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 September 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
-------- --------
Commission file Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 Saginaw Drive, Redwood City, CA 94063
------------------------------------------
(Address of principal executive offices)
(650) 366-2626
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
At October 31, 2000, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,206,064.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2000
and 1999
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 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>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,903,741 $ 3,705,194
Marketable securities 13,898,983 --
Trade accounts receivable, net 1,211,945 3,580,026
Receivables for royalties,
license and option fees and
R&D fees 1,071,963 1,492,634
Accrued interest receivable 110,810 756
Inventory 67,537 60,650
Advances and loans to officers
and employees 89,912 84,632
Prepaid expenses and other 619,404 318,450
Net assets held for sale
(Note 4) -- 7,664,482
---------- ----------
Total current assets 26,974,295 16,906,824
Property and equipment, net 1,875,020 2,007,932
Deferred loan costs, net -- 39,853
Other long-term assets 157,300 342,047
---------- ----------
Total assets $ 29,006,615 $ 19,296,656
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 701,677 $ 1,029,534
Accrued expenses 3,869,524 1,263,186
Taxes payable 450,558 13,480
Deferred revenue 446,000 575,000
Current portion - long-term debt -- 891,111
---------- ----------
Total current liabilities 5,467,759 3,772,311
Deferred revenue - non-current 935,626 1,079,644
Long-term debt -- 2,408,933
---------- ----------
Total liabilities 6,403,385 7,260,888
---------- ----------
Commitments and Contingencies
Shareholders' equity:
Common stock and common stock
warrants 85,954,027 85,530,952
Accumulated deficit (63,350,797) (73,495,184)
---------- ----------
Total shareholders' equity 22,603,230 12,035,768
---------- ----------
Total liabilities and shareholders'
equity $ 29,006,615 $ 19,296,656
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
-------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Royalties and R&D fees $ 605,392 $ 669,698 $ 1,594,634 $ 1,722,991
License and option fees -- -- -- 1,100,000
Product revenues 281,170 291,657 891,215 922,551
---------- ---------- ---------- ----------
Total revenues 886,562 961,355 2,485,849 3,745,542
Cost of sales 116,627 147,141 304,121 408,914
Operating expenses:
Research & development, net 790,295 623,762 2,194,810 1,845,445
Selling & marketing 149,517 100,051 426,321 382,582
General & administration 722,116 769,925 2,113,568 2,144,112
---------- ---------- ---------- ----------
Total operating expenses 1,661,928 1,493,738 4,734,699 4,372,139
---------- ---------- ---------- ----------
Operating loss (891,993) (679,524) (2,552,971) (1,035,511)
Interest income 302,192 52,291 421,243 133,021
Interest expense (66,208) (150,340) (294,247) (454,236)
Other income (expense), net (1,992) (1,919) 4,523 (3,563)
---------- ---------- ---------- ----------
Loss from continuing
Operations (658,001) (779,492) (2,421,452) (1,360,289)
Discontinued operations:
Income from discontinued
operations, net of taxes 30,980 1,389,563 1,381,046 3,012,966
Gain on disposition of
discontinued operations,
net of taxes 11,184,793 -- 11,184,793 --
---------- ---------- ---------- ----------
Net income $10,557,772 $ 610,071 $10,144,387 $ 1,652,677
========== ========== ========== ==========
Basic earnings per common
share:
Loss from continuing
operations $ (0.03) $ (0.04) $ (0.12) $ (0.07)
========== ========== ========== ==========
Net income $ 0.52 $ 0.03 $ 0.50 $ 0.08
========== ========== ========== ==========
Diluted earnings per common
share:
Loss from continuing
operations $ (0.03) $ (0.04) $ (0.12) $ (0.07)
========== ========== ========== ==========
Net income $ 0.52 $ 0.03 $ 0.50 $ 0.08
========== ========== ========== ==========
Weighted average common shares
outstanding-basic 20,190,181 20,092,148 20,170,351 20,066,263
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,194,157 20,335,481 20,194,017 20,295,550
========== ========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
<TABLE>
<CAPTION>
For the nine months ended
-------------------------
September 30, September 30,
2000 1999
---------- -------------
<S> <C> <C>
Net cash used in operating activities $ (1,588,649) $ (1,525,864)
---------- -----------
Cash flows from investing activities:
Purchases of property and equipment (141,678) (183,808)
Purchase of intangibles (100,000) --
Purchases of marketable securities (13,866,677) --
----------- ----------
