SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
[ ] 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, 1999, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,092,005.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Restated) (unaudited):
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999
and 1998
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998
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 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
June 30, 1999 December 31, 1998
------------- -----------------
(As Restated - See Note 11)
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,528,767 $ 4,088,173
Trade accounts receivable, net 2,885,579 2,532,527
Receivables for royalties,
license and option fees and
R&D fees 2,414,412 2,296,852
Inventory 3,601,301 2,959,443
Advances and loans to officers
and employees 303,679 338,947
Prepaid expenses and other 864,388 596,400
---------- ----------
Total current assets 13,598,126 12,812,342
Property and equipment, net 8,348,562 8,643,856
Deferred loan costs, net 54,727 90,428
Goodwill and other intangible
assets, net 1,258,143 1,351,813
Other long-term assets 482,892 182,892
---------- ----------
Total assets $ 23,742,450 $ 23,081,331
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,092,868 $ 1,347,737
Accrued expenses 1,433,115 1,057,287
Accrued settlement liability -- 1,300,000
Deferred revenue 1,350,952 1,291,540
Current portion - long-term debt 954,130 3,055,460
---------- ----------
Total current liabilities 4,831,065 8,052,024
Deferred revenue - non-current 5,546,519 5,993,245
Long-term debt 2,869,873 --
---------- ----------
Total liabilities 13,247,457 14,045,269
---------- ----------
Commitments and Contingencies
Shareholders' equity:
Common stock and common stock
warrants 85,319,958 84,903,633
Accumulated deficit (74,824,965) (75,867,571)
---------- ----------
Total shareholders' equity 10,494,993 9,036,062
---------- ----------
Total liabilities and shareholders'
equity $ 23,742,450 $ 23,081,331
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
(As Restated - See Note 11) (As Restated - See Note 11)
--------------------------- ---------------------------
Product revenues $ 3,528,917 $ 3,594,937 $ 6,478,972 $ 7,148,148
Royalties, license and option
fees and R&D fees 1,390,778 1,272,996 3,255,553 2,539,672
---------- ---------- ---------- ----------
Total revenues 4,919,695 4,867,933 9,734,525 9,687,820
Cost of sales 1,679,554 1,953,342 3,227,726 3,702,953
Operating expenses:
Research & development, net 1,027,701 1,161,090 2,083,222 2,199,842
Selling & marketing 689,215 738,896 1,416,300 1,614,726
General & administration 889,145 865,411 1,739,861 1,592,101
---------- ---------- ---------- ----------
Total operating expenses 2,606,061 2,765,397 5,239,383 5,406,669
---------- ---------- ---------- ----------
Operating income 634,080 149,194 1,267,416 578,198
Interest income 47,030 70,902 80,730 154,359
Interest expense (161,180) (211,419) (303,896) (440,199)
Other expense, net (1,217) (11,483) (1,644) (20,359)
---------- ---------- ---------- ---------
Net income $ 518,713 $ (2,806) $ 1,042,606 $ 271,999
========== ========== ========== =========
Basic earnings per common share $ 0.03 $ (0.00) $ 0.05 $ 0.01
========== ========== ========== =========
Diluted earnings per common share $ 0.03 $ (0.00) $ 0.05 $ 0.01
========== ========== ========== =========
Weighted average common shares
outstanding-basic 20,088,397 19,877,164 20,053,321 19,727,206
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,410,721 20,585,182 20,308,510 20,494,607
========== ========== ========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the six months ended June 30,
---------------------------------
1999 1998
---------- ----------
(As Restated - See Note 11)
---------------------------
Cash flows from operating activities:
Net income $ 1,042,606 $ 271,999
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 543,362 534,531
Amortization of deferred loan costs 35,701 131,632
Stock issued to directors 21,000 --
Stock compensation awards to non-
employees -- 12,850
Restricted stock awards 99,858 --
Changes in operating assets and
liabilities:
Trade accounts receivable (353,052) (1,419,550)
Receivables for royalties, license
and option fees and R&D fees (117,560) (452,466)
