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 June 30, 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 July 31, 1998, the number of outstanding shares of the Company's
common stock, par value $.01, was 19,968,058.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations
for the three and six months ended June 30,
1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
CONDENSED BALANCE SHEETS (UNAUDITED)
- ------------------------------------
June 30, 1998 December 31, 1997
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,196,844 $ 8,672,021
Trade accounts receivable, net 5,260,681 3,388,665
Inventory 3,079,943 2,639,129
Prepaid expenses and other 669,442 541,151
---------- ----------
Total current assets 14,206,910 15,240,966
Property and equipment, net 8,370,159 6,771,173
Deferred loan costs, net 222,061 353,693
Prepaid license fees, net 41,444 82,880
Goodwill and other intangible
assets 1,386,812 1,477,542
Other long-term assets 212,892 254,180
---------- ----------
$ 24,440,278 $ 24,180,434
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,275,524 $ 1,636,189
Accrued expenses 2,300,998 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 4,206,643 2,523,389
---------- ----------
Total current liabilities 11,667,805 10,883,746
Long-term debt 124,062 3,055,460
---------- ----------
Total liabilities 11,791,867 13,939,206
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 84,658,778 82,505,394
Accumulated deficit (72,010,367) (72,264,166)
---------- ----------
Total shareholders' equity 12,648,411 10,241,228
---------- ----------
$ 24,440,278 $ 24,180,434
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1998 June 30,1997 June 30, 1998 June 30, 1997
------------- ------------ ------------- -------------
Product and technology
revenues $ 5,097,722 $ 4,499,516 $ 9,669,620 $ 8,046,648
Milestone payment -- -- -- 1,500,000
---------- ---------- ---------- ----------
Total revenues 5,097,722 4,499,516 9,669,620 9,546,648
Cost of sales 1,953,342 1,952,179 3,702,953 3,443,694
Operating expenses:
Research & development 1,161,090 900,817 2,199,842 1,833,291
Selling & marketing 738,896 949,069 1,614,726 2,122,881
General & administration 865,411 1,069,705 1,592,101 1,912,999
---------- ---------- ---------- ----------
Total operating expenses 2,765,397 2,919,591 5,406,669 5,869,171
---------- ---------- ---------- ----------
Operating income (loss) 378,983 (372,254) 559,998 233,783
Interest income 70,902 80,227 154,359 159,527
Interest expense (211,419) (268,862) (440,199) (540,254)
Other expense, net (11,483) (70,845) (20,359) (65,867)
---------- ---------- ---------- ----------
Net income (loss) $ 226,983 $ (631,734) $ 253,799 $ (212,811)
========== ========== ========== ==========
Basic earnings (loss) per
common share $ 0.01 $ (0.03) $ 0.01 $ (0.01)
========== ========== ========== ==========
Diluted earnings (loss) per
common share $ 0.01 $ (0.03) $ 0.01 $ (0.01)
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 19,877,164 18,577,599 19,727,206 18,491,867
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,585,182 19,697,625 20,494,607 19,721,408
========== ========== ========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the six months ended June 30,
---------------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 253,799 $ (212,811)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 534,531 487,413
Amortization of deferred loan costs 131,632 131,632
Provision for deferred compensation 12,850 126,757
Changes in operating assets and
liabilities:
Trade accounts receivable (1,872,016) (1,592,926)
Inventory (440,814) (533,896)
Prepaid expenses and other (128,291) (98,026)
Other assets 41,288 (488,176)
Accounts payable and accrued expenses (904,816) (342,329)
Deferred revenues (7,229) 1,500,000
--------- ---------
Net cash used in operating activities (2,379,066) (1,022,362)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets (2,001,351) (596,872)
Purchases of marketable securities - (1,596,617)
Maturities and sales of marketable
securities - 1,596,617
Proceeds from assets held for sale - 2,181,004
--------- ---------
Net cash (used in) provided by
investing activities (2,001,351) 1,584,132
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants and
issuance of restricted stock 2,043,749 2,071,923
Proceeds from shares issued under
the Employee Stock Purchase Plan 109,635 -
Repayment of long-term debt (1,248,144) (578,268)
Net cash provided by financing --------- ---------
activities 905,240 1,493,655
--------- ---------
Net (decrease) increase in cash and
cash equivalents (3,475,177) 2,055,425
Cash and cash equivalents, beginning
of the period 8,672,021 5,394,509
--------- ---------
Cash and cash equivalents, end
of the period $ 5,196,844 $ 7,449,934
========= =========
Supplemental disclosure of non-cash
financing transactions:
Cash paid for interest $ 317,281 $ 410,351
========= =========
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
JUNE 30, 1998 AND 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 June 30, 1998 and
the results of their operations for the three and six months ended
June 30, 1998 and 1997, and their cash flows for the six months
ended June 30, 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.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 1998.
