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 September 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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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 October 31, 1999, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,115,664.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 (as restated)
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1999
and 1998 (as restated)
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 (as
restated)
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):
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
September 30, 1999 December 31, 1998
------------------ -----------------
(As Restated -
See Note 11)
ASSETS
Current assets:
Cash and cash equivalents $ 3,152,576 $ 4,088,173
Trade accounts receivable, net 3,026,752 2,532,527
Receivables for royalties,
license and option fees and
R&D fees 2,053,564 2,296,852
Inventory 4,423,929 2,959,443
Advances and loans to officers
and employees 343,748 338,947
Prepaid expenses and other 730,875 596,400
---------- ----------
Total current assets 13,731,444 12,812,342
Property and equipment, net 8,163,899 8,643,856
Deferred loan costs, net 39,601 90,428
Goodwill and other intangible
assets, net 1,219,421 1,351,813
Other long-term assets 422,892 182,892
---------- ----------
Total assets $ 23,577,257 $ 23,081,331
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,486,763 $ 1,347,737
Accrued expenses 1,229,978 1,057,287
Accrued settlement liability -- 1,300,000
Deferred revenue 1,284,284 1,291,540
Current portion - long-term debt 872,906 3,055,460
---------- ----------
Total current liabilities 4,873,931 8,052,024
Deferred revenue - non-current 4,884,170 5,993,245
Long-term debt 2,643,386 --
---------- ----------
Total liabilities 12,401,487 14,045,269
---------- ----------
Commitments and Contingencies
Shareholders' equity:
Common stock and common stock
warrants 85,390,664 84,903,633
Accumulated deficit (74,214,894) (75,867,571)
---------- ----------
Total shareholders' equity 11,175,770 9,036,062
---------- ----------
Total liabilities and shareholders'
equity $ 23,577,257 $ 23,081,331
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
(As Restated - (As Restated -
See Note 11) See Note 11)
Product revenues $ 3,924,012 $ 3,445,262 $10,402,984 $10,593,410
Royalties, license and
option fees and R&D fees 1,257,123 1,540,311 4,512,676 4,079,983
---------- ---------- ---------- ----------
Total revenues 5,181,135 4,985,573 14,915,660 14,673,393
Cost of sales 1,889,475 1,950,668 5,117,201 5,653,621
Operating expenses:
Research & development, net 1,028,466 996,052 3,111,688 3,195,894
Selling & marketing 629,951 684,585 2,046,251 2,299,311
General & administration 923,204 859,585 2,663,065 2,451,686
---------- ---------- ---------- ----------
Total operating expenses 2,581,621 2,540,222 7,821,004 7,946,891
---------- ---------- ---------- ----------
Operating income 710,039 494,683 1,977,455 1,072,881
Interest income 52,291 51,001 133,021 205,360
Interest expense (150,340) (193,127) (454,236) (633,326)
Other income (expense), net (1,919) 2,105 (3,563) (18,254)
---------- ---------- ---------- ----------
Net income $ 610,071 $ 354,662 $ 1,652,677 $ 626,661
========== ========== ========== ==========
Basic earnings per common
share $ 0.03 $ 0.02 $ 0.08 $ 0.03
========== ========== ========== ==========
Diluted earnings per common
share $ 0.03 $ 0.02 $ 0.08 $ 0.03
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 20,092,148 19,969,391 20,066,263 19,807,934
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,335,481 20,248,716 20,295,550 20,349,075
========== ========== ========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the nine months ended
-------------------------
September 30, September 30,
1999 1998
---------- -------------
(As Restated -
See Note 11)
Cash flows from operating activities:
Net income $ 1,652,677 $ 626,661
Adjustments to reconcile net income to
net cash used in
operating activities:
Depreciation and amortization 796,157 761,470
Amortization of deferred loan costs 50,827 197,448
Stock issued to directors 24,000 --
Stock compensation awards to non-
employees -- 27,276
Restricted stock awards 149,788 49,928
Changes in operating assets and
liabilities:
Trade accounts receivable (494,225) (1,457,957)
Receivables for royalties, license
and option fees and R&D fees 243,288 (1,093,632)
Inventory (1,464,486) (192,110)
Prepaid expenses and other (139,276) (604,370)
Other long-term assets (240,000) 71,289
Accounts payable and accrued expenses 311,717 (1,462,282)
Accrued settlement liability (1,300,000) --
Deferred revenues (1,116,331) 314
--------- ---------
Net cash used in operating activities (1,525,864) (3,075,965)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (183,808) (2,439,999)
--------- ---------
Net cash used in investing activities (183,808) (2,439,999)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants and
issuance of restricted stock 229,525 2,054,376
Proceeds from issuance of shares
under the Employee Stock Purchase
Plan 83,718 109,635
Proceeds from long-term debt 4,000,000 --
Repayment of debt (3,539,168) (1,882,284)
--------- ---------
Net cash provided by financing
activities 774,075 281,727
--------- ---------
Net decrease in cash and cash
equivalents (935,597) (5,234,237)
Cash and cash equivalents, beginning
of the period 4,088,173 8,672,021
--------- ---------
Cash and cash equivalents, end
of the period $ 3,152,576 $ 3,437,784
========= =========
Cash paid for interest $ 358,530 $ 448,026