Inventory (641,858) (440,814)
Prepaid expenses and other (232,720) (128,291)
Other long-term assets (300,000) 41,288
Accounts payable and accrued expenses 120,959 (904,816)
Accrued settlement liability (1,300,000) --
Deferred revenues (387,314) (25,429)
--------- ---------
Net cash used in operating activities (1,469,018) (2,379,066)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (154,398) (2,001,351)
--------- ---------
Net cash used in investing activities (154,398) (2,001,351)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 211,726 2,043,749
Proceeds from issuance of shares
under the Employee Stock Purchase
Plan 83,741 109,635
Proceeds from long-term debt 4,000,000 --
Repayment of debt (3,231,457) (1,248,144)
--------- ---------
Net cash provided by financing
activities 1,064,010 905,240
--------- ---------
Net decrease in cash and cash
equivalents (559,406) (3,475,177)
Cash and cash equivalents, beginning
of the period 4,088,173 8,672,021
--------- ---------
Cash and cash equivalents, end
of the period $ 3,528,767 $ 5,196,844
========= =========
Cash paid for interest $ 226,270 $ 317,281
========= =========
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
JUNE 30, 1999 AND 1998 (UNAUDITED)
- ----------------------------------
(1) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements have been prepared
on the same basis as those in the Annual Report on Form 10-K/A
(Amendment No. 2) for the year ended December 31, 1998 and
include all adjustments necessary to present fairly the
financial position of Advanced Polymer Systems, Inc. and
subsidiaries ("the Company" or "APS") as of June 30, 1999 and
the results of their operations for the three and six months
ended June 30, 1999 and 1998.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K/A (Amendment No. 2).
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 in debt
securities which have original maturities of less than three
months at date of purchase 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 1999.
(2) Common Shares Outstanding and Earnings Per Share Information
------------------------------------------------------------
Common stock outstanding as of June 30, 1999 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1998 19,993,311
Warrants exercised after December 31, 1998 70,000
Shares issued to Directors after December
31, 1998 4,802
Shares issued under the Employee Stock
Purchase Plan 20,173
Shares issued upon exercise of stock options 333
----------
Total shares 20,088,619
==========
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, 1999 June 30,1998 June 30, 1999 June 30,1998
------------- ------------ ------------- ------------
(As Restated - See Note 11) (As Restated - See Note 11)
--------------------------- ---------------------------
Net income (numerator) $ 518,713 $ (2,806) $ 1,042,606 $ 271,999
========== ========== ========== ==========
Shares calculation
(denominator):
Weighted average shares
outstanding - basic 20,088,397 19,877,164 20,053,321 19,727,206
Effect of dilutive securities:
Stock options and employee
stock purchase plan 217,860 555,317 152,199 528,646
Warrants 104,464 152,701 102,990 238,755
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,410,721 20,585,182 20,308,510 20,494,607
========== ========== ========== ==========
Earnings (loss) per share
- basic $ 0.03 $ (0.00) $ 0.05 $ 0.01
========== ========== ========== ==========
Earnings (loss) per share
- diluted $ 0.03 $ (0.00) $ 0.05 $ 0.01
========== ========== ========== ==========
The following options with expiration dates ranging from July
23, 2001 to June 16,2009 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, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
Number outstanding 2,088,310 812,417 2,730,788 827,917
Range of exercise prices $5.44-$15.00 $7.75-$15.00 $5.19-$15.00 $7.75-$15.00
(3) R&D Fees
--------
Fees from research and development activities are recognized as
revenues when earned and contract provisions are met. Such
fees (revenues) represent amounts paid to APS as reimbursement
of costs incurred in product development and clinical
evaluation, including a portion of overhead and administrative
expenses. As a general policy, the revenues are not recognized
if amounts received are refundable or the Company has related
future performance obligations.
