SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Fee Required) For the fiscal year ended December 31, 19961997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(No Fee Required) For the transition period from __________ to
__________.---------- ----------
Commission File Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
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(State or other jurisdiction of (I.R.S. Employer
Identification Number)
incorporation or organization) 3696 Haven Avenue,Identification Number)
123 Saginaw Drive, Redwood City, California 94063
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415)(650) 366-2626
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock ($.01 par value)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.10-
K. [X]
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The aggregate market value of the voting stock of the registrant held by
nonaffiliatesnon-affiliates of the registrant as of February 28, 1997,1998, was $149,602,066.$91,391,637.
(1)
As of February 28, 1997, 18,412,5621998, 19,465,009 shares of registrant's Common Stock,
$.01 par value, were outstanding.
Exhibit Index at Page 35
Total Pages 35
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1 --------------------------------------------------------------------------
(1)Excludes 5,668,1326,292,389 shares held by directors, officers and shareholders
whose ownership exceeds 5% of the outstanding shares at February 28,
1997.1998. Exclusion of such shares should not be construed as indicating
that the holders thereof possess the power, directdirectly or indirect,indirectly, to
direct the management or policies of the registrant, or that such
person is controlled by or under common control with the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Document
-------- Form
10-K
Document Part
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Definitive Proxy Statement to be used III
in connection with the Annual Meeting
of Stockholders. iIII
TABLE OF CONTENTS
Item Page
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PART I
ITEM 1. Business
___________________________________________________________ 1ITEM 2. Properties
_________________________________________________________ 9ITEM 3. Legal Proceedings
__________________________________________________ 9ITEM 4. Submission of Matters to a Vote of Security Holders
________________ 9
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
_______________________________________________ 9ITEM 6. Selected Financial Data
____________________________________________10ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
__________________________________________10ITEM 8. Financial Statements and Supplementary Data
________________________14ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
___________________________________________29
PART III
ITEM 10. Directors and Executive Officers of the Registrant
_________________29ITEM 11. Executive Compensation
_____________________________________________29ITEM 12. Security Ownership of Certain Beneficial Owners
and Management
_____29ITEM 13. Certain Relationships and Related Transactions
_____________________29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
___30
Signatures _________________________________________________________32
ii
PART I
Item 1. BUSINESS
INTRODUCTION-FORWARD LOOKING STATEMENTS
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To the extent that this report discusses future financial projections,
information or expectations about our products or markets, or otherwise
makes statements about future events, such statements are forward-looking
and are subject to a number of risks and uncertainties that could cause
actual results to differ materially from the statements made. These
include, among others, uncertainty associated with timely approval, launch
and acceptance of new products, the costs associated with new product
introductions, as well as other factors described below under the headings
"APS Technology", "Products", "Manufacturing", "Marketing", "Government
Regulation", "Patents and Trade Secrets" and "Competition". In addition,
such risks and uncertainties also include the matters discussed under
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 below.
THE COMPANY
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Advanced Polymer Systems, Inc. and subsidiaries ("APS" or the "Company")
is using its patented Microsponge(R) delivery systems and related
proprietary technologies to enhance the safety, effectiveness and
aesthetic quality of topical prescription, over-the-counter ("OTC") and
personal care products. The Company is currently manufacturing and
selling Microsponge systems for use by corporate customers in almost 100
different cosmetic and personalskin care products sold worldwide. APS holds 188190 issued U.S.
and foreign patents on its technology and has over 6869 other patent
applications pending.
The Company, founded in February 1983 as a California corporation under
the name AMCO Polymerics, Inc., changed its name to Advanced Polymer
Systems, Inc. in 1984 and was reincorporated in Delaware in 1987.
Products under development or in the marketplace utilize the Company's
Microsponge systems in three primary ways: 1) as reservoirs releasing
active ingredients over an extended period of time, 2) as receptacles for
absorbing undesirable substances, such as excess skin oils, or 3) as
closed containers holding ingredients away from the skin for superficialtherapeutic
action. The resulting benefits include extended efficacy, reduced skin
irritation, cosmetic elegance, formulation flexibility and improved
product stability.
In February 1997, the Company received FDAFood and Drug Administration
("FDA") approval for the first ethical pharmaceutical product based on its
patented Microsponge technology - Retin A(R)-Micro(TM) - which has been
licensed to Ortho-McNeil Pharmaceutical Corporation, a member of the
Johnson & Johnson ("J&J") family of companies. This product was launched
in March 1997. In September 1994, the Company submitted a New Drug
Application (NDA)("NDA") for a melanin-Microsponge sunscreen. The NDA was
found to be non-approvable pending additional information which the Company is
continuing to provide.generating.
APS has established several alliances with multinational corporations
including J&J, Avon and Rhone-Poulenc Rorer to developfor products which incorporate
Microsponge systems. In general, these alliances provide for the client companies to pay the
costs of product development, clinical testing, regulatory approval and
commercialization. In return, the clientsThe alliance partners receive certain marketing
rights to the products developed. In return, APS typically receives an
initial cash infusion in the form of license fees, future payments
contingent on the achievement of certain milestones, revenues from the
manufacture of Microsponge systems, and royalty payments based on third
party product sales.sales or a share of partner revenues. For products
requiring FDA approval, these alliances provide for the partners to pay
the costs of product development, clinical testing, regulatory approval
and commercialization. J&J and Rhone-Poulenc Rorer also have made equity
investments in the Company. APS and Dow Corning Corporation formed a
joint venture alliance in 1992 to develop and commercialize Polytrap(R) and
Microsponge systems for use in the manufacture of cosmetics and personal
care products. In the first quarter of 1996, APS acquired all rights to
the Polytrap technology from Dow Corning in exchange for 200,000 shares of
APS common stock.
Effective January 1997, the Company licensed certain of its consumer
products to Lander Company in the United States and Canada in return for
guaranteed minimum royalties, revenues from the sale of Microsponge
systems and research and development funding for new consumer products.
Lander will beis responsible for all aspects of commercialization including
selling, marketing, manufacturing, distribution and customer service. Also as part of its long-term strategic plan
to move away from the direct marketing of consumer products, the Company plans
to discontinue the marketing of its in-licensed suncare products.
1
To maintain quality control over manufacturing, APS has committed
significant resources to its production processes and polymer systems
development programs. The Company's manufacturing facility in Lafayette,
Louisiana, is responsible for large-scale production of Microsponge
systems and related technologies. All products are manufactured according
to Current Good Manufacturing Practices guidelines ("CGMPs") established
by the FDA. In addition, APS has a process development pilot plant in its
Louisiana facility. APS also has established relationships with contract
manufacturers, which provide second-source production capabilities to
handle growing product demand. The Company's objective is to utilize
these third parties selectively, so that it can maintain its flexibility
and direct the bulk of APS' capital resources to other areas such as
product and technology development.
APS TECHNOLOGY
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The fundamental appeal of the Company's Microsponge technology stems from
the difficulty experienced with conventional formulations in releasing
active ingredients over an extended period of time. Cosmetics and skin
care preparations are intended to work only on the outer layers of the
skin. Yet, the typical active ingredient in conventional products is
present in a relatively high concentration and, when applied to the skin,
may be rapidly absorbed. The common result is over-medication, followed
by a period of under-medication until the next application. Rashes and
more serious side effects can occur when the active ingredients rapidly
penetrate below the skin's surface. APS' Microsponge technology is
designed to allow a prolonged rate of release of the active ingredients,
thereby offering potential reduction in the side effects while maintaining
the therapeutic efficacy.
Microsponge Systems. The Company's Microsponge systems are based on
microscopic, polymer-based microspheres that can bind, suspend or entrap a
wide variety of substances and then be incorporated into a formulated
product, such as a gel, cream, liquid or powder. A single Microsponge is
as tiny as a particle of talcum powder, measuring less than one-thousandth
of an inch in diameter. Like a true sponge, each microsphere consists of
a myriad of interconnecting voids within a non-collapsible structure that
can accept a wide variety of substances. The outer surface is typically
porous, allowing the controlled flow of substances into and out of the
sphere. Several primary characteristics, or parameters, of the
Microsponge system can be defined during the production phase to obtain
spheres that are tailored to specific product applications and vehicle
compatibility.
Polymeric (R)Polytrap Systems. In January 1996, the Company signed a definitive
agreement with Dow Corning Corporation, one of the world's largest
suppliers of ingredients used in cosmetics and personal care products, to
acquire full rights to Dow Corning's Polytrap(R)Polytrap technology and full
responsibility for the continuing commercialization of Polytrap systems in
exchange for 200,000 shares of APS common stock. Polytrap systems are
designed to: 1) absorb skin oils and eliminate shine, 2) provide a smooth
and silky feel to product formulations,formulation, 3) entrap and deliver various
ingredients in personal care products and 4) convert liquids into powders.
Microsponge and Polytrap systems are made of biologically inert polymers.
Extensive safety studies have demonstrated that the polymers are non-irritating,non-
irritating, non-mutagenic, non-allergenic, non-toxic and non-biodegradable.non-
biodegradable. As a result, the human body cannot convert them into other
substances or break them down. Furthermore, although they are microscopic
in size, these systems are too large to pass through the stratum corneum
(skin surface) when incorporated into topical products.
Colon-specific Systems. A Microsponge system offers the potential to hold
active ingredients in a protected environment and provide controlled
delivery of oral medication to the lower gastrointestinal (GI) tract, where it will be released
upon exposure to specific enzymes in the colon.("GI") tract.
This approach, if successful, should open up entirely new opportunities
for APS.
2
Bioerodible Systems. The Company is also developing systems based on new
bioerodible polymers for the delivery of small and large molecule drugs,
including proteins and peptides, which, if successful, should open up new
fields of opportunity in systemic drug delivery arenas.
PRODUCTS
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APS is focusing its efforts primarily on the ethical dermatology, OTC skin
care and personal care markets in which Microsponge and Polytrap systems
can provide substantial advantages. Certain additional applications for
the Company's technology are also under development, as noted below.
Ethical Dermatology
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APS defines "ethical dermatology" products as prescription and non-prescriptionnon-
prescription drugs that are promoted primarily through the medical
profession for the prevention and treatment of skin problems or diseases.
The Company is developing several ethical dermatology products which will
require approval of the FDA before they can be sold in the United States.
Although these pharmaceuticals are likely to take longer to reach the
marketplace than OTC and personal care products, due to the regulatory
approval process, the Company believes that the benefits offered by
Microsponge delivery systems will allow valuable product differentiation
in this large and potentially profitable market. Results from various
human clinical studies reaffirm that this technology offers the potential
to reduce the drug side effects, maintain the therapeutic efficacy and
potentially increase patient compliance with the treatment regimen. The
following ethical dermatology products have been developed or are under
development by APS:
Tretinoin Acne Medication. In February 1997, the Company received FDA
approval for Microsponge-entrapped tretinoin for improved acne treatment.
This submission to the FDA represented the culmination of an intensive
research and clinical development program involving approximately 1,150
patients. Tretinoin has been marketed in the U.S. by Ortho
Dermatological, a Johnson & Johnson subsidiary, under the brand name
RETIN-A(R) since 1971. It has proven to be a highly effective topical
acne medication. However, skin irritation among sensitive individuals can
limit patient compliance with the prescribed therapy. The Company
believes its patented approach to drug delivery reduces the potentially
irritating side effects of tretinoin. Ortho Dermatological began marketing
this product in March 1997.
Melanin-Microsponge Sunscreen. Concern about the sun's harmful effects
and its role in aging and skin cancer has resulted in heightened awareness
of preventative measures in the sunscreen market. APS has developed a
sun protectant designed to provide the highest-available protection
against the sun's UVA rays as well as protection from the burning UVB
rays. This unique APS product candidate incorporates the Company's
melanin-Microsponge system containing genetically engineered melanin, a
natural pigment found in skin.
The Company filed its NDA in September 1994 for marketing clearance.
Since it involves an entirely new ethical pharmaceutical ingredient and
application, the regulatory review process is lengthier and more complex.
The NDA was found to be non-approvable pending additional information
which the Company is continuing to
provide.generating. There can be no assurance that U.S. FDA
approval will be received. The Company has, however, begun to
commercialize melanin-Microsponge systems through strategic partners in
Europe and South America, where regulatory approval is not required for
the sale of sunscreen products. If approval is received in the U.S., the
Company plans to market this product through a strategic partner.
5-Fluorouracil. Another ethical dermatology product candidate,
Microsponge-entrapped 5-Fluorouracil (5-FU)("5-FU"), was the subject of an
Investigational New Drug ("IND") filing in early 1995. 5-FU is an
effective chemotherapeutic agent for treating actinic keratosis, a pre-cancerous,pre-
cancerous, hardened-skin condition caused by excessive exposure to
sunlight. However,
3
patient compliance with the treatment regimen is poor,
due to significant, adverse side effects. Through a joint agreement with
Rhone-Poulenc Rorer, the Company is developing a Microsponge-enhanced
topical formulation that potentially offers a less irritating solution for
treating actinic keratosis. Phase IIIII clinical studies have been
completed and Phase III clinical studies
are scheduled to commence in mid-1997.initiated.
Tretinoin Photodamage Treatment. Initial product development was
undertaken in 1994 to develop a Microsponge system product for the
treatment of photodamage, which contributes to the premature aging of skin
and has been implicated in skin cancer. Should an IND be filed for this
product, funding for this second tretinoin treatment indication will be
provided by J&J's Ortho-McNeil Pharmaceutical subsidiary.
Cosmeceutical Products
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Retinol. Retinol is a highly pure form of vitaminVitamin A which has
demonstrated a remarkable ability for maintaining the skin's youthful
appearance. However, it has been available only on a limited basis
because it becomes unstable when mixed with other ingredients. APS has
been able to stabilize retinol in a formulation which is cosmetically
elegant and which has a low potential for skin irritation. The Company
has executed agreements with threefive companies, each of which havehas marketing
strength in a particular channel of distribution. The channels for which
the Company has licensed retinol are direct marketing (Avon),
dermatologists (Medicis) and, salons and spas (Sothys), plastic surgery
(BioMedic), and prestige (La Prairie). The Company retains full rights to
alternate channels of distribution, including department stores and other
mass merchandisers. Additionally, the Company formed an alliance with
R.P. Scherer to develop and commercialize unit-dose skin care treatments
for aging skin, combining retinol and/or Vitamin C.
In May 1997, the Company entered into an agreement under which it licensed
exclusive rights to broad-based patents covering the topical use of
Vitamin K. Potential applications include bruises from surgery or
traumatic injury, spider veins, age-related purpura, rosacea and a variety
of other cosmetic dermatological conditions. Subsequently, the Company
licensed rights to commercialize Vitamin K to Avon in the direct-to-
consumer channel, to BioMedic for recommendation by plastic surgeons and
to Medicis for recommendation by dermatologists in the U.S. Again, the
Company retains full rights to alternate channels of distribution.
Personal Care and OTC Products
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APS technologies are ideal for skin and personal care products. They can
retain several times their weight in liquids, respond to a variety of
release stimuli, and absorb large amounts of excess skin oil, all while
retaining an elegant feel on the skin's surface. In fact, APS
technologies are currently employed in almost 100 products sold by major
cosmetic and toiletry companies worldwide. Among these products are skin
cleansers, conditioners, oil control lotions, moisturizers, deodorants,
razors, lipstick,lipsticks, makeup, powders, and eye shadows.
Entrapping cosmetic ingredients in APS' proprietary Microsponge delivery
systems offers several advantages, including improved physical and
chemical stability, greater available concentrations, controlled release
of the active ingredients, reduced skin irritation and sensitization, and
unique tactile qualities.
Other Product Applications
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While not the principal focus of APS development efforts, other products
could benefit from the value-added application of the Company's polymer
technology. To date, the Company has chosen to apply its technology to
the following non-skin-care field:
Analytical Standards. APS initially developed microsphere precursors to
the Microsponge for use as a testing standard for gauging the purity of
municipal drinking water. Marketed by APS nationwide, these microspheres
are suspended in pure water to form an accurate, stable, reproducible
turbidity standard for the calibration of turbidimeters used to test water
purity.
APS believes its Analytical Standards technology has much broader
applicationsapplication than testing the turbidity of water. The Company has begun to
develop standards for industrial use for the calibration of
spectrophotometers and colorimeters.
4
MANUFACTURING
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Polymer Raw Material. Raw materials for the Company's polymers are
petroleum-based monomers which are widely available at low cost. The
monomers have not been subject to unavailability or significant price
fluctuations. Raw
material costs generally account for less than a third of the total cost of the
Company's products.
Process Engineering and Development. The Company employs chemical
engineers and operates a pilot-plant facility for developing production
processes. The equipment used for manufacturing and process development
is commercially available in industrial sizes and is installed in the
Company's production facility in Lafayette, Louisiana.
Microsponge Production. APS has committed significant resources to the
production process and polymer systems development required to
commercialize its products. The Company has to date manufactured most
Microsponge systems in company-owned and operated facilities.
The Company's manufacturing facility in Lafayette, Louisiana, is
responsible for large-scale production of Microsponge systems and related
technologies. The Company initiated a plant expansion project during 1997
in anticipation of higher volume requirements. This is expected to be
completed during 1998. APS also has established relationships with
contract manufacturers which provide second-source production
capabilities. The Company's objective is to utilize these third parties
selectively, so that it can maintain its flexibility and direct the bulk
of APS' capital resources to other areas, such as product development and
marketing. All products are manufactured according to CGMP. In addition,
APS has a process development pilot plant in its Louisiana facility.
MARKETING
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A key part of APS' business strategy is to ally the Company with major
marketing partners. The Company has therefore negotiated several
agreements for the development of Microsponge delivery systems, the supply
of entrapped ingredients, and the marketing of formulated products. To
create an incentive for APS to develop products as quickly as possible,
these development and license agreements provide, in some cases, for
substantial payments by the client companies during the period of product
development and test marketing. Additionally, some agreements provide for
non-refundable payments on the achievement of certain key milestones,
royalties on sales of formulated products, and minimum annual payments to
maintain exclusivity. APS has, in some product areas, retained co-marketingco-
marketing rights.
