FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
At July 31, 1999, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,092,005.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999
and 1998
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (unaudited):
--------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,528,767 $ 4,088,173
Trade accounts receivable, net 2,885,579 2,532,527
Receivables for royalties,
license and option fees and
R&D fees 2,414,412 2,296,852
Inventory 3,601,301 2,959,443
Advances and loans to officers
and employees 303,679 338,947
Prepaid expenses and other 864,388 596,400
---------- ----------
Total current assets 13,598,126 12,812,342
Property and equipment, net 8,348,562 8,643,856
Deferred loan costs, net 54,727 90,428
Goodwill and other intangible
assets, net 1,258,143 1,351,813
Other long-term assets 482,892 182,892
---------- ----------
Total assets $ 23,742,450 $ 23,081,331
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,092,868 $ 1,347,737
Accrued expenses 1,433,115 1,057,287
Accrued settlement liability -- 1,300,000
Deferred revenue 750,000 750,000
Current portion - long-term debt 954,130 3,055,460
---------- ----------
Total current liabilities 4,230,113 7,510,484
Deferred revenue - long-term 1,036,517 1,035,855
Long-term debt 2,869,873 --
---------- ----------
Total liabilities 8,136,503 8,546,339
---------- ----------
Commitments and Contingencies
Shareholders' equity:
Common stock and common stock
warrants 85,319,958 84,903,633
Accumulated deficit (69,714,011) (70,368,641)
---------- ----------
Total shareholders' equity 15,605,947 14,534,992
---------- ----------
Total liabilities and shareholders'
equity $ 23,742,450 $ 23,081,331
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Product revenues $ 3,528,917 $ 3,594,937 $ 6,478,972 $ 7,148,148
Royalties, license and option
fees and R&D fees 1,196,790 1,502,785 2,867,577 2,521,472
---------- ---------- ---------- ----------
Total revenues 4,725,707 5,097,722 9,346,549 9,669,620
Cost of sales 1,679,554 1,953,342 3,227,726 3,702,953
Operating expenses:
Research & development, net 1,027,701 1,161,090 2,083,222 2,199,842
Selling & marketing 689,215 738,896 1,416,300 1,614,726
General & administration 889,145 865,411 1,739,861 1,592,101
---------- ---------- ---------- ----------
Total operating expenses 2,606,061 2,765,397 5,239,383 5,406,669
---------- ---------- ---------- ----------
Operating income 440,092 378,983 879,440 559,998
Interest income 47,030 70,902 80,730 154,359
Interest expense (161,180) (211,419) (303,896) (440,199)
Other expense, net (1,217) (11,483) (1,644) (20,359)
---------- ---------- ---------- ---------
Net income $ 324,725 $ 226,983 $ 654,630 $ 253,799
========== ========== ========== =========
Basic earnings per common share $ 0.02 $ 0.01 $ 0.03 $ 0.01
========== ========== ========== =========
Diluted earnings per common share $ 0.02 $ 0.01 $ 0.03 $ 0.01
========== ========== ========== =========
Weighted average common shares
outstanding-basic 20,088,397 19,877,164 20,053,321 19,727,206
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,410,721 20,585,182 20,308,510 20,494,607
========== ========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 654,630 $ 253,799
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 543,362 534,531
Amortization of deferred loan costs 35,701 131,632
Stock issued to directors 21,000 --
Stock compensation awards to non-
employees -- 12,850
Restricted stock awards 99,858 --
Changes in operating assets and
liabilities:
Trade accounts receivable (353,052) (1,419,550)
Receivables for royalties, license
and option fees and R&D fees (117,560) (452,466)
Inventory (641,858) (440,814)
Prepaid expenses and other (232,720) (128,291)
Other long-term assets (300,000) 41,288
Accounts payable and accrued expenses 120,959 (904,816)
Accrued settlement liability (1,300,000) --
Deferred revenues 662 (7,229)
--------- ---------
Net cash used in operating activities (1,469,018) (2,379,066)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (154,398) (2,001,351)
--------- ---------
Net cash used in investing activities (154,398) (2,001,351)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 211,726 2,043,749
Proceeds from issuance of shares
under the Employee Stock Purchase
Plan 83,741 109,635
Proceeds from long-term debt 4,000,000 --
Repayment of debt (3,231,457) (1,248,144)
--------- ---------
Net cash provided by financing
activities 1,064,010 905,240
--------- ---------
Net decrease in cash and cash
equivalents (559,406) (3,475,177)
Cash and cash equivalents, beginning
of the period 4,088,173 8,672,021
--------- ---------
Cash and cash equivalents, end
of the period $ 3,528,767 $ 5,196,844
========= =========
Cash paid for interest $ 226,270 $ 317,281
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
JUNE 30, 1999 AND 1998 (UNAUDITED)
- ----------------------------------
(1) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position of Advanced
Polymer Systems, Inc. and subsidiaries ("the Company" or "APS")
as of June 30, 1999 and the results of their operations for the
three and six months ended June 30, 1999 and 1998.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiaries,
Premier, Inc. ("Premier") and APS Analytical Standards, Inc.