(4) Long-Lived Assets, Including Goodwill and Other Intangibles
-----------------------------------------------------------
The Company evaluates the carrying value of long-lived assets,
including goodwill, whenever changes have occurred that would
require revision of the remaining estimated lives of recorded
long-lived assets, including goodwill, or render those assets
not recoverable. If such circumstances arise, recoverability
is determined by comparing the undiscounted net cash flows of
long-lived assets, including goodwill to their respective
carrying values. The amount of impairment, if any, is measured
based on the projected discounted cash flows using an
appropriate discount rate. At this time, the Company believes
that no impairment of long-lived assets, including goodwill and
other intangibles, has occurred and that no reduction of the
estimated useful lives of such assets is warranted.
(5) Related Party Transactions
--------------------------
During May 1999, a payment of $120,000 on an outstanding loan
balance was made by an officer. As of June 30, 1999, the
outstanding secured loan receivable from the officer totaled
$240,000. The loan bears an interest rate of the lower of
13.87% or the highest rate permitted under the applicable law.
The loan was approved by the Compensation Committee of the
Company's Board of Directors. Repayment of the loan is due by
December 31, 1999.
(6) Inventory
---------
The major components of inventory are as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials and work-
in-process $1,122,695 $ 743,383
Finished goods 2,478,606 2,216,060
--------- ---------
Total inventory $3,601,301 $2,959,443
========= =========
(7) Note Receivable
---------------
Included in long-term assets is the non-current portion of a
note receivable recorded by the Company in connection with the
sale of certain proprietary product rights. The total amount
due as of June 30, 1999, is $600,000. The Company received
$100,000 payment in July 1999. The remaining $500,000, which
bears an interest rate equal to the prime rate, is due in equal
monthly installments over a period of twenty-five months
commencing September 15, 1999.
(8) Debt
----
In March 1999, the Company received a $4,000,000 term loan with
a fixed interest rate of 13.87%. The loan is secured by the
assets of the Company's manufacturing facility in Louisiana and
a portion of the Company's accounts receivable. Principal and
interest payments are due in equal monthly installments over a
period of forty-eight months commencing March 1999. The term
loan was obtained mainly to refinance scheduled debt payments
made in the first quarter of 1999.
(9) Income Taxes
------------
The Company does not anticipate incurring significant amounts
of income taxes in 1999 due to the use of its net operating
loss carry forwards from the prior year. Currently, any income
tax expense is being offset by recognition of a corresponding
change in the valuation allowance for deferred tax assets.
(10) Legal Proceedings
-----------------
In November 1997, Biosource Technologies, Inc. ("Biosource")
filed a complaint against the Company in the San Mateo Superior
Court. Biosource claimed damages from the Company on the
grounds that the Company had failed to pay certain minimum
amounts allegedly due under a contract for the supply of
melanin.
In December 1998, the Company reached a settlement agreement
with Biosource for a net amount of $1,300,000, which consisted
of a $1,500,000 settlement of Biosource's claims and a $200,000
settlement of the Company's cross claims. Pursuant to the
agreement, the Company paid Biosource $300,000 in January, 1999
and $1,000,000 on May 31, 1999. The settlement agreement also
provided for the termination of the license and supply
agreement between the parties.
(11) Restatement
-----------
Subsequent to the issuance of the Company's 1998 financial
statements and the filing of its 1998 Form 10-K, March 31, 1999
Form 10Q and June 30, 1999 Form 10Q with the Securities and
Exchange Commission (SEC), and following discussions with the
staff of the SEC concerning its review of the Company's
financial statements, APS decided to restate its financial
statements for the fiscal years ended December 31, 1992 through
1998 and the first and second quarters of 1999. The
accompanying condensed consolidated financial statements for
the three and six months ended June 30, 1999 and June 30, 1998
and as of June 30, 1999 and December 31, 1998 present restated
results to reflect a change in accounting such that license
fees are amortized over the estimated life of the product to
which they relate. In prior presentations, the Company
recognized as earned license fees which were non-refundable and
not subject to material contingencies or commitments. The
change results in a difference in the timing of revenue
recognition of license fees and has no effect on the Company's
cash flows.