In general, APS grants limited marketing exclusivity in defined markets to
client companies, while retaining the right to manufacture the Microsponge
delivery systems it develops for these clients. However, after
development is completed and a client commercializes a formulated product
utilizing the Company's delivery systems, APS can exert only limited
influence 5
over the manner and extent of the client's marketing efforts.
APS' client companies may cancel their agreements without penalty.
The Company's material agreements andkey relationships are set forth below:
Johnson & Johnson Inc. In May 1992, APS and Ortho-McNeil Pharmaceutical
Corporation ("Ortho"), a subsidiary of J&J, entered into a licensing
agreement related to tretinoin-based products incorporating APS'
Microsponge technology. As part of the agreement, in 1992, license fees
of $6,000,000 were paid to APS. In addition, Johnson & JohnsonJ&J purchased 723,006 shares
of newly issued APS common stock for $8,000,000. In 1994, J&J purchased
1,000,000 additional shares of newly issued common stock for $5,000,000.
J&J also received 200,000 warrants that expired in 1996. The number of
shares issuableissued to J&J was increased by 432,101 pursuant to an agreed upon
formula tied to the trading price of APS stock prior to January 1996. In
March 1998, J&J announced that it had divested its initial investment of
723,006 shares of the Company's stock as part of a rebalancing of its
investment portfolio. The license fee provides Ortho with exclusive
distribution or license rights for all Ortho tretinoin products utilizing
the APS Microsponge system. Ortho's exclusivity will continue as long as
certain annual minimum payments are made. In addition, Ortho will pay
license fees and milestone payments over time to APS. APS will also receivereceives
royalty payments on net product sales worldwide.
In February 1997, APS received FDA approval for the first product covered
by this agreement, Microsponge-entrapped tretinoin. This product will beis being
marketed by Ortho Dermatological beginning March 1997.1997 as Retin-A(R) Micro
(TM). APS received a milestone payment of $3,000,000 from Ortho upon receipt of the
approval.
In December 1996, the Company purchased the Take-Off(R) trademark from Johnson &
Johnson Consumer Products, Inc. forapproval, of which half is a royalty of 3% on net sales of Take-Off
products with annual minimums for five years. Effective January,milestone payment which was recognized as
revenue in 1997 this
productand half is prepaid royalties which was licensed to Lander Company.recorded as
deferred revenues.
Rhone-Poulenc Rorer. In March 1992, APS and Rhone-Poulenc Rorer ("RPR")
restructured their 1989 joint venture agreement to give APS more freedom
in developing products. Under the new terms, APS has regained from RPR
worldwide marketing rights to products in the prescription dermatology
field, including the melanin-based sunscreen product in which RPR had
invested approximately $4,000,000 in development costs. APS also gained
ownership of a partially-completed manufacturing facility in Vacaville,
California, which the Company sold in December 1995. Also under the new
terms, RPR invested $2,000,000 in cash in APS and relieved APS of the
obligation to repay a $1,500,000 advance. In return, RPR received 705,041
shares of APS stock and maintains a minority share in the potential net
profits of the melanin-based sunscreen product. Furthermore, RPR has
agreed to continue funding the exploration and development of certain
dermatology applications of APS' technology in which APS shares marketing
rights. Product applications include a 5-FU treatment for pre-cancerous
actinic keratosis. In 1995, RPR filed an IND application to begin human
clinical testing of 5-FU. Phase II clinical trials for 5-FU have been
completed and Phase III clinical trials are scheduled to commence in mid 1997.have commenced.
Dow Corning. In July 1991, APS and Dow Corning Corporation formed a
collaborative alliance to manufacture and sell both APS' Microsponge and
Dow Corning's Polytrap technologies worldwide in the cosmetics and
toiletries field. Under the agreement, Dow Corning provided financial
assistance in this venture, as well as worldwide sales and support
services; APS contributed its technology, research and development,
technical support and manufacturing capability for both the Microsponge
and Polytrap products. In the first quarter of 1996, APS acquired full
rights to the Polytrap technology and full responsibility for the
continuing commercialization in exchange for 200,000 shares of APS common
stock.
Lander Company. In March 1996, the Company formed a collaboration with
Lander Company, Inc. to develop and provide premium quality, store-brand
personal care products based on the Company's patented delivery system
technology. Under terms of the agreement, the Company received a $3
million equity investment and license fees and will receive additional
licensing fees, royalties on product sales and research and development funding for new
consumer products. APS and Lander will collaborate on product
formulations and marketing preparations and Lander will be responsible for
sales, manufacturing and distribution to retailers.
Effective January 1997, APS established a new strategic alliance with
Lander under which Lander was granted full marketing rights in the United
States and Canada to Microsponge-based Exact(R) acne medications, Take-Off(R)Take-
Off(R) facial
6
cleansers, Everystep(R) Foot Powder, as well as in-licensed
consumer products. Under terms of the agreement, Lander will beis responsible
for all aspects of commercialization including selling, marketing,
manufacturing, distribution and customer service. APS will receivereceives guaranteed
minimum royalties, revenues from the sale of Microsponge systems and
research and development funding for new branded consumer products.
Avon. In August 1996, APS signed a license and supply agreement with Avon
under which APS is providing Avon with a formulation incorporating
Microsponge delivery systems and retinol, an ingredient developed to
improve the appearance of aging skin. Under terms of the agreement, APS
received upfront licensing fees and will receive manufacturing revenues on
supply of product. In January 1998, the Company announced that it had
signed a new agreement with Avon, substantially expanding Avon's access to
Microsponge systems technology. The expanded agreement provides Avon with
exclusive worldwide rights in Avon's channel of distribution to additional
cosmetic products utilizing the Company's technology. In order for Avon
to maintain exclusivity the Company will receive annual royalties on
worldwide sales and research and development funding. Jointly developed
products can be marketed independently by the Company.
Medicis. In October 1996, APS entered into an agreement with Medicis
Pharmaceutical Corporation for the commercialization of certain
dermatology products. Medicis will initially be responsible for marketing
two newly developed APS products in the United States. In return, APS
received an upfront licensing fee,
and will receive an additional licensing feefees and a share of revenues, with guaranteed minimums.
In November 1997, the Company licensed Vitamin K to Medicis for sale in
the U.S. to dermatologists. In return, the Company received an additional
fee and will share revenues on product sales.
Procter & Gamble. In the first quarter of 1992, after having been one of APS'
original licensees in 1987, Scott Paper Company began
the regional U.S. launch of Baby Fresh with Ultra Guard baby wipes. Ultra
Guard is Scott's trademark for an APS Microsponge system that contains
dimethicone to help protect a baby's skin from diaper rash. In early 1993, Scott achieved national distribution for
Baby Fresh with Ultra Guard. In the first
quarter of 1996, Kimberly-Clark completed its acquisition of Scott Paper
Company. One of the conditions of the acquisition imposed by the Federal
Trade Commission was that Kimberly-Clark divest the acquired baby wipe
business. Procter & Gamble bought the baby wipe business in 1996 and now
markets the product under the Pampers brand name. In July 1997, Procter &
Gamble expanded its agreement with the Company to include adult wipe.
These have been launched under the Attends(R) name to healthcare
institutions.
Pharmacia and Upjohn. In January 1998, the Company announced an agreement
with Pharmacia and Upjohn to develop and commercialize a new product for a
major global category. Advanced Polymer's Microsponge system technology
will be utilized to deliver a proprietary Pharmacia and Upjohn therapeutic
agent topically.
GOVERNMENT REGULATION
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Ethical Products
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In order to clinically test, produce and sell products for human
therapeutic use, mandatory procedures and safety evaluations established
by the FDA and comparable agencies in foreign countries must be followed.
The procedure for seeking and obtaining the required governmental
clearances for a new therapeutic product includes pre-clinical animal
testing to determine safety and efficacy, followed by human clinical
testing, and can take many years and require substantial expenditures. In
the case of third-party agreements, APS expects that the corporate client
will fund the testing and the approval process with guidance from APS.
The Company intends to seek the necessary regulatory approvals for its
proprietary dermatology products as they are being developed.
APS' facilities, where the Company manufacturesutilized to manufacture pharmaceutical raw materials, are
subject to periodic governmental inspections. If violations of applicable
regulations are noted during these inspections, significant problems may
arise affecting the continued marketing of any products manufactured by
the Company.
The Company's plant in Lafayette, Louisiana operates according to CGMP
prescribed by the FDA. This compliance has entailed modifying certain
manufacturing equipment, as well as implementing certain record keeping
and other practices and procedures which are required of all
pharmaceutical manufacturers. The Company believes it is in compliance
with federal and state laws regarding occupational safety, laboratory
practices, environmental protection and hazardous substance control.
Personal Care Products
- ----------------------
Under current regulations, the market introduction of non-medicated
cosmetics, toiletries and skin care products does not require prior formal
registration or approval by the FDA or regulatory agencies in foreign
countries, although this situation could change in the future. The
cosmetics industry has established self-regulating procedures and the
Company, like most companies, perform theirperforms its own toxicity and consumer
tests.
7
PATENTS AND TRADE SECRETS
- -------------------------
As part of the Company's strategy to protect its current products and to
provide a foundation for future products, APS has filed a number of United
States patent applications on inventions relating to specific products,
product groups, and processing technology. The Company also has filed
foreign patent applications on its polymer technology with the European
Union, Japan, Australia, South Africa, Canada, Korea and Taiwan. The
Company received U.S. patent protection for its basic Microsponge system
in 1987 and now has a total of 4041 issued U.S. patents and an additional
148149 issued foreign patents. The Company has over 6869 pending patent
applications worldwide.
Although the Company believes the bases for these patents and patent
applications are sound, they are untested, and there is no assurance that
they will not be successfully challenged. There can be no assurance that
any patent already issued will be of commercial value, or that any patent
applications will result in issued patents of commercial value, or that
APS' technology will not be held to infringe on patents held by others.
APS relies on unpatented trade secrets and know-how to protect certain
aspects of its production technologies. APS' employees, consultants,
advisors and corporate clients have entered into confidentiality
agreements with the Company. These agreements, however, may not
necessarily provide meaningful protection for the Company's trade secrets
or proprietary know-how in the event of unauthorized use or disclosure.
In addition, others may obtain access to, or independently develop, these
trade secrets or know-how.
COMPETITION
- -----------
Although Microsponge and Polytrap systems, by virtue of their highly
porous structure, are unique delivery systems, there are many alternate
delivery systems available. However, in the cosmetic and cosmeceutical
fields, Microsponge and Polytrap systems are particularly versatile at
allowing the entrapment of active agents and controlled release by simple
changes in vehicles.
Other delivery systems based on microparticulate materials could compete
with Microsponge and Polytrap systems. Among these are liposomes,
microcapsules and microspheres. Liposomes are small phospholipid vesicles
capable of entrapping and releasing active agents. However, they are
significantly more expensive to manufacture, less versatile and their
stability is a concern. While they are primarily used in systemic
applications, they are also used in the cosmetic arena.
The most closely related systems are microcapsules and microspheres.
Microcapsules are spherical particles containing an active agent in the
core, surrounded by a polymeric membrane. MicrospheresMircospheres are spherical
particles containing the active agent dispersed in a polymeric matrix.
The major distinguishing feature between Microsponge and Polytrap systems
and microcapsules, or microspheres is that the structure of Microsponge
and Polytrap systems is highly porous, while microspheres or microcapsules
are solid particles with no internal voids.
Thus, while only one type ifof Microsponge system can be used to entrap a variety
of active agents and release these at desired rates by vehicle changes,
different active agents and different release profiles can only be
achieved with microcapsules or microspheres by a complete change in
polymer and fabrication methods.
HUMAN RESOURCES
- ---------------
As of February 28, 1997,March 5, 1998, the Company had 8494 full-time employees, 34 of whom
hold PhDs. There were 1530 employees engaged in research and development
34and quality control, 36 in manufacturing and production activities 8 in quality control, and 2728
working in sales,customer service, finance, marketing, human resources and
administration.
The Company considers its relations with employees to be satisfactory.
None of the Company's employees is covered by a collective bargaining
agreement.
8
Item 2. PROPERTIES
The Company currently occupiesoccupied 23,040 square feet of laboratory, office and
warehouse space in Redwood City, California as of December 31, 1997 and
4,800currently occupies 2,800 square feet of office space in Greenwich,
Connecticut. RentSubsequent to year end, the Company relocated its Redwood
City operations to a 26,067 square-foot facility in the same city. The
annual rent expense for these facilities in 1996 was
$254,184 and $109,936, respectively.such facility is expected to be approximately
$642,000. The annual rent expense for the Greenwich office is
approximately $76,000.
The Company occupies a production facility and warehouse in Lafayette,
Louisiana, with a current annual capacity, depending upon the application,
to produce 500,0001,000,000 to 750,0003,000,000 pounds of entrapped materials. The
existing plant, with contiguous acreage, has been designed to allow
significant expansion. In
1995 the Company sold this facility and warehouse along with certain other
assets and subsequently leased them back for a certain fixed monthly rent over a
period of forty-eight months. The Company reported this transaction as a
financing transaction. The construction of the facility in 1986 was
financed primarily by 15-year tax-exempt industrial development bonds. In
1990, the bonds were refinanced. The maturity date of the bonds occurs in
installments beginning June 30, 1993, and ending December 31, 2000. The
bonds bear a fixed interest rate of 10%. In 1995, the Company
extinguished the bond liability through an "insubstance defeasance"
transaction by placing U.S. government securities in an irrevocable trust
to fund all future interest and principal payments. In 1995 the Company
sold certain assets and subsequently leased them back for a certain fixed
monthly rent over a period of forty-eight months. The Company reported
this transaction as a financing transaction.
The Company's existing research and development and administrative
facilities are not yet being used at full capacity and management believes
that such facilities are adequate and suitable for its current and
anticipated needs. Additional manufacturing capacity could be required as
APS expands commercial production. It is anticipated that any additional
production facilities would be built on land the Company presently
occupies in Lafayette, Louisiana.
Item 3. LEGAL PROCEEDINGS
None.In November, 1997 Biosource Technologies, Inc. ("Biosource") filed a
complaint against the Company in the San Mateo Superior Court. Biosource
claims damages from the Company of an amount not less than $1,050,000, on
the grounds that the Company has failed to pay certain minimum amounts
allegedly due under a contract for the supply of melanin. Biosource also
claims interest on that sum and costs.
The Company has denied liability, basing its defense on the assertion that
obligations under the contract have been suspended, because the expected
FDA approval of the Company's melanin based product has not yet been
forthcoming. The Company is vigorously defending the action, and has
cross claimed for rescission of the contract and restitution of money paid
thereunder, and for a declaratory judgment that it is not indebted to
Biosource.
The Company expects that the outcome of this legal proceeding will not
have a material adverse effect on the consolidated financial statements
considering amounts accrued at December 31, 1997.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Shares of the Company's common stock trade on the Nasdaq National Market,
under the symbol APOS. As of February 28, 1997,1998, there were 595570 holders of
record of the Company's common stock.
The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. The following table sets forth
for the fiscal periods indicated, the range of high and low closing sales prices
for the Company's common stock on the NASDAQ National Market System.
1996 High Low 1995 High Low
------------------------------------------------------------------------------
1997 High Low 1996 High Low
- ----------------------------------------------------------------------
First Quarter 10 3/8 7 3/8 First Quarter 9 1/4 5 1/4
Second Quarter 8 1/2 6 7/8 Second Quarter 11 1/4 7 7/8
Third Quarter 8 5/8 6 7/8 Third Quarter 9 5/8 5 7/8
Fourth Quarter 8 3/4 6 Fourth Quarter 8 7/8 6 3/4
5 1/4 First Quarter 6 4
Second Quarter 11 1/4 7 7/8 Second Quarter 5 7/8 4 1/16
Third Quarter 9 5/8 5 7/8 Third Quarter 8 3/8 5 1/8
Fourth Quarter 8 7/8 6 3/8 Fourth Quarter 7 1/2 4 7/8
9
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
For the Years Ended and as of
December 31 1997 1996 1995 1994 1993
1992
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Total- ------------------------
Product and technology revenues $18,665 $16,108 $15,884 $19,932 $15,527$16,833 8,197 6,254 7,260 10,266
Consumer products - 10,468 9,104 8,624 8,916
Milestone payments 1,500 - 750 - 750
Research and development, net 3,740 3,506 4,139 6,334 7,343
3,726
Selling, marketing and
advertising 3,806 8,455 6,560 5,669 6,237
4,013
General and administrative 3,552 2,984 3,082 2,844 2,988 3,468
Loss on purchase commitment,
including related inventory -- 1,400 600 685 950
-
Net loss (683) (9,378) (9,359) (9,759) (9,877)
(5,545)
LossBasic and diluted
loss per common share $(0.04) (0.52) $ (0.57) $ (0.65) $ (0.73) $ (0.43)
Weighted average common
shares outstanding 18,779 17,987 16,459 15,018 13,527
12,805
December 31 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
Balance Sheets
- --------------
Working capital $3,800 $4,976 $5,641 $4,555 $14,428$ 4,357 3,800 4,976 5,641 4,555
Total assets 24,180 18,444 23,082 23,508 24,378 31,115
Long-term debt, excluding
current portion 3,055 5,579 6,355 979 3,355
3,672
Shareholders' equity 10,241 5,010 5,233 11,786 10,501 20,143
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(DollarOperations(Dollar amounts are rounded to
nearest $1,000)
Tothousand)
The following tables summarize highlights from the extent that this report discusses financial projections, information or
expectations about our products or markets, or otherwise makes statements about
future events, suchof
operations expressed as a percentage change from the prior year and as a
percentage of product revenues.