Net cash used in investing activities (14,108,355) (183,808)
----------- ----------
Cash flows from financing activities:
Proceeds from disposal of
discontinued operations 25,000,000 --
Proceeds from the exercise of common
stock options and warrants and
issuance of restricted stock 120,000 229,525
Proceeds from issuance of shares
under the Employee Stock Purchase
Plan 75,595 83,718
Proceeds from long-term debt -- 4,000,000
Repayment of debt (3,300,044) (3,539,168)
----------- ----------
Net cash provided by financing
activities 21,895,551 774,075
----------- ----------
Net increase (decrease) in cash
and cash equivalents 6,198,547 (935,597)
Cash and cash equivalents, beginning
of the period 3,705,194 4,088,173
----------- ----------
Cash and cash equivalents, end
of the period $ 9,903,741 $ 3,152,576
=========== ==========
Cash paid for interest $ 250,025 $ 358,530
=========== ==========
Non-cash investing activities:
Change in unrealized appreciation
of marketable securities $ 7,234 $ --
=========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
---------------------------------------
(1) Basis of Presentation
---------------------
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of Advanced
Polymer Systems, Inc. and subsidiaries ("the Company" or "APS")
as of September 30, 2000 and the results of their operations
for the three and nine months ended September 30, 2000 and
1999.
These condensed consolidated statements should be read in
conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 1999 included in the
Company's Annual Report on Form 10-K.
The condensed consolidated financial statements include the
financial statements of the Company and its subsidiaries,
Premier, Inc. ("Premier") and APS Analytical Standards, Inc.
All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company considers all short-term investments in debt
securities which have original maturities of less than three
months at date of purchase to be cash equivalents. Investments
which have original maturities longer than three months are
classified as marketable securities in the accompanying balance
sheets.
Certain reclassifications have been made to the prior period
financial statements to conform with the presentation in 2000.
(2) Common Shares Outstanding and Earnings Per Share Information
------------------------------------------------------------
Common stock outstanding as of September 30, 2000 is as
follows:
Number of Shares
----------------
Common stock outstanding as of
December 31, 1999 20,119,042
Warrants exercised after December 31, 1999 40,000
Shares issued to Directors after December
31, 1999 10,197
Shares issued under the Employee Stock
Purchase Plan 23,324
----------
Total shares 20,192,563
==========
The following table sets forth the computation of the Company's
basic and diluted loss per share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from continuing
operations (numerator) $ (658,001) $ (779,492) $(2,421,452) $(1,360,289)
========== ========== ========== ==========
Shares calculation
(denominator):
Weighted average shares
outstanding - basic 20,190,181 20,092,148 20,170,351 20,066,263
Effect of dilutive securities:
Stock options and employee
stock purchase plan 3,976 225,281 21,584 173,909
Warrants -- 18,052 2,082 55,378
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,194,157 20,335,481 20,194,017 20,295,550
========== ========== ========== ==========
Loss per share - basic $ (0.03) $ (0.04) $ (0.12) $ (0.07)
========== ========== ========== ==========
Loss per share - diluted $ (0.03) $ (0.04) $ (0.12) $ (0.07)
========== ========== ========== ==========
</TABLE>
The following options with expiration dates ranging from
February 13, 2001 to August 8, 2010 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number outstanding 3,621,859 1,921,411 3,587,109 2,732,738
Range of exercise prices $3.34-$15.00 $5.56-$15.00 $4.00-$15.00 $5.25-$15.00
</TABLE>
(3) Revenue Recognition
-------------------
Licensing agreements that generally provide for the Company to
receive periodic minimum payments, royalties, and/or non-
refundable license fees typically allow customers to sell the
Company's proprietary products in a specific field or
territory. The license agreements provide for APS to earn
future revenue through royalty payments. The license fees are
non-refundable even if the agreements are terminated before
their term or APS fails to supply product to the licensee.
These license fees are amortized on a straight-line basis over
the estimated life of the product to which they relate. When
the customer fails to meet applicable contract terms and
product supply is no longer required, any unamortized license
fees are recognized as revenue.
