FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
At April 30, 1999, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,088,286.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,356,566 $ 4,088,173
Trade accounts receivable, net 2,466,906 2,532,527
Receivables for royalties,
license and option fees and
R&D fees 2,808,557 2,296,852
Inventory 3,169,611 2,959,443
Advances and loans to officers
and employees 420,632 338,947
Prepaid expenses and other 657,057 596,400
---------- ----------
Total current assets 14,879,329 12,812,342
Property and equipment, net 8,495,715 8,643,856
Deferred loan costs, net 44,612 90,428
Goodwill and other intangible
assets, net 1,304,978 1,351,813
Other long-term assets 187,892 182,892
---------- ----------
Total assets $ 24,912,526 $ 23,081,331
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,292,476 $ 1,347,737
Accrued expenses 1,403,313 1,057,287
Accrued settlement liability 1,000,000 1,300,000
Deferred revenue 750,000 750,000
Current portion - long-term debt 1,195,757 3,055,460
---------- ----------
Total current liabilities 5,641,546 7,510,484
Deferred revenue - long-term 1,036,517 1,035,855
Long-term debt 3,088,636 --
---------- ----------
Total liabilities 9,766,699 8,546,339
---------- ----------
Shareholders' equity:
Common stock and common stock
warrants 85,184,563 84,903,633
Accumulated deficit (70,038,736) (70,368,641)
---------- ----------
Total shareholders' equity 15,145,827 14,534,992
---------- ----------
Total liabilities and shareholders'
equity $ 24,912,526 $ 23,081,331
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
Three Months Ended March 31,
----------------------------
1999 1998
------ ------
Product revenues $ 2,950,055 $ 3,509,461
Royalties, license and option
fees and R&D fees 1,670,787 1,062,437
---------- ----------
Total revenues 4,620,842 4,571,898
Cost of sales 1,548,172 1,749,611
Operating expenses:
Research & development, net 1,055,521 1,038,752
Selling & marketing 727,085 875,830
General & administration 850,716 726,686
---------- ----------
Total operating expenses 2,633,322 2,641,268
---------- ----------
Operating income 439,348 181,019
Interest income 33,700 83,457
Interest expense (142,716) (228,780)
Other expense, net (427) (8,876)
---------- ----------
Net income $ 329,905 $ 26,820
========== ==========
Basic earnings per common share $ 0.02 $ 0.00
========== ==========
Diluted earnings per common share $ 0.02 $ 0.00
========== ==========
Weighted average common shares
outstanding-basic 20,018,245 19,577,247
========== ==========
Weighted average common shares
outstanding-diluted 20,241,082 20,358,114
========== ==========
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
For the three months ended March 31,
------------------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 329,905 $ 26,820
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 269,264 269,853
Amortization of deferred loan costs 45,816 65,816
Stock issued to directors 21,000 --
Stock compensation awards to non-
employees -- 30,000
Restricted stock awards 49,930 --
Changes in operating assets and
liabilities:
Trade accounts receivable 65,621 (917,391)
Receivables for royalties, license
and option fees and R&D fees (511,705) (460,617)
Inventory (210,168) (339,365)
Prepaid expenses and other (142,342) (135,998)
Other long-term assets (5,000) 40,008
Accounts payable and accrued expenses 290,765 (752,239)
Accrued settlement liability (300,000) --
Deferred revenues 662 (7,229)
--------- ---------
Net cash used in operating activities (96,252) (2,180,342)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (74,288) (1,213,942)
--------- ---------
Net cash used in investing activities (74,288) (1,213,942)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 210,000 1,766,393
Proceeds from long-term debt 4,000,000 --
Repayment of debt (2,771,067) (620,778)
--------- ---------
Net cash provided by financing
activities 1,438,933 1,145,615
--------- ---------
Net (decrease) increase in cash and
cash equivalents 1,268,393 (2,248,669)
Cash and cash equivalents, beginning
of the period 4,088,173 8,672,021
--------- ---------
Cash and cash equivalents, end
of the period $ 5,356,566 $ 6,423,352
========= =========
Cash paid for interest $ 77,273 $ 164,472
========= =========
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
MARCH 31, 1999 AND DECEMBER 31, 1998 (UNAUDITED)
- ------------------------------------------------
(1) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position of Advanced
Polymer Systems, Inc. and subsidiaries ("the Company" or "APS")
as of March 31, 1999 and the results of their operations and
cash flows for the three months ended March 31, 1999 and 1998.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiaries,
Premier, Inc. ("Premier") and APS Analytical Standards, Inc.
