SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2000 or
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
123 Saginaw Drive, Redwood City, California 94063
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 366-2626
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock ($.01 par value)
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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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant as of February 28, 2001, was $27,718,756. (1)
As of February 28, 2001, 20,206,065 shares of registrant's Common Stock, $.01
par value, were outstanding.
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(1)Excludes 6,346,687 shares held by directors, officers and shareholders
whose ownership exceeds 5% of the outstanding shares at February 28, 2001.
Exclusion of such shares should not be construed as indicating that the
holders thereof possess the power, directly or indirectly, to direct the
management or policies of the registrant, or that such person is controlled
by or under common control with the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Form
10-K
Document Part
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Definitive Proxy Statement to be used
in connection with the Annual Meeting
of Stockholders. III
TABLE OF CONTENTS
PART I
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management
ITEM 13. Certain Relationships and Related Transactions
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Signatures
PART I
Item 1. BUSINESS
INTRODUCTION-FORWARD LOOKING STATEMENTS
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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 development,
approval, launch and acceptance of new products, establishment of new
corporate alliances, progress in research and development programs and other
factors described below under the headings "APS Technology", "Products",
"Manufacturing", "Marketing", "Government Regulation", "Patents and Trade
Secrets" and "Competition". In addition, such risks and uncertainties also
include the matters discussed under Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 below.
THE COMPANY
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Advanced Polymer Systems, Inc. and subsidiaries ("APS" or the "Company") is
using its patented delivery systems and other proprietary technologies to
enhance the safety and effectiveness of prescription products. It has under
development patented new drug delivery systems including bioerodible polymers
for injectable, implantable and oral drug delivery. Additionally, the
company has commercialized its Microsponge(R) system technology in topical
products in the market place today. APS holds 102 issued U.S. and foreign
patents on its technology and has over 21 other patent applications pending.
The Company, founded in February 1983 as a California corporation under the
name AMCO Polymerics, Inc., changed its name to Advanced Polymer Systems,
Inc. in 1984 and was reincorporated in Delaware in 1987.
Until July 2000, the Company engaged in the manufacturing, marketing and
selling of a variety of cosmeceutical and toiletry products to cosmetic
companies. In July 2000, the Company sold its cosmeceutical and toiletry
product lines, together with certain technology rights to topical
pharmaceuticals to R.P. Scherer, a subsidiary of Cardinal Health. The
Company received $25 million at closing, and could receive up to an
additional $26.5 million over the next three years if certain performance
milestones are met.
The major focus for the Company is the development of its families of
bioerodible polymers. Such polymers are of increasing interest within the
pharmaceutical community for use in both drug delivery applications and as
devices. APS has made substantial progress in developing bioerodible
polymers that represent a significant improvement over existing drug delivery
systems. The major point of difference is that the APS polymers have been
specifically designed as drug delivery devices and for this reason they are
very versatile. The Company has demonstrated that erosion times can be
varied from days to months and that mechanical properties can be adjusted to
produce materials ranging from semi-solid at room temperature to hard. In
addition, the synthesis is reproducible, can be easily scaled up and the
polymer is stable at room temperature, provided it is stored under anhydrous
conditions. In previous studies, the polymer was observed to erode to
completion and, once the drug was released, no polymer remained.
The Company's current areas of focus for the use of its bioerodible
technologies are in pain management, orthopedic applications and delivery of
therapeutic proteins, peptides and DNA. The Company is also developing
bioerodible polymer systems that have the potential to carry anti-cancer
drugs preferentially to solid tumors. Such a targeted delivery would make
possible high drug concentration in a tumor without excessive concentration
in normal tissue, thus greatly decreasing the serious side effects of cancer
chemotherapy.
Ethical topical products in the marketplace utilize the Company's
Microsponge(R) Systems as reservoirs releasing active ingredients over an
extended period of time. The resulting benefits include extended efficacy
and reduced skin irritation.
In February 1997, the Company received FDA marketing clearance for the first
ethical pharmaceutical product based on its patented Microsponge technology,
Retin-A(R) Micro(TM), which has been licensed to Ortho-McNeil Pharmaceutical
Corporation, a member of the Johnson & Johnson family of companies. This
product was launched in March 1997. The Company has also licensed to Dermik,
an Aventis company, a Microsponge-based formulation incorporating 5-
fluorouracil for the treatment of actinic keratoses, a pre-cancerous skin
condition. The New Drug Application ("NDA") was approved in the fourth
quarter of 2000 and the product was launched in the first quarter of 2001
under the brand name Carac(TM). This new product has a number of advantages
over existing topical therapies, including less irritation with shorter
duration of therapy and reduced dosage frequency.
Additionally, the Company is utilizing its patented Microsponge systems in
the development of oral delivery systems for improved bioavailability. There
are many drugs that have a very low rate of solubilization and whose efficacy
could be substantially improved if their rate of solubilization and hence
bioavailability could be increased. The Company is still in early research
and development stages, but has successfully concluded significant in vitro
and preliminary in vivo studies which indicate that a Microsponge system
enhances the rate of dissolution of poorly water-soluble drugs.
Also in development are modified Microsponge systems that are able to deliver
drugs to the colon. This could provide much better treatment of a number of
diseases including ulcerative colitis and chronic constipation. A
feasibility study in humans has demonstrated that the APS system is capable
of bypassing degradation in the stomach and small intestine and releasing
drugs throughout the length of the colon.
APS TECHNOLOGY
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The Company has made a significant investment in the development of
bioerodible drug delivery systems. Specifically, the Company has developed
three families of polymers, each with unique attributes. The first family is
known collectively as poly(ortho esters) under the trademark
Biochronomer(TM); polymers in the second family are known collectively as
block copolymers of poly(ortho esters) and poly(ethylene glycol) under the
trade name Erodomer(TM); and polymers in the third family are known
collectively as polyacetals. The first two polymer families are covered by
US 5,968,543, issued October 19, 1999 and US 5,939,453, issued August 17,
1999. Both are broad composition of matter patents. A number of other
patents have been filed.
Work at the Company with bioerodible polymers used as drug delivery vehicles
is in early stages of development. Toxicology studies are nearing
completion, scaled up synthesis and GMP manufacturing procedures are
completed, and pre-clinical studies are in progress.
Current product development work takes full advantage of the versatility of
these materials, and is exemplified by forms that are injectable semi-solids
into which drugs can be incorporated by a simple mixing procedure, as well as
solid devices that can be fabricated at temperatures low enough to allow the
incorporation of materials such as proteins that require mild fabrication
conditions.
The Company is also developing water-soluble polymers with the intent to
maximize the concentration of anti-cancer agents in solid tumors and to
minimize their concentration in healthy tissue. Two such approaches are
currently under development. In one approach, drugs are chemically attached
to a water-soluble polyacetal. The resulting compound is injected
intravenously where it accumulates in the tumor and releases the chemically
attached drug. In the second approach, micelles formed from block copolymers
of poly(ortho esters) and poly(ethylene glycol) are used to entrap
hydrophobic drugs. The micelles are then injected intravenously and carry
the entrapped drug to the solid tumor. The latter approach has the benefit
of not chemically altering the drug.
The Company is also developing biodegradable devices based on poly(ortho
esters). Because both mechanical properties and erosion rates can be
controlled, these polymers are emerging as promising materials for the
construction of orthopedic devices for soft and hard tissue fixation, as
devices useful in cardiovascular applications such as stent coatings and in
the development of scaffolding materials used in tissue engineering. In all
of these applications, the ability to also deliver drugs is a distinct
advantage.
The Company's Microsponge technology is a highly crosslinked copolymer system
that is completely inert, thus allowing a wide range of fabrication methods.
It is currently used as a topical delivery system for prescription drugs and
has potential for oral delivery applications. Its success as a topical
delivery system for drugs that can cause a high degree of irritation is based
on the incorporation of Microsponge systems into an ointment in which the
drug being delivered has only limited solubility. In these systems, the
Microsponge system acts as a reservoir to replenish the drug dissolved in the
ointment as it penetrates the skin.
In oral applications, the Microsponge system has been shown to increase the
rate of solubilization of poorly water-soluble drugs by entrapping such drugs
in the Microsponge system's pores. Because these pores are very small, the
drug is in effect reduced to microscopic particles and the significantly
increased surface area thus greatly increases the rate of solubilization. An
added benefit is that the time it takes the Microsponge system to traverse
the small and large intestine is significantly increased thus maximizing the
amount of drug that is absorbed.
In another oral application, the Microsponge system is incorporated into a
matrix that is designed to disintegrate only in the colon by taking advantage
of the unique environment found in the colon. Using human subjects the
Company has demonstrated that this system performs as designed and
preliminary evidence shows that drug is released from this delivery system as
it traverses the entire length of the colon.
PRODUCTS
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APS' efforts in pharmaceutical markets include additional applications using
the Company's technology which are under development, as noted below.
Ethical Pharmaceuticals
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APS defines ethical pharmaceutical products as prescription products which
are promoted primarily through the medical profession. The Company is
developing several pharmaceutical products which will require marketing
clearance from the FDA before they can be sold in the United States. The
Company believes that the benefits offered by its delivery systems will
create valuable product differentiation and improvements in this large and
profitable market. Results from various clinical studies reaffirm that this
technology offers the potential to reduce drug side effects, maintain or
improve therapeutic efficacy and potentially increase patient compliance with
a less frequent treatment regimen.
The following ethical dermatological products have been developed and
commercialized:
Tretinoin Acne Medication. In February 1997, the Company received FDA
approval for Microsponge-entrapped tretinoin for improved acne treatment.
Tretinoin has been marketed in the U.S. by Ortho Dermatological, a Johnson &
Johnson ("J&J") subsidiary, under the brand name RETIN-A(R) since 1971. It
has proven to be a highly effective topical acne medication. However, skin
irritation among sensitive individuals can limit patient compliance with the
prescribed therapy. The Company believes its patent-protected approach to
drug delivery reduces the potentially irritating side effects of tretinoin.
Ortho Dermatological began marketing this product in March 1997 under the
brand name Retin-A(R) Micro (TM). The company receives royalty income based
on the sales of this product over the life of the applicable patents.
During 1999, Ortho also filed an NDA in Canada for this formulation and
completed Phase III clinical trials in Europe in preparation for a European
Union filing. Additionally, Ortho completed Phase III clinical trials in the
U.S.A. on a second Retin-A Micro formulation and is preparing an NDA filing
for the product.
5-Fluorouracil. In the fourth quarter of 2000, Dermik Laboratories, an
Aventis company, received marketing clearance for an NDA for an APS-developed
formulation containing Microsponge-entrapped 5-fluorouracil (5-FU) for the
treatment of actinic keratoses. This product was launched under the trade
name Carac(TM) in the first quarter of 2001. The Company receives royalty
income based on the sales of this product over the life of the applicable
patents. The Company also expanded its agreement with Dermik to include two
additional indications in return for milestone payments and royalties upon
successful development.
Other Product Applications
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While not the principal focus of APS development efforts, other products
could benefit from the value-added application of the Company's polymer
technology. To date, the Company has applied its technology to its
analytical standards business.
Analytical Standards. APS initially developed microspheres (precursors to
the Microsponge system) for use as a testing standard for gauging the purity
of municipal drinking water. Marketed by APS nationwide, these microspheres
are suspended in pure water to form an accurate, stable, reproducible
turbidity standard for the calibration of turbidimeters used to test water
purity.
The Company has also developed standards for industrial use for the
calibration of spectrophotometers and colorimeters.
MARKETING
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A key part of APS' business strategy is to ally the Company with
pharmaceutical partners. The Company has therefore negotiated agreements
covering Microsponge delivery systems and the marketing of formulated
products. The Company is now engaged in several feasibility studies relating
to its bioerodible polymer systems.
