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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 (Fee Required) For the fiscal year ended December 31, 1995
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) 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 (I.R.S. Employer Identification Number)
incorporation or organization)
3696 Haven Avenue, Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 366-2626
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock ($.01
par value)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 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.
[X]
The aggregate market value of the voting stock of the registrant held by
nonaffiliates of the registrant as of February 29, 1996, was $59,924,243. (1)
As of February 29, 1996, 17,139,292 shares of registrant's Common Stock, $.01
par value, were outstanding.
Exhibit Index at Page 43
Total Pages 43
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1 Excludes 6,243,975 shares held by directors, officers and shareholders
whose ownership exceeds 5% of the outstanding shares at February 29,
1996. Exclusion of such shares should not be construed as indicating
that the holders thereof possess the power, direct or indirect, to
direct the management or policies of the registrant, or that such person
is controlled by or under common control with the registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT
FORM
10-K
PART
Definitive Proxy Statement to be used in connection with the Annual III
Meeting of Stockholders.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
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PART I
<S> <C>
1. Business _______________________________________________________________ 1
2. Properties ______________________________________________________________ 12
3. Legal Proceedings ________________________________________________________ 13
4. Submission of Matters to a Vote of Security Holders ____________________________ 13
PART II
5. Market for the Registrant's Common Equity and Related Shareholder Matters _____________ 14
6. Selected Financial Data ____________________________________________________ 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations __________________________________________________ 15
8. Financial Statements and Supplementary Data __________________________________ 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure __________________________________________________ 37
PART III
10. Directors and Executive Officers of the Registrant _______________________________ 37
11. Executive Compensation __________________________________________________ 37
12. Security Ownership of Certain Beneficial Owners and Management _________________ 37
13. Certain Relationships and Related Transactions _________________________________ 37
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K _______________________ 38
Signatures _____________________________________________________________ 40
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PART I
ITEM 1. BUSINESS
INTRODUCTION--FORWARD-LOOKING STATEMENTS
To the extent that this report discusses future financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements 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 and acceptance of new products, the
costs associated with new product introductions, as well as other factors
described below under the headings "APS Technology", "Products", Ethical
Dermatology", "License and Technology--Related Agreements", "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
Advanced Polymer Systems, Inc. and subsidiaries ("APS" or the
"Company") is using its patented Microsponge(R) delivery systems and related
proprietary technologies to enhance the safety, effectiveness and aesthetic
quality of topical prescription, over-the-counter ("OTC") and personal care
products. The Company is currently manufacturing and marketing in the U.S. nine
OTC products based on its technology and is manufacturing and selling
Microsponge systems for use by corporate customers in approximately 70
different cosmetic and personal care products sold worldwide. APS holds 81
issued U.S. and foreign patents on its technology and has over 32 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. On April 2, 1993, the Company
acquired Premier Inc., a marketing and distribution company specializing in
over-the-counter drug and personal care products. The business combination was
accounted for as a pooling of interests.
Products under development or in the marketplace utilize the Company's
Microsponge systems in three primary ways: 1) as reservoirs releasing active
ingredients over an extended period of time, 2) as receptacles for absorbing
undesirable substances, such as excess skin oils, or 3) as closed containers
holding ingredients away from the skin for superficial action. The resulting
benefits include extended efficacy, reduced skin irritation, cosmetic elegance,
formulation flexibility and improved product stability.
In ethical dermatology, New Drug Applications ("NDAs") seeking marketing
clearance on two APS-developed ethical dermatology products have been filed with
the U.S. Food and Drug Administration ("FDA"). The first filing in September
1994 was for a melanin-based sun protection cream. The second NDA, which was
submitted in February 1995, was for a prescription acne preparation licensed to
Ortho Pharmaceutical Corporation, a Johnson & Johnson ("J&J") subsidiary.
APS has established several alliances with multinational corporations including
J&J and Rhone-Poulenc Rorer to develop products which incorporate Microsponge
systems. In general, these alliances provide for the client companies to pay the
costs of product development, clinical testing, regulatory approval and
commercialization. In return, the clients receive certain marketing rights to
the products developed. APS typically receives an initial cash infusion, future
payments contingent on the achievement of certain milestones, revenues from the
manufacture of Microsponge systems, and royalty payments based on third party
product sales. J&J and Rhone-
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Poulenc Rorer also have made equity investments in the Company. APS and Dow
Corning Corporation formed a joint venture alliance in 1992 to
develop and commercialize Polytrap(R) and Microsponge systems for the
manufacturers of cosmetics and personal care products. In the first quarter of
1996, APS acquired all rights to the Polytrap technology from Dow Corning in
exchange for 200,000 shares of APS Common Stock.
APS-marketed products utilizing the Microsponge technology include six acne
products sold in the U.S.: Exact(R) Vanishing Cream, Exact Tinted Cream, Exact
Pore Treatment Gel, Exact Adult Acne Cream, Exact Cleansing Wipes and Exact Face
Wash. Another APS product, EveryStep(R) shoe and foot powder which is designed
to eliminate the causes of foot odor, also is marketed in the U.S. In addition,
the Company introduced in 1994 two new formulations of Take-Off make-up/facial
cleansers which have been improved with a Microsponge-based moisturizing system.
Corporate customers are marketing products containing the Company's technology
on a worldwide basis.
To maintain quality control over manufacturing, APS has committed significant
resources to its production processes and polymer systems development programs.
The Company's manufacturing facility in Lafayette, Louisiana, is responsible for
large-scale production of Microsponge systems and related technologies. All
products are manufactured according to Current Good Manufacturing Practices
guidelines ("CGMPs") established by the FDA. In addition, APS has process
development pilot plants in both its Louisiana and California facilities to
handle the production of new technologies. APS also has established
relationships with contract manufacturers, which provide second-source
production capabilities to handle growing product demand. The Company's
objective is to utilize these third parties selectively, so that it can maintain
its flexibility and direct the bulk of APS' capital resources to other areas
such as product development and marketing.
APS TECHNOLOGY
The fundamental appeal of the Company's Microsponge technology stems from the
difficulty experienced with conventional formulations in releasing active
ingredients over an extended period of time. Cosmetics and skin care
preparations are intended to work only on the outer layers of the skin. Yet, the
typical active ingredient in conventional products is present in a relatively
high concentration and, when applied to the skin, may be rapidly absorbed. The
common result is over-medication, followed by a period of under-medication until
the next application. Rashes and more serious side effects can occur when the
active ingredients rapidly penetrate below the skin's surface. APS' Microsponge
technology is designed to allow a prolonged rate of release of the active
ingredients, thereby offering potential reduction in the side effects while
maintaining the therapeutic efficacy.
MICROSPONGE SYSTEMS. The basis of the Company's Microsponge systems are
microscopic, polymer-based microspheres that can bind, suspend or entrap a wide
variety of substances and then be incorporated into a formulated product, such
as a gel, cream, liquid or powder. A single Microsponge is as tiny as a particle
of talcum powder, measuring less than one-thousandth of an inch in diameter.
Like a true sponge, each microsphere consists of a myriad of interconnecting
voids within a non-collapsible structure that can accept a wide variety of
substances. The outer surface is typically porous, allowing the controlled flow
of substances into and out of the sphere.
Several primary characteristics, or parameters, of the Microsponge can be
defined during the production phase to obtain spheres that are tailored to
specific product applications and vehicle compatibility. By altering parameters,
such as material composition, particle size, pore diameter and volume, as well
as the resiliency of the Microsponge, APS is able to optimize the release of
entrapped ingredients in response to a number of "triggers."
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These triggers can include variations in temperature, friction, the volatility
of the entrapped ingredient, the presence of moisture or the passage of time.
The technology can also provide an absorbent Microsponge, a Microsponge that can
both release ingredients and absorb skin oils, or a Microsponge that confines
ingredients, such as melanin, permanently within microspheres. Preselection of
the programmable parameters thus results in a truly "custom-made" Microsponge
designed to meet the specific requirements of the finished product.
Microsponge systems are made of biologically inert polymers. Extensive safety
studies have demonstrated that the polymers are non-irritating, non-mutagenic,
non-allergenic, non-toxic and non-biodegradable. As a result, the human body
cannot convert them into other substances or break them down. Furthermore,
although they are microscopic in size, Microsponge systems are too large to pass
through the stratum corneum (skin surface) when incorporated into topical
products.
BIOADHESIVE MICROSPONGE SYSTEMS (HYDROSPONGE(TM)). The effectiveness of many
topical products could be extended by enabling them to adhere more tightly to
their site of application. To satisfy this need, APS is developing hydrogel
variations of Microsponge systems. Like other Microsponge systems, Hydrosponges
are highly porous and capable of entrapping active ingredients for release over
an extended period of time. However, unlike other Microsponge systems, they are
hydrophilic (have an affinity for water) and can have electric charges that are
either positive or negative. These properties allow entrapped ingredients to
adhere readily to the skin and hair until released by certain types of triggers,
such as soap. They also provide more control over the delivery of certain
entrapped ingredients and can potentially improve the product's aesthetic
qualities.
COATED MICROSPONGE SYSTEMS. A membrane-coated Microsponge system offers the
potential to hold active ingredients in a protected environment and provide
controlled delivery of oral medication to the lower gastrointestinal (GI) tract.
The Company's focus is on coatings that will not be removed from the Microsponge
until exposure to new types of triggers, such as internal body fluids. This
approach would open up entirely new opportunities for APS, including oral drug
delivery. Among the possibilities under evaluation are systems for encapsulating
unpleasant-tasting drugs until they enter the stomach or allowing targeted drugs
to remain inactive until reaching their intended site of action (e.g., the small
intestine), where they can then provide continuous, extended release therapy.
SPECIALTY APPLICATIONS. In November 1995, the Company signed an agreement with
biosys, Inc. to supply Microsponge-entrapped pheromones to develop long-lasting
environmentally safe agricultural pest control products. In late 1994, the
Company signed an agreement with The Western Company of North America
("Western") to supply Microsponge systems containing industrial chemicals.
Western found that Microsponge-entrapped industrial chemicals can be used inside
oil wells to allow more cost-efficient recovery of crude oil. While not a
principal focus at Advanced Polymer, a wide range of specialty applications
could benefit from the value-added contribution of our polymer technology.
PRODUCTS
APS is focusing its efforts primarily on the ethical dermatology, OTC skin care
and personal care markets in which Microsponge systems can provide substantial
advantages. Certain additional applications for the Company's technology are
also under development, as noted below.
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ETHICAL DERMATOLOGY
APS defines "ethical dermatology" products as prescription and non-prescription
drugs that are promoted primarily through the medical profession for the
prevention and treatment of skin problems or diseases. The Company is developing
several ethical dermatology products which will require approval of the FDA
before they can be sold in the United States. Although these pharmaceuticals are
likely to take longer to reach the marketplace than OTC and personal care
products, due to the regulatory approval process, the Company believes that the
benefits offered by Microsponge delivery systems will allow valuable product
differentiation in this large and potentially profitable market. Results from
Phase III human clinical studies on two product candidates reaffirm that this
technology offers the potential to reduce the drug side effects, maintain the
therapeutic efficacy and potentially increase patient compliance with the
treatment regimen. The following ethical dermatology products are under
development by APS:
MELANIN-MICROSPONGE SUNSCREEN. Concern about the sun's harmful effects and its
role in aging and skin cancer has resulted in heightened awareness of
preventative measures in the sunscreen market. Recently published scientific
data indicate that conventional sunscreens may not provide complete protection
against UVA rays and their damaging effects on the immune system, which are
thought to be related to malignant melanoma, a potentially fatal cancer of the
skin and other organs. This APS-developed sun protectant is designed to provide
the highest-available protection against the sun's UVA rays as well as
protection from the burning UVB rays.
This unique APS product candidate incorporates the Company's
melanin-Microsponge system containing genetically engineered melanin, a natural
pigment found in skin. The product is designed to evenly distribute melanin
over the skin's surface, and mimic the body's own method of providing
full-spectrum protection from the sun's rays. The melanin-Microsponge
technology already is incorporated into nine personal care products marketed by
Lancaster Group in Europe and APS is developing additional product applications
for itself and for other corporations.
The Company filed its NDA in 1994 for marketing clearance. Since it involves an
entirely new ethical pharmaceutical ingredient and application, the regulatory
review process is lengthier and more complex. The Company is continuing to
provide additional information in response to FDA comments with respect to its
NDA. If approval by the FDA is received, APS expects the product to be marketed
in the United States either by its own sales force or, more likely, through a
strategic alliance with an established company in the field. There can be no
assurance that FDA approval will be received, or that if received, the Company
will be able to successfully market melanin-Microsponge sunscreens.
TRETINOIN ACNE MEDICATION. In February 1995, the Company submitted an NDA on the
use of Microsponge-entrapped tretinoin for improved acne treatment. This
submission to the FDA represented the culmination of an intensive research and
clinical development program involving approximately 1,150 patients. Tretinoin
has been marketed in the U.S. by Ortho Pharmaceutical, a Johnson & Johnson
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 patented approach to drug delivery reduces the
potentially irritating side effects of tretinoin. Upon FDA approval, Ortho
Pharmaceutical will market this product. There can be no assurance that FDA
approval will be received, or that if received, that Ortho Pharmaceutical will
be able to successfully market this product.
5-FLUOROURACIL. Another ethical dermatology product candidate,
Microsponge-entrapped 5-Fluorouracil (5-FU), was the subject of an
Investigational New Drug ("IND") filing in early 1995. 5-FU is an effective
chemotherapeutic agent for treating actinic keratosis, a pre-cancerous,
hardened-skin condition caused by excessive exposure to sunlight. However,
patient compliance with the treatment regimen is poor, due to significant,
adverse side effects. Through a joint agreement with Rhone-Poulenc Rorer, the
Company is developing a Microsponge-enhanced topical formulation that
potentially offers a less irritating solution for treating actinic keratosis.
TRETINOIN PHOTODAMAGE TREATMENT. Initial product development was undertaken in
1994 to develop a Microsponge system product for the treatment of photodamage,
which contributes to the premature aging of skin and has been implicated in skin
cancer. Funding for this second tretinoin treatment indication is being provided
by J&J's Ortho Pharmaceutical
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subsidiary.
OTC SKIN CARE
EXACT(R) ACNE TREATMENTS. The first of these over-the-counter
Microsponge-entrapped benzoyl peroxide products, Exact Vanishing Cream was
introduced commercially by APS in the third quarter of 1992. During the third
quarter of 1993, APS introduced Exact Tinted Cream, which is an extension of the
vanishing cream. The tinted formula is designed to both provide treatment and
hide pimples. Exact's patented On Demand(TM) system of drug release is designed
to provide a steady, controlled amount of benzoyl peroxide medication to treat
acne without irritating, inflaming or overdrying healthy skin. It also absorbs
excess skin oils to help prevent acne from returning. As demonstrated in a
175-patient clinical study comparing Exact acne cream to the leading
competitive commercial benzoyl peroxide acne product, the controlled release
mechanism of Exact offers equivalent medication efficacy with significantly
less skin irritation. The product is being sold in the United States as a
non-prescription, over-the-counter acne treatment.
During 1995, the Company introduced four line extensions;
Exact Face Wash, Exact Adult Acne Cream, Exact Pore Treatment Gel and Exact
Cleansing Wipes.
TAKE-OFF(R) MAKE-UP/FACIAL CLEANSERS. This is the second major brand of products
using Microsponge systems to provide competitive advantages. Two formulations
are now being marketed under a licensing agreement with J&J.
PERSONAL CARE
POLYMERIC TRANSPORT(R) SYSTEMS. In January 1996, the Company signed a definitive
agreement with Dow Corning Corporation, one of the world's largest suppliers of
ingredients used in cosmetics and personal care products, to acquire full rights
to Dow Corning's Polytrap(R) technology and full responsibility for the
continuing commercialization of Polymeric Transport Systems in exchange for
200,000 shares of APS common stock. APS and Dow Corning previously shared these
rights under an agreement signed in 1991 whereby the two companies shared in the
proceeds from the manufacture and marketing of products based on both APS
Microsponge systems and the Dow Corning Polytrap technologies. As a result,
patented microspheres were commercialized as Polymeric Transport Systems to: 1)
entrap and deliver various ingredients in personal care products, 2) absorb skin
oils to eliminate shine without leaving a white residue, and 3) provide a smooth
and silky feel to product formulations. The first Polymeric Transport Systems
were introduced to industry customers domestically in February 1992 and globally
in June and July 1992. The systems include Microsponge systems with vitamin A,
glycerin, a UV absorber, skin oil absorber or mineral oil, as well as Polytrap
systems containing a polymer powder, cyclomethicone or mineral oil beads.
Customized Polymeric Transport Systems are developed upon request to suit
specific customer needs.
Entrapping cosmetic ingredients in APS' proprietary Microsponge
delivery systems offers several advantages, including improved physical and
chemical stability, greater available concentrations, controlled release of the
active ingredients, reduced skin irritation and sensitization, and unique
tactile qualities. As a result of the APS-Dow Corning alliance, Microsponge
and Polytrap systems are now incorporated into approximately 70 leading
personal care products worldwide. In the U.S., 8 of the 10 largest companies in
the personal care field are using Microsponge systems in lipsticks, face creams
and powders, eyeshadows, moisturizers, cleansers, oil control lotions,
deodorant products, or other primarily cosmetic products.
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APS' trade-marked Microsponge name does not appear on most of these products,
because of the need to protect proprietary positions. Instead, "acrylates
copolymer," a general term for various polymer-based technologies, is listed
among the product ingredients.
NEET(R). Effective September 1995, the Company acquired exclusive U.S. rights to
Neet hair removal products from Reckitt & Colman. Under the licensing agreement,
APS is handling the manufacturing, sales, marketing, distribution and product
development of Neet products in the United States. Neet is a long-established,
multi-million dollar brand of lotions, creams and roll-ons used to remove
unwanted hair from the surface of the skin. The licensing agreement also
provides for a reciprocal exchange of technology between APS and Reckitt and
Colman.
EVERYSTEP(R) FOOT POWDER. In January 1992, APS introduced EveryStep, a unique
shoe and foot deodorant with five active ingredients entrapped in Microsponge
systems. This product is a daily use, continuous-action, odor-fighting powder.
BABY FRESH(R) WITH ULTRA GUARD(R) BABY WIPES. Scott Paper Company, one of APS'
early licensees, has incorporated an APS Microsponge system into a baby wipe to
both cleanse a baby's sensitive skin and help protect against common diaper
rash. Moisture is a major contributor to diaper rash, a painful skin irritation.
Ultra Guard is Scott's trademark for the APS delivery system. Baby Fresh with
Ultra Guard skin protectant is designed to provide effective skin protection
without blocking air from the skin by the controlled release of water-repellent
dimethicone, a substance commonly used in baby creams, lotions and skin
protectants. This product was launched in the U.S. during 1992, and marketing
efforts were expanded in 1993 to include Canada and the United Kingdom. In
addition to the normal supply agreement, APS receives royalty income on
worldwide product sales.
MELANOSPONGE(R) TOILETRIES, COSMETICS AND SUNCARE PRODUCTS. Melanosponge, APS'
trademark for the Microsponge system entrapping genetically engineered melanin,
has been added to a number of premium cosmetic products marketed by Lancaster, a
major European cosmetics manufacturer, in major European markets. These include
an eye cosmetic, a lipstick and a moisturizer commercialized in early 1992, as
well as six additional cosmetic products that offer protection from the sun's
damage.
OTHER PRODUCT APPLICATIONS
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 chosen to apply its technology to the following
non-skin-care fields:
ANALYTICAL STANDARDS. APS initially developed microsphere precursors to the
Microsponge 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.
APS believes its Analytical Standards technology has much broader applications
than testing the turbidity of water. The Company has begun to develop hematology
standards for industrial use as process monitors in blood plasma manufacturing
and as control materials for blood analysis. The Company is also expanding its
line of visual haze standards for use in the beer industry and is investigating
applications for the paper, semiconductor and pharmaceutical industries which
require the use of ultrapure water.
INDUSTRIAL ENZYMES FOR USE IN OIL WELLS. The Western Company of North
America, which was acquired by BJ Services Company in 1995, has found that
Microsponge- entrapped industrial chemicals can be used inside oil wells to
allow more cost-efficient recovery of crude oil. This innovative industrial
application of our technology has enabled us to enter a potentially significant
new field of supply.
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BIOPESTICIDES. biosys, a company which develops and commercializes
bioinsecticides, conducted extensive studies which showed that the use of the
Microsponge technology with biopesticides could provide long-lasting,
environmentally safe pest control. biosys will use Microsponge systems
to entrap and gradually release non-toxic chemicals called pheromones, which
are normally produced by insects to communicate with one another.
Microsponge-entrapped pheromones mimic insect communication signals so
effectively that targeted insects are unable to distinguish the location of
potential mates in sprayed areas for extended periods of time. Although
unharmed, the insects are prevented from producing offspring that feed on
agricultural crops.
MANUFACTURING
POLYMER RAW MATERIAL. Raw materials for the Company's polymers are
petroleum-based monomers which are widely available at low cost. The monomers
have not been subject to unavailability or significant price fluctuations. Raw
material costs generally account for less than a third of the total cost of the
Company's products.
PROCESS ENGINEERING AND DEVELOPMENT. The Company employs chemical engineers and
operates two pilot-plant facilities for developing production processes. APS has
created process technologies which it believes offer the greatest potential for
application to the widest variety of APS products. The equipment used for
manufacturing and process development is commercially available in industrial
sizes and is installed in the Company's production facility in Lafayette,
Louisiana.
GENETICALLY ENGINEERED MELANIN. Genetically engineered melanin for the
Melanosponge system is provided by Biosource Technologies Inc. ("Biosource")
pursuant to license and supply agreements. Under the terms of these agreements,
APS has worldwide rights to use and sell genetically engineered melanin in
Microsponge systems for all sun protectant, cosmetic, ethical dermatology and
OTC skin care purposes. Biosource is guaranteed minimum purchases, receives
royalties on product sales and has received certain other financial
considerations.
MICROSPONGE PRODUCTION. APS has committed significant resources to the
production process and polymer systems development required to commercialize its
products. The Company has to date manufactured most Microsponge systems in
company-owned and operated facilities.
The Company's manufacturing facility in Lafayette, Louisiana, is responsible for
large-scale production of Microsponge systems and related technologies. APS also
has established relationships with contract manufacturers which provide
second-source production capabilities. The Company's objective is to utilize
these third parties selectively, so that it can maintain its flexibility and
direct the bulk of APS' capital resources to other areas, such as product
development and marketing. All products are manufactured according to CGMP. In
addition, APS has process development pilot plants in both its Louisiana and
California facilities to handle the production of new technologies.
MARKETING
The Company's strategy is to retain marketing or co-promotion rights for most of
its products in the United States and Canada. Outside of North America, APS
initially intends to rely on other companies as partners for marketing,
co-promotion, distribution and/or sales of its products. To date, aside from
Premier, most marketing activities involve the sale of Microsponge systems
directly to corporate customers for whom the Company has performed product
research and development activities.
APS' own products are being commercialized through its wholly owned subsidiary
Premier, Inc., a marketing and distribution company specializing in OTC drug and
personal care products. Premier was acquired by APS in April 1993 in a stock for
stock merger for approximately 450,000 shares of APS Common Stock.
Premier provides APS with its own experienced sales, marketing and distribution
team. The APS-Premier relationship dates back to 1990, when the two companies
incorporated a consumer products company to develop and sell personal care
products. Premier subsequently served as an independent marketer for APS,
launching and building a presence for the Exact and EveryStep products on a
nationwide basis. Premier's capabilities range from launching new products and
securing national distribution channels, to increasing the retail presence of
established
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brands.
Premier, in addition to being the sales and marketing arm of APS, has marketing,
licensing and distribution agreements with Johnson & Johnson. The Company's goal
is to build a strong market position for APS' topical dermatology and personal
care products by providing several products in key market segments. A number of
products including new formulations that incorporate Microsponge delivery
systems are currently marketed by Premier.
Premier also introduced a Microsponge-enhanced version of Take-Off(R) make-up
remover cloths which it markets under a licensing agreement with J&J. This
product is used to remove facial and eye make-up.
Until the first quarter of 1996, Dow Corning marketed Microsponge and
Polytrap systems to manufacturers of personal care products as part of the
Polymeric Transport Systems alliance with APS. The alliance with Dow Corning has
allowed APS to expand the use of its technology in the personal care supply
field without requiring the Company to expand its own sales and marketing
infrastructure. In the first quarter of 1996, APS acquired all rights to the
Polytrap technology from Dow Corning in exchange for 200,000 shares of APS
Common Stock. Sales and marketing in the U.S. became the responsibility of APS.
Dow Corning will continue to serve as the international distributor for these
products.
LICENSE AND TECHNOLOGY-RELATED AGREEMENTS
Part of APS' business strategy is to ally the Company with major strategic
partners. The Company has therefore negotiated several agreements for the
development of Microsponge delivery systems, the supply of entrapped
ingredients, and the marketing of formulated products. To create an incentive
for APS to develop products as quickly as possible, these development and
license agreements provide, in some cases, for substantial payments by the
client companies during the period of product development and test marketing.