All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company considers all short-term investments in debt
securities which have original maturities of less than three
months to be cash equivalents. Investments which have original
maturities longer than three months are classified as
marketable securities in the accompanying balance sheets.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 1999.
(2) Common Shares Outstanding and Earnings Per Share Information
------------------------------------------------------------
Common stock outstanding as of March 31, 1999 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1998 19,993,311
Warrants exercised after December 31, 1998 70,000
Shares issued to Directors after December
31, 1998 4,802
----------
Total shares 20,068,113
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share:
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Net income available to
stockholders (numerator) $ 329,905 $ 26,820
========== ==========
Shares calculation (denominator):
Weighted average shares
outstanding - basic 20,018,245 19,577,247
Effect of dilutive securities:
Stock options and employee
stock purchase plan 104,432 501,844
Warrants 118,405 279,023
---------- ----------
Weighted average shares
outstanding - diluted 20,241,082 20,358,114
========== ==========
Earnings per share - basic $ 0.02 $ 0.00
========== ==========
Earnings per share - diluted $ 0.02 $ 0.00
========== ==========
Options to purchase 2,761,305 and 1,037,838 shares of Common
Stock with exercise prices ranging from $5.00 to $15.00 and
$7.38 to $15.00 per share were outstanding during the quarters
ended March 31, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per share since
the exercise prices of the options were greater than the
average market price of the common shares. The options expire
between July 23, 2001 and June 23, 2008.
(3) Related Party Transactions
--------------------------
During the first quarter of 1999, additional advances totaling
$102,000 were made to an officer of the Company. As of March
31, 1999, the outstanding secured loan receivable from the
officer totaled $355,000. During May 1999, $120,000 of the
loan balance was paid by the officer. The loan bears an
interest rate of the lower of 13.87% or the highest rate
permitted under the applicable law. The loan was approved by
the Compensation Committee of the Company's Board of Directors.
Repayment of the loan is due by December 31, 1999.
(4) Inventory
---------
The major components of inventory are as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials and work-
in-process $ 906,064 $ 743,383
Finished goods 2,263,547 2,216,060
--------- ---------
Total inventory $3,169,611 $2,959,443
========= =========
(5) Debt
----
In March 1999, the Company received a $4,000,000 term loan with
a fixed interest rate of 13.87%. The loan is secured by the
assets of the Company's manufacturing facility in Louisiana and
a portion of the Company's accounts receivable. Principal and
interest payments are due in equal monthly installments over a
period of forty-eight months commencing March 1999. The term
loan was obtained mainly to refinance scheduled debt repayments
made in the first quarter of 1999.
(6) Legal Proceedings
-----------------
In November 1997, Biosource Technologies, Inc. filed a
compliant against the Company in the San Mateo Superior Court.
Biosource claimed damages from the Company on the grounds that
the Company had failed to pay certain minimum amounts allegedly
due under a contract for the supply of melanin.
In December 1998, the Company reached a settlement agreement
with Biosource for a net amount of $1,300,000, which consists
of a $1,500,000 settlement of Biosource's claims and a $200,000
settlement of the Company's cross claims. Pursuant to the
agreement, the Company paid Biosource $300,000 in January,
1999. The remaining $1,000,000 will be paid in cash by May 31,
1999. The settlement agreement also provides for the
termination of the license and supply agreement between the
parties.
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
Results of Operations for the Three Months Ended March 31, 1999 and
- -------------------------------------------------------------------
1998
- ----
Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially
from the statements made. These include, among others, uncertainty
associated with timely approval, launch and acceptance of new
products, establishment of new corporate alliances, progress in
research and development programs, risks of consummation of the sale
of the Company (as to which there is no assurance) and other risks
described below or identified from time to time in the Company's
Securities and Exchange Commission filings.
The Company's revenues are derived principally from product sales,
license fees, royalties and R&D fees. The Company is currently
manufacturing and selling Microsponge(R) and Polytrap (R) delivery
systems for use by customers in approximately 100 different personal
care and cosmetic products. Under strategic alliance arrangements
entered into with certain corporations, APS can receive non-
refundable upfront fees, future milestone payments, commitments for
future minimum purchases and royalties based on third party product
sales or a share of partners' revenues, and revenues from the sale
of Microsponge and Polytrap systems.