In general, APS grants limited marketing exclusivity in defined markets for
defined periods to its partners. However, after development is completed and
a partner commercializes a formulated product utilizing the Company's
delivery systems, APS can exert only limited influence over the manner and
extent of the client's marketing efforts.
The Company's key relationships are set forth below:
Johnson & Johnson Inc. In May 1992, APS and Ortho-McNeil Pharmaceutical
Corporation ("Ortho"), a subsidiary of J&J, entered into a development and
license agreement related to tretinoin-based products incorporating APS'
Microsponge technology. As part of the agreement, certain license fees and
milestone payments were paid by Ortho to APS. The license fees provided
Ortho with exclusive distribution or license rights for all Ortho tretinoin
products utilizing the APS Microsponge system. Ortho's exclusivity will
continue as long as annual minimum royalty payments are made, governed by the
life of the applicable patents owned by the Company.
In February 1997, APS received FDA marketing clearance for the first product
covered by this agreement, Microsponge-entrapped tretinoin. This product has
been marketed by Ortho Dermatological since March 1997 as Retin-A(R) Micro
(TM). APS received a payment of $3,000,000 from Ortho upon receipt of the
FDA approval, of which half is a milestone payment which was recognized as
revenue and half as prepaid royalties which was recorded as deferred
revenues.
Dermik. In March 1992, APS and Dermik, a subsidiary of Aventis
Pharmaceuticals, formerly known as Rhone-Poulenc Rorer, restructured their
1989 joint venture agreement. Under the new terms, Aventis received 705,041
shares of APS stock. Furthermore, Aventis agreed to continue funding the
exploration and development of certain dermatological applications of APS'
technology in exchange for exclusive marketing rights. Product applications
include a 5-FU treatment for actinic keratoses, pre-cancerous skin lesions.
In the fourth quarter of 1999, Dermik filed an NDA for this product and
expanded its agreement with APS to cover two additional applications, in
return for milestone payments and royalties upon successful development. In
the fourth quarter of 2000 Dermik received FDA marketing clearance for the
product which was launched under the trade name Carac(TM) in the first
quarter of 2001. Dermik's exclusivity will continue as long as annual
minimum royalty payments are made, governed by the life of the applicable
patents owned by the Company.
GOVERNMENT REGULATION
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Ethical Products
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In order to clinically test, produce and sell products for human therapeutic
use, mandatory procedures and safety evaluations established by the FDA and
comparable agencies in foreign countries must be followed. The procedure for
seeking and obtaining the required governmental clearances for a new
therapeutic product includes pre-clinical animal testing to determine safety
and efficacy, followed by human clinical testing. This can take many years
and require substantial expenditures. In the case of third party agreements,
APS expects that its corporate partner will partially fund the testing and
the approval process with guidance from APS. The Company intends to seek the
necessary regulatory approvals for its proprietary products as they are
developed.
PATENTS AND TRADE SECRETS
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As part of the Company's strategy to protect its current products and to
provide a foundation for future products, APS has filed a number of United
States patent applications on inventions relating to specific products,
product groups, and processing technology. The Company also has filed
foreign patent applications on its polymer technology with the European
Union, Japan, Australia, South Africa, Canada, Korea and Taiwan. The Company
has a total of 10 issued U.S. patents and an additional 92 issued foreign
patents. Currently, the Company has over 21 pending patent applications
worldwide.
Although the Company believes the bases for these patents and patent
applications are sound, they are untested, and there is no assurance that
they will not be successfully challenged. There can be no assurance that any
patent previously issued will be of commercial value, or that any patent
applications will result in issued patents of commercial value, or that APS'
technology will not be held to infringe patents held by others.
APS relies on unpatented trade secrets and know-how to protect certain
aspects of its production technologies. APS' employees, consultants,
advisors and corporate partners have entered into confidentiality agreements
with the Company. These agreements, however, may not necessarily provide
meaningful protection for the Company's trade secrets or proprietary know-how
in the event of unauthorized use or disclosure. In addition, others may
obtain access to, or independently develop, these trade secrets or know-how.
COMPETITION
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In the development of bioerodible poly(ortho esters) for implantation
applications, there is competition from a number of other bioerodible
systems, especially polymers based on lactic and glycolic acid and to a
lesser extent, polyanhydrides. The Company believes that its proprietary
bioerodible Biochronomer(TM) polymers have a number of important advantages.
Among these are ease of synthesis, ability to control within wide limits both
erosion times and mechanical properties and the simultaneous drug delivery
and erosion process, resulting in complete polymer disappearance when all the
drug has been delivered.
The attribute of the second family of bioerodible polymers, the block
copolymers of poly(ortho esters) and poly(ethylene glycols) is that a
hydrophobic (water-hating) bioerodible segment can be connected to a water-
soluble segment. There are other such polymers, but the Company believes
that its proprietary material is superior because the hydrophobic poly(ortho
ester) segment can greatly increase the efficiency of drug entrapment making
transport to tumors much more effective.
The third family of bioerodible polymers, the water-soluble polyacetals with
chemically bound drugs for transport to tumors also competes with alternate
polymer systems. However, the Company believes that its proprietary polymer
system is superior because it is degradable and can be easily eliminated from
the body.
Microsponge polymers, by virtue of their highly porous structure, are
versatile delivery systems for topical and oral applications.
In topical applications, there is competition from many transdermal systems
currently in the marketplace, or in development, as well as other
microparticulate systems such as liposomes, microcapsules and microspheres.
However, in topical applications, Microsponge systems are particularly
versatile because the active agent can be entrapped within the pores of the
Microsponge polymer and the release rate of the active agent can be
controlled by changes in the composition of the vehicle that contains the
Microsponge polymer. This is not the case with transdermal delivery systems
or with liposomes, microcapsules and microspheres that require a complete
change in composition to achieve desired delivery rates.
For oral applications, there are a number of systems that deliver active
agents directly to the colon. However, many such systems are based on
transit time through the gastrointestinal tract and it is well known that
such transit times are variable so that delivery to the colon cannot be
reproducibly achieved. There are also systems under development that rely,
as do the Microsponge systems, on the unique environment of the colon to
trigger release. However, such competing systems are based on materials that
are not approved for human use, while the Microsponge colonic delivery system
is based on approved materials with the exception of Microsponge polymers for
which extensive toxicological data are available.
The use of Microsponge polymers to achieve enhanced dissolution rates of
poorly water-soluble drugs competes with many approaches that reduce the
solid drug to very small particles. However, preliminary indications of
using the Microsponge polymer approach to enhance dissolution rates indicate
that a much greater reduction in particle size is possible and that
agglomeration, common with many competing systems, may not be a problem.
HUMAN RESOURCES
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As of February 28, 2001, the Company had 27 full-time employees, 5 of whom
hold PhDs. There were 12 employees engaged in research and development and
quality control, 8 in production and sales activities and 7 working in
finance, marketing, human resources and administration.
The Company considers its relations with employees to be satisfactory. None
of the Company's employees is covered by a collective bargaining agreement.
Item 2. PROPERTIES
The Company leases 26,067 square feet of laboratory, office and warehouse
space in Redwood City, California. The annual rent expense for the Redwood
City facility is approximately $587,000.
The Company occupied a production facility and warehouse in Lafayette,
Louisiana which was sold to R.P. Scherer in July 2000. The construction of
the facility in 1986 was financed primarily by 15-year, tax-exempt industrial
development bonds. In 1995, the Company extinguished the bond liability
through an "insubstance defeasance" transaction by placing U.S. government
securities in an irrevocable trust to fund all future interest and principal
payments.
The Company's existing research and development and administrative facilities
are not yet being used at full capacity and management believes that such
facilities are adequate and suitable for its current and anticipated needs.
Item 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Shares of the Company's common stock trade on the Nasdaq National Market,
under the symbol APOS. As of February 28, 2001, there were 487 holders of
record of the Company's common stock.
The Company has never paid cash dividends and does not anticipate paying cash
dividends in the foreseeable future. The following table sets forth for the
fiscal periods indicated, the range of high and low sales prices for the
Company's common stock on the NASDAQ National Market System.
2000 High Low 1999 High Low
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First Quarter 6 1/2 3 11/32 First Quarter 5 5/8 4 1/8
Second Quarter 5 1/4 3 1/4 Second Quarter 7 1/4 4 1/8
Third Quarter 4 1/8 2 1/8 Third Quarter 7 1/8 3 7/8
Fourth Quarter 3 9/16 1 3/4 Fourth Quarter 4 3/4 2 3/4
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
For the Years Ended and as of
December 31, 2000 1999 1998 1997 1996
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Statements of Operations Data
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Product revenues $ 1,163 1,210 1,131 1,273 1,325
Royalties 2,081 2,025 1,724 1,150 --
Consumer products -- -- -- -- 10,468
License, R&D and option fees 122 1,462 219 1,500 --
Cost of sales 496 532 321 676 6,958
Research and development, net 3,713 2,471 2,371 2,354 1,875
Selling, marketing and
advertising 594 496 385 595 6,450
General and administrative 2,869 2,946 2,165 2,797 2,589
Loss from continuing operations (3,758) (2,138) (2,746) (3,252) (7,005)
Income (loss) from discontinued
operations 1,163 4,510 5,271 1,444 (3,376)
Gain on disposition of
discontinued operations 11,147 -- -- -- --
Net income (loss) 8,552 2,372 2,525 (1,808) (10,381)
Basic (loss) income per
common share:
Loss from continuing
operations $ (0.19) (0.11) (0.14) (0.17) (0.39)
Net income (loss) $ 0.42 0.12 0.13 (0.10) (0.58)
Diluted (loss) income per
common share:
Loss from continuing
operations $ (0.19) (0.11) (0.14) (0.17) (0.39)
Net income (loss) $ 0.42 0.12 0.12 (0.10) (0.58)
Weighted average common
shares outstanding - basic 20,179 20,079 19,854 18,779 17,987
Weighted average common
shares outstanding - diluted 20,213 20,252 20,381 19,815 19,494
Balance Sheet Data
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Working capital $20,087 13,192 2,456 3,372 2,371
Total assets 26,996 19,296 17,582 18,052 13,441
Long-term debt, excluding
current portion -- 2,409 -- 3,055 5,579
Shareholders' equity 21,159 12,036 9,036 4,113 7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (DOLLAR AMOUNTS ARE ROUNDED TO
NEAREST THOUSAND)
The following tables summarize highlights from the statements of operations
expressed as a percentage change from the prior year and as a percentage of
product revenues.
STATEMENTS OF OPERATIONS HIGHLIGHTS (in thousands)
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For the Years Ended December 31, Annual % Change
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2000 1999 1998 00/99 99/98
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Product revenues $ 1,163 1,210 1,131 (4%) 7%
Royalties 2,081 2,025 1,724 3% 17%
License, R&D and option fees 122 1,462 219 (92%) 568%
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Total revenues 3,366 4,697 3,074 (28%) 53%
Cost of sales 496 532 321 (7%) 66%
Research and development, net 3,713 2,471 2,371 50% 4%
Selling and marketing 594 496 385 20% 29%
General and administrative 2,869 2,946 2,165 (3%) 36%
2000 1999 1998
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Expenses expressed as a percentage
of total revenues:
Cost of sales 15% 11% 10%
Research and development, net 110% 53% 77%
Selling and marketing 18% 11% 13%
General and administrative 85% 63% 70%
Results of Operations for the years ended December 31, 2000 and 1999
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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 development,
approval, launch and acceptance of new products, establishment of new
corporate alliances, progress in research and development programs, and other
risks described below or identified from time to time in the Company's
Securities and Exchange Commission filings.
