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, 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 July 31, 2000, the number of outstanding shares of the Company's
common stock, par value $.01, was 20,188,990.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations
for the three months and six months ended June 30, 2000
and 1999
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
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, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,670,810 $ 3,705,194
Trade accounts receivable, net 4,346,119 3,580,026
Receivables for royalties,
license and option fees and
R&D fees 1,263,574 1,492,634
Inventory 81,137 60,650
Advances and loans to officers
and employees 79,925 84,632
Prepaid expenses and other 319,195 319,206
Net assets held for sale
(Notes 4, 5 and 10) 7,774,935 7,664,482
---------- ----------
Total current assets 16,535,695 16,906,824
Property and equipment, net 1,854,763 2,007,932
Deferred loan costs, net 33,722 39,853
Goodwill and other intangible
assets, net -- --
Other long-term assets 222,047 342,047
---------- ----------
Total assets $ 18,646,227 $ 19,296,656
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,688,082 $ 1,029,534
Accrued expenses 847,294 1,263,186
Taxes payable 12,307 13,480
Deferred revenue 454,212 575,000
Current portion - long-term debt 954,725 891,111
---------- ----------
Total current liabilities 3,956,620 3,772,311
Deferred revenue - long-term 829,651 1,079,644
Long-term debt 1,915,119 2,408,933
---------- ----------
Total liabilities 6,701,390 7,260,888
---------- ----------
Commitments and Contingencies
Shareholders' equity:
Common stock and common stock
warrants 85,853,406 85,530,952
Accumulated deficit (73,908,569) (73,495,184)
---------- ----------
Total shareholders' equity 11,944,837 12,035,768
---------- ----------
Total liabilities and shareholders'
equity $ 18,646,227 $ 19,296,656
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Royalties $ 563,556 $ 442,526 $ 989,242 $ 970,978
License and option fees
and R&D fees -- 600,000 -- 1,174,216
Product revenues 305,483 291,054 610,045 638,993
---------- ---------- ---------- ----------
Total revenues 869,039 1,333,580 1,599,287 2,784,187
Expenses:
Cost of sales 131,885 130,544 187,494 261,773
Research & development 850,631 569,273 1,404,515 1,221,683
Selling & marketing 147,561 137,016 276,804 282,531
General & administration 752,718 735,844 1,391,452 1,374,187
---------- ---------- ---------- ----------
Operating loss (1,013,756) (239,097) (1,660,978) (355,987)
Interest income 53,958 47,030 119,051 80,730
Interest expense (109,907) (161,180) (228,039) (303,896)
Other income (expense), net 4,189 (1,217) 6,515 (1,644)
---------- ---------- ---------- ----------
Net loss before taxes (1,065,516) (354,464) (1,763,451) (580,797)
Taxes (39,667) -- -- --
---------- ---------- ---------- ----------
Loss from continuing operations (1,025,849) (354,464) (1,763,451) (580,797)
Income from discontinued
operations 392,167 873,177 1,350,066 1,623,403
---------- ---------- ---------- ----------
Net income/(loss) $ (633,682) $ 518,713 $ (413,385) $ 1,042,606
========== ========== ========== ==========
Net income (loss) per common
share-basic:
Continuing operations $ (0.05) $ (0.01) $ (0.09) $ (0.03)
Discontinued operations 0.02 0.04 0.07 0.08
Net income (loss) $ (0.03) $ 0.03 $ (0.02) $ 0.05
Net income (loss) per common
share-diluted:
Continuing operations $ (0.05) $ (0.01) $ (0.09) $ (0.03)
Discontinued operations 0.02 0.04 0.07 0.08
Net income (loss) $ (0.03) $ 0.03 $ (0.02) $ 0.05
Weighted average common shares
outstanding-basic 20,187,190 20,088,397 20,160,437 20,053,321
========== ========== ========== ==========
Weighted average common shares
outstanding-diluted 20,210,724 20,410,721 20,206,740 20,308,510
========== ========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
<TABLE>
<CAPTION>
For the six months ended June 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net cash used in operating activities (694,158) (1,469,018)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (5,621) (154,398)
Purchase of intangibles (100,000) --
--------- ---------
Net cash used in investing activities (105,621) (154,398)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of common
stock options and warrants 120,000 211,726
Proceeds from issuance of shares
under the Employee Stock Purchase
Plan 75,595 83,741
Proceeds from long-term debt -- 4,000,000
Repayment of debt (430,200) (3,231,457)
--------- ---------
Net cash (used in) provided by
financing activities (234,605) 1,064,010
--------- ---------
Net decrease in cash and cash
equivalents (1,034,384) (559,406)
Cash and cash equivalents, beginning
of the period 3,705,194 4,088,173
--------- ---------
Cash and cash equivalents, end
of the period $ 2,670,810 $ 3,528,767
========= =========
Cash paid for interest $ 216,600 $ 226,270
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
JUNE 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 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, 2000 and the results of their operations for the
three and six months ended June 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 June 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 6,624
Shares issued under the Employee Stock
Purchase Plan 23,324
----------
Total shares 20,188,990
==========
The following table sets forth the computation of the Company's
basic and diluted earnings per share from continuing
operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Loss from continuing operations
(numerator) $(1,025,849) $ (354,464) $(1,763,451) $ (580,797)
========== ========== ========== ==========