(2) Common Shares Outstanding and Earnings (Loss) Per Share
--------------------------------------------------------
Information
-----------
Common stock outstanding as of June 30, 1998 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1997 19,464,821
Warrants exercised 310,278
Options exercised 75,494
Restricted stock issued 100,000
Shares issued under the Employee Stock
Purchase Plan 17,465
----------
Total shares 19,968,058
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Net income (loss) (numerator) $ 226,983 $ (631,734) $ 253,799 $ (212,811)
========== ========= ========== ===========
Shares calculation
(denominator):
Weighted average shares
outstanding - basic 19,877,164 18,577,599 19,727,206 18,491,867
Effect of dilutive
securities:
Stock options and employee
stock purchase plan 555,317 622,384 528,646 692,698
Warrants 152,701 497,642 238,755 536,843
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,585,182 19,697,625 20,494,607 19,721,408
========== ========== ========== ==========
Earnings (loss) per
share - basic $ 0.01 $ (0.03) $ 0.01 $ (0.01)
========== ========== ========== ==========
Earnings (loss) per
share - diluted $ 0.01 $ (0.03) $ 0.01 $ (0.01)
========== ========== ========== ==========
The following options with expiration dates ranging from November
19, 2001 to June 5, 2008 were outstanding during the periods
presented, 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:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Number outstanding 812,417 883,104 827,917 832,500
Range of exercise prices $7.75-$15.00 $7.75-$15.00 $7.75-$15.00 $8.125-$15.00
(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 and six months ended
June 30, 1998 and 1997, comprehensive income (loss) was the same
as net income (loss).
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.
In June 1998, the FASB issued SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) which
will be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Earlier
application of all provisions of this Statement is encouraged but
it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this Statement. The Company
anticipates that adoption of this Statement will not have a
material effect on the consolidated financial statements.
(4) Inventory
---------
The major components of inventory are as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Raw materials and work-
in-process $1,054,601 $ 834,496
Finished goods 2,025,342 1,804,633
--------- ---------
Total inventory $3,079,943 $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 June 30,
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 June 30, 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 approximately 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 June 30,
1998 totaled $5,098,000 compared to $4,500,000 in the corresponding
period of the prior year, representing an increase of $598,000 or 13%.
This was due primarily to increased sales of proprietary cosmeceutical
products, higher royalties from Johnson & Johnson for sales of Retin-
A(R) Micro (TM), and a license fee for the mass distribution of a
retinol formulation.
Gross profit for the second quarter of 1998 of $3,144,000 represented
62% of product and technology revenues, an increase of five percentage
points from the gross profit in the corresponding quarter of the prior
year. This was primarily attributable to an increase in royalties from
Johnson & Johnson for sales of Retin-A Micro which was launched in
March 1997, a license fee for the mass distribution of a retinol
formulation and an increase in revenues from higher margin proprietary
cosmeceutical products.
Research and development expenses increased by $260,000 or 29% to
$1,161,000 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 $210,000 or 22% to
$739,000 as a result of a reduction in headcount and outside services.
General and administrative expense decreased by $204,000 or 19% to
$865,000 due mainly to decreased use of consultants and outside
services.
Interest income of $71,000 decreased by $9,000 or 12% over the year-ago
quarter due to lower average cash balances. Interest expense decreased
by $57,000 or 21% to $211,000 due mainly to debt principal repayments
in the past year.
Net income for the second quarter of 1998 was $227,000 compared to a
net loss of $632,000 in the corresponding quarter of the prior year.