The Company's revenues are derived principally from product sales, license
fees, royalties and R&D fees. Under strategic alliance arrangements entered
into with certain corporations, APS can receive non-refundable upfront fees,
future milestone payments and royalties based on third party product sales.
Until July 25, 2000, the Company manufactured and sold Microsponge(R) and
Polytrap(R) delivery systems for use by customers in a variety of personal
care and cosmetic products. On July 25, 2000, the Company completed the sale
of certain technology rights for topical pharmaceuticals and its
cosmeceutical product lines and other assets to R.P. Scherer Corporation, a
subsidiary of Cardinal Health, Inc.
Royalties for 2000 increased by 3% to $2,081,000 from $2,025,000 in the prior
year. This increase related to increased sales of Retin-A(R) Micro(TM) by
Ortho Dermatological, a Johnson and Johnson company. Product revenues for
2000 relating to sales of analytical standards decreased by 4% or $47,000 to
$1,163,000 from $1,210,000 in the prior year. License, R&D and option fees
of $122,000 decreased by $1,340,000 from $1,462,000 in the prior year due
mainly to the absence of revenues from the sale of a proprietary product line
in the prior year.
Gross profit on sales of analytical standards increased from 56% to 57% due
mainly to lower production labor costs resulting from staff turnover.
Research and development expense for 2000 increased by $1,242,000 or 50% over
the prior year to $3,713,000 due mainly to the initiation of preliminary
toxicology studies on the Company's bioerodible Biochronomer(TM) delivery
systems.
Selling and marketing expense for 2000 increased by $98,000 or 20% over the
prior year to $594,000 due mainly to higher commission expense on sales of
analytical standards and higher overhead allocation compared with the prior
year.
General and administrative expense decreased by 3% or $77,000 from the prior
year to $2,869,000 due mainly to reduced travel expenses and outside
services.
Interest income for 2000 increased by $616,000 or 307% over the prior year to
$817,000 due mainly to the receipt of $25 million in July 2000 as proceeds
from the sale of the Company's cosmeceutical and toiletries product lines to
R.P. Scherer Corporation. Interest expense for 2000 decreased by $291,000 or
50% to $294,000 due to the repayment of all outstanding debt on the receipt
of the $25 million from R.P. Scherer.
Income from discontinued operations represents the net contribution
attributable to the cosmeceutical and toiletries product lines which were
sold to R.P. Scherer Corporation in July 2000. For the year 2000, the net
contribution totaled $1,163,000, being the contribution earned in the seven
months prior to the closing of the sale transaction in July 2000, compared
with $4,510,000 in the full twelve months of the prior year. This decrease
was also due to unabsorbed overhead at the manufacturing facility in
Louisiana, resulting from a planned reduction in inventory levels and a shift
in sales mix from toiletries to cosmeceutical products which require less
Microsponge entrapment.
Results of Operations for the years ended December 31, 1999 and 1998
- --------------------------------------------------------------------
Royalties for 1999 increased by 17% or $301,000 to $2,025,000 due mainly to
increased sales of Retin-A Micro by Ortho Dermatological, a Johnson and
Johnson company. Product revenues from sales of analytical standards
increased by 7% or $78,000 to $1,210,000 due mainly to increased sales of
calibration equipment compared to the prior year. License, R&D and option
fees increased by $1,243,000 to $1,462,000 over the prior year due to
revenues from the one-time sale of a proprietary product line in 1999.
Gross profit on sales of analytical standards for 1999 decreased from 72% in
1998 to 56% due mainly to sales mix, as revenues included higher sales of low
margin equipment.
Research and development expense, net, for 1999 increased by 4% or $100,000
to $2,471,000 due mainly to increased headcount and overhead allocation
resulting from the Company's relocation to new offices and laboratories in
1999.
Selling and marketing expense increased by 29% or $111,000 to $496,000 due to
increased overhead allocation resulting from the Company's relocation to new
offices in 1999.
General and administrative expense in 1999 increased by 36% or $781,000 to
$2,946,000 due mainly to increased professional, directors and investor
relations fees.
Interest expense in 1999 decreased by 27% or $220,000 to $585,000 due mainly
to scheduled principal repayments during the year. Interest income for 1999
decreased by 18% or $45,000 to $201,000 due to lower average cash balances
during the year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of December 31, 2000 were $26,996,000 compared with
$19,297,000 at December 31, 1999. Working capital increased to $20,087,000
from $13,192,000 for the same period and cash, cash equivalents and
marketable securities increased to $22,523,000 from $3,705,000. For the year
ended December 31, 2000, the Company's operating activities used $3,116,000
of cash compared to $842,000 in the prior year. The Company invested
approximately $3,713,000 in product research and development.
Accounts receivable, net of allowances, decreased to $491,000 at December 31,
2000 from $3,580,000 at December 31, 1999 due primarily to the sale of the
Company's cosmeceutical product lines in July 2000.
Capital expenditures for the year ended December 31, 1999 totaled $179,000
compared to $176,000 in the prior year.
Purchases of marketable securities of $18,854,000 were made using the
proceeds from the sale of its cosmeceutical and toiletries product lines and
certain technology rights to topical pharmaceuticals to R.P. Scherer, Inc.
for $25 million in July 2000. These proceeds were also used to repay the
Company's outstanding debt in full.
In the current year, the Company has also financed its operations, including
technology and product research and development, from 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, marketable securities,
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 Financial Accounting Standards Board (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. 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. The Company anticipates that adoption of
this statement will not have a material effect on the consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation-an interpretation of APB
Opinion No. 25 (FIN 44). This opinion provides guidance on the accounting
for certain stock option transactions and subsequent amendments to stock
option transactions. FIN 44 was effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998
or January 12, 2000. The adoption of FIN 44 did not have a material impact
on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. Subsequently, the SEC released SAB
101B, which delayed the implementation date of SAB 101 for registrants with
fiscal years beginning between December 16, 1999 and March 15, 2000 until the
fourth quarter of 2000. The implementation of the provisions of SAB 101 did
not have a material impact on the financial position or results of operations
of the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to our investment portfolio. APS does not use derivative
financial instruments in our investment portfolio. The Company manages its
interest rate risk by maintaining an investment portfolio primarily
consisting of debt instruments of high credit quality and relatively short
average maturities. The Company also manages its interest rate risk by
maintaining sufficient cash and cash equivalent balance such that it is
typically able to hold its investments to maturity. At December 31, 2000,
the Company's cash equivalents, and marketable securities include corporate
and other debt securities of $22,285,662. Notwithstanding its efforts to
manage interest rate risks, there can be no assurances that it will be
adequately protected against the risks associated with interest rate
fluctuations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Advanced Polymer Systems, Inc.
Consolidated Balance Sheets
- ---------------------------
December 31,
-------------------------
2000 1999
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 6,493,336 3,705,194
Marketable securities 16,029,320 --
Accounts receivable less allowance
for doubtful accounts of $223,235 and
$27,301 at December 31, 2000 and 1999,
respectively 490,578 3,580,026
Receivables for royalties, license fees
and R&D fees 1,200,554 1,492,634
Inventory 71,079 60,650
Advances to officers and employees 34,018 84,632
Prepaid expenses and other 730,964 319,206
Assets held for sale -- 7,721,958
---------- ----------
Total current assets 25,049,849 16,964,300
Property and equipment, net 1,795,313 1,990,309
Other long-term assets 151,000 342,047
---------- ----------
Total Assets $ 26,996,162 19,296,656
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 329,305 1,029,534
Accrued expenses 1,499,552 1,263,186
Accrued disposition costs 2,488,242 --
Income taxes payable 255,358 13,480
Current portion - long-term debt -- 891,111
Deferred revenue 390,201 575,000
---------- ----------
Total current liabilities 4,962,658 3,772,311
Deferred revenue - long-term 874,250 1,079,644
Long-term debt -- 2,408,933
---------- ----------
Total Liabilities 5,836,908 7,260,888
Commitments and Contingencies
(Notes 4 and 9)
Shareholders' Equity:
Preferred stock, authorized 2,500,000
shares; none issued or outstanding at
December 31, 2000 and 1999 -- --
Common stock, $.01 par value,
authorized 50,000,000 shares; issued
and outstanding 20,206,064 and
20,119,042 at December 31, 2000 and
1999, respectively 202,061 201,190
Deferred compensation (79,890) (299,578)
Additional paid-in capital 85,901,145 85,629,340
Accumulated deficit (64,942,829) (73,495,184)
Accumulated other comprehensive
income 78,767 --
---------- ----------
Total Shareholders' Equity 21,159,254 12,035,768
---------- ----------
Total Liabilities and Shareholders'
Equity $ 26,996,162 19,296,656
========== ==========
See accompanying notes to consolidated financial statements.
Advanced Polymer Systems, Inc.
Consolidated Statements of Operations
- -------------------------------------
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Revenues
Product revenues $ 1,162,537 1,209,914 1,131,582
Royalties 2,081,025 2,024,817 1,724,055
License, R&D and option fees 122,297 1,461,842 218,600
---------- ---------- ----------
Total revenues 3,365,859 4,696,573 3,074,237
Expenses
Cost of sales 496,439 532,470 321,116
Research and development, net 3,713,089 2,471,144 2,370,871
Selling and marketing 594,226 496,054 384,704
General and administrative 2,868,935 2,945,594 2,164,870
---------- ---------- ----------
Operating loss (4,306,830) (1,748,689) (2,167,324)
---------- ---------- ----------
Interest expense (294,374) (585,313) (805,364)
Interest income 816,864 200,650 246,260
Other income (expense), net 26,224 (4,157) (19,252)
--------- --------- ----------
Loss from continuing operations (3,758,116) (2,137,509) (2,745,680)
Income from discontinued operations 1,162,984 4,509,896 5,270,721
Gain on disposition of discontinued
operations, net of taxes 11,147,487 -- --
---------- ---------- ----------
Net income $ 8,552,355 2,372,387 2,525,041
========== ========== ==========
Basic (loss) income per common
share:
Loss from continuing operations $ (0.19) (0.11) (0.14)
========== ========== ==========
Net income $ 0.42 0.12 0.13
========== ========== ==========
Diluted (loss) income per common
share:
Loss from continuing operations $ (0.19) (0.11) (0.14)
========== ========== ==========
Net income $ 0.42 0.12 0.12
========== ========== ==========
Weighted average common shares
outstanding - basic 20,179,280 20,078,912 19,854,103
========== ========== ==========
Weighted average common shares
outstanding - diluted 20,213,095 20,252,381 20,380,832
========== ========== ==========
See accompanying notes to consolidated financial statements.