STATEMENTS OF OPERATIONS HIGHLIGHTS (in thousands)
- --------------------------------------------------
For the Years Ended December 31, Annual % Change
-------------------------------- ---------------
1997 1996 1995 97/96 96/95
------ ------ ------ ----- -----
Product and technology
revenues $16,833 8,197 6,254 105% 31%
Consumer products -- 10,468 9,104 (100%) 15%
Milestone payment 1,500 -- 750 N/A (100%)
------ ------ ------ ----- -----
Total revenues 18,333 18,665 16,108 (2%) 16%
Cost of sales 7,164 10,772 11,047 (33%) (2%)
Research and development, net 3,740 3,506 4,139 7% (15%)
Selling and marketing 3,806 5,405 4,756 (30%) 14%
Advertising and promotion -- 3,050 1,805 (100%) 69%
General and administrative 3,552 2,984 3,082 19% (3%)
Loss on purchase commitments,
Including related inventory -- 1,400 600 (100%) 133%
1997 1996 1995
---- ---- ----
Expenses expressed as a percentage
of total revenues excluding
milestone payment:
Cost of sales 43% 58% 72%
Research and development, net 22% 19% 27%
Selling and marketing 23% 29% 31%
Advertising and promotion -- 16% 12%
General and administrative 21% 16% 20%
Loss on purchase commitments,
including related inventory -- 8% 4%
Results of Operations for the years ended December 31, 1997 and 1996
- --------------------------------------------------------------------
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, development of new
products, establishment of new corporate alliances, progress in research
and development programs and other risks listeddescribed 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 and royalties. The Company is currently manufacturing and selling
Microsponge(R) delivery systems for use by customers in almost 100
different cosmetic and
personalskin care products. Under strategic alliance arrangements
entered into with certain multinational corporations, APS generally receivescan receive an initial cash
infusion,license
fee, future milestone payments, royalties based on third party product
sales or a share of partners' revenues, and revenues from the supply of
Microsponge and Polytrap systems.
AsThese strategic alliances are intended to provide the Company with the
marketing expertise and/or financial strength of other companies. In this
respect, the Company's periodic financial results are dependent upon the
degree of success of current collaborations and the Company's ability to
negotiate acceptable collaborative agreements in the future.
Product and technology revenues for 1997 totalled $16,833,000, an increase
of $8,636,000 or 105% over the prior year.
This increase resulted primarily from the launches of a variety of new
products incorporating the Microsponge(R) system technology by the
Company's marketing partners and technology revenues received from certain
corporate partners. These product launches included Retin-A(R) Micro(TM)
by Ortho Dermatological, Anew Retinol Recovery Complex PM Treatment which
is marketed by Avon, and TxSystems(TM) AFIRM retinol formulation and Beta
Lift peel kits which are marketed by Medicis Pharmaceutical.
Total revenues for 1997 of $18,333,000 also included recognition of
$1,500,000 as a portion of a milestone payment received from J&J upon
receipt of marketing clearance from the FDA for Retin-A Micro in February
1997.
Total revenues of $18,665,000 for 1996 included $10,468,000 from sales of
consumer products most of which were licensed out to Lander Company
effective January 1, 1997.
Gross profit on total revenues excluding milestone payment for 1997 was
$9,669,000, an increase of $1,776,000 over the prior year. Expressed as a
percentage of total revenues excluding milestone payment, gross profit
increased from 42% to 57% due to increased sales of higher margin
proprietary cosmeceutical products, technology revenues and increased
manufacturing volume.
Operating expenses for 1997 of $11,098,000 represented a decrease of
$5,247,000 or 32% from the prior year total of $16,345,000. Operating
expenses for the prior year included a loss on purchase commitment for the
purchase of melanin for $1,400,000.
Selling and marketing expense decreased by $1,599,000 or 30% from the
year-ago period to $3,806,000 in 1997. This substantial decrease was due
primarily to the execution of the Company's strategic plan whereby it is
no longer responsible for the direct selling, advertising and distribution
of consumer products. Effective January 1, 1997, the Company licensedout-licensed
most of its over the counter consumer products to the Lander Company in return for royaltiesa royalty
stream. This also resulted in the elimination of spending on future product sales.
Alsoadvertising
and promotion of products which had been $3,050,000 in the prior year.
Research and development expenses increased by $234,000 or 7% to
$3,740,000 in 1997 as partthe Company continued to invest in the expansion of
its long-term strategic plantechnology base.
General and administrative expense increased by $568,000 or 19% to
move away$3,552,000 in 1997 due mainly to increased spending on a variety of
outside services.
Interest income increased by $47,000 or 15% to $370,000 due to higher
average cash balances. Interest expense decreased by $171,000 or 14% to
$1,053,000 due mainly to scheduled principal repayments during the year.
The net loss for the year of $683,000 represented a decrease of 93% or
$8,695,000 from the direct
marketingyear-ago loss of consumer products, the Company plans to discontinue the marketing
of its in-licensed suncare products.
Past results are not indicative of future results.
The following tables summarize highlights from the statements of operations
expressed as a percentage change from the prior year and as a percentage of
product revenues.
10
Years Ended December 31, Annual % Change
STATEMENTS OF OPERATIONS HIGHLIGHTS 1996 1995 1994 96/95 95/94
- ----------------------------------- ---- ---- ---- ----- -----
$000 $000 $000
Product revenues $17,490 $15,203 $14,787 15% 3%
Licensing revenues 1,175 905 1,097 30% -18%
-------- --------- --------
Total revenues 18,665 16,108 15,884 16% 1%
Cost of sales 10,772 11,047 10,149 -2% 9%
Research and development, net 3,506 4,139 6,334 -15% -35%
Selling and marketing 5,405 4,756 4,012 14% 19%
Advertising and promotion 3,050 1,805 1,657 69% 9%
General and administrative 2,984 3,082 2,844 -3% 8%
Loss on purchase commitments, including
related inventory 1,400 600 685 133% -12%
STATEMENTS OF OPERATIONS HIGHLIGHTS 1996 1995 1994
- ----------------------------------- ---- ---- ----
Expenses expressed as a percentage of product revenues:
Cost of sales 62% 73% 69%
Research and development, net 20% 27% 43%
Selling and marketing 31% 31% 27%
Advertising and promotion 17% 12% 11%
General and administrative 17% 20% 19%
Loss on purchase commitments, including
related inventory 8% 4% 5%
$9,378,000.
Results of Operations for the years ended December 31, 1996 and 1995
Total- --------------------------------------------------------------------
Product and technology revenues for 1996 totalled $18,665,000 compared to $16,108,000 in the
prior year,$8,197,000, an increase
of $2,557,000$1,943,000 or 16%. Product sales amounted to
$17,490,000, an increase of $2,287,000 or 15% over the prior year, and licensing
revenues amounted to $1,175,000, an increase of $270,000 or 30%31% over the prior year. Revenues derived from products which incorporate the Microsponge
technology totalled $11,682,000, anThis increase of $559,000 or 5% over the prior
year.
The increase in product revenues over 1995 was due primarily
to increased shipments of Microsponge systems to manufacturers of
cosmetics and personal care products of $856,000 or 18% and increased salesup-front fees received from
corporate partners and licensees.
Sales of consumer products of
$1,363,000increased by $1,364,000 or 15%. The Company anticipates an increase to $10,468,000
in sales1996. Most of Microsponge
systems in 1997 as a result of agreements signed with major corporate customers
who are launching newthese products during the year. These partners include Ortho
Dermatological, Avon, Medicis, Lander and Johnson & Johnson Consumer Products,
Inc. These increases will be offset by the absence of sales of consumer products
duewere licensed to the licensing of products to the Lander Company effective
January 1, 1997 in return for a royalty stream, and the Company's plans to discontinue the
marketing of its in-licensed suncare products.
The increase in licensing fee revenue during 1996 relates to the receipt of fees
received from the Company's new corporate partners as part of the agreements
executed in 1996.Company's
strategy to no longer be responsible for the direct marketing of its
products.
Revenues for 1995 also included a milestone payment of $750,000 received
from J&J on the filing of the NDA for Retin-A Micro.
Total revenues for 1996 of $18,665,000 represented an increase of
$2,557,000 or 16% over the prior year.
Gross profit on producttotal revenues forexcluding milestone payment totalled
$7,893,000, compared to $4,311,000 in the prior year, increased by $2,562,000 or 62% to
$6,718,000 due mainly to
increased up-front fees received from corporate partners and increased
manufacturing efficiencies resulting from the higher
volume and the sales mix of consumer products.efficiencies.
Research and development expense decreased by $633,000 or 15% due
primarily to a change in estimate. Additionally, there was a continuing
reduction in outside services as external costs are being borne
principally by corporate partners. Selling and marketing expense
increased by $649,000 or 14% to $5,405,000 due mainly to an increased
focus on opening new markets for Microsponge systems and increased
distribution expense attributable to higher sales volume.
Advertising and promotion expense increased by $1,245,000 or 69% due to a
consumer products sampling program and expenditures relating to a full
year's advertising for the Neet(R) depilatory product line which was
licensed from Reckitt and Colman in September, 1995.
These costs, together with selling
expenses, will decrease significantly in 1997 as a result of the licensing
arrangement for the Company's consumer product lines.
General and administrative expense decreased by $98,000 or 3% to
$2,984,000 due mainly to reduced spending on external services.
The loss on purchase commitment relates to a contractual commitment for
the purchase of melanin in excess of
11
current estimated requirements.
Melanin is the key ingredient in the manufacture of the APS-developed
UVA/UVB sun protection cream for which an NDA was filed. This amount
includes the final amount due under the contractual commitment.
The Company's operating loss decreased by $869,000 or 9% to $8,452,000 as
a result of the factors discussed above.
Interest income was essentially flat between 1996 and 1995, but interest
expense increased by $778,000 to $1,223,000 in 1996 as a result of the
debt financing arranged in the second half of 1995.
The net loss for the year of $9,378,000 was essentially flat with the loss
in the prior year, with the increased gross profit being offset by
increases in selling and promotional expense, interest expense and the
increased loss on the purchase commitment.
Results of Operations for the years ended December 31, 1995 and 1994
Total revenues for 1995 amounted to $16,108,000 compared to $15,884,000 in the
prior year, an increase of $224,000 or 1%. This consisted of product sales of
$15,203,000, an increase of $416,000 or 3% over the prior year, and licensing
revenues of $905,000, a decrease of $192,000 or 18% from the prior year.
Revenues from products which incorporate the Microsponge technology totalled
$10,458,000, an increase of $3,787,000 or 57% over the prior year.
The increase in product revenues over 1994 resulted from increased shipments of
Microsponge systems to a variety of personal care and specialty customers,
primarily manufacturers of cosmetics and toiletries through the alliance with
Dow Corning Corporation. This increase was offset by a slight decrease in sales
of consumer products. While sales of the Exact(R) acne line increased by 71%
over the prior year and the addition of the line of Neet(R) products under a
licensing agreement with Reckitt & Colman also contributed to sales of consumer
products, this was offset by an anticipated decrease in sales of in-licensed
suncare products which do not incorporate the Company's technology.
The decrease in licensing fees was due mainly to the fact that the prior year
included $894,000 of revenues recognized under the percentage-of-completion
method on now-completed clinical trials, offset by a milestone payment of
$1,500,000 paid to the Company by Ortho-McNeil Pharmaceutical Corporation upon
the filing of the New Drug Application for Microsponge-enhanced tretinoin acne
cream in February 1995, of which $750,000 was recognized as revenues.
The gross profit on product revenues for the year decreased to 27% from 31% due
to a higher percentage of close-out sales of suncare products, partially offset
by improved gross profit on the supply of Microsponge systems.
Research and development expense decreased significantly from $6,334,000 to
$4,139,000, or by 35%, due to the fact that the prior year included significant
external expenses associated with clinical trials for NDAs which have now been
filed.
Selling and marketing expense increased by $744,000 or 19% to $4,756,000 due
mainly to the Company's investment in the initiation of its ethical
pharmaceutical marketing effort. Advertising and promotion expense increased by
$148,000 or 9% to $1,805,000 largely due to a sampling program related to the
Company's consumer products, the benefits of which should be realized in 1996,
partially offset by reduced spending on print media.
General and administrative expense increased by $238,000 or 8% to $3,082,000 due
mainly to increased spending on a variety of outside services.
The loss on purchase commitment primarily relates to a contractual commitment
for the purchase of melanin in excess of current estimated requirements. Melanin
is the key ingredient in the manufacture of the APS-developed UVA/UVB sun
protection cream for which an NDA was filed in the third quarter of 1994.
Interest income decreased by $38,000 or 11% to $318,000 due mainly to lower
average cash balances. Interest expense increased by $167,000 or 60% to $446,000
due to the debt financing arranged by the Company in the third quarter.
The net loss for the year of $9,359,000 was lower by $400,000 or 4% than the
prior year, with reduced research and development expense being offset by
increased selling and marketing expense and reduced gross profit.
12
Capital Resources and Liquidity
- -------------------------------
Total assets as of December 31, 1996 were $18,444,0001997 increased to $24,180,000 compared
with $23,082,000$18,444,000 at December 31, 1995. Cash1996. Working capital increased to
$4,357,000 from $3,800,000 for the same period and cash and cash
equivalents atalso increased to $8,672,000 from $5,395,000. For the year
ended December 31, 1996 increased1997, the Company's operating activities used $30,000
of cash compared to $5,395,000 from $5,173,000 at December 31, 1995. The Company's primary
investment objectives for those assets are$6,117,000 in the preservation of capital and the
maintenance of a high degree of liquidity. In the same period, working capital
decreased to $3,800,000 from $4,976,000,prior year. This was primarily due
to the discontinuationsignificant reduction in operating losses compared to the prior
year as the Company's marketing partners launched several new products
incorporating Microsponge systems during 1997. In addition, the Company
no longer bore the high cost of marketing and distributing products
directly to consumers. The Company invested approximately $3,740,000 in
product research and development and $3,806,000 in selling and marketing
the Company's products and technologies.
Capital expenditures for the year ended December 31, 1997 totalled
$2,800,000 compared to $720,000 in the prior year. The increase was due
primarily to plant expansion projects at the Company's manufacturing
facility in Lafayette, Louisiana which are necessary to meet anticipated
higher volume requirements. This stage of the direct marketing of consumer products which resulted in reduced inventory.plant expansion is expected
to be completed during 1998.
The Company has financed its operations, including product research and
development, from amounts raised in debt and equity financings;financings, the sale
of consumer products, Microsponge and Polytrap delivery systems and Analytical Standard
products;analytical standard
products, payments received under licensing agreements;agreements, and interest
earned on short-term investments.
In prior years, cash was expended on Phase III clinical tests of tretinoin
entrapped in a Microsponge delivery system for the treatment of acne which have
now been completed, and of APS' melanin-Microsponge sun protectant product,
together with related research and development costs. Additionally, the Company
is contractually obligated to purchase minimum annual quantities of melanin. The
final amounts due under the contractual commitment are included in current
liabilities.
In the first quarter of 1996, the Company formed a collaborative agreement with
the Lander Company under which the Company received $2,961,000 in net proceeds
from the sale of 356,761 shares of common stock. In addition, the Company will
receive license fees, royalties on product sales and research and development
funding.
In the second quarter of 1996, the Company entered into an agreement for the
sale of up to $5,000,000 of its common stock and warrants, which can be
initiated at the Company's sole discretion. In May 1996, the Company exercised
its right to sell common stock and warrants totalling $2,000,000 under this
agreement.
During 1996, Company operations used approximately $6,117,000 of cash.
Approximately $3,506,000 was invested in product research and development and
$3,050,000 was invested in advertising and promoting products.
In February 1997, upon receipt of approvalmarketing clearance from the FDA to
market Retin-A(R)
Micro(TM) (tretinoin gel) microsphereRetin-A Micro for the treatment of acne, APS received $3,000,000
from J&JOrtho McNeil Pharmaceutical of which one half was prepaid royalties
which was recorded as a milestone payment and prepaid royalties.
Also in February 1997, thedeferred revenue. The Company also received
$653,000$2,181,000 from Lander Company representingin the first half of 1997 as payment for a third of the
assets held for sale pursuant to the agreement between the two companies.
The final two installments are due on March
31 and April 30, 1997.During 1997, the company received approximately $4,951,000 from the
exercise of approximately 925,000 warrants to purchase common stock which
had been issued in conjunction with a 1994 private placement.
The Company's existing cash and cash equivalents, collections of trade
accounts receivable, together with interest income and other revenue
producing activities including licensing fees and milestone payments, are
expected to be sufficient to meet the Company's cashworking capital
requirements for the foreseeable future, assuming no changes to existing
business plans.
13Year 2000
- ---------
The Company is reviewing its internal computer systems to ensure that
these systems and offerings are adequate to address the issues expected to
arise in connection with the Year 2000. The required systems and
programming changes will be implemented on an enterprise-wide basis. The
Company is currently reviewing the costs of such actions that are required
to address the Year 2000. A significant proportion of the costs is not
expected to be incremental in that they will represent redeployment of
company resources that currently exist.
The Company expects that the required modifications to its systems will be
made on a timely basis. The Company also expects that, with modifications
to existing hardware and software or converting to new software, the Year
2000 will not pose significant operational problems for the Company's
systems. There can be no assurance, however, that there will not be a
delay in or increased costs associated with the implementation of such
changes, and the Company's inability to implement such changes could have
an adverse effect on future results of operations.
The Company has not fully determined the extent to which the Company's
interface systems may be impacted by third parties' systems, which may not
be Year 2000 compliant. While the Company has begun efforts to seek
reassurance from its suppliers and service providers, 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 in a timely
manner.