Additionally, some agreements provide for non-refundable payments on the
achievement of certain key milestones, royalties on sales of formulated
products, and minimum annual payments to maintain exclusivity. APS has, in some
product areas, retained co-marketing rights.
In general, APS grants limited marketing exclusivity in defined markets to
client companies, while retaining the right to manufacture the Microsponge
delivery systems it develops for these clients. However, after development is
completed and a client 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. APS' client companies may cancel
their agreements without penalty.
The Company's material agreements and relationships are set forth below:
JOHNSON & JOHNSON, INC. In May 1992, APS and Ortho Pharmaceutical Corporation, a
subsidiary of J&J, entered into a licensing agreement related to tretinoin-based
products incorporating APS' Microsponge technology. As part of the agreement, in
1992, license fees of $6,000,000 were paid to APS. In addition, Johnson &
Johnson Development Corporation ("JJDC") purchased 723,006 shares of newly
issued APS common stock (amounting to approximately 5% of the Company's then
outstanding shares) for $8,000,000. The license fee provides 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 certain annual minimum payments are made. In addition, Ortho will pay license
fees and milestone payments over time to APS. Milestone, license and equity
payments to APS have the potential to total $24,000,000 of which approximately
$16,250,000 had been received through December 1995. Because the milestones are
separate for each product candidate, failure of one product to win FDA approval
will not interfere with the potential flow of payments from the other product.
APS will receive royalty payments on
8
<PAGE> 12
net product sales worldwide.
During 1991, $1,000,000 was received from J&J's Consumer Products, Inc.
subsidiary for the rights to purchase selected APS products in the fourth or
sixth years after introduction for a predetermined multiple of sales. The first
of these products are EveryStep foot powder and the Exact acne treatment and
cleanser. Other potential products include a topical feminine hygiene product, a
deodorant, and hair and scalp treatment products. J&J may also launch line
extensions of its own products incorporating Microsponge delivery systems upon
payment of certain development fees and royalties to APS.
In 1994, J&J purchased additional shares of newly issued common stock
through its subsidiary JJDC for $5,000,000. JJDC also received 200,000 warrants
exercisable for two years at $12.00 per share. The number of shares issuable
to JJDC was increased to a total of 1,432,101 pursuant to an agreed upon
formula tied to the trading price of APS stock prior to January 1996.
RHONE-POULENC RORER. In March 1992, APS and Rhone-Poulenc Rorer ("RPR")
restructured their 1989 joint venture agreement to give APS more freedom in
developing products. Under the new terms, APS has regained from RPR worldwide
marketing rights to products in the prescription dermatology field, including
the melanin-based sunscreen product in which RPR had invested approximately
$4,000,000 in development costs. APS also gained ownership of a
partially-completed manufacturing facility in Vacaville, California, which the
Company sold in December 1995. Also under the new terms, RPR invested $2,000,000
in cash in APS and relieved APS of the obligation to repay a $1,500,000 advance.
In return, RPR received 705,041 shares of APS stock (approximately 5% of the
Company's then outstanding shares) and maintains a minority share in the
potential net profits of the melanin-based sunscreen product. Furthermore, RPR
has agreed to continue funding the exploration and development of certain
dermatology applications of APS' technology in which APS shares marketing
rights. Product applications include a 5-FU treatment for pre-cancerous actinic
keratosis. In 1995, the Company filed an IND application to begin human clinical
testing of 5-FU. As APS maintains co-marketing rights to these products, the
companies will pay each other reciprocal royalties on product sales.
DOW CORNING. In July 1991, APS and Dow Corning Corporation formed a
collaborative alliance to manufacture and sell both APS' Microsponge and Dow
Corning's Polytrap technologies worldwide in the cosmetics and toiletries field.
Under the agreement, Dow Corning provided financial assistance in this venture,
as well as worldwide sales and support services; APS contributed its technology,
research and development, technical support and manufacturing capability for
both the Microsponge and Polytrap products. As part of its alliance with the
Company, Dow Corning advanced to APS $1,000,000 which was repaid out of the
gross profits of the alliance. In the first quarter of 1996, APS acquired full
rights to the Polytrap(R) technology and full responsibility for the continuing
commercialization of Polymeric Transport Systems in exchange for 200,000 shares
of common stock.
SCOTT PAPER COMPANY. In the first quarter of 1992, after having been one of APS'
original licensees in 1987, Scott Paper Company began the regional U.S. launch
of Baby Fresh with Ultra Guard baby wipes. Ultra Guard is Scott's trademark for
an APS Microsponge system that contains dimethicone to help protect a baby's
skin from diaper rash. In early 1993, Scott achieved national distribution for
Baby Fresh with Ultra Guard. In the fourth quarter of 1995, Kimberly-Clark
announced its intention to acquire Scott Paper Company. This transaction was
completed in the first quarter of 1996. One of the conditions of the acquisition
imposed by the Federal Trade Commission was that Kimberly-Clark divest the baby
wipe business due to the size of the combined business. No buyer for this
business has yet been identified.
9
<PAGE> 13
SMITHKLINE BEECHAM. APS' signed a marketing and distribution agreement with
SmithKline Beecham ("SKB") for OraFix denture adhesive, a long-established,
multi-million dollar brand in the third quarter of 1993. The SKB agreement
provided for Premier to handle product sales, marketing and distribution in
return for a management fee. In December 1995, SKB sold the OraFix business to
Hogil Pharmaceutical, Inc., and the agreement with Premier terminated.
BJ SERVICES COMPANY. In late 1994, the Company signed an agreement with the
Western Company of North America to supply Microsponge systems containing
industrial chemicals. Western has found that Microsponge-entrapped industrial
chemicals can be used inside oil wells to allow more cost-efficient recovery
of crude oil. Western was subsequently acquired by BJ Services Company.
GOVERNMENT REGULATION
ETHICAL DERMATOLOGY PRODUCTS
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, and can take many years and require
substantial expenditures. In the case of third-party agreements, APS expects
that the corporate client will fund the testing and the approval process with
guidance from APS. The Company intends to seek the necessary regulatory
approvals for its proprietary dermatology products as they are being developed.
NDAs on two APS-developed ethical dermatology products have been filed with the
FDA, in September 1994 and February 1995. There can be no assurance that any
such marketing clearances will be granted by the FDA on a timely basis, if at
all, or that approved products will be economically feasible to commercialize.
The FDA also may require post-marketing testing and surveillance programs to
monitor the effects of the Company's products. Following initial marketing,
product approvals may be withdrawn for noncompliance with regulatory standards
or the occurrence of unforeseen problems.
APS' facilities, where the Company manufactures pharmaceutical raw materials,
are subject to periodic governmental inspections. If violations of applicable
regulations are noted during these inspections, significant problems may arise
affecting the continued marketing of any products manufactured by the Company.
While APS does not currently manufacture commercially available pharmaceuticals,
its Lafayette, Louisiana plant continues to operate according to CGMP prescribed
by the FDA, in anticipation of marketing clearance of ethical dermatology
product candidates. This compliance has entailed modifying certain manufacturing
equipment, as well as implementing certain record keeping and other practices
and procedures which are required of all pharmaceutical manufacturers. The
Company believes it is in compliance with federal and state laws regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control.
10
<PAGE> 14
PERSONAL CARE PRODUCTS
Under current regulations, the market introduction of non-medicated cosmetics,
toiletries and skin care products does not require prior formal registration or
approval by the FDA or regulatory agencies in foreign countries, although this
situation could change in the future. The cosmetics industry has established
self-regulating procedures and most companies perform their own toxicity and
consumer tests.
PATENTS AND TRADE SECRETS
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 Economic Community, Japan, Australia,
South Africa, Canada, Korea and Taiwan. The Company received U.S. patent
protection for its basic Microsponge system concept in 1987 and now has a total
of 18 issued U.S. patents and an additional 63 issued foreign patents. The
Company has over 32 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
already 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 on 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 clients 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
Numerous companies, including major chemical and pharmaceutical companies in the
United States, seek to develop products based on enhanced delivery technologies.
The established companies have financial and technical resources and production
and marketing capabilities substantially greater than those of APS. In addition,
most have significantly greater experience in undertaking product and market
tests, clinically testing therapeutic products and obtaining approval of the
regulatory authorities. The Company expects competition to intensify as
technological developments are made and become more widely accepted.
Microsponge systems compete with two time-release drug delivery technologies:
liposomes for the delivery of therapeutic agents and the enmeshing of
therapeutic agents in a polymer polycarbophil. Existing alternatives to APS'
Microsponge delivery systems also include other topical polymeric systems and
encapsulation techniques. The competitive polymeric system most closely related
to the Microsponge is Dow Corning's Polytrap technology which was acquired by
APS in January 1996.
Liposome technologies, which utilize phospholipids, cholesterol or other
lipid-based microscopic spheres for encapsulation, release their entrapped
ingredients only through a diffusion or vehicle degradation process. This
approach has the disadvantage of low payload. Liposomes can be significantly
more expensive than Microsponge systems because their manufacturing requires
ultrapure raw materials while Microsponge systems are produced from widely
available monomers. Liposomes also require strong preservatives to maintain
their microbiological
11
<PAGE> 15
stability, while the APS technology requires no preservatives and is
self-sterilizing. Liposomes are primarily directed toward systemic drug
delivery.
Microencapsulation differs significantly from the Company's delivery system
because once a capsule is ruptured or melted, all of the entrapped substance is
released. Furthermore, encapsulation does not offer the same control over
programmability or release of the active ingredients offered by Microsponge
systems.
HUMAN RESOURCES
As of February 29, 1996, the Company had 90 full-time employees, 5 of whom hold
PhDs. There were 17 employees engaged in research and development, 38 in pilot
manufacturing and production activities, and 35 working in sales, 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 currently occupies 23,040 square feet of laboratory, office and
warehouse space in Redwood City, California and 4,800 square feet of office
space in Greenwich, Connecticut. Rent expense for these facilities in 1995 were
$246,194 and $107,444, respectively.
The Company occupies a production facility and warehouse in Lafayette,
Louisiana, with a current annual capacity, depending upon the application, to
produce 500,000 to 750,000 pounds of entrapped materials. The existing plant,
with contiguous acreage, has been designed to allow significant expansion. In
1995, the Company sold this facility and warehouse along with other certain
assets and subsequently leased them back for a certain fixed monthly rent over
a period of forty-eight months. The Company reported this transaction as a
financing transaction since the requirements for consummation of a sale were
not met.
The construction of the facility in 1986 was financed primarily by 15-year
tax-exempt industrial development bonds. In 1990, the bonds were refinanced. The
maturity date of the bonds occurs in installments beginning June 30, 1993, and
ending December 31, 2000. The bonds bear a fixed interest rate of 10%. In 1995,
the Company extinguished the bonds through an "insubstance defeasance"
transaction by placing U.S. government securities in an irrevocable trust to
fund all future interest and principal payments.
In March, 1992, as part of the restructuring of the arrangements with
Rhone-Poulenc Rorer, APS acquired a partially-completed manufacturing facility
in Vacaville, California. APS management decided not to complete the plant,
and the facility was sold in December 1995.
The Company's existing research and development and administrative facilities
are not being used at full capacity and, as such, management believes that such
facilities are adequate and suitable for its current and anticipated needs.
Additional manufacturing capacity could be required as APS expands commercial
production. It is anticipated that any additional production facilities would be
built on land the Company presently occupies in Lafayette, Louisiana.
12
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE> 17
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 29, 1996, there were 653 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 closing sales prices for the
Company's Common Stock on the NASDAQ National Market System.
<TABLE>
<CAPTION>
1995 High Low 1994 High Low
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter 6 4 First Quarter 7 3/4 5 1/8
Second Quarter 5 7/8 4 1/16 Second Quarter 7 4 3/4
Third Quarter 8 3/8 5 1/8 Third Quarter 6 1/8 3 5/8
Fourth Quarter 7 1/2 4 7/8 Fourth Quarter 5 7/8 4 1/8
</TABLE>
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Total revenues $ 16,108 $ 15,884 $ 19,932 $ 15,527 $ 4,602
Research and
development, net 4,139 6,334 7,343 3,726 2,211
Selling, marketing and
advertising 6,560 5,669 6,237 4,013 1,394
General and administrative 3,082 2,844 2,988 3,468 2,141
Loss on purchase commitment,
including related inventory 600 685 950 -- --
Net loss (9,359) (9,759) (9,877) (5,545) (4,312)
Loss per common share $ (0.57) $ (0.65) $ (0.73) $ (0.43) $ (0.42)
Weighted average common
shares outstanding 16,459 15,018 13,527 12,805 10,198
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS
Working capital $ 4,976 $ 5,641 $ 4,555 $ 14,428 $ 2,103
Total assets 23,082 23,508 24,378 31,115 14,849
Long-term debt, excluding
current portion 6,355 979 3,355 3,672 4,000
Shareholders' equity 5,233 11,786 10,501 20,143 3,061
</TABLE>
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts are rounded to nearest $1,000)
To the extent that this report discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements 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 and acceptance of new products, the
costs associated with new product introductions, establishment of new corporate
alliances, progress in research and development programs and other risks listed
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
and royalties. The Company is currently marketing in the United States nine
over-the-counter ("OTC") products based on its patented technology and is
manufacturing and selling Microsponge(R) delivery systems for use by customers
in approximately 70 different cosmetic and personal care products. Under
strategic alliance arrangements entered into with certain multinational
corporations, APS generally receives an initial cash infusion, future milestone
payments, royalties based on third party product sales and revenues from the
supply of Microsponge systems.
The consolidated financial statements for each of the periods presented include
the financial results of Premier, Inc. ("Premier"), a marketing and distribution
company specializing in OTC drug and personal care products, which was acquired
on April 2, 1993. The business combination was accounted for as a pooling of
interests, and the historical financial statements of Advanced Polymer Systems,
Inc., ("APS" or the "Company") have been restated to include the accounts and
results of operations of Premier.
Premier has exclusive arrangements to market and distribute two sunscreen
product lines which do not incorporate the Company's technology, Sundown(R) and
Johnson's Baby Sunblock(R), on behalf of Johnson & Johnson's Consumer Products,
Inc. and has further licensed Take-Off(R) makeup remover from Johnson &
Johnson. In addition, effective September 1995, the Company licensed from
Reckitt & Coleman the exclusive U.S. rights to the Neet(R) line of depilatory
products. The sales of the two sunscreen products and the depilatory product
line are highly seasonal and heavily weighted to the first two calendar quarters
of each year as retailers buy product for the summer season. Additionally,
shipments of Microsponge systems can fluctuate significantly from period to
period since manufacturing plans of, and inventory quantities held by, customers
are beyond the Company's control.
No major capital expenditures are planned in the coming year, since the
Company's manufacturing facilities are complete. Future marketing expenses for
the melanin-Microsponge sun protectant product candidate have not yet been
determined, as the Company is currently exploring various plans for marketing
this product assuming regulatory approval is received, including discussions
with prospective corporate partners. If the Company should bear all of the
marketing costs for the introduction of this product, the anticipated
achievement of profitable operations could be delayed beyond 1997.
Past results are not deemed to be indicative of the future. Assuming FDA
approval of its two NDAs, the Company anticipates revenues from sales of these
products in future years.
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<PAGE> 19
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.
<TABLE>
<CAPTION>
Year Ended December 31, Annual % Change
STATEMENTS OF OPERATIONS HIGHLIGHTS 1995 1994 1993 95/94 94/93
- ----------------------------------- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Product revenues $15,203,000 $14,787,000 $16,781,000 3% -12%
Licensing revenues 905,000 1,097,000 3,151,000 -18% -65%
------- --------- ---------
Total revenues 16,108,000 15,884,000 19,932,000 1% -20%
Cost of sales 11,047,000 10,149,000 12,840,000 9% -21%
Research and development, net 4,139,000 6,334,000 7,343,000 -35% -14%
Selling and marketing 4,756,000 4,012,000 4,284,000 19% -6%
Advertising and promotion 1,805,000 1,657,000 1,953,000 9% -15%
General and administrative 3,082,000 2,844,000 2,988,000 8% -5%
Loss on purchase commitments, including
related inventory 600,000 685,000 950,000 -12% -28%
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS HIGHLIGHTS 1995 1994 1993
- ----------------------------------- ---- ---- ----
<S> <C> <C> <C>
Expenses expressed as a percentage of product revenues:
Cost of sales 73% 69% 77%
Research and development, net 27% 43% 44%
Selling and marketing 31% 27% 26%
Advertising and promotion 12% 11% 12%
General and administrative 20% 19% 18%
Loss on purchase commitments, including 4% 5% 6%
related inventory
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues for 1995 amounted to $16,108,000 compared to $15,884,000 in the
prior year, an increase of $224,000 or 1%. This consisted of product sales of
$15,203,000, an increase of $416,000 or 3% over the prior year, and licensing
revenues of $905,000, a decrease of $192,000 or 18% from the prior year.
Revenues from products which incorporate the Microsponge technology totalled
$10,458,000, an increase of $3,787,000 or 57% over the prior year.
The increase in product revenues over 1994 resulted from increased shipments of
Microsponge systems to a variety of personal care and specialty customers,
primarily manufacturers of cosmetics and toiletries through the alliance with
Dow Corning Corporation.
This increase was offset by a slight decrease in sales of consumer
products. While sales of the Exact(R) acne line increased by 71% over the prior
year and the addition of the line of Neet(R) products under a licensing
agreement with Reckitt & Colman also contributed to sales of consumer products,
this was offset by an anticipated decrease in sales of in-licensed suncare
products, which do not incorporate the Company's technology. The Company
anticipates decreases in sales of suncare products to continue as it focuses
greater effort on products which contain the Company's Microsponge system.
The decrease in licensing fees was due mainly to the fact that the prior year
included $894,000 of
16
<PAGE> 20
revenues recognized under the percentage-of-completion method on now-completed
clinical trials, offset by a milestone payment of $1,500,000 paid to the Company
by Johnson & Johnson upon the filing of the New Drug Application for
Microsponge-enhanced tretinoin acne cream in February 1995, of which $750,000
was recognized as revenues.
The gross profit on product revenues for the year decreased to 27% from 31% due
to a higher percentage of close-out sales of suncare products, partially offset
by improved gross profit on the supply of Microsponge systems.
Research and development expense decreased significantly from $6,334,000 to
$4,139,000, or by 35%, due to the fact that the prior year included significant
external expenses associated with clinical trials for NDAs which have now been
filed.
Selling and marketing expense increased by $744,000 or 19% to $4,756,000 due
mainly to the Company's investment in the initiation of its ethical
pharmaceutical marketing effort. Advertising and promotion expense increased by
$148,000 or 9% to $1,805,000 largely due to a sampling program related to the
Company's consumer products, the benefits of which should be realized in 1996,
partially offset by reduced spending on print media.
General and administrative expense increased by $238,000 or 8% to $3,082,000 due
mainly to increased spending on a variety of outside services.
The loss on purchase commitment primarily relates to a contractual commitment
for the purchase of melanin in excess of current estimated requirements. Melanin
is the key ingredient in the manufacture of the APS-developed UVA/UVB sun
protection cream for which an NDA was filed in the third quarter of 1994.
Interest income decreased by $38,000 or 11% to $318,000 due mainly to lower
average cash balances. Interest expense increased by $167,000 or 60% to $446,000
due to the debt financing arranged by the Company in the third quarter.
The net loss for the year of $9,359,000 was lower by $400,000 or 4% than the
prior year, with reduced research and development expense being offset by
increased selling and marketing expense and reduced gross profit.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenues for 1994 totalled $15,884,000, consisting of product revenues of
$14,787,000 and licensing revenues of $1,097,000. This represented an overall
decrease of 20% from the prior year. Product revenues decreased by 12% while
licensing revenues decreased by 65%.
17
<PAGE> 21
The decrease in product revenues was due mainly to a reduction in shipments to
Scott Paper Company arising principally in the second quarter of 1994. This was
compounded by the absence in 1994 of a $766,000 non-recurring sale of analytical
standards equipment that occurred in 1993. Overall revenues from consumer
products including commissions increased by 2% over the prior year. Shipments of
APS-marketed consumer products decreased slightly by $277,000 or 3% in 1994 due
mainly to a decrease in sales of suncare products. This was partially offset by
a modest increase in shipments of Take-Off makeup remover which was
reintroduced in the second half of the year as a Microsponge-enhanced product.
Sales of the Exact OTC acne treatment were essentially flat with the prior year,
which included initial stocking orders of two line extensions introduced during
the year.
Licensing revenues decreased to $1,097,000 from $3,151,000. The prior year
included a milestone payment of $750,000 received from Johnson & Johnson, Inc.
on a photodamage product and revenue of $2,106,000 which was recognized in
accordance with the percentage-of-completion method of accounting on milestone
payments received from J&J in the prior year. Revenues in 1994 included the
balance remaining under the percentage-of-completion method of $894,000.
Gross profit for the year on product sales amounted to $4,638,000 compared to
$3,941,000 in the prior year. Expressed as a percentage of product revenues,
gross profit increased by eight percentage points over the prior year to 31%.
This is attributable to increased manufacturing efficiencies at the Company's
facility in Lafayette, Louisiana, and to the fact that higher margin consumer
product sales represented a greater portion of overall product revenues.
Research and development expense decreased compared to the prior year by
$1,009,000 or 14% due both to cost-containment measures implemented in the
fourth quarter of 1993 and reduced expenditures on clinical trials. This latter
trend is expected to continue. The Company submitted its NDA for its UVA/UVB
sun protection cream in September of 1994 and a second NDA for its tretinoin
acne treatment in February 1995.
Selling and marketing expense decreased in 1994 by $272,000 or 6% due mainly to
reduced overhead expense at the Company's consumer products and analytical
standards divisions. Advertising and promotion costs decreased by $296,000 or
15% to $1,657,000 as the Company moved from the more expensive print advertising
to other forms of media, mainly point-of-sale. Advertising and promotion costs
associated with current products and those to be launched in the future
will depend on market sizes and perceived opportunities.
General and administrative expense decreased by $144,000 or 5% due mainly to
continuing cost control measures.
18
<PAGE> 22
The loss on purchase commitment and inventory primarily relates to a contractual
commitment for the purchase of melanin in excess of current estimated
requirements. Melanin is a key ingredient in the manufacture of the APS
developed UVA/UVB sun protection cream.
Interest income decreased to $356,000 from $560,000 in the prior year due to
lower average cash balances. Other income decreased because the prior year
included gains on disposal of equipment which the Company acquired as a result
of the restructuring of its agreements with Rhone-Poulenc Rorer.
The Company incurred a net loss of $9,759,000 for the year ended 1994. This was
slightly below the loss of $9,877,000 in the prior year with lower sales offset
by a better gross profit mix and reduced operating expenses.
CAPITAL RESOURCES AND LIQUIDITY
Total assets as of December 31, 1995 were $23,082,000 compared with $23,508,000
at December 31, 1994. Working capital decreased to $4,976,000 at December 31,
1995 from $5,641,000 at December 31, 1994. In the same period, cash and cash
equivalents and marketable securities increased to $5,173,000 from $4,517,000.
The Company's primary investment objectives for those assets are the
preservation of capital and the maintenance of a high degree of liquidity.
The Company has financed its operations, including product research and
development, from amounts raised in debt and equity financings, the sale of
consumer products, Microsponge delivery systems and analytical standard
products; payments received under licensing agreements; and interest earned on
short-term investments.
The Company raised $9,117,000 from two private placements in 1994, and
$1,388,000 from a private placement in the first quarter of 1995.
In September 1995, the Company extinguished $2,500,000 of Industrial Revenue
Bonds through an "insubstance defeasance" transaction by placing approximately
$2,500,000 of U.S. government securities in an irrevocable trust to fund all
future interest and principal payments. The purchase of the government
securities was achieved through the sale of the Company's pledged marketable
securities. The debt extinguishment did not have a material impact on the
Company's earnings.
Also in the second half of 1995, the Company raised an aggregate amount of
$8,122,000 from three financing agreements. The first financing arrangement is a
bank loan totalling $3,000,000 with an interest rate equal to two percentage
points above the Prime Rate. The loan is secured by the assets and operating
cash flows of a subsidiary of the Company and guaranteed by the Company. The
second financing arrangement is a $1,500,000 term loan with a fixed interest
rate of 14%. This loan is also secured by the assets and operating cash flows of
a subsidiary of the Company and guaranteed by the Company. The security interest
of the debt holders is subordinated to the bank loan's security
19
<PAGE> 23
interest. The third financing arrangement, aggregating $3,622,000, resulted
from the sale of certain real and personal properties that the Company
subsequently leased back for a fixed rental stream over a period of forty-eight
months. The Company reported this transaction as a financing transaction since
the requirements for consummation of a sale were not met. The effective
interest rate of this financing is approximately 11%.
During 1995, Company operations used approximately $8,520,000 of cash.
Approximately $4,139,000 was invested in product research and development and
$1,805,000 was invested in advertising and promoting new products.
In prior years, cash was expended with regard to Phase III clinical tests of
tretinoin entrapped in a Microsponge delivery system for the treatment of acne,
and of APS' melanin-Microsponge sunscreen product, together with related
research and development costs, all of which decreased substantially in 1995
following the filing of the respective NDAs. Additionally, the Company is
contractually obligated to purchase minimum annual quantities of melanin.