Advanced Polymer Systems, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
- ------------------------------------------------------------------------
For the Years Ended December 31, 2000, 1999 and 1998
Accumulated
Other
Additional Compre-
Common Stock Deferred Paid-In Accumulated hensive Shareholders'
Shares Amount Compensation Capital Deficit Income Equity
---------- -------- --------- ----------- ----------- ------------ ------------
Balance, December
31, 1997 19,464,821 $194,648 -- $82,310,746 $(78,392,612) -- $ 4,112,782
---------- ------- --------- ---------- ----------- -------- ----------
Options exercised 79,598 796 -- 413,072 -- -- 413,868
Fair value of
stock options
issued to
non-employees -- -- -- 42,200 -- -- 42,200
Restricted
stock awards 100,000 1,000 (599,151) 599,151 -- -- 1,000
Amortization of
restricted stock -- -- 99,857 -- -- -- 99,857
Common stock issued
to employees under
the Employee Stock
Purchase Plan 38,614 386 -- 190,249 -- -- 190,635
Warrants exercised 310,278 3,103 -- 1,647,576 -- -- 1,650,679
Net income -- -- -- -- 2,525,041 -- 2,525,041
---------- ------- -------- --------- ----------- -------- ----------
Balance, December
31, 1998 19,993,311 $199,933 $(499,294) $85,202,994 $(75,867,571) -- $ 9,036,062
Options exercised 3,719 37 -- 19,489 -- -- 19,526
Fair value of
stock issued to
non-employees 8,506 85 -- 37,415 -- -- 37,500
Amortization of
restricted stock -- -- 199,716 -- -- -- 199,716
Common stock issued
to employees under
the Employee Stock
Purchase Plan 43,506 435 -- 160,142 -- -- 160,577
Warrants exercised 70,000 700 -- 209,300 -- -- 210,000
Warrants expired -- -- -- -- -- -- --
Net income -- -- -- -- 2,372,387 -- 2,372,387
---------- ------- -------- --------- ----------- -------- ----------
Balance, December
31, 1999 20,119,042 $201,190 $(299,578) $85,629,340 $(73,495,184) -- $12,035,768
Comprehensive
income:
Net income -- -- -- -- 8,552,355 -- 8,552,355
Net unrealized
holding gain
on marketable
securities -- -- -- -- -- 78,767 78,767
----------
Comprehensive
income 8,631,122
----------
Fair value of
stock issued to
non-employees 10,197 102 -- 40,398 -- -- 40,500
Amortization of
restricted stock -- -- 219,688 -- -- -- 219,688
Common stock issued
to employees under
the Employee Stock
Purchase Plan 36,825 369 -- 111,807 -- -- 112,176
Warrants exercised 40,000 400 -- 119,600 -- -- 120,000
---------- ------- -------- --------- ----------- -------- ----------
Balance, December
31, 2000 20,206,064 $202,061 $ (79,890) $85,901,145 $(64,942,829) $ 78,767 $21,159,254
========== ======= ======== ========== =========== ======== ==========
See accompanying notes to consolidated financial statements.
Advanced Polymer Systems, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------
For the Years Ended December 31,
--------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 8,552,355 2,372,387 2,525,041
Adjustments to reconcile net income to net
cash used in operating activities:
Gain on disposition of discontinued
operations (11,147,487) -- --
Depreciation and amortization 374,962 379,978 378,480
Provision for doubtful accounts 206,968 7,891 38,830
Amortization of deferred revenue (390,193) (131,211) (306,014)
Stock compensation awards to non-employees 40,500 37,500 42,200
Restricted stock awards 179,745 199,716 100,857
Amortization of premium/discount and
accretion of marketable securities (101,531) -- --
Changes in operating assets and liabilities:
Accounts receivable 2,882,480 (1,055,390) (283,060)
Receivables for royalties, license fees
and R&D fees 292,080 804,218 (1,196,484)
Inventory (10,429) (1,627) 35
Advances to officers and employees 50,614 254,315 (242,241)
Prepaid expenses and other (411,758) 96,933 (162,596)
Other long-term assets 191,047 (166,680) 71,288
Accounts payable (700,229) 205,899 (288,452)
Accrued expenses 236,366 (318,203) (1,775,012)
Accrued disposition costs (2,946,589) -- --
Income taxes payable (208,622) 13,480 --
Accrued settlement liability -- (1,300,000) (500,000)
---------- --------- ----------
Net cash (used in) provided by
continuing activities (2,909,721) 1,399,206 (1,597,128)
Cash used in discontinued operations (206,281) (2,241,348) (1,142,699)
---------- --------- ----------
Net cash used in operating activities (3,116,002) (842,142) (2,739,827)
---------- --------- ----------
Cash flows from investing activities:
Proceeds from disposition of discontinued
operations 25,000,000 -- --
Purchases of property and equipment (178,966) (175,524) (1,575,814)
Purchases of marketable securities (18,854,008) -- --
Maturities of marketable securities 3,004,986 -- --
---------- --------- ----------
Net cash provided by (used in) investing
activities 8,972,012 (175,524) (1,575,814)
---------- --------- ----------
Cash flows from financing activities:
Repayment of long-term debt (3,300,044) (3,755,416) (2,523,389)
Proceeds from long-term debt and warrants
issued -- 4,000,000 --
Proceeds from the exercise of common
stock options and warrants 120,000 229,526 2,064,547
Proceeds from issuance of shares under
the Employee Stock Purchase Plan 112,176 160,577 190,635
---------- --------- ----------
Net cash provided by (used in) financing
activities (3,067,868) 634,687 (268,207)
---------- --------- ----------
Net increase (decrease) in cash and cash
equivalents 2,788,142 (382,979) (4,583,848)
Cash and cash equivalents at the beginning
of the year 3,705,194 4,088,173 8,672,021
---------- --------- ----------
Cash and cash equivalents at the end of
the year $ 6,493,336 3,705,194 4,088,173
========== ========= =========
Cash paid in interest $ 244,243 478,375 559,664
========== ========= =========
Cash paid in taxes $ 244,044 51,500 39,621
========== ========= =========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------
Note 1 Business
Advanced Polymer Systems, Inc. ("APS" or the "Company") develops,
manufactures and sells patented delivery systems to enhance the safety and
effectivenes of prescription products. Projects are currently conducted
under development and licensing arrangements with pharmaceutical companies.
New products and technologies under development include bioerodible polymers
for injectable and implantable drug delivery, and certain oral applications.
On July 25, 2000, the Company completed the sale of certain technology rights
for topical pharmaceuticals and its cosmeceutical product lines and other
assets ("cosmeceutical and toiletry business") to R.P. Scherer Corporation, a
subsidiary of Cardinal Health, Inc. The Company received $25 million up-
front and could receive up to an additional $26.5 million over the next three
years relating to the performance milestones of the cosmeceutical and
toiletry business (Note 12).
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include
the financial statements of the Company and its wholly owned subsidiaries,
Premier, Advanced Consumer Products, Inc. ("ACP") and APS Analytical
Standards, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash Equivalents and Marketable Securities
- ------------------------------------------
For purposes of the Consolidated Statements of Cash Flows and Consolidated
Balance Sheets, the Company considers all short-term investments that have
original maturities of less than three months to be cash equivalents.
Investments with original maturities longer than three months are classified
as marketable securitites. Short-term investments consist primarily of
commercial paper, bankers acceptances, master notes, repurchase agreements
and corporate debt securities. The Company has classified all its
investments in certain debt and equity securities as "available-for-sale".
Financial Instruments
- ---------------------
The carrying value of financial instruments, including marketable securities
and accounts receivable, approximate fair value. Financial instruments that
potentially subject the Company to concentrations of credit risk consist
primarily of cash equivalents, short-term investments and trade accounts
receivable. The Company invests excess cash in a variety of high grade
short-term, interest-bearing securities. This diversification of risk is
consistent with our policy to ensure safety of principal and maintain
liquidity.
The Company's investments are recorded at fair value with unrealized holding
gains and losses reported as a separate component of shareholders' equity.
Inventory
- ---------
Inventory is stated at the lower of cost or market value, utilizing the
average cost method.
Assets Held for Sale
- --------------------
On July 25, 2000, the Company completed the sale of certain technology rights
for topical pharmaceuticals and its cosmeceutical product lines and other
assets ("cosmeceutical and toiletry business") to R.P. Scherer Corporation, a
subsidiary of Cardinal Health, Inc. The Company received $25 million up-
front and could receive up to an additional $26.5 million over the next three
years relating to the performance milestones of the cosmeceutical and
toiletry business (Note 12).
All assets and liabilities relating to the cosmeceutical and toiletry
business are reported in the accompanying condensed Consolidated Balance
Sheet as of December 31, 1999 as "Net assets held for sale" and consist of
the following:
December 31,
1999
------------
Inventory $ 4,524,347
Prepaid expenses 59,763
Property, plant & equipment, net 6,040,767
Other intangible assets 1,259,020
Other long-term assets 44,203
Deferred revenue - short-term (620,396)
Deferred revenue - long-term (3,585,746)
----------
$ 7,721,958
==========
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows: equipment and machinery, 5 to 10 years; furniture and fixtures, 5
years; and leasehold improvements, over the shorter of the respective lease
terms or the respective useful lives of the leasehold improvements.
Long-Lived Assets, Including Goodwill and Other Intangibles
- -----------------------------------------------------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" as circumstances dictate, the Company evaluates
whether 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. Recoverability of assets to be held and used
is determined by comparing the undiscounted net cash flows of long-lived
assets to their respective carrying values. If such assets are considered to
be impaired, the amount of impairment to be recognized is measured based on
the projected discounted cash flows using an appropriate discount rate.
Stock-Based Compensation
- ------------------------
The Company follows the provisions of SFAS No. 123 "Accounting for Stock
Based Compensation" and has elected to account for stock-based compensation
related to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, except for stock
options issued to non-employees and restricted stock awards to employees, no
compensation cost has been recognized for the Company's fixed stock option
plans and stock purchase plan.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
related notes to financial statements. Changes in such estimates may affect
amounts in future periods.
Revenue Recognition
- -------------------
Product revenues are recorded upon shipment of products.
The Company has 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 partners to sell the Company's proprietary products in
a defined field or territory for a defined period. The license agreements
provide for APS to earn future revenue through royalty payments. The license
fees are non-refundable even if the agreements are terminated before their
term. These amounts are reported as deferred revenues and amortized over the
estimated life of the product to which they relate. Amortization of license
fees are classified as License, R&D and Option Fees in the accompanying
consolidated statements of operations.
Contractually required minimum royalties are recorded ratably throughout the
contractual period. Royalties in excess of minimum royalties are recognized
as earned when the related product is shipped to the end customer by the
Company's licensees based on information received by the Company from its
licensees.
A milestone payment is a payment made by a third party or corporate partner
to the Company upon the achievement of a predetermined milestone as defined
in a legally binding contract. Milestone payments are recognized as revenue
when the milestone event has occurred and the Company has completed all
milestone related services such that the milestone payment is currently due
and is non-refundable. In 1999, the Company earned milestone payments from
Dermik upon the acceptance for filing by the FDA of the New Drug Application
("NDA") for 5-Fluorouracil.
Deferred Revenue
- ----------------
Non-refundable license fees received by the Company are reported as deferred
revenues and amortized over the estimated life of the product to which they
relate.
Prepaid royalties paid to APS by Ortho-McNeil Pharmaceutical Corporation
("Ortho"), a subsidiary of Johnson & Johnson Inc. ("J&J"), as part of the
retinoid licensing agreement are also reported as deferred revenue. In
accordance with the licensing agreement, 25% of the royalties earned by APS
are applied against the deferred revenues after certain annual minimum
royalty payments are met.
Earnings (Loss) Per Share
- -------------------------
SFAS No. 128 requires the Company to report both basic earnings per share,
which is computed by dividing net income by the weighted-average number of
common shares outstanding, and diluted earnings per share, which is computed
by dividing net income by the total of weighted-average number of common
shares outstanding and dilutive potential common shares outstanding.
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, consist primarily of trade
accounts receivable and receivables from royalties, license fees and R&D
fees. Approximately 79% and 57% of the recorded trade receivables and
receivables from royalties, license fees and R&D fees were concentrated with
five and four customers in the pharmaceutical, cosmetic and personal care
industries as of December 31, 2000 and 1999, respectively. Approximately
62%, 67% and 63% of the recorded net sales were concentrated with one, three
and one customers for the years ended December 31, 2000, 1999 and 1998,
respectively. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial conditions. The Company does not
generally require collateral.