All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company considers all short-term investments in debt
securities which have original maturities of less than three
months at date of purchase to be cash equivalents. Investments
which have original maturities longer than three months are
classified as marketable securities in the accompanying balance
sheets.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 1999.
(2) Common Shares Outstanding and Earnings Per Share Information
------------------------------------------------------------
Common stock outstanding as of June 30, 1999 is as follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1998 19,993,311
Warrants exercised after December 31, 1998 70,000
Shares issued to Directors after December
31, 1998 4,802
Shares issued under the Employee Stock
Purchase Plan 20,173
Shares issued upon exercise of stock options 333
----------
Total shares 20,088,619
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1999 June 30,1998 June 30, 1999 June 30,1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income available to
stockholders (numerator) $ 324,725 $ 226,983 $ 654,630 $ 253,799
========== ========== ========== ==========
Shares calculation
(denominator):
Weighted average shares
outstanding - basic 20,088,397 19,877,164 20,053,321 19,727,206
Effect of dilutive securities:
Stock options and employee
stock purchase plan 217,860 555,317 152,199 528,646
Warrants 104,464 152,701 102,990 238,755
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,410,721 20,585,182 20,308,510 20,494,607
========== ========== ========== ==========
Earnings per share - basic $ 0.02 $ 0.01 $ 0.03 $ 0.01
========== ========== ========== ==========
Earnings per share - diluted $ 0.02 $ 0.01 $ 0.03 $ 0.01
========== ========== ========== ==========
</TABLE>
The following options with expiration dates ranging from July
23, 2001 to June 16,2009 were outstanding during the periods
presented, but were not included in the computation of diluted
earnings per share since the exercise prices of the options
were greater than the average market price of the common
shares:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Number outstanding 2,088,310 812,417 2,730,788 827,917
Range of exercise prices $5.44-$15.00 $7.75-$15.00 $5.19-$15.00 $7.75-$15.00
</TABLE>
(3) R&D Fees
--------
Fees from research and development activities are recognized as
revenues when earned and contract provisions are met. Such
fees (revenues) represent amounts paid to APS as reimbursement
of costs incurred in product development and clinical
evaluation, including a portion of overhead and administrative
expenses. As a general policy, the revenues are not recognized
if amounts received are refundable or the Company has related
future performance obligations.
(4) Long-Lived Assets, Including Goodwill and Other Intangibles
-----------------------------------------------------------
The Company evaluates the carrying value of long-lived assets,
including goodwill, whenever changes have occurred that would
require revision of the remaining estimated lives of recorded
long-lived assets, including goodwill, or render those assets
not recoverable. If such circumstances arise, recoverability
is determined by comparing the undiscounted net cash flows of
long-lived assets, including goodwill to their respective
carrying values. The amount of impairment, if any, is measured
based on the projected discounted cash flows using an
appropriate discount rate. At this time, the Company believes
that no impairment of long-lived assets, including goodwill and
other intangibles, has occurred and that no reduction of the
estimated useful lives of such assets is warranted.