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130") which is effective for financial statements for periods
beginning after December 15, 1997, and establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. The Company will make the required
reporting of comprehensive income in its consolidated financial statements
for the first quarter ending March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of a
Business Enterprise" ("SFAS 131") which is effective for financial
statements beginning after December 15, 1997, and establishes standards
for disclosures about segments of an enterprise. In its consolidated
financial statements for the year ending December 31, 1998, the Company
will make the required disclosures.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
- ---------------------------
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Advanced Polymer Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------
1997 1996
1995---- ----
Assets
Current Assets:
Cash and cash equivalents $5,394,509 $5,172,809$ 8,672,021 5,394,509
Accounts receivable less allowance
for doubtful accounts of $47,527$57,453 and
$68,650$47,527 at December 31, 1997 and 1996,
and 1995, respectively 3,388,665 1,666,148 2,436,815
Accrued interest receivable 13,606 3,963
16,473
Inventory 2,639,129 2,085,073 7,858,584
Prepaid expenses and other 527,545 324,065 985,199
Assets held for sale - 2,181,004
--
----------- --------------------- ----------
Total current assets 15,240,966 11,654,762 16,469,880
Property and equipment, net 6,771,173 4,681,292 5,027,034
Deferred loan costs, net 353,693 616,958 832,324
Prepaid license fees, net 82,880 165,752 303,638
Goodwill and other intangibles, net of
accumulated amortization of $763,424$1,102,480
and $483,668$914,221 at December 31, 1997 and
1996, and 1995, respectively 1,477,542 1,265,801 345,557
Other long-term assets 254,180 59,603
103,809
----------- ------------------------ ----------
Total Assets $18,444,168 $23,082,242
=========== =============$ 24,180,434 18,444,168
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $1,543,143 $3,240,8071,529,189 1,543,143
Accounts payable, Johnson & Johnson 107,000 814,509 4,229,637
Accrued expenses 2,832,299 1,456,512 1,819,541
Accrued melanin purchase commitments 1,800,000 600,0001,800,000
Current portion - long-term debt 2,523,389 1,490,779 853,987
Deferred revenue 2,091,869 750,000
750,000
----------- ---------------------- ----------
Total current liabilities 10,883,746 7,854,943 11,493,972
Long-term debt 3,055,460 5,578,849
6,354,969
----------- ---------------------- ----------
Total Liabilities 13,939,206 13,433,792 17,848,941
----------- ------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, authorized 2,500,000
shares; none issued or outstanding at
December 31, 19961997 and 19951996 -- --
Common stock, $.01 par value,
authorized 50,000,000 shares; issued
and outstanding 18,359,74419,464,821 and
16,594,56518,359,744 at December 31, 1997 and
1996, and 1995, respectively 194,648 183,597 165,946
Common stock to be issued, $.01 par value, 432,101 shares
issuable in 1996 -- 4,321
Warrants, issued and outstanding:
506,816 at December 31, 1997 and
1,431,974 at December 31, 1996 and 1,628,611 at December 31, 1995983,192 2,457,692 2,653,076
Additional paid-in capital 81,327,554 73,950,092 64,600,516
Unrealized gain on securities -- 12,348
Accumulated deficit (72,264,166) (71,581,005)
(62,202,906)
----------- ----------------------- ----------
Total Shareholders' Equity 10,241,228 5,010,376 5,233,301
----------- -------------
Total Liabilities and Shareholders'
Equity $18,444,168 $23,082,242
=========== =============$ 24,180,434 18,444,168
========== ==========
See accompanying notes.
14
Consolidated Statements of Operations
- -------------------------------------
Advanced Polymer Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
- --------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1997 1996 1995
1994---- ---- ----
Revenues:
Product and technology revenues $17,489,907 $15,203,196 $14,787,048
Licensing revenues 1,175,000 905,000 1,097,402
------------- ------------- -------------$16,832,659 8,197,395 6,253,831
Consumer products - 10,467,512 9,104,365
Milestone payments 1,500,000 - 750,000
---------- ---------- ----------
Total revenues 18,332,659 18,664,907 16,108,196
15,884,450
Expenses:Expenses
Cost of sales 7,164,120 10,771,766 11,047,399 10,149,302
Research and development, net 3,740,337 3,506,161 4,139,441 6,334,168
Selling and marketing 3,806,030 5,404,774 4,755,788 4,011,752
Advertising and promotion - 3,050,180 1,804,540 1,657,178
General and administrative 3,551,977 2,984,213 3,081,900 2,844,282
Loss on purchase commitment,
including related inventory - 1,400,000 600,000
685,000
------------- ------------- ---------------------- ---------- ----------
Operating lossincome (loss) 70,195 (8,452,187) (9,320,872)
(9,797,232)---------- ---------- ----------
Interest expense (1,052,715) (1,223,303) (445,501)
(278,988)
Interest income 370,478 322,986 317,948 355,837
Other income (expense), net (71,119) (25,595) 89,895
(38,593)
------------- ------------- ---------------------- ---------- ----------
Net loss $(9,378,099) $(9,358,530) $(9,758,976)
============= ============= ============
Loss$ (683,161) (9,378,099) (9,358,530)
========== ========== ==========
Basic and diluted
loss per common share $(0.52) $(0.57) $(0.65)
============= ============= ============$ (0.04) (0.52) (0.57)
========== ========== ==========
Weighted average common shares
outstanding 18,778,921 17,987,153 16,459,446
15,017,753
============= ============= ====================== ========== ==========
See accompanying notes.
15
Advanced Polymer Systems, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended
December 31, 1996, 1995 and 1994
Common Stock Additional Unrealized
Common Stock Warrants Paid-In Holding
Shares Amount Shares Amount Capital Gain
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 13,646,657 $136,467 1,161,500 $ 2,300,000 $ 51,077,341 $--
Options exercised 471,306 4,713 -- -- 1,881,821 --
Agreement with Johnson &
Johnson, net of $30,201
in offering costs 1,000,000 10,000 200,000 285,000 4,674,799Consolidated Statements of Shareholders' Equity
- -----------------------------------------------
For the Years Ended December 31, 1997, 1996 and 1995
Common Stock Additional Unrealized Total
Common Stock Warrants Paid-In Holding Accumulated Shareholders'
Shares Amount Shares Amount Capital Gain Deficit Equity
----------- -------- --------- ---------- ----------- ---------- ------------ -----------
Balance December 31,
1994 16,043,121 $160,431 2,286,658 $ 4,059,500 $60,297,027 $113,166 $(52,844,376) $11,785,748
---------- ------- --------- --------- ---------- ------- ----------- ----------
Options exercised 236,992 2,370 -- -- 1,078,929 -- -- 1,081,299
Private placement,
net of $112,383 in
offering costs 310,278 3,103 310,278 485,591 898,923 -- -- 1,387,617
Securities issued in
debt financing
arrangements 4,174 42 193,175 407,985 29,958 -- -- 437,985
Common stock to be
issued in connection
with the agreement with
Johnson & Johnson 432,101 4,321 -- -- (4,321) -- -- --
Warrants expired -- -- (1,161,500) (2,300,000) 2,300,000 -- -- --
Change in unrealized
holding gain -- -- -- -- -- (100,818) -- (100,818)
Net loss -- -- -- -- -- -- (9,358,530) (9,358,530)
---------- ------- --------- --------- ---------- ------- ----------- ----------
Balance December 31,
1995 17,026,666 170,267 1,628,611 2,653,076 64,600,516 12,348 (62,202,906) 5,233,301
---------- ------- --------- --------- ---------- ------- ---------- ----------
Options exercised 416,219 4,162 -- -- 1,993,017 -- -- 1,997,179
Shares retired (12,836) (128) -- -- (97,747) -- -- (97,875)
Private placement,
net of $353,183 in
offering costs 925,158 9,251 925,158 1,474,500 2,663,066 --
Unrealized holding gain -- -- -- -- -- 113,166
Net loss -- -- -- -- -- --
Distributions -- -- -- -- -- --
--------------------------------------------------------------------------------------
1994 Total 2,396,464 23,964 1,125,158 1,759,500 9,219,686 113,166
--------------------------------------------------------------------------------------
Balance December 31, 1994 16,043,121 $160,431 2,286,658 $ 4,059,500 $ 60,297,027 $ 113,166
--------------------------------------------------------------------------------------
Options exercised 236,992 2,370 -- -- 1,078,929 --
Private placement,
net of $112,383 in
offering costs 310,278 3,103 310,278 485,591 898,923 --
Securities issued in debt
financing arrangements 4,174 42 193,175 407,985 29,958 --
Common stock to be issued in
connection with the agreement
with Johnson & Johnson 432,101 4,321 -- -- (4,321) --
Warrants expired -- -- (1,161,500) (2,300,000) 2,300,000 --
Change in unrealized holding gain -- -- -- -- -- (100,818)
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------------
1995 Total 983,545 9,836 (658,047) (1,406,424) 4,303,489 (100,818)
--------------------------------------------------------------------------------------
Balance December 31, 1995 17,026,666 $170,267 1,628,611 $ 2,653,076 $ 64,600,516 $ 12,348
======================================================================================
Options exercised 416,219 4,162 -- -- 1,993,017 --
Shares retired (12,836) (128) -- -- (97,747) --
Private Placement,
net of $62,149 in
offering costs 201,922 2,019 86,538 295,751 1,640,081 -- -- 1,937,851
Common stock to be
issued in connection
with the agreement with
Johnson & Johnson (432,101) (4,321) -- -- 4,321 -- -- --
Common stock issued in
connection with the
agreement with Johnson
& Johnson 432,101 4,321 -- -- (4,321) --
Common stock issued in connection
with the agreement with Lander
Company, net of $39,547 in
offering costs 356,761 3,567 -- -- 2,956,976 --
Common stock issued to Dow Corning,
net of $4,000 in offering costs 200,000 2,000 -- -- 1,194,000 --
Common stock issued to Biosource 94,000 940 -- -- 599,060 --
Securities issued in debt financing
arrangements 10,675 107 4,325 (50,935) 78,353 --
Fair value of stock options
issued to non-employees -- -- -- -- 161,299 --
Warrants exercised 66,337 663 (87,500) (155,200) 539,537 --
Warrants expired -- -- (200,000) (285,000) 285,000 --
Change in unrealized holding gain -- -- -- -- -- (12,348)
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------------
1996 Total 1,333,078 13,330 (196,637) (195,384) 9,349,576 (12,348)
--------------------------------------------------------------------------------------
Balance December 31, 1996 18,359,744 $183,597 1,431,974 $ 2,457,692 $ 73,950,092 $--
======================================================================================
See accompanying notes.
For the Years Ended
December 31, 1996, 1995 and 1994
Total
Accumulated Shareholders'
Deficit Equity
- ------------------------------------------------------------------
Balance December 31, 1993 $(43,012,400) $ 10,501,408
Options exercised -- 1,886,534
Agreement with Johnson &
Johnson, net of $30,201
in offering costs -- 4,969,799
Private placement,
net of $353,183 in
offering costs -- 4,146,817
Unrealized holding gain -- 113,166
Net loss (9,758,976) (9,758,976)
Distributions (73,000) (73,000)
------------ ------------
1994 Total (9,831,976) 1,284,340
------------ ------------
Balance December 31, 1994 $(52,844,376) $ 11,785,748
============ ============
Options exercised -- 1,081,299
Private placement,
net of $112,383 in
offering costs -- 1,387,617
Securities issued in debt
financing arrangements -- 437,985
Common stock to be issued in
connection with the agreement
with Johnson & Johnson -- --
Warrants expired -- --
Change in unrealized holding gain -- (100,818)
Net loss (9,358,530) (9,358,530)
------------ ------------
1995 Total (9,358,530) (6,552,447)
------------ ------------
Balance December 31, 1995 $(62,202,906) $ 5,233,301
============ ============
Options exercised -- 1,997,179
Shares retired -- (97,875)
Private Placement,
net of $62,149 in
offering costs -- 1,937,851
Common stock to be issued in
connection with the agreement
with Johnson & Johnson -- --
Common stock issued in
connection with the agreement
with Johnson & Johnson -- --
Common stock issued in
connection with the
agreement with Lander
Company, net of $39,547
in offering costs 356,761 3,567 -- -- 2,956,976 -- -- 2,960,543
Common stock issued to
Dow Corning, net of
$4,000 in offering
costs 200,000 2,000 -- -- 1,194,000 -- -- 1,196,000
Common stock issued to
Biosource 94,000 940 -- -- 599,060 -- -- 600,000
Securities issued in
debt financing
arrangements 10,675 107 4,325 (50,935) 78,353 -- -- 27,525
Fair value of stock
options issued to
non-employees -- -- -- -- 161,299 -- -- 161,299
Warrants exercised 66,337 663 (87,500) (155,200) 539,537 -- -- 385,000
Warrants expired -- -- (200,000) (285,000) 285,000 -- -- --
Change in unrealized
holding gain -- -- -- -- -- (12,348) -- (12,348)
Net loss -- -- -- -- -- -- (9,378,099) (9,378,099)
------------ ------------
1996 Total (9,378,099) (222,925)
------------ ---------------------- ------- --------- --------- ---------- ------- ---------- ----------
Balance December 31,
1996 18,359,744 $183,597 1,431,974 $ 2,457,692 $73,950,092 $ -- $(71,581,005) $ 5,010,376
============ ============---------- ------- --------- --------- ---------- ------- ---------- ----------
Options exercised 165,374 1,654 -- -- 777,452 -- -- 779,106
Fair value of stock
options issued to
non-employees -- -- -- -- 96,757 -- -- 96,757
Common stock issued to
employees under the
Employee Stock
Purchase Plan 14,545 145 -- -- 87,125 -- -- 87,270
Warrants exercised 925,158 9,252 (925,158) (1,474,500) 6,416,128 -- -- 4,950,880
Net loss -- -- -- -- -- -- (683,161) (683,161)
---------- ------- --------- --------- ---------- ------- ---------- ----------
Balance, December 31,
1997 19,464,821 $194,648 506,816 $ 983,192 $81,327,554 $ -- $(72,264,166) $10,241,228
========== ======= ========= ========= ========== ======= ========== ==========
See accompanying notes.
16
Advanced Polymer Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
Cash flows from operating activities:
Net loss $(9,378,099) $(9,358,530) $(9,758,976)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,393,805 1,377,614 1,243,906
Provision for loss on purchase commitments, including inventory 1,400,000 600,000 685,000
Change in allowance for doubtful accounts (21,123) 2,086 (69,456)
Accretion of pledged long-term marketable securities -- (121,572) (150,498)
(Gain) loss on sale of equipment and assets held for sale -- 125,764 (868)
Gain on sale of pledged marketable securities -- (234,319) --
Provision for deferred compensation 161,299 -- --
Changes in operating assets and liabilities:
Accounts receivable 791,790 (1,130,448) 908,738
Accrued interest receivable 12,510 9,570 6,981
Inventory 5,573,511 (856,558) 1,291,126
Prepaid expenses and other 661,134 20,931 (575,003)
Assets held for sale (2,181,004) -- --
Deferred loan costs 215,366 (439,824) --
Other long-term assets 129,425 (10,856) 17,895
Accounts payable and accrued expenses (1,460,693) 87,394 517,005
Accounts payable, Johnson & Johnson (3,415,128) 659,112 (1,852,753)
Deferred revenue -- 750,000 (894,000)
------------------------------------------------
Net cash used in operating activities (6,117,207) (8,519,636) (8,630,903)
------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (719,640) (901,288) (645,899)
Proceeds from sale of equipment and assets held for sale -- 797,672 2,290
Purchases of marketable securities (512,513) (4,458,891) (1,448,467)
Maturities and sales of marketable securities 500,165 5,935,087 1,216,394
------------------------------------------------
Net cash provided from (used in) investing activities (731,988) 1,372,580 (875,682)
------------------------------------------------
Cash flows from financing activities:
Repayment to Dow Corning -- -- (274,208)
Repayment of long-term debt (870,598) (258,304) (200,000)
Proceeds from long-term debt and warrants 758,795 7,367,259 --
Proceeds from private placements, net of offering costs 1,937,851 1,387,617 4,146,817
Proceeds from stock issued to Lander Company, net of offering costs 2,960,543 -- --
Proceeds from agreement with Johnson & Johnson -- -- 4,969,799
Distributions -- -- (73,000)
Proceeds from the exercise of common stock options and warrants,
net of common stock retired 2,284,304 1,081,299 1,886,534
------------------------------------------------
Net cash provided from financing activities 7,070,895 9,577,871 10,455,942
------------------------------------------------
Net increase in cash and cash equivalents 221,700 2,430,815 949,357
Cash and cash equivalents at the beginning of the year 5,172,809 2,741,994 1,792,637
------------------------------------------------
Cash and cash equivalents at the end of the year $5,394,509 $5,172,809 $2,741,994
================================================Consolidated Statements of Cash Flows
- --------------------------------------
For the Years Ended December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (683,161) (9,378,099) (9,358,530)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 980,933 1,393,805 1,377,614
Provision for loss on purchase
commitments, including inventory -- 1,400,000 600,000
Allowance for doubtful accounts 22,967 (21,123) 2,086
Accretion of pledged long-term marketable
Securities -- -- (121,572)
Loss on sale of equipment and assets held
for sale -- -- 125,764
Gain on sale of pledged marketable securities -- -- (234,319)
Provision for deferred compensation 216,757 161,299 --
Amortization of deferred loan costs 263,265 215,366 (439,824)
Changes in operating assets and liabilities:
Accounts receivable (1,745,484) 791,790 (1,130,448)
Accrued interest receivable (9,643) 12,510 9,570
Inventory (554,056) 5,573,511 (856,558)
Prepaid expenses and other (203,480) 661,134 20,931
Assets held for sale -- (2,181,004) --
Other long-term assets (194,577) 129,425 (10,856)
Accounts payable and accrued expenses 1,241,833 (1,460,693) 87,394
Accounts payable, Johnson & Johnson (707,509) (3,415,128) 659,112
Deferred revenue 1,341,869 -- 750,000
--------- --------- ----------
Net cash used in operating activities (30,286) (6,117,207) (8,519,636)
--------- --------- ----------
Cash flows from investing activities:
Purchase of property and equipment (2,799,683) (719,640) (901,288)
Purchases of intangible assets (400,000) -- --
Proceeds from sale of equipment and
assets held for sale 2,181,004 -- 797,672
Purchases of marketable securities -- (512,513) (4,458,891)
Maturities and sales of marketable
securities -- 500,165 5,935,087
--------- --------- ----------
Net cash provided by (used in)
investing activities (1,018,679) (731,988) 1,372,580
--------- --------- ----------
Cash flows from financing activities:
Repayment of long-term debt (1,490,779) (870,598) (258,304)
Proceeds from long-term debt and warrants -- 758,795 7,367,259
Proceeds from private placements, net of
offering costs -- 1,937,851 1,387,617
Proceeds from stock issued to Lander
Company, net of offering costs -- 2,960,543 --
Proceeds from the exercise of common
stock options and warrants, net of
common stock retired 5,729,986 2,284,304 1,081,299
Proceeds from issuance of shares under the
Employee Stock Purchase Plan 87,270 -- --
--------- --------- ----------
Net cash provided by financing activities 4,326,477 7,070,895 9,577,871
--------- --------- ----------
Net increase in cash and cash equivalents 3,277,512 221,700 2,430,815
Cash and cash equivalents at the beginning
of the year 5,394,509 5,172,809 2,741,994
--------- --------- ----------
Cash and cash equivalents at the end of
the year $ 8,672,021 5,394,509 5,172,809
========= ========= ==========
Supplemental disclosure of non-cash financing transactions:
During the first quarter of 1996, the Company acquired all rights to the
Polytrap technology from Dow Corning Corporation ("DCC") in exchange for
200,000 shares of common stock valued at $1,200,000.