(4) Discontinued Operations
-----------------------
On July 25, 2000, the Company completed the sale of certain
technology rights for topical pharmaceuticals and its
cosmeceutical product lines and other assets ("cosmeceutical
and toiletry business") to R.P. Scherer Corporation, a
subsidiary of Cardinal Health, Inc. The Company received $25
million up-front and could receive up to an additional $26.5
million over the next three years relating to the performance
milestones of the cosmeceutical and toiletry business. In
accordance with Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," the
cosmeceutical and toiletry business is reported as a
discontinued operation for all periods presented in the
accompanying Condensed Consolidated Statements of Operations.
All assets and liabilities relating to the cosmeceutical and
toiletry business are reported in the accompanying condensed
Consolidated Balance Sheet as of December 31, 1999 as "Net
assets held for sale" and consist of the following:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Inventory $ 4,524,347
Prepaid expenses 59,763
Property, plant & equipment, net 6,023,144
Other intangible assets 1,259,020
Other long-term assets 4,350
Deferred revenue - short-term (620,396)
Deferred revenue - long-term (3,585,746)
----------
$ 7,664,482
==========
</TABLE>
"Gain on disposal of discontinued operations" in the
accompanying condensed Consolidated Statement of Operations for
the three and nine months ended September 30, 2000 is reported
net of a provision for income taxes of $450,500.
Basic and diluted income per common share from discontinued
operations was $0.00 and $0.07 for the three and nine months
ended September 30, 2000, respectively. Basic and diluted
income per common share from discontinued operations was $0.07
and $0.15 for the three and nine months ended September 30,
1999.
(5) Comprehensive Income
--------------------
Comprehensive income for the three and nine months ended
September 30, 2000 consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $10,557,772 $ 610,071 $10,144,387 $ 1,652,637
Unrealized holding gains
arising during the period 7,234 -- 7,234 --
---------- ---------- ---------- ----------
Comprehensive income $10,565,006 $ 610,071 $10,151,621 $ 1,652,637
========== ========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
(6) 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 or carrying values of such assets is
warranted.
(7) Inventory
---------
The major components of inventory are as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials $44,257 $33,383
Finished goods 23,280 27,267
------ ------
Total inventory $67,537 $60,650
====== ======
</TABLE>
(8) Legal Proceedings
-----------------
In February 2000, Douglas Kligman and Albert Kligman filed a
complaint against the Company in the U.S. District Court for
the Eastern District of Pennsylvania. The complaint alleges
that the plaintiffs entered into a partnership with the Company
to pursue development and sales of a product developed by the
plaintiffs. The complaint states various claims, dissolution
of partnership, implied-in-law contract and other claims. The
complaint alleges damages in excess of $75,000, but otherwise
makes no specific damage claim.
The Company has denied liability and is vigorously defending
the claims, basing its defense on the assertion that its rights
to the product are governed by a binding license agreement that
was executed in November 1995 and amended in September 1996 and
that there are no partnership agreements entered into by the
parties.
The Company expects that the outcome of this legal proceeding
will not have a material adverse effect on the consolidated
financial statements.
<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 September 30, 2000
-------------------------------------------------------------------
and 1999
--------
Except for statements of historical fact, the statements herein are
forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially
from the statements made. These include, among others, uncertainty
associated with timely approval, launch and acceptance of new
products, establishment of new corporate alliances, progress in
research and development programs and other risks described below or
identified from time to time in the Company's Securities and
Exchange Commission filings.
The Company's revenues are derived principally from product sales,
license fees, royalties and R&D fees. Under strategic alliance
arrangements entered into with certain corporations, APS can receive
non-refundable upfront fees, future milestone payments and royalties
based on third party product sales. Until July 25, 2000, the
Company manufactured and sold Microsponge(R) and Polytrap (R)
delivery systems for use by customers in approximately 100 different
personal care and cosmetic products.
Royalties and R&D fees for the three months ended September 30, 2000
totaled $605,000, a decrease of $64,000 from the corresponding
quarter of the prior year.
Product revenues relating to sales of analytical standards decreased
by $10,000 compared to the corresponding quarter of the prior year.
Gross profit as a percentage of product sales for the third quarter
of 2000 represented 59% compared with 50% in the corresponding
quarter of the prior year, due mainly to sales mix.
Research and development expense for the quarter ended September 30,
2000 totaled $790,000, an increase of $167,000 over the
corresponding quarter of the prior year. This increase was
primarily attributable to the cost of materials for pre-clinical
trials on the company's proprietary bioerodible drug delivery
systems.