(5) Related Party Transactions
--------------------------
During May 1999, a payment of $120,000 on an outstanding loan
balance was made by an officer. As of June 30, 1999, the
outstanding secured loan receivable from the officer totaled
$240,000. The loan bears an interest rate of the lower of
13.87% or the highest rate permitted under the applicable law.
The loan was approved by the Compensation Committee of the
Company's Board of Directors. Repayment of the loan is due by
December 31, 1999.
(6) Inventory
---------
The major components of inventory are as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials and work-
in-process $1,122,695 $ 743,383
Finished goods 2,478,606 2,216,060
--------- ---------
Total inventory $3,601,301 $2,959,443
========= =========
</TABLE>
(7) Note Receivable
---------------
Included in long-term assets is the non-current portion of a
note receivable recorded by the Company in connection with the
sale of certain proprietary product rights. The total amount
due as of June 30, 1999, is $600,000. The Company received
$100,000 payment in July 1999. The remaining $500,000, which
bears an interest rate equal to the prime rate, is due in equal
monthly installments over a period of twenty-five months
commencing September 15, 1999.
(8) Debt
----
In March 1999, the Company received a $4,000,000 term loan with
a fixed interest rate of 13.87%. The loan is secured by the
assets of the Company's manufacturing facility in Louisiana and
a portion of the Company's accounts receivable. Principal and
interest payments are due in equal monthly installments over a
period of forty-eight months commencing March 1999. The term
loan was obtained mainly to refinance scheduled debt payments
made in the first quarter of 1999.
(9) Income Taxes
------------
The Company does not anticipate incurring significant amounts
of income taxes in 1999 due to the use of its net operating
loss carry forwards from the prior year. Currently, any income
tax expense is being offset by recognition of a corresponding
change in the valuation allowance for deferred tax assets.
(10) Legal Proceedings
-----------------
In November 1997, Biosource Technologies, Inc. ("Biosource")
filed a complaint against the Company in the San Mateo Superior
Court. Biosource claimed damages from the Company on the
grounds that the Company had failed to pay certain minimum
amounts allegedly due under a contract for the supply of
melanin.
In December 1998, the Company reached a settlement agreement
with Biosource for a net amount of $1,300,000, which consisted
of a $1,500,000 settlement of Biosource's claims and a $200,000
settlement of the Company's cross claims. Pursuant to the
agreement, the Company paid Biosource $300,000 in January, 1999
and $1,000,000 on May 31, 1999. The settlement agreement also
provided for the termination of the license and supply
agreement between the parties.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations (all dollar amounts rounded to the
------------------------------------------------------------
nearest thousand)
-----------------
Results of Operations for the Three Months Ended June 30, 1999 and
- -------------------------------------------------------------------
1998
- ----
Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially
from the statements made. These include, among others, uncertainty
associated with timely approval, launch and acceptance of new
products, establishment of new corporate alliances, progress in
research and development programs, risks of consummation of
contemplated action to maximize stockholder value (as to which there
is no assurance) and other risks described below or identified from
time to time in the Company's Securities and Exchange Commission
filings.
The Company's revenues are derived principally from product sales,
license fees, royalties and R&D fees. Under strategic alliance
arrangements entered into with certain corporations, APS can receive
non-refundable upfront fees, future milestone payments, commitments
for future minimum purchases and royalties based on third party
product sales or a share of partners' revenues, and revenues from
the sale of Microsponge and Polytrap systems. The Company is
currently manufacturing and selling Microsponge(R) and Polytrap (R)
delivery systems for use by customers in approximately 100 different
personal care and cosmetic products.
Product revenues for the three months ended June 30, 1999 totaled
$3,529,000 compared to $3,595,000 in the corresponding period of the
prior year, representing a slight decrease of $66,000 or 2%.
Product revenues for the second quarter of 1999 included initial
shipments of a Microsponge-entrapped retinol formulation to a new
customer for the U.S. launch of a new product. The corresponding
period of the prior year included shipments to a customer for the
worldwide launch of a Microsponge-based formulation and shipments to
a customer for a baby wipe product that has now been discontinued.