A comparison of the restated and previously reported condensed
consolidated statements of operations for the three and six
months ended June 30, 1999 and June 30, 1998 and condensed
consolidated balance sheets as of June 30, 1999 follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1999 1999 1999
---- ---- ---- ----
(As Previously (As Previously
(As Restated) Reported) (As Restated) Reported)
------------- ------------- ----------- ------------
Product revenues $ 3,528,917 $ 3,528,917 $ 6,478,972 $ 6,478,972
Royalties, license and
option fees and R&D fees 1,390,778 1,196,790 3,255,553 2,867,577
---------- ---------- ---------- ----------
Total revenues 4,919,695 4,725,707 9,734,525 9,346,549
Cost of sales 1,679,554 1,679,554 3,227,726 3,227,726
Operating expenses:
Research & development, net 1,027,701 1,027,701 2,083,222 2,083,222
Selling & marketing 689,215 689,215 1,416,300 1,416,300
General & administration 889,145 889,145 1,739,861 1,739,861
---------- ---------- ---------- ----------
Total operating expenses 2,606,061 2,606,061 5,239,383 5,239,383
---------- ---------- ---------- ----------
Operating income 634,080 440,092 1,267,416 879,440
Interest income 47,030 47,030 80,730 80,730
Interest expense (161,180) (161,180) (303,896) (303,896)
Other expense, net (1,217) (1,217) (1,644) (1,644)
---------- ---------- ---------- ----------
Net income $ 518,713 $ 324,725 $ 1,042,606 $ 654,630
========== ========== ========== ==========
Basic earnings per common
share $ 0.03 $ 0.02 $ 0.05 $ 0.03
========== ========== ========== ==========
Diluted earnings per common
share $ 0.03 $ 0.02 $ 0.05 $ 0.03
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 20,088,397 20,088,397 20,053,321 20,053,321
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,410,721 20,410,721 20,308,510 20,308,510
========== ========== ========== ==========
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1998 1998 1998 1998
---- ---- ---- ----
(As Previously (As Previously
(As Restated) Reported) (As Restated) Reported)
------------- ------------- ----------- ------------
Product revenues $ 3,594,937 $ 3,594,937 $ 7,148,148 $ 7,148,148
Royalties, license and
option fees and R&D fees 1,272,996 1,502,785 2,539,672 2,521,472
---------- ---------- ---------- ----------
Total revenues 4,867,933 5,097,722 9,687,820 9,669,620
Cost of sales 1,953,342 1,953,342 3,702,953 3,702,953
Operating expenses:
Research & development, net 1,161,090 1,161,090 2,199,842 2,199,842
Selling & marketing 738,896 738,896 1,614,726 1,614,726
General & administration 865,411 865,411 1,592,101 1,592,101
---------- ---------- ---------- ----------
Total operating expenses 2,765,397 2,765,397 5,406,669 5,406,669
---------- ---------- ---------- ----------
Operating income 149,194 378,983 578,198 559,998
Interest income 70,902 70,902 154,359 154,359
Interest expense (211,419) (211,419) (440,199) (440,199)
Other expense, net (11,483) (11,483) (20,359) (20,359)
---------- ---------- ---------- ----------
Net (loss) income $ (2,806) $ 226,983 $ 271,999 $ 253,799
========== ========== ========== ==========
Basic (loss) earnings per
common share $ (0.00) $ 0.01 $ 0.01 $ 0.01
========== ========== ========== ==========
Diluted (loss) earnings per
common share $ (0.00) $ 0.01 $ 0.01 $ 0.01
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 19,877,164 19,877,164 19,727,206 19,727,206
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,585,182 20,585,182 20,494,607 20,494,607
========== ========== ========== ==========
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
June 30, 1999 June 30, 1999
------------- --------------
(As Previously
(As Restated) Reported)
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,528,767 $ 3,528,767
Trade accounts receivable, net 2,885,579 2,885,579
Receivables for royalties,
license and option fees and
R&D fees 2,414,412 2,414,412
Inventory 3,601,301 3,601,301
Advances and loans to officers
and employees 303,679 303,679
Prepaid expenses and other 864,388 864,388
---------- ----------
