research and development expenses increased by $106,000 or 11% to
$1,039,000 due mainly to increased headcount and expenses resulting
from the Company's move to new R&D facilities during the first quarter
of 1998. Selling and marketing expense decreased by $298,000 or 25% to
$876,000 as a result of decreased headcount and one-time expenses
related to the relocation of a senior executive in the year-ago
quarter. General and administrative expense decreased by $117,000 or
14% to $727,000 due mainly to decreased use of outside consultants.
Interest income of $83,000 increased by $4,000 or 5% over the year-ago
quarter. Interest expense decreased by $43,000 or 16% to $229,000 due
mainly to principal repayments in the first quarter.
Net income was $27,000 compared with $419,000 in the corresponding
quarter of the prior year which included the milestone payment of
$1,500,000 from Johnson & Johnson.
Capital Resources and Liquidity
- -------------------------------
Total assets as of March 31, 1998 were $24,623,000 compared with
$24,180,000 at December 31, 1997, and working capital decreased to
$2,649,000 from $4,357,000. In the same period, cash and cash
equivalents decreased to $6,423,000 from $8,672,000. During the first
three months of 1998, the Company's operating activities used
$2,180,000 of cash. This principally related to an increase in
receivables as a result of the launches of new products by corporate
partners and the restructuring of the agreement with Avon to a royalty
arrangement. The Company invested approximately $1,039,000 in product
research and development and $876,000 in selling and marketing the
Company's products and technologies.
Capital expenditures for the three months ended March 31, 1998 totaled
$1,214,000 compared to $136,000 in the same period of the prior year.
The increase in capital expenditures is mainly due to capital projects
that will increase capacity in the Company's manufacturing facility in
Lafayette, Louisiana. This is necessary in order to meet anticipated
higher volume requirements. This plant expansion project is expected
to be completed in the third quarter of 1998. In addition, the
Company's lease on its facilities in Redwood City expired and the
increase in capital expenditures also included leasehold improvements,
primarily laboratories, in the Company's new facilities in Redwood
City.
The Company has financed its operations, including product research and
development, from amounts raised in debt and equity financings, the
sale of Microsponge and Polytrap delivery systems and analytical
standard products; payments received under licensing agreements; and
interest earned on short-term investments.
The Company's existing cash and cash equivalents, collections of trade
accounts receivable, together with interest income and other revenue
producing activities including royalties, licensing fees and milestone
payments, are expected to be sufficient to meet the Company's working
capital requirements for the foreseeable future, assuming no changes to
existing business plans.
New Accounting Standards
- ------------------------
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. For the three months ended March 31, 1998 and 1997,
comprehensive income was the same as net income.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments
of a Business Enterprise" which is effective for financial statements
beginning after December 15, 1997, and establishes standards for
disclosures about segments of an enterprise. In its consolidated
financial statements for the year ending December 31, 1998, the Company
will make the required disclosures.
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
-----------------
In November, 1997 Biosource Technologies, Inc. ("Biosource")
filed a complaint against the Company in the San Mateo Superior
Court. Biosource claims damages from the Company of an amount
not less than $1,050,000, on the grounds that the Company has
failed to pay certain minimum amounts allegedly due under a
contract for the supply of melanin. Biosource also claims
interest on that sum and costs.
The Company has denied liability, basing its defense on the
assertion that obligations under the contract have been
suspended, because the expected FDA approval of the Company's
melanin-based product has not yet been forthcoming. The
Company is vigorously defending the action, and has cross
claimed for rescission of the contract and restitution of money
paid thereunder, and for a declaratory judgment that it is not
indebted to Biosource.
The Company expects that the outcome of this legal proceeding
will not have a material adverse effect on the consolidated
financial statements considering amounts accrued at March 31,
1998.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the three
months ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
Date: May 14, 1998 By: /s/ John J. Meakem, Jr.
-------------- -------------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: May 14, 1998 By: /s/ Michael O'Connell
-------------- -------------------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
EXHIBIT INDEX
Form 10-Q
EXHIBIT DESCRIPTION
27 Financial Data Schedule
5