During the first quarter of 1996, the Company paid Biosource for the 1995
purchase commitment totalling $600,000 by issuing 94,000 shares of common
stock.
The Company offset a deposit of approximately $188,000 and $755,000 for 1996
and 1995, respectively, with a creditor against a loan from the same creditor
(Note 8).
In September, 1995, the Company offset its note payable to Dow Corning
Corporation against its receivable from DCC. This resulted in a decrease in
long-term debt, short-term debt and accounts receivable of $478,935, $100,000
and $578,935, respectively.
In 1995, the Company extinguished a debt through an insubstance defeasance
transaction by placing U.S. government securities in an irrevocable trust to
fund all future scheduled payments on the debt.
See accompanying notes.
17
ADVANCED POLYMER SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
Note 1 Business
Advanced Polymer Systems, Inc. ("APS" or the "Company") develops, manufactures
and sells patented delivery systems that allow for the controlled release of
active ingredients which have benefits in the ethical dermatology, cosmetic and
personal care areas. Certain projects are conducted under development and
licensing arrangements with large companies, others are part of joint ventures
in which APS is a major participant, and a number of projects are exclusive to
APS. APS also marketed and distributed a range of consumer products for personal
care through its subsidiary, Premier, Inc. ("Premier"). Effective January 1997,
APS licensed the consumer products to a third party (Note 6).
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the
financial statements of the Company and its wholly owned subsidiaries, Premier,
Advanced Consumer Products, Inc. ("ACP") and APS Analytical Standards. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents and Marketable Securities: For purposes of the Consolidated
Statements of Cash Flows and Consolidated Balance Sheets, the Company considers
all short-term investments that have original maturities of less than three
months to be cash equivalents. Short-term investments consist primarily of
certificates of deposit, commercial paper, master notes and repurchase
agreements. Investments which have original maturities longer than three months
are classified as marketable securities in the accompanying Consolidated Balance
Sheets. The Company has classified its investments in certain debt and equity
securities as "available-for-sale". Such investments are recorded at fair value
with unrealized holding gains and losses reported as a separate component of
stockholders' equity.
Inventory: Inventory is stated at the lower of cost or market value, utilizing
the average cost method (Note 5).
Property and Equipment: Property and equipment are carried at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, not exceeding twenty years (Note 7).
Prepaid License Fees: The fee paid to Biosource Technologies, Inc. ("Biosource")
in 1992 is being amortized over a seven-year period consistent with the term of
the agreement (Note 3). Amortization of prepaid license fees totalled $137,880,
$137,868 and $124,057 in 1996, 1995 and 1994, respectively.
Deferred Loan Costs: Deferred charges relate to costs incurred in obtaining
certain loans. These charges are being amortized over the life of the loans
using the effective interest method (Note 8).
Long-Lived Assets, Including Goodwill and Other Intangibles: In accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", the Company evaluates whether changes have
occurred that would require revision of the remaining estimated lives of
recorded long-lived assets, including goodwill, or render those assets not
recoverable. If such circumstances arise, recoverability is determined by
comparing the undiscounted net cash flows of long-lived assets to their
respective 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 significant impairment of long-lived
assets, including goodwill, has occurred and that no reduction of the estimated
useful lives of such assets is warranted.
In the first quarter of 1996, APS acquired all patents and rights to the Polytrap technology from Dow Corning
Corporation ("DCC") in exchange for 200,000 shares of its common stock. APS recorded intangible assets totalling $1,200,000
relating to this transaction. The intangible assets are being amortized on a
straight line basis over a period of approximately 10 years, which is the
remaining life of the main patent acquired.
In 1992, APS acquired for 157,894 shares of its common stock valued at $1,200,000.
During the outstanding
25% interest in ACP, APS' over-the-counter consumer products subsidiary. The
acquisition was accounted for as a purchase. Excessfirst quarter of cost over net assets
acquired
18
arising from the purchase is being amortized over five years on a straight-line
basis.
Amortization of intangible assets totalled $279,756, $188,875 and $160,796, in
1996, 1995 and 1994, respectively.
Adoption of Statement of Financial Accounting Standards No. 123: Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for "Stock
Issued to Employees" and related interpretations. Accordingly, except for stock
options issued to non-employees, no compensation cost has been recognized for
the Company's fixed stock option plans (Note 10).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such estimates
may affect amounts in future periods.
Advertising and Promotion Costs: Advertising and promotion costs are expensed as
incurred.
Earnings (Loss) Per Share: Earnings (loss) per common share are based on the
weighted average number of common shares outstanding during each year. The
computation assumes that no outstanding stock options and warrants were
exercised as they would be anti-dilutive.
Licensing Agreements: The Company has several licensing agreements that
generally provide for monthly payments, periodic minimum payments and royalties
for exclusivity. Revenue is recorded as services are performed. The agreements
do not contain any financial obligations with respect to the Company at the
expiration or earlier termination of the agreements. Certain agreements also
require the remittance of non-refundable license fees.
Deferred Revenue: Prepaid royalties paid to APS by Ortho-McNeil Pharmaceutical
Corporation ("Ortho"), a subsidiary of Johnson & Johnson Inc. ("J&J"), as part
of the retinoid licensing agreement are reported as deferred revenues (Note 13).
Concentrations of Credit Risk: Financial instruments which potentially expose
the Company to concentrations of credit risk, as defined by Statement of
Financial Accounting Standards No. 105, consist primarily of trade accounts
receivable. As of December 31, 1996, approximately 53% of the recorded trade
receivables were concentrated with two customers in the cosmetic and personal
care industries. To reduce credit risk, the Company performs ongoing credit
evaluations of its customers' financial conditions. The Company does not
generally require collateral.
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform with the presentation in 1996.
Note 3 Related Party Transactions
APS has entered into agreements with Biosource. One director serves on the Board
of Directors of both Biosource and APS. All agreements between APS and Biosource
have been, and will continue to be, considered and approved by a vote of the
disinterested directors. The agreements provide APS worldwide rights to use and
sell Biosource's biologically-synthesized melanin in Microsponge systems for all
sun protection, cosmetic, ethical dermatology and over-the-counter skin care
purposes. In return, APS is required to make annual minimum purchases of
melanin, pay royalties on sales of APS melanin-Microsponge products and was
required to prepay $500,000 of royalties. For estimated losses on purchase
commitments and related inventory, the Company accrued $1,400,000, $600,000 and
$685,000 in 1996, 1995 and 1994, respectively. During 1994, the Company paid Biosource $263,403 for the supply of melanin. All minimum financial commitments
under the current agreements have been expensed by APS.
In 1996, APS paid Biosource the 1995 minimum purchase commitment totaling
$600,000 by issuing
Biosource 94,000 shares of APS common stock.
19
Note 4 Cash Equivalents
All investments in debt securities have been classified as cash equivalents in
the accompanying balance sheets as they mature in less than three months.
At December 31,The Company offset a deposit of approximately $188,000 and $755,000 for 1996 and 1995, the amortized cost and estimated market value of
investments in debt securities are set forth in the tables below:
December 31, 1996
- --------------------------------------------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
Available-for-Sale:
Corporate debt securities $3,556,052 -- -- $3,556,052
Other debt securities 214,790 -- -- 214,790
-------------------------------------------------
Totals $3,770,842 -- -- $3,770,842
=================================================
December 31, 1995
- --------------------------------------------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
Available-for-Sale:
Corporate debt securities $3,273,602 $12,348 -- $3,285,950
Other debt securities 164,425 -- -- 164,425
-------------------------------------------------
Totals $3,438,027 $12,348 -- $3,450,375
==================================================
Note 5 Inventory
The major components of inventory are as follows: December 31, December 31,
1996 1995
---------------------------
Raw materials and work-in-process $604,852 $1,006,847
Finished goods 1,480,221 6,851,737
---------------------------
Total inventory $2,085,073 $7,858,584
===========================
Consumer products inventory is classified as Assets Held for Sale in the
accompanying December 31, 1996 balance sheet (Note 6). J&J hasrespectively, with a
security
interest in the Company's Sundown(R) and Johnson's Baby Sunblock(R) inventory.
Inventory subject to their security interest totalled approximately $4,400,000
at December 31, 1995 (Note 14).
Note 6 Assets Held for Sale
As part of the Company's long-term strategic plan to move awaycreditor against a loan from the direct
marketing of consumer products, APS entered into an agreement with Lander
Company under which Lander will commercialize the APS consumer products. Under
the terms of the agreement, certain consumer products inventory, manufacturing
equipment and prepaid advertising credits were sold to Lander in January 1997 at
the December 31, 1996 book value.same creditor (Note 9).
In addition, APS will receive revenue from
royalties on consumer product sales and the supply of Microsponge systems to
Lander. Also,September, 1995, the Company plansoffset its note payable to discontinueDow Corning Corporation against its receivable from
DCC. This resulted in a decrease in long-term debt, short-term debt and accounts receivable of $478,935,
$100,000 and $578,935, respectively.
In 1995, the marketing ofCompany extinguished a debt through an insubstance defeasance transaction by placing U.S.
government securities in an irrevocable trust to fund all future scheduled payments on the suncare
products licensed from J&J; the related inventory, in which J&J has a security
interest, amounted to approximately $198,000 at December 31, 1996. For financial
reporting purposes, these consumer product assets are classified as Assets Held
for Sale in thedebt.
See accompanying balance sheet and consist of the following at
December 31, 1996:
Inventory $1,703,764
Prepaid Asset 388,021
Property Plant and Equipment 89,219
-------------
$2,181,004
=============
20
Note 7 Property and Equipment
Property and equipment consist of the following:
December 31, December 31,
1996 1995
--------------------------------
Building $1,611,039 $1,610,339
Land and improvements 163,519 163,519
Leasehold improvements 571,223 571,223
Furniture and equipment 11,119,307 10,623,203
--------------------------------
Total property and equipment $13,465,088 $12,968,284
Accumulated depreciation and
amortization (8,783,796) (7,941,250)
--------------------------------
Property and equipment, net $4,681,292 $5,027,034
================================
Depreciation expense amounted to $976,163, $980,779 and $920,871 for the years
ended December 31, 1996, 1995, and 1994, respectively.
Certain consumer products manufacturing equipment is classified as Assets Held
for Sale in the accompanying December 31, 1996 balance sheetnotes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------
Note 1 Business
Advanced Polymer Systems, Inc. ("APS" or the "Company") develops,
manufactures and sells patented delivery systems that allow for the
controlled release of active ingredients which have benefits in the
ethical dermatology, cosmetic and personal care areas. Certain projects
are conducted under development and licensing arrangements with large
companies, others are part of joint ventures in which APS is a major
participant, and a number of projects are exclusive to APS. Prior to
1997, APS also marketed and distributed a range of consumer products for
personal care through its subsidiary, Premier, Inc. ("Premier").
Effective January 1, 1997, APS licensed the consumer products to a third
party (Note 7).
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements
include the financial statements of the Company and its wholly owned
subsidiaries, Premier, Advanced Consumer Products, Inc. ("ACP") and APS
Analytical Standards. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash Equivalents and Marketable Securities
- ------------------------------------------
For purposes of the Consolidated Statements of Cash Flows and
Consolidated Balance Sheets, the Company considers all short-term
investments that have original maturities of less than three months to
be cash equivalents. Short-term investments consist primarily of
commercial paper, master notes and repurchase agreements. All
investments were classified as cash equivalents in the accompanying
financial statements since there were no investments with original
maturities longer than three months. The Company has classified its
investments in certain debt and equity securities as "available-for-
sale".
Financial Instruments
- ---------------------
The Company's investments are recorded at fair value with unrealized
holding gains and losses reported as a separate component of
shareholders' equity. The carrying amounts reported in the balance
sheets for cash, receivables, accounts payable, accrued liabilites and
short-term and long-term debt approximate fair values due to the short-
term maturities.
Inventory
- ---------
Inventory is stated at the lower of cost or market value, utilizing the
average cost method (Note 6).
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets, not exceeding twenty years (Note 8).
Prepaid License Fees
- --------------------
The fee paid to Biosource in 1992 is being amortized over a seven-year
period consistent with the term of the agreement (Note 3). Amortization
of prepaid license fees totalled $82,872, $137,880 and $137,868 in
1997, 1996 and 1995, respectively.
Deferred Loan Costs
- -------------------
Deferred charges relate to costs incurred in obtaining certain loans.
These charges are being amortized over the life of the loans using the
effective interest method (Note 9).
Long-Lived Assets, Including Goodwill and Other Intangibles
- -----------------------------------------------------------
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the
Company evaluates whether changes have occurred that would require
revision of the remaining estimated lives of recorded long-lived
assets, including goodwill, or render those assets not recoverable.
If such circumstances arise, recoverability is determined by comparing
the undiscounted net cash flows of long-lived assets to their
respective 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
significant 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.
In 1997, APS acquired all the rights to Exact(R) acne medication from
Johnson & Johnson Consumer Products, Inc. for $350,000. Effective
January 1, 1997, APS licensed Exact and other consumer products to
Lander Company (Note 7). The rights are being amortized on a straight-
line basis over the length of the licensing agreement with Lander.
In the first quarter of 1996, APS acquired all patents and rights to
the Polytrap technology from Dow Corning Corporation in exchange for
200,000 shares of its common stock. APS recorded intangible assets
totalling $1,200,000 relating to this transaction. The intangible
assets are being amortized on a straight-line basis over a period of
approximately 10 years, which is the remaining life of the main patent
acquired.
In 1992, APS acquired for 157,894 shares of its common stock, the
outstanding 25% interest in ACP, APS' over-the-counter
consumer products subsidiary. The acquisition was accounted for as a
purchase. Excess of cost over net assets acquired arising from the
purchase was amortized over five years on a straight-line basis.
Amortization of intangible assets totalled $188,259, $279,756 and
$188,875, in 1997, 1996 and 1995, respectively.
Stock-Based Compensation
- ------------------------
The Company has chosen to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for "Stock Issued to Employees" and related
interpretations. Accordingly, except for stock options issued to non-
employees, no compensation cost has been recognized for the Company's
fixed stock option plans and stock purchase plan (Note 11).
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and related notes to financial statements.
Changes in such estimates may affect amounts in future periods.
Revenue Recognition
- -------------------
Product revenues are recorded upon shipment of products.
The Company has several licensing agreements that generally provide for
the Company to receive periodic minimum payments, royalties,and/or non-
refundable license fees. These amounts are classified as Product and
Technology Revenues in the accompanying consolidated statements of
operations and are recognized when earned.
Advertising and Promotion Costs
- -------------------------------
Advertising and promotion costs are expensed as incurred.
Earnings (Loss) Per Share
- -------------------------
The Company adopted SFAS No. 128 "Earnings per Share" (SFAS 128) in the
quarter ended December 31,1997. All prior period earnings per share
data were restated by the Company upon adoption of SFAS 128.
Basic and diluted earnings (loss) per common share were computed based
on the weighted average number of common shares outstanding during each
year. The computation assumes that no outstanding stock options and
warrants were exercised as they would be anti-dilutive.
Deferred Revenue
- ----------------
Prepaid royalties paid to APS by Ortho-McNeil Pharmaceutical
Corporation ("Ortho"), a subsidiary of Johnson & Johnson Inc. ("J&J"),
as part of the retinoid licensing agreement are reported as deferred
revenues (Note 14).
In accordance with the licensing agreement, a portion of the royalties
earned by APS is applied against the deferred revenues after certain
annual minimum royalty payments are met.
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial
Accounting Standards No. 105, consist primarily of trade accounts
receivable. Approximately 51% and 53% of the recorded trade
receivables were concentrated with five and two customers in the
cosmetic and personal care industries as of December 31, 1997 and 1996,
respectively. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial conditions. The Company
does not generally require collateral.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial
statements to conform with the presentation in 1997.
Note 3 Related Party Transactions
APS has entered into agreements with Biosource. One director serves on
the Board of Directors of both Biosource and APS. All agreements between
APS and Biosource have been, and will continue to be, considered and
approved by a vote of the disinterested directors. The agreements provide
APS worldwide rights to use and sell Biosource's biologically-synthesized
melanin in Microsponge systems for all sun protection, cosmetic, ethical
dermatology and over-the-counter skin care purposes. In return, APS was
required to make annual minimum purchases of melanin, pay royalties on
sales of APS melanin-Microsponge products and was required to prepay
$500,000 of royalties. For estimated losses on purchase commitments and
related inventory, the Company accrued $0, $1,400,000 and $600,000 in
1997, 1996 and 1995, respectively. All minimum financial commitments
under the current agreements have been expensed by APS.