Total current assets 13,598,126 13,598,126
Property and equipment, net 8,348,562 8,348,562
Deferred loan costs, net 54,727 54,727
Goodwill and other intangible
assets, net 1,258,143 1,258,143
Other long-term assets 482,892 482,892
---------- ----------
Total assets $ 23,742,450 $ 23,742,450
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,092,868 $ 1,092,868
Accrued expenses 1,433,115 1,433,115
Accrued settlement liability -- --
Deferred revenue 1,350,952 750,000
Current portion - long-term debt 954,130 954,130
---------- ----------
Total current liabilities 4,831,065 4,230,113
Deferred revenue - non-current 5,546,519 1,036,517
Long-term debt 2,869,873 2,869,873
---------- ----------
Total liabilities 13,247,457 8,136,503
---------- ----------
Commitments and Contingencies
Shareholders' equity:
Common stock and common stock
warrants 85,319,958 85,319,958
Accumulated deficit (74,824,965) (69,714,011)
---------- ----------
Total shareholders' equity 10,494,993 15,605,947
---------- ----------
Total liabilities and shareholders'
equity $ 23,742,450 $ 23,742,450
========== ==========
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, 1999 and
- -------------------------------------------------------------------
1998
- ----
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, risks of consummation of
contemplated action to maximize stockholder value (as to which there
is no assurance) 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, royalties and R&D fees. Under strategic alliance
arrangements entered into with certain corporations, APS can receive
non-refundable upfront fees, future milestone payments, commitments
for future minimum purchases and royalties based on third party
product sales or a share of partners' revenues, and revenues from
the sale of Microsponge and Polytrap systems. 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.
Product revenues for the three months ended June 30, 1999 totaled
$3,529,000 compared to $3,595,000 in the corresponding period of the
prior year, representing a slight decrease of $66,000 or 2%.
Product revenues for the second quarter of 1999 included initial
shipments of a Microsponge-entrapped retinol formulation to a new
customer for the U.S. launch of a new product. The corresponding
period of the prior year included shipments to a customer for the
worldwide launch of a Microsponge-based formulation and shipments to
a customer for a baby wipe product that has now been discontinued.
Royalties, license and option fees, and R&D fees of $1,391,000 for
the second quarter of 1999 increased by $118,000 or 9% from the
second quarter of the prior year. This increase is mainly
attributable to the sale of a proprietary product line to a third
party and an increase in license fees recognized in the period,
offset by lower R&D fees due to the timing and status of various R&D
projects.
Gross profit on product revenues of $1,849,000 increased as a
percentage of product revenues from 46% to 52% as lower-margin sales
of Microsponge systems to a customer for its baby wipe product were
replaced by sales of higher-margin cosmeceutical products.
Research and development expenses for the second quarter of 1999
decreased by $133,000 or 11% from the corresponding period of the
prior year due to lower expenses for professional fees and increased
expense reimbursement for clinical studies from some of the
Company's corporate partners.
Selling and marketing expenses totaled $689,000, a decrease of
$50,000 or 7% from the second quarter of the prior year. This
decrease is primarily attributable to a decrease in headcount as
part of the Company's cost-containment efforts.
General and administrative expenses for the second quarter of 1999
totaled $889,000, a slight increase of $24,000 or 3% from the same
period of the prior year. This increase is primarily due to higher
professional fees resulting from the potential proxy contest that
was resolved in the second quarter of 1999 and increased investor
and public relations expenses.