Failure to purchase the minimum quantities results in a mandatory payment of
$600,000 to its melanin supplier under "take or pay" provisions. In February
1995, the Company received a milestone payment of $1,500,000 from Ortho
Pharmaceutical Corporation upon the filing of its NDA on the tretinoin acne
treatment.
Additionally, in 1995 the Company received $748,000 from the sale of an idle
facility in Vacaville, California. The Company recorded a loss on the sale of
approximately $126,000.
The Company's existing cash and cash equivalents, collections of trade accounts
receivable, together with interest income and other revenue producing activities
including milestone payments, are expected to be sufficient to meet the
Company's near-term cash requirements assuming no changes to existing business
plans. The Company is also currently developing a variety of opportunities which
would generate additional funds including joint ventures, equity financings,
licensing agreements and other financing activities.
In the unlikely event that the Company is unable to raise additional funds
required to finance its operations, operating costs will have to be
significantly reduced by decreasing spending on advertising and promotion
activities, outside clinical programs and a variety of other discretionary
external expenditures.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", must be adopted for years beginning after December 15, 1995. This
standard defines a fair-value-based method of accounting for stock-based
employee compensation plans; however, it also allows an entity to continue to
measure compensation cost for those plans using the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Under the
fair value based method, compensation cost is measured at the grant date based
on the fair value of the award and is recognized over the service period, which
is usually the vesting period. Under Opinion 25, compensation cost is recognized
based on the difference, if any, between the market price of the stock and the
amount an employee must pay to acquire the stock. Entities
20
<PAGE> 24
electing to remain with the accounting in Opinion 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method
defined in this standard had been applied. The Company has elected to continue
accounting for compensation cost arising from its stock-based compensation plans
under the Opinion 25 approach, and will therefore present the pro forma
disclosures required by the standard in its financial statements for the year
ending December 31, 1996.
21
<PAGE> 25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Advanced Polymer Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31, 1995 1994
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 5,172,809 $ 2,741,994
Marketable securities -- 1,775,502
Pledged marketable securities -- 1,945,620
Accounts receivable less allowance for doubtful accounts of
$68,650 and $66,564 at December 31, 1995 and 1994, respectively 2,436,815 1,887,388
Accrued interest receivable 16,473 26,043
Inventory 7,858,584 7,002,026
Prepaid expenses and other 985,199 1,006,130
------------ ------------
Total current assets 16,469,880 16,384,703
Property and equipment, net 5,027,034 5,106,525
Assets held for sale -- 923,436
Deferred loan costs, net 832,324 52,685
Prepaid license fees, net 303,638 441,506
Goodwill, net of accumulated amortization of $616,387 and $455,590
at December 31, 1995 and 1994, respectively 187,596 348,393
Other long-term assets 261,770 250,914
------------ ------------
TOTAL ASSETS $ 23,082,242 $ 23,508,162
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,240,807 $ 2,584,161
Accounts payable, Johnson & Johnson 4,229,637 3,570,525
Accrued expenses 1,819,541 1,731,545
Accrued melanin purchase commitments 600,000 657,248
Current portion - long-term debt 853,987 2,200,000
Deferred revenue 750,000 --
------------ ------------
Total current liabilities 11,493,972 10,743,479
Long-term debt 6,354,969 978,935
------------ ------------
TOTAL LIABILITIES 17,848,941 11,722,414
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, authorized 2,500,000 shares; none issued or
outstanding at December 31, 1995 and 1994 -- --
Common stock, $.01 par value, authorized 50,000,000 shares;
issued and outstanding 16,594,565 and 16,043,121 at
December 31, 1995 and 1994, respectively 165,946 160,431
Common stock to be issued, $.01 par value, 432,101 shares
issuable in 1996 4,321 --
Warrants, issued and outstanding: 1,628,611 at December 31, 1995
and 2,286,658 at December 31, 1994 2,653,076 4,059,500
Additional paid-in capital 64,600,516 60,297,027
Unrealized gain on securities 12,348 113,166
Accumulated deficit (62,202,906) (52,844,376)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,233,301 11,785,748
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,082,242 $ 23,508,162
============ ============
</TABLE>
See accompanying notes
22
<PAGE> 26
Advanced Polymer Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Revenues:
Product revenues $ 15,203,196 $ 14,787,048 $ 16,780,598
Licensing revenues 905,000 1,097,402 3,151,000
------------ ------------ ------------
Total revenues 16,108,196 15,884,450 19,931,598
Expenses:
Cost of sales 11,047,399 10,149,302 12,840,205
Research and development, net 4,139,441 6,334,168 7,342,601
Selling and marketing 4,755,788 4,011,752 4,283,657
Advertising and promotion 1,804,540 1,657,178 1,953,042
General and administrative 3,081,900 2,844,282 2,988,284
Loss on purchase commitment, including related inventory 600,000 685,000 950,000
------------ ------------ ------------
Operating loss (9,320,872) (9,797,232) (10,426,191)
Other income (expense), net 89,895 (38,593) 288,929
Interest income 317,948 355,837 560,104
Interest expense (445,501) (278,988) (299,973)
------------ ------------ ------------
Net loss $ (9,358,530) $ (9,758,976) $ (9,877,131)
============ ============ ============
Loss per common share $ (0.57) $ (0.65) $ (0.73)
============ ============ ============
Weighted average common shares outstanding 16,459,446 15,017,753 13,527,207
============ ============ ============
</TABLE>
See accompanying notes.
23
<PAGE> 27
Advanced Polymer Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31, 1995, 1994, 1993 Common Stock Additional Unrealized
Common Stock Warrants Paid-In Holding
Shares Amount Shares Amount Capital Gain
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 13,440,654 $ 134,406 1,161,500 $ 2,300,000 $ 50,790,569 $ --
Options exercised 211,639 2,117 -- -- 321,221 --
Shares retired (5,636) (56) -- -- (34,449) --
Net loss -- -- -- -- -- --
Distributions -- -- -- -- -- --
------------------------------------------------------------------------------------
1993 Total 206,003 2,061 -- -- 286,772 --
------------------------------------------------------------------------------------
Balance December 31, 1993 13,646,657 $ 136,467 1,161,500 $ 2,300,000 $ 51,077,341 $ --
------------------------------------------------------------------------------------
Options exercised 471,306 4,713 -- -- 1,881,821 --
Agreement with Johnson &
Johnson, net of $30,201 in
offering costs 1,000,000 10,000 200,000 285,000 4,674,799 --
Private placement,
net of $353,183 in offering costs 925,158 9,251 925,158 1,474,500 2,663,066 --
Unrealized holding gain -- -- -- -- -- 113,166
Net loss -- -- -- -- -- --
Distributions -- -- -- -- -- --
------------------------------------------------------------------------------------
1994 Total 2,396,464 23,964 1,125,158 1,759,500 9,219,686 113,166
------------------------------------------------------------------------------------
Balance December 31, 1994 16,043,121 $ 160,431 2,286,658 $ 4,059,500 $ 60,297,027 $ 113,166
------------------------------------------------------------------------------------
Options exercised 236,992 2,370 -- -- 1,078,929 --
Private placement,
net of $112,383 in offering costs 310,278 3,103 310,278 485,591 898,923 --
Securities issued in debt financing
arrangements 4,174 42 193,175 407,985 29,958 --
Common Stock to be issued in
connection with the agreement
with Johnson & Johnson 432,101 4,321 -- -- (4,321) --
Warrants expired -- -- (1,161,500) (2,300,000) 2,300,000 --
Unrealized holding gain -- -- -- -- -- (100,818)
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------
1995 Total 983,545 9,836 (658,047) (1,406,424) 4,303,489 (100,818)
------------------------------------------------------------------------------------
Balance December 31, 1995 17,026,666 $ 170,267 1,628,611 $ 2,653,076 $ 64,600,516 $ 12,348
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
December 31, 1995, 1994, 1993 Total
Accumulated Shareholders'
Deficit Equity
<S> <C> <C>
Balance December 31, 1992 $(33,081,570) $ 20,143,405
Options exercised -- 323,338
Shares retired -- (34,505)
Net loss (9,877,131) (9,877,131)
Distributions (53,699) (53,699)
-----------------------------
1993 Total (9,930,830) (9,641,997)
-----------------------------
Balance December 31, 1993 $(43,012,400) $ 10,501,408
-----------------------------
Options exercised -- 1,886,534
Common stock to be issued
in connection with agreement
with Johnson & Johnson, net
of $30,201 in offering costs -- 4,969,799
Private placement,
net of $353,183 in offering costs -- 4,146,817
Unrealized holding gain -- 113,166
Net loss (9,758,976) (9,758,976)
Distributions (73,000) (73,000)
-----------------------------
1994 Total (9,831,976) 1,284,340
-----------------------------
Balance December 31, 1994 $(52,844,376) $ 11,785,748
-----------------------------
Options exercised -- 1,081,299
Private placement,
net of $112,383 in offering costs -- 1,387,617
Securities issued in debt financing
arrangements -- 437,985
Common stock to be issued in
connection with the agreement
with Johnson & Johnson -- --
Warrants expired -- --
Unrealized holding gain -- (100,818)
Net loss (9,358,530) (9,358,530)
-----------------------------
1995 Total (9,358,530) (6,552,447)
-----------------------------
Balance December 31, 1995 $(62,202,906) $ 5,233,301
=============================
</TABLE>
See accompanying notes.
24
<PAGE> 28
Advanced Polymer Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,358,530) $ (9,758,976) $ (9,877,131)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,377,614 1,243,906 1,202,230
Provision for loss on purchase commitments, including inventory 600,000 685,000 850,000
Change in allowance for doubtful accounts 2,086 (69,456) 106,888
Accretion of pledged long-term marketable securities (121,572) (150,498) (138,243)
(Gain) loss on sale of equipment and assets held for sale 125,764 (868) (195,914)
Gain on sale of pledged marketable securities (234,319) -- --
Changes in operating assets and liabilities:
Accounts receivable (1,130,448) 908,738 (1,116,787)
Accrued interest receivable 9,570 6,981 172,009
Inventory (856,558) 1,291,126 (5,065,950)
Prepaid expenses and other 20,931 (575,003) (419,645)
Deferred charges loan costs (439,824) -- --
Other long-term assets (10,856) 17,895 (20,704)
Accounts payable and accrued expenses 87,394 517,005 1,603,855
Accounts payable, Johnson & Johnson 659,112 (1,852,753) 3,205,707
Deferred revenue 750,000 (894,000) (2,106,000)
--------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (8,519,636) (8,630,903) (11,799,685)
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (901,288) (645,899) (1,220,185)
Proceeds from sale of equipment and assets held for sale 797,672 2,290 518,667
Purchases of marketable securities (4,458,891) (1,448,467) (6,540,855)
Maturities and sales of marketable securities 5,935,087 1,216,394 18,063,192
--------------------------------------------
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 1,372,580 (875,682) 10,820,819
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to Dow Corning -- (274,208) (98,391)
Repayment of long-term debt (258,304) (200,000) (200,000)
Proceeds from long-term debt and warrants 7,367,259 -- --
Proceeds from private placement, net of offering costs 1,387,617 4,146,817 --
Proceeds from agreement with Johnson & Johnson -- 4,969,799 --
Distributions -- (73,000) (53,699)
Proceeds from the exercise of common stock options,
net of common stock retired 1,081,299 1,886,534 288,833
--------------------------------------------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 9,577,871 10,455,942 (63,257)
--------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,430,815 949,357 (1,042,123)
Cash and cash equivalents at the beginning of the year 2,741,994 1,792,637 2,834,760
--------------------------------------------
Cash and cash equivalents at the end of the year $ 5,172,809 $ 2,741,994 $ 1,792,637
============================================
</TABLE>
Supplemental disclosure of non-cash financing transactions:
In September 1995, the Company offset its note payable to Dow Corning
Corporation ("DCC") against its receivable from DCC. This resulted in a
decrease in long-term debt, short-term debt and accounts receivable of
$478,935, $100,000 and $578,935, respectively.
In September 1995, the Company extinguished a debt through an insubstance
defeasance transaction by placing U.S. government securities in an
irrevocable trust to fund all future scheduled payments on the debt (Note
7).
See accompanying notes.
25
<PAGE> 29
ADVANCED POLYMER SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE 1 BUSINESS
Advanced Polymer Systems, Inc. ("APS" or the "Company") develops, manufactures
and sells patented delivery systems that allow for the controlled release of
active ingredients in a programmed manner in the ethical dermatology, cosmetic
and personal care areas. Certain projects are conducted under development and
licensing arrangements with large companies, others are part of joint ventures
in which APS is a major participant, and a number of projects are exclusive to
APS. APS also markets and distributes a range of in-licensed consumer products
for personal care through its subsidiary, Premier, Inc. ("Premier").
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,
APS Analytical Standards and APS Joint Venture Corporation. All significant
intercompany balances and transactions have been eliminated in consolidation.
On April 2, 1993, APS acquired Premier, a marketing and distribution company
specializing in over-the-counter drug and personal care products. The business
combination was accounted for as a pooling of interests and, accordingly, the
Company's historical consolidated financial statements have been restated to
include the accounts and results of Premier for all periods presented.
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. Short-term investments consist primarily of
certificates of deposit, commercial paper, master notes and repurchase
agreements. Investments which have original maturities longer than three months
are classified as marketable securities in the accompanying Consolidated Balance
Sheets. The Company has classified its investments in certain debt and equity
securities as "available-for-sale". Such investments are recorded at fair value
with unrealized holding gains and losses reported as a separate component of
stockholders' equity.
Inventory: Inventory is stated at the lower of cost or market value, utilizing
the average cost method (Note 5).
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, not exceeding twenty years (Note 6).
Prepaid License Fees: The fee paid in 1992 to ROCEP Pressure Packs of Scotland
for the exclusive right to supply the Microsponge delivery system in an
environmentally friendly aerosol is being amortized over the five-year length of
the contract on a straight-line basis. The fee paid to Biosource Technologies,
Inc. ("Biosource") in 1992 is being amortized over a seven-year term consistent
with the term of the related minimum purchase commitments (Notes 3 and 8).
Amortization of prepaid license fees totalled $137,868, $124,057 and $120,244
in 1995, 1994 and 1993, respectively.
Deferred Charges: Deferred Charges relate to costs incurred in obtaining certain
loans. These charges are being amortized over the life of the loans using the
effective interest method (Note 7).
Long-Lived Assets, Including Goodwill: In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", 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. If such
circumstances arise, recoverability is determined by comparing the undiscounted
net cash flows of long-lived assets to their respective recorded net book
values. The amount of impairment, if any, is measured based on the projected
discounted cash flows using an appropriate discount rate. At this time, the
Company believes that no significant impairment of long-lived assets, including
goodwill, has occurred and that no reduction of the estimated useful lives of
such assets is warranted.
In 1992, APS acquired for 157,894 shares of its common stock, the outstanding
25% interest in ACP, APS' over-the-counter
26
<PAGE> 30
consumer products subsidiary. The acquisition was accounted for as a purchase.
Excess of cost over net assets acquired arising from the purchase is being
amortized over five years on a straight-line basis. Amortization of goodwill
totalled $160,797, $160,796, and $160,797 in 1995, 1994 and 1993, respectively.
Advertising and Promotion Costs: Advertising costs are expensed as incurred.
Earnings (Loss) per Share: Earnings (loss) per common share are based on the
weighted average number of common and common equivalent shares outstanding
during each year. The computation assumes that no outstanding stock options and
warrants were exercised as they would be anti-dilutive.
Licensing Agreements: The Company has several licensing agreements that
generally provide for monthly payments, periodic minimum payments and royalties
for exclusivity. Revenue is recorded as services are performed. The agreements
do not contain any financial obligations with respect to the Company at the
expiration or earlier termination of the agreements. Certain agreements also
require the remittance of non-refundable milestone fees. Such fees and option
payments aggregated $750,000, $0 and $750,000 in 1995, 1994 and 1993,
respectively.
Deferred Revenue: Prepaid royalties paid to APS by Ortho Pharmaceutical
Corporation ("Ortho"), a subsidiary of Johnson & Johnson Inc. ("J&J"), as part
of the retinoid licensing agreement are reported as deferred revenues. (Note 12)
Concentrations of Credit Risk: Financial instruments which potentially expose
the Company to concentrations of credit risk, as defined by Statement of
Financial Accounting Standards No. 105, consist primarily of trade accounts
receivable. As of December 31, 1995, approximately 43% of the recorded trade
receivables were concentrated with three customers in the cosmetic and personal
care industries. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial conditions. The Company does not
generally require collateral.
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform with the presentation in 1995.
NOTE 3 RELATED PARTY TRANSACTIONS
APS has entered into agreements with Biosource. Two directors serve on the Board
of Directors of both Biosource and APS. All agreements between APS and Biosource
have been, and will continue to be, considered and approved by a vote of the
disinterested directors. The agreements provide APS worldwide rights to use and
sell Biosource's biologically-synthesized melanin in Microsponge systems for all
sun protection, cosmetic, ethical dermatology and over-the-counter skin care
purposes. In return, APS is required to make annual minimum purchases of melanin
(Note 8), pay royalties on sales of APS melanin-Microsponge products and was
required to prepay $500,000 of royalties. During 1995, the Company paid
Biosource $3,329 in royalties and accrued $600,000 for estimated loss on future
purchase commitments. During 1994, APS paid Biosource $3,279 prepaid royalties
and $263,403 for the supply of melanin. The 1994 financial results also included
a $685,000 provision for the estimated loss on certain future purchase
commitments and related inventory on hand for product in excess of estimated
requirements. During 1993, the Company paid or accrued $893,485 for the supply
of melanin, an additional $200,000 to meet the annual minimum purchase
commitment, and $40,820 for royalties on product sales. The 1993 financial
results also included a $750,000 provision for the estimated loss on certain
future purchase commitments and related inventory on hand for product in excess
of estimated requirements.
27
<PAGE> 31
NOTE 4 CASH EQUIVALENTS AND MARKETABLE SECURITIES
At December 31, 1995 and 1994, the amortized cost and estimated market value of
investments in debt securities are set forth in the tables below:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------------------------------------------------
<S> <C> <C> <C>
Available-for-Sale:
Corporate debt securities $3,273,602 $ 12,348 - $3,285,950
Other debt securities 164,425 -- - 164,425
----------------------------------------------------
Totals $3,438,027 $ 12,348 - $3,450,375
====================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------------------------------------------------
<S> <C> <C> <C>
Available-for-Sale:
U.S. Government debt securities $2,132,604 $101,682 - $2,234,286
Corporate debt securities 1,555,352 11,484 - 1,566,836
Other debt securities 1,945,453 -- - 1,945,453
----------------------------------------------------
Totals $5,633,409 $113,166 - $5,746,575
====================================================
</TABLE>
The table below reflects the balance sheet classification of investments in debt
securities at December 31:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------
Fair Fair
Cost Value Cost Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents $3,438,027 $3,450,375 $2,025,453 $2,025,453
Marketable securities -- -- 1,761,139 1,775,502
Pledged marketable securities -- -- 1,846,817 1,945,620
-------------------------------------------------------------
Totals $3,438,027 $3,450,375 $5,633,409 $5,746,575
=============================================================
</TABLE>
Available-for-sale debt securities as of December 31, 1995,
are all due in less than three months.
NOTE 5 INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
---------------------------
<S> <C> <C>
Raw materials and work-in-process $1,006,847 $1,019,427
Finished goods 6,851,737 5,982,599
---------------------------
Total inventory $7,858,584 $7,002,026
===========================
</TABLE>
J&J has a security interest in the Company's Sundown(R) and Johnson's Baby
Sunblock(R) inventory. Inventory subject to their security interest totalled
approximately $4,400,000 and $3,600,000 at December 31, 1995 and 1994,
respectively (Note 14).
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
28
<PAGE> 32
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
--------------------------------
<S> <C> <C>
Building $ 1,610,339 $ 1,594,979
Land and improvements 163,519 163,519
Leasehold improvements 571,223 571,223
Furniture and equipment 10,623,203 9,737,275
--------------------------------
Total property and equipment $ 12,968,284 $ 12,066,996
Accumulated depreciation and amortization (7,941,250) (6,960,471)
--------------------------------
Property and equipment, net $ 5,027,034 $ 5,106,525
================================
</TABLE>
Depreciation expense amounted to $980,779, $920,871 and $880,236 for the years
ended December 31, 1995, 1994, and 1993, respectively.
In 1992, the Company obtained ownership of a manufacturing facility as part of a
settlement of a joint venture. The Company sold this facility in 1995 and
recorded a loss on the sale of approximately $126,000.
NOTE 7 LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------------------------
<S> <C> <C>
Bank loan, interest payable monthly, principal due in non-equal installments
commencing December 1, 1996 through March 1, 1999, secured by the assets and
operating cash flow of a subsidiary of the Company and guaranteed by the Company $3,000,000 $ --
Term loan, subordinated to bank loan, interest payable quarterly, principal due
in non-equal installments commencing December 1, 1996 through March 1, 1999,
secured by the assets and operating cash flows of a subsidiary of the Company
and guaranteed by the Company 1,500,000 --
Term loan, principal and interest due in equal monthly installments commencing
October 1995 through December 1999, secured by certain real and personal property 2,708,956 --
Industrial Revenue Bonds, interest payable quarterly, principal due in non-equal
semi-annual installments, commencing June 30, 1993, through December 31, 2000,
secured by pledged marketable securities, and certain real and personal property -- 2,600,000
Advance from Dow Corning Corporation, non-interest bearing, to be repaid out of
the gross profits of certain future sales, but in no case later than December
11, 1996, subordinated to the Industrial Revenue Bonds, notes payable, and
secured by certain real and personal property -- 578,935
---------------------------
Total $7,208,956 $3,178,935
Less current portion 853,987 2,200,000
---------------------------
Long-term debt $6,354,969 $ 978,935
===========================
</TABLE>
29
<PAGE> 33
Maturities of the long-term debt are as follows:
<TABLE>
<CAPTION>
Years ending December 31: Amount
- ---------------------------------------------------------------------
<S> <C>
1996 $ 853,987
1997 1,470,780
1998 2,473,389
1999 2,410,800
- ---------------------------------------------------------------------
$7,208,956
=====================================================================
</TABLE>
In 1995, the Company received an aggregate amount of $8,122,334 from three
financing arrangements.
The first financing arrangement is a $3,000,000 bank loan with an interest rate
equal to two percentage points above the Prime Rate (8.5% as of December 31,
1995). The loan is secured by the assets and operating cash flows of a
subsidiary of the Company and guaranteed by the Company.
The second financing arrangement is a $1,500,000 term loan with a syndicate of
lenders and a fixed interest rate of 14%. The loan is also secured by the assets
and operating cash flows of a subsidiary of the Company and guaranteed by the
Company. The security interest of the debt holders is subordinated to the bank
loan's security interest.
In the third quarter of 1995, the Company consummated a transaction whereby
certain real and personal properties were sold to a third party and subsequently
leased back for a fixed rental stream over a period of forty-eight months. The
Company has the option either to purchase all the properties at the expiration
of the term of the lease or extend the term of the lease. The Company reported
this transaction as a financing transaction since the requirements for
consummation of a sale were not met. A deposit of $755,000 with the lender was
offset against the loan balance as of December 31, 1995. This deposit earns an
interest rate of 4%. This transaction has been reflected in the table above as a
term loan.
The terms of certain financing agreements contain among other provisions,
requirements for a subsidiary of the Company to maintain defined levels of
earnings, net worth and various financial ratios, including net worth. In
conjunction with the debt financing agreements, APS issued a total of 193,175
warrants with an exercise price of $7.00 per share of common stock.
All costs incurred in obtaining the financing arrangements have been capitalized
as deferred charges, and are being amortized over the life of the loans using
the effective interest method. Interest paid in 1995, 1994 and 1993 approximated
interest expense reflected in the Consolidated Statements of Operations.
In September 1995, the Company extinguished $2,500,000 of Industrial Revenue
Bonds through an "insubstance defeasance" transaction by placing approximately
$2,500,000 of U.S. government securities in an irrevocable trust to fund all
future interest and principal payments. The purchase of the government
securities was achieved through the sale of the Company's pledged marketable
security. The debt extinguishment did not have a material impact on the
Company's earnings. The debt balance outstanding as of December 31, 1995 was
$2,500,000.
In 1995, the Company offset its note payable to Dow Corning Corporation ("DCC")
against its receivable from DCC as agreed by both companies.
NOTE 8 COMMITMENTS
Lease Commitments: Total rental expense for property and equipment was $639,807,
$558,086 and $578,208 for 1995, 1994 and 1993, respectively.
The Company's future minimum lease payments under noncancellable operating
leases for facilities as of December 31, 1995, are as follows:
30
<PAGE> 34
<TABLE>
<CAPTION>
Minimum
Years ending December 31, Payments
--------
<S> <C>
1996 $442,037
1997 362,184
1998 51,441
1999 17,638
--------
$873,300
========
</TABLE>
Supply Agreements: The Company has entered into agreements with Biosource. APS
is required to make annual minimum purchases of melanin and pay royalties on
sales of APS melanin-Microsponge products (Note 3). The minimum financial
commitments not yet expensed by APS under the current agreements are $600,000
per annum for each of the years in the two year period ending December 31, 1998,
in aggregate $1,200,000.