========= =========
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
SEPTEMBER 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 September 30, 1999
and the results of their operations for the three and nine
months ended September 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 September 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 5,230
Shares issued under the Employee Stock
Purchase Plan 20,173
Shares issued upon exercise of stock options 3,719
----------
Total shares 20,092,433
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(As Restated - (As Restated -
See Note 11) See Note 11)
Net income (numerator) $ 610,071 $ 354,662 $ 1,652,677 $ 626,661
========== ========== ========== ==========
Shares calculation
(denominator):
Weighted average shares
outstanding - basic 20,092,148 19,969,391 20,066,263 19,807,934
Effect of dilutive securities:
Stock options and employee
stock purchase plan 225,281 142,023 173,909 393,347
Warrants 18,052 137,302 55,378 147,794
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,335,481 20,248,716 20,295,550 20,349,075
========== ========== ========== ==========
Earnings per share - basic $ 0.03 $ 0.02 $ 0.08 $ 0.03
========== ========== ========== ==========
Earnings per share - diluted $ 0.03 $ 0.02 $ 0.08 $ 0.03
========== ========== ========== ==========
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Number outstanding 1,921,411 1,844,556 2,732,738 1,185,630
Range of exercise prices $5.56-$15.00 $5.63-$15.00 $5.25-$15.00 $6.82-$15.00
(3) Revenue Recognition
The Company has several licensing agreements that generally
provide for the Company to receive periodic minimum payments,
royalties, and/or non-refundable license fees. These licensing
agreements typically require a non-refundable license fee and
allow customers to sell the Company's proprietary products in a
specific field or territory. The license agreements provide
for APS to earn future revenue through product sales and/or, in
some cases, royalty payments. The license fees are non-
refundable even if the agreements are terminated before their
term or APS fails to supply product to the licensee. These
license fees are amortized on a straight-line basis over the
estimated life of the product to which they relate. When the
customer fails to meet applicable contract terms and product
supply is no longer required, any unamortized license fees are
recognized as revenue.
(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 or carrying values of such assets is
warranted.
(5) Related Party Transactions
--------------------------
As of September 30, 1999, the Company has an outstanding
secured loan receivable of $276,000 from an officer of the
Company. 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:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw materials and work-
in-process $1,110,020 $ 743,383
Finished goods 3,313,909 2,216,060
--------- ---------
Total inventory $4,423,929 $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 note
receivable of $500,000 is due in equal monthly installments
over a period of twenty-five months commencing September 15,
1999 and bears an interest rate equal to the prime rate.
(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 prior years. 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 nine months ended September 30, 1998 and as of
December 31, 1998 present restated results to reflect a change
in accounting such that license fees are now 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 nine
months ended September 30, 1998 follows:
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- -----------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
As Previously As Previously
As Restated Reported As Restated Reported
September 30, September 30, September 30, September 30,
------------- ------------- ------------- ------------
1998 1998 1998 1998
---- ---- ---- ----
Product revenues $ 3,445,262 $ 3,445,262 $10,593,410 $10,593,410
Royalties, license and
option fees and R&D fees 1,540,311 1,707,600 4,079,983 4,229,072
---------- ---------- ---------- ----------
Total revenues 4,985,573 5,152,862 14,673,393 14,822,482
Cost of sales 1,950,668 1,950,668 5,653,621 5,653,621
Operating expenses:
Research & development, net 996,052 996,052 3,195,894 3,195,894
Selling & marketing 684,585 684,585 2,299,311 2,299,311
General & administration 859,585 859,585 2,451,686 2,451,686
---------- ---------- ---------- ----------
Total operating expenses 2,540,222 2,540,222 7,946,891 7,946,891
---------- ---------- ---------- ----------
Operating income 494,683 661,972 1,072,881 1,221,970
Interest income 51,001 51,001 205,360 205,360
Interest expense (193,127) (193,127) (633,326) (633,326)
Other income (expense), net 2,105 2,105 (18,254) (18,254)
---------- ---------- ---------- ----------
Net income $ 354,662 $ 521,951 $ 626,661 $ 775,750
========== ========== ========== ==========
Basic earnings per common
share $ 0.02 $ 0.03 $ 0.03 $ 0.04
========== ========== ========== ==========
Diluted earnings per common
share $ 0.02 $ 0.03 $ 0.03 $ 0.04
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 19,969,391 19,969,391 19,807,934 19,807,934
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,248,716 20,248,716 20,349,075 20,349,075
========== ========== ========== ==========
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 September 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
access/license fees, milestone payments, commitments for future
minimum purchases, 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.