Product revenues for the three months ended March 31, 1999 totaled
$2,950,000 compared to $3,509,000 in the corresponding period of the
prior year, representing a decrease of $559,000 or 16%. This
decrease is primarily due to the launch of a Microsponge-based
retinol formulation in the first quarter of the prior year and the
supply of Microsponge systems to Procter & Gamble for a baby wipe
product which has now been discontinued.
Royalties, license and option fees, and R&D fees for the first
quarter of 1999 increased by $608,000 or 57% from the first quarter
of the prior year to a total of $1,671,000. Approximately 82% of
the increase is due to the exercise of an option by a cosmeceutical
customer to purchase the rights to a certain proprietary product.
Higher royalties from Ortho Pharmaceutical for Retin-A(R) Micro(TM)
accounted for 31% of the increase. These increases were partly
offset by the absence of royalties from Procter & Gamble for the
baby wipe product.
Gross profit on product revenues of $1,402,000 decreased as a
percentage of product revenues from 50% to 48% due mainly to the
launch of a Microsponge-based retinol formulation in the first
quarter of the prior year.
Research and development expenses for the first quarter of 1999 were
essentially flat with the corresponding period of the prior year.
Selling and marketing expenses decreased by $149,000 or 17% from the
first quarter of the prior year to $727,000. The decrease is mostly
due to lower expenses for outside services relating to print
promotion activities.
General and administrative expenses totaled $851,000, an increase of
$124,000 or 17% from the first quarter of the prior year. This
increase is primarily attributable to incremental compensation
expense resulting from restricted stock awards, incremental
compensation for the Company's Board of Directors, higher travel
expenses and other outside services.
Interest income decreased by $50,000 or 60% from the first quarter
of the prior year due to lower average cash balances. Interest
expense decreased by $86,000 or 38% to $143,000 due to a decrease in
outstanding debt compared to the first quarter of the prior year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of March 31, 1999 were $24,913,000 compared with
$23,081,000 at December 31, 1998. Working capital increased to
$9,238,000 from $5,302,000 for the same period and cash and cash
equivalents increased to $5,357,000 from $4,088,000. During the
first three months of 1999, the Company's operating activities used
$96,000 of cash compared to $2,180,000 in the first quarter of the
prior year. The Company invested approximately $1,056,000 in
product research and development and $727,000 in selling and
marketing the Company's products and technologies.
Trade accounts receivable decreased slightly to $2,467,000 at March
31, 1999 from $2,533,000 at December 31, 1998. Days sales
outstanding increased to 73 days at March 31, 1999 compared to 68
days at December 31, 1998. The increase in days sales outstanding is
mainly due to the timing of product shipments, which was heavily
weighted towards the last month of the quarter. Receivables from
royalties, license and option fees and R&D fees increased to
$2,809,000 at March 31, 1999 compared to $2,297,000 at December 31,
1998. This increase is primarily attributable to certain proceeds
related to the sale of a proprietary product which are not due for
payment until the second quarter of 1999.
Capital expenditures for the three months ended March 31, 1999
decreased substantially to $74,000 compared to $1,214,000 in the
same period of the prior year. The first quarter of the prior year
included capital expenditures related to the plant expansion in the
Company's manufacturing facility in Louisiana and leasehold
improvements to the Company's new facility in Redwood City, which
are now substantially complete.
In March 1999, the Company received a $4,000,000 term loan with a
fixed interest rate of 13.87%. The loan is secured by the assets of
the Company's manufacturing facility in Louisiana and a portion of
the Company's accounts receivable. Principal and interest payments
are due in equal monthly installments over a period of forty-eight
months commencing March 1999. The term loan was obtained mainly to
refinance scheduled debt repayments made in the first quarter of
1999.
In accordance with the terms of the settlement agreement with
Biosource, the Company will pay Biosource an amount of $1,000,000 in
May 1999 in lieu of issuing shares of the Company's common stock.
The Company has financed its operations, including technology and
product research and development, from amounts raised in debt and
equity financings, the sale of Microsponge and Polytrap delivery
systems and analytical standard products; payments received under
licensing agreements; and interest earned on short-term investments.
