SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)2)
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 0-16109
ADVANCED POLYMER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2875566
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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: (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]
---
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of April 22,February 28, 1999, was $72,900,410.$64,091,712.
(1)
As of April 22,February 28, 1999, 20,068,11319,993,311 shares of registrant's Common Stock,
$.01 par value, were outstanding.
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(1)Excludes 6,505,2466,500,319 shares held by directors, officers and shareholders
whose ownership exceeds 5% of the outstanding shares at April 22,February 28,
1999. Exclusion of such shares should not be construed as indicating
that the holders thereof possess the power, directly or 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
Form
10-K
Document Part
- -------- ----
Definitive Proxy Statement to be used
in connection with the Annual Meeting
of Stockholders. III
TABLE OF CONTENTS
PART IIIII
ITEM 10. Directors6. Selected Financial Data
ITEM 7. Management's Discussion and Executive OfficersAnalysis of the RegistrantFinancial
Condition and Results of Operations
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners8. Financial Statements and Management
ITEM 13. Certain Relationships and Related TransactionsSupplementary Data
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Signatures
The accompanying information in Items 6, 7 and 8 has been restated to
reflect a change in accounting for license fees. See footnote 17 to Item
8, financial statements.
Part III
Item 10. Directors and Executive Officers of the Registrant6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
DIRECTORS
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCEFor the Years Ended and as of
December 31 1998 1997 1996 1995 1994
- ----------------------- --- --------------------- --------
John J. Meakem, Jr. 62 Chairman, President and CEO 1991
Carl Ehmann, M.D. (3) 56 Director 1994
Jorge Heller, Ph.D. (3) 71 Director 1991
Peter Riepenhausen (2) 62 Director 1991
Toby Rosenblatt--------------------------------------------------------------------------------
(As Restated (1)(2) 60 Director 1983
Gregory H. Turnbull (1) 60 Director 1986
C. Anthony Wainwright (2) 65 Director 1996
Dennis Winger (1) 51 Director 1993
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(1) Member of the Finance and Audit Committee of the Board.
(2) Member of the Compensation and Stock Option Committee of the
Board.
(3) Member of the Science Oversight Committee of the Board.
EXECUTIVE OFFICERS
NAME AGE POSITION WITH COMPANY
- ----------------------- --- ---------------------
Michael O'Connell 49 Executive Vice President,
Chief Financial and
Administrative Officer of
Company, President of
Pharmaceutical Sciences
Les Riley 54 Senior Vice President;
President of Dermatology
and Skin Care
Subhash Saxena, Ph.D 52 Senior Vice President,
Research and Development/
Regulatory Affairs
John J. Meakem, Jr. -- chief executive officer and president of APS since
June 1991, director since July 1991; chairman of APS board of directors since
March 1993; chairman of Premier, Inc., a privately held company, from 1986
until its acquisition by APS in 1993. From 1970 to 1986, Mr. Meakem was with
Combe, Inc. and served as corporate executive vice president and president of
Combe, North America. Prior to that Mr. Meakem was vice president of
Richardson-Vicks, Inc.
Carl Ehmann, M.D., F.A.C.P. -- director of APS since June 1994. Dr.
Ehmann currently serves as Group Director, Global Research and Development of
Reckitt & Colman plc. Formerly, he was executive vice president - research
and development of R.J. Reynolds Tobacco Company where he also served as a
member of the executive and operating committee from 1992 until 1996. From
1987 until 1992, he was executive vice president of research and development
at Johnson & Johnson Consumer Products, Inc.
Jorge Heller, Ph.D. -- director of APS since April 1991. Dr. Heller is a
full time consultant to the Company and its Chief Scientist. Prior to
joining the Company, Dr. Heller was director of the controlled release and
biomedical polymers program at SRI International until January 1994, where he
was a staff member since 1974. He is also adjunct professor of pharmacy at
the University of California, San Francisco, and at the University of Utah.
He is editor of the Journal of Controlled Release and past president of the
Controlled Release Society.
Peter Riepenhausen -- director of APS since April 1991. Mr. Riepenhausen
is currently a business consultant. He was president and chief executive
officer of ReSound Corporation from 1994 to 1998. He serves as a director of
Weru A.G. He also served as a director of Caradon (Europe) plc from April
1994 until September 1998. He served as vice chairman of the board of
directors of The Cooper Companies, Inc. from January, 1987 until September,
1989, and from January, 1984 until December, 1986 he was executive vice
president of The Cooper Companies, Inc. Mr. Riepenhausen has also held
executive positions with Blendax-Werke R. Schneider GmbH & Co. of West
Germany and Pepsico, Inc.
Toby Rosenblatt -- director of APS since September, 1983. Mr. Rosenblatt
is president of The Glen Ellen Company and vice president of Founders
Investments, Ltd. Both companies are involved in private investment
activities. Mr. Rosenblatt also serves as a director of State Street
Research Mutual Funds and is a trustee of numerous civic and educational
institutions.
Gregory H. Turnbull -- director of APS since February, 1986. Mr. Turnbull
is currently a business consultant and a director of Planar Systems, Inc.
Previously, he was a general partner of Cable & Howse Ventures, a venture
capital organization which he first joined in 1983, and of which he is
currently a special limited partner. Prior to his work as a venture
capitalist, Mr. Turnbull was an investment banker for 15 years with Morgan
Stanley & Co. and White Weld & Co.
Charles Anthony Wainwright -- director of APS since November 1996. Mr.
Wainwright is currently vice chairman of McKinney & Silver, a national
advertising agency and a director of the following companies: Gibson
Greetings, American Woodmark Corp., Del Webb Corp., Caribiner Corp., and
Marketing Services Group, Inc. He was the chairman of Harris Drury Cohen
from 1995 until early 1997 and from 1990 to 1995, he was the chairman of
Compton Partners, Saatchi & Saatchi. He was also the president and chief
operating officer of the Bloom Companies from 1980 until 1989.
Dennis Winger -- director of APS since February 1993. Mr. Winger is
senior vice president and chief financial officer of Perkin-Elmer
Corporation. From 1989 to 1997, Mr. Winger was senior vice president,
finance and administration and chief financial officer of Chiron
Corporation. He was also a member of Chiron's Strategy Committee.
Prior to joining Chiron, Mr. Winger held a series of financial
positions at The Cooper Companies, Inc., including chief financial
officer.
Michael O'Connell - chief financial officer of APS since July 1992; senior
vice president and chief administrative officer since 1993; executive vice
president and president of APS' Pharmaceutical Sciences since 1998. From
1980 to 1992, he held various positions with The Cooper Companies including
vice president, finance and corporate controller from 1989 to 1991, vice
president, finance and administration of Coopervision Surgical from 1987 to
1989 and vice president, finance and administration of Coopervision
International from 1986 to 1987.
Les Riley - senior vice president of APS and president of APS' Dermatology
and Skin Care since January 1996. From 1993 to 1995, he was the chief
executive officer and president of Tristrata Incorporated ("Tristrata"), a
member of the board of directors of Neostrata Company ("Neostrata") a
subsidiary of Tristrata, and chief executive officer of Neostrata. From 1976
to 1993, he held various positions with Ortho Pharmaceutical Corporation
where he was president of the Dermatology Division from 1991 to 1993 in
addition to being a member of the Board of Directors.