In 1996, APS paid Biosource the 1995 minimum purchase commitment by
issuing Biosource 94,000 shares of APS common stock.
In November, 1997 Biosource filed a complaint against the Company in the
San Mateo Superior Court (Note 4).
Note 4 Legal Proceeding
In November, 1997 Biosource filed a complaint against the Company in the
San Mateo Superior Court. Biosource claims damages from the Company of an
amount not less than $1,050,000, on the grounds that the Company has
failed to pay certain minimum amounts allegedly due under a contract for
the supply of melanin. Biosource also claims interest on that sum and
costs.
The Company has denied liability, basing its defense on the assertion that
obligations under the contract have been suspended, because the expected
FDA approval of the Company's melanin based product has not yet been
forthcoming. The Company is vigorously defending the action, and has
cross claimed for rescission of the contract and restitution of money paid
thereunder, and for a declaratory judgment that it is not indebted to
Biosource.
The Company expects that the outcome of this legal proceeding will not
have a material adverse effect on the consolidated financial statements
considering amounts accrued at December 31, 1997.
Note 5 Cash Equivalents
All investments in debt securities have been classified as cash
equivalents in the accompanying balance sheets as they mature in less than
three months.
At December 31, 1997 and 1996, the amortized cost and estimated market
value of investments in debt securities are set forth in the tables below:
December 31, 1997
--------------------------------
Estimated
Cost Fair Value
--------------------------------
Available-for-Sale:
Corporate debt securities $6,726,919 6,726,919
Other debt securities 869,634 869,634
--------- ---------
Totals $7,596,553 7,596,553
========= =========
December 31, 1996
--------------------------------
Estimated
Cost Fair Value
--------------------------------
Available-for-Sale:
Corporate debt securities $3,556,052 3,556,052
Other debt securities 214,790 214,790
--------- ---------
Totals $3,770,842 3,770,842
========= =========
Note 6 Inventory
The major components of inventory are as follows:
December 31,
---------------------------
1997 1996
---- ----
Raw materials and work-in-process $ 834,496 604,852
Finished goods 1,804,633 1,480,221
--------- ---------
Total inventory $2,639,129 2,085,073
========= =========
Consumer products inventory was classified as Assets Held for Sale in the
accompanying December 31, 1996 balance sheet (Note 7).
Note 7 Assets Held for Sale
In January 1997, APS entered into an agreement with Lander Company under
which Lander commercialized the APS consumer products as part of the
Company's long-term strategic plan to move away from the direct marketing
of consumer products. Under the terms of the agreement, certain consumer
products inventory, manufacturing equipment and prepaid advertising
credits were sold to Lander in January 1997 at the December 31, 1996 book
value. In addition, APS receives revenue from royalties on consumer
product sales and the supply of Microsponge systems to Lander. Also, the
Company discontinued the marketing of the suncare products licensed from
J&J; the related inventory amounted to approximately $198,000 at December
31, 1996. For financial reporting purposes, these consumer product assets
are classified as Assets Held for Sale in the accompanying December 31,
1996 balance sheet and consist of the following:
Inventory $1,703,764
Prepaid Asset 388,021
Property Plant and Equipment 89,219
---------
$2,181,004
=========
Note 8 Property and Equipment
Property and equipment consist of the following:
December 31,
---------------------------
1997 1996
---------- ----------
Building $ 1,823,625 1,611,039
Land and improvements 163,519 163,519
Leasehold improvements 1,233,074 571,223
Furniture and equipment 13,001,437 11,119,307
---------- ----------
Total property and equipment 16,221,655 13,465,088
Accumulated depreciation
and amortization (9,450,482) (8,783,796)
---------- ----------
Property and equipment, net $ 6,771,173 4,681,292
========== ==========
Depreciation expense amounted to $709,802, $976,163 and $980,779 for the
years ended December 31, 1997, 1996, and 1995, respectively.
Certain consumer products manufacturing equipment is classified as Assets
Held for Sale in the accompanying December 31, 1996 balance sheet (Note
7).
Note 9 Long-Term Debt
Long-term debt consists of the following:
December 31, December 31,
1996 1995
-----------------------------
Bank loan, interest payable monthly, principal due in non-equal installments
commencing December 1, 1996 through March 1, 1999, secured by the assets and
operating cash flow of a subsidiary of the Company and guaranteed by the Company $2,950,000 $3,000,000
December 31
--------------------
1997 1996
---- ----
Bank loan, interest payable monthly, principal
due in non-equal installments commencing
December 1, 1996 through March 1, 1999,
secured by the assets and operating cash
flow of a subsidiary of the Company and
guaranteed by the Company $2,550,000 2,950,000
Term loan, subordinated to bank loan, interest
payable quarterly, principal due in non-equal
installments commencing December 1, 1996
through March 1, 1999,
secured by the assets and operating cash flows of a subsidiary of the Company
and guaranteed by the Company 1,622,500 1,500,000
Term loan, principal and interest due in equal monthly installments commencing
October 1996 through December 1999, secured by certain real and personal property 2,497,128 2,708,956
-----------------------------
Total $7,069,628 $7,208,956
Less current portion 1,490,779 853,987
-----------------------------
Long-term debt $5,578,849 $6,354,969
=============================
Maturities of the long-term debt are as follows:
Years ending December 31: Amount
- --------------------------------------------------------------------------------
1997 $ 1,490,779
1998 2,523,389
1999 3,055,460
- --------------------------------------------------------------------------------
$ 7,069,628
================================================================================
In 1995, the Company received an aggregate amount of $8,122,334 from three
financing arrangements.
The first financing arrangement was a $3,000,000 bank loan with an interest rate
equal to two percentage points above the
21
Prime Rate (8.25% as of December 31, 1996). The loan is secured by the assets
and operating cash flows of a subsidiary of
the Company and guaranteed by the Company.
The second financing arrangement was originally a $1,500,000 termCompany 1,402,500 1,622,500
Term loan, with a
syndicate of lendersprincipal and a fixed interest rate of 14%. In Januarydue in equal
monthly installments commencing October 1996
an
incremental $150,000 was received under this financing arrangement. The loan is
alsothrough December 1999, secured by the assets and operating cash flows of a subsidiary of the
Company and guaranteed by the Company. The security interest of the debt holders
is subordinated to the bank loan's security interest.
In the third quarter of 1995, the Company consummated a transaction whereby certain
real and personal properties were sold to a third party and subsequently
leased back for a fixed rental stream over a period of forty-eight months. The
Company has the option either to purchase all the properties at the expiration
of the term of the lease or extend the term of the lease. The Company reported
this transaction as a financing transaction since the requirements for
consummation of a sale were not met. A deposit of $188,000 and $755,000 with the
lender was offset against the loan balance as of December 31, 1996 and 1995
respectively.property 1,626,349 2,497,128
--------- ---------
Total 5,578,849 7,069,628
Less current portion 2,523,389 1,490,779
--------- ---------
Long-term debt $3,055,460 5,578,849
========= =========
Maturities of the long-term debt are as follows:
Years ending December 31 Amount
------------------------ ----------
1998 $2,523,389
1999 3,055,460
---------
$5,578,849
=========
In 1995, the Company received an aggregate amount of $8,122,334 from three
financing arrangements.
The first financing arrangement was a $3,000,000 bank loan with an
interest rate equal to two percentage points above the Prime Rate (8.5% as
of December 31, 1997). The loan is secured by the assets and operating
cash flows of a subsidiary of the Company and guaranteed by the Company.
The second financing arrangement was originally a $1,500,000 term loan
with a syndicate of lenders and a fixed interest rate of 14%. In January
1996, an incremental $150,000 was received under this financing
arrangement. The loan is also secured by the assets and operating cash
flows of a subsidiary of the Company and guaranteed by the Company. The
security interest of the debt holders is subordinated to the bank loan's
security interest.
In the third quarter of 1995, the Company consummated a transaction
whereby certain assets were sold to a third party and subsequently leased
back for a fixed rental stream over a period of forty-eight months. The
Company has the option either to purchase all the properties at the
expiration of the term of the lease or extend the term of the lease. The
Company reported this transaction as a financing transaction since the
requirements for consummation of a sale were not met. A deposit of
$188,000 with the lender was offset against the loan balance as of
December 31, 1997 and 1996. In 1996, the Company received a refund of
$567,000 of the deposit upon satisfaction of certain conditions identified
in the financing agreement. This transaction has been reflected in the
table above as a term loan.
The terms of certain financing agreements contain, among other provisions,
requirements for a subsidiary of the Company to maintain defined levels of
earnings, net worth and various financial ratios, including debt to net
worth. In conjunction with the debt financing agreements, APS issued a
total of 197,500 warrants with an original exercise price of $7.00 per
share of common stock. In accordance with the original terms of the
warrant agreements, the exercise price on 110,000 of the warrants
outstanding at December 31, 1997 was reduced to $3.00 per share on
December 31, 1997 as a result of the Company reporting a net loss for the
1997 fiscal year.
All costs incurred in obtaining the financing arrangements have been
capitalized as deferred charges, and are being amortized over the life of
the loans using the effective interest method. Interest paid in 1997,
1996 and 1995 approximated interest expense reflected in the Consolidated
Statements of Operations.
In September 1995, the Company extinguished $2,500,000 of Industrial
Revenue Bonds through an "insubstance defeasance" transaction by placing
approximately $2,500,000 of U.S. government securities in an irrevocable
trust to fund all future interest and principal payments. The defeased
debt balance outstanding as of December 31, 1997 was $2,500,000. The
purchase of the government securities to offset this debt was achieved
through the sale of the Company's pledged marketable security. The debt
extinguishment did not have a material impact on the Company's earnings.
Note 10 Commitments
Lease Commitments: Total rental expense for property and equipment was
$770,187, $655,283 and $639,807 for 1997, 1996 and 1995, respectively.
The Company's future minimum lease payments under noncancellable operating
leases for facilities as of December 31, 1997, are as follows:
Years Ending Minimum
December 31, Payments
------------ -----------
1998 $ 739,871
1999 723,027
2000 717,181
2001 725,233
2002 735,095
Thereafter 1,248,609
----------
$4,889,016
==========
Note 11 Shareholders' Equity
Private Placements and Common Stock Warrants: In January 1996, in
accordance with a 1994 private placement agreement, APS issued J&J 432,101
shares of common stock as a result of the APS stock price not achieving
certain predetermined levels. The 200,000 warrants issued to J&J in
conjunction with this private placement expired in 1996 (Note 14).
During 1997, 925,158 warrants issued in connection with a 1994 private
placement were exercised. As of December 31, 1997, 310,278 warrants from
the 1994 private placement are outstanding with an exercise price of $5.32
per warrant. The outstanding warrants expire on March 30, 1998.
In conjunction with certain debt financing agreements made in 1995 (Note
9), APS issued a total of 197,500 warrants with an original exercise price
of $7.00 per share of common stock. In accordance with the warrant
agreements, the exercise price was reduced to $3.00 on December 31, 1997
as a result of the Company reporting a net loss for the 1997 fiscal year.
These warrants will expire on March 27, 2000.
In the first quarter of 1995, 1,161,500 warrants issued in a 1992 private
placement expired.
In the first quarter of 1996, the Company formed a collaborative agreement
with the Lander Company under which the Company received $2,961,000 in net
proceeds from the sale of 356,761 shares of common stock. In addition,
the Company will receive licensing fees, research and development funding
and royalties on product sales in the future.
In 1996, APS acquired all patents and rights to the Polytrap technology
from Dow Corning in exchange for 200,000 shares of APS common stock (Note
2).
During the second quarter of 1996, APS received $1,937,851 net of offering
costs, through a private placement and sale of 201,922 shares of common
stock and 86,538 warrants exercisable over a three-year period. The
warrants are exercisable at the following prices:
Number of Shares Exercise Price
---------------- --------------
28,846 $ 7.43
28,846 9.90
28,846 12.38
Shareholders Rights Plan: On August 19, 1996, the Board of Directors
approved a Shareholders Rights Plan under which shareholders of record on
September 3, 1996 received a dividend of one Preferred Stock purchase
right ("Rights") for each share of common stock outstanding. The Rights
were not exercisable until 10 business days after a person or group
acquired 20% or more of the outstanding shares of common stock or
announced a tender offer which could have resulted in a person or group
beneficially owning 20% or more of the outstanding shares of common stock
(an "Acquisition") of the Company. The Board of Directors approved an
increase in threshold to 30% in December 1997. Each Right, should it
become exercisable, will entitle the holder (other than acquirer) to
purchase company stock at a discount. The Board of Directors may
terminate the Rights plan or, under certain circumstances, redeem the
rights.
In the event of an Acquisition without the approval of the Board, each
Right will entitle the registered holder, other than an acquirer and
certain related parties, to buy at the Right's then current exercise price
a number of shares of common stock with a market value equal to twice the
exercise price.
In addition, if at the time when there was a 30% shareholder, the Company
were to be acquired by merger, shareholders with unexercised Rights could
purchase common stock of the acquirer with a value of twice the exercise
price of the Rights.
The Board may redeem the Rights for $0.01 per Right at any time prior to
Acquisition. Unless earlier redeemed, the Rights will expire on August
19, 2006.
Stock-Based Compensation Plans: The Company has two types of stock-based
compensation plans, a stock purchase plan and a stock option plan.
In 1997, the stockholders approved the Company's 1997 Employee Stock
Purchase Plan (the "Plan"). Under the 1997 Employee Stock Purchase Plan,
the Company is authorized to issue up to 400,000 shares of common stock to
its employees, nearly all of whom are eligible to participate. Under the
terms of the Plan, employees can elect to have up to a maximum of 10
percent of their base earnings withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of the
closing prices for the Company's common stock on: (i) the first trading
day in the enrollment period, as defined in the Plan, in which the
purchase is made, or (ii) the purchase date. The length of the enrollment
period may not exceed a maximum of 24 months. Enrollment dates are the
first business day of May and November provided that the first enrollment
date was April 30, 1997. Approximately 58 percent of eligible employees
participated in the Plan in 1997. Under the Plan, the Company issued
14,545 shares in 1997 and no shares in 1996 and 1995. The weighted
average fair value of purchase rights granted during the year was $2.77.
The weighted average exercise price of the purchase rights exercised
during the year was $6.00. As of December 31, 1997, the Company had
385,455 shares reserved for issuance under the stock purchase plan.
The Company has various stock option plans for employees, officers,
directors and consultants. The options are granted at fair market value
and expire no later than ten years from the date of grant. The options
are exercisable in accordance with vesting schedules that generally
provide for them to be fully exercisable four years after the date of
grant.
The following table summarizes option activity for 1997, 1996 and 1995:
1997 1996 1995
and 1994 approximated
interest expense reflected in the Consolidated Statements----------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ------------------ --------------------
Outstanding at beginning
of Operations.
In September 1995, the Company extinguished $2,500,000year 2,901,440 $6.46 2,972,324 $5.98 2,677,162 $6.14
Granted 313,500 7.50 502,500 7.89 636,500 5.31
Exercised (165,374) 4.71 (416,219) 4.80 (236,992) 4.59
Expired or Cancelled (101,811) 8.36 (157,165) 6.25 (104,346) 9.14
--------- --------- ---------
Outstanding at end of Industrial Revenue
Bonds through an "insubstance defeasance" transaction by placing approximately
$2,500,000 of U.S. government securities in an irrevocable trust to fund all
future interest and principal payments. The purchase of the government
securities was achieved through the sale of the Company's pledged marketable
security. The debt extinguishment did not have a material impact on the
Company's earnings. The debt balance outstanding as of December 31, 1996 was
$2,500,000.
Note 9 Commitments
Lease Commitments: Total rental expense for property and equipment was $655,283,
$639,807 and $558,086 for 1996, 1995 and 1994, respectively.
The Company's future minimum lease payments under noncancellable operating
leases for facilities as of December 31, 1996, are as follows:
Minimum
Years Ending December 31, Payments
- -------------------------------------------------------------------------------
1997 $ 443,442
1998 132,186
1999 100,043
2000 80,869
2001 75,600
- -------------------------------------------------------------------------------
$ 832,140
===============================================================================
Note 10 Shareholders' Equity
Private Placements and Common Stock Warrants: In 1994, the Company raised
$9,116,616 net of offering costs through two private placements. In the first
private placement, APS issued 1,000,000 shares of newly issued common stock to
Johnson & Johnson ("J&J") in consideration for $5,000,000. In addition, J&J
received 200,000 warrants exercisable for two years at $12.00 per share. In
January 1996, in accordance with the 1994 private placement agreement, APS
issued J&J 432,101 shares of common stock as a result of the APS stock price not
achieving certain
22
predetermined levels. The 200,000 warrants issued to J&J in conjunction with
this private placement expired in 1996 (Note 13).
The second private placement was pursuant to an agreement for the sale of up to
$8,000,000 of common stock and warrants in six installments beginning in June,
1994 and ending on September 29, 1995. The Company sold $6,000,000 of common
stock and warrants through March 30, 1995. The remaining two optional
installments in June and September 1995 totalling $2,000,000 of common stock and
warrants were not sold by the Company. In accordance with the agreement, the
following shares of common stock and warrants were issued:
Number of shares Number of Exercise Price
Date Issued of Common Stock Issued Warrants Issued of Warrants
- --------------------------------------------------------------------------------
June 30, 1994 294,314 294,314 $5.61
September 30, 1994 299,066 299,066 $5.52
December 31, 1994 331,778 331,778 $4.97
March 30, 1995 310,278 310,278 $5.32
The warrants issued are exercisable over a three-year period. The value of the
warrants was determined using the Black-Scholes model.