Royalties, license and option fees, and R&D fees of $1,197,000 for
the second quarter of 1999 decreased by $306,000 or 20% from the
second quarter of the prior year. This decrease is mainly
attributable to lower R&D fees due to the timing and status of
certain R&D projects.
Gross profit on product revenues of $1,849,000 increased as a
percentage of product revenues from 46% to 52% as lower-margin sales
of Microsponge systems to a customer for its baby wipe product were
replaced by sales of higher-margin cosmeceutical products.
Research and development expenses for the second quarter of 1999
decreased by $133,000 or 11% from the corresponding period of the
prior year due to lower expenses for professional fees and increased
expense reimbursement for clinical studies from some of the
Company's corporate partners.
Selling and marketing expenses totaled $689,000, a decrease of
$50,000 or 7% from the second quarter of the prior year. This
decrease is primarily attributable to a decrease in headcount as
part of the Company's cost-containment efforts.
General and administrative expenses for the second quarter of 1999
totaled $889,000, a slight increase of $24,000 or 3% from the same
period of the prior year. This increase is primarily due to higher
professional fees resulting from the potential proxy contest that
was resolved in the second quarter of 1999 and increased investor
and public relations expenses.
Interest income decreased by $24,000 or 34% from the second quarter
of the prior year due to lower average cash balances. Interest
expense decreased by $50,000 or 24% due to a decrease in the average
debt compared to the second quarter of the prior year.
Results of Operations for the Six Months Ended June 30, 1999 and
- ----------------------------------------------------------------
1998
- ----
Product revenues for the six months ended June 30, 1999 were
$6,479,000 compared to $7,148,000 in the same period of the prior
year, representing a decrease of $669,000 or 9%. This decrease is
primarily attributable to the supply of Microsponge systems to a
customer in the year-ago period for a baby wipe product that has now
been discontinued. Product revenues for the second half of 1999
included first shipments of a Microsponge-entrapped retinol
formulation to a new customer for the U.S. launch of a new product.
The corresponding period of the prior year included shipments to a
customer for the worldwide launch of a Microsponge-based formulation
and shipments to a customer for a baby wipe product that has now
been discontinued.
Royalties, license and option fees and R&D fees for the first half
of 1999 increased by $346,000 or 14% from the first half of the
prior year to a total of $2,868,000. This increase is mainly due to
the exercise of an option by a cosmeceutical customer for rights to
a certain proprietary product and its subsequent sale to a third
party. Higher royalties from Ortho Pharmaceutical for Retin-A(R)
Micro(TM) were offset by lower R&D fees due to the timing and status
of certain R&D projects.
Research and development expenses for the first six months of 1999
decreased by $117,000 or 5% from the corresponding period of the
prior year due to lower expenses for professional fees and increased
expense reimbursement for clinical studies from some of the
Company's corporate partners.
Selling and marketing expenses for the first half of 1999 totaled
$1,416,000, a decrease of $198,000 or 12% from the first half of the
prior year. This decrease is primarily attributable to lower
expenses for outside services relating to print promotion activities
and a decrease in headcount as part of the Company's cost-
containment efforts.
General and administrative expenses for the six months ended June
30, 1999 increased by $148,000 or 9% to $1,740,000 compared to the
corresponding period of the prior year. This increase is mainly due
to increased investor and public relations expenses, incremental
compensation for the Company's Board of Directors and higher
professional fees resulting from the potential proxy contest that
was resolved in the second quarter of 1999.
Interest income decreased by $74,000 or 48% from the first half of
the prior year due to lower average cash balances. Interest expense
decreased by $136,000 or 31% to $304,000 due to a decrease in
average debt compared to the first half of the prior year.
Capital Resources and Liquidity
- -------------------------------
Total assets as of June 30, 1999 were $23,742,000 compared with
$23,081,000 at December 31, 1998. Working capital increased to
$9,368,000 from $5,302,000 for the same period and cash and cash
equivalents decreased to $3,529,000 from $4,088,000. During the
first six months of 1999, the Company's operating activities used
$1,469,000 of cash compared to $2,379,000 in the first half of the
prior year. The Company invested approximately $2,083,000 in
product research and development and $1,416,000 in selling and
marketing the Company's products and technologies.