Subhash J. Saxena, Ph.D. - senior vice president of research and
development/regulatory affairs of APS since 1998; vice president of research
and development/regulatory affairs of APS since 1994; director of
pharmaceutical sciences of APS since 1988. From 1983 to 1988, he was a
director of research and development for VLI Corporation.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------ -------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL
SALARY BONUS AWARDS OPTIONS OTHER
NAME AND POSITION YEAR ($)
($) ($)(1) (#) COMPENSATION
- ----------------- ---- ------ ------- ------ ------- -----------------------------------------------------------
John J. Meakem, Jr. 1998 373,654 0 359,400 198,000 4,800(2)
Chairman, President 1997 339,635 100,000 0 50,000 4,569(2)Statements of Operations Data
- -----------------------------
Product revenues $13,637 12,442 6,138 5,803 5,093
Royalties, license fees and
Chief Executive 1996 324,693 0 0 0 4,500(2)
Officer
Michael O'Connell 1998 235,616 0 119,800 110,000 4,800(2)
Executive Vice 1997 211,769 56,000 0 40,000 4,750(2)
President, Chief 1996 195,962 10,000 0 40,000 4,500(2)R&D fees 6,984 3,266 1,056 451 508
Consumer products -- -- 10,468 9,104 9,389
Milestone payments -- 1,500 -- 750 --
Cost of sales 7,127 7,164 10,772 11,047 10,149
Research and development, net 4,382 3,740 3,506 4,139 6,334
Selling, marketing and
advertising 2,999 3,806 8,455 6,560 5,669
General and administrative 3,009 3,552 2,984 3,082 2,844
Loss on purchase commitment,
including related inventory -- -- 1,400 600 685
Net income (loss) 2,525 (1,808) (10,381) (9,359) (10,653)
Basic earnings (loss) per
common share 0.13 (0.10) (0.58) (0.57) (0.71)
Diluted earnings (loss) per
common share 0.12 (0.10) (0.58) (0.57) (0.71)
Weighted average common
shares outstanding - basic 19,854 18,779 17,987 16,459 15,018
Weighted average common
shares outstanding - diluted 20,381 19,815 19,494 16,953 15,401
Balance Sheet Data
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Working capital $ 4,760 5,151 3,860 5,725 5,641
Total assets 23,081 24,180 18,444 23,082 23,508
Long-term debt, excluding
current portion -- 3,055 5,579 6,355 979
Shareholders' equity 9,036 4,113 7 1,233 7,786
(1) See footnote 17 to Item 8, Financial and
Administrative
Officer; President
of Pharmaceutical
Sciences
Les Riley 1998 235,616 0 119,800 75,000 4,800(2)
Senior Vice 1997 211,769 56,000 0 40,000 169,799(3)
President, President 1996 190,769 10,000 0 125,000 3,249(2)
of Dermatology and
Skin Care
Subhash Saxena, Ph.D. 1998 188,077 0 0 70,000 4,800(2)
Senior Vice 1997 166,731 37,500 0 20,000 4,560(2)
President, Research 1996 137,846 5,000 0 20,000 4,285(2)
and Development/
Regulatory Affairs
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(1)Statements. The dollar value of restricted stock awards net of consideration paid byabove five-year
summary reflects the named executive officer was calculated using the closing market pricecumulative effect of the Company's Common Stock on daterestatement as of January 1,
1992.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations(Dollar amounts are rounded to
nearest thousand)
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.
STATEMENTS OF OPERATIONS HIGHLIGHTS (in thousands)
- --------------------------------------------------
For the restricted stock award was
granted. Each restricted stock award provides that for a period of three
years after the award of restricted stock, the recipient may not sell,
assign, transfer, pledge or otherwise encumber the shares of restricted
stock. Any cash dividends with respect to shares of restricted stock are
automatically reinvested in additional shares of restricted stock. Each
restricted stock award provides that if the employee should leave the
employ of the Company prior to three years from the date of award, unless
waived by the administrator of the plan under certain circumstances, the
Company will have the right to repurchase the restricted stock at their
original purchase price of $.01 per share. As ofYears Ended December 31, Annual % Change
-------------------------------- ---------------
1998 the
Company had a total of 100,000 shares of restricted stock outstanding
with an aggregate value of $537,500 based on the value of the Company's
shares at December 31, 1998.
(2) The stated amounts are Company matching contributions to the Advanced
Polymer Systems Salary Reduction Profit Sharing Plan. In 1998, 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 $4,800.
(3) This amount consists of $165,349 in relocation costs that were taxable to
Mr. Riley in 1997 and $4,450 in Company matching contribution to the
Advanced Polymer Systems Salary Reduction Profit Sharing Plan. See note
(2) above.
The following table sets forth certain information with respect to options
granted during 1998 to the executive officers named in the Summary
Compensation Table.
STOCK OPTION GRANTS IN 1998
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------- --------------------
%
OF
TOTAL
OPTIONS
NUMBER OF GRANTED
SECURITIES TO
UNDERLYING EMPLOYEES
OPTIONS IN EXERCISE
GRANTED FISCAL PRICE EXPIRATION
NAME (#)(2) YEAR ($/SH) DATE 5%($1996 98/97 97/96
------ ------ ------ ----- -----
(As Restated (1))
10%($)
- -------------------- --------- ---- ------ -------- ------- -----------------------------------------------------
John J. Meakem, Jr. 60,000 8.5 $7.000 03/06/08 264,136 669,372
95,000 13.5 $4.188 10/20/08 250,212 634,086
43,000 6.1 $4.625 12/16/08 125,071 316,956
Michael P.J. O'Connell 20,000 2.8 $6.375 01/13/08 80,184 203,202
60,000 8.5 $4.188 10/20/08 158,029 400,476
30,000 4.2 $4.625 12/16/08 87,259 221,132
Les Riley 20,000 2.8 $6.375 01/13/08 80,184 203,202
25,000 3.6 $4.188 10/20/08 65,845 166,865
30,000 4.3 $4.625 12/16/08 87,259 221,132
Subhash Saxena, Ph.D. 20,000 2.8 $6.000 06/23/08 75,467 191,249
30,000 4.3 $4.188 10/20/08 79,014 200,238
20,000 2.8 $4.625 12/16/08 58,173 147,421Product revenues $13,637 12,442 6,138 10% 103%
Royalties, license fees and
R&D fees 6,984 3,266 1,056 114% 209%
Consumer products -- -- 10,468 --% (100%)
Milestone payment -- 1,500 -- (100%) --%
------ ------ ------ ----- -----
Total revenues 20,621 17,208 17,662 20% (3%)
Cost of sales 7,127 7,164 10,772 (1%) (33%)
Research and development, net 4,382 3,740 3,506 17% 7%
Selling and marketing 2,999 3,806 5,405 (21%) (30%)
Advertising and promotion -- -- 3,050 --% (100%)
General and administrative 3,009 3,552 2,984 (15%) 19%
Loss on purchase commitments,
Including related inventory -- -- 1,400 --% (100%)
1998 1997 1996
---- ---- ----
Expenses expressed as a percentage
of total revenues:
Cost of sales 35% 42% 61%
Research and development, net 21% 22% 20%
Selling and marketing 15% 22% 31%
Advertising and promotion -- -- 17%
General and administrative 15% 21% 17%
Loss on purchase commitments,
including related inventory -- -- 8%
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(1) Potential realizable value is based on an assumption thatSee footnote 17 to Item 8, Financial Statements. Subsequent to the
priceissuance of the Common Stock appreciates atCompany's 1998 financial statements and the annual rate shown
(compounded annually)
from the datefiling of grant until the end of the ten year option term.