In conjunction with certain debt financing agreements made in 1995 (Note 8), APS
issued a total of 197,500 warrants with an exercise price of $7.00 per share of
common stock. These warrants expire on March 27, 2000.
In the first quarter of 1995, 1,161,500 warrants issued in a 1992 private
placement expired.
In the first quarter of 1996, the Company formed a collaborative agreement with
the Lander Company under which the Company received $2,961,000 in net proceeds
from the sale of 356,761 shares of common stock. In addition, the Company will
receive licensing fees, research and development funding and royalties on
product sales in the future.
In 1996, APS acquired all patents and rights to the Polytrap technology from Dow
Corning in exchange for 200,000 shares of APS common stock (Note 2).
During the second quarter of 1996, APS received $1,937,851 net of offering
costs, through a private placement and sale of 201,922 shares of common stock
and 86,538 warrants exercisable over a three-year period. The warrants areyear 2,947,755 6.63 2,901,440 6.46 2,972,324 5.98
========= ========= =========
Options exercisable at
the following prices:
Number ofyear-end 2,259,683 1,945,056 1,877,295
Shares Exercise Price
---------------- --------------
28,846 $7.43
28,846 $9.90
28,846 $12.38
The private placement was pursuant to an agreementavailable for the sale of up to
$5,000,000 of common stock and warrants, which can be initiatedfuture
grant at the Company's
sole discretion.
Shareholders Rights Plan: On August 19, 1996, the Board of Directors approved a
Shareholders Rights Plan under which shareholders of record on September 3, 1996
received a dividend of one Preferred Stock purchase right ("Rights") for each
share of common stock outstanding. The Rights are not generally exercisable
until 10 business days after a person or group acquires 20% or more of the
outstanding shares of common stock or announces a tender offer which could
result in a person or group beneficially owning 20% or more of the outstanding
shares of common stock (an "Acquisition") of the Company. Each Right, should it
become exercisable, will entitle the holder (other than acquirer) to purchase
company stock at a discount. The Board of Directors may terminate the Rights
plan or, under certain circumstances, redeem the rights.
In the event of an Acquisition without the approval of the Board, each Right
will entitle the registered holder, other than an acquirer and certain related
parties, to buy at the Right's then current exercise price a number of shares of
common stock with a market value equal to twice the exercise price.
23
In addition, if at the time when there was a 20% shareholder, the Company were
to be acquired by merger, shareholders with unexercised Rights could purchase
common stock of the acquirer with a value of twice the exercise price of the
Rights.
The Board may redeem the Rights for $0.01 per Right at any time prior to
Acquisition. Unless earlier redeemed, the Rights will expire on August 19, 2006.
Stock Options: The Company has various stock option plans for employees,
officers, directors and consultants. The options are granted at fair market
value and expire no later than ten years from the date of the grant. The options
are exercisable in accordance with vesting schedules that generally provide for
them to be fully exercisable four years after the date of grant.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, ("SFAS No. 123") "Accounting for Stock-Based
Compensation." Accordingly, except for stock options issued to non-employees, no
compensation cost has been recognized for the fixed stock option plans. The
compensation cost that has been charged against income for the stock options
issued to non-employees was $161,000, $0 and $0 for 1996, 1995 and 1994,
respectively. Had compensation cost for the Company's fixed stock option plans
been determined consistent with the provisions of SFAS No. 123, the Company's
net loss and loss per common share would have increased to the pro-forma amounts
indicated below:
1996 1995
---- ----
Net loss - as reported $( 9,378,099) $(9,358,530)
Net loss - pro-forma $(10,462,871) $(9,815,235)
Loss per common share - as reported $ (0.52) $ (0.57)
Loss per common share - pro-forma $ (0.58) $ (0.60)
Theyear end 358,295 569,984 167,819
Weighted-average fair
value of each option grant is estimated onoptions granted
during the dateyear $4.25 $5.12 $3.44
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants inNumber Remaining Remaining Number Remaining
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/97 Life Price at 12/31/97 Price
- ----------- ----------- ----------- --------- ----------- ---------
$3.44-$5.25 788,251 5.8 years $ 4.67 618,005 $ 4.54
$5.38-$6.25 852,139 6.4 5.61 726,765 5.55
$6.38-$8.13 795,365 7.7 7.41 402,913 7.18
$9.25-$15.00 512,000 5.0 10.14 512,000 10.14
--------- ---------
$3.44-$15.00 2,947,755 6.4 6.63 2,259,683 6.60
========= =========
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS No. 123") "Accounting for
Stock-Based Compensation." Accordingly, except for stock options issued
to non-employees, no compensation cost has been recognized for the various
fixed stock option plans and stock purchase plan. The compensation cost
that has been charged against income for the stock options issued to non-
employees was $96,800, $161,300 and $0 for 1997, 1996 and 1995,
respectively. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value method
provisions of SFAS No. 123, the Company's net loss and loss per common
share would have increased to the pro-forma amounts indicated below:
1997 1996 1995
----------- ----------- ---------
Net loss - as reported $ (683,161) (9,378,099) (9,358,530)
Net loss - pro-forma (2,010,319) (10,462,871) (9,815,235)
Loss per common share
(basic and diluted)
- as reported (0.04) (0.52) (0.57)
Loss per common share
(basic and diluted)
- pro-forma (0.11) (0.58) (0.60)
For stock options, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1997, 1996 and
1995, respectively: dividend yield of 0 for all years; expected
volatility of 60 percent, 85 percent and 85 percent; risk-free interest
rates of 5.7 percent, 6.1 percent and 1995: dividend yield of 0; expected
volatility of 85%; risk-free interest rate of 6.1 percent; and expected life of
five years, four years and four years for all the stock option plans.
For the stock purchase plan, the fair value of each award is also
estimated using the Black-Scholes option pricing model. The multiple
option approach was used, with the following assumptions for expected
terms of six, twelve, eighteen and twenty-four months, respectively:
risk-free interest rates of 5.7 percent, 5.8 percent, 6.0 percent and 6.0
percent; volatility of 40 percent for all terms; and dividend yield of
zero for all terms. There were no grants under the stock purchase plan in
1996 and 1995.
The amounts disclosed above under the fair value method of SFAS No. 123
include compensation costs and fair values for options and purchase rights
granted since January 1, 1995 and may not be representative of the effects
in future years.
The following table summarizes option activity for 1996, 1995 and 1994:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 2,972,324 $5.98 2,677,162 $6.14 2,588,940 $6.21
Granted 502,500 $7.89 636,500 $5.31 723,500 $5.13
Exercised (416,219) $4.80 (236,992) $4.59 (471,306) $4.00
Expired or Cancelled (157,165) $6.25 (104,346) $9.14 (163,972) $9.00
--------- --------- ---------
Outstanding at end of year 2,901,440 $6.46 2,972,324 $5.98 2,677,162 $6.14
========= ========= =========
Options exercisable at year-end 1,945,056 1,877,295 1,529,574
Shares available for future grant at
year end 569,984 167,819 709,973
Weighted-average fair value of options
granted during the year $7.89 $5.31 $5.13
24
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted Avg.
Range of Number Remaining Number
Exercise Outstanding Contractual Weighted Avg. Exercisable Weighted Avg.
Prices 12/31/96 Life Exercise Price at 12/31/96 Exercise Price
- ------ ------- ---- -------------- ----------- --------------
$3.44-$5.25 922,760 6.6 years $ 4.65 613,035 $ 4.39
$5.38-$5.75 727,180 7.1 $ 5.45 581,772 $ 5.46
$6.13-$8.13 729,500 8.1 $ 7.15 308,249 $ 6.97
$9.25-$11.13 522,000 5.9 $ 10.11 442,000 $ 10.08
--------- ---------
$3.44-$11.13 2,901,440 7.0 $ 6.46 1,945,056 $ 6.42
Distributions: Distributions presented in the Consolidated Statements of
Shareholders' Equity represent payments to the shareholders of Premier, which
was a subchapter S Corporation. Premier's S Corporation election was terminated
in conjunction with the merger.
Note 11Note 12 Defined Contribution Plan
The Company sponsors a defined contribution plan covering substantially
all of its employees. In the past three calendar years, the Company made
matching contributions equal to 50% of each participant's contribution
during the plan year up to a maximum amount equal to the lesser of 3% of
each participant's annual compensation or $4,750, $4,750 and $4,500 for
the 1997, 1996 and 1995 calendar years, respectively. The Company may
also contribute additional discretionary amounts as it may determine. For
the years ended December 31, 1997, 1996 and 1995, the Company contributed
to the plan approximately $110,000, $110,000 and $89,000, respectively.
No discretionary contributions have been made to the plan since its
inception.
Note 13 Income Taxes
A reconciliation of the federal statutory rate of 34% to the Company's
effective tax rate is as follows:
December 31
------------------------
1997 1996 1995
---- ---- ----
U.S. Federal statutory rate (benefit) (34.00)% (34.00)% (34.00)%
Net losses without tax benefits 31.40 33.75 33.50
State income taxes, net of U.S.
Federal income tax effect -- -- --
Nondeductible expenses 2.60 0.25 0.5
----- ----- -----
Total tax expense (benefit) -- -- --
At December 31, 1997, the Company had net federal operating loss
carryforwards of approximately $73,576,000 for income tax reporting
purposes and California operating loss carryforwards of approximately
$7,512,000. The federal net operating loss carryforwards expire beginning
in 1998 through the year 2012. The California net operating loss
carryforwards expire beginning in 1998 through the year 2002. A
California net operating loss carryforward from 1990 in the approximate
amount of $1,200,000 expired December 31, 1997.
The Company also has investment tax credits and research and experimental
tax credits aggregating approximately $1,688,000 and $744,000 for federal
and California purposes, respectively. The federal credit carryforwards
expire beginning in 1998 through the year 2012. The California credits
carryover indefinitely until utilized.
There are also California credit carryforwards for qualified manufacturing
and research and development equipment of approximately $13,000; these
credits expire beginning in 2005 through the year 2007.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1997 1996
------------ -----------
Deferred tax assets:
Deferred research expenditures $ 1,367,000 1,445,000
Accruals and 1995, the Company made matching contributions equal
to 50% of each participant's contribution during the plan year up to a maximum
amount equal to the lesser of 3% of each participant's annual compensation or
$4,750 and $4,500reserves not
currently deductible for the 1996 and 1995 calendar years, respectively. In 1994
the maximum matching contribution made by the Company was equal to the lesser of
1.5% of each participant's salary or $1,000 per calendar year. The Company may
also contribute additional discretionary amounts as it may determine. For the
years ended December 31, 1996, 1995 and 1994, the Company contributed to the
plan approximately $110,000, $89,000 and $55,000, respectively. No discretionary
contributions have been made to the plan since its inception.
Note 12 Income Taxes
A reconciliation of the Federal statutory rate of 34% to the Company's effective
tax
rate is as follows:
December 31
1996 1995 1994
-----------------------------------
U.S. Federal statutory rate (benefit) (34.0)% (34.0)% (34.0)%purposes 1,934,000 1,771,000
Net losses without tax benefits 33.75 33.5 34.0
State income taxes, net of U.S.
Federal income tax effect -- -- --
Nondeductible expenses 0.25 0.5 --
----------------------------------
Total tax expense -- -- --
==================================
At December 31, 1996, the Company had net Federal operating loss carryforwards of approximately $72,500,000 for income tax reporting purposes and California
operating loss25,680,000 25,407,000
Credit carryforwards of approximately $8,400,000. The Federal net
operating loss carryforwards expire beginning in 1998 through the year 2011. The
California net operating loss carryforwards expire beginning in 1997 through the
year 2001. A California net operating loss carryforward from 1989 in the
approximate amount of $2,000,000 expired December 31, 1996.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
approximately $32,000,000 and $5,500,000 of the Company's Federal and California
net operating loss carryforwards, respectively, are subject to an annual
limitation against taxable income. The balance of the Federal and California
loss carryforwards of approximately $40,500,000 and $2,900,000, respectively,
which arose subsequent to the Company's change in ownership will be fully
available to offset taxable income in excess of the annual limitation until
fully utilized or there is another ownership change.
25
The Company also has investment tax credits and research and experimental tax
credits aggregating approximately $1,692,000 and $673,000 for Federal and
California purposes, respectively. The Federal credit carryforwards expire
beginning in 1998 through the year 2011. The California credits carryover
indefinitely until utilized.
There are also California credit carryforwards for qualified manufacturing and
research and development equipment of approximately $11,000; these credits
expire beginning in 2005 through the year 2006.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
1996 1995
---- -----
Deferred tax assets:
Deferred research expenditures $1,445,000 $1,443,000
Accruals and reserves not currently deductible
for tax purposes 1,771,000 1,197,000
Net operating loss carryforwards 25,407,000 22,283,000
Credit carryforwards 2,377,000 2,274,000
Other 406,000 572,000
-------------- --------------
Gross deferred tax assets 31,406,000 27,769,000
Less valuation allowance (31,182,000) (27,426,000)
-------------- --------------
Total deferred tax assets $224,000 $343,000
-------------- --------
Deferred tax liabilities:
Property and equipment $(224,000) $(343,000)
-------------- --------------
Total deferred tax liabilities (224,000) (343,000)
-------------- --------------
Net deferred taxes $ -- $ --
============== ==============
The net change in the valuation allowance for the years ended December 31, 1996,
1995 and 1994 was an increase of approximately $3,756,000, $4,534,000 and
$3,627,000, respectively. Management believes that sufficient uncertainty exists
regarding the realizability of these items and, accordingly, a valuation
allowance is required.2,445,000 2,377,000
Other 246,000 406,000
---------- ----------
Gross deferred tax assets as of December 31, 1996 include approximately
$2,594,000 relating to the exercise of stock options, for which any related31,672,000 31,406,000
Less valuation allowance (31,522,000) (31,182,000)
---------- ----------
Total deferred tax benefits will be credited to equity when realized.
Note 13 Ortho-McNeil Pharmaceutical Corporation
In May 1992, APS entered into development,assets 150,000 224,000
---------- ----------
Deferred tax liabilities:
Property and licensing and investment
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho") for the
development of retinoid products. The first product is a Microsponge system
entrapment of tretinoin (trans-retinoic acid or "t-RA"), a prescription acne
drug for which FDA approval was received in February 1997. A second product
licensed to Ortho is a Microsponge entrapment of a retinoid to be used for the
treatment of photodamaged skin.
The terms of the agreements included an $8,000,000 investment in APS for 723,006
newly issued shares of APS common stock and the payment to APS of $6,000,000 in
licensing fees by J&J. The licensing fees were recognized as revenues according
to the percentage-of-completion method of accounting whereby income was
recognized based on the estimated stage of completion of the related project.
Cash payments received in advance of being earned were classified asequipment (150,000) (224,000)
---------- ----------
Total deferred revenue. Revisions of estimated profits were included in earnings by the
reallocation method which spread the change in estimate over the current and
future periods. As of December 31, 1994, the project had been completed and all
associated revenues had been recognized.
J&J made a second equity investment in the Company in May 1994. Under this
agreement, J&J purchased 1,000,000 shares of newly issued common stock in
consideration for $5,000,000. In January 1996, APS issued J&J 432,101 shares of
common stock as a result of the APS stock price not achieving certain
predetermined levels. The 200,000 warrants issued in 1994 to J&J in conjunction
with this equity investment expired in 1996. As of December 31, 1996, J&J owns
approximately 12% of the APS common shares outstanding.
In February 1995, APS received $750,000 in prepaid royalties and an additional
$750,000 as a milestone payment on the submission to the FDA of its New Drug
Application for the tretinoin prescription acne treatment. The milestone payment
26
was recognized as revenue upon receipt. The prepaid royalties of $750,000 were
recorded astax liabilities (150,000) (224,000)
---------- ----------
Net deferred revenues. In February 1997, upon receipt of approval from
the FDA to market Retin-A(R) Micro(TM) (tretinoin gel) microsphere for the
treatment of acne, APS received $3,000,000 from Ortho of which one half is a
milestone payment which will be recognized as revenue in 1997 and half is
prepaid royalties which will be recorded as deferred revenues. APS will earn a
mark-up on Microsponge systems supplied to Ortho and Ortho will pay APS a
royalty on product sales, subject to certain minimums. Should these minimums not
be achieved, Ortho would lose its exclusivity and APS would regain marketing
rights to the retinoid products. APS has the ability to earn an additional
$4,750,000 in fees if certain research milestones are achieved.
Note 14 Johnson & Johnson
Licensing Agreement: The Company's wholly owned subsidiary, Premier, licensed
from J&J the exclusive right to manufacture and distribute a product, Take-Off,
in the U.S. The agreement provided for Premier to remit royalty payments to J&J
based on net sales, with minimum payments of $375,000 per year. In December
1996, the Company purchased the rights to Take-Off from J&J for a 3% royalty on
net sales for the five year period ending December 31, 2001. In January 1997, as
part of its long-term strategic plan to move away from the marketing of consumer
products, the Company sub-licensed the right to manufacture and distribute
Take-Off to Lander Company.
Distribution Arrangement: Premier obtained the rights to market and distribute
two suncare products, Sundown and Johnson's Baby Sunblock, in the U.S. Premier &
J&J share the profits or losses on sales of suncare products. Premier performs a
reconciliation of the payable to J&J annually to determine the portion that is
currently due. The portion of the payable that relates to inventory sold during
a contract year is due at the end of that contract year, which begins on January
1 and ends on December 31.
As part of the Company's long-term strategic plan to move away from the direct
marketing of consumer products, this distribution arrangement with J&J will be
terminated in 1997. The remaining inventory on hand as of December 31, 1996 will
be sold in 1997.
27
Independent Auditors' Report
The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced Polymer
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Item 14(a)2. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Polymer
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
San Francisco, California
March 5, 1997
28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
APS incorporates by reference the information set forth under the
captions "Nomination and Election of Directors" and "Executive Compensation" of
the Company's Proxy Statement (the "Proxy Statement") for the annual meeting of
shareholders to be held on June 4, 1997.
