SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
At April 30, 2000, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,186,261.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Restated) (unaudited):
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999
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)
- -------------------------------------------------
March 31, 2000 December 31, 1999
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,538,955 $ 3,705,194
Trade accounts receivable, net 3,088,684 3,580,026
Receivables for royalties,
license and option fees and
R&D fees 1,255,001 1,492,634
Inventory 4,753,385 4,584,997
Advances and loans to officers
and employees 81,416 84,632
Prepaid expenses and other 402,793 378,969
---------- ----------
Total current assets 13,120,234 13,826,452
Property and equipment, net 7,837,707 8,031,076
Deferred loan costs, net 36,787 39,853
Goodwill and other intangible
assets, net 1,206,958 1,259,020
Other long-term assets 286,397 346,397
---------- ----------
Total assets $ 22,488,083 $ 23,502,798
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 907,284 $ 1,029,534
Accrued expenses 984,658 1,263,186
Taxes payable 12,307 13,480
Deferred revenue 1,003,088 1,195,396
Current portion - long-term debt 922,370 891,111
---------- ----------
Total current liabilities 3,829,707 4,392,707
Deferred revenue - long-term 4,052,599 4,665,390
Long-term debt 2,166,282 2,408,933
---------- ----------
Total liabilities 10,048,588 11,467,030
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 85,714,382 85,530,952
Accumulated deficit (73,274,887) (73,495,184)
---------- ----------
Total shareholders' equity 12,439,495 12,035,768
---------- ----------
Total liabilities and shareholders'
equity $ 22,488,083 $ 23,502,798
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
Three Months Ended March 31,
----------------------------
2000 1999
------ ------
Product revenues $ 3,176,692 $ 2,950,055
Royalties, license and option
fees and R&D fees 1,468,834 1,864,775
---------- ----------
Total revenues 4,645,526 4,814,830
Expenses:
Cost of product sales 1,918,536 1,548,172
Research & development, net 892,248 1,055,521
Selling & marketing 675,484 727,085
General & administration 848,581 850,716
---------- ----------
Operating income 310,677 633,336
Interest income 65,093 33,700
Interest expense (118,132) (142,716)
Other income/(expense), net 2,326 (427)
---------- ----------
Net income before taxes 259,964 523,893
Taxes 39,667 --
---------- ----------
Net income $ 220,297 $ 523,893
========== ==========
Basic earnings per common share $ 0.01 $ 0.03
========== ==========
Diluted earnings per common share $ 0.01 $ 0.03
========== ==========
Weighted average common shares
outstanding-basic 20,133,683 20,018,245
========== ==========
Weighted average common shares
outstanding-diluted 20,210,068 20,241,082
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the three months ended March 31,
------------------------------------
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $ 220,297 $ 523,893
Adjustments to reconcile net income to
net cash used in operating
activities:
Depreciation and amortization 261,043 269,264
Amortization of deferred revenue (805,099) (193,326)
Amortization of deferred loan costs 3,066 45,816
Stock issued to directors 13,500 21,000
Restricted stock awards 49,930 49,930
Changes in operating assets and
liabilities:
Trade accounts receivable 491,342 65,621
Receivables for royalties, license
and option fees and R&D fees 237,633 (511,705)
Inventory (168,388) (210,168)
Advances to officers and employees 3,216 (81,685)
Prepaid expenses and other (23,824) (60,657)
Other long-term assets 60,000 (5,000)
Accounts payable (122,250) (55,261)
Accrued expenses (278,527) 346,026
Accrued settlement liability -- (300,000)
Taxes payable (1,173) --
--------- ---------
Net cash used in operating activities (59,234) (96,252)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (15,613) (74,288)
--------- ---------
Net cash used in investing activities (15,613) (74,288)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 120,000 210,000
Proceeds from long-term debt -- 4,000,000
Repayment of debt (211,392) (2,771,067)
--------- ---------
Net cash provided by financing
activities (91,392) 1,438,933
--------- ---------
Net (decrease) increase in cash and
cash equivalents (166,239) 1,268,393
Cash and cash equivalents, beginning
of the period 3,705,194 4,088,173
--------- ---------
Cash and cash equivalents, end
of the period $ 3,538,955 $ 5,356,566
========= =========
Cash paid for interest $ 112,008 $ 77,273
========= =========
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
MARCH 31, 2000 AND DECEMBER 31, 1999 (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
for the year ended December 31, 1999 and include all
adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position of Advanced
Polymer Systems, Inc. and subsidiaries ("the Company" or "APS")
as of March 31, 2000 and the results of their operations and
cash flows for the three months ended March 31, 2000 and 1999.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1999 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 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 2000.
(2) Common Shares Outstanding and Earnings Per Share Information
------------------------------------------------------------
Common stock outstanding as of March 31, 2000 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1999 20,119,042
Warrants exercised after December 31, 1999 40,000
Shares issued to Directors after December
31, 1999 3,924
----------
Total shares 20,162,966
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share:
Three Months Ended
March 31,
------------------
2000 1999
---- ----
Net income (numerator) $ 220,297 $ 523,893
========== ==========
Shares calculation (denominator):
Weighted average shares
outstanding - basic 20,133,683 20,018,245
Effect of dilutive securities:
Stock options and employee
stock purchase plan 67,995 104,432
Warrants 8,390 118,405
---------- ----------
Weighted average shares
outstanding - diluted 20,210,068 20,241,082
========== ==========
Earnings per share - basic $ 0.01 $ 0.03
========== ==========
Earnings per share - diluted $ 0.01 $ 0.03
========== ==========
Options to purchase 3,080,175 and 2,761,305 shares of Common
Stock with exercise prices ranging from $4.41 to $15.00 and
$5.00 to $15.00 per share were outstanding during the quarters
ended March 31, 2000 and 1999, respectively, but were not
included in the computation of diluted earnings per share since
the exercise prices of the options were greater than the
average market price of the common shares. The options expire
between July 23, 2001 and June 16, 2009.