The numbers are calculated based on the requirements promulgated byits
1998 Form 10-K with the Securities and Exchange Commission ("SEC")(SEC), and
do notfollowing discussions with the staff of the SEC concerning its review of the
Company's financial statements, APS decided to restate its financial
statements for fiscal years ended December 31, 1992 through 1998. The
statements of operations highlights reflect the Company's estimatecumulative effect of future stock price growth.
(2)the
restatement as of December 31, 1995. The options granted underaccompanying consolidated financial
statements for the years ended December 31, 1998, 1997 and 1996 included in
Item 8 present restated results to reflect a change in accounting such that
license fees are amortized over the estimated life of the product to which
they relate. In prior presentations, the Company recognized as earned
license fees which were non-refundable and not subject to material
contingencies or commitments. The change results in a difference in the
timing of revenue recognition of license fees and has no effect on the
Company's 1992 Stock Plan typically vest
over 4 years at 25% annually. Payments on exercise, including any taxes
the Company is required to withhold, may be made in cash by a full
recourse promissory note or by tender of shares. Options are granted at
fair market value on the date of grant.flows.
The following table sets forth certain information with respect to options exercised during 1998 and the value
of options held at fiscal year end by the executive officers named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 1998 YEAR-END AT FISCAL YEAR END (2)
------------------------- --------------------------
SHARES
ACQUIRED
UPON
OPTION VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)(1) (#) (#) ($) ($)
- --------------------- -------- -------- ----------- ------------- ----------- ------------
John J. Meakem, Jr. 20,000 100,938 625,081 225,833 189,903 115,369
Michael P.J. O'Connell 0 0 330,833 119,167 74,216 71,689
Les Riley 0 0 151,146 88,854 22,500 29,675
Subhash Saxena, Ph.D 0 0 139,667 70,833 55,000 35,923
- ---------------
(1) Market value of underlying securities at exercise less the exercise price.
(2) Market value of underlying securities at fiscal year-end minus the
exercise price of "in-the-money" options.
Item 12. Security Ownership
Results of Certain Beneficial OwnersOperations for the years ended December 31, 1998 and Management
The following table sets forth beneficial Common Stock ownership as of April
22, 1999, by (i) each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director
and each executive officer named in the Summary Compensation Table above, and
(iii) all executive officers and directors as a group. Each person has sole
investment and voting power with respect to the shares indicated, subject to
community property laws where applicable and except as otherwise set forth in
the footnotes to the table.
NUMBER PERCENT
OF OF
NAME SHARES(1) CLASS(1)
- ------------------------------------------- --------- --------
Carl Ehmann, M.D., F.A.C.P.(2) 67,686 *
Jorge Heller, Ph.D.(3) 100,686 *
John J. Meakem, Jr.(4) 905,967 4.4
Michael O'Connell(5) 371,526 1.8
Peter Riepenhausen(6) 93,686 *
Les Riley(7) 194,098 1.0
Toby Rosenblatt(8) 266,212 1.3
Subhash Saxena, Ph.D.(9) 149,912 *
Gregory H. Turnbull(10) 75,686 *
C. Anthony Wainwright(11) 24,186 *
Dennis Winger(12) 75,686 *
Johnson & Johnson Development Corporation(13) 1,332,101 6.6
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Citigroup, Inc.(14) 4,657,561 23.2
388 Greenwich Street
New York, NY 10013
Officers and Directors as a group(11 persons) 2,325,331 10.6
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)
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* Less than one percent.
(1) Assumes the exercise of all outstanding options and warrants
to purchase Common Stock held by such person or group to the
extent exercisable on or before June 22, 1999, and that no
other person has exercised any outstanding stock options.
(2) Includes 65,000 shares underlying presently exercisable
stock options.
(3) Includes 90,000 shares underlying presently exercisable
stock options.
(4) Includes 654,247 shares underlying presently exercisable
stock options.
(5) Includes 346,249 shares underlying presently exercisable
stock options.
(6) Includes 8,000 shares held as joint tenant with Mr.
Riepenhausen's spouse and 85,000 shares underlying presently
exercisable stock options.
(7) Includes 172,917 shares underlying presently exercisable
stock options.
(8) Includes 75,000 shares underlying presently exercisable
stock options.
(9) Includes 148,834 shares underlying presently exercisable
stock options.
(10) Includes 75,000 shares underlying presently exercisable
stock options.
(11) Includes 22,500 shares underlying presently exercisable
stock options.
(12) Includes 75,000 shares underlying presently exercisable
stock options.
(13) Based solely on information contained in a Schedule 13G
dated July 6, 1998.
(14) Based solely on information contained in a Schedule 13G
dated January 8, 1999, and includes 1,659,500 shares held by
Mutual Management Corporation and 2,998,061 shares held by
Solomon Smith Barney, Inc.
Item 13. Certain Relationships1997
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Except for statements of historical fact, the statements herein are
forward-looking and Related Transactionsare 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, risks of consummation of contemplated action to
maximize shareholder value (as to which there is no assurance) and other
risks described below or identified from time to time in the Company's
Securities and Exchange Commission filings.
The Company's revenues are derived principally from product sales, license
fees and royalties and R&D fees. Under strategic alliance arrangements
entered into with certain corporations, APS can receive an access/license
fee, milestone payments, commitments for future minimum purchases,
royalties based on third party product sales or a share of partners'
revenues, and revenues from the supply of Microsponge and Polytrap
systems. The Company entered into a three-year employment agreementis currently manufacturing and selling
Microsponge(R) delivery systems for use by customers in approximately 100
different skin care products.
These strategic alliances are intended to provide the Company with Mr. Meakem in
May 1993.the
marketing expertise and/or financial strength of other companies. In 1995,this
respect, the employment agreement was amendedCompany's periodic financial results are dependent upon the
degree of success of current collaborations and the Company's ability to
extend the term
for an additional three years and provide for automatic yearly extensions
thereafter unless written notice of its intention not to automatically extend
the agreement is given by either party and was further amended in April 1999
to includenegotiate acceptable collaborative agreements in the definitionfuture.
Product revenues for 1998 totaled $13,637,000, an increase of "change in control"$1,195,000
or 10% from the prior year. This increase resulted from the launches of a
change invariety of new cosmeceutical products incorporating the Microsponge system
technology.
Royalties, license fees and R&D fees increased by $3,718,000 or 114% from
the prior year to a majoritytotal of $6,984,000. Approximately 31% of the
Board of Directors discussed below. The employment agreement provides
that Mr. Meakem may electincrease is attributable to terminate his employment within stated periods
of a change in controlhigher R&D fees. Increased royalties
accounted for approximately 20% of the Companyincrease. The remaining 49% of the
increase is due to license fees from corporate partners for access to new
products and receivetermination of exclusive supply agreements that resulted in
recognition of the unamortized portion of the related license fees.
License fees totaled $2,555,000 in 1998, an amount equalincrease of $1,830,000 or 152%
from the prior year. Approximately $1,500,000 of the increase relates to
his
prior twelve months' salary and bonus, payablelicense fees for terminated or renegotiated supply agreements.
Total revenues for 1997 included a milestone payment of $1,500,000 from
Ortho upon receipt of marketing clearance from the FDA for Retin-A Micro
in February 1997.
Gross profit on product revenues for 1998 was $6,511,000, an increase of
$1,233,000 or 23% over the subsequent twelve
month period. Mr. Meakem is entitledprior year. The gross profit improvement was
mainly due to receive an amount equalincreased sales of higher margin proprietary cosmeceutical
products.