NOTE 9 SHAREHOLDERS' EQUITY
Private Placements and Common Stock Warrants: In 1994, the Company raised
$9,116,616 net of offering costs through two private placements. In the first
private placement, APS issued 1,000,000 shares of newly issued common stock to
Johnson & Johnson Development Corporation ("JJDC"), a subsidiary of Johnson &
Johnson, Inc. in consideration for $5,000,000. In addition, JJDC received
200,000 warrants exercisable for two years at $12.00 per share. APS will be
issuing JJDC an additional 432,101 shares in 1996 as a result of the APS stock
price not achieving certain predetermined levels.
The second private placement was pursuant to an agreement for the sale of up to
$8,000,000 of common stock and warrants in six installments beginning in June
1994 and ending on September 29, 1995. The Company sold $6,000,000 of common
stock and warrants through March 30, 1995. The remaining two optional
installments in June and September 1995 totalling $2,000,000 of common stock and
warrants were not sold by the Company. In accordance with the agreement, the
following shares of common stock and warrants were issued:
<TABLE>
<CAPTION>
Number of Shares Number of Exercise Price
Date Issued of Common Stock Issued Warrants Issued of Warrants
----------- ---------------------- --------------- -----------
<S> <C> <C> <C>
June 30, 1994 294,314 294,314 $5.61
September 30, 1994 299,066 299,066 $5.52
December 31, 1994 331,778 331,778 $4.97
March 30, 1995 310,278 310,278 $5.32
</TABLE>
The warrants issued are exercisable over a three-year period. The value of the
warrants was determined using the Black-Scholes model.
In conjunction with certain debt financing agreements made in 1995 (Note 7), APS
issued a total of 193,175 warrants with an exercise price of $7.00 per share of
common stock. These warrants expire on March 27, 2000.
In the first quarter of 1995, 1,161,500 warrants which were issued in a 1992
private placement expired.
Stock Options: 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 the 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.
31
<PAGE> 35
The following table summarizes option activity for 1995, 1994 and 1993:
- --------------------------------------------------------------------------------
Option shares,
<TABLE>
<CAPTION>
December 31, 1995 1994 1993
- ------------ ---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning of year 2,677,162 2,688,940 2,330,829
Granted 486,500 623,500 715,000
Exercised (236,992) (471,306) (211,639)
Expired or cancelled (104,346) (163,972) (145,250)
---------- ---------- ----------
Outstanding at end of year 2,822,324 2,677,162 2,688,940
---------- ---------- ----------
Option shares exercisable, December 31 1,877,295 1,529,574 1,607,539
---------- ---------- ----------
Shares available for future grant, December 31 317,819 707,973 1,279,750
---------- ---------- ----------
Option price per share:
Granted $ 5.000 - $ 6.500 $ 4.250 - $ 6.125 $ 5.250 - $ 8.125
Exercised $ 3.000 - $ 5.438 $ 3.750 - $ 6.500 $ 0.250 - $ 4.350
Outstanding, December 31 $ 3.000 - $11.125 $ 3.000 - $11.125 $ 3.000 - $11.125
</TABLE>
Distributions: Distributions presented in the Consolidated Statements of
Shareholders' Equity represent payments to the shareholders of Premier, which
was a subchapter S Corporation. Premier's S Corporation election was terminated
in conjunction with the merger (Note 13).
NOTE 10 DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan covering substantially all of
its employees. In 1995, 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 $4,620
for the calendar year. In the prior years, the maximum matching contribution
made by the Company was equal to the lesser of 1.5% of each participant's salary
or $1,000 per calendar year. The Company may also contribute additional
discretionary amounts as it may determine. For the years ended December 31,
1995, 1994 and 1993, the Company contributed to the plan approximately $89,000,
$55,000 and $40,000, respectively. No discretionary contributions have been made
to the plan since its inception.
NOTE 11 INCOME TAXES
A reconciliation of the Federal statutory rate of 34% to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
U.S. Federal statutory rate (benefit) (34.0)% (34.0)% (34.0)%
Losses without tax benefits 33.5 34.0 34.0
State income taxes, net of U.S.
Federal income tax effect -- -- --
Nondeductible expenses 0.5 -- --
------ ------ ------
Total tax expense -- -- --
====== ====== ======
</TABLE>
At December 31, 1995, the Company had net Federal operating loss carry forwards
of approximately $63,000,000 for income tax reporting purposes and California
state operating loss carry forwards of approximately $8,800,000. The Federal net
operating loss carry forwards expire beginning in 1998 through the year 2010.
The California net operating loss carry forwards expire beginning in 1996
through the year 2000. A California net operating loss carry forward from 1988
in the approximate amount of $2,200,000 expired December 31, 1995.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
approximately $32,000,000 and $5,500,000 of the Company's Federal and California
net operating loss carry forwards, respectively, are subject to an annual
limitation against taxable income. The balance of the Federal and California
loss carry forwards of approximately $31,000,000 and $3,300,000, respectively,
which arose subsequent to the Company's change in ownership will be fully
available to offset taxable income in excess of the annual limitation until
fully utilized or there is another ownership change.
32
<PAGE> 36
The Company also has investment tax credit/carryovers and research and
experimental tax credits aggregating approximately $1,692,000 and $572,000 for
Federal and California purposes, respectively, of which approximately $663,000
and $139,000, respectively, are also subject to an annual limitation due to the
"change in ownership" provisions of the Tax Reform Act of 1986. The Federal
credits expire beginning in 1998 through the year 2010. The California credits
carry over indefinitely until utilized.
There are also California credit carry forwards for qualified manufacturing and
research and development equipment of approximately $10,000; these credits
expire in 2005.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred research expenditures $ 1,443,000 $ 765,000
Accruals and reserves not currently deductible
for tax purposes 1,197,000 953,000
Net operating loss carry forward 22,283,000 19,061,000
Credit carry forwards 2,274,000 2,051,000
Other 572,000 175,000
------------ ------------
Gross deferred tax assets 27,769,000 23,005,000
Less valuation allowance (27,426,000) (22,892,000)
------------ ------------
Total deferred tax assets $ 343,000 $ 113,000
------------ ------------
Deferred tax liabilities:
Property and equipment $ (343,000) $ (113,000)
------------ ------------
Total deferred tax liabilities (343,000) (113,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
The net change in the valuation allowance for the years ended December 31, 1995
and 1994 was an increase of approximately $4,534,000 and $3,627,000,
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, 1995 include approximately
$2,329,000 relating to the exercise of stock options, which will be
credited to equity when realized.
NOTE 12 ORTHO PHARMACEUTICAL CORPORATION
In May 1992, APS entered into development and licensing and investment
agreements with Ortho for the development of retinoid products. The first
product under development is a Microsponge system entrapment of tretinoin
(trans-retinoic acid or "t-RA"), a prescription acne drug. A second product
licensed to Ortho is a Microsponge entrapment of a retinoid to be used for the
treatment of photodamaged skin.
The terms of the agreements included an $8,000,000 investment in APS for 723,006
newly issued shares of APS common stock and the payment to APS of $6,000,000 in
licensing fees by J&J. The licensing fees were recognized as revenues according
to the percentage-of-completion method of accounting whereby income was
recognized based on the estimated stage of completion of the related project.
Cash payments received in advance of being earned were classified as deferred
revenue. Revisions of estimated profits have been included in earnings by the
reallocation method which spread the change in estimate over the current and
future periods. As of December 31, 1994, the project had been completed and all
associated revenues had been recognized.
J&J made a second equity investment in the Company in May 1994 through its
subsidiary Johnson & Johnson Development Corporation ("JJDC"). Under this
agreement, JJDC purchased 1,000,000 shares of newly issued common stock in
consideration for $5,000,000. In addition, JJDC received 200,000 warrants
exercisable for two years at $12.00 per share. APS will be issuing JJDC an
additional 432,101 shares in 1996 as a result of the APS stock price not
achieving certain predetermined levels. Upon issuance of these additional
shares, J&J's holding in APS common stock will increase to approximately 13% of
common shares outstanding.
33
<PAGE> 37
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. APS has the ability to earn an additional
$7,750,000 in fees if research milestones are achieved. If and when
approval is received from the FDA to market the Microsponge tretinoin products,
APS will earn a mark-up on Microsponge systems supplied to Ortho and J&J will
pay APS a royalty on product sales, subject to certain minimums. Should these
minimums not be achieved, Ortho loses its exclusivity and APS regains marketing
rights to the retinoid products.
NOTE 13 PREMIER, INC.
On April 2, 1993, APS acquired Premier, a marketing and distribution company
specializing in over-the-counter drug and personal care products. APS exchanged
454,444 shares of common stock for all the shares of Premier. The business
combination was accounted for as a pooling of interests, and accordingly, the
Company's historical consolidated financial statements presented herein are
restated to include the accounts and results of operations of Premier.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31, 1993
- ----------------------- ----
<S> <C>
Total revenues:
Advanced Polymer Systems, Inc. $ 12,002,807
Premier, Inc. 7,928,791
------------
Combined $ 19,931,598
------------
Net loss:
Advanced Polymer Systems, Inc. $ (8,729,627)
Premier, Inc. (1,147,504)
------------
Combined $ (9,877,131)
------------
</TABLE>
NOTE 14 JOHNSON & JOHNSON
Licensing Agreement: The Company's wholly owned subsidiary, Premier, licensed
from J&J the exclusive right to manufacture and distribute a product, Take-Off,
in the U.S. The agreement provides for Premier to remit royalty payments to J&J
based on net sales, with minimum payments of $375,000 per year. This agreement
expires in 1996 and provides an option for Premier to extend the term.
Distribution Arrangement: Premier obtained the rights to market and distribute
two suncare products, Sundown and Johnson's Baby Sunblock, in the U.S. Premier
purchases all Sundown inventory from J&J at an agreed-upon price. Premier is
reimbursed by J&J for agreed-upon marketing expenses. Upon the termination of
the arrangement, Premier is required to sell to J&J all of the J&J product in
Premier's inventory at Premier's then current book value. Premier performs a
reconciliation of the payable to J&J annually to determine the portion that is
currently due. The portion of the payable that relates to inventory sold during
a contract year is due at the end of that contract year.
34
<PAGE> 38
NOTE 15 SUBSEQUENT EVENTS AND MANAGEMENT'S PLANS WITH RESPECT TO FUNDING OF
OPERATIONS
In the first quarter of 1996, APS acquired all rights to the Polytrap
technology from Dow Corning in exchange for 200,000 shares of APS Common Stock.
The Company's existing cash and cash equivalents, collection of trade accounts
receivable, together with interest income and other revenue producing activities
including milestone payments, are expected to be sufficient to meet the
Company's near-term cash requirements assuming no changes to existing business
plans.
The Company is also currently developing a variety of opportunities which would
generate additional funds, including joint ventures, equity financings,
licensing agreements and other financing activities.
In the unlikely event that the Company is unable to raise additional funds
required to finance its operations, operating costs will have to be
significantly reduced by decreasing spending on advertising and promotion
activities, outside clinical programs and a variety of other discretionary
external expenditures.
35
<PAGE> 39
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, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule 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 generally accepted auditing
standards. 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
San Francisco, California
March 15, 1996
36
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the twenty-four month period prior to December 31, 1995 and
through the date of this report, there has not been a change in accountants or a
reported disagreement with accountants on any matter of accounting principles or
practices or financial statement disclosure.
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 June 5, 1996.
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.
37
<PAGE> 41
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 on
pages 19-33 of 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.
<TABLE>
<CAPTION>
3. Exhibits
<S> <C>
3-A -Copy of Registrant's Certificate of Incorporation. (1)
3-B -Copy of Registrant's Bylaws. (1)
10-B -Lease Agreement between the Registrant and White Properties Joint Venture
for lease of Registrant's executive offices in Redwood City, dated as of August 1, 1992. (3)
10-C -Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-N -Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-O -Unit Purchase Agreement dated June 6, 1994. (5)
10-P -Warrant to Purchase Common Stock. (5)
10-Q -Investment Agreement with Johnson & Johnson Development Corporation dated May 13, 1994. (5)
10-R -Form of Warrant to purchase Common Stock issued to Johnson & Johnson
Development Corporation (5)
10-S -Lease Agreement between Registrant and Financing for Science International dated September 1, 1995
(6)
10-T -Security and Loan Agreement between Registrant and Venture Lending dated September 27, 1995 (6)
10-U -Asset Purchase Agreement with Dow Corning Corporation dated January 23, 1996.
21 -Proxy Statement for the Annual Meeting of Shareholders. (4)
23 -Consent of Independent Auditors.
27 -Financial Data Schedules
</TABLE>
(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 as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3
and 4.4 to Registrant's Registration Statement on Form S-3
(Registration No. 33-82562) and incorporated herein by
reference.
(6) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.
* Management Contract or Compensatory plans.
38
<PAGE> 42
For purposes of complying with the amendments to the rules governing
Registration Statements on Form S-8 (effective July 13, 1990) under the
Securities Act of 1933 ("the Act"), as amended, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into Part II of the registrant's Registration Statements on Form S-8
Nos. 33-18942, 33-21829, 33-29084 and 33-50640 filed on December 8, 1987, May
13, 1988, June 6, 1989 and August 11, 1992, respectively.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
39
<PAGE> 43
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/ John J. Meakem, Jr.
-----------------------------
John J. Meakem, Jr.
Chairman, President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following person in the capacitites and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ John J. Meakem, Jr. Chairman, President,
- ----------------------------
John J. Meakem, Jr. Chief Executive Officer March 27, 1996
/s/ Michael O'Connell Senior Vice President, Chief
- ----------------------------
Michael O'Connell Administrative Officer and
Chief Financial Officer March 27, 1996
/s/ Carl Ehmann Director March 27, 1996
- ----------------------------
Carl Ehmann
/s/ Jorge Heller Director March 27, 1996
- ----------------------------
Jorge Heller
/s/ Helen C. Leong Director March 27, 1996
- ----------------------------
Helen C. Leong
/s/ Peter Riepenhausen Director March 27, 1996
- ----------------------------
Peter Riepenhausen
/s/ Toby Rosenblatt Director March 27, 1996
- ----------------------------
Toby Rosenblatt
/s/ Gregory H. Turnbull Director March 27, 1996
- ----------------------------
Gregory H. Turnbull
/s/ Dennis Winger Director March 27, 1996
- ----------------------------
Dennis Winger
</TABLE>
40
<PAGE> 44
ADVANCED POLYMER SYSTEMS, INC.
SCHEDULE II
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
Additions
Beginning Charged to Ending
Balance Expense Deductions Balance
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1993
Accounts receivable, allowance
for doubtful accounts $29,132 $108,240 $1,352 $136,020
December 31, 1994
Accounts receivable, allowance
for doubtful accounts $136,020 $5,833 $75,289 $66,564
December 31, 1995
Accounts receivable, allowance
for doubtful accounts $66,564 $29,464 $27,378 $68,650
</TABLE>
41
<PAGE> 45
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 and 33-50640) on Forms S-8 of Advanced Polymer
Systems, Inc. and in the Registration Statements (Nos. 33-47399, 33-51326 and
33-82562, 33-88972 and 333-759) on Forms S-3 of Advanced Polymer Systems, Inc.
of our report dated March 15, 1996, relating to the consolidated balance sheets
of Advanced Polymer Systems, Inc. and subsidiaries as of December 31, 1995 and
1994, the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three year period ended
December 31, 1995, and the related schedule, which report appears in the
December 31, 1995 annual report on Form 10-K of Advanced Polymer Systems, Inc.
KPMG PEAT MARWICK LLP
San Francisco, California
March 27, 1996
42
<PAGE> 46
EXHIBIT INDEX
FORM 10-K ANNUAL REPORT
ADVANCED POLYMER SYSTEMS, INC.
<TABLE>
<S> <C>
3-A -Copy of Registrant's Certificate of Incorporation. (1)
3-B -Copy of Registrant's Bylaws. (1)
10-B -Lease Agreement between the Registrant and White Properties Joint Venture
for lease of Registrant's executive offices in Redwood City, dated as of August 1, 1992. (3)
10-C -Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-N -Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-O -Unit Purchase Agreement dated June 6, 1994. (5)
10-P -Warrant to Purchase Common Stock. (5)
10-Q -Investment Agreement with Johnson & Johnson Development Corporation dated May 13, 1994. (5)
10-R -Form of Warrant to purchase Common Stock issued to Johnson & Johnson
Development Corporation (5)
10-S -Lease Agreement between Registrant and Financing for Science International dated September 1, 1995
(6)
10-T -Security and Loan Agreement between Registrant and Venture Lending dated September 27, 1995 (6)
10-U -Asset Purchase Agreement with Dow Corning Corporation dated January 23, 1996.
21 -Proxy Statement for the Annual Meeting of Shareholders. (4)
23 -Consent of Independent Auditors.
27 -Financial Data Schedules
</TABLE>
- --------------------------------------------------------------------------------
(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 as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3
and 4.4 to Registrant's Registration Statement on Form S-3
(Registration No. 33-82562) and incorporated herein by
reference.
(6) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.
* Management Contract or Compensatory plans.
43
<PAGE> 1
EXHIBIT 10-U
REGISTRATION RIGHTS AGREEMENT
January 23, 1996
Advanced Polymer Systems, Inc., a Delaware corporation ("APS") and Dow
Corning Corporation, a Michigan corporation ("PURCHASER"), hereby agree as
follows:
RECITALS
A. APS is acquiring a polymer-based carrier system business from
PURCHASER, and in payment thereof is issuing 200,000 shares of its Common Stock
(the "Shares") to PURCHASER.
B. The parties wish to provide for the registration of the subsequent
resale of the Shares and for the orderly distribution thereof, all on the terms
and conditions hereof.
THE PARTIES AGREE AS FOLLOWS:
1. Registration Rights; Listing.
1.1 Certain Definitions. As used herein, the following terms
shall have the following respective meanings:
(a) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Convertible Securities" shall mean securities of APS
convertible into or exchangeable for Registrable Securities.
(c) "Holder" shall mean any holder of outstanding Registrable
Securities which have not been sold to the public, but only if such holder is
PURCHASER or an assignee or transferee of Registration rights as permitted by
Section 1.8.
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(d) The terms "Registrar", "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act ("Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(e) "Registrable Securities" shall mean the Shares issued to PURCHASER
by APS, together with any Common Stock issued with respect to the Shares
pursuant to stock splits, stock dividends and similar distributions, so long as
such securities have not been sold to the public in a public distribution or a
public securities transaction or sold in a single transaction exempt from the
registration and prospectus delivery requirements of the Securities Act such
that all transfer restrictions and restrictive legends with respect to such
Shares shall have been removed in connection with such sale.
(f) "Registration Expenses" shall mean all expenses incurred by APS in
complying with this Agreement, including, without limitation, all federal and
state registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for APS, blue sky fees and expenses, the expense of
any special audits incident to or required by any such Registration and any
expenses related to the maintenance of such Registration and qualification
during the period specified in Section 1.4(a) hereof.
(g) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the
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rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
(h) "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities pursuant
to this Agreement.
1.2 Registration.
1.2.1 Registration. Subject to the terms of this Agreement, APS
shall use its best efforts to effect Registration of the Registrable Securities
within 60 days of their issuance to PURCHASER by filing as soon as possible
after the date hereof a Form S-3 Registration Statement (or any successor to
Form S-3) with the Commission.
1.2.2 Registration of Other Securities. Any Registration
Statement filed under this Section 1 may include securities of APS other than
Registrable Securities; provided, however, that neither PURCHASER or any Holder
shall be required to utilize an underwriter in connection with the sale of
their Registrable Securities.
1.2.3 Blue Sky. In the event of any Registration pursuant to
Section 1, APS will exercise its best efforts to Register and qualify the
securities covered by the Registration Statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the
distribution of such securities; provided, however, that:
(a) APS shall not be required to qualify to do business or
to file a general consent to service of process in
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any such states or jurisdictions, unless APS is already subject to service in
such jurisdiction; and
(b) notwithstanding anything in this Agreement to the contrary,
in the event any jurisdiction in which the securities shall be qualified
imposes a non-waivable requirement that expenses incurred in connection with
the qualification of the securities be borne by selling shareholders, such
expenses shall be payable pro rata by selling shareholders.
1.3 Expenses of Registration. All Registration Expenses (but not
Selling Expenses) incurred in connection with the Registration pursuant to
Section 1 shall be borne by APS.
1.4 Registration Procedures. Whenever required under this Agreement to
effect the Registration of any securities of APS, subject to the other
provisions of this Agreement, APS shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the Commission a Registration
Statement with respect to such securities in accordance with Section 1.2.1 and
use its diligent best efforts to cause such Registration Statement to become
effective as promptly as possible thereafter and to remain effective for a
period equal to the shorter of: (i) three years from the date of such
effectiveness; or (ii) until the distribution described in the Registration
Statement has been completed.
(b) Prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to comply with
the provisions of the Securities
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Act with respect to the disposition of all securities covered by such
Registration Statement.
(c) Furnish to the Holders participating in such
Registration and the underwriters, if any, of the securities being
Registered, such reasonable number of copies of the Registration Statement,
preliminary prospectus and final prospectus as they may request in order to
facilitate the public offering of such securities.
1.5 Additional Information Available. So long as the Registration
Statement is effective covering the resale of Shares owned by a Holder, APS
will furnish to the Holder(s):
(a) as soon as practicable after it becomes available (but
in the case of APS' Annual Report to Stockholders, within 120 days after the
end of each fiscal year of APS), one copy of: (i) its Annual Report to
Stockholders (which Annual Report shall contain financial statements audited
in accordance with generally accepted accounting principles by a national firm
of certified public accountants); (ii) if not included in substance in the
Annual Report to Stockholders, its Annual Report on Form 10-K; (iii) if not
included in substance in its Quarterly Reports to Stockholders, its
quarterly reports on Form 10-Q; and (iv) a full copy of the particular
Registration Statement covering the Shares (the foregoing, in each case,
excluding exhibits); and
(b) upon the reasonable request of a Holder, all exhibits
excluded by the parenthetical to subparagraph (a) (iv) of this Section 1.5;
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and APS, upon the reasonable request of a Holder, will meet with such Holder or
a representative thereof at APS' headquarters to discuss all information
relevant for disclosure in the Registration Statement covering the Shares and
will otherwise cooperate with any Holder conducting an investigation for the
purpose of reducing or eliminating such Holder's exposure to liability under
the Securities Act, including the reasonable production of information at APS'
headquarters.
1.6 Information Furnished by Holder. It shall be a condition
precedent of APS' obligations under this Agreement that each Holder of
Registrable Securities included in any Registration furnish to APS such
information regarding such Holder and the distribution proposed by such Holder
as APS may reasonably request.
1.7 Indemnification.
1.7.1 Company's Indemnification of Holder. APS will
indemnify and hold harmless each Holder, each of its officers, directors,
employees, agents, affiliates and constituent partners, and each person deemed
to be in control of such Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934 (the
"Exchange Act"), from and against all claims, losses, damages or liabilities
(or actions in respect thereof) to the extent such claims, losses, damages or
liabilities arise out of or are based upon any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus or other
document (including any related Registration Statement) incident to any
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such Registration, qualification or compliance, or are based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by APS of any rule or regulation promulgated under the Securities Act
applicable to APS and relating to action or inaction required of APS in
connection with any such Registration, qualification or compliance or arise out
of any failure by APS to fulfill an undertaking included in the Registration
Statement; and APS will reimburse each such Holder, each such underwriter and
each person who controls any such Holder or underwriter, for any legal and any
other expenses reasonably incurred in connection with defending any such claim,
loss, damage, liability or action; provided, however, that the indemnity
contained in this Section 1.7.1 shall not apply to amounts paid in settlement
of any such claim, loss, damage, liability or action if settlement is effected
without the consent of APS (which consent shall not unreasonably be withheld)
and; provided, further, that APS will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based upon any untrue statement or omission based upon written information
furnished to APS by such Holder or controlling person and stated expressly to
be for use in connection with the offering of securities of APS.
1.7.2 Holder's Indemnification of Company. Each Holder will indemnify
and hold harmless APS, each of its directors, officers, employees, agents and
affiliates, each
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person deemed to be in control of APS within the meaning of Section 15 the
Securities Act or Section 20 of the Exchange Act, and each other such Holder,
each of its officers, directors, employees, agents, affiliates and constituent
partners, and each person deemed to be in control of such other Holder within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by such Holder of any rule or regulation promulgated under the
Securities Act applicable to such Holder and relating to action or inaction
required of such Holder in connection with any such Registration, qualification
or compliance; and will reimburse APS, such Holder, such directors, officers,
partners, persons or control persons for any legal and any other expenses
reasonably incurred in connection with defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to APS by such Holder and specifically approved in writing by such
Holder for
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use in connection with the offering of securities of APS; provided, however,
that the indemnity contained in this Section 1.7.2 shall not apply with respect
to a Holder to amounts paid in settlement of any claim, loss, damage, liability
or action if settlement is effected without the consent of such Holder (which
consent shall not be unreasonably delayed or withheld).