Selling and marketing expense for the quarter ended September 30,
2000 totaled $150,000, an increase of $49,000 over the corresponding
period of the prior year. This increase was primarily attributable
to higher commission expense on sales of analytical standards and
higher overhead allocation compared with the prior year. General
and administrative expense for the quarter ended September 30, 2000
totaled $722,000, a decrease of $48,000. This decrease was
primarily attributable to lower salary expense due to lower
headcount.
Interest income for the quarter ended September 30, 2000 was
$302,000 compared with $52,000 in the corresponding quarter of the
prior year, an increase of $250,000, due to the receipt of $25
million on the divestiture of a portion of the company to R.P.
Scherer, Inc. Interest expense for the three months ended September
30, 2000 totaled $66,000, a decrease of $84,000, due to the
repayment of all outstanding debt on the receipt of the $25 million
from R.P. Scherer.
Income from discontinued operations represents the net contribution
attributable to the cosmeceutical and toiletries product lines which
were sold to R.P. Scherer Corporation in July 2000. For the three
months ended September 30, 2000, the net contribution totaled
$31,000, being the contribution earned prior to the closing of the
sale transaction in July 2000, compared with $1,390,000 in the third
quarter of the prior year. This decrease was primarily due to
unabsorbed overhead at the manufacturing facility in Louisiana,
resulting from a planned reduction in inventory levels and a shift
in sales mix from toiletries to cosmeceutical products which require
less Microsponge entrapment.
Results of Operations for the Nine Months Ended September 30, 2000
------------------------------------------------------------------
and 1999
--------
Royalties and R&D fees for the nine months ended September 30, 2000
totaled $1,595,000, a decrease of $128,000 from the corresponding
period of the prior year. This decrease was primarily due to the
absence of R&D fees in the current period. Product sales for the
nine months ended September 30, 2000 totaled $891,000, a decrease of
$32,000 or 3%. License and option fees in the year-ago period
related to revenues recognized on the exercise of an option and
subsequent purchase of a proprietary product line by a third party.
As a percentage of product sales, gross profit increased to 66% from
56% due principally to sales mix.
Research and development expense for the nine months ended September
30, 2000 totaled $2,195,000, an increase of $349,000 over the
corresponding period of the prior year. This increase was mainly
due to the cost of materials and laboratory supplies for pre-
clinical trials on the Company's proprietary bioerodible drug
delivery systems.
Selling and marketing expense for the nine months ended September
30, 2000 was $426,000, an increase of $44,000 over the corresponding
period of the prior year. This increase is due mainly to higher
commission expense on sales of analytical standards and higher
allocation costs.
General and administrative expenses for the nine months ended
September 30, 2000 totaled $2,114,000, a decrease of $31,000 due
mainly to lower salary expense as a result of lower headcount.
Interest income for the nine months ended September 30, 2000 totaled
$421,000, an increase of $288,000 over the corresponding period of
the prior year. This increase was due mainly to higher cash
balances, resulting from the receipt of $25 million from the sale of
the company's cosmeceutical product lines and certain technology
rights to topical pharmaceuticals in July 2000. Interest expense
for the nine months ended September 30, 2000 totaled $294,000, a
decrease of $160,000 from the corresponding period of the prior
year. This decrease was mainly due to the repayment of all
outstanding debt by the company in July 2000.
Income from discontinued operations for the nine months ended
September 30, 2000 totaled $1,381,000, compared with $3,013,000 in
the corresponding period of the prior year. This represents the net
contribution of the cosmeceutical and toiletries product lines
earned prior to the closing of the sale transaction in July 2000.
Capital Resources and Liquidity
-------------------------------
Total assets as of September 30, 2000 were $29,007,000 compared with
$19,297,000 at December 31, 1999. Working capital increased to
$21,507,000 from $13,135,000. This was due primarily to the sale of
the company's cosmeceutical product lines and certain technology
rights to topical pharmaceuticals to R.P. Scherer, Inc. for an
upfront cash payment of $25 million. The Company could receive up
to an additional $26.5 million over the next three years relating to
performance milestones of the purchased business.