Segment and Geographic Information
- ----------------------------------
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," requires an enterprise to report segment information based on
how management internally evaluates the operating performance of its business
units (segments). The Company's operations are confined to a single business
segment, the design and commercialization of polymer technologies for
pharmacetuical and other applications.
Royalty revenues from one domestic customer amounted to approximately 62% of
total revenues for the year ended December 31, 2000. Revenues from three
domestic customers amounted to 43%, 13% and 11% for the year ended December
31, 1999. Revenues from one domestic customer amounted to approximately 63%
for the year ended December 31, 1998.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the presentation in 2000.
Note 3 Related Party Transactions
The Company has entered into agreements with Large Scale Biology Corp.("LSB
Corp.") formerly known as Biosource Technologies, Inc. of which Toby
Rosenblatt, a member of the Company's Board of Directors, is a stockholder
and a former director. Agreements between APS and LSB were made prior to
1998 and have been settled and closed in 1999. All agreements between APS
and LSB Corp. were considered and approved by a vote of the disinterested
directors (Note 4).
Note 4 Legal Proceedings
In November, 1997 LSB Corp. filed a complaint against the Company in the San
Mateo Superior Court. LSB Corp. 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 LSB Corp.
for a net amount of $1,300,000, which consisted of a $1,500,000 settlement of
LSB Corp. claims and a $200,000 settlement of the Company's cross claims.
The Company's consolidated financial statemements for the period ended
December 31, 1998 included a favorable decrease in accrued settlement
liability of $500,000 resulting from the settlement agreement. The
settlement liability was paid to LSB Corp. in cash in 1999.
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.
Note 5 Cash Equivalents and Marketable Securities
At December 31, 2000 and 1999, the amortized cost and estimated market value
of investments in debt securities are set forth in the tables below:
December 31, 2000
--------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Marked Value
------ ---------- ---------- ------------
Available-for-Sale:
Corporate debt
securities $ 7,997,117 52,813 -- 8,049,930
Other debt securities 14,209,778 26,424 (470) 14,235,732
---------- ------ --- ----------
Totals $22,206,895 79,237 (470) 22,285,662
========== ====== === ==========
December 31, 1999
--------------------------------
Estimated
Cost Market Value
--------------------------------
Available-for-Sale:
Corporate debt securities $2,518,000 2,518,000
Other debt securities 102,660 102,660
--------- ---------
Totals $2,620,660 2,620,660
========= =========
The table below summarizes fair value disclosures at December 31:
2000 1999
---------------------- ----------------------
Fair Fair
Cost Value Cost Value
---- ---------- --------- ----------
Cash Equivalents $ 6,343,300 6,256,342 2,620,660 2,620,660
Marketable Securities 15,863,595 16,029,320 -- --
---------- ---------- -------- ---------
Totals $22,206,895 22,285,662 2,620,660 2,620,660
========== ========== ========= =========
The cost and estimated fair value of available-for-sale debt securities as of
December 31, 2000, by contractual maturity, consisted of the following:
Estimated
Cost Market Value
--------------------------------
Available-for-Sale:
Due in one year or less $14,208,875 14,213,292
Due after one year
through two years 7,998,020 8,072,370
---------- ----------
Totals $22,206,895 22,285,662
========== ==========
Note 6 Inventory
The major components of inventory are as follows:
December 31,
---------------------------
2000 1999
---- ----
Raw materials $43,387 27,267
Finished goods 27,692 33,383
------- ------
Total inventory $71,079 60,650
======= ======
Note 7 Property and Equipment
Property and equipment consist of the following:
December 31,
---------------------------
2000 1999
---------- ----------
Leasehold improvements $ 1,358,320 1,380,779
Furniture and equipment 3,206,744 3,238,521
---------- ----------
Total property and equipment 4,565,064 4,619,300
Accumulated depreciation
and amortization (2,769,751) (2,628,991)
---------- ----------
Property and equipment, net $ 1,795,313 1,990,309
=========== ==========
Depreciation expense amounted to $374,962, $379,978 and $378,480 for the
years ended December 31, 2000, 1999, and 1998, respectively.
Note 8 Long-Term Debt
Long-term debt consists of the following:
December 31,
--------------------
2000 1999
---- ----
Term loan, principal and interest due in equal
monthly installments commencing March 1999
through February 2003, secured by certain
real and personal property and a portion of
the Company's accounts receivable $ -- 3,300,044
--------- ---------
Total -- 3,300,044
Less current portion -- 891,111
--------- ---------
Long-term debt $ -- 2,408,933
========= =========
In March 1999, the Company obtained a $4,000,000 term loan with a fixed
interest rate of 13.87%. The loan was 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 were 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.
In July 2000, the Company extinguished the debt as repayment of the debt was
necessary in order to release liens on the assets sold as part of the
cosmeceutical and toiletry business (Note 12).
All costs incurred in obtaining the financing arrangement were capitalized as
deferred loan costs, and were amortized over the life of the loans using the
interest method. Interest paid in 2000, 1999 and 1998 totalled $244,243,
$478,375 and $559,664, respectively.
Note 9 Commitments
Lease Commitments: Total rental expense for property and equipment was
$586,991, $803,140 and $853,653 for 2000, 1999 and 1998, respectively.
The Company's future minimum lease payments under noncancellable operating
leases for facilities as of December 31, 2000, are as follows:
Years Ending Minimum
December 31, Payments
------------ -----------
2001 $ 659,423
2002 659,495
2003 675,135
2004 573,474
2005 and thereafter --
----------
$2,567,527
==========
Note 10 Shareholders' Equity
Shareholders Rights Plan: On August 19, 1996, the Board of Directors approved
a Shareholders Rights Plan under which shareholders of record on September 3,
1996 received a dividend of one Preferred Stock purchase right ("Rights") for
each share of common stock outstanding. The Rights were not exercisable
until 10 business days after a person or group acquired 20% or more of the
outstanding shares of common stock or announced a tender offer which could
have resulted in a person or group beneficially owning 20% or more of the
outstanding shares of common stock (an "Acquisition") of the Company. The
Board of Directors approved an increase in threshold to 30% in December 1997.
Each Right, should it become exercisable, will entitle the holder (other than
acquirer) to purchase company stock at a discount. The Board of Directors
may terminate the Rights plan or, under certain circumstances, redeem the
rights.
In the event of an Acquisition without the approval of the Board, each Right
will entitle the registered holder, other than an acquirer and certain
related parties, to buy at the Right's then current exercise price a number
of shares of common stock with a market value equal to twice the exercise
price.
In addition, if at the time when there was a 30% shareholder, the Company
were to be acquired by merger, shareholders with unexercised Rights could
purchase common stock of the acquirer with a value of twice the exercise
price of the Rights.
The Board may redeem the Rights for $0.01 per Right at any time prior to
Acquisition. Unless earlier redeemed, the Rights will expire on August 19,
2006.
Stock-Based Compensation Plans: The Company has two types of stock-based
compensation plans, a stock purchase plan and stock option plans.
In 1997, the stockholders approved the Company's 1997 Employee Stock Purchase
Plan (the "Plan"). Under the 1997 Employee Stock Purchase Plan, the Company
is authorized to issue up to 400,000 shares of common stock to its employees,
nearly all of whom are eligible to participate. Under the terms of the Plan,
employees can elect to have up to a maximum of 10 percent of their base
earnings withheld to purchase the Company's common stock. The purchase price
of the stock is 85 percent of the lower of the closing prices for the
Company's common stock on: (i) the first trading day in the enrollment
period, as defined in the Plan, in which the purchase is made, or (ii) the
purchase date. The length of the enrollment period may not exceed a maximum
of 24 months. Enrollment dates are the first business day of May and
November provided that the first enrollment date was April 30, 1997.
Approximately 54 percent of eligible employees participated in the Plan in
2000. Under the Plan, the Company issued 36,825 shares in 2000, 43,506
shares in 1999 and 38,614 shares in 1998. The weighted average fair value of
purchase rights granted during 2000, 1999 and 1998 were $1.90, $3.05 and
$1.65, respectively. The weighted average exercise price of the purchase
rights exercised during 2000, 1999 and 1998 were $3.05, $3.69 and $3.83,
respectively. As of December 31, 2000, the Company had 266,510 shares
reserved for issuance under the stock purchase plan.
The Company has various stock option plans for employees, officers, directors
and consultants. The options are granted at fair market value and expire no
later than ten years from the date of grant. The options are exercisable in
accordance with vesting schedules that generally provide for them to be fully
exercisable four years after the date of grant. Any shares that are issuable
upon exercise of options granted under the 1992 Stock Option Plan that expire
or become unexercisable for any reason without having been exercised in full
are available for future grant and issuance under the same stock option plan.
The following table summarizes option activity for 2000, 1999 and 1998:
2000 1999 1998
----------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ------------------ --------------------
Outstanding at beginning
of year 3,660,048 $6.30 3,567,183 $6.32 2,947,755 $6.63
Granted 507,000 3.12 125,047 5.69 777,000 5.18
Exercised -- -- (3,719) 5.25 (79,598) 5.20
Expired or Cancelled (256,871) 6.56 (28,463) 6.81 (77,974) 7.83
--------- --------- ---------
Outstanding at end of year 3,910,177 5.87 3,660,048 6.30 3,567,183 6.32
========= ========= =========
Options exercisable at
year end 3,224,583 6.33 3,013,164 6.46 2,698,960 6.44
Shares available for future
grant at year end 176,056 196,185 293,269
Weighted-average fair
value of options granted
during the year $1.70 $3.00 $2.45
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Remaining Number Remaining
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/00 Life Price at 12/31/00 Price
- ----------- ----------- ----------- --------- ----------- ---------
$2.50-$4.19 1,061,508 6.8 years $ 3.62 470,673 $ 4.02
$4.41-$5.44 1,120,602 4.2 5.18 1,120,602 5.18
$5.56-$7.38 1,016,812 5.8 6.52 923,583 6.55
$7.75-$11.13 711,255 3.1 9.38 709,725 9.38
--------- ---------
$2.50-$11.13 3,910,177 5.1 $ 5.87 3,224,583 $ 6.33
========= =========
The Company has adopted the disclosure only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly, except for stock
options issued to non-employees and restricted stock awards to employees, no
compensation cost has been recognized for the various fixed stock option
plans and stock purchase plan. The compensation cost that has been charged
against income for the stock options issued to non-employees and restricted
stock awards to employees was $179,745, $199,716 and $142,057 for 2000, 1999
and 1998, respectively. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value method
provisions of SFAS No. 123, the Company's net income (loss) and income (loss)
per common share would have changed to the pro-forma amounts indicated below:
2000 1999 1998
----------- ----------- ---------
Loss from continuing
operations - as reported $(3,758,116) (2,137,509) (2,745,680)
Loss from continuing
operations - pro-forma (5,050,654) (3,436,184) (4,475,635)
Basic (loss) income per
common share - as
reported
Loss from continuing
operations (0.19) (0.11) (0.14)
Net income 0.42 0.12 0.13
Basic (loss) income per
common share - pro-forma
Loss from continuing
operations (0.25) (0.17) (0.23)
Net income 0.36 0.05 0.04
Diluted (loss) income per
common share - as reported
Loss from continuing
operations (0.19) (0.11) (0.14)
Net income 0.42 0.12 0.12
Diluted (loss) income per
common share - pro-forma
Loss from continuing
operations (0.25) (0.17) (0.23)
Net income 0.36 0.05 0.04
For stock options, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998,
respectively: dividend yield of zero for all years; annualized volatility of
58 percent, 52 percent and 48 percent; risk-free interest rates of 4.8
percent, 6.6 percent and 4.7 percent; and expected life of five years for all
the stock option plans.