Results of Operations for the Six Months Ended June 30, 1998 and 1997
- ---------------------------------------------------------------------
Product and technology revenues for the six months ended June 30, 1998
totaled $9,670,000, an increase of $1,623,000 or 20% over the
corresponding period in the prior year. This was mainly due to
increased sales of proprietary cosmeceutical products, the receipt of a
license fee for a mass marketing agreement for a retinol formulation
and increased royalties from Johnson & Johnson for Retin-A Micro, which
was launched in March 1997. Total revenues for the first six months of
the prior year also included a milestone payment of $1,500,000 from
Johnson & Johnson upon receipt of marketing approval from the FDA for
Retin-A Micro in February 1997.
Gross profit on product and technology revenues for the first half of
1998 was $5,967,000, an increase of $1,364,000 or 30% over the same
period in the prior year. 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, a
license fee for a mass marketing agreement and increased royalties from
Johnson & Johnson for sales of Retin-A Micro.
Research and development expense increased by $367,000 or 20% due
mainly to increased headcount and expenses resulting from the Company's
move to new research & development facilities during the first quarter
of 1998. Selling and marketing expenses decreased by $508,000 or 24%
to $1,615,000 primarily as a result of reduced headcount, reduced
outside services and one-time expenses related to the relocation of a
senior executive in the year-ago period. General and administrative
expenses decreased by $321,000 or 17% due mainly to decreased use of
outside services.
Interest expense for the first six months of 1998 decreased by $100,000
due to debt principal repayments in the past year.
Net income for the first six months of 1998 was $254,000 compared with
a net loss of $213,000 in the corresponding period of the prior year
which included the milestone payment of $1,500,000 from Johnson &
Johnson.
Capital Resources and Liquidity
- -------------------------------
Total assets as of June 30, 1998 were $24,440,000 compared with
$24,180,000 at December 31, 1997, and working capital decreased to
$2,539,000 from $4,357,000, mainly due to an increase in the current
portion of long-term debt. In the same period, cash and cash
equivalents decreased to $5,197,000 from $8,672,000. During the first
six months of 1998, the Company's operating activities used $2,379,000
of cash. This principally related to an increase in receivables as a
result of increased shipments for the launches of new products by
corporate partners. The Company invested approximately $2,200,000 in
product research and development and $1,615,000 in selling and
marketing the Company's products and technologies.
Capital expenditures for the six months ended June 30, 1998 totaled
$2,001,000 compared to $597,000 in the same period of the prior year.
The increase in capital expenditures is mainly due to on-going capital
projects that will increase capacity in the Company's manufacturing
facility in Lafayette, Louisiana in order to meet anticipated higher
volume requirements. This plant expansion project is expected to be
completed in 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
- ------------------------
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.
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) which will be effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. Earlier application of all provisions of this Statement is
encouraged but it is permitted only as of the beginning of any fiscal
quarter that begins after issuance of this Statement. The Company
anticipates that adoption of this Statement will not have a material
effect on the consolidated financial statements.
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 June 30,
1998.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's annual shareholder's meeting was held on June 10, 1998,
at which the following proposals were approved:
Proposal I: Election of the following Directors:
Votes For Votes Withheld
--------- --------------
John J. Meakem, Jr. 16,799,644 893,109
Chairman of the Board
Carl Ehmann 16,798,095 894,658
Jorge Heller 16,798,640 894,113
Peter Riepenhausen 16,800,245 892,508
Toby Rosenblatt 16,798,840 893,913
Gregory Turnbull 16,796,395 896,358
Charles Anthony Wainwright 16,797,840 894,913
Dennis Winger 16,798,845 893,908
Proposal II: To amend the Company's 1992 Stock Plan (i) to increase by
750,000 the number of shares of common stock reserved for issuance
under the plan; and (ii) to provide for grants of restricted stock
awards under the plan.
Votes For Votes Against Abstentions & Broker Non-Votes
- --------- ------------- ------------------------------
15,918,362 1,583,068 191,323
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the six
months ended June 30, 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: August 12, 1998 By: /s/ John J. Meakem, Jr.
--------------- --------------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: August 12, 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