Interest income decreased by $24,000 or 34% from the second quarter
of the prior year due to lower average cash balances. Interest
expense decreased by $50,000 or 24% due to a decrease in the average
debt compared to the second quarter of the prior year.
Results of Operations for the Six Months Ended June 30, 1999 and
- ----------------------------------------------------------------
1998
- ----
Product revenues for the six months ended June 30, 1999 were
$6,479,000 compared to $7,148,000 in the same period of the prior
year, representing a decrease of $669,000 or 9%. Product revenues
for the first half of 1999 included first shipments of a
Microsponge-entrapped retinol formulation to a new customer for the
U.S. launch of a new product. The corresponding period of the prior
year included shipments to a customer for the worldwide launch of a
Microsponge-based formulation and shipments to a customer for a baby
wipe product that has now been discontinued.
Royalties, license and option fees and R&D fees for the first half
of 1999 increased by $716,000 or 28% from the first half of the
prior year to a total of $3,256,000. This increase is mainly due to
the exercise of an option by a cosmeceutical customer for rights to
a certain proprietary product and its subsequent sale to a third
party and an increase in license fees recognized in the period.
Higher royalties from Ortho Pharmaceutical for Retin-A(R) Micro(TM)
were offset by lower R&D fees due to the timing and status of
various R&D projects.
Research and development expenses for the first six months of 1999
decreased by $117,000 or 5% from the corresponding period of the
prior year due to lower expenses for professional fees and increased
expense reimbursement for clinical studies from some of the
Company's corporate partners.
Selling and marketing expenses for the first half of 1999 totaled
$1,416,000, a decrease of $198,000 or 12% from the first half of the
prior year. This decrease is primarily attributable to lower
expenses for outside services relating to print promotion activities
and a decrease in headcount as part of the Company's cost-
containment efforts.
General and administrative expenses for the six months ended June
30, 1999 increased by $148,000 or 9% to $1,740,000 compared to the
corresponding period of the prior year. This increase is mainly due
to increased investor and public relations expenses, incremental
compensation for the Company's Board of Directors and higher
professional fees resulting from the potential proxy contest that
was resolved in the second quarter of 1999.
Interest income decreased by $74,000 or 48% from the first half of
the prior year due to lower average cash balances. Interest expense
decreased by $136,000 or 31% to $304,000 due to a decrease in
average debt compared to the first half of the prior year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of June 30, 1999 were $23,742,000 compared with
$23,081,000 at December 31, 1998. Working capital increased to
$8,767,000 at June 30, 1999 from $4,760,000 at December 31, 1998 and
cash and cash equivalents decreased to $3,529,000 from $4,088,000.
During the first six months of 1999, the Company's operating
activities used $1,469,000 of cash compared to $2,379,000 in the
first half of the prior year. The Company invested approximately
$2,083,000 in product research and development and $1,416,000 in
selling and marketing the Company's products and technologies.
Trade accounts receivable increased to $2,886,000 at June 30, 1999
from $2,533,000 at December 31, 1998. Days sales outstanding
increased to 81 days at June 30, 1999 compared to 68 days at
December 31, 1998. The increase in days sales outstanding is mainly
due to the timing of product shipments, which was heavily weighted
towards the last month of the quarter. Receivables from royalties,
license and option fees and R&D fees increased to $2,414,000 at June
30, 1999 compared to $2,297,000 at December 31, 1998. This increase
is primarily attributable to the sale of a proprietary product in
June 1999. Payment for the aforementioned sale is due over a two-
year period and the current portion is included in receivables from
royalties, license and option fees and R&D fees.
Capital expenditures for the six months ended June 30, 1999
decreased substantially to $154,000 compared to $2,001,000 in the
same period of the prior year. The first half of the prior year
included capital expenditures related to expansion of the Company's
manufacturing facility in Louisiana and leasehold improvements to
the Company's new facility in Redwood City, which are now complete.