(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. If the
customer fails to meet applicable contract terms and/or 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 might
require revision of the remaining estimated lives of recorded
long-lived assets, including goodwill, or render those assets
impaired or 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) Inventory
---------
The major components of inventory are as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials and work-
in-process $ 970,706 $ 675,106
Finished goods 3,782,679 3,909,891
--------- ---------
Total inventory $4,753,385 $4,584,997
========= =========
(6) 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.
(7) Income Taxes
------------
The Company does not anticipate incurring significant amounts
of income taxes in 2000 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.
(8) Legal Proceedings
-----------------
In February 2000, Douglas Kligman and Albert Kligman filed
a complaint against the Company in the U.S. District Court
for the Eastern District of Pennsylvania. The complaint
alleges that the plaintiffs entered into a partnership
with the Company to pursue development and sales of a
product developed by the plantiffs. The complaint states
various claims, dissolution of partnership, implied-in-law
contract and other claims. The complaint alleges damages
in excess of $75,000, but otherwise makes no specific
damage claim.
The Company has denied liability and is vigorously
defending the claims, basing its defense on the assertion
that its rights to the product are governed by a binding
license agreement that was executed in November 1995 and
amended in September 1996.
The Company expects that the outcome of this legal
proceeding will not have a material adverse effect on the
consolidated financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
Results of Operations for the Three Months Ended March 31, 2000 and
- -------------------------------------------------------------------
1999
- ----
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 shareholder 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. 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 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.
Product revenues for the three months ended March 31, 2000 totaled
$3,177,000 an increase of 8% or $227,000 over the corresponding
period of the prior year. This increase was primarily attributable
to increased shipments of Microsponge formulations to customers in
both the U.S. and international mass merchandising channels.
Royalties and license and R&D fees for the first quarter of 2000 of
$1,469,000 decreased by $396,000 or 21%. This decrease was mainly
due to the receipt of R&D fees in the year-ago quarter. This
decrease was partially offset by R&D fees received from Fujisawa
Pharmaceutical under a new agreement relating to the development of
a Microsponge formulation of a proprietary compound. The first
quarter of each of the years also included one-time benefits of
approximately $600,000 and $500,000 respectively, related to license
and option fees.
Gross profit on product revenues of $1,258,000 decreased as a
percentage of product revenues from 48% to 40% due mainly to the
sales mix, as the current quarter contained increased sales of lower
margin products to customers in the mass merchandising channel
whereas the year-ago quarter included a higher percentage of
shipments to customers in the prestige channel.
Research and development expense decreased by $163,000 or 15% to
$892,000 due mainly to lower expenses for outside consultants,
outside services and travel.
Selling and marketing expense decreased by $52,000 or 7% to $675,000
due mainly to lower salary expense resulting from lower headcount,
and lower travel expense.
General and administrative expense of $849,000 was essentially flat
with the corresponding period of the prior year.
Interest income increased by $31,000 or 91% to $65,000 due to higher
average cash balances. Interest expense decreased by $25,000 or 17%
to $118,000 due to the repayment of certain debts in the first
quarter of the prior year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of March 31, 2000 were $22,488,000 compared with
$23,503,000 at December 31, 1999. Working capital decreased to
$9,291,000 at March 31, 2000 from $9,434,000 at December 31, 1999.
Cash and cash equivalents at March 31, 2000 decreased to $3,539,000
from $3,705,000 at December 31, 1999. During the first three months
of 2000, the Company's operating activities used $59,000 of cash
compared to $96,000 in the corresponding period of the prior year.
The Company invested approximately $892,000 in product research and
development and $675,000 in selling and marketing the Company's
products.
Trade accounts receivable decreased to $3,089,000 at March 31, 2000
compared with $3,580,000 at December 31, 1999. Days sales
outstanding decreased slightly to 88 days at March 31, 2000 compared
to 89 days at December 31, 1999. Receivables from royalties,
license and option fees and R&D fees decreased to $1,255,000 from
$1,493,000 at December 31, 1999 due to reduced activity during the
first quarter of 2000.
Capital expenditures for the first quarter of 2000 decreased to
$16,000 from $74,000 in the corresponding period of the prior year.
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.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137, which defers the
implementation of SFAS 133 to be effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company
anticipates that adoption of this Statement will not have a material
effect on the financial position or results of operations of the
Company. 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.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB
101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB 101A, which amends
SAB 101 to defer the effective date of required adoption. As
amended, SAB 101 is required to be adopted in the second quarter of
a fiscal year that begins between December 16, 1999 and March 15,
2000. For fiscal years beginning after March 15, 2000 adoption is
required in the first quarter. The Company chose to adopt the
guidance given in SAB 101 as of the year ended December 31, 1999.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation
of APB Opinion No. 25. This Interpretation clarifies the
application of Opinion 25 for certain issues: a) the definition of
employee for purposes of applying Opinion 25, b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, c)
the accounting consequence of various modifications to the terms of
a previously fixed stock option or award, and d) the accounting for
an exchange of stock compensation awards in a business combination.
Generally, this Interpretation is effective July 1, 2000. We do
not expect the adoption of Interpretation No. 44 to have a material
effect on our consolidated financial statements.
PART II. OTHER INFORMATION
-----------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the three
months ended March 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
Date: May 15, 2000 By: /S/ John J. Meakem, Jr.
----------------- ----------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: May 15, 2000 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 Schedule
5