1.7.3 Indemnification Procedure. Promptly after receipt by an
indemnified party under this Section 1.7 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party under this Section 1.7, notify the
indemnifying party in writing of the commencement thereof and, to the extent
reasonably possible, generally summarize such action. The indemnifying party
shall have the right to participate in and to assume the defense of such claim;
provided, however, that the indemnifying party shall be entitled to select
counsel for the defense of such claim with the approval of any parties entitled
to indemnification, which approval shall not be unreasonably withheld;
provided, further, that if either party reasonably determines that there may be
a conflict between the position of APS and a Holder in conducting the defense
of such action, suit or proceeding by reason of recognized claims for indemnity
under this Section 1.7, then counsel for such party shall be entitled to
conduct, or participate in, the defense to the extent reasonably determined by
such counsel to be necessary to protect the interest of such party and the
costs of such counsel shall be borne by the indemnifying party. The failure to
notify an
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indemnifying party promptly of the commencement of any such action, if
prejudicial to the ability of the indemnifying party to defend such action,
shall relieve such indemnifying party, to the extent so prejudiced, of any
liability to the indemnified party under this Section 1.7, but the omission so
to notify the indemnifying party will not relieve such party of any liability
that such party may have to any indemnified party otherwise other than under
this Section 1.7.
1.8 Transfer of Rights. The right to cause APS to Register securities
granted by APS to PURCHASER under this Agreement may be assigned by any Holder
to a transferee or assignee of any Registrable Securities not sold to the
public acquiring at least 25,000 shares of such Holder's Registrable Securities
(equitably adjusted for any stock splits, subdivisions, stock dividends,
changes, combinations or the like); provided, however, that:
(a) APS must receive written notice prior to the time of said
transfer, stating the name and address of said transferee or assignee and
identifying the securities with respect to which such information and
Registration rights are being assigned; and
(b) the transferee or assignee of such rights must not be a
person deemed by the Board of Directors of APS, in its best judgment, to be a
competitor or potential competitor of APS. Notwithstanding the limitations set
forth in the foregoing sentence respecting the minimum number of shares which
must be transferred and permitted transferees and assignees: (i) any
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Holder which is a partnership may transfer such Holder's Registration rights to
such Holder's constituent partners without restriction as to the number or
percentage of shares acquired by any such constituent partner; and (ii) Section
1.8(b) shall not prohibit the transfer or assignment of such rights to an
affiliate of the PURCHASER.
1.9 Nasdaq Listing. Prior to the effective date of a Registration of
any of the Shares, APS shall file an application with NASDAQ to list such
Shares for quotation on the Nasdaq National Market.
1.10 Delay in Effectiveness. In the event a Registration Statement
covering the Shares is not declared effective within ninety (90) days after the
date hereof or in the event the effectiveness of such Registration Statement is
suspended or terminated at any time subsequent to the 90th day after the date
hereof and prior to the termination of the period specified in Section 1.4(a)
hereof, APS shall pay to the Holders an amount equal to $275 per day for each
day such Registration Statement is not effective; provided that nothing herein
is intended to limit a Holder's ability to seek to enforce its rights to
require that a Registration Statement covering Shares remains effective during
the period specified in Section 1.4 hereof; and provided further that APS shall
not be required to make any payments to a Holder if the failure to obtain or
maintain an effective Registration Statement is solely attributable to a
Holder's failure to provide APS with
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information required to be provided by such Holder for inclusion in the
Registration Statement.
2. Miscellaneous.
2.1 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts entered into and wholly to be performed within the State of
California by California residents.
2.2 Successors and Assigns. Subject to the exceptions
specifically set forth in this Agreement, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
executors, administrators, heirs, successors and assigns of the parties.
2.3 Entire Agreement. This Agreement and the Asset Purchase
Agreement and the Exhibits and Schedules hereto and thereto constitute the
entire contract between APS and the PURCHASER relative to the subject matter
hereof. Any previous agreement between APS and the PURCHASER with respect to
the subject matter hereof is superseded by this Agreement.
2.4 Severability. Any invalidity, illegality or limitation of the
enforceability with respect to any Holder of any one or more of the provisions
of this Agreement, or any part thereof, whether arising by reason of the law of
any PURCHASER's domicile or otherwise, shall in no way affect or impair the
validity, legality or enforceability of this Agreement with respect to other
Holders. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, it shall to the extent practicable, be modified so as to make it
valid, legal
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and enforceable and to retain as nearly as practicable the intent of the
parties, and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
2.5 Amendment of Agreement. Any provision of this Agreement may
be amended only by a written instrument signed by APS and by PURCHASER.
2.6 Notices. Any notice required or permitted hereunder shall be given
in writing and shall be conclusively deemed effectively given upon personal
delivery, or five days after deposit in the United States mail, by registered
or certified mail, postage prepaid, addressed:
(a) if to APS, Advanced Polymer Systems, Inc., 3696 Haven
Avenue, Redwood City, California 94063, ATTENTION: President; and
(b) if to PURCHASER, Dow Corning Corporation, 2200 W. Salzburg
Road, Midland, Michigan 48686-0994, ATTENTION: General Counsel.
2.7 Headings. The headings of the Sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
2.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IT WITNESS WHEREOF, the parties have executed this Agreement.
ADVANCED POLYMER SYSTEMS, INC.
By:/s/ Michael O'Connell
---------------------------------
Michael O'Connell
Senior Vice President and CFO
DOW CORNING CORPORATION
By:/s/ William P. Cavanaugh
---------------------------------
William P. Cavanaugh
Commercial Unit Manager
Personal Household and
Automotive Products
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EXECUTION COPY
ASSET PURCHASE AGREEMENT
THIS AGREEMENT made the 23rd day of January, 1996, by and between
ADVANCED POLYMER SYSTEMS, INC., a Delaware corporation with its principal place
of business at 3696 Haven Avenue, Redwood City, California 94063 ("APS") and
DOW CORNING CORPORATION, a Michigan corporation with its principal place of
business at 2200 W. Salzburg Road, Midland, Michigan 48686-0994 ("DCC").
RECITALS
A. APS and DCC entered into a Joint Agreement effective November
25, 1991, providing for joint cross licensing, joint development and sharing of
gross margin from the marketing of certain Microsponge(R) Systems and
Polytrap(R) Systems (together, the "Systems").
B. APS and DCC entered into a Purchase/Sales Agreement effective
November 25, 1991, providing for supply of the Systems by APS to DCC and their
purchase by DCC from APS.
C. The parties now desire to terminate the Joint Agreement and
the Purchase/Sales Agreement.
D. The parties also now desire to provide for the sale, transfer
and assignment by DCC to APS of certain worldwide patents that cover the
Polytrap(R) System, all unpatented Polytrap(R) Technology and the Polytrap(R)
Trademarks on the terms and conditions and for the consideration herein set
forth.
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IT IS, THEREFORE, AGREED as follows:
1. Definitions. For the purposes of this Agreement, the
following definitions shall apply.
"Affiliates" of a party shall mean agents, representatives,
attorneys, successors, assigns, employees, officers, directors and shareholders
of, or entities controlling, controlled by or under common control with, the
party.
"Capital Loan" shall have the definition as set forth in
Section 7.1 of the Joint Agreement.
"Closing Date" shall have the meaning as defined in Section 3
hereto.
"Division of Gross Margin" shall have the meaning consistent
with Section 6 of the Joint Agreement and the definition of "Gross Margin" in
such agreement.
"Joint Agreement" shall mean the agreement between the parties
effective November 25, 1991, a copy of which is attached hereto as Exhibit A.
"Microsponge(R) System" shall mean a polymer-based delivery
system as described and claimed in U.S. Patent No. 4,690,825.
"Net Sales" shall have the meaning set forth in Section 1.11
of the Joint Agreement.
"Purchase/Sales Agreement" shall mean the Purchase/Sales
Agreement effective November 25, 1991 between the parties.
"Polytrap(R) System Assets" shall have the meaning as set
forth in Section 3.1.
"Polytrap(R) System" shall mean a polymer-based carrier
system as described and claimed in U.S. Patent No. Re. 33,429 issued on
November 6, 1990.
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"Polytrap(R) Patents" shall mean the patents and patent
applications as listed on Exhibit B, and any patents that may issue on such
patent applications, any divisions, continuations, continuations-in-part and
reissues and renewals thereof, and all foreign counterparts thereof.
"Polytrap(R) Patents" shall not include (a) U.S. patent number 5,100,477 and
5,126,309, and Japanese application number 121430/9, all of which are entitled
"Decontamination of Toxic Chemical Agents"; and (b) U.S. patent number
5,173,520 entitled "Colorant Material with a Polymerized Coating," which are
not listed on Exhibit B.
"Polytrap(R) Technology" shall mean know-how, trade secrets,
inventions, data, technology and information, including, but not limited to,
improvements thereof, relating to a Polytrap(R) System which are now owned by
DCC and which DCC has the lawful right to disclose. Polytrap(R) Technology
shall include, but shall not be limited to, processes and analytical
methodology used in development, testing, analysis and manufacture, and
clinical, toxicological, research, formulation, product development and other
scientific data.
"Polytrap(R) Trademarks" shall mean the marks "Polytrap(R)",
"Polytrap FLM(R)" and "Polytrap SMP(R)" in use by or registered to DCC.
"Related Seller Documents" shall have the meaning as set forth
in Section 6.1(b) hereof.
"Related Purchaser Documents" shall have the meaning as set
forth in Section 6.2(b) hereof.
"System(s)" shall mean a Microsponge(R) and/or Polytrap(R)
System.
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2. Termination of Existing Agreements.
2.1 The Joint Agreement shall be terminated effective on
the Closing Date, as defined in Section 7. Notwithstanding such termination,
DCC shall pay to APS the excess of APS' unpaid share of the Division of Gross
Margin over the balance that may be due to DCC on the Capital Loan (subject to
paragraph 2.3 of this Section) and the Capital Loan shall be considered paid in
full.
2.2 The Purchase/Sales Agreement shall be terminated as of
the Closing Date. Notwithstanding such termination, DCC shall make payment of
all outstanding unpaid bills for purchases from APS (subject to provision 2.3
of this Section).
2.3 Any monies due APS, which relate to purchases and sales
occurring prior to DCC's filing on May 15, 1995 for Chapter 11 protection under
the U.S. Bankruptcy Code and still unpaid at Closing Date, may be considered
pre-petition claims of APS against DCC and subject to payment in accordance
with and upon confirmation of DCC's plan of reorganization.
3. Sale of Polytrap(R) System Assets.
3.1 DCC agrees to sell to APS and APS agrees to buy from DCC full
right and title to the Polytrap(R) Patents, the Polytrap(R) Technology, the
Polytrap(R) Trademarks, and all customer information and files with respect to
the sale of products utilizing the Polytrap(R) Patents or Technology
(collectively, the "Polytrap(R) System Assets"). In consideration of such sale
by DCC, APS shall issue to DCC 200,000 shares of its common stock (the
"Shares"). The Shares shall be publicly marketable (subject to any applicable
securities law restriction or limitation) pursuant to a separate agreement to
be executed substantially in the form attached as Exhibit C ("Registration
Rights Agreement").
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3.2 The Closing of the sale and transfer contemplated by this
Agreement (the "Closing") shall take place in Chicago on or before March 31,
1996, or at such other place, time and date as shall be fixed by mutual
agreement between the parties hereto. The date of Closing is referred to
herein as the "Closing Date".
3.3 The sale, assignment, conveyance, transfer and delivery
of the Polytrap(R) Assets shall be made at the Closing by appropriate bills of
sale, assignments, endorsements and such other appropriate instruments of
transfer, all in form and substance satisfactory to APS, as shall be sufficient
to vest in APS as of the Closing Date good and merchantable title to the
Polytrap(R) System Assets free and clear of any liens, charges, options,
encumbrances or adverse claims of any kind. Such instruments of assignment,
conveyance and transfer shall include the Patent Assignment and Trademark
Assignment, substantially in the form set forth hereto as Exhibits D and E,
respectively.
3.4 APS shall be responsible for preparing and recording
documents, including payment of any fees and expenses related thereto, as may
be required for affecting transfer of title and interest in, to and under all
of the Polytrap(R) System Assets from DCC to APS.
3.5 DCC agrees that at the Closing and from time to time
thereafter, without additional consideration, it will execute and deliver or
cause to be executed and delivered such other and further instruments of
assignment, transfer or conveyance of any of the assets and properties being
transferred and conveyed herein and take such other action as APS may
reasonably request to effect the transfer to APS of the right, title and
interest in, to and under all of the Polytrap(R) System Assets.
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4. Distribution Agreement. In order to assist with the business
transition from DCC to APS, DCC shall continue to distribute and sell on behalf
of APS all products that have been covered by the Joint Agreement between the
parties for a period not to exceed one (1) year in exchange for a service fee
paid to DCC by APS of three (3%) percent of Net Sales of such products made
directly by DCC's sales force. The terms and conditions of such sales and
distribution arrangement shall be as set forth in a separate agreement
substantially in the form attached hereto as Exhibit F ("Distribution
Agreement").
5. Noncompete. In consideration of the undertakings herein by
APS, DCC agrees that it will not compete with APS for a period of ten years
from the December 31, 1995, in the United States and other parts of the world
where Systems are presently being sold or utilized in products, in the business
of creating, licensing or marketing polymer-based carrier systems, pursuant to
a separate agreement to be executed substantially in the form attached as
Exhibit G ("Non-Compete Agreement").
6. Representations and Warranties.
6.1 DCC represents and warrants:
(a) DCC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Michigan and has
the corporate power to own, lease and operate its properties and to carry on
its business as now being conducted. There will be delivered to APS on the
Closing Date accurate and complete copies of the Restated Articles of
Incorporation and Bylaws of DCC in effect on the Closing Date.
(b) DCC has all necessary corporate power and
authority under its Restated Articles of Incorporation and Bylaws and under the
laws of the State of Michigan and
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other applicable laws to execute, deliver and perform this Agreement and any
other agreements or documents delivered pursuant to this Agreement (the
"Related Seller Documents"). The execution, delivery and performance of this
Agreement and the Related Seller Documents have been duly authorized by all
necessary corporate action on the part of DCC, including any shareholder and
director approval necessary for the consummation of the transactions hereby
contemplated. This Agreement is, and each of the Related Seller Documents when
executed and delivered by DCC will be, a valid, binding and enforceable
obligation of DCC.
(c) DCC is not a party to any agreement, written or
oral, that is inconsistent with this Agreement.
(d) Except as set forth on Exhibit B hereto, to
its knowledge, (i) DCC has full right, title and interest in the Polytrap(R)
Patents, the Polytrap(R) Technology and the Polytrap(R) Trademarks and; (ii)
DCC is not presently aware of any patents owned by a third party which would be
infringed by the practice of the Polytrap(R) Patents or the Polytrap(R)
Technology.
(e) Except as set forth on Exhibit B hereto, to the
knowledge of DCC there have been no customer complaints concerning the use of
any product that utilizes Polytrap(R) Patents or Polytrap(R) Technology
during the period of two years prior to the Closing Date.
6.2 APS represents and warrants:
(a) APS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power to own, lease and operate its properties and to carry on
its business as now being conducted. There will be delivered to DCC on the
Closing Date accurate and complete copies of the Certificate of
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Incorporation and Bylaws of APS in effect on the Closing Date.
(b) APS has all necessary corporate power and
authority under its Certificate of Incorporation and Bylaws and under the laws
of the State of Delaware and other applicable laws to execute, deliver and
perform this Agreement and any other agreements or documents delivered pursuant
to this Agreement (the "Related Purchaser Documents"). The execution, delivery
and performance of this Agreement and the Related Purchaser Documents have been
duly authorized by all necessary corporate action on the part of APS, including
any shareholder and director approval necessary for the consummation of the
transactions hereby contemplated. This Agreement is, and each of the Related
Purchaser Documents when executed and delivered by APS will be, a valid,
binding and enforceable obligation of APS.
(c) APS is not a party to any agreement, written or
oral, that is inconsistent with this Agreement.
(d) The Shares have been duly and validly issued and
are fully paid and non-assessable. No pre-emptive right, co-sale right,
registration right, right of first refusal or other similar right exists with
respect to the Shares or as a result of the issuance and sale thereof. No
further approval or authorization of any shareholder or director of APS or of
any other party is required for the issuance and sale or transfer of the Shares
in accordance with the terms of this Agreement and the Registration Rights
Agreement.
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7. Conditions of Closing; Closing Deliveries.
7.1 The obligations of APS to close under this Agreement
are subject to the satisfaction of all of the following conditions as of the
Closing Date, any of which may be waived by APS:
(a) the representations and warranties of DCC set
forth in this Agreement or in any certificate or document called for in this
Agreement shall be true and correct in all material respects as made, both on
the date hereof and at and as of the Closing (as though such representations
and warranties were made anew), and, except with respect to the effect of
transactions permitted by the provisions of this Agreement, all agreements and
transactions contemplated hereby and to be performed by DCC on or before the
Closing shall have been duly performed.
(b) there shall have been delivered to APS by DCC
such bills of sale, assignments, and other good and sufficient instruments of
transfer (the "Transfer Documents"), including, without limitation, the Patent
Assignment and Trademark Assignment, conveying and transferring to APS title to
the Polytrap(R) Patents and Trademarks as provided in this Agreement, and all
other required documents, certificates, and instruments set forth in Section
7.3. Provided, however, to the extent that it is not practicable to deliver
any of such conveyancing documents other than the Patent Assignment and the
Trademark Assignment at the time of Closing, such documents shall be delivered
to APS as soon as practicable thereafter.
7.2 The obligations of DCC to close under this Agreement are
subject to the satisfaction of all of the following conditions as of the
Closing Date, any of which may be waived by DCC:
9
<PAGE> 24
(a) the representations and warranties of APS
contained in this Agreement or in any certificate or document called for in
this Agreement shall be true and correct in all material respects as made, both
on the date hereof and at and as of the Closing (as though such representations
and warranties were made anew), and, except with respect to the effect of
transactions permitted by the provisions of this Agreement, all agreements and
transactions contemplated hereby and to be performed by APS on or before the
Closing shall have been duly performed.
(b) there shall have been delivered to DCC a
certified copy of a Resolution of the Board of Directors of APS authorizing and
approving the purchase of the Polytrap(R) System Assets.
(c) DCC shall have obtained approval from the U.S.
Bankruptcy Court, Eastern District of Michigan, Northern Division to enter into
the transactions contemplated by this Agreement.
7.3 At the Closing, DCC shall tender or cause to be tendered
to APS the following:
(a) the Transfer Documents referred to in Section
7.1(b) hereof properly executed and acknowledged.
(b) appropriate receipts.
(c) all other documents and papers required by
Section 7.1 hereof as conditions of Closing and executed counterparts of the
Agreements attached hereto as exhibits including:
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<PAGE> 25
(1) the Patent Assignment, duly executed
by DCC.
(2) the Trademark Assignment, duly
executed by DCC.
(3) a counterpart of the Distribution
Agreement, duly executed by DCC.
(4) a counterpart of the Non-Compete
Agreement, duly executed by DCC.
(5) a counterpart of the Registration
Rights Agreement, duly executed by
DCC.
7.4 At the Closing, APS shall deliver to DCC the following:
(a) A certificate(s) for the Shares, free and clear
of any and all encumbrances (other than any restrictions under the U.S. or
state securities laws), in form satisfactory to DCC.
(b) all other documents and papers required by
Section 7.2 hereof as conditions to the Closing and executed counterparts of
the Agreements attached hereto as exhibits, including:
(1) a counterpart of the Distribution
Agreement, duly executed by APS.
(2) a counterpart of the Non-Compete
Agreement, duly executed by APS.
(3) a counterpart of the Registration
Rights Agreement, duly executed by
APS.
11
<PAGE> 26
8. Disclaimer. APS agrees that, as of Closing Date,
determination of the suitability of the Polytrap(R) System Assets for uses
contemplated by APS will be the sole responsibility of APS, that DCC has not
and does not represent that the Polytrap(R) System is suitable for, or has been
tested for medical device, pharmaceutical, or any other medical product
applications or end-uses, and that DCC shall not be held liable for the
damages, direct or consequential, resulting from the use of the Polytrap(R)
System Assets transferred to APS under this Agreement.
9. Assumption of Liabilities. APS shall assume, effective as of
the Closing Date, and thereafter pay, perform and discharge all liabilities and
obligations with respect to the prosecution, maintenance and protection of the
Polytrap(R) System Assets, and all liabilities for the sale and delivery of
Polytrap(R) System and Microsponge(R) System products after the Closing,
including without limitation, tort liability, products liability, and strict
liability related to Polytrap(R) System or Microsponge(R) System products made
by APS after the Closing.
10. Indemnification.
10.1 The representations and warranties made in this
Agreement by either party hereto and in any agreement, certificate, exhibit or
document delivered in connection therewith shall survive the Closing.
10.2 DCC agrees to indemnify and hold harmless APS and its
Affiliates from and against any loss, damage or expense (including reasonable
attorneys' fees) suffered by APS resulting from (a) any material breach by DCC
of this Agreement; (b) any material inaccuracy in or material breach of any of
the representations, warranties or covenants made by DCC herein, or in any
other agreement, or certificate delivered by DCC at the Closing in accordance
with the provisions of any Section hereof; (c) any and all liabilities,
obligations, charges, claims
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<PAGE> 27
and demands in any way relating to, arising out of, or connected with (i) the
development, sale or distribution by DCC, or on behalf of DCC other than by
APS, of the Polytrap(R) System product prior to the Closing, including, but not
limited to, any products liability claims with respect to the Polytrap(R)
System product manufactured by or on behalf of DCC, (ii) the conduct of the
Polytrap(R) business prior to the Closing, or (iii) the ownership, possession
or use of the Polytrap(R) System Assets prior to the Closing; and (d) the
failure of DCC to pay, discharge or perform any liability or obligations of DCC
which is not expressly assumed by APS under this Agreement.
10.3 APS agrees to indemnify and hold harmless DCC and its
Affiliates from and against any loss, damage or expense (including reasonable
attorneys' fees) suffered by DCC resulting from (a) any material breach by APS
of this Agreement; (b) any material inaccuracy in or material breach of any of
the representations, warranties or covenants made by APS herein, or in any
agreement or certificate delivered by APS at the Closing in accordance with the
provisions of any Section hereof; (c) any and all liabilities, obligations,
charges, claims and demands in any way relating to, arising out of, or
connected with (i) the development, manufacture, sale or distribution by APS,
or on behalf of APS other than by DCC, of the Polytrap(R) System product after
the Closing, including, but not limited to any products liability claims with
respect to the Polytrap(R) System product manufactured by APS, (ii) the conduct
of the Polytrap(R) business after the Closing, or (iii) the ownership,
possession or use of the Polytrap(R) System Assets after the Closing; and (d)
the failure of APS to pay, discharge or perform any liability or obligations of
APS which is expressly assumed by APS under this Agreement.
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<PAGE> 28
10.4 (a) A party entitled to be indemnified pursuant to
Section 10.2 or 10.3 hereof (the "Indemnified Party") shall notify the party
liable for such indemnification (the "Indemnifying Party") in writing of any
claim or demand which the Indemnified Party has determined has given or could
give rise to a right of indemnification under this Agreement. Subject to the
Indemnifying Party's right to defend in good faith third party claims as
hereinafter provided, the Indemnifying Party shall satisfy its obligations
under this Section within thirty (30) days after receipt of written notice
thereof from the Indemnified Party.
(b) If the Indemnified Party shall notify the
Indemnifying Party of any claim or demand pursuant to Section 10.4(a) hereof,
and if such claim or demand relates to a claim or demand asserted by a third
party against the Indemnified Party which the Indemnifying party acknowledges
is a claim or demand for which it must indemnify or hold harmless the
Indemnified Party under Section 10.2 or 10.3 hereof, the Indemnifying Party
shall have the right to employ counsel acceptable to the Indemnified Party to
defend any such claim or demand asserted against the Indemnified Party. The
Indemnified Party shall have the right to cooperate in the defense of any such
claim or demand. The Indemnifying Party shall notify the Indemnified Party in
writing, within thirty (30) days after the date of the notice of claim given by
the Indemnified Party to the Indemnifying Party under Section 10.4(a) hereof of
its election to defend in good faith any such third party claim or demand. So
long as the Indemnifying Party is defending in good faith any such claim or
demand asserted by a third party against the Indemnified Party, the Indemnified
Party shall not settle or compromise such claim or demand. The Indemnified
Party shall make available other materials in the Indemnified Party's
possession reasonably required by it for its use in contesting any third party
claim or demand. Whether
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<PAGE> 29
or not the Indemnifying Party elects to defend any such claim or demand, the
Indemnified Party shall have no obligation to do so.
10.5 The rights provided in this Section 10 do not
constitute an election of remedies or waiver of any rights which may be
available to any party other than as provided herein should the provisions of
this Section 10 be found by a court of competent jurisdiction to be
unenforceable, void or unavailable for any reason.