Total revenues for the three months ended September 30, 1999 were
$5,181,000 which represents an increase of $196,000 or 4% over the
corresponding period of the prior year, as restated. Product
revenues increased by $479,000 or 14% to $3,924,000. This was due
mainly to a 50% increase in sales of Microsponge-entrapped retinol
and Vitamin K formulations which reflected U.S. launches by new
customers. This was partially offset by a 32% decrease in sales of
toiletries, due in part to the absence of shipments to a customer
for a baby-wipe product which was discontinued in 1998.
Royalties, license and R&D fees totaled $1,257,000, a decrease of
$283,000 or 18% from the year-ago quarter, as restated, due mainly
to the absence of R&D fees which rely on the timing and status of
various R&D projects.
Gross profit on product revenues of $2,035,000 increased as a
percentage of product revenues by nine percentage points to 52% due
to the sales mix, as sales of higher-margin cosmeceutical products
replaced sales of lower-margin toiletries.
Research and development expenses increased by $32,000 or 3% to
$1,028,000 due mainly to higher professional fees relating to the
Company's proprietary patent estate partially offset by a decrease
in clinical studies from the year-ago quarter.
Selling and marketing expenses decreased by $55,000 or 8% to
$630,000 due mainly to decreased headcount and lower commission
payments compared to the year-ago quarter.
General and administrative expenses increased by $64,000 or 7% to
$923,000 due mainly to increased directors' and professional fees.
Interest expense decreased by $43,000 or 22% to $150,000 due to
lower average debt compared to the year-ago quarter.
Results of Operations for the Nine Months Ended September 30, 1999
- ------------------------------------------------------------------
and 1998
- --------
Total revenues for the nine months ended September 30, 1999
increased by $242,000 or 2% to $14,916,000 compared to the
corresponding period of the prior year. Product revenues decreased
by $190,000 or 2% to $10,403,000, as restated. This was due mainly
to the absence of shipments in the current year of Microsponge
entrapments for a baby-wipe product which was discontinued in 1998,
partially offset by shipments of Microsponge-based retinol and
Vitamin K formulations for U.S. launches by new customers.
Royalties, license and R&D fees increased by $433,000 or 11% due
mainly to the exercise of an option by a cosmeceutical customer for
rights to a proprietary product and its subsequent sale to a third
party, and an increase in license fees recognized in the period.
Gross profit on product revenues for the nine months ended September
30, 1999 increased by $346,000 or 7% to $5,286,000 over the
corresponding period of the prior year due to the improved sales
mix, as sales of higher-margin cosmeceutical products replaced sales
of lower-margin toiletries.
Research and development expenses decreased by $84,000 or 3% to
$3,112,000 for the nine months ended September 30, 1999 due mainly
to the absence of clinical study costs and higher expense
reimbursement in the period. Selling and marketing expense for the
nine months ended September 30, 1999 decreased by $253,000 or 11%
due mainly to reduced headcount.
General and administrative expenses for the nine months ended
September 30, 1999 increased by $211,000 or 9% to $2,663,000 due
mainly to increased directors' fees and professional fees resulting
from a potential proxy contest which was resolved in the second
quarter of 1999.
Interest income for the nine months ended September 30, 1999
decreased by $72,000 or 35% due to lower average cash balances.
Interest expense decreased by $179,000 or 28% to $454,000 due to the
repayment of debt in the first quarter of 1999.
Capital Resources and Liquidity
- -------------------------------
Total assets as of September 30, 1999 were $23,577,000 compared with
$23,081,000 at December 31, 1998. Working capital increased to
$8,857,000 from $4,760,000, as restated, for the nine-month period
ending September 30, 1999 and cash and cash equivalents decreased to
$3,153,000 from $4,088,000. During the first nine months of 1999,
the Company's operating activities used $1,526,000 of cash compared
to $3,076,000 in the first nine months of the prior year. The
Company invested approximately $3,112,000 in product research and
development and $2,046,000 in selling and marketing the Company's
products and technologies during the first nine months of 1999.
Trade accounts receivable increased to $3,027,000 at September 30,
1999 from $2,533,000 at December 31, 1998. Days sales outstanding
were 79 days at September 30, 1999 compared to 68 days at December
31, 1998 due mainly to the timing of shipments during the third
quarter. Receivables from royalties, license and option fees and
R&D fees decreased to $2,054,000 at September 30, 1999 compared to
$2,297,000 at December 31, 1998.
Inventory increased to $4,424,000 at September 30, 1999 from
$2,959,000 at December 31, 1998 due mainly to a planned build-up of
the Microsponge and Polytrap systems as part of the Company's
contingency plans for possible disruptions caused by Year 2000
problems.
Capital expenditures for the nine months ended September 30, 1999
decreased substantially to $184,000 compared to $2,440,000 in the
same period of the prior year. The first nine months 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 consisted 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.
As part of its Year 2000 contingency plans the Company has incurred
a build-up of inventories of approximately $1,000,000.
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.
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 1. 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 has 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 consists 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 in May 1999. The settlement agreement also provided for
the termination of the license and supply agreement between the
parties.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedules as of and for the nine
months ended September 30, 1999 and September 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