Item 11. Executive Compensation
APS incorporates by reference the information set forth under the caption
"Executive Compensation" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company incorporates by reference the information set forth under the
caption "Beneficial Stock Ownership" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The Company incorporates by reference the information set forth under the
caption "Certain Transactions" of the Proxy Statement.
29
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements and supplementary data set forth on
pages 14-27 of Part II of the 10-K Annual Report are
incorporated herein by reference.
2. Financial Statement Schedules
Schedule II Valuation Accounts
All other schedules have been omitted because the information is not
required or is not so material as to require submission of the
schedule, or because the information is included in the financial
statements or the notes thereto.
3. Exhibits
3-A -Copy of Registrant's Certificate of Incorporation. (1)
3-B -Copy of Registrant's Bylaws. (1)
10-B -Lease Agreement between the Registrant and White Properties
Joint Venture for lease of Registrant's executive offices
in Redwood City, dated as of August 1, 1992. (3)
10-C -Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-N -Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P -Warrant to Purchase Common Stock. (5)
10-S -Lease Agreement between Registrant and Financing for
Science International dated September 1, 1995 (6)
10-T -Security and Loan Agreement between Registrant and Venture
Lending dated September 27, 1995 (6)
10-U -Asset Purchase Agreement with Dow Corning Corporation dated
January 23, 1996 (7)
10-V -Investment Agreement between Registrant and the Lander
Company. (8)
10-W -License, Assignment and Supply Agreement between Registrant
and Lander Company.
21 -Proxy Statement for the Annual Meeting of Shareholders. (4)
23 -Consent of Independent Auditors.
27 -Financial Data Schedules
(b) Reports on Form 8-K
None.
(c) Exhibits
The Company hereby files as part of this Form 10-K the exhibits
listed in Item 14(a)3. As set forth above.
(d) Financial Statement Schedules
See Item 14(a)2. of this Form 10-K.
- --------------------------------------------------------------------------------
(1) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Registration Statement on Form S-1 (Registration
No. 33-15429) and incorporated herein by reference.
(2) Filed as Exhibit No. 28.1 to Registrant's Registration
Statement on Form S-8 (Registration No. 33- 50640), and
incorporated herein by reference.
(3) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, and incorporated herein by reference.
(4) To be filed supplementally.
(5) Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3
and 4.4 to Registrant's Registration Statement on Form S-3
(Registration No.33-82562) and incorporated herein by
reference.
(6) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.
(7) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Annual Report on Form 10-K for the year ended
Deccember 31, 1995, and incorporated herein by reference.
(8) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996, and incorporated herein by
reference.
* Management Contract or Compensatory plans.
30
For purposes of complying with the amendments to the rules governing
Registration Statements on Form S-8 (effective July 13, 1990) under the
Securities Act of 1933 ("the Act"), as amended, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into Part II of the registrant's Registration Statements on Form S-8
Nos. 33-18942, 33-21829, 33-29084 and 33-50640 filed on December 8, 1987, May
13, 1988, June 6, 1989 and August 11, 1992, respectively.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
31
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
By: /S/John J. Meakem, Jr.
--------------------------------------------taxes $ -- --
========== ==========
The net change in the valuation allowance for the years ended December 31,
1997, 1996 and 1995 was an increase of approximately $340,000, $3,756,000
and $4,534,000, respectively. Management believes that sufficient
uncertainty exists regarding the realizability of these items and,
accordingly, a valuation allowance is required.
Gross deferred tax assets as of December 31, 1997 include approximately
$2,800,000 relating to the exercise of stock options, for which any
related tax benefits will be credited to equity when realized.
Note 14 Ortho-McNeil Pharmaceutical Corporation
In May 1992, APS entered into development, and licensing and investment
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho") for the
development of retinoid products. The first product is a Microsponge
system entrapment of tretinoin (trans-retinoic acid or "t-RA"), a
prescription acne drug for which FDA approval was received in February
1997. A second product licensed to Ortho is a Microsponge entrapment of a
retinoid to be used for the treatment of photodamaged skin.
The terms of the agreements included an $8,000,000 investment in APS for
723,006 newly issued shares of APS common stock and the payment to APS of
$6,000,000 in licensing fees by J&J.
J&J made a second equity investment in the Company in May 1994. Under
this agreement, J&J purchased 1,000,000 shares of newly issued common
stock in consideration for $5,000,000. In January 1996, APS issued J&J
432,101 shares of common stock as a result of the APS stock price not
achieving certain predetermined levels. The 200,000 warrants issued in
1994 to J&J in conjunction with this equity investment expired in 1996.
As of December 31, 1997, J&J owned approximately 11% of the APS common
shares outstanding. In March 1998, J&J announced that it had divested its
initial investment of 723,006 shares of the Company's stock as part of a
rebalancing of its investment portfolio.
In February 1995, APS received $750,000 in prepaid royalties and an
additional $750,000 as a milestone payment on the submission to the FDA of
its New Drug Application for the tretinoin prescription acne treatment.
The milestone payment was recognized as revenue upon receipt. The prepaid
royalties of $750,000 were recorded as deferred revenues. In February
1997, upon receipt of approval from the FDA to market Retin-A(R) Micro
(tretinoin gel) microsphere for the treatment of acne, APS received
$3,000,000 from Ortho of which one half is a milestone payment which was
recognized as revenue in 1997 and half is prepaid royalties which was
recorded as deferred revenues. APS earns a mark-up on Microsponge systems
supplied to Ortho and Ortho pays APS a royalty on product sales, subject
to certain minimums. Should these minimums not be achieved, Ortho would
lose its exclusivity and APS would regain marketing rights to the retinoid
products. APS has the ability to earn an additional $4,750,000 in fees if
certain research milestones are achieved.
Note 15 Johnson & Johnson
Licensing Agreement: The Company's wholly owned subsidiary, Premier,
licensed from J&J the exclusive right to manufacture and distribute a
product, Take-Off, in the U.S. The agreement provided for Premier to
remit royalty payments to J&J based on net sales, with minimum payments of
$375,000 per year. In December 1996, the Company purchased the rights to
Take-Off from J&J for a 3% royalty on net sales for the five year period
ending December 31, 2001. In January 1997, as part of its long-term
strategic plan to move away from the marketing of consumer products, the
Company sub-licensed the right to manufacture and distribute Take-Off to
Lander Company.
Distribution Arrangement: In 1992, Premier obtained the rights to market
and distribute two suncare products, Sundown and Johnson's Baby Sunblock,
in the U.S. Premier & J&J shared the profits or losses on sales of
suncare products.
As part of the Company's long-term strategic plan to move away from the
direct marketing of consumer products, this distribution arrangement with
J&J was terminated in 1997. The remaining inventory on hand as of
December 31, 1996 was sold in 1997.
Independent Auditors' Report
The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Polymer Systems, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1997. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement schedule as listed in Item 14(a)2. These consolidated
financial statements and the consolidated financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Advanced Polymer Systems, Inc. and subsidiaries as of December 31, 1997
and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/KPMG Peat Marwick LLP
San Francisco, California
March 6, 1998
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
APS incorporates by reference the information set forth under the captions
"Nomination and Election of Directors" and "Executive Compensation" of the
Company's Proxy Statement (the "Proxy Statement") for the annual meeting
of shareholders to be held on June 4, 1997.
Item 11. Executive Compensation
APS incorporates by reference the information set forth under the caption
"Executive Compensation" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The Company incorporates by reference the information set forth under the
caption "Beneficial Stock Ownership" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The Company incorporates by reference the information set forth under the
caption "Certain Transactions" of the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) 1. Financial Statements
The financial statements and supplementary data set forth in Part
II of the 10-K Annual Report are incorporated herein by
reference.
2. Financial Statement Schedules
Schedule II Valuation Accounts
All other schedules have been omitted because the information is
not required or is not so material as to require submission of
the schedule, or because the information is included in the
financial statements or the notes thereto.
3. Exhibits
3-A-Copy of Registrant's Certificate of Incorporation. (1)
3-B-Copy of Registrant's Bylaws. (1)
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March
5, 1997 (9)*
10-E-Lease Agreement between Registrant and Metropolitan Life
Insurance Company for lease of Registrant's executive offices
in Redwood City dated as of November 17, 1997.
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P-Warrant to Purchase Common Stock. (5)
10-S-Lease Agreement between Registrant and Financing for Science
International dated September 1, 1995 (6)
10-T-Security and Loan Agreement between Registrant and Venture
Lending dated September 27, 1995 (6)
10-U-Asset Purchase Agreement with Dow Corning Corporation dated
January 23, 1996 (7)
10-V-Investment Agreement between Registrant and the Lander
Company. (8)
10-W-License, Assignment and Supply Agreement between Registrant
and Lander Company.
21-Proxy Statement for the Annual Meeting of Shareholders. (4)
23-Consent of Independent Auditors.
27-Financial Data Schedule
(b) Reports on Form 8-K
None.
(c) Exhibits
The Company hereby files as part of this Form 10-K the exhibits listed
in Item 14(a)3. As set forth above.
(d) Financial Statement Schedules
See Item 14(a)2. of this Form 10-K.
- --------------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Registration Statement on Form S-1 (Registration No. 33-15429) and
incorporated herein by reference.
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 33- 50640), and incorporated herein by
reference.
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(4)To be filed supplementally.
(5)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3 and
4.4 to Registrant's Registration Statement on Form S-3 (Registration
No.33-82562) and incorporated herein by reference.
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995.
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference.
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1996, and incorporated herein by referenced.
(9)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on
Form s-8 (Registration No. 333-35151), and incorporated herein by
reference.
* Management Contract or Compensatory plans.
For purposes of complying with the amendments to the rules governing
Registration Statements on Form S-8 (effective July 13, 1990) under the
Securities Act of 1933 ("the Act"), as amended, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into Part II of the registrant's Registration Statements on Form
S-8 Nos. 33-18942, 33-21829, 33-29084 and 33-50640 filed on December 8,
1987, May 13, 1988, June 6, 1989 and August 11, 1992, respectively.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
By: /s/John J. Meakem, Jr.
----------------------------------------------
John J. Meakem, Jr.
Chairman, President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following person in the capacities and on the
dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------------------------------
/S/ John J. Meakem, Jr. Chairman, President,
- --------------------------- Chief Executive Officer March 28, 1997
John J. Meakem, Jr. ---------------
/S/ Michael O'Connell Executive Vice President, Chief
- --------------------------- Administrative Officer and
Michael O'Connell Chief Financial Officer March 28, 1997
--------------
/S/ Carl Ehmann Director March 28, 1997
- --------------------------- --------------
Carl Ehmann
/S/ Jorge Heller Director March 28, 1997
- --------------------------- --------------
Jorge Heller
/S/ Peter Riepenhausen Director March 28, 1997
- --------------------------- --------------
Peter Riepenhausen
/S/ Toby Rosenblatt Director March 28, 1997
- --------------------------- --------------
Toby Rosenblatt
/S/ Gregory H. Turnbull Director March 28, 1997
- --------------------------- --------------
Gregory H. Turnbull
/S/ C. Anthony Wainwright Director March 28, 1997
- ---------------------------
Signature Title Date
- --------------------------------------------------------------------------
/S/ John J. Meakem, Jr. Chairman, President,
- ------------------------- Chief Executive Officer March 27, 1998
John J. Meakem, Jr. --------------
/S/ Michael O'Connell Executive Vice President,
- ------------------------- Chief Administrative Officer and
Michael O'Connell Chief Financial Officer March 27, 1998
--------------
/S/ Carl Ehmann Director March 27, 1998
- ------------------------- --------------
Carl Ehmann
/S/ Jorge Heller Director March 27, 1998
- ------------------------- --------------
Jorge Heller
/S/ Peter Riepenhausen Director March 27, 1998
- ------------------------- --------------
Peter Riepenhausen
/S/ Toby Rosenblatt Director March 27, 1998
- ------------------------- --------------
Toby Rosenblatt
/S/ Gregory H. Turnbull Director March 27, 1998
- ------------------------- --------------
Gregory H. Turnbull
/S/ C. Anthony Wainwright Director March 27, 1998
- ------------------------- --------------
C. Anthony Wainwright
/S/ Dennis Winger Director March 28, 1997
- --------------------------- -------------- Dennis Winger Director March 27, 1998
- ------------------------- --------------
Dennis Winger
32
ADVANCED POLYMER SYSTEMS, INC.
Schedule II
Valuation Accounts
Additions
Beginning Charged to Ending
Balance Expense Deductions Balance
- --------------------------------------------------------------------------------------------------------
December 31, 1994
Accounts receivable, allowance
for doubtful accounts $136,020 $5,833 $75,289 $66,564
December 31, 1995
Accounts receivable, allowance
for doubtful accounts $66,564 $29,464 $27,378 $68,650
December 31, 1996
Accounts receivable, allowance
for doubtful accounts $68,650 $9,331 $30,454 $47,527
33
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-18942, 33-21829, 33-29084 and 33-50640) on Forms S-8 of Advanced Polymer
Systems, Inc. and in the Registration Statements (Nos. 33-47399, 33-51326,
33-82562, 33-88972 and 333-759) on Forms S-3 of Advanced Polymer Systems, Inc.
of our report dated March 5, 1997, relating to the consolidated balance sheets
of Advanced Polymer Systems, Inc. and subsidiaries as ofEnding
Balance Expense Deductions Balance
- ---------------------------------------------------------------------------
December 31, 1995
Accounts receivable, allowance
for doubtful accounts $66,564 29,464 27,378 68,650
December 31, 1996
and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flowsAccounts receivable, allowance
for each of the years in the three-year period endeddoubtful accounts 68,650 9,331 30,454 47,527
December 31, 1996, and the related schedule, which report appears in the
December 31, 1996 annual report on Form 10-K of Advanced Polymer Systems, Inc.
KPMG Peat Marwick LLP
San Francisco, California
March 26, 1997
34
EXHIBIT INDEX
Form 10-K Annual Report
ADVANCED POLYMER SYSTEMS, INC.
3-A -Copy of Registrant's Certificate of Incorporation. (1)
3-B -Copy of Registrant's Bylaws. (1)
10-B -Lease Agreement between the Registrant a nd White Properties
Joint VentureAccounts receivable, allowance
for lease of Registrant's executive offices in
Redwood City, dated as of August 1, 1992. (3)
10-C -Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-N -Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P -Warrant to Purchase Common Stock. (5)
10-S -Lease Agreement between Registrant and Financing for Science
International dated September 1, 1995 (6)
10-T -Security and Loan Agreement between Registrant and Venture
Lending dated September 27, 1995 (6)
10-U -Asset Purchase Agreement with Dow Corning Corporation dated
January 23, 1996.doubtful accounts 47,527 22,967 13,041 57,453
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Advanced Polymer Systems, Inc.:
We consent to incorporation by reference in the Registration Statements
(Nos. 33-18942, 33-21829, 33-29084, 33-50640 and 333-35151) on Forms S-8
of Advanced Polymer Systems, Inc. and in the Registration Statements (Nos.
33-47399, 33-51326, 33-82562, 33-88972 and 333-759) on Forms S-3 of
Advanced Polymer Systems, Inc. of our report dated March 6, 1998, relating
to the consolidated balance sheets of Advanced Polymer Systems, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1997,
and the related schedule, which report appears in the December 31, 1997
annual report on Form 10-K of Advanced Polymer Systems, Inc.
/s/KPMG Peat Marwick LLP
San Francisco, California
March 27, 1998
EXHIBIT INDEX
Form 10-K Annual Report
3-A-Copy of Registrant's Certificate of Incorporation. (1)
3-B-Copy of Registrant's Bylaws. (1)
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March 5, 1997
(9)*
10-E-Lease Agreement between Registrant and Metropolitan Life Insurance
Company for lease of Registrant's executive offices in Redwood City
dated as of November 17, 1997.
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P-Warrant to Purchase Common Stock. (5)
10-S-Lease Agreement between Registrant and Financing for Science
International dated September 1, 1995 (6)
10-T-Security and Loan Agreement between Registrant and Venture Lending
dated September 27, 1995 (6)
10-U-Asset Purchase Agreement with Dow Corning Corporation dated January
23, 1996 (7)
10-V-Investment Agreement between Registrant and the Lander Company. (8)
10-W-License, Assignment and Supply Agreement between Registrant and
Lander Company.
21-Proxy Statement for the Annual Meeting of Shareholders. (4)
23-Consent of Independent Auditors.
27-Financial Data Schedules
- --------------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Registration Statement on Form S-1 (Registration No. 33-15429) and
incorporated herein by reference.
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 33- 50640), and incorporated herein by
reference.
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(4)To be filed supplementally.
(5)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3 and 4.4
to Registrant's Registration Statement on Form S-3 (Registration
No.33-82562) and incorporated herein by reference.
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1995.
(7)
10-V -Investment Agreement between Registrant and Lander Company.
(8)
10-W -License, Assignment and Supply Agreement between Registrant
and Lander Company.
21 -Proxy Statement for the Annual Meeting of Shareholders. (4)
23 -Consent of Independent Auditors.
27 -Financial Data Schedules
- --------------------------------------------------------------------------------
(1) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Registration Statement on Form S-1 (Registration
No. 33-15429) and incorporated herein by reference.
(2) Filed as Exhibit No. 28.1 to Registrant's Registration
Statement on Form S-8 (Registration No. 33-50640), and
incorporated herein by reference.
(3) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, and incorporated herein by reference.
(4) To be filed supplementally.
(5) Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3
and 4.4 to Registrant's Registration Statement on Form S-3
(Registration No.33-82562) and incorporated herein by
reference.
(6) Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995, and incorporated herein by
reference.
(7) Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference.
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1996, and incorporated herein by referenced.
(9)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on
Form s-8 (Registration No. 333-35151), and incorporated herein by
reference.
* Management Contract or Compensatory plans.