11. Confidentiality.
11.1 APS and DCC acknowledge that they will each become
privy to confidential information relating to each such party's businesses
during the course of the negotiations and during the period between the
execution hereof and the Closing hereunder which it otherwise would not have
known and that any disclosure of said information could injure such party's
businesses. Therefore APS and DCC and their respective representatives, agents
and employees agree to exert their best efforts (equivalent to the protection
given their own confidential information) to prevent delivery or disclosure of
all information so obtained to any third party or to any other outside source
or used for any purpose other than the consummation of this Agreement.
"Confidential Information" includes information ordinarily known only to the
personnel of APS and DCC and includes, without limitation, customer lists,
supplier lists, trade secrets, distribution channels, pricing policy and
records, inventory records, and such other information designated as
proprietary or confidential by APS or DCC.
11.2 It is understood and agreed by the parties that the
above obligations to keep information confidential shall not attach to
information which (a) was in the public knowledge or domain at the time of
disclosure, (b) was known to the recipient prior to the time of receipt
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<PAGE> 30
under this Agreement as is shown by recipient's written or other tangible
records, or (c) is obtained by the recipient from a third party who has a bona
fide right to disclose the information and without obligations to keep it
confidential. It is further understood and agreed by the parties that the
obligations of confidence shall immediately cease at such time as the
information becomes a part of the public knowledge or domain without breach or
fault on the part of the receiving party, or a period of fifteen (15) years has
lapsed from the date of this Agreement.
11.3 In the event that the recipient of such information
considers certain confidential information received under this Agreement to be
excluded from the above obligations of confidence and intends to disclose or
transfer it to a third party, the recipient agrees to give the originating
party thirty (30) days written notice prior to any such disclosure or transfer
as to what information is believed to be excluded and the basis for the
exclusion.
11.4 Further, neither party hereto shall make any public
disclosure pertaining to the terms of this Agreement or any of the transactions
contemplated hereby, unless such disclosure is necessary (a) to satisfy such
party's legal or contractual obligations without the express written consent of
the other party or (b) reasonably required for compliance with any federal or
state securities laws, regulations, or filing requirements.
12. Miscellaneous.
12.1 The parties acknowledge that neither DCC, APS nor any
party acting on behalf of DCC or APS has paid or become obligated to pay any
fee or commission to any broker, finder or intermediary for or on account of
the transactions contemplated by this Agreement.
12.2 APS shall be responsible for obtaining all licenses,
permits and approvals
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<PAGE> 31
from public authorities necessary for it to use the Polytrap(R) System Assets,
and DCC shall not be responsible for transferring or obtaining such licenses,
permits or approvals, except that DCC shall cooperate with APS in attempting to
obtain such licenses, permits and approvals.
12.3 Whether or not the transactions contemplated herein
are consummated, unless otherwise expressly provided herein each party hereto
shall pay its own expenses incident to this Agreement and the transactions
contemplated herein, including all legal and accounting fees and disbursements.
APS shall pay all sales and use taxes applicable to the transactions referred
to in this Agreement. The party responsible under applicable law shall bear and
pay in their entirety all other taxes and registration and transfer fees, if
any, payable by reason of the sale and conveyance of the Polytrap(R) System
Assets. The parties shall fully cooperate to avoid, to the extent legally
possible, the payment of duplicate taxes, and each party shall furnish, at the
request of the other, proof of payment of any taxes or other documentation
which is a prerequisite to avoiding payment of a duplicate tax. Each party
will cooperate to the extent practicable in minimizing all taxes and fees
levied by reason of the sale and conveyance of the Polytrap(R) System Assets.
12.4 Neither of the parties hereto shall, prior to the
Closing, issue or authorize to be issued any press release, or other public
announcement concerning this Agreement or any of the transactions contemplated
hereby (other than any filing required to be made by APS or DCC pursuant to any
federal or state law or regulation), unless such release or announcement, in
respect of timing and contents, has been approved by authorized executives or
officers of both APS and DCC, as appropriate, which approval shall not be
unreasonably withheld. Notwithstanding the foregoing, neither party is
prevented from making such public
17
<PAGE> 32
announcements as such party may consider necessary in order to satisfy such
party's legal or contractual obligations, including, but not limited to, the
public disclosure necessary for DCC to obtain Bankruptcy Court approval
pursuant to Section 7.2(c) of this Agreement.
12.5 Legal title, equitable title and risk of loss with
respect to the Polytrap(R) System Assets shall not pass to APS until they are
transferred at the Closing hereunder.
12.6 All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to be duly given upon delivery, if delivered by hand, or three business
days after mailing, if mailed certified or registered first class mail, postage
prepaid, properly addressed to the party entitled to receive such notice at the
addresses stated below:
If to APS:
Advanced Polymer Systems, Inc.
3696 Haven Avenue
Redwood City, California 94063
Attention: President
If to DCC:
Dow Corning Corporation
2200 W. Salzburg Road
Midland, Michigan 48686-0994
Attention: General Counsel
or to such other address as a party may direct by notice given to the other
party.
12.7 The parties have in this Agreement and the Exhibits
hereto incorporated all representations, warranties, covenants, commitments and
understandings on which they have relied in entering into this Agreement and,
except as provided for herein, neither party has made any other covenant or
commitment to the other concerning its future action. Accordingly, this
Agreement, the Registration Rights Agreement, the Distribution Agreement, and
the Non-
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<PAGE> 33
Compete Agreement (i) constitute the entire agreement and understanding between
the parties with respect to the matters contained herein, and there are no
promises, representations, conditions, provisions or terms related thereto
other than those set forth in these agreements, and (ii) supersede all previous
understandings, agreement(s) and representations between the parties, written
or oral, relating to the subject matter hereof. The parties hereto may from
time to time during the continuance of this Agreement modify, vary or alter any
of the provisions of this Agreement, but only by an instrument duly executed by
the parties hereto.
12.8 If any particular provision of this Agreement which
substantially affects the commercial basis of this Agreement shall be
determined to be invalid or unenforceable, such provision shall be amended as
hereinafter provided to delete therefrom or revise the portion thus determined
to be invalid or unenforceable. Such amendment shall apply only with respect
to the operation of such provision of this Agreement in the particular
jurisdiction for which such determination is made. In such event, the parties
agree to use reasonable efforts to agree on substitute provisions, which, while
valid, will achieve as closely as possible the same economic effects or
commercial basis as the invalid provisions, and this Agreement otherwise shall
continue in full force and effect.
12.9 The waiver by a party of any single default or breach
or succession of defaults or breaches by the other shall not deprive either
party of any right under this Agreement arising out of any subsequent default
or breach.
12.10 All matters affecting the interpretation, validity,
and performance of this Agreement shall be governed by the laws of the State of
Michigan, without regard to principles of conflict of laws.
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<PAGE> 34
12.11 Except as specified in the attached Distribution
Agreement, nothing in this Agreement authorizes either party to act as agent
for the other party as to any matter. The relationship between APS and DCC is
that of independent contractors.
12.12 This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.13 The Section headings contained in this Agreement have
been inserted for identification and reference purposes and shall not determine
the construction or interpretation of this Agreement.
12.14 Each party hereto and its counsel have mutually
contributed to the drafting of this Agreement, and no provision hereof shall be
construed against any party on the grounds that a party or its counsel drafted
the provision.
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<PAGE> 35
IN WITNESS WHEREOF, the parties have executed this Agreement.
ADVANCED POLYMER SYSTEMS, INC.
By: /s/ Michael O'Connell
--------------------------------------------
Michael O'Connell
Senior Vice President and CFO
DOW CORNING CORPORATION
By: /s/ William P. Cavanaugh
--------------------------------------------
William P. Cavanaugh
Commercial Unit Manager
Personal, Household and Automotive Products
21
<PAGE> 36
EXHIBIT A
JOINT AGREEMENT
THIS AGREEMENT effective the 25th day of November, 1991, by and between
ADVANCED POLYMER SYSTEMS, INC. ("APS"), a Delaware corporation, and DOW CORNING
CORPORATION ("DCC"), a Michigan corporation.
R E C I T A L S
A. APS is the owner of the Patents and Patent Applications described
on Exhibit A attached hereto (the APS "Patent Rights") and the Trademark
described on Exhibit B attached hereto (the "APS Licensed Trademark").
B. APS possesses technical proprietary information relating to certain
proprietary polymers and manufacturing equipment and know-how for preparing
polymer-based carrier systems based thereon.
C. DCC is the owner of the Patents and Patent Applications described
on Exhibit C attached hereto (the DCC "Patent Rights").
D. DCC possesses technical proprietary information relating to certain
proprietary polymers and manufacturing equipment and know-how for preparing
polymer-based carrier systems based thereon.
E. DCC possesses worldwide capabilities to market certain products for
use in other products in the Field as hereinafter defined.
F. APS and DCC desire to form a joint endeavor pursuant to which APS
will supply and DCC will market polymer-based carrier
<PAGE> 37
systems, based on the proprietary rights of APS and DCC, for use in products in
the Field.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, APS and DCC agree as follows:
1. Definitions. For purposes of this Agreement, the following
definitions shall be applicable:
1.1 "Promissory Notes" shall be the notes described in Section 7.3
of this Agreement.
1.2 "Capital Loan" shall be the loan described in Section 7.1 of
this Agreement.
1.3 "Research Loan" shall be the loan described in Section 7.2 of
this Agreement.
1.4 "CTFA" shall mean the most recent edition of the Cosmetic,
Toiletry and Fragrance Association Ingredient Handbook.
1.5 "Field" shall mean all CTFA listed ingredients entrapped in
Microsponge(R) Systems or improvements thereon or Polytrap(R) Systems or
improvements thereon or either System without entrapped ingredient or
ingredients, to be used as raw materials in cosmetic, personal care, and
personal household care, which are sold to primary or end-use manufacturers or
distributors. Excluded are entrapments of drugs (other than over-the-counter
"OTC" category I Sunscreens and OTC antiperspirant active ingredients), and any
pre-existing rights of third parties described in Exhibit 2.1.
1.6 "Affiliate" shall mean a corporation or any other entity that
directly, or indirectly through one or more
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<PAGE> 38
intermediaries, is controlled by, the designated party, but only for so long as
the relationship exists. "Control" shall mean ownership of at least 50 percent
of the shares of stock entitled to vote for the election of directors in the
case of a corporation, and at least 50 percent of the interests in profits in
the case of a business entity other than a corporation.
1.7 "Fully Burdened Costs" shall mean in connection with services to
be performed by a party under the terms of this Agreement or the Manufacturing
Agreement, all direct and indirect costs incurred by the party or any Affiliate
in performing its obligations under this Agreement or the Manufacturing
Agreement as determined in accordance with generally accepted accounting
principles (based in the case of the Manufacturing Agreement on 80 percent
utilization of the manufacturing facility). Such costs shall include without
limitation:
(i) salaries and wages,
(ii) payroll taxes,
(iii) contract labor,
(iv) fringe benefits,
(v) facilities (including leasehold improvements)
and equipment related expenses,
(vi) recruitment and relocation,
(vii) communications expense,
(viii) raw materials and supplies,
(ix) development and prototype materials,
(x) freight and transportation, including freight
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<PAGE> 39
charges for shipment of Products to DCC warehouse or customer
locations,
(xi) training and education,
(xii) travel expenses,
(xiii) data processing costs,
(xiv) patent, trademark and license fees,
(xv) insurance,
(xvi) professional services,
(xvii) depreciation and amortization of capital acquisitions,
(xviii) outside purchased services,
(xix) examples of the calculation of Fully Burdened Costs for 4
products are attached as Exhibit D.
1.8 "Gross Margin" shall mean Net Sales (whose computation shall be
after reimbursement of freight and sales taxes, import duties, and other excise
taxes) less cost of goods sold (which shall include the cost of active
ingredients supplied by DCC or an Affiliate at the price DCC or such Affiliate
charges to its most favored customer in the Field) computed in accordance with
generally accepted accounting principles consistently applied.
1.9 "Joint Operating Committee" shall mean the Committee referred to
in Article 4 hereof.
1.10 "Microsponge(R) System" shall mean a polymer-based delivery system
as described and claimed in U.S. Patent No. 4,690,825.
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<PAGE> 40
1.11 "Net Sales" shall mean the total of all revenues received by DCC
and its Affiliates on sales of Products to an independent, unrelated third
party in a bona fide arm's length transaction, less the following deductions to
the extent included in the amounts received: (i) cash and trade discounts
actually allowed and taken; (ii) credits or refunds actually allowed for
spoiled, damaged, outdated or returned goods; (iii) freight charges paid for
delivery; (iv) sales taxes, import duties and other excise taxes; and (v)
external warehousing costs. Net sales shall not include sales between DCC and
any of its Affiliates or between Affiliates.
1.12 "Polytrap(R) System" shall mean a polymer-based carrier system as
described and claimed in U.S. Patent No. RE 33,426 issued on November 6, 1990.
1.13 "Products" shall mean any and all Microsponge and Polytrap
Systems for use in products in the Field.
1.14 "System" shall mean a Microsponge System or a Polytrap System.
1.15 "Technical Information" shall mean know-how, trade secrets,
inventions, data, technology and information including improvements thereof
relating to a System which are now owned or hereafter acquired by a party
hereto and which such party has the lawful right to disclose. Technical
Information shall include, without limitation, processes and analytical
methodology used in development, testing, analysis and manufacture, and
clinical, toxicological or other scientific data.
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<PAGE> 41
2. Grant of Licenses.
2.1 APS hereby licenses DCC, royalty-free, under APS Patent Rights
and Technical Information to use and sell Microsponge Systems for use in the
Field in all countries of the world. Such license shall be exclusive except for
and subject to presently existing rights of others as set forth on Exhibit 2.1,
shall be immediately effective, and shall include, but shall not be limited to,
the Microsponge Systems containing entrapped silicone, vitamin A, vitamin E,
mineral oil, glycerin, alphabisabolol, and humectants, it being understood that
the parties agree to add or delete certain patent rights in this grant, in
support of the objectives of the Agreement, which patent rights shall be
contained in a writing executed by both parties, as an Addendum to this
Agreement.
2.2 DCC hereby licenses APS, royalty-free, under DCC Patent Rights
and Technical Information to manufacture Polytrap Systems for sale to DCC and
its Affiliates for use in the Field in all countries of the world. Such license
shall be exclusive, but shall not become effective until such time as APS is
prepared to undertake such manufacturing at its Lafayette, Louisiana,
manufacturing facilities and to supply the requirements of DCC for Systems for
use in the Field, and shall include, without limitation, the Polytrap Systems
containing entrapped silicone and mineral oil.
3. New Product Development.
3.1 APS will make available its research and development
capabilities to develop new products based on its
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<PAGE> 42
Microsponge Systems for use in the Field as may be agreed upon by the Joint
Operating Committee.
3.2 DCC will advance to APS the full cost of such agreed research.
APS will reimburse DCC for one-half of such cost in accordance with the
provisions of Section 7.2 hereof.
4. Joint Operating Committee.
4.1 Each of APS and DCC shall promptly designate their respective
representatives to a Joint Operating Committee, which shall coordinate all
activities under this Agreement by unanimous decision. In the event any matter
for determination by the Joint Operating Committee is not concurred in by all
its then members, the parties shall consult together in good faith to endeavor
to resolve the issue. Any member of the Joint Operating Committee may be
replaced from time to time by notice from the party originally designating such
member to the other party.
4.2 The Joint Operating Committee is authorized to determine
general policy for the joint endeavor between the parties, including, but not
limited to, research and development programs and budget, sales goals and
policies, technical service levels and staffing, and expansion of manufacturing
facilities.
4.3 The Joint Operating Committee will meet at least quarterly.
Each party will also designate one of its members of the Committee as the
contact person for discussion of policy questions between meetings of the
Committee.
5. Certain Operating Provisions.
5.1 During the term of this Agreement, DCC will not undertake,
either through its own capabilities or those of any
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<PAGE> 43
other party except APS and as approved by the Joint Operating Committee,
improvement of its Polytrap System technology in the Field or development of
new products in the Field that utilize a Polytrap System.
5.2 APS will use reasonable efforts to respond timely to reasonable
requests by the DCC sales and marketing force to supply custom formulation of
available Microsponge or Polytrap Systems, which requests result from technical
service contacts with customers and prospective customers. APS will also
provide reasonable help to aid DCC in training of its sales and marketing
personnel in possible applications of the Systems.
5.3 Both APS and DCC will jointly participate in the development of
formulations, on behalf of customers, of products incorporating a System.
5.4 APS will provide technical services at reasonable levels to
attempt solution of specific customer problems in the use of a System after
prescreening by DCC of such requests.
5.5 DCC will be responsible for the pricing of Systems to customers,
provided that the resulting Gross Margin will not be less than 30 percent
without APS' written consent.
5.6 All new products developed by APS in the Field, whether based on a
Microsponge or Polytrap System will be marketed under the Microsponge
trademark, which trademark, however, shall remain the property of APS but be
licensed to DCC for use in the Field during the term of the Agreement.
5.7 APS and DCC agree to decide the ownership of any jointly-developed
new trademarks in a separate Agreement.
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6. Division of Gross Margin.
6.1 The parties will share equally (except to the extent that DCC
is entitled to reimbursement of advances by it to APS as provided herein) in
the Gross Margin received by DCC and its Affiliates on Net Sales by or on
behalf of DCC and its Affiliates of Microsponge and Polytrap Systems for use in
the Field.
6.2 Gross Margin payments shall be made to APS within thirty (30)
days following the end of each calendar quarter, and each payment shall include
payments which shall have accrued during the calendar quarter immediately
preceding, and shall be accompanied by a report setting forth separately the Net
Sales of each Product sold during said calendar quarter in each Area, (as
described in Exhibit 6.2A) and the calculation of Gross Margin payments payable
for such calendar quarter. Distribution of Gross Margin payments to APS shall
be net of amounts owed to DCC under the Promissory Notes attached as Exhibits
6.2B and 6.2C.
6.3 The remittance of Gross Margin payments payable on Net Sales
of Products outside the United States shall be made to APS at the internal DCC
Exchange Rate at which the sales were accrued. This Rate is updated monthly
and used by DCC in the reporting of all DCC's operations outside the United
States, less any withholding or transfer taxes which are applicable. DCC shall
at APS' request supply APS with proof of payment of such taxes deducted from
the Gross Margin payable to APS and paid on APS' behalf.
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<PAGE> 45
6.4 DCC and its Affiliates shall keep and maintain records of Net
Sales of Products. Such records shall be open to inspection at any mutually
agreeable time during normal business hours within three years after the
payment period to which such records relate by an independent certified public
accountant (or the equivalent in countries other than the United States)
reasonably acceptable to DCC, but selected by APS. Said accountant shall have
the right to examine the records kept pursuant to this Agreement and report
findings of said examination of records to APS only insofar as it is necessary
to evidence any error on the part of DCC. This right of inspection shall be
exercised only once with respect to each country of sale for any calendar year.
The cost of such inspection shall be borne by APS unless the result of such
examination is the determination that Net Sales in a particular country have
been understated by at least three percent for any calendar year in which event
DCC and its Affiliates shall bear the cost.
6.5 The inspecting accountant may make an examination of the accounts
contemplated above, as well as any supporting instruments and documents, and
make copies of and extracts from such records for the purposes of this
Agreement, provided that APS shall not be entitled to obtain or receive any
information on customers or regarding manufacturing operations not related to
the Products and further provided that any information obtained by APS pursuant
to such examination of accounts shall be kept confidential as provided herein
except as is necessary to protect
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<PAGE> 46
the rights of APS under this Agreement and used solely for the purpose of this
Article 6.
7. Loans and Advances from DCC to APS.
7.1 Capital Loan. Upon execution of this Agreement, DCC will loan
to APS the sum of One Million Dollars ($1,000,000) as a Capital Loan which
Capital Loan will be used by APS in furtherance of its obligations under this
Agreement. Repayment of the Capital Loan by APS shall be as provided in
Section 7.3 hereof.
7.2 Research Loan. DCC will loan to APS one-half of the full cost
of research agreed to by the Joint Operating Committee pursuant to Section 3.2
hereof as a Research Loan; provided, however, the Research Loan shall not
exceed at any one time One Hundred Twenty-five Thousand Dollars ($125,000).
Repayment of the Research Loan by APS shall be as provided in Section 7.3
hereof.
7.3 Promissory Notes. The obligations of APS to repay the Capital
Loan and the Research Loan shall be evidenced by, and such repayment shall be
made by APS in accordance with the terms and conditions of, the Promissory
Notes attached hereto as Exhibits 6.2B and 6.2C. The Capital Loan and the
Research Loan shall be reimbursed to DCC by APS on a periodic, interest-free
basis; such periodic repayments shall be equal to twenty-five percent of APS'
share of the Gross Margin with such payments being first applied to the
outstanding balance under the Capital Loan and then to the Research Loan.
Provided, however, the unpaid balance under the Capital Loan and the Research
Loan shall
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<PAGE> 47
be due and payable in any event upon the earlier of five years from the date
hereof or the date of termination of this Agreement. Notwithstanding the above
APS' repayment obligation under the Research Loan shall be suspended upon
termination of this agreement by DCC without cause or by APS with cause (as
specified in Section 11.1 hereof).
7.4 Security for Loans. The Promissory Notes shall be secured by a
mortgage and possessory collateral security agreement from APS to DCC on APS'
real estate located at 301 Laser Lane, Lafayette, Lafayette Parish, Louisiana;
such mortgage and possessory collateral security agreement shall be in the
forms attached hereto as Exhibit 7.4A. The Promissory Notes shall be further
secured by a security agreement given by APS to DCC on all of APS' equipment
located at APS' facility at 301 Laser Lane, Lafayette, Lafayette Parish,
Louisiana, pursuant to a Security Agreement to be executed by APS and DCC in
the form attached as Exhibit 7.4B.
7.5 Indemnification. Notwithstanding any other provision of this
Agreement to the contrary, APS shall indemnify and hold DCC harmless form any
and all obligations and liabilities which DCC may incur for environmental or
other damages prior to the date of foreclosure in the event DCC elects to
foreclose on the manufacturing site owned and operated by APS and located in
Lafayette, Louisiana. APS does hereby release an shall defend, indemnify and
hold DCC harmless from any and all obligations and liabilities which may be
asserted by any person or entity against DCC for contribution, set-of,
indemnify or
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<PAGE> 48
liability in any manner whatsoever under the Capital Loan, the Research Loan or
the Promissory Notes.
7.6 Corporate Resolution. APS shall furnish to DCC prior to execution
of this Agreement by DCC a certified copy of a corporate resolution, still in
effect, by the Board of Directors of APS authorizing the transactions set forth
in this Agreement.
7.7 No Consent Required. APS represents and warrants that, to the
best of APS' knowledge, no consent to any of the transactions set forth in this
Article 7 is required from any holder of any prior security interest in any
security provided hereunder for any loan from DCC to APS.
8. Future Capital Funding and Loans.
8.1 Provided that DCC first agrees that APS' manufacturing processes
should be modified for the production of Polytrap Systems and that the
estimated cost for such modification is reasonable, DCC will provide the
capital funds required for such modification. The cost of any such modification
paid for by DCC shall not be included in the computation of Fully Burdened
Costs for any purpose hereunder.
8.2 When and if APS' manufacturing facilities reach capacity and
provided that both parties agree to expand APS' capacity for manufacturing
Systems for use in the Field, DCC shall arrange for capital loans deemed
necessary for such expansion on such repayment terms to be negotiated at that
time. For the purposes of paragraph 8.2, "reaching capacity" is to be
determined on the basis of said manufacturing facilities being used solely for
the manufacture of Products covered by this
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<PAGE> 49
Agreement. The parties agree that as of the signing of this Agreement, the best
approximation of APS' manufacturing capacity for such Products is 500,000
pounds per year of unloaded Product.
8.3 All obligations of DCC under Sections 8.1 and 8.2 are
expressly conditioned upon the negotiation and acceptance of terms and
conditions acceptable to DCC in its sole discretion and the execution by DCC
and APS of documents to effectuate the purposes of Sections 8.1 and 8.2 in
a form satisfactory to counsel for DCC.
9. Manufacturing.
APS and DCC shall enter into a Purchase/Sales Agreement for the
supply of Systems in the form attached hereto as Exhibit 9.
10. Term; Renewal.
10.1 The initial term of this Agreement shall be five years.
10.2 Such initial term shall be automatically renewed on a
year-to-year basis unless the party desiring to terminate the Agreement gives
to the other party at least two years' written advance notice of its intention
to terminate.
11. Termination.
11.1 Termination For Cause. Either APS or DCC may terminate
this Agreement and the licenses granted herein at any time upon breach of any
of the material terms hereof by the other party (including failure to pay Gross
Margin when due) upon sixty days' written notice; provided that if during said
sixty days the party so notified cures the breach complained of then
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<PAGE> 50
this Agreement shall continue in full force and effect. In addition, APS or DCC
may terminate this Agreement if (a) the other party (or any affiliated entity)
becomes embroiled in circumstances which seriously degrade the terminating
party's name or reputation, (b) the other party is unable to perform its
obligations under this Agreement due to a contingency as provided under
paragraph 15 if such inability persists for a period of longer than six months,
and (c) the other party (i) commits an act of bankruptcy, (ii) is declared
bankrupt, (iii) voluntarily files or has filed against it a petition for
bankruptcy or reorganization unless such petition is dismissed within sixty
days of filing, (iv) enters a procedure of winding up or dissolution, or
(v) has a trustee or receiver appointed for its business assets or operations.