The Company's existing cash and cash equivalents, collections of
trade accounts receivable, together with interest income and other
revenue producing activities including royalties, license and option
fees and R&D fees, are expected to be sufficient to meet the
Company's working capital requirements for the foreseeable future,
assuming no changes to existing business plans.
Year 2000
- ---------
The Company is conducting a comprehensive review of its internal
computer systems to ensure these systems are adequate to address the
issues expected to arise in connection with the Year 2000. These
issues include the possibility that software which uses only the
last two digits to refer to the year will no longer function
properly for years that begin with 20 rather than 19. In addition,
the Company is reviewing the status of its customers and suppliers
with regard to this issue and assessing the potential impact of non-
compliance by such parties on the Company's operations.
The Company has developed a phased program to address Year 2000
issues. The first phase consists of identifying necessary changes
to application software used by the Company. The Company utilizes
an integrated ERP system for the majority of its manufacturing and
financial systems and has received the Year 2000 compliant version
of the software from the vendor. Implementation of the upgraded
software was completed on September 30, 1998.
The second phase consists of determining whether Company systems not
addressed in Phase One (including non-IT systems) are Year 2000
compliant. Identification of systems that are not Year 2000
compliant has been completed. The Company is now in the process of
upgrading or replacing these systems. The Company expects to
upgrade or replace these non-compliant systems by the third quarter
of 1999.
The third phase consists of determining the extent to which the
Company may be impacted by third parties' systems, which may not be
Year 2000-compliant. The Year 2000 computer issue creates risk for
the Company from third parties with whom the Company deals on
financial transactions worldwide. While the Company expects to
complete efforts in the second quarter of 1999, there can be no
assurance that the systems of other companies with which the Company
deals or on which the Company's systems rely will be converted on a
timely basis, or that any such failure to convert by another company
could not have an adverse effect on the Company.
Based on current estimates, management expects the total cost to
remediate non-compliant systems will be less than $650,000
(approximately $598,000 of which has been incurred since the project
was started in early 1998). Most of the costs incurred were for
purchases of new systems and related equipment. The estimate may
change materially as the Company continues to review and audit the
result of its work. The Company expects to fund all costs to
upgrade or replace systems that are not Year 2000-compliant through
operating cash flows.
The Company has not yet determined its most likely worst case Year
2000 scenario. Potential Year 2000 scenarios are going to be
considered in the Company's contingency plans.
The Company is currently in the process of developing formal
contingency plans for addressing any problems which may result if
the work performed in phase two and three do not successfully
resolve all issues by the Year 2000. The Company expects to
complete its contingency plans in the third quarter of 1999.
Failure to complete any necessary remediation by the Year 2000 may
have a material adverse impact on the operations of the Company.
Failure of third parties, such as customers and suppliers, to
remediate Year 2000 problems in their IT and non-IT systems would
also have a material adverse impact on the operations of the
Company.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) which will
be effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 generally provides for
matching the timing of gain or loss recognition on the hedging
instrument with the recognition of (a) the changes in the fair value
of the hedged asset or liability that are attributed to the hedged
risk or (b) the earnings effect of hedged forecasted transactions.
Earlier application of all provisions of this statement is
encouraged but it is permitted only as of the beginning of any
fiscal quarter that begins after issuance of this statement. The
Company anticipates that adoption of this statement will not have a
material effect on the consolidated financial statements.
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
-----------------
In November, 1997 Biosource Technologies, Inc. ("Biosource") filed a
complaint against the Company in the San Mateo Superior Court.
Biosource claimed damages from the Company on the grounds that the
Company has failed to pay certain minimum amounts allegedly due
under a contract for the supply of melanin.
In December 1998, the Company reached a settlement agreement with
Biosource for a net amount of $1,300,000, which consists of a
$1,500,000 settlement of Biosource's claims and a $200,000
settlement of the Company's cross claims. Pursuant to the
agreement, the Company paid Biosource $300,000 in January, 1999.
The remaining $1,000,000 will be paid by the Company in cash by May
31, 1999. The settlement agreement also provided for the
termination of the license and supply agreement between the parties.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the three
months ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
Date: May 13, 1999 By: /S/ John J. Meakem, Jr.
-------------- ----------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: May 13, 1999 By: /S/ Michael O'Connell
-------------- ----------------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer;
President of Pharmaceutical
Sciences
EXHIBIT INDEX
Form 10-Q
EXHIBIT DESCRIPTION
27 Financial Data Schedule
5