Trade accounts receivable increased to $2,886,000 at June 30, 1999
from $2,533,000 at December 31, 1998. Days sales outstanding
increased to 81 days at June 30, 1999 compared to 68 days at
December 31, 1998. The increase in days sales outstanding is mainly
due to the timing of product shipments, which was heavily weighted
towards the last month of the quarter. Receivables from royalties,
license and option fees and R&D fees increased to $2,414,000 at June
30, 1999 compared to $2,297,000 at December 31, 1998. This increase
is primarily attributable to the sale of a proprietary product in
June 1999. Payment for the aforementioned sale is due over a two-
year period and the current portion is included in receivables from
royalties, license and option fees and R&D fees.
Capital expenditures for the six months ended June 30, 1999
decreased substantially to $154,000 compared to $2,001,000 in the
same period of the prior year. The first half of the prior year
included capital expenditures related to expansion of the Company's
manufacturing facility in Louisiana and leasehold improvements to
the Company's new facility in Redwood City, which are now complete.
In March 1999, the Company received a $4,000,000 term loan with a
fixed interest rate of 13.87%. The loan is secured by the assets of
the Company's manufacturing facility in Louisiana and a portion of
the Company's accounts receivable. Principal and interest payments
are due in equal monthly installments over a period of forty-eight
months commencing March 1999. The term loan was obtained mainly to
refinance scheduled debt repayments made in the first quarter of
1999.
In accordance with the terms of the settlement agreement with
Biosource (Note 7), the Company paid Biosource the final settlement
amount of $1,000,000 in cash in May 1999 in lieu of issuing shares
of the Company's common stock in payment.
The Company has financed its operations, including technology and
product research and development, from amounts raised in debt and
equity financings, the sale of Microsponge and Polytrap delivery
systems and analytical standard products, payments received under
licensing agreements, and interest earned on short-term investments.
The Company's existing cash and cash equivalents, collections of
trade accounts receivable, together with interest income and other
revenue producing activities including royalties, license and option
fees and R&D fees, are expected to be sufficient to meet the
Company's working capital requirements for the foreseeable future,
assuming no changes to existing business plans.
Year 2000
- ---------
The Company is conducting a comprehensive review of its internal
computer systems to ensure these systems are adequate to address the
issues expected to arise in connection with the Year 2000. These
issues include the possibility that software which uses only the
last two digits to refer to the year will no longer function
properly for years that begin with 20 rather than 19. In addition,
the Company is reviewing the status of its customers and suppliers
with regard to this issue and assessing the potential impact of non-
compliance by such parties on the Company's operations.
The Company developed a three-phased program to address Year 2000
issues. The first phase consists of identifying necessary changes
to application software used by the Company. The Company utilizes
an integrated ERP system for the majority of its manufacturing and
financial systems and has received the Year 2000 compliant version
of the software from the vendor. Implementation of the upgraded
software was completed on September 30, 1998.
The second phase consisted of identifying and determining whether
Company systems not addressed in Phase One (including non-IT
systems) are Year 2000 compliant. The Company believes that upgrades
and replacements of systems that are not Year 2000 compliant have
been substantially completed.
The third phase consisted of determining the extent to which the
Company may be impacted by third parties' systems, which may not be
Year 2000-compliant. The Year 2000 computer issue creates risk for
the Company from third parties with whom the Company deals on
financial transactions worldwide. Although the Company has received
assurances from third parties that their systems are either
currently Year 2000 compliant or will be Year 2000 compliant by the
end of the year, there can be no assurance that the systems of other
companies with which the Company deals or on which the Company's
systems rely will be converted on a timely basis, or that any such
failure to convert by another company could not have an adverse
effect on the Company.
The Company has incurred approximately $600,000 to remediate non-
compliant systems since the project was started in early 1998. Most
of the costs incurred were for purchases of new systems and related
equipment. The Company has funded all costs to upgrade or replace
systems that are not Year 2000-compliant through operating cash
flows.