Research and development expenses increased by $642,000 or 17% to
twice his
prior twelve months' salary$4,382,000 due mainly to increased headcount, increased expenditure on new
technology and bonus ifexpenses resulting from the Company should terminate his
employment within stated periods of a change in control or if he electsmove to terminate his employment following a change in control if his position with
the Company is reduced in terms of responsibility or indicia of status.
"Change in control" under the agreement is defined to include an acquisition
of more than fifty percent of the outstanding shares of the Company or a
changenew facilities in the
majorityfirst quarter of 1998.
Selling and marketing expense decreased by $807,000 or 21% from the individuals who were members of the Board of
Directors in May 1993 (the "Initial Directors") plus any new directors who
were approved by a majority of the original Initial Directors and any new
directors who were so approved by them, but excluding any new director who
initially assumed officeprior
year to $2,999,000 primarily as a result of reduced headcount, reduced
outside services and one-time expenses related to the relocation of a
senior executive in the prior year.
General and administrative expenses decreased by $543,000 or 15% to
$3,009,000. This decrease was primarily attributable to a favorable
settlement of the lawsuit from Biosource and a reduction in a variety of
outside services.
Interest income decreased by $124,000 or 34% from the prior year due to
lower average cash balances. Interest expense decreased by $247,000 or
23% due mainly to scheduled principal repayments during the year.
Net income for 1998 was $2,525,000, an actualimprovement of $4,333,000 over the
prior year's net loss of $1,808,000.
Results of Operations for the years ended December 31, 1997 and 1996
- --------------------------------------------------------------------
Product revenues excluding revenues from consumer products for 1997
totaled $12,442,000, an increase of $6,305,000 or threatened contested
election103% over the prior
year. This increase resulted primarily from the launches of directors.
Asa variety of
April 26,new products incorporating the Microsponge(R) system technology by the
Company's marketing partners. These product launches included 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.
Royalties, license fees and R&D fees increased by $2,210,000 or 209% to
$3,266,000 due mainly to royalties received from Ortho on sales of Retin-
A(R) Micro(TM) and from Lander on sales of certain consumer products.
License fees received from new corporate partners for access to new
products also contributed to the increase.
Total revenues for 1997 of $17,208,000 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 Food and Drug Administration
("FDA") for Retin-A Micro in February 1997.
Total revenues of $17,662,000 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 as a percentage of total product revenues including consumer
products (in 1996), increased from 35% in 1996 to 42% in 1997. The
increase was primarily attributable to increased sales of higher margin
proprietary cosmeceutical products, the absence of consumer products 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 out-licensed
most of its consumer products to Lander Company in return for a royalty
stream. This also resulted in the elimination of spending on advertising
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 the Company continued to invest in the expansion of
its technology base.
General and administrative expense increased by $568,000 or 19% to
$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 $1,808,000 represented a decrease of 83% or
$8,573,000 from the year-ago loss of $10,381,000.
Capital Resources and Liquidity
- -------------------------------
Total assets as of December 31, 1998 were $23,081,000 compared with
$24,180,000 at December 31, 1997. Working capital decreased to $4,760,000
at December 31, 1998 from $5,151,000 at December 31, 1997 and cash and
cash equivalents decreased to $4,088,000 from $8,672,000. For the year
ended December 31, 1998, the Company's operating activities used
$1,548,000 of cash compared to $30,000 in the prior year. The Company
invested approximately $4,382,000 in product research and development and
$2,999,000 in selling and marketing the Company's products and
technologies.
Accounts receivable, net increased to $2,533,000 at December 31, 1998 from
$2,288,000 at December 31, 1997. Days sales outstanding increased to 68
days in 1998 from 67 days in 1997. Receivables from royalties, license
fees and R&D fees increased to $2,297,000 in 1998 from $1,100,000 in 1997
due mainly to an increase in related revenues and deferred revenues in the
fourth quarter of 1998. Royalty payments are not typically due from
customers until 45 days after the end of each quarter. Research and
development fees are typically billed at the end of each quarter.
Capital expenditures for the year ended December 31, 1998 totaled
$2,710,000 compared to $2,800,000 in the prior year. Capital expenditures
were incurred for 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 plant expansion has been
completed. Capital expenditures were also incurred for leasehold
improvements to the newly-leased corporate offices and research and
development facility in Redwood City and for replacement of non-Year 2000
compliant systems.
The Company has financed its operations, including technology and product
research and development, from amounts raised in debt and equity
financings, the sale of Microsponge and Polytrap delivery systems and
analytical standard products; payments received under licensing
agreements; and interest earned on short-term investments.
During 1998, the company received approximately $1,651,000 from the
exercise of approximately 310,000 warrants to purchase common stock which
had been issued in conjunction with a 1994 private placement.
In March 1999, the Company had an outstanding securedreceived a $4,000,000 term loan receivablewith a fixed
interest rate of $235,000 from John J. Meakem, Jr.13.87%. The loan is secured by the shares of
Company stock owned by Mr. Meakem. In 1998, the Company charged an interest
rate of 5% on this loan, which was intended to be equivalent to interest
earned by the Company on its short term investments. The rate of interest
was increased beginning March 1, 1999 to a rate equal to the Company's cost
of funds (approximately 13.87%) or, if lower, the highest rate permitted
under applicable law. The loan was approved by the Compensation and Stock
Option Committeeassets of the
Company's Board of Directors. Repaymentmanufacturing facility in Louisiana and a portion of the
Company's accounts receivable. Principal and interest payments are due in
equal monthly installments over a period of forty-eight months commencing
March 1999.
The term loan was obtained mainly to refinance the scheduled debt
repayments made in the first quarter of 1999.
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, royalties and research and
development fees are expected to be sufficient to meet the Company's
working capital requirements for the foreseeable future, assuming no
changes to existing business plans.
Year 2000
- ---------
The Company is due on or before December 31, 1999.
During 1998,conducting a comprehensive review of its internal computer
systems to ensure these systems are adequate to address the issues
expected to arise in connection with the Year 2000. These issues include
the possibility that software which uses only the last two digits to refer
to the year will no longer function properly for years that begin with 20
rather than 19. In addition, the Company paidis reviewing the status of its
customers and suppliers with regard to Dr. Carl Ehmann, Dr. Jorge Heller (who
consultsthis issue and assessing the
potential impact of non-compliance by such parties on the Company's
operations.
The Company has developed a phased program to address Year 2000 issues.
The first phase consists of identifying necessary changes to application
software used by the Company. The Company utilizes an integrated ERP
system for the majority of its manufacturing and financial systems and has
received the Year 2000 compliant version of the software from the vendor.
Implementation of the upgraded software was completed on September 30,
1998.
The second phase consists of determining whether Company systems not
addressed in Phase One (including non-IT systems) are Year 2000 compliant.
Identification of systems that are not Year 2000 compliant has been
completed. The Company is now in the process of upgrading or replacing
these systems. The Company expects to upgrade or replace these non-
compliant systems by the third quarter of 1999.
The third phase consists of determining the extent to which the Company
may be impacted by third parties' systems, which may not be Year 2000-
compliant. The Year 2000 computer issue creates risk for the Company from
third parties with whom the Company deals on financial transactions
worldwide. While the Company expects to complete efforts in the second
quarter of 1999, there can be no assurance that the systems of other
companies with which the Company deals or on which the Company's systems
rely will be converted on a full timetimely basis, and isor that any such failure to
convert by another company could not have an adverse effect on the
Company's Chief
Scientist), Peter Riepenhausen and Mr. C. Anthony Wainwright, all who are
directorsCompany.