Shares calculation
(denominator):
Weighted average shares
outstanding - basic 20,187,190 20,088,397 20,160,437 20,053,321
Effect of dilutive securities:
Stock options and employee
stock purchase plan 23,534 217,860 42,442 152,199
Warrants -- 104,464 3,861 102,990
---------- ---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,210,724 20,410,721 20,206,740 20,308,510
========== ========== ========== ==========
Basic and diluted loss per
share from continuing
operations $ (0.05) $ (0.01) $ (0.09) $ (0.03)
========== ========== ========== ==========
</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, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Number outstanding 3,354,342 2,088,310 3,074,258 2,730,788
Range of exercise prices $4.13-$15.00 $5.44-$15.00 $4.41-15.00 $5.19-$15.00
</TABLE>
(3) Revenue Recognition
-------------------
The Company has licensing agreements that generally provide for
the Company to receive royalties and/or non-refundable license
fees. These licensing agreements typically require a non-
refundable license fee and 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. If the
customer fails to meet applicable contract terms and/or 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 Sheets as "Net assets held for sale" and
consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------------
<S> <C> <C>
Inventory $ 4,137,519 $ 4,524,347
Prepaid expenses 156,528 59,763
Property, plant & equipment, net 5,765,658 6,023,144
Other intangible assets 1,254,894 1,259,020
Other long-term assets 4,350 4,350
Deferred revenue - short-term (428,088) (620,396)
Deferred revenue - long-term (3,115,926) (3,585,746)
---------- ----------
$ 7,774,935 $ 7,664,482
========== ==========
</TABLE>
Basic and diluted income per common share from discontinued
operations was $0.02 and $0.07 for the three and six months
ended June 30, 2000, respectively. Basic and diluted income
per common share from discontinued operations was $0.04 and
$0.08 for the three and six months ended June 30, 1999. (See
Note 10)
(5) Net Assets Held for Sale
------------------------
Net assets held for sale at June 30, 2000 consist of the
Company's assets from discontinued operations offset by related
deferred revenues. On July 25, 2000, the Company completed the
sale of certain technology rights for topical pharmaceuticals
and its cosmeceutical product lines and other assets to R.P.
Scherer Corporation, a subsidiary of Cardinal Health, Inc.
(See Notes 4 and 10)
(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 of such assets is warranted.
(7) Inventory
---------
The major components of inventory are as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $ 43,498 $ 33,383
Finished goods 37,639 27,267
--------- ---------
Total inventory $ 81,137 $ 60,650
========= =========
</TABLE>
Inventory relating to the cosmeceutical and toiletry business
is reported as "Net assets for sale" in the accompanying
condensed consolidated balance sheet as of June 30, 2000. (see
Notes 4 and 5)
(8) Income Taxes
------------
The Company does not anticipate incurring significant amounts
of income taxes in 2000 due to the use of its net operating
loss carry forwards from the prior years. Currently, any
income tax expense is being offset by recognition of a
corresponding change in the valuation allowance for deferred
tax assets.
(9) 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.
(10) Subsequent Event
----------------
In July 2000 the Company sold its cosmeceutical and toiletry
business to R.P. Scherer Corporation, a subsidiary of Cardinal
Health, Inc.
The Company received $25 million up-front in July 2000 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. On receipt of the up-
front fee, the Company repaid its debt outstanding in full.
The Company anticipates reporting a gain on sale of its
cosmeceutical and toiletry business of approximately $11-13
million in the third quarter of 2000. (See Note 4)
<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, 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. (See Subsequent Event)
Royalties for the three months ended June 30, 2000 totaled $564,000,
representing an increase of $121,000 or 27% over the corresponding
quarter of the prior year. This increase reflects continued growth
in sales of Retin-A(R) Micro(TM) by Ortho-McNeil, a member of the
J&J family of companies, of a formulation containing Microsponge(R)-
entrapped tretinoin. This product was the first marketing clearance
received by the Company from the U.S. Food and Drug administration
(FDA). The license fee in the second quarter of the prior year
related to the sale of a proprietary product line to a third party.
Product revenues relating to sales of analytical standards
increased by 5% or $14,000 over the corresponding period of the
prior year.
Gross profit on product revenues for the second quarter of 2000 of
$174,000 represented 57% of product revenues compared to 55% in the
corresponding period of the prior year.
Research and development expenses for the quarter ending June 30,
2000 totaled $851,000 an increase of $281,000 or 49% over the
corresponding period of the prior year due mainly to increased
professional fees and clinical and preclinical study costs for the
Company's new bioerodible polymers.
Selling and marketing expense for the quarter ended June 30, 2000
totaled $148,000, an increase of $11,000 or 8% over the
corresponding quarter of the prior year, resulting mainly from
product advertising expense.
General and administrative for the quarter ended June 30, 2000
totaled $753,000, an increase of $17,000 or 2%, due mainly to
increased professional fees.