Any termination under this Section 11.1 shall be for cause.
11.2 Accounting Upon Termination. In the event of termination of this
Agreement for any reason by either party, DCC shall, with respect to such
termination, (a) make timely payment to APS of all monies owed it under this
Agreement net of amounts due from APS to DCC pursuant to the Promissory Notes
and (b) make an accounting to APS of the inventory of Systems it and its
Affiliates have on hand, if any, as of the date of such termination. DCC and
its Affiliates shall, for a period of six months after such termination, have
the right to sell such inventory, provided that the Net Sales thereof shall be
subject to the division of Gross Margin obligations set forth herein.
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<PAGE> 51
11.3 Suspension of Research Note. Notwithstanding the
provisions of Section 11.2 above, in the event of termination of this Agreement
by DCC without cause or by APS with cause (as specified in Section 11.1
hereof), APS' repayment obligation under the Research Loan (pursuant to Section
7 hereof) shall be suspended upon such termination. Provided, however, such
repayment obligation shall not be suspended in the event of termination by DCC
with cause (as specified in Section 11.1 hereof) or by APS without cause in
which case repayment shall be made by APS to DCC within thirty days of such
termination.
11.4 Termination Procedure. The party terminating this
Agreement shall do so by registered letter to the other party.
11.5 Termination Without Prejudice. Termination of this
Agreement or any license granted hereunder shall be without prejudice to any
rights of either party which may have occurred prior to such termination or the
obligations of confidentiality contained in Section 14 hereof.
12. Assignability and Sublicensing.
12.1 This Agreement may not be assigned, nor may any
sublicense of any rights be granted, by either party without the prior written
consent of the other party which consent shall not be unreasonably withheld
except that without consent (i) this Agreement may be assigned, and rights may
be sublicensed in whole or in part, by DCC to an Affiliate of DCC or to a
corporate successor of DCC; (ii) this Agreement may be assigned by DCC in whole
to a person or corporation acquiring all or substantially all of the business
of DCC in the Field; and (iii) this Agreement
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<PAGE> 52
may be assigned in whole by APS without consent to a corporate successor of APS
or to a person or corporation acquiring all or substantially all of the business
and assets of APS in the Field except APS shall give notice to DCC if all or
substantially all of the business and/or assets of APS are going to be acquired
by GE, Shinetsu, UCC, or any other basic silicone producer, at which time DCC
may elect to terminate this Agreement and such termination shall be considered
to be for cause.
12.2 APS agrees that DCC may enter into separate sublicense
agreements with Affiliates in or outside the United States, granting such
Affiliates rights to use and sell Microsponge Systems. Such sublicenses shall
be subject to the same terms and conditions as contained in this Agreement to
the extent permitted by the laws of the jurisdiction in which each such
Affiliate is located.
12.3 No assignment or sublicense contemplated by this Article 12
shall serve to release either party from liability for the performance of its
obligations hereunder.
13. Notices.
All notifications, demands, approvals and communications required
to be made under this Agreement shall be validly given if and when made by mail
prepaid and registered or certified (return receipt requested) addressed to the
address of the party to whom directed (as herein set forth or the latest change
thereof notified to the addressor). The parties hereto shall have the right to
notify each other of changes of address during the life of this Agreement.
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<PAGE> 53
ADVANCED POLYMER SYSTEMS, INC.
3696 Haven Avenue
Redwood City, California 94063
Attention: President
DOW CORNING CORPORATION
Midland, Michigan 48686-0994
Attention: General Counsel
Any such notice mailed as aforesaid shall be deemed to have been
received by and given to the addressee on the date specified on the notice of
receipt of delivery returned to the sender.
14. Confidentiality.
14.1 Since each party may throughout the course of the
performance of this Agreement obtain access to confidential and proprietary
information of the other, each party will hold in strict confidence the
confidential information of the other and will treat it with the same degree
of care that it exercises with regard to its own proprietary information. This
obligation of confidentiality shall not prevent either party from making such
disclosures to government bodies, courts or agencies as are required by law,
as for example, to obtain the permission of said government body or agency to
test or market any Product or to file or prosecute a patent application for
any Product.
14.2 The obligation of confidentiality set out herein shall
extend for a period of five years beyond the expiration or termination of this
Agreement, provided however, that such obligations shall not apply to any
information:
(i) which is or becomes publicly available through no fault
of the obligated party; or
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<PAGE> 54
(ii) which the obligated party can show by written
evidence was in its possession prior to the
furnishing of same by the furnishing party; or
(iii) which the obligated party lawfully receives from
a third party.
14.3 Each party shall protect the confidential information of the
other party and all Technical Information in the same manner that it protects
its own confidential information which it does not wish disclosed or
disseminated.
15. Force Majeure.
15.1 In the event of any failure or delay in the performance by a
party of any provision of this Agreement due to acts beyond the reasonable
control of such party (such as, for example, fire, explosion, strike or other
difficulty with workmen, shortage of transportation equipment, accident, act of
God, or compliance with or other action taken to carry out the intent or
purpose of any law or regulation), then such party shall have such additional
time to perform as shall be reasonably necessary under the circumstances. In
the event of such failure or delay, the affected party will use its best
efforts, consonant with sound business judgment and to the extent permitted by
law, to correct such failure or delay as expeditiously as possible.
15.2 In the event that a party is unable to perform by a reason
described in (a) above, the obligations under this Agreement thus affected
shall be suspended during such time of nonperformance.
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<PAGE> 55
16. Miscellaneous.
16.1 It is the mutual desire and intent of the parties to provide
certainty as to their future rights and remedies against each other by defining
the extent of their mutual undertakings as provided herein. The parties have in
this Agreement incorporated all representations, warranties, covenants,
commitments and understandings on which they have relied in entering into this
Agreement and, except as provided for herein, neither party has made any
covenant or other commitment to the other concerning its future action.
Accordingly, this Agreement (i) constitutes the entire agreement and
understanding between the parties with respect to the matters contained herein,
and there are no promises, representations, conditions, provisions or terms
related thereto other than those set forth in this Agreement, and (ii)
supersedes all previous understandings, agreement and representations between
the parties, written or oral relating to the subject matter hereof. The parties
hereto may from time to time during the continuance of this Agreement modify,
vary or alter any of the provisions of this Agreement, but only by an
instrument duly executed by the parties hereto.
16.2 It is the desire and intent of the parties that the
provisions of this Agreement shall be enforced to the extent permissible under
the laws and public policies applied in each jurisdiction in which enforcement
is sought. Accordingly, if any particular provision of this Agreement which
substantially affects the commercial basis of this Agreement shall be
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<PAGE> 56
determined to be invalid or unenforceable, such provision shall be amended as
hereinafter provided to delete therefrom or revise the portion thus determined
to be invalid or unenforceable, such amendment to apply only with respect to the
operation of such provision of this Agreement in the particular jurisdiction for
which such determination is made. In such event, the parties agree to use
reasonable efforts to agree on substitute provisions, which, while valid, will
achieve as closely as possible the same economic effects or commercial basis as
the invalid provisions, and this Agreement otherwise shall continue in full
force and effect. If the parties cannot agree to such revision within sixty days
after such invalidity or unenforceability is established, the matter may be
submitted by either party to arbitration as provided in this Agreement to
finalize such revision.
16.3 The waiver by a party of any single default or breach of
succession of defaults or breaches by the other shall not deprive either party
of any right under this Agreement arising out of any subsequent default or
breach.
16.4 All matters affecting the interpretation, validity, and
performance of this Agreement shall be governed by the laws of the State of
Michigan, without regard to principles of conflict of laws.
16.5 Nothing in this Agreement authorizes either party to act
as agent for the other party as to any matter. The relationship between APS and
DCC is that of independent contractors.
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<PAGE> 57
16.6 Any controversy or claim arising out of or relating to
this Agreement or the Purchase/Sales Agreement between the parties, or the
breach thereof, including controversies or claims arising out of or relating to
(i) the parties' decision to enter into this Agreement, and the circumstances
thereof, or (ii) patent validity or infringement issues arising under this
Agreement, shall in any such case be settled by binding arbitration. Any
controversy or claim arising out of this Agreement, or the breach thereof, shall
be settled by arbitration before a panel of three arbitrators in accordance with
the commercial arbitration rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitration panel may be entered in any
court having jurisdiction thereof. The minimum qualifications of any arbitrator
selected pursuant to this Section 16.6 shall include graduation from an
accredited school of law and current admission to practice law within the United
States, and in the case of the head of the arbitration panel, substantial
experience in conducting contested case proceedings. Admission of any evidence
in any arbitration hearing conducted pursuant to this Section 16.6 shall be
governed by the Federal Rules of Evidence. In the event DCC initiates
arbitration, such arbitration shall be conducted in Palo Alto, California, and
in the event APS initiates arbitration, such arbitration shall be conducted in
Bay City, Michigan.
16.7 This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 58
16.8 The Section headings contained in this Agreement have been
inserted for identification and reference purposes and shall not determine the
construction or interpretation of this Agreement.
16.9 Each party hereto and its counsel have mutually contributed
to the drafting of this Agreement, and no provision hereof shall be construed
against any party on the grounds that a party or its counsel drafted the
provision.
IN WITNESS THEREOF, the undersigned have caused this Agreement to
be duly executed on the day first above written by their duly authorized
officers.
ADVANCED POLYMER SYSTEMS, INC.
By: /s/ John J. Meakem, Jr.
---------------------------
Title: President
DOW CORNING CORPORATION
By: /s/ Gary E. Anderson
--------------------------
Gary E. Anderson
Title: Group Vice President
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<PAGE> 59
EXHIBIT B
PATENTS/APPLICATIONS
US/FOREIGN
<TABLE>
<CAPTION>
CASE NO PATENT NO CO SERIAL TITLE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DC 2901 4,880,617 US Lattice-Entrapped Composition
DC 2979 4,762,703 US Nitrocellulose-Free Nail Lacquer
1,230,560 CA Composition
DC 3131 RE.33,429 US Lattice-Entrapped Emollient-
Moisturizer Composition
DC 3168 5,035,890 US Emulsifier-Free Hand and Body Lotion
GB 90106775
FR 90106775
EP 90106775
DE 90106775
BE 90106775
628,511 AU
57,859 TW
KR 90/4885
JP 92387/90
CA 2012892
DC 3170 4,898,913 US Method of Making Hydrophobic
GB 90303226 Copolymers Hydrophilic
FR 90303226
EP 90303226
DE 90303226
BE 90303226
JP 88432/90
CA 2012766
625,997 AU
DC 3176 4,948,818 US Method of Making Hydrophilic-
398,538 NL Lipophilic Copolymeric Powders
398,538 GB
398,538 FR
398,538 EP
398,538 DE
JP 121431/9
DC 3208 4,962,170 US Method of Making Highly Absorptive
NL 90308884 Polymers
IT 90308884
GB 90308884
FR 90308884
EP 90308884
DE 90308884
JP 121431/9
</TABLE>
================================================================================
<PAGE> 60
<TABLE>
<S> <C> <C> <C> <C>
DC 3211 4,961,532 US Fragrance Release Device Containing A
51,199 TW Highly Adsorptive Copolymer
KR 90/10206
JP 177648/9
640,670 AU
DC 3228 4,962,133 US Method of Making Highly Adsorptive
417,606 NL Copolymers
417,606 IT
417,606 GB
417,606 FR
417,606 EP
417,606 DE
JP 235461/9
DC 3245 5,037,485 US Method of Cleaning Surfaces
57,156 TW
629,040 AU
DC 3273 5,102,662 US Insect Repellent Plastic
CA 2030829
DC 3283 5,208,038 US Coacervated Highly Absorptive Polymers
DC 3284 5,135,989 US Method of Making Hydrophobic
Copolymers Hydrophilic
DC 3388 5,246,972 US Polish Containing Highly Adsorptive
450,656 GB Polymer
450,656 EP
450,656 DE
JP 100261/9
DC 3413 5,169,904 US Method of Making Hydrophobic
Copolymers Hydrophilic
DC 3414 5,026,781 US Method of Making Hydrophobic
Copolymers Hydrophilic
DC 3447 5,281,413 US Antiperspirant Stick Containing A
JP 256883/9 Macroporous Polymer
CA 2050259
DC 3451 5,387,411 US Antiperspirant Containing A
JP 256881/9 Hydrophobic Macroporous Polymer as the
CA 2050188 Suspending Agent
DC 3491 5,135,660 US Method of Recovering Oil from the
JP 432/92 Surface of Water
DC 3538 5,145,685 US Skin Treatment Method and Composition
JP 85151/92
</TABLE>
<PAGE> 61
<TABLE>
<S> <C> <C> <C> <C>
DC 3919 5,350,679 US Repeat Insult Microbial Test Method
GB 94304152
FR 94304152
EP 94304152
DE 94304152
AU 64675/95
JP 130731/9
KR 94/13216
DC 3947 US 103,318 Method of Making Hydrophobic
Copolymers Hydrophilic
DC 4042 5,409,695 US Method of Increasing Deposition of
IT 95300979 Silicone Conditioner to Hair
GB 95300979
FR 95300979
ES 95300979
EP 95300979
DE 95300979
JP 33947/95
CA 2142511
DC 4139 US 307,121 Adsorption of Sweat Components with A
Macroporous Copolymer
</TABLE>
<PAGE> 62
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
January 23, 1996
Advanced Polymer Systems, Inc., a Delaware corporation ("APS") and Dow
Corning Corporation, a Michigan corporation ("PURCHASER"), hereby agree as
follows:
RECITALS
A. APS is acquiring a polymer-based carrier system business from
PURCHASER, and in payment thereof is issuing 200,000 shares of its Common Stock
(the "Shares") to PURCHASER.
B. The parties wish to provide for the registration of the subsequent
resale of the Shares and for the orderly distribution thereof, all on the terms
and conditions hereof.
THE PARTIES AGREE AS FOLLOWS:
1. Registration Rights; Listing.
1.1 Certain Definitions. As used herein, the following terms
shall have the following respective meanings:
(a) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Convertible Securities" shall mean securities of APS
convertible into or exchangeable for Registrable Securities.
(c) "Holder" shall mean any holder of outstanding Registrable
Securities which have not been sold to the public, but only if such holder is
PURCHASER or an assignee or transferee of Registration rights as permitted by
Section 1.8.
<PAGE> 63
(d) The terms "Register", "Registered" and "Registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act ("Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(e) "Registrable Securities" shall mean the Shares issued to PURCHASER
by APS, together with any Common Stock issued with respect to the Shares
pursuant to stock splits, stock dividends and similar distributions, so long as
such securities have not been sold to the public in a public distribution or a
public securities transaction or sold in a single transaction exempt from the
registration and prospectus delivery requirements of the Securities Act such
that all transfer restrictions and restrictive legends with respect to such
Shares shall have been removed in connection with such sale.
(f) "Registration Expenses" shall mean all expenses incurred by APS in
complying with this Agreement, including, without limitation, all federal and
state registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for APS, blue sky fees and expenses, the expense of
any special audits incident to or required by any such Registration and any
expenses related to the maintenance of such Registration and qualification
during the period specified in Section 1.4(a) hereof.
(g) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the
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<PAGE> 64
rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
(h) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities
pursuant to this Agreement.
1.2 Registration.
1.2.1 Registration. Subject to the terms of this Agreement,
APS shall use its best efforts to effect Registration of the Registrable
Securities within 60 days of their issuance to PURCHASER by filing as soon as
possible after the date hereof a Form S-3 Registration Statement (or any
successor to Form S-3) with the Commission.
1.2.2 Registration of Other Securities. Any Registration
Statement filed under this Section 1 may include securities of APS other than
Registrable Securities; provided, however, that neither PURCHASER or any Holder
shall be required to utilize an underwriter in connection with the sale of
their Registrable Securities.
1.2.3 Blue Sky. In the event of any Registration pursuant
to Section 1, APS will exercise its best efforts to Register and qualify the
securities covered by the Registration Statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for
the distribution of such securities; provided, however, that:
(a) APS shall not be required to qualify to do
business or to file a general consent to service of process in
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<PAGE> 65
any such states or jurisdictions, unless APS is already subject to service in
such jurisdiction; and
(b) notwithstanding anything in this Agreement to the
contrary, in the event any jurisdiction in which the securities shall be
qualified imposes a non-waivable requirement that expenses incurred in
connection with the qualification of the securities be borne by selling
shareholders, such expenses shall be payable pro rata by selling shareholders.
1.3 Expenses of Registration. All Registration Expenses (but not
Selling Expenses) incurred in connection with the Registration pursuant to
Section 1 shall be borne by APS.
1.4 Registration Procedures. Whenever required under this Agreement
to effect the Registration of any securities of APS, subject to the other
provisions of this Agreement, APS shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the Commission a Registration
Statement with respect to such securities in accordance with Section 1.2.1 and
use its diligent best efforts to cause such Registration Statement to become
effective as promptly as possible thereafter and to remain effective for a
period equal to the shorter of: (i) three years from the date of such
effectiveness; or (ii) until the distribution described in the Registration
Statement has been completed.
(b) Prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to comply with
the provisions of the Securities
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<PAGE> 66
Act with respect to the disposition of all securities covered by such
Registration Statement.
(c) Furnish to the Holders participating in such Registration and the
underwriters, if any, of the securities being Registered, such reasonable
number of copies of the Registration Statement, preliminary prospectus and
final prospectus as they may request in order to facilitate the public offering
of such securities.
1.5 Additional Information Available. So long as the Registration
Statement is effective covering the resale of Shares owned by a Holder, APS
will furnish to the Holder(s):
(a) as soon as practicable after it becomes available (but in the case
of APS' Annual Report to Stockholders, within 120 days after the end of each
fiscal year of APS), one copy of: (i) its Annual Report to Stockholders (which
Annual Report shall contain financial statements audited in accordance with
generally accepted accounting principles by a national firm of certified public
accountants); (ii) if not included in substance in the Annual Report to
Stockholders, its Annual Report on Form 10-K; (iii) if not included in
substance in its Quarterly Reports to Stockholders, its quarterly reports on
Form 10-Q; and (iv) a full copy of the particular Registration Statement
covering the Shares (the foregoing, in each case, excluding exhibits); and
(b) upon the reasonable request of a Holder, all exhibits excluded by
the parenthetical to subparagraph (a) (iv) of this Section 1.5;
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<PAGE> 67
and APS, upon the reasonable request of a Holder, will meet with such Holder or
a representative thereof at APS' headquarters to discuss all information
relevant for disclosure in the Registration Statement covering the Shares and
will otherwise cooperate with any Holder conducting an investigation for the
purpose of reducing or eliminating such Holder's exposure to liability under
the Securities Act, including the reasonable production of information at APS'
headquarters.
1.6 Information Furnished by Holder. It shall be a condition precedent
of APS' obligations under this Agreement that each Holder of Registrable
Securities included in any Registration furnish to APS such information
regarding such Holder and the distribution proposed by such Holder as APS may
reasonably request.
1.7 Indemnification.
1.7.1 Company's Indemnification of Holder. APS will indemnify
and hold harmless each Holder, each of its officers, directors, employees,
agents, affiliates and constituent partners, and each person deemed to be in
control of such Holder within the meaning of Section 15 of the Securities Act
or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), from
and against all claims, losses, damages or liabilities (or actions in respect
thereof) to the extent such claims, losses, damages or liabilities arise out of
or are based upon any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus or other document (including any
related Registration Statement) incident to any
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<PAGE> 68
such Registration, qualification or compliance, or are based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by APS of any rule or regulation promulgated under the Securities Act
applicable to APS and relating to action or inaction required of APS in
connection with any such Registration, qualification or compliance or arise out
of any failure by APS to fulfill an undertaking included in the Registration
Statement; and APS will reimburse each such Holder, each such underwriter and
each person who controls any such Holder or underwriter, for any legal and any
other expenses reasonably incurred in connection with defending any such claim,
loss, damage, liability or action; provided, however, that the indemnity
contained in this Section 1.7.1 shall not apply to amounts paid in settlement of
any such claim, loss, damage, liability or action if settlement is effected
without the consent of APS (which consent shall not unreasonably be withheld)
and; provided, further, that APS will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based upon any untrue statement or omission based upon written information
furnished to APS by such Holder or controlling person and stated expressly to be
for use in connection with the offering of securities of APS.
1.7.2 Holder's Indemnification of Company. Each Holder will indemnify
and hold harmless APS, each of its directors, officers, employees, agents and
affiliates, each
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<PAGE> 69
person deemed to be in control of APS within the meaning of Section 15 the
Securities Act or Section 20 of the Exchange Act, and each other such Holder,
each of its officers, directors, employees, agents, affiliates and constituent
partners, and each person deemed to be in control of such other Holder within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, from and against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by such Holder of any rule or regulation promulgated under the
Securities Act applicable to such Holder and relating to action or inaction
required of such Holder in connection with any such Registration, qualification
or compliance; and will reimburse APS, such Holder, such directors, officers,
partners, persons or control persons for any legal and any other expenses
reasonably incurred in connection with defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to APS by such Holder and specifically approved in writing by such
Holder for
-8-
<PAGE> 70
use in connection with the offering of securities of APS; provided, however,
that the indemnity contained in this Section 1.7.2 shall not apply with respect
to a Holder to amounts paid in settlement of any claim, loss, damage, liability
or action if settlement is effected without the consent of such Holder (which
consent shall not be unreasonably delayed or withheld).
1.7.3 Indemnification Procedure. Promptly after receipt by an
indemnified party under this Section 1.7 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party under this Section 1.7, notify the
indemnifying party in writing of the commencement thereof and, to the extent
reasonably possible, generally summarize such action. The indemnifying party
shall have the right to participate in and to assume the defense of such claim;
provided, however, that the indemnifying party shall be entitled to select
counsel for the defense of such claim with the approval of any parties entitled
to indemnification, which approval shall not be unrasonably withheld; provided,
further, that if either party reasonably determines that there may be a
conflict between the position of APS and a Holder in conducting the defense of
such action, suit or proceeding by reason of recognized claims for indemnity
under this Section 1.7, then counsel for such party shall be entitled to
conduct, or participate in, the defense to the extent reasonably determined by
such counsel to be necessary to protect the interest of such party and the
costs of such counsel shall be borne by the indemnifying party. The failure to
notify an
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<PAGE> 71
indemnifying party promptly of the commencement of any such action, if
prejudicial to the ability of the indemnifying party to defend such action,
shall relieve such indemnifying party, to the extent so prejudiced, of any
liability to the indemnified party under this Section 1.7, but the omission so
to notify the indemnifying party will not relieve such party of any liability
that such party may have to any indemnified party otherwise other than under
this Section 1.7.
1.8 Transfer of Rights. The right to cause APS to Register securities
granted by APS to PURCHASER under this Agreement may be assigned by any Holder
to a transferee or assignee of any Registrable Securities not sold to the
public acquiring at least 25,000 shares of such Holder's Registrable Securities
(equitably adjusted for any stock splits, subdivisions, stock dividends,
changes, combinations or the like); provided, however, that:
(a) APS must receive written notice prior to the time of said transfer,
stating the name and address of said transferee or assignee and identifying
the securities with respect to which such information and Registration rights
are being assigned; and
(b) the transferee or assignee of such rights must not be a person
deemed by the Board of Directors of APS, in its best judgment, to be a
competitor or potential competitor of APS. Notwithstanding the limitations set
forth in the foregoing sentence respecting the minimum number of shares which
must be transferred and permitted transferees and assignees: (i) any
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<PAGE> 72
Holder which is a partnership may transfer such Holder's Registration rights to
such Holder's constituent partners without restriction as to the number or
percentage of shares acquired by any such constituent partner; and (ii) Section
1.8(b) shall not prohibit the transfer or assignment of such rights to an
affiliate of the PURCHASER.
1.9 Nasdaq Listing. Prior to the effective date of a Registration of
any of the Shares, APS shall file an application with NASDAQ to list such
Shares for quotation on the Nasdaq National Market.
1.10 Delay in Effectiveness. In the event a Registration Statement
covering the Shares is not declared effective within ninety (90) days after the
date hereof or in the event the effectiveness of such Registration Statement is
suspended or terminated at any time subsequent to the 90th day after the date
hereof and prior to the termination of the period specified in Section 1.4(a)
hereof, APS shall pay to the Holders an amount equal to $275 per day for each
day such Registration Statement is not effective; provided that nothing herein
is intended to limit a Holder's ability to seek to enforce its rights to
require that a Registration Statement covering Shares remains effective during
the period specified in Section 1.4 hereof; and provided further that APS shall
not be required to make any payments to a Holder if the failure to obtain or
maintain an effective Registration Statement is solely attributable to a
Holder's failure to provide APS with
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<PAGE> 73
information required to be provided by such Holder for inclusion in the
Registration Statement.
2. Miscellaneous.
2.1 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
entered into and wholly to be performed within the State of California by
California residents.
2.2 Successors and Assigns. Subject to the exceptions specifically set
forth in this Agreement, the terms and conditions of this Agreement shall inure
to the benefit of and be binding upon the respective executors, administrators,
heirs, successors and assigns of the parties.