Based on current estimates, management expects the total cost to remediate
non-compliant systems will be less than $650,000 (approximately $580,000
of which was incurred in 1998). Most of the costs incurred were for
purchases of new systems and related equipment. The estimate may change
materially as the Company for consulting services in their fieldscontinues to review and audit the result of expertise, the respective amounts of $3,000, $160,000, $7,500 and $4,500,
respectively. Payments for similar services in 1997 were $0, $144,999, $0
and $2,000, respectively, and in 1996 were $0, $127,000, $0 and $0,
respectively.its
work. The Company expects to fund all costs to upgrade or replace systems
that are not Year 2000-compliant through operating cash flows.
The Company has entered into agreements with Biosource Technologies, Inc.
("Biosource") of which Toby Rosenblatt is a stockholder and a former
director. All agreements between APS and Biosource have been, and will
continuenot yet determined its most likely worst case Year 2000
scenario. Potential Year 2000 scenarios are going to be considered in the
Company's contingency plans.
The Company is currently in the process of developing formal contingency
plans for addressing any problems which may result if the work performed
in phase two and approvedthree do not successfully resolve all issues by the Year
2000. The Company expects to complete its contingency plans in the second
quarter of 1999.
Failure to complete any necessary remediation by the Year 2000 may have a
votematerial adverse impact on the operations of the disinterested
directors. The agreements provided APS worldwide rightsCompany. Failure of
third parties, such as customers and suppliers, to useremediate Year 2000
problems in their IT and sell
Biosource's biologically-synthesized melaninnon-IT systems would also have a material adverse
impact on the operations of the Company.
New Accounting Standards
- ------------------------
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. Currently the Company
operates in Microsponge(R) systemsa single segment.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) which will be effective for
all sun protection, cosmetic, ethical dermatologyfiscal quarters of fiscal years beginning after June 15, 1999. SFAS
133 establishes accounting and over-the-counter skin
care purposes. In return, APS was requiredreporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS
133 generally provides for matching the timing of gain or loss recognition
on the hedging instrument with the recognition of (a) the changes in the
fair value of the hedged asset or liability that are attributed to make annual minimum purchasesthe
hedged risk or (b) the earnings effect of melanin, pay royaltieshedged forecasted transactions.
Earlier application of all provisions of this statement is encouraged but
it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of this statement. The Company anticipates that adoption
of this statement will not have a material effect on salesthe consolidated
financial statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
- ---------------------------
December 31,
-------------------------
1998 1997
---- ----
(As Restated - See Note 17)
Assets
Current Assets:
Cash and cash equivalents $ 4,088,173 8,672,021
Accounts receivable less allowance
for doubtful accounts of $96,284 and
$57,453 at December 31, 1998 and 1997,
respectively 2,532,527 2,288,297
Receivables for royalties, license fees
and R&D fees 2,296,852 1,100,368
Accrued interest receivable 3,801 13,606
Inventory 2,959,443 2,639,129
Advances to officers and employees 338,947 96,706
Prepaid expenses and other 592,599 430,839
---------- ----------
Total current assets 12,812,342 15,240,966
Property and equipment, net 8,643,856 6,771,173
Deferred loan costs, net 90,428 353,693
Prepaid license fees, net -- 82,880
Goodwill and other intangibles, net of
accumulated amortization of $1,286,873
and $1,102,480 at December 31, 1998
and 1997, respectively 1,351,813 1,477,542
Other long-term assets 182,892 254,180
---------- ----------
Total Assets $ 23,081,331 24,180,434
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 1,347,737 1,636,189
Accrued expenses 1,057,287 2,832,299
Accrued settlement liability 1,300,000 1,800,000
Current portion - long-term debt 3,055,460 2,523,389
Deferred revenue 1,291,540 1,297,970
---------- ----------
Total current liabilities 8,052,024 10,089,847
Deferred revenue - long-term 5,993,245 6,922,345
Long-term debt -- 3,055,460
---------- ----------
Total Liabilities 14,045,269 20,067,652
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, authorized 2,500,000
shares; none issued or outstanding at
December 31, 1998 and 1997 -- --
Common stock, $.01 par value,
authorized 50,000,000 shares; issued
and outstanding 19,993,311 and
19,464,821 at December 31, 1998 and
1997, respectively 199,933 194,648
Warrants, issued and outstanding:
196,538 at December 31, 1998 and
506,816 at December 31, 1997 497,192 983,192
Additional paid-in capital 84,206,508 81,327,554
Accumulated deficit (75,867,571) (78,392,612)
---------- ----------
Total Shareholders' Equity 9,036,062 4,112,782
---------- ----------
Total Liabilities and Shareholders'
Equity $ 23,081,331 24,180,434
========== ==========
See accompanying notes to consolidated financial statements.
Consolidated Statements of APS melanin-MicrospongeOperations
- -------------------------------------
For the Years Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(As Restated - See Note 17)
Revenues
Product revenues $13,637,093 12,441,484 6,138,094
Royalties, license fees and R&D
fees 6,983,702 3,266,095 1,055,935
Consumer products -- -- 10,467,512
Milestone payments -- 1,500,000 --
---------- ---------- ----------
Total revenues 20,620,795 17,207,579 17,661,541
Expenses
Cost of sales 7,126,573 7,164,120 10,771,766
Research and development, net 4,381,913 3,740,337 3,506,161
Selling and marketing 2,999,424 3,806,030 5,404,774
Advertising and promotion -- -- 3,050,180
General and administrative 3,009,488 3,551,977 2,984,213
Loss on purchase commitment,
including related inventory -- -- 1,400,000
---------- ---------- ----------
Operating income (loss) 3,103,397 (1,054,885) (9,455,553)
---------- ---------- ----------
Interest expense (805,364) (1,052,715) (1,223,303)
Interest income 246,260 370,478 322,986
Other expense, net (19,252) (71,119) (25,595)
---------- ---------- ----------
Income (loss) $ 2,525,041 (1,808,241) (10,381,465)
========== ========== ==========
Basic earnings (loss) per common
Share $ 0.13 (0.10) (0.58)
========== ========== ==========
Diluted earnings (loss) per
common share $ 0.12 (0.10) (0.58)
========== ========== ==========
Weighted average common shares
outstanding - basic 19,854,103 18,778,921 17,987,153
========== ========== ==========
Weighted average common shares
Outstanding - diluted 20,380,832 19,814,833 19,494,412
========== ========== ==========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------
For the Years Ended December 31, 1998, 1997 and was required1996
(As Restated - See Note 17)
Accumulated
Common Stock Additional Other
Common Stock Warrants Paid-In Comprehensive Accumulated Shareholders'
Shares Amount Shares Amount Capital Income Deficit Equity
----------- -------- --------- ---------- ----------- ---------- ------------ -----------
Balance, December 31,
1995 17,026,666 $170,267 1,628,611 $2,653,076 $64,600,516 $12,348 $(66,202,906) $1,233,301
---------- ------- --------- --------- ---------- ------- ---------- ----------
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 $62,149 in
offering costs 201,922 2,019 86,538 295,751 1,640,081 -- -- 1,937,851
Common stock to prepay $500,000be
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 royalties. For estimated losses on
purchase commitments and related inventory, the Company accrued $1,400,000$39,547
in 1996. All minimum financial commitments under the current agreements have
been expensed by APS. In 1996, APS paid Biosource the 1995 minimum purchase