For the stock purchase plan, the fair value of each award is also estimated
using the Black-Scholes option pricing model. For purchase rights granted in
2000, the multiple option approach with the following assumptions were used
for expected terms of six, twelve, eighteen and twenty-four months: risk free
interest rate of 6.4 percent; volatility of 58 percent; and dividend yield of
zero. The purchase rights granted in 1999 were valued using the following
assumptions for expected terms of six, twelve, eighteen and twenty-four
months: risk-free interest rate of 4.6 percent; volatility of 55 percent; and
dividend yield of zero. The purchase rights granted in 1998 were valued
using the following assumptions for expected terms of six, twelve, eighteen
and twenty-four months, respectively: risk-free interest rate of 5.1 percent;
volatility of 54 percent; and dividend yield of zero.
Note 11 Earnings Per Share
The following table sets forth the computation of the Company's basic and
diluted loss per share:
2000 1999 1998
---- ---- ----
Loss from continuing operations $(3,758,116) (2,137,509) (2,745,680)
========== ========== ==========
Net income 8,552,355 2,372,387 2,525,041
========== ========== ==========
Shares calculation (denominator):
Weighted average shares
outstanding - basic 20,179,280 20,078,912 19,854,103
Effect of dilutive securities:
Stock options, employee stock
purchase plan and stock to be
issued to directors 32,712 125,762 381,518
Warrants 1,103 47,707 145,211
---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,213,095 20,252,381 20,380,832
========== ========== ==========
Basic (loss) income per common
share:
Loss from continuing operations $ (0.19) (0.11) (0.14)
========== ========== ==========
Net income $ 0.42 0.12 0.13
========== ========== ==========
Diluted (loss) income per common
share:
Loss from continuing operations $ (0.19) (0.11) (0.14)
========== ========== ==========
Net income $ 0.42 0.12 0.12
========== ========== ==========
The following options with expiration dates ranging from February 19, 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:
2000 1999 1998
---- ---- ----
Number outstanding 3,571,590 2,816,970 1,362,432
Range of exercise prices $3.88 - $15.00 $5.00 - $15.00 $6.81 - $15.00
Note 12 Discontinued Operations
On July 25, 2000, the Company completed the sale of certain technology rights
for topical pharmaceuticals and its cosmeceutical product lines and other
assets ("cosmeceutical and toiletry business") to R.P. Scherer Corporation, a
subsidiary of Cardinal Health, Inc. The Company received $25 million up-
front and could receive up to an additional $26.5 million over the next three
years relating to the performance milestones of the cosmeceutical and
toiletry business. In accordance with Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," the cosmeceutical and
toiletry business is reported as a discontinued operation for all periods
presented in the accompanying Condensed Consolidated Statements of Operations
(Note 2).
"Gain on disposal of discontinued operations" in the accompanying
Consolidated Statement of Operations for the year ended December 31, 2000 is
reported net of a provision for income taxes of $450,000.
The following table sets forth the Company's basic and diluted income per
common share from discontinued operations excluding the gain on sale for the
years ended December 31, 2000, 1999 and 1998:
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Basic income per common
share from discontinued
operations $0.06 $0.22 $0.27
Diluted income per common
share from discontinued
operations $0.06 $0.22 $0.26
Note 13 Defined Contribution Plan
The Company sponsors a defined contribution plan covering substantially all
of its employees. In the past three calendar years, the Company made
matching contributions equal to 50% of each participant's contribution during
the plan year up to a maximum amount equal to the lesser of 3% of each
participant's annual compensation or $5,100, $4,800 and $4,800 for the 2000,
1999 and 1998 calendar years, respectively. The Company may also contribute
additional discretionary amounts as it may determine. For the years ended
December 31, 2000, 1999 and 1998, the Company contributed to the plan
approximately $106,000, $122,000 and $124,000, respectively. No
discretionary contributions have been made to the plan since its inception.
Note 14 Income Taxes
Income tax expense for the year ended December 31, 2000 consisted of:
Current Deferred Total
Federal $304,500 -- $304,500
State 145,500 -- 145,500
------- ------ -------
450,000 -- 450,000
======= ====== =======
A reconciliation of the federal statutory rate of 35% (34% in 1999 and 1998)
to the Company's effective tax rate is as follows:
December 31,
------------------------
2000 1999 1998
---- ---- ----
U.S. statutory rate (benefit) 35.00% 34.00% 34.00%
State taxes, net of federal income
tax benefit -- -- --
Net losses without benefits -- -- --
Alternative minimum tax -- -- --
Utilization of temporary differences
for which no benefit was previously
recognized (34.58) (32.22) (33.47)
Nondeductible expenses (0.42) (1.78) (0.53)
----- ----- -----
Total tax expense (benefit) --% --% --%
===== ===== =====
At December 31, 2000, the Company had net federal operating loss
carryforwards of approximately $61,444,000 for income tax reporting purposes
and California operating loss carryforwards of approximately $1,480,000. The
federal net operating losses expire beginning in 2004 through the year 2019.
The California net operating loss carryforwards expire beginning in 2001
through the year 2002. A California net operating loss carryforward from
1995 in the approximate amount of $911,000 expired on December 31, 2000. The
Company also has federal alternative minimum tax credit carryforwards of
approximately $237,000, which can be carried forward indefinitely.
The Company also has research and experimental tax credits aggregating
approximately $1,673,000 and $1,193,000 for federal and California purposes,
respectively. The federal credit carryforwards expire beginning in 2001
through the year 2011. The California credits carry over indefinitely until
utilized.
There are also California credit carryforwards for qualified manufacturing
and research and development equipment of approximately $33,000; these
credits expire beginning in 2004 through the year 2008.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 2000 and 1999 are presented below:
2000 1999
------------ -----------
Deferred tax assets:
Deferred research expenditures $ 214,800 441,000
Accruals and reserves not
currently deductible for tax
purposes 461,500 253,000
Net operating loss carryforwards 22,240,200 24,728,000
Credit carryforwards 3,144,700 2,745,000
Other 2,900 320,000
---------- ----------
Gross deferred tax assets 26,064,100 28,487,000
Less valuation allowance (26,010,500) (26,615,000)
---------- ----------
Total deferred tax assets 53,600 1,872,000
---------- ----------
Deferred tax liabilities:
Property and equipment (53,600) (1,872,000)
---------- ----------
Total deferred tax liabilities (53,600) (1,872,000)
---------- ----------
Net deferred tax assets
(liabilities) $ -- --
========== ==========
The net change in the valuation allowance for the year ended December 31,
2000 was a decrease of approximately $604,500. The net change in the
valuation allowance for the years ended December 31, 1999 and 1998 was a
decrease of approximately $3,312,000 and $1,595,000, respectively.
Management believes that sufficient uncertainty exists regarding the
realizability of these items and, accordingly, a valuation allowance is
required.
Gross deferred tax assets as of December 31, 2000 include approximately
$2,848,000 relating to the exercise of stock options, for which any related
tax benefits will be credited to equity when realized.
Note 15 Ortho-McNeil Pharmaceutical Corporation
In May 1992, APS entered into development, and licensing and investment
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho") for the
development of retinoid products. The first product is a Microsponge system
entrapment of tretinoin (trans-retinoic acid or "t-RA"), a prescription acne
drug for which FDA approval was received in February 1997. A second product
licensed to Ortho is a Microsponge entrapment of a retinoid to be used for
the treatment of photodamaged skin.
In February 1995, APS received $750,000 in prepaid royalties and an
additional $750,000 as a milestone payment on the submission to the FDA of
its New Drug Application for the tretinoin prescription acne treatment. The
milestone payment was recognized as revenue upon receipt. The prepaid
royalties of $750,000 were recorded as deferred revenues. In February 1997,
upon receipt of approval from the FDA to market Retin-A(R) Micro (tretinoin
gel) microsphere for the treatment of acne, APS received $3,000,000 from
Ortho of which one half was a milestone payment which was recognized as
revenue in 1997 and half was prepaid royalties which were recorded as
deferred revenues. As of December 31, 2000, $1,014,000 was the balance
remaining in deferred revenues. Ortho pays APS a royalty on product sales
subject to certain minimums. Should these minimums not be achieved, Ortho
would lose its exclusivity and APS would regain marketing rights to the
retinoid products.
Note 16 Historical Quarterly Results of Operations (Unaudited)
The following table presents summarized historical quarterly results of
operations for each of the fiscal quarters in the Company's fiscal years
ended December 31, 2000 and 1999. These quarterly results are unaudited,
but, in the opinion of management, have been prepared on the same basis as
the Company's audited financial information and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information set forth therein.
HISTORICAL QUARTERLY RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
First Second Third Fourth
Year Ended December 31, 2000 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
Total revenue $ 730 869 887 880
Cost of sales 56 132 117 192
Operating expenses 1,322 1,751 1,662 2,441
Interest income 65 54 302 396
Loss from continuing operations (738) (1,026) (658) (1,336)
Net income (loss) 220 (634) 10,558 (1,592)
Basic (loss) income per common share:
Loss from continuing operations (0.04) (0.05) (0.03) (0.07)
Net income (loss) 0.01 (0.03) 0.52 (0.08)
Diluted (loss) income per common share:
Loss from continuing operations (0.04) (0.05) (0.03) (0.07)
Net income (loss) 0.01 (0.03) 0.52 (0.08)
First Second Third Fourth
Year Ended December 31, 1999 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
Total revenue $1,451 1,334 961 951
Cost of sales 131 131 147 124
Operating expenses 1,436 1,442 1,494 1,540
Interest income 34 47 52 67
Loss from continuing operations (227) (354) (779) (777)
Net income (loss) 524 519 610 720
Basic (loss) income per common share:
Loss from continuing operations (0.01) (0.01) (0.04) (0.04)
Net income 0.03 0.03 0.03 0.04
Diluted (loss) income per common share:
Loss from continuing operations (0.01) (0.01) (0.04) (0.04)
Net income (loss) 0.03 0.03 0.03 0.04
Independent Auditors' Report
The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Polymer Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanced
Polymer Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/KPMG LLP
Mountain View, California
February 16, 2001
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
APS incorporates by reference the information set forth under the captions
"Nomination and Election of Directors" and "Executive Compensation" of the
Company's Proxy Statement (the "Proxy Statement") for the annual meeting of
shareholders to be held on May 9, 2001.
Item 11. EXECUTIVE COMPENSATION
APS incorporates by reference the information set forth under the caption
"Executive Compensation" of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company incorporates by reference the information set forth under the
caption "Beneficial Stock Ownership" of the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information set forth under the
caption "Certain Transactions" of the Proxy Statement.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. Financial Statements
The financial statements and supplementary data set forth in Part II
of the 10-K Annual Report are incorporated herein by reference.
2. Financial Statement Schedules
Schedule II Valuation Accounts
All other schedules have been omitted because the information is not
required or is not so material as to require submission of the
schedule, or because the information is included in the financial
statements or the notes thereto.
3. Exhibits
2.1-Copy of Asset Purchase Agreement between Registrant and R.P.
Scherer South, Inc. dated June 21, 2000 (7)
3-A-Copy of Registrant's Certificate of Incorporation. (1)
3-B-Copy of Registrant's Bylaws. (1)
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March 5,
1997 (5)*
10-E-Lease Agreement between Registrant and Metropolitan Life
Insurance Company for lease of Registrant's executive offices
in Redwood City dated as of November 17, 1997. (6)
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-X-Registrant's Non-Qualified Plan
21-Proxy Statement for the Annual Meeting of Shareholders. (4)
23-Consent of Independent Auditors.
(b) Reports on Form 8-K
None.