The Company is currently in the process of considering potential
Year 2000 scenarios and developing formal contingency plans for
addressing any problems which may result if the work performed in
phase two and three do not successfully resolve all issues by the
Year 2000. The Company expects to complete the identification of
its potential Year 2000 scenarios, including the identification of
its most likely worst case scenario, and the determination of its
contingency plans during the third quarter of 1999.
Failure to complete any necessary remediation by the Year 2000 may
have a material adverse impact on the operations of the Company.
Failure of third parties, such as customers and suppliers, to
remediate Year 2000 problems in their IT and non-IT systems would
also have a material adverse impact on the operations of the
Company.
New Accounting Standards
- ------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) which as
amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities, Deferral of the Effective Date of FASB Statement
No. 133, and Amendment of FASB Statement No. 133" will be effective
for all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments
at fair value. SFAS 133 generally provides for matching the timing
of gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value of the hedged asset
or liability that are attributed to the hedged risk or (b) the
earnings effect of hedged forecasted transactions. Earlier
application of all provisions of this statement is encouraged but it
is permitted only as of the beginning of any fiscal quarter that
begins after issuance of this statement. The Company anticipates
that adoption of this statement will not have a material effect on
the consolidated financial statements.
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings
-----------------
In November, 1997 Biosource Technologies, Inc. ("Biosource") filed a
complaint against the Company in the San Mateo Superior Court.
Biosource claimed damages from the Company on the grounds that the
Company has failed to pay certain minimum amounts allegedly due
under a contract for the supply of melanin.
In December 1998, the Company reached a settlement agreement with
Biosource for a net amount of $1,300,000, which consists of a
$1,500,000 settlement of Biosource's claims and a $200,000
settlement of the Company's cross claims. Pursuant to the
agreement, the Company paid Biosource $300,000 in January 1999 and
$1,000,000 in May 1999. The settlement agreement also provided for
the termination of the license and supply agreement between the
parties.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's annual shareholder's meeting was held on June 16,
1999, at which the following proposal was approved:
Proposal I: Election of the following directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
John J. Meakem, Jr. 17,814,557 306,322
Chairman of the Board
Stephen Drury 17,860,788 260,091
Carl Ehmann 17,816,678 304,201
Jorge Heller 17,838,178 282,701
Peter Riepenhausen 17,812,378 308,501
Toby Rosenblatt 14,421,148 3,699,731
Richard Spizzirri 17,858,488 262,391
Gregory Turnbull 17,811,678 309,201
Charles Anthony Wainwright 17,814,813 306,066
Dennis Winger 17,814,228 306,651
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the three
months ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
Date: August 12, 1999 By: /S/ John J. Meakem, Jr.
---------------- ----------------------------
John J. Meakem, Jr.
Chairman, President and
Chief Executive Officer
Date: August 12, 1999 By: /S/ Michael O'Connell
---------------- ----------------------------
Michael O'Connell
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer;
President of Pharmaceutical
Sciences
<PAGE>
EXHIBIT INDEX
Form 10-Q
EXHIBIT DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS
OF JUNE 30, 1999, AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,528,767
<SECURITIES> 0
<RECEIVABLES> 5,299,991
<ALLOWANCES> 20,264
<INVENTORY> 3,601,301
<CURRENT-ASSETS> 13,598,126
<PP&E> 18,034,392
<DEPRECIATION> 9,685,830
<TOTAL-ASSETS> 23,742,450
<CURRENT-LIABILITIES> 4,230,113
<BONDS> 2,869,873
0
0
<COMMON> 200,886
<OTHER-SE> 15,405,061
<TOTAL-LIABILITY-AND-EQUITY> 23,742,450
<SALES> 6,478,972
<TOTAL-REVENUES> 9,346,549
<CGS> 3,227,726
<TOTAL-COSTS> 3,227,726
<OTHER-EXPENSES> 5,239,383
<LOSS-PROVISION> 7,799
<INTEREST-EXPENSE> 303,896
<INCOME-PRETAX> 654,630
<INCOME-TAX> 0
<INCOME-CONTINUING> 654,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 654,630
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