commitment by issuingoffering 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 shares940 -- -- 599,060 -- -- 600,000
Securities issued in debt
financing arrangements 10,675 107 4,325 (50,935) 78,353 -- -- 27,525
Fair value of APS common stock. In
November 1997 Biosource filed a complaint againststock
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 -- -- --
Reclassification
adjustment for
unrealized holding
gains included
in net income -- -- -- -- -- (12,348) -- (12,348)
Net loss -- -- -- -- -- -- (10,381,465) (10,381,465)
---------- ------- --------- --------- ---------- ------- ---------- ----------
Balance December 31,
1996 18,359,744 $183,597 1,431,974 $2,457,692 $73,950,092 $ -- $(76,584,371) $ 7,010
---------- ------- --------- --------- ---------- ------- ---------- ----------
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 Company in the San
Mateo Superior Court alleging failure to make annual minimum purchases of
melanin and the Company cross complained. In December 1998, the Company
reached a settlement agreement with Biosource for a net amount of $1,300,000,
which consists of a $1,500,000 settlement of Biosource's claims and a
$200,000 settlement of the Company's cross claims.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) 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 5,14,545 145 -- -- 87,125 -- -- 87,270
Warrants exercised 925,158 9,252 (925,158) (1,474,500) 6,416,128 -- -- 4,950,880
Net loss -- -- -- -- -- -- (1,808,241) (1,808,241)
---------- ------- --------- --------- ---------- ------- ---------- ----------
Balance, December 31,
1997 (7)*
10-E-Lease Agreement between Registrant19,464,821 $194,648 506,816 $ 983,192 $81,327,554 $ -- $(78,392,612) $ 4,112,782
---------- ------- --------- --------- ---------- ------- ---------- ----------
Options exercised 79,598 796 -- -- 413,072 -- -- 413,868
Fair value of stock
options issued to
non-employees -- -- -- -- 42,200 -- -- 42,200
Restricted stock
awards 100,000 1,000 -- -- 99,857 -- -- 100,857
Common stock issued to
employees under the
Employee Stock Purchase
Plan 38,614 386 -- -- 190,249 -- -- 190,635
Warrants exercised 310,278 3,103 (310,278) (486,000) 2,133,576 -- -- 1,650,679
Net income -- -- -- -- -- -- 2,525,041 2,525,041
---------- ------- --------- --------- ---------- ------- ----------- ----------
Balance, December 31,
1998 19,993,311 $199,933 196,538 $ 497,192 $84,206,508 $ -- $(75,867,571) $ 9,036,062
========== ======= ========= ========= ========== ======= =========== ==========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
- --------------------------------------
For the Years Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(As Restated - See Note 17)
Cash flows from operating activities:
Net income (loss) $ 2,525,041 (1,808,241) (10,381,465)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and Metropolitan Life
Insuranceamortization 1,104,337 980,933 1,393,805
Provision for loss on purchase
commitments, including inventory -- -- 1,400,000
Allowance for doubtful accounts 38,830 22,967 9,331
Stock compensation awards to non-employees 42,200 96,757 161,299
Restricted stock awards 100,857 -- --
Amortization of deferred loan costs 263,265 263,265 215,366
Changes in operating assets and liabilities:
Accounts receivable (283,060) (1,286,817) 958,682
Receivables for royalties, license fees and
R&D fees (1,196,484) (458,667) (197,346)
Accrued interest receivable 9,805 (9,643) 12,510
Inventory (320,314) (554,056) 5,573,511
Advances to officers and employees (242,241) (3,727) (23,058)
Prepaid expenses and other (161,760) (199,753) 684,192
Assets held for sale -- -- (2,181,004)
Other long-term assets 71,288 (194,577) 129,425
Accounts payable and accrued expenses (2,063,464) 654,324 (6,075,821)
Accrued settlement liability (500,000) -- 1,200,000
Deferred revenue (935,530) 2,466,949 1,003,366
--------- --------- ----------
Net cash used in operating activities (1,547,230) (30,286) (6,117,207)
--------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment (2,709,747) (2,799,683) (719,640)
Purchases of intangible assets (58,664) (400,000) --
Proceeds from sale of equipment and
assets held for sale -- 2,181,004 --
Purchases of marketable securities -- -- (512,513)
Maturities and sales of marketable
securities -- -- 500,165
--------- --------- ----------
Net cash used in investing activities (2,768,411) (1,018,679) (731,988)
--------- --------- ----------
Cash flows from financing activities:
Repayment of long-term debt (2,523,389) (1,490,779) (870,598)
Proceeds from long-term debt and warrants -- -- 758,795
Proceeds from private placements, net of
offering costs -- -- 1,937,851
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 2,064,547 5,729,986 2,284,304
Proceeds from issuance of shares under
the employee Stock Purchase Plan 190,635 87,270 --
--------- --------- ----------
Net cash (used in) provided by financing
activities (268,207) 4,326,477 7,070,895
--------- --------- ----------
Net (decrease) increase in cash and cash
equivalents (4,583,848) 3,277,512 221,700
Cash and cash equivalents at the beginning
of the year 8,672,021 5,394,509 5,172,809
--------- --------- ----------
Cash and cash equivalents at the end of
the year $ 4,088,173 8,672,021 5,394,509
========= ========= =========
Cash paid in interest $ 559,664 790,379 893,239
========= ========= =========
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 lease200,000 shares of Registrant's executive
offices in Redwood City dated ascommon stock valued at $1,200,000.
During the first quarter of November 17, 1997. (9)
10-N-Agreement with Johnson & Johnson dated April 14, 1992.
(3)
10-P-Warrant to Purchase Common Stock. (4)
10-S-Lease Agreement between Registrant and Financing for
Science International dated September 1, 1995 (5)
10-V-Investment Agreement between Registrant and Lander
Company. (6)
10-W-License, Assignment and Supply Agreement between
Registrant and Lander Company. (8)
10-X-Employment Agreement between1996, the Registrant and John J.
Meakem, Jr., as amended. *
10-Y-Master Loan and Security Agreement with Finova Capital
Corporation dated March 29, 1999 with exhibits.
- -----------------------------------------------------------------------
(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-KCompany paid Biosource for the 1995 purchase commitment totaling
$600,000 by issuing 94,000 shares of common stock.
In 1996, the Company offset a deposit of approximately $188,000 with a creditor against a loan from the same
creditor (Note 8).
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------
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 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 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.
Subsequent to the issuance of the Company's 1998 financial statements and
the filing of its 1998 10-K with the Securities and Exchange Commission
("SEC"), and following discussions with the staff of the SEC concerning
its review of the Company's financial statements, APS decided to restate
its financial statements for all periods presented (Note 17).
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 7).
Prepaid License Fees
- --------------------
A fee paid to Biosource in 1992 was amortized over a seven-year period
consistent with the term of the agreement (Note 3). Amortization of
prepaid license fees totalled $82,880, $82,872 and $137,880 in 1998,
1997 and 1996, respectively. As of December 31, 1998, the prepaid
license fee has been fully amortized.
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" as
circumstances dictate, 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. 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 $184,392, $188,259 and
$279,756, in 1998, 1997 and 1996, 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 and restricted stock awards to employees, no compensation
cost has been recognized for the Company's fixed stock option plans and
stock purchase plan (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.