(c) Exhibits
The Company hereby files as part of this Form 10-K the exhibits listed
in Item 14(a)3 as set forth above.
(d) Financial Statement Schedules
See Item 14(a)2 of this Form 10-K.
- --------------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Registration Statement on Form S-1 (Registration No. 33-15429) and
incorporated herein by reference.
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 33-50640), and incorporated herein by
reference.
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(4)To be filed supplementally.
(5)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 333-35151), and incorporated herein by
reference.
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Form 8-K dated July 25, 2000, and incorporated herein by reference.
* Management Contract or Compensatory plans.
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) 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.
By: /s/Michael O'Connell
----------------------------------------------
Michael O'Connell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------------------------------------------------------------------------
/S/ Michael O'Connell President and Chief March 23, 2001
- ------------------------- Executive Officer --------------
Michael O'Connell
/S/ Gordon Sangster Chief Financial Officer March 23, 2001
- ------------------------- --------------
Gordon Sangster
/S/ Paul Goddard Chairman of the Board of March 23, 2001
- ------------------------- Directors --------------
Paul Goddard
/S/ Stephen Drury Director March 23, 2001
- ------------------------- --------------
Stephen Drury
/S/ Carl Ehmann Director March 23, 2001
- ------------------------- --------------
Carl Ehmann
/S/ Jorge Heller Director March 23, 2001
- ------------------------- --------------
Jorge Heller
/S/ Peter Riepenhausen Director March 23, 2001
- ------------------------- --------------
Peter Riepenhausen
/S/ Toby Rosenblatt Director March 23, 2001
- ------------------------- --------------
Toby Rosenblatt
/S/ Richard Spizzirri Director March 23, 2001
- ------------------------- --------------
Richard Spizzirri
/S/ Gregory H. Turnbull Director March 23, 2001
- ------------------------- --------------
Gregory H. Turnbull
/S/ C. Anthony Wainwright Director March 23, 2001
- ------------------------- --------------
C. Anthony Wainwright
/S/ Dennis Winger Director March 23, 2001
- ------------------------- --------------
Dennis Winger
Schedule II
Valuation Accounts
Additions
Beginning Charged to Ending
Balance Expense Deductions Balance
- ---------------------------------------------------------------------------
December 31, 1998
Accounts receivable, allowance
for doubtful accounts 57,454 38,830 -- 96,284
December 31, 1999
Accounts receivable, allowance
for doubtful accounts 96,284 7,891 76,874 27,301
December 31, 2000
Accounts receivable, allowance
for doubtful accounts 27,301 206,968 11,034 223,235
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-18942, 33-21829, 33-29084, 33-50640, 333-06841, 333-35151 and 333-60585)
on Forms S-8 of Advanced Polymer Systems, Inc. and in the Registration
Statements (Nos. 33-47399, 33-51326, 33-67936, 33-82562, 33-88972, 333-00759,
333-042527 and 333-69815) on Forms S-3 of Advanced Polymer Systems, Inc. of
our report dated February 16, 2001, relating to the consolidated balance
sheets of Advanced Polymer Systems, Inc. and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 2000, which report appears
in the December 31, 2000 annual report on Form 10-K of Advanced Polymer
Systems, Inc.
/s/KPMG LLP
Mountain View, California
March 23, 2001
EXHIBIT INDEX
Form 10-K Annual Report
2.1-Copy of Asset Purchase Agreement between Registrant and R.P. Scherer
South, Inc. dated June 21, 2000. (7)
3-A-Copy of Registrant's Certificate of Incorporation. (1)
3-B-Copy of Registrant's Bylaws. (1)
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March 5, 1997 (5)*
10-E-Lease Agreement between Registrant and Metropolitan Life Insurance
Company for lease of Registrant's executive offices in Redwood City
dated as of November 17, 1997. (6)
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-X-Registrant's Non-Qualified Stock Plan
21-Proxy Statement for the Annual Meeting of Shareholders. (4)
23-Consent of Independent Auditors.
- --------------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Registration Statement on Form S-1 (Registration No. 33-15429) and
incorporated herein by reference.
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on Form
S-8 (Registration No. 33- 50640), and incorporated herein by reference.
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(4)To be filed supplementally.
(5)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on Form
S-8 (Registration No. 333-35151), and incorporated herein by reference.
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Form 8-K dated July 25, 2000, and incorporated herein by reference.
* Management Contract or Compensatory plans.
ADANCED POLYMER SYSTEMS, INC.
NON-QUALIFIED STOCK PLAN
------------------------
SECTION 1. PURPOSE; DEFINITIONS.
a. Purpose. The purposes of the Plan are:
(i) to provide to certain persons who are not employees of the
Company a material inducement to become executives of, or consultants to,
Advance Polymer Systems, Inc., a Delaware corporation, its subsidiaries or
affiliates by providing an opportunity to acquire stock in the Company; and
(ii) to encourage selected employees, excluding officers and
directors, to improve operations and increase profits of the Company.
b. Definitions. For purposes of the Plan, the following terms have the
following meanings:
(i) "Award" means any award under the Plan, including any Option,
Restricted Stock or Stock Purchase Right Award.
(ii) "Award Agreement" means, with respect to each Award, the signed
written agreement between the Company and the Plan participant setting forth
the terms and conditions of the Award.
(iii) "Board" means the Board of Directors of the Company.
(iv) "Change in Control" has the meaning set forth in Section
8(a).
(v) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor statute.
(vi) "Commission" means the Securities and Exchange Commission and
any successor agency.
(vii) "Committee" means the Committee referred to in Section 2, or
the Board in its capacity as administrator of the Plan in accordance with
Section 2.
(viii) "Company" means Advanced Polymer Systems, Inc., a Delaware
corporation.
(ix) "Disability" means permanent and total disability as determined
by the Committee for purposes of the Plan.
(x) "Non-Employee Director" has the meaning set forth in Rule 16b-3
under the Exchange Act, and any successor definition adopted by the
Commission.
(xi) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.
(xii) "Fair Market Value" means as of any given date (a) if the Stock
is listed on any established stock exchange or a national market system, the
closing sales price for the Stock or the closing bid if no sales were
reported, as quoted on such system or exchange, as reported in the Wall
Street Journal; or (b) in the absence of an established market for the Stock,
the fair market value of the Stock as determined by the Committee in good
faith.
(xiii) "Non-Qualified Stock Option" means an Option that is not an
Incentive Stock Option, within the meaning of Section 422 of the Code.
(xiv) "Option" means an option granted under Section 5.
(xv) "Plan" means this Advanced Polymer Systems, Inc. Non-Qualified
Stock Plan, as amended from time to time.
(xvi) "Restricted Stock" means an Award of Stock subject to
restrictions, as more fully described in Section 6.
(xvii) "Restriction Period" means the period determined by the
Committee under Section 6(b).
(xviii) "Rule 16b-3" means Rule 16b-3 under Section 16(b) of the
Exchange Act, as amended from time to time, and any successor rule.
(xix) "Stock" means the Common Stock of the Company, and any
successor security.
(xx) "Stock Purchase Right" means an Award granted under Section 7.
(xxi) "Subsidiary" has the meaning set forth in Section 424 of the
Code.
(xxii) "Tax Date" means the date defined in Section 9(f).
(xxiii) "Termination" means, for purposes of the Plan, with respect to
a participant, that the participant has ceased to be, for any reason,
employed by, or a consultant to, the Company, a subsidiary or an affiliate;
provided, that for purposes of this definition, unless otherwise determined
by the President of the Company, in his sole discretion, Termination shall
not include a change in status from an employee of, to a consultant to, the
Company or any subsidiary or affiliate, or vice versa.
SECTION 2. ADMINISTRATION.
a. Committee. The Plan shall be administered by the Board or, upon
delegation by the Board, by a committee of Non-Employee Directors appointed
by the Board. In connection with the administration of the Plan, the
Committee shall have the powers possessed by the Board. The Committee may
act only by a majority of its members, except that the Committee may from
time to time select another committee or one or more other persons to be
responsible for any matters for which Non-Employee Director are not required
pursuant to Rule 16b-3. The Board at any time may abolish the Committee and
revest in the Board the administration of the Plan.
b. Authority. The Committee shall grant Awards only to persons who (i) are
not at the time of the Award employees of the Company for the purpose of
providing a material inducement to such persons to become employees of or
consultants to the Company or (ii) are employees, but not officers and
directors of the Company. In particular and without limitation, the
Committee, subject to the terms of the Plan, shall:
(i) select the persons to whom Awards may be granted;
(ii) determine whether and to what extent Awards are to be granted
under the Plan;
(iii) determine the number of shares to be covered by each Award
granted under the Plan;
(iv) determine the terms and conditions of any Award granted under
the Plan and any related loans to be made by the Company, based upon factors
determined by the Committee; and
(v) determine to what extent and under what circumstances any Award
payments may be deferred by a participant.
c. Committee Determinations Binding. The Committee may adopt, alter and
repeal administrative rules, guidelines and practices governing the Plan as
it from time to time shall deem advisable, may interpret the terms and
provisions of the Plan, any Award and any Award Agreement and may otherwise
supervise the administration of the Plan. Any determination made by the
Committee pursuant to the provisions of the Plan with respect to any Award
shall be made in its sole discretion at the time of the grant of the Award
or, unless in contravention of any express term of the Plan or Award, at any
later time. All decisions made by the Committee under the Plan shall be
binding on all persons, including the Company and Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN.
a. Number of Shares. The total number of shares of Stock reserved and
available for issuance pursuant to Awards under this Plan shall be 250,000
shares. Such shares may consist, in whole or in part, of authorized and
unissued shares or treasury shares or shares reacquired in private
transactions or open market purchases, but all shares issued under the Plan,
regardless of source shall be counted against the 250,000 share limitation.
If any Option terminates or expires without being exercised in full or if any
shares of Stock subject to an Award are forfeited, or if an Award otherwise
terminates without issuance in full being made to the participant in the form
of Stock, the shares not issued under such Option or Award shall again be
available for issuance in connection with Awards. Any Award under this Plan
shall be governed by the terms of the Plan and any applicable Award
Agreement.
b. Adjustments. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Stock, such substitution or adjustments shall be made
in the aggregate number of shares of Stock reserved for issuance under the
Plan, in the number and exercise price of shares subject to outstanding
Options, and in the number of shares subject to other outstanding Awards, as
may be determined to be appropriate by the Committee, in its sole discretion;
provided, however, that the number of shares subject to any Award shall
always be a whole number.
SECTION 4. ELIGIBILITY.
Awards may be granted only to persons (i) not employed by the Company at the
time of the Award and who the Company wishes to attract as an officer or
other employee of, or consultant to, the Company, its subsidiaries and
affiliates as a material inducement to accepting employment or consultancy
with the Company or (ii) who are employees of the Company but are not
officers or directors of the Company at the time of the Award.
SECTION 5. STOCK OPTIONS.
a. Type. Any Option granted under the Plan shall be in such form as the
Committee may from time to time approve; provided, that only Non-Qualified
Stock Options may be granted under the Plan.
b. Terms and Conditions. Options granted under the Plan shall be subject
to the following terms and conditions:
(i) Option Term. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable more than ten (10) years after
the date the Option is granted.
(ii) Grant Date. The Company may grant Options under the Plan at any
time and from time to time before the Plan terminates. The Committee shall
specify the date of grant or, if it fails to, the date of grant shall be the
date the intended optionee is first treated as an employee or consultant for
payroll purposes.
(iii) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be equal to at least 85% of the Fair Market
Value on the date of grant.
(iv) Exercisability. Subject to the other provisions of the Plan, an
Option shall be exercisable in its entirety at grant or at such times and in
such amounts as are specified in the Award Agreement evidencing the Option.