Interest income for the quarter ended June 30, 2000 of $54,000 was
essentially flat with the reported $47,000 in the corresponding
period of the prior year. Interest expense for the quarter ended
June 30, 2000 decreased by $51,000 or 32% to $110,000 due to
scheduled principal repayments in the quarter.
Income from discontinued operations represents the net contribution
attributable to the cosmeceutical and toiletries product lines which
were sold to R.P. Scherer Corporation on July 25, 2000. For the
three months ended June 30, 2000, the net contribution totaled
$392,000 compared with $873,000 in the corresponding period 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 Six Months Ended June 30, 2000 and
----------------------------------------------------------------
1999
----
Royalties for the six months ended June 30, 2000 totaled $989,000
representing an increase of $18,000 or 2% over the corresponding
period of the prior year. License and R&D fees in the year-ago
quarter related mainly to revenues recognized on the exercise of an
option and subsequent purchase of a proprietary product line by a
third party. Product revenues from sales of analytical standards
totaled $610,000, a decrease of $29,000 or 5%.
As a percentage of sales, gross profit on product revenues for the
six months ended June 30, 2000 of $423,000 represented 69% of
product revenues compared with 59% in the corresponding period of
the prior year.
Research and development expenses for the six months ended June 30,
2000 totaled $1,405,000, an increase of $183,000 or 15% over the
corresponding period of the prior year. This increase was due
mainly to increased professional fees and clinical and preclinical
study costs for the Company's new bioerodible polymers.
Selling and marketing expenses of $277,000 and general and
administrative expenses of $1,391,000 for the six months ended June
30, 2000 were essentially flat with the corresponding period of the
prior year.
Interest income for the six months ended June 30, 2000 totaled
$119,000, an increase of $38,000 or 47% over the corresponding
period of the prior year. Interest expense for the six months ended
June 30, 2000 totaled $228,000, a decrease of $76,000 or 25% due to
scheduled principal repayments in the period.
Income from discontinued operations for the six months ended June
30, 2000 totaled $1,350,000 compared with $1,623,000 in the
corresponding period of the prior year.
Capital Resources and Liquidity
-------------------------------
Total assets as of June 30, 2000 were $18,646,000 compared with
$19,297,000 at December 31, 1999. Working capital decreased to
$12,579,000 from $13,135,000 primarily due to a planned reduction in
inventory levels of the Company's cosmeceutical and toiletries
product lines which were subsequently sold to R.P. Scherer
Corporation. (See Subsequent Event) Cash and cash equivalents
decreased to $2,671,000 at June 30, 2000 from $3,705,000 at December
31, 1999. During the first six months of 2000, the Company's
operating activities used $694,000 compared with $1,469,000 in the
first half of 1999. In the first six months of 2000, the Company
invested approximately $1,405,000 in product research and
development and $277,000 in selling the Company's products.
Trade accounts receivable increased to $4,346,000 at June 30, 2000
from $3,580,000 at December 31, 1999. Days sales outstanding
increased to 100 days at June 30, 2000 compared to 89 days at
December 31, 1999. The increase in days sales outstanding is mainly
due to the increase in accounts receivable, as payments had not yet
been received for shipments for product launches by cosmeceutical
customers which were heavily weighted towards the last month of the
quarter. Receivables from royalties, license and R&D fees decreased
to $1,264,000 at June 30, 2000 from $1,493,000 at December 31, 1999
due mainly to the receipt of the payment for the exercise of the
option fee relating to the sale of a proprietary product line in the
year-ago period.
Capital expenditures for the six months ended June 30, 2000 totaled
$6,000, a decrease from the amount spent in the corresponding period
of the prior year of $154,000. This decrease was due primarily to
the fact that expenditures in the prior period included final
purchases relating to plant expansion in Louisiana and the Company's
move to new premises in California.
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
were due in equal monthly installments over a period of forty-eight
months commencing March 1999. The term loan was obtained mainly to
refinance scheduled debt repayments made in the first quarter of
1999. This loan was repaid in full at the close of the sale of the
cosmeceutical product lines to R.P. Scherer Corporation.
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.
Subsequent Event
----------------
In July 2000, the Company sold its 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 performance milestones of the purchased business. On
receipt of the up-front fee, the Company repaid its outstanding debt
in full.
The Company anticipates reporting a gain on sale of its
cosmeceutical and toiletry business of approximately $11-13 million
in the third quarter of 2000.
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. 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 is evaluating
the impact of SAB 101 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.
Generally, this Interpretation is effective July 1, 2000. We do not
expect the adoption of Interpretation No. 44 to have a material
effect on our consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
Since December 31, 1999, there have been no material changes in the
Company's market risk exposure.
<PAGE>
PART II. OTHER INFORMATION
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ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: 27 Financial Data Schedule as of and for the six
months ended June 30, 2000.
(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: August 14, 2000 By: /S/ Michael O'Connell
--------------- ----------------------------
Michael O'Connell
President and Chief
Executive Officer
Date: August 14, 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 Schedule