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 licensing agreements typically
require a non-refundable license fee and allow customers to sell the
Company's proprietary products in a specific field or territory. The
license agreements provide for APS to earn future revenue through
product sales and/or, in some cases, royalty payments. The license
fees are non-refundable even if the agreements are terminated before
their term or APS fails to supply product to the licensee. These
license fees are amortized on a straight-line basis over the estimated
life of the product to which they relate. When the customer fails to
meet applicable contract terms and product supply is no longer
required, any unamortized license fees are recognized as revenue.
Contractually required minimum royalties are recorded ratably
throughout the contractual period. Royalties in excess of minimum
royalties are recognized as earned when the related product is shipped
to the end customer by the Company's licensees based on information
received by the Company from its licensees.
A milestone payment is a payment made by a third party or corporate
partner to the Company upon the achievement of a predetermined
milestone as defined in a legally binding contract. Milestone payments
are recognized as revenue when the milestone event has occurred and the
Company has completed all milestone related services such that the
milestone payment is currently due and is non-refundable. In 1997, the
Company achieved a milestone payment with the receipt of marketing
clearance from the FDA for Retin-A(R) Micro(TM) (Note 15).
Fees from research and development activities are recognized as
revenues when earned and contract provisions are met. Such fees
(revenues) represent amounts paid to APS as reimbursement of costs
incurred in product development and clinical evaluation, including a
portion of overhead and administrative expenses. As a general policy,
revenues are not recognized if amounts received are refundable or the
Company has related future performance obligations.
Advertising and Promotion Costs
- -------------------------------
Advertising and promotion costs are expensed as incurred.
Earnings (Loss) Per Share
- -------------------------
The Company has adopted and retroactively applied the provisions of
Statement of Financial Accounting Standards No. 128 "Earnings per
Share" ("FAS 128") for all periods presented. FAS 128 requires the
Company to report both basic earnings per share, which is computed by
dividing net income by the weighted-average number of common shares
outstanding, and diluted earnings per share, which is computed by
dividing net income by the total of weighted-average number of common
shares outstanding and dilutive potential common shares outstanding
(Note 11).
Deferred Revenue
- ----------------
Non-refundable license fees received by the Company are reported as
deferred revenues and amortized over the estimated life of the product
to which they relate (Note 17).
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 also reported as
deferred revenues (Note 15). In accordance with the licensing
agreement, 25% of the royalties earned by APS are 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 65% and 51% of the recorded trade
receivables were concentrated with five and five customers in the
cosmetic and personal care industries as of December 31, 1998 and 1997,
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 1998.
Note 3 Related Party Transactions
The Company has entered into agreements with Biosource Technologies, Inc.
("Biosource") of which Toby Rosenblatt, a member of the Company's Board of
Directors, is a stockholder and a former director. 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
provided 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,$0 and
$1,400,000 in 1998, 1997 and 1996, 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. In December 1998, the Company reached a
settlement agreement with Biosource for a net amount of $1,300,000, which
consists of a $1,500,000 settlement of Biosource's claims and a $200,000
settlement of the Company's cross claims (Note 4). The Company's
consolidated financial statemements for the period ended December 31, 1998
include a favorable decrease in accrued settlement liability of $500,000
resulting from the settlement agreement.
As of December 31, 1998, the Company has an outstanding secured loan
receivable of $253,000 from an officer of the Company. The loan bears an
interest rate of approximately 5% and is secured by the shares of Company
stock owned by the officer. The loan was approved by the Compensation
Committee of the Company's Board of Directors. Repayment of the loan is
due by December 31, 1999.
Note 4 Legal Proceeding
In November, 1997 Biosource filed a complaint against the Company in the
San Mateo Superior Court. Biosource claimed damages from the Company on
the grounds that the Company had failed to pay certain minimum amounts
allegedly due under a contract for the supply of melanin.
In December 1998, the Company reached a settlement agreement with
Biosource for a net amount of $1,300,000, which consists of a $1,500,000
settlement of Biosource's claims and a $200,000 settlement of the
Company's cross claims. Pursuant to the agreement, the Company paid
Biosource $300,000 in January, 1999. The remaining $1,000,000 is payable
by any combination of cash and/or the issuance of shares of the Company's
Common Stock. The settlement agreement also provides for the termination
of the license and supply agreement between the parties.
Note 5 Cash Equivalents
All investments in debt securities have been classified as cash
equivalents in the accompanying balance sheets as they had original
maturities of 90 days or less.
At December 31, 1998 and 1997, the amortized cost and estimated market
value of investments in debt securities are set forth in the tables below:
December 31, 1998
--------------------------------
Estimated
Cost Marked Value
--------------------------------
Available-for-Sale:
Corporate debt securities $1,984,204 1,984,204
Other debt securities 152,119 152,119
--------- ---------
Totals $2,136,323 2,136,323
========= =========
December 31, 1997
--------------------------------
Estimated
Cost Market 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
========= =========
Note 6 Inventory
The major components of inventory are as follows:
December 31,
---------------------------
1998 1997
---- ----
Raw materials and work-in-process $ 743,383 834,496
Finished goods 2,216,060 1,804,633
--------- ---------
Total inventory $2,959,443 2,639,129
========= =========
Note 7 Property and Equipment
Property and equipment consist of the following:
December 31,
---------------------------
1998 1997
---------- ----------
Building $ 1,831,392 1,823,625
Land and improvements 163,519 163,519
Leasehold improvements 1,423,584 1,233,074
Furniture and equipment 14,504,305 13,001,437
---------- ----------
Total property and equipment 17,922,800 16,221,655
Accumulated depreciation
and amortization (9,278,944) (9,450,482)
---------- ----------
Property and equipment, net $ 8,643,856 6,771,173
========== ==========
Depreciation expense amounted to $837,064, $709,802 and $976,163 for the
years ended December 31, 1998, 1997, and 1996, respectively.
Note 8 Long-Term Debt
Long-term debt consists of the following:
December 31,
1992,--------------------
1998 1997
---- ----
Bank loan, interest payable monthly, principal
due in non-equal installments commencing
December 1, 1996 through March 1, 1999,
secured by the assets and incorporated hereinoperating cash
flow of a subsidiary of the Company and
guaranteed by reference.
(4)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3the Company $1,550,000 2,550,000
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 4.4 to Registrant's Registration Statement on Form S-3
(Registration No.33-82562)operating cash flows of a subsidiary of
the Company and incorporated hereinguaranteed by reference.
(5)Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Quarterly Report on Form 10-Qthe Company 852,500 1,402,500
Term loan, principal and interest due in equal
monthly installments commencing October 1996
through December 1999, secured by certain
real and personal property 652,960 1,626,349
--------- ---------
Total 3,055,460 5,578,849
Less current portion 3,055,460 2,523,389
--------- ---------
Long-term debt $ -- 3,055,460
========= =========
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 (7.75%
as of December 31, 1998). 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 a $1,650,000 term loan with a
syndicate of lenders and a fixed interest rate of 14%. The loan is also
secured by the assets and operating cash flows of a subsidiary of the
Company and guaranteed by the Company. The security interest of the debt
holders is subordinated to the bank loan's security interest.
In the third quarter of 1995, the Company consummated a transaction
whereby certain 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, 1998 and 1997. 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 1998,
1997 and 1996 approximated interest expense reflected in the Consolidated
Statements of Operations.
Note 9 Commitments
Lease Commitments: Total rental expense for property and equipment was
$1,019,534, $770,187 and $655,283 for 1998, 1997 and 1996, respectively.