In March 1999, the Company received a $4,000,000 term loan with a
fixed interest rate of 13.87%. The loan is secured by the assets of
the Company's manufacturing facility in Louisiana and a portion of
the Company's accounts receivable. Principal and interest payments
are due in equal monthly installments over a period of forty-eight
months commencing March 1999. The term loan was obtained mainly to
refinance scheduled debt repayments made in the first quarter of
1999.
In accordance with the terms of the settlement agreement with
Biosource (Note 10), the Company paid Biosource the final settlement
amount of $1,000,000 in cash in May 1999 in lieu of issuing shares
of the Company's common stock in payment.
The Company has financed its operations, including technology and
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, license and option
fees and R&D fees, are expected to be sufficient to meet the
Company's working capital requirements for the foreseeable future,
assuming no changes to existing business plans.
Year 2000
- ---------
The Company is conducting a comprehensive review of its internal
computer systems to ensure these systems are adequate to address the
issues expected to arise in connection with the Year 2000. These
issues include the possibility that software which uses only the
last two digits to refer to the year will no longer function
properly for years that begin with 20 rather than 19. In addition,
the Company is reviewing the status of its customers and suppliers
with regard to this issue and assessing the potential impact of non-
compliance by such parties on the Company's operations.
The Company developed a three-phased program to address Year 2000
issues. The first phase consists of identifying necessary changes
to application software used by the Company. The Company utilizes
an integrated ERP system for the majority of its manufacturing and
financial systems and has received the Year 2000 compliant version
of the software from the vendor. Implementation of the upgraded
software was completed on September 30, 1998.
The second phase consisted of identifying and determining whether
Company systems not addressed in Phase One (including non-IT
systems) are Year 2000 compliant. The Company believes that upgrades
and replacements of systems that are not Year 2000 compliant have
been substantially completed.
The third phase consisted of determining the extent to which the
Company may be impacted by third parties' systems, which may not be
Year 2000-compliant. The Year 2000 computer issue creates risk for
the Company from third parties with whom the Company deals on
financial transactions worldwide. Although the Company has received
assurances from third parties that their systems are either
currently Year 2000 compliant or will be Year 2000 compliant by the
end of the year, there can be no assurance that the systems of other
companies with which the Company deals or on which the Company's
systems rely will be converted on a timely basis, or that any such
failure to convert by another company could not have an adverse
effect on the Company.
The Company has incurred approximately $600,000 to remediate non-
compliant systems since the project was started in early 1998. Most
of the costs incurred were for purchases of new systems and related
equipment. The Company has funded all costs to upgrade or replace
systems that are not Year 2000-compliant through operating cash
flows.
The Company is currently in the process of considering potential
Year 2000 scenarios and developing formal contingency plans for
addressing any problems which may result if the work performed in
phase two and three do not successfully resolve all issues by the
Year 2000. The Company expects to complete the identification of
its potential Year 2000 scenarios, including the identification of
its most likely worst case scenario, and the determination of its
contingency plans during the third quarter of 1999.
Failure to complete any necessary remediation by the Year 2000 may
have a material adverse impact on the operations of the Company.
Failure of third parties, such as customers and suppliers, to
remediate Year 2000 problems in their IT and non-IT systems would
also have a material adverse impact on the operations of the
Company.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) which as
amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities, Deferral of the Effective Date of FASB Statement
No. 133, and Amendment of FASB Statement No. 133" will be effective
for all fiscal quarters of fiscal years beginning after June 15,
2000. 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. SFAS 133 generally provides for matching the timing
of gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value of the hedged asset
or liability that are attributed to the hedged risk or (b) the
earnings effect of hedged forecasted transactions. 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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedules as of and for the six
months ended June 30, 1999 and 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: November 18, 1999 By: /S/ John J. Meakem, Jr.
------------------ ----------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: November 18, 1999 By: /S/ Michael O'Connell
------------------ ----------------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer;
President of Pharmaceutical
Sciences
EXHIBIT INDEX
Form 10-Q
EXHIBIT DESCRIPTION
27 Financial Data Schedules
5
5