Cash, cash equivalents and marketable securities increased to
$23,803,000 from $3,705,000 at December 31, 1999. During the first
nine months of 2000, the Company's operating activities used
$1,589,000 compared with $1,526,000 in the corresponding period of
the prior year. In the first nine months of 2000, the Company
invested approximately $2,195,000 in product research and
development.
Trade accounts receivable decreased to $1,212,000 at September 30,
2000 from $3,580,000 due primarily to the sale of the Company's
cosmeceutical product lines in July 2000.
Receivables for royalties, license and option fees and R&D fees
decreased to $1,072,000 from $1,493,000 at December 31, 1999 due
mainly to the collection of the receivable from the sale of
proprietary product rights in the year-ago period.
Capital expenditures for the nine months ended September 30, 2000
totaled $142,000 a decrease of $42,000 from the corresponding period
of the prior year.
Purchases of marketable securities of $13,867,000 were made using
the proceeds of the sale of a portion of the Company to R.P.
Scherer, Inc. for $25 million. These proceeds were also used to
repay the Company's outstanding debt in full.
The Company raised $25 million from the sale of its cosmeceutical
and toiletries product lines and certain technology rights to
topical pharmaceuticals to R.P. Scherer, Inc. in July 2000.
The Company has also financed its operations, including technology
and product research and development, from amounts raised in debt
and equity financings, the sale of Microsponge and Polytrap delivery
systems and analytical standard products, payments received under
licensing agreements, and interest earned on short-term investments.
The Company's existing cash and cash equivalents, collections of
trade accounts receivable, together with interest income and other
revenue-producing activities including royalties, license and option
fees and R&D fees, are expected to be sufficient to meet the
Company's working capital requirements for the foreseeable future,
assuming no changes to existing business plans.
New Accounting Standards
------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (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" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133", issued in June
2000, 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.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB
101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB 101A, which amends SAB
101 to defer the effective date of required adoption. In June 2000,
the SEC issued SAB 101B which further amends the transition guidance
for SAB 101, and extends the implementation date of SAB 101 once
more. On October 12, 2000, the SEC staff released a Frequently
Asked Questions (FAQ) document to provide additional guidance on
implementing SAB No. 101. The FAQ does not change the
implementation date of SAB No. 101, or any of the guidance included
in the SAB. As amended, SAB 101 is required to be adopted in the
fourth quarter of a fiscal year that ends on December 31, 2000, and
in first, second, and third quarters, respectively, of fiscal years
ending in March, June and September 2001. The Company believes that
the adoption of SAB 101 will not have a material effect on its
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation
of APB Opinion No. 25. This Interpretation clarifies the
application of Opinion 25 for certain issues: a) the definition of
employee for purposes of applying Opinion 25, b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, c)
the accounting consequence of various modifications to the terms of
a previously fixed stock option or award, and d) the accounting for
an exchange of stock compensation awards in a business combination.
This Interpretation was effective July 1, 2000. The adoption of
Interpretation No. 44 did not have a material effect on our
consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
Our exposure to market rate risk for changes in interest rates
relates primarily to our investment portfolio. We do not use
derivative financial instruments in our investment portfolio. We
manage our interest rate risk by maintaining an investment portfolio
primarily consisting of debt instruments of high credit quality and
relatively short average maturities. We also manage our interest
rate risk by maintaining sufficient cash and cash equivalent balance
such that we are typically able to hold our investments to maturity.
At September 30, 2000, our cash equivalents, and marketable
securities included debt securities of $8,011,700. Notwithstanding
our efforts to manage interest rate risks, there can be no
assurances that we will be adequately protected against the risks
associated with interest rate fluctuations.
<PAGE>
PART II. OTHER INFORMATION
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ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedules as of and for the nine
months ended September 30, 2000 and September 30, 1999.
(b) On August 9, 2000 the Company filed a current report on Form 8-
K reporting the completion of the sale of its cosmeceutical and
toiletry business on July 25, 2000. The Asset Purchase
Agreement between the Company and R.P. Scherer Corporation
dated June 22, 2000 filed as Exhibit 2.1 to Form 8-K is
incorporated here by reference.
<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: November 13, 2000 By: /S/ Michael O'Connell
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Michael O'Connell
President and Chief
Executive Officer
Date: November 13, 2000 By: /S/ Gordon Sangster
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Gordon Sangster
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Form 10-Q
EXHIBIT DESCRIPTION
27 Financial Data Schedules