Except to the extent otherwise provided in the Award Agreement, in the event
of Termination prior to the Option being exercisable in full, any such
unexercisable portion shall expire as of such Termination. The Committee, in
its absolute discretion, at any time may waive any limitations respecting the
time at which an Option first becomes exercisable in whole or in part.
(v) Method of Exercise; Payment. To the extent the right to
purchase shares has accrued, Options may be exercised, in whole or in part,
from time to time, by written notice from the optionee to the Company stating
the number of shares being purchased, accompanied by payment of the exercise
price for the shares.
SECTION 6. RESTRICTED STOCK.
a. Price. The Committee may grant to a participant Restricted Stock. The
grantee shall pay the par value per share as consideration therefor.
b. Restrictions. Subject to the provisions of the Plan and the Award
Agreement, during the Restriction Period set by the Committee, commencing
with and not exceeding ten (10) years from the date of such Award, the
participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock. Within these limits, the
Committee may provide for the lapse of such restrictions in installments and
may accelerate or waive such restrictions, in whole or in part, based on
service, performance or such other factors or criteria as the Committee may
determine.
c. Dividends. Unless otherwise determined by the Committee, with respect
to dividends on shares of Restricted Stock, dividends payable in cash shall
be automatically reinvested in additional Restricted Stock, and dividends
payable in Stock shall be paid in the form of Restricted Stock.
d. Termination. Except to the extent otherwise provided in the Award
Agreement and pursuant to Section 6(b), in the event of a Termination during
the Restriction Period, all shares still subject to restriction shall be
forfeited by the participant.
SECTION 7. STOCK PURCHASE RIGHTS.
a. Price. The Committee may grant Stock Purchase Rights which shall enable
the recipients to purchase Stock at a price equal to not less than 85% of its
Fair Market Value on the date of grant.
b. Exercisability. Stock Purchase Rights shall be exercisable for a period
determined by the Committee not exceeding 30 days from the date of the grant.
SECTION 8. CHANGE IN CONTROL.
a. Definition of "Change in Control". For purposes of Section 8(b), a
"Change in Control" means the occurrence of any one of the following:
(i) Any "person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company, a subsidiary, an affiliate, or a
Company employee benefit plan, including any trustee of such plan acting as
trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 51% or more of the combined voting power of the Company's then
outstanding securities; or
(ii) the dissolution or liquidation (partial or total) of the Company
or a sale of assets involving 51% or more of the assets of the Company, any
merger or reorganization of the Company, whether or not another entity is the
survivor, in a transaction pursuant to which the holders, as a group, of all
of the shares of the Company outstanding prior to the transaction hold, as a
group, less than 51% of the shares of the Company outstanding after the
transaction, or any other event which the Board determines, in its
discretion, would materially alter the structure of the Company or its
ownership.
b. Impact of Event. In the event of a "Change in Control" as defined in
Section 8(a), acceleration provisions no more favorable to participants than
the following shall apply:
(i) Any Options outstanding as of the date such Change in Control is
determined to have occurred and not then exercisable and vested shall become
fully exercisable and vested; and
(ii) The restrictions and limitations applicable to any Restricted
Stock and Stock Purchase Rights shall lapse, and such Restricted Stock shall
become fully vested.
SECTION 9. GENERAL PROVISIONS.
a. Award Grants. Any Award may be granted either alone or in addition to
other Awards granted under the Plan. Subject to the terms and restrictions
set forth elsewhere in the Plan, the Committee shall determine the
consideration, if any, payable by the participant for any Award and, in
addition to those set forth in the Plan, any other terms and conditions of
the Awards. The Committee may condition the grant or payment of any Award
upon the attainment of specified performance goals or such other factors or
criteria, including vesting based on continued employment or consulting, as
the Committee shall determine. Performance objectives may vary from
participant to participant and among groups of participants and shall be
based upon such Company, subsidiary, group or division factors or criteria as
the Committee may deem appropriate, including, but not limited to, earnings
per share or return on equity. The other provisions of Awards also need not
be the same with respect to each recipient.
b. Award Agreement. As soon as practicable after the date of an Award
grant, the Company and the participant shall enter into a written Award
Agreement identifying the date of grant, and specifying the terms and
conditions of the Award. Options are not exercisable until after execution
of the Award agreement by the Company and the Plan participant, but a delay
in execution of the agreement shall not affect the validity of an Option
grant.
c. Certificates. All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem advisable under the
rules, regulations and other requirements of the Commission, any market in
which the Stock is then traded and any applicable federal, state or foreign
securities law.
d. Termination. Unless otherwise provided in the applicable Award
Agreement or by the Committee, in the event of Termination for any reason
other than death, retirement or Disability, Awards held at the date of
Termination (and only to the extent then exercisable or payable, as the case
may be) may be exercised in whole or in part at any time within three (3)
months after the date of Termination, or such lesser period specified in the
Award Agreement (but in no event after the expiration date of the Award), but
not thereafter. If Termination is due to retirement or to death or
Disability, Awards held at the date of Termination (and only to the extent
then exercisable or payable, as the case may be) may be exercised in whole or
in part by the participant in the case of retirement or Disability, by the
participant's guardian or legal representative or by the person to whom the
Award is transferred by will or the laws of descent and distribution, at any
time within two (2) years from the date of Termination or any lesser period
specified in the Award Agreement (but in no event after the expiration of the
Award).
e. Delivery of Purchase Price. If and only to the extent authorized by the
Committee, participants may make all or any portion of any payment due to the
Company
(i) with respect to the consideration payable for an Award,
(ii) upon exercise of an Award, or
(iii) with respect to federal, state, local or foreign tax payable in
connection with an Award, by delivery of (x) cash, (y) check, or (z) any
property other than cash (including a promissory note of the participant or
shares of Stock or securities) so long as, if applicable, such property
constitutes valid consideration for the Stock under, and otherwise complies
with, applicable law. No promissory note under the Plan shall have a term
(including extensions) of more than five years or shall be of a principal
amount exceeding 90% of the purchase price paid by the borrower.
f. Tax Withholding. Any shares or other securities so withheld or tendered
will be valued by the Committee as of the date they are withheld or tendered;
provided, however, that Stock shall be valued at Fair Market Value on such
date. The value of the shares withheld or tendered may not exceed the
required federal, state, local and foreign withholding tax obligations as
computed by the Company. Unless the Committee permits otherwise, the
participant shall pay to the Company in cash, promptly when the amount of
such obligations becomes determinable (the "Tax Date"), all applicable
federal, state, local and foreign withholding taxes that the Committee in its
discretion determines to result (i) from the lapse of restrictions imposed
upon an Award, (ii) upon exercise of an Award, or (iii) from a transfer or
other disposition of shares acquired upon exercise or payment of an Award, or
otherwise related to the Award or the shares acquired in connection with an
Award.
A participant who has received an Award or payment under an Award may, to the
extent, if any, authorized by the Committee in its discretion, make an
election to (x) deliver to the Company a promissory note of the participant
on the terms set forth in Section 9(e), or (y) tender any such securities to
the Company to pay the amount of tax that the Committee in its discretion
determines to be required to be withheld by the Company subject to any
limitations imposed by Section 16(b) of the Exchange Act or other applicable
law.
g. No Transferability. Unless otherwise provided for in the applicable
Award Agreement or by the Committee, no Award shall be assignable or
otherwise transferable by the participant other than by will or by the laws
of descent and distribution, and during the life of a participant, an Award
shall be exercisable, and any elections with respect to an Award may be made,
only by the participant or participant's guardian or legal representative.
h. Adjustment of Awards; Waivers. The Committee may adjust the performance
goals and measurements applicable to Awards (i) to take into account changes
in law and accounting and tax rules, (ii) to make such adjustments as the
Committee deems necessary or appropriate to reflect the inclusion or
exclusion of the impact of extraordinary or unusual items, events or
circumstances in order to avoid windfalls or hardships, and (iii) to make
such adjustments as the Committee deems necessary or appropriate to reflect
any material changes in business conditions. In the event of hardship or
other special circumstances of a participant and otherwise in its discretion,
the Committee may waive in whole or in part any or all restrictions,
conditions, vesting, or forfeiture with respect to any Award granted to such
participant.
i. Non Competition. The Committee may condition its discretionary waiver
of a forfeiture, the acceleration of vesting at the time of Termination of a
participant holding any unexercised or unearned Award, the waiver of
restrictions on any Award, or the extension of the expiration period to a
period not longer than that provided by the Plan upon such participant's
agreement (and compliance with such agreement) to (i) not engage in any
business or activity competitive with any business or activity conducted by
the Company and (ii) be available for consultations at the request of the
Company's management, all on such terms and conditions (including conditions
in addition to clauses (i) and (ii)) as the Committee may determine.
j. Dividends. The reinvestment of dividends in additional Stock or
Restricted Stock at the time of any dividend payment pursuant to Section 6(c)
shall only be permissible if sufficient shares of Stock are available under
Section 3 for such reinvestment (taking into account then outstanding
Awards).
k. Regulatory Compliance. Each Award under the Plan shall be subject to
the condition that, if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of Stock upon any
securities exchange or for trading in any securities market or under any
state or federal law, (ii) the consent or approval of any government or
regulatory body or (iii) an agreement by the participant with respect
thereto, is necessary or desirable, then such Award shall not be consummated
in whole or in part unless such listing, registration, qualification,
consent, approval or agreement shall have been effected or obtained free of
any conditions not acceptable to the Committee.
l. Rights as Shareholder. Unless the Plan or the Committee expressly
specifies otherwise, an optionee shall have no rights as a shareholder with
respect to any shares covered by an Award until the stock certificates
representing the shares are actually delivered to the optionee. Subject to
Sections 3(b) and 6(c), no adjustment shall be made for dividends or other
rights for which the record date is prior to the date the certificates are
delivered.
m. Beneficiary Designation. The Committee, in its discretion, may
establish procedures for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid.
n. Additional Plans. Nothing contained in the Plan shall prevent the
Company, a subsidiary or an affiliate from adopting other or additional
compensation arrangements for its employees and consultants.
o. No Employment Rights. The adoption of the Plan shall not confer upon
any employee any right to continued employment nor shall it interfere in any
way with the right of the Company, a subsidiary or an affiliate to terminate
the employment of any employee at any time.
p. Rule 16b-3. Notwithstanding any provision of the Plan, the Plan shall
always be administered, and Awards shall always be granted and exercised, in
such a manner as to conform to the provisions of Rule 16b-3.
q. Governing Law. The Plan and all Awards shall be governed by and
construed in accordance with the laws of the State of California.
r. Use of Proceeds. All cash proceeds to the Company under the Plan shall
constitute general funds of the Company.
s. Unfunded Status of Plan. The Plan shall constitute an "unfunded" plan
for incentive and deferred compensation. The Committee may authorize the
creation of trusts or arrangements to meet the obligations created under the
Plan to deliver Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan.
t. Assumption by Successor. The obligations of the Company under the Plan
and under any outstanding Award may be assumed by any successor corporation,
which for purposes of the Plan shall be included within the meaning of
"Company".
SECTION 10. AMENDMENTS AND TERMINATION.
The Board may amend, alter or discontinue the Plan or any Award, but no
amendment, alteration or discontinuance shall be made which would impair the
rights of a participant under an outstanding Award without the participant's
consent.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is adopted by the Board.
SECTION 12. TERM OF PLAN.
No Award shall be granted on or after October 24, 2010, but Awards granted
prior to October 24, 2010 may extend beyond that date.
Plan approved by the Board of Directors on October 24, 2000.