2.3 Entire Agreement. This Agreement and the Asset Purchase Agreement
and the Exhibits and Schedules hereto and thereto constitute the entire
contract between APS and the PURCHASER relative to the subject matter hereof.
Any previous agreement between APS and the PURCHASER with respect to the
subject matter hereof is superseded by this Agreement.
2.4 Severability. Any invalidity, illegality or limitation of the
enforceability with respect to any Holder of any one or more of the provisions
of this Agreement, or any part thereof, whether arising by reason of the law of
any PURCHASER's domicile or otherwise, shall in no way affect or impair the
validity, legality or enforceability of this Agreement with respect to other
Holders. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, it shall to the extent practicable, be modified so as to make it
valid, legal
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<PAGE> 74
and enforceable and to retain as nearly as practicable the intent of the
parties, and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
2.5 Amendment of Agreement. Any provision of this Agreement may be
amended only by a written instrument signed by APS and by PURCHASER.
2.6 Notices. Any notice required or permitted hereunder shall be given
in writing and shall be conclusively deemed effectively given upon personal
delivery, or five days after deposit in the United States mail, by registered
or certified mail, postage prepaid, addressed:
(a) if to APS, Advanced Polymer Systems, Inc., 3696 Haven Avenue,
Redwood City, California 94063, ATTENTION: President; and
(b) if to PURCHASER, Dow Corning Corporation, 2200 W. Salzburg Road,
Midland, Michigan 48686-0994, ATTENTION: General Counsel.
2.7 Headings. The headings of the Sections of this Agreement are for
convenience and shall not by themselves determine the interpretation of this
Agreement.
2.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 75
IN WITNESS WHEREOF, the parties have executed this Agreement.
ADVANCED POLYMER SYSTEMS, INC.
By: /s/ Michael O'Connell
_______________________________
Michael O'Connell
Senior Vice President and CFO
DOW CORNING CORPORATION
By: /s/ William P. Cavanaugh
____________________________
William P. Cavanaugh
Commercial Unit Manager
Personal Household and
Automotive Products
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<PAGE> 76
EXHIBIT D
ASSIGNMENT
For value received, the sufficiency, adequacy and receipt of
which is hereby acknowledged, DOW CORNING CORPORATION, a Michigan corporation,
having its principal office in Midland, Michigan, sells, assigns, transfers and
releases unto ADVANCED POLYMER SYSTEMS, INC., a Delaware corporation, having
its principal place of business at Redwood City, California, all of its right,
title and interest of whatsoever nature in and to the following United States
Letters Patents:
<TABLE>
<CAPTION>
Patent Number Patent Number Patent Number
------------- ------------- -------------
<S> <C> <C>
Re.33,429 5,026,781 5,169,904
4,762,703 5,035,890 5,208,038
4,880,617 5,037,485 5,246,972
4,898,913 5,102,662 5,281,413
4,948,818 5,135,660 5,350,679
4,961,532 5,135,989 5,387,411
4,962,133 5,145,685 5,409,695
4,962,170
</TABLE>
and in and to the following United States Patent Applications:
Serial Number
-------------
103,318
307,121
and in and to the following Foreign Patents:
<TABLE>
<CAPTION>
Country Patent Number
------- -------------
<S> <C>
Australia 628,511
Australia 625,997
Australia 640,670
Canada 1,230,560
European 398,538
European 417,606
European 450,656
European 629,040
Taiwan 51,199
</TABLE>
1
<PAGE> 77
<TABLE>
<S> <C>
Taiwan 57,156
Taiwan 57,859
</TABLE>
and in and to the following Foreign Patent Applications:
<TABLE>
<CAPTION>
Country Serial Number
------- -------------
<S> <C>
Australia 64675/94
Canada 2012766
Canada 2012892
Canada 2030829
Canada 2050188
Canada 2050259
Canada 2142511
European 90106775
European 90303226
European 90308884
European 94304152
European 95300979
Japan 432/92
Japan 33947/95
Japan 85151/92
Japan 88432/90
Japan 92387/90
Japan 100261/9
Japan 121431/9
Japan 130731/9
Japan 177648/9
Japan 235461/9
Japan 256881/9
Japan 256883/9
Korea 90/ 4885
Korea 90/10206
Korea 94/13216
</TABLE>
and in and to all inventions described and claimed therein, and also in and to
any and all other U.S. and Foreign Patents, Reissue Patents and/or Patent
Applications deriving in any way out of said U.S. and Foreign Patents, and the
above listed U.S. and Foreign Patent Applications, and further including the
entire right, title and interest in and to any and all causes of action arising
out
2
<PAGE> 78
of all past, present and future infringement of said U.S. and Foreign Patents,
and Patent Applications.
The effective date of this Assignment is ____________ .
______________________________
Leon D. Crossman
Vice President and
Executive Director
Science & Technology
STATE OF MICHIGAN )
) SS
COUNTY OF BAY )
BEFORE ME,_______________________, a Notary Public in and for
Bay County, Michigan, on this day personally appeared Leon D. Crossman, Vice
President and Executive Director, S&T, known to me to be the person and officer
whose name is subscribed to the foregoing instrument and acknowledged to me
that he executed the same as the act of such corporation for the purposes and
consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this _____ day of
________________, 1996.
My commission expires on the ________day of
____, 19___.
3
<PAGE> 79
EXHIBIT E
TRADEMARK ASSIGNMENT
WHEREAS, Dow Corning Corporation, a Michigan corporation ("Dow Corning"),
has adopted, used and is using or has intent to use the marks which are
registered or pending registration and which are listed in the attached
Schedule;
AND WHEREAS, Advanced Polymer Systems, Inc., a Delaware corporation
("APS"), is desirous of acquiring said marks and the registrations thereof;
NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby
acknowledged, said Dow Corning does hereby assign unto the said APS all right,
title and interest in and to the said marks, together with the goodwill of the
business symbolized by the marks and the attached identified registrations
thereof.
DOW CORNING CORPORATION
By: /s/ James R. Jenkins
__________________________
James R. Jenkins
Vice President, Secretary and
General Counsel
State of Michigan)
)ss
County of Bay )
On this ______ day of December 1995, before me appeared James R. Jenkins, the
person who signed this instrument, who acknowledged that he signed it as a
free act on behalf of the identified corporation.
_____________________________
Notary Public
<PAGE> 80
SCHEDULE FOR EXHIBIT E
U.S. AND FOREIGN POLYTRAP TRADEMARK REGISTRATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TRADEMARK COUNTRY STATUS REGISTRATION REGISTRATION GOODS
DATE NUMBER
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
POLYTRAP AUSTRALIA REGISTERED 05/07/82 A375,235 CHEMICALS AND CHEMICAL
PRODUCTS IN THIS CLASS,
INCLUSIVE OF POLYMER USED
FOR ENTRAPPING SOLID AND/OR
LIQUID MATERIALS.
POLYTRAP CANADA REGISTERED 11/10/83 284,921 CHEMICALS, NAMELY: A
POLYMER USED FOR ENTRAPPING
SOLID OR LIQUID MATERIALS.
POLYTRAP DENMARK REGISTERED 06/13/86 1403/1986 CHEMICAL PRODUCTS FOR
INDUSTRIAL USE, NAMELY
POLYMER USED FOR
ENTRAPPING SOLID AND/OR
LIQUID MATERIALS.
POLYTRAP FRANCE REGISTERED 08/04/82 1,210,886 CHEMICALS -- NAMELY, POLYMER
USED FOR ENTRAPPING SOLID
AND/OR LIQUID MATERIALS.
POLYTRAP GERMANY REGISTERED 08/07/82 1 054 970 CHEMICALS, POLYMER
POLYTRAP ITALY REGISTERED 03/03/86 408599 CHEMICALS -- NAMELY, POLYMER
USED FOR ENTRAPPING SOLID
AND/OR LIQUID MATERIALS.
POLYTRAP JAPAN REGISTERED 03/25/85 1752867 CHEMICALS -- NAMELY, POLYMER
USED FOR ENTRAPPING SOLID
AND/OR LIQUID MATERIALS.
POLYTRAP SWITZERLAND REGISTERED 05/05/82 318568 CHEMICALS -- NAMELY, POLYMER
USED FOR ENTRAPPING SOLID
AND/OR LIQUID MATERIALS.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE -- Page 1
<PAGE> 81
SCHEDULE FOR EXHIBIT E
U.S. AND FOREIGN POLYTRAP TRADEMARK REGISTRATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TRADEMARK COUNTRY STATUS REGISTRATION REGISTRATION GOODS
DATE NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
POLYTRAP UNITED KINGDOM REGISTERED 05/06/82 B1,174,500 CHEMICAL PRODUCTS, BEING POLYMERS FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP UNITED STATES REGISTERED 10/05/82 1,211,149
POLYTRAP FLM CANADA REGISTERED 06/14/85 303 665 CHEMICAL - NAMELY, POLYMER USED FOR ENTRAPPING
SOLID AND/OR LIQUID MATERIALS.
POLYTRAP FLM DENMARK REGISTERED 07/04/86 1587/1986 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP FLM ITALY REGISTERED 04/13/88 491490 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP FLM SWITZERLAND REGISTERED 05/20/83 325569 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP FLM UNITED KINGDOM REGISTERED 05/31/83 B1,196,850 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP FLM UNITED STATES REGISTERED 02/21/84 1,267,508 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
- ----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE - Page 2
</TABLE>
<PAGE> 82
SCHEDULE FOR EXHIBIT E
U.S. AND FOREIGN POLYTRAP TRADEMARK REGISTRATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TRADEMARK COUNTRY STATUS REGISTRATION REGISTRATION GOODS
DATE NUMBER
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
POLYTRAP SMP CANADA REGISTERED 12/21/84 298 275 CHEMICAL - NAMELY, POLYMER USED FOR ENTRAPPING
SOLID AND/OR LIQUID MATERIALS.
POLYTRAP SMP ITALY REGISTERED 04/13/88 491491 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP SMP JAPAN REGISTERED 09/21/87 1,982,992 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP SMP UNITED KINGDOM REGISTERED 00/00/0000 B1,196,851 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
POLYTRAP SMP UNITED STATES REGISTERED 02/21/84 1,267,515 CHEMICALS - NAMELY, POLYMER USED FOR
ENTRAPPING SOLID AND/OR LIQUID MATERIALS.
- ----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE - Page 3
</TABLE>
<PAGE> 83
EXHIBIT F
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT is made and entered into this ___ day of
______, 1996, by and between Dow Corning Corporation, a corporation organized
and existing the laws of the State of Michigan and having its principal place of
business at 2200 West Salzburg Road, Midland, Michigan 48686-0994 ("DCC"), and
Advanced Polymer Systems, Inc. ("APS"), a corporation organized and existing
under the laws of the State of Delaware having its principal place of business
at 3696 Haven Avenue, Redwood City, California 94063.
WHEREAS, DCC and APS have entered into an Asset Purchase Agreement
dated _______ , 1996, wherein APS desires to appoint DCC, and DCC is willing to
accept the appointment, to act as a non-exclusive distributor to sell
Microsponge(R) and Polytrap(R) Systems ("Systems") to customers located within
and outside of the United States ("Customers").
NOW, THEREFORE, in consideration of the following covenants and
obligations, and subject to the conditions and limitations set forth here, the
parties agree as follows:
ARTICLE I. DEFINITIONS
All capitalized terms not defined herein shall have the same meaning as
defined in the Asset Purchase Agreement.
Unless otherwise specifically set forth herein, the following terms
shall have the following meanings:
1.1 "Distribution Agreement", with no other modification or
description, refers to this Distribution Agreement.
1
<PAGE> 84
1.2 "Gross Sales Revenues" shall mean the total sales revenues in
local currency derived by APS from the sale of Systems to Customers sold by DCC,
less (a) returns and allowances, and (b) shipping expenses, freight and duty, in
accordance with the appointment hereunder.
1.3 "Joint Agreement" shall mean that certain agreement between DCC
and APS effective November 25, 1991, which provides for the supply and purchase
of the Systems.
ARTICLE II. APPOINTMENT OF DCC
APS hereby appoints DCC, and DCC hereby accepts the appointment
by APS, to act as APS non-exclusive distributor of the Systems to Customers for
the period commencing on the date hereof and ending on _______, or such earlier
date mutually acceptable to DCC and APS ("Term"). During the Term, APS may also
sell Systems directly to Customers.
ARTICLE III. DISTRIBUTOR PRICES
APS shall continue to sell Systems to DCC at the same price and
under the same terms at which DCC has been purchasing Systems pursuant to the
Joint Agreement. Customer prices shall be determined by APS.
ARTICLE IV. SALES LEADS
As appropriate, DCC shall provide to APS any industry contracts
or potential sales leads that arise during the Term.
ARTICLE V. DELIVERY TO CUSTOMERS
DCC will work with APS to arrange for all orders of Systems to
be drop-shipped to Customer's plant. If APS is unable to arrange for
drop-shipment, DCC shall be reimbursed by APS for all shipping expenses,
overseas freight and duty, as applicable, incurred by DCC.
2
<PAGE> 85
ARTICLE VI. COMMISSION
In consideration for the foregoing to be performed by DCC, APS
agrees to pay to DCC, in U.S. dollars, a commission in the amount of three
percent (3%) of the Gross Sales Revenues ("Commissions").
ARTICLE VII. STATEMENTS AND PAYMENT
DCC shall pay APS, on a quarterly basis, the Gross Sales
Revenue, netted by Commissions earned and shipping expenses incurred for the
period. Each payment shall be accompanied by a statement setting forth the
amount of Gross Sales Revenue, Commissions earned and shipping expenses,
overseas freight and duty incurred for the period.
ARTICLE VIII. ACTS CONSTITUTING BREACH
8.1 Unless waived by DCC, the following acts shall be deemed to
constitute breach of this Distribution Agreement by APS:
8.1.1 The nonperformance by APS of any material provision of
this Distribution Agreement;
8.1.2 The insolvency or dissolution of APS;
8.1.3 The filing of a petition seeking relief under any
federal bankruptcy law by or against APS; or
8.1.4 An application by APS for receivership, an assignment
for the benefit of APS' creditors, or an admission by APS that it is
unable to pay its debts or meet its obligations.
8.2 Unless waived by APS, the nonperformance by DCC of any material
provision of this Distribution Agreement shall be deemed to constitute breach of
this Distribution Agreement by DCC.
3
<PAGE> 86
ARTICLE IX. REMEDIES UPON BREACH
9.1 In the event APS shall breach this Agreement as provided in
Paragraph 8.1, this Agreement shall terminate and DCC shall be entitled to
pursue any available remedies, whether legal or equitable, against APS.
9.2 In the event DCC shall breach this Agreement as provided in
Paragraph 8.2, this Agreement shall terminate and APS shall be entitled to
pursue any available remedies, whether legal or equitable, against DCC.
ARTICLE X. GOVERNING LAW
This Distribution Agreement, regardless of where signed, shall be
governed by the law of the State of Michigan without giving effect to any
principles of conflict of law.
ARTICLE XI. ENTIRE AGREEMENT AND AMENDMENT
This Distribution Agreement contains the entire agreement between the
parties in respect to the subject matter hereof and can only be altered or
amended by a written document or instrument signed by DCC and APS. No
modification of, addition to, extension of or waiver of any of the terms of this
Distribution Agreement shall be binding on the other party unless in writing and
signed by an authorized representative of such party.
ARTICLE XII. INVALID OR UNENFORCEABLE TERMS
If any term or provision of this Distribution Agreement is deemed
invalid or unenforceable by reason of law, this Distribution Agreement shall be
construed in such a manner as to delete that term or provision held to be
invalid or unenforceable and all other terms and provisions of this Distribution
Agreement shall remain in full force and effect. To the extent that any term or
provision is invalid or unenforceable by limitation or in part, then that term
or provision shall be enforceable to the fullest extent permitted by law.
4
<PAGE> 87
ARTICLE XIII. NOTICE
Any notice to APS provided for in this Distribution Agreement shall be
given by mailing such notice, or certified mail, return receipt requested,
addressed to 3696 Haven Avenue, Redwood City, California 94063, or to such other
address as APS may designate by written notice to DCC. Any notice to DCC shall
be given by mailing such notice, certified mail, return receipt requested,
addressed to DCC at 2200 West Salzburg Road, Midland, Michigan 48686-0994,
Attention: General Counsel or to such other address as DCC may designate by
written notice to APS. Any notice issued in accordance with this Distribution
Agreement shall be deemed to have been received by the appropriate party two (2)
business days after being so mailed.
IN WITNESS WHEREOF, the parties have executed this Distribution
Agreement.
DOW CORNING CORPORATION ADVANCED POLYMER SYSTEMS, INC.
By:___________________________ By: __________________________
William P. Cavanaugh Title:__________________________
Commercial Unit Manager
Personal, Household and
Automotive Products
5
<PAGE> 88
EXHIBIT G
NON-COMPETE AGREEMENT
THIS NON-COMPETE AGREEMENT ("Non-Compete Agreement") is made this
______ day of ___________, 1996, by and between Advanced Polymer Systems Inc., a
Corporation organized and existing under the laws of the State of Delaware
("Purchaser"), and Dow Corning Corporation, a Corporation organized and existing
under the laws of the State of Michigan ("DCC").
W I T N E S S E T H:
WHEREAS, Purchaser and DCC have entered into an Asset Purchase
Agreement dated _________________ related to the sale, transfer, and assignment,
from DCC to Purchaser of DCC's POLYTRAP(R) patents, trademarks, and technology;
and
WHEREAS, the Asset Purchase Agreement in Paragraph 5 provides that
Purchaser and DCC shall enter into a non-compete agreement on the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the receipt and adequacy of which is hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Definitions
1.1 All capitalized terms not defined herein shall have the same
meaning as defined in the Asset Purchase Agreement.
1.2 Unless otherwise specifically set forth herein, the following terms
shall have the following meanings:
<PAGE> 89
1.2.1 "Field " shall mean a POLYTRAP(R) polymer-based carrier system,
with or without entrapped ingredient(s), to be used as a raw material(s), which
raw material(s) is sold to primary or end-use manufacturers or distributors.
Other than over-the-counter (OTC) sunscreens and OTC antiperspirant active
ingredients, entrapment of drugs is excluded.
1.2.2 "POLYTRAP(R)" shall mean a polymer-based carrier system as
described and claimed in US Patent No. Re. 33,429, issued on November 6, 1990.
SECTION 2. Covenant Not to Compete.
2.1 In the Asset Purchase Agreement of even date herewith, DCC has
agreed to sell, transfer, and assign, to PURCHASER all of DCC s rights in the
POLYTRAP(R) System Assets.
2.2 Except as provided in Section 4 of the Asset Purchase Agreement,
DCC hereby agrees not to engage, directly or indirectly, in the United States,
or in any foreign country, in which the POLYTRAP(R) System is presently being
sold or utilized in products, either alone or in association with any other
person, firm, corporation, or any other business organization, in the business
of creating, licensing, manufacturing, or marketing, POLYTRAP(R) polymer-based
carrier systems for use in the Field.
2.3 The period of time during which DCC is prohibited from engaging in
the activities enumerated in Section 2.2 hereof shall commence on the date
hereof and end on December 31, 2005, or end on the date when Purchaser ceases to
carry on like business, whichever occurs first.
2
<PAGE> 90
2.4 Nothing in this Non-Compete Agreement shall be construed as
prohibiting DCC from supplying organosilicon compounds, silicones, silanes, or
organo-modified silicones or silanes, to any person, firm, corporation, or
business located anywhere in the world, regardless of whether that person, firm,
corporation, or business is engaged in direct or indirect competition with
Purchaser.
2.5 DCC shall have no right to make, have made, use, or sell
POLYTRAP(R) materials, or license any third party to do so, for use in the
Field, for the term specified in Section 2.3.
2.6 DCC has carefully read and considered the provisions of this
Section 2, and having done so, agrees that the agreements and restrictions set
forth in this Section, including without limitation, the time period of
restriction and the geographical area of restriction, are bargained for, and are
fair and reasonable restrictions on DCC.
SECTION 3. New POLYTRAP(R) Developments
3.1 If, during the term of this Non-Compete Agreement, DCC acquires
licensable or sublicensable patent rights in POLYTRAP(R), uses of POLYTRAP(R),
or methods of making POLYTRAP(R), discovered after the date of this Non-Compete
Agreement, DCC agrees not to license or sublicense those rights to any third
party, without first offering such license or sublicense on the same terms to
Purchaser. Any license granted by DCC pursuant to this Section shall be, subject
to the extent of rights obtained by DCC, exclusive in nature for the term of
this Non-Compete Agreement and nonexclusive thereafter. Any such license shall
not bear a royalty in excess of five percent (5%) of the net sale price of
POLYTRAP(R) discovered after the date of this Non-Compete Agreement and covered
by such patent.
3
<PAGE> 91
SECTION 4. Fee.
4.1 In consideration of the agreements of DCC contained in this
Non-Compete Agreement, Purchaser agrees to pay to DCC the agreed upon
consideration set forth in Paragraph 3.1 in the Asset Purchase Agreement, the
consideration of which compensates DCC s for obligations undertaken in this
Non-Compete Agreement.
SECTION 5. Notices.
5.1 All demands, notices, and communications hereunder shall be in
writing, and shall be given by United States mail (certified, return receipt
requested), overnight courier services, or other means, in each case with all
postage or delivery charges prepaid, to the party entitled thereto at such
party's address as set forth below:
If to DCC: Dow Corning Corporation
2200 West Salzburg Road
Midland, MI 48686-0994
Attention: General Counsel
If to Purchaser: Advanced Polymer Systems, Inc.
3696 Haven Avenue
Redwood City, CA 94063
or at such other address as such party may hereafter furnish to the other party,
by notice conforming to the requirements of this Section. Any demand, notice, or
communication hereunder shall be deemed to have been received by the appropriate
party three (3) business days after being so mailed.
4
<PAGE> 92
SECTION 6. Separability Clause.
Any provision of this Non-Compete Agreement that conflicts with
applicable law, or is held to be void or unenforceable, shall be ineffective to
the extent of such conflict, voidness, or unenforceability, without invalidating
the remaining provisions hereof, which remaining provisions shall be enforceable
to the fullest extent permitted under applicable law.
SECTION 7. Governing Law.
This Non-Compete Agreement shall be construed, and the obligations,
rights and remedies of the parties hereunder shall be determined, in accordance
with the laws of the State of Michigan, without reference to the principles of
conflict of laws thereof.
SECTION 8. Successors and Assigns; Assignment of Agreement.
This Non-Compete Agreement shall bind and inure to the benefit of, and
be enforceable by the parties hereto, and their respective successors and
assigns. This Non-Compete Agreement may not be assigned, pledged, or
hypothecated by any party hereto, to any person not a party hereto, whether by
operation of law or otherwise, without the consent of all parties to this
Non-Compete Agreement. This Non-Compete Agreement is not intended to confer upon
any person not a party hereto any rights or remedies hereunder, unless such
person is a permitted successor to or an assignee of a party hereto.
5
<PAGE> 93
SECTION 9. Waiver.
The failure of any party to insist upon strict performance of any
covenant or obligation hereunder, irrespective of the length of time for which
such failure continues, shall not be deemed a waiver of such party s right to
demand strict performance of such covenant or obligation at a later time. No
consent to or waiver of any breach or default in the performance of any covenant
or obligation hereunder, whether express or implied, shall constitute a consent
to or waiver of any other breach or default in the performance of the same, of
any other convenant or obligation hereunder. No term or provision of this
Non-Compete Agreement shall be deemed waived unless such waiver is in writing,
and signed by the party against whom such waiver is sought to be enforced.
SECTION 10. Term of Non-Compete Agreement.
This Non-Compete Agreement shall remain in effect from its date of
execution until December 31, 2005, unless terminated sooner as provided in
Section 2.2.
SECTION 11. Entire Agreement.
This Non-Compete Agreement constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
between the parties hereto, with respect to the transactions contemplated
hereby, and the subject matter hereof. No provision of this Non-Compete
Agreement may be modified, altered, or amended except in writing executed by all
parties hereto.
6
<PAGE> 94
SECTION 12. Captions.
The Section and other headings contained in this Non-Compete Agreement
are inserted only as a matter of convenience and for reference, and in no way
define, limit, extend, or describe the scope of this Non-Compete Agreement, or
the intent of any provision hereof.
SECTION 13. Counterparts.
This Non-Compete Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed to be an original, and all of
which shall constitute but one and the same instrument.
SECTION 14. Enforceability,
In the event of default by Purchaser thirty (30) days after receipt by
Purchaser of notice of such default from DCC, of consideration due DCC under the
terms of the Asset Purchase Agreement, then this Non-Compete Agreement shall be
null and void, and unenforceable against DCC.
IN WITNESS WHEREOF, the parties hereto have caused this Non-Compete
Agreement to be executed by their respective officers thereunto, duly
authorized.
ADVANCED POLYMER SYSTEMS, INC. DOW CORNING CORPORATION
By: __________________________ By: __________________________
Leon D. Crossman
Vice President & Director,
Science & Technology
Date: ________________________ Date: ________________________
7
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