The Company's future minimum lease payments under noncancellable operating
leases for facilities as of December 31, 1998, are as follows:
Years Ending Minimum
December 31, Payments
------------ -----------
1999 $ 768,279
2000 770,849
2001 747,455
2002 737,333
2003 675,135
Thereafter 573,474
----------
$4,272,525
==========
Note 10 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 15).
During 1997, 925,158 warrants issued in connection with a 1994 private
placement were exercised. In March 1998, the remaining 310,278 warrants
from the 1994 private placement were exercised.
In conjunction with certain debt financing agreements made in 1995 (Note
8), 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 expire on March 27, 2000.
In the first quarter of 1996, the Company formed a collaborative agreement
with Lander Company under which the Company received approximately
$2,961,000 in net proceeds from the sale of 356,761 shares of common
stock. The agreement also provided for licensing fees, research and
development funding and royalties on product sales.
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 stock option plans.
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 50 percent of eligible employees
participated in the Plan in 1998. Under the Plan, the Company issued
38,614 shares in 1998, 14,545 shares in 1997 and no shares in 1996. The
weighted average fair value of purchase rights granted during 1998 and
1997 were $1.65 and $2.77, respectively. The weighted average exercise
price of the purchase rights exercised during 1998 and 1997 were $3.83 and
$6.00, respectively. As of December 31, 1998, the Company had 346,841
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 1998, 1997 and 1996:
1998 1997 1996
----------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ------------------ --------------------
Outstanding at beginning
of year 2,947,755 $6.63 2,901,440 $6.46 2,972,324 $5.98
Granted 777,000 5.18 313,500 7.50 502,500 7.89
Exercised (79,598) 5.20 (165,374) 4.71 (416,219) 4.80
Expired or Cancelled (77,974) 7.83 (101,811) 8.36 (157,165) 6.25
--------- --------- ---------
Outstanding at end of year 3,567,183 6.32 2,947,755 6.63 2,901,440 6.46
========= ========= =========
Options exercisable at
year-end 2,698,960 2,259,683 1,945,056
Shares available for the quarterly
period ended September 30, 1995.
(6)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.
(7)Filed an Exhibit No. 99.1 to Registrant's Registration Statement
on Form S-8 (Registration No. 333-35151), and incorporated herein
by reference.
(8)Filed as an Exhibit with corresponding Exhibit No. to
Registrant's Annual Report on Form 10-K forfuture
grant at year end 293,269 358,295 569,984
Weighted-average fair
value of options granted
during the year $2.45 $4.25 $5.12
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Remaining Number Remaining
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/98 Life Price at 12/31/98 Price
- ----------- ----------- ----------- --------- ----------- ---------
$3.44-$5.25 1,205,490 6.8 years $ 4.55 875,285 $ 4.64
$5.38-$6.25 939,620 5.9 5.66 796,079 5.59
$6.38-$8.13 933,073 7.3 7.28 538,596 7.28
$9.25-$15.00 489,000 4.0 10.12 489,000 10.12
--------- ---------
$3.44-$15.00 3,567,183 6.3 6.32 2,698,960 6.44
========= =========
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 and restricted stock awards to 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 and restricted stock awards
to employees was $142,057, $96,800 and $161,300 for 1998, 1997 and 1996,
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:
1998 1997 1996
---- ---- ----
(As Restated - See Note 17)
---------------------------
Net income (loss)
- as reported $ 2,525,041 (1,808,241) (10,381,465)
Net income (loss)
- pro-forma 795,086 (3,135,399) (11,466,237)
Basic earnings (loss) per
common share 0.13 (0.10) (0.58)
Diluted earnings (loss) per
common share 0.12 (0.10) (0.58)
Basic earnings (loss) per
common share - pro-forma 0.04 (0.17) (0.64)
Diluted earnings (loss) per
common share - pro-forma 0.04 (0.17) (0.64)
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 1998, 1997 and
1996, respectively: dividend yield of 0 for all years; expected volatility
of 48 percent, 60 percent and 85 percent; risk-free interest rates of 4.7
percent, 5.7 percent and 6.1 percent; and expected life of five years, five
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. For purchase rights granted
in 1998, the multiple option approach with the following assumptions were
used for expected terms of six, twelve, eighteen and twenty-four months:
risk-free interest rate of 5.1%; volatility of 54%; and dividend yield of
zero. The purchase rights granted in 1997 were valued using 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 four
terms; and dividend yield of zero for all terms. There were no grants
under the stock purchase plan in 1996.
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.
Note 11 Earnings Per Share
In the fourth quarter of 1997, the Company adopted and retroactively applied
the requirements of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", to all periods presented. The following table sets
forth the computation of the Company's basic and diluted earnings (loss) per
share:
1998 1997 1996
---- ---- ----
(As Restated - See Note 17)
---------------------------
Net income (loss) (numerator) $ 2,525,041 (1,808,241) (10,381,465)
========== ========== ==========
Shares calculation (denominator):
Weighted average shares
outstanding - basic 19,854,103 18,778,921 17,987,153
Effect of dilutive securities:
Stock options and employee
stock purchase plan 381,518 634,655 859,767
Warrants 145,211 401,257 647,492
---------- ---------- ----------
Weighted average shares
outstanding - diluted 20,380,832 19,814,833 19,494,412
========== ========== ==========
Earnings (loss) per share -
basic 0.13 (0.10) (0.58)
========== ========== ==========
Earnings (loss) per share -
diluted 0.12 (0.10) (0.58)
========== ========== ==========
The following options with expiration dates ranging from December 18, 2001 to
June 10, 2008 were outstanding during the periods presented, but were not
included in the computation of diluted earnings per share since the exercise
prices of the options were greater than the average market price of the common
shares:
1998 1997 1996
---- ---- ----
Number outstanding 1,362,432 757,417 522,000
Range of exercise prices $6.81 - $15.00 $7.88 - $15.00 $9.25 - $11.13
Note 12 Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. For the years ended December 31, 1998 and 1997, comprehensive
income (loss) was the same as net income (loss). For the year ended
December 31, 1996, a reclassification adjustment for gains included in net
income is reported in the Statement of Shareholders' Equity.
Note 13 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 $4,800, $4,750 and $4,750 for the
1998, 1997 and 1996 calendar years, respectively. The Company may also
contribute additional discretionary amounts as it may determine. For the
years ended December 31, 1998, 1997 and 1996, the Company contributed to
the plan approximately $124,000, $110,000 and $110,000, respectively. No
discretionary contributions have been made to the plan since its inception.
Note 14 Income Taxes
A reconciliation of the federal statutory rate of 34% to the Company's
effective tax rate is as follows:
December 31
------------------------
1998 1997 1996
---- ---- ----
U.S. Federal statutory rate (benefit) 34.00% (34.00)% (34.00)%
State taxes, net of federal income
tax benefit -- -- --
Net losses without benefits -- 31.40 33.75
Utilization of temporary differences
for which no benefit was previously
recognized (34.76) -- --
Nondeductible expenses 0.76 2.60 0.25
----- ----- -----
Total tax expense (benefit) -- -- --
===== ===== =====
At December 31, 1998, the Company had net federal operating loss
carryforwards of approximately $73,400,000 for income tax reporting
purposes and California operating loss carryforwards of approximately
$3,460,000. The federal net operating losses expire beginning in 1999
through the year 2018. The California net operating loss carryforwards
expire beginning in 1999 through the year 2003. A federal net operating
loss carryforward from 1983 in the approximate amount of $147,000 expired
December 31, 1998. A California net operating loss carryforward from 1993
in the approximate amount of $370,000 expired on December 31, 1998.
The Company also has investment tax credits and research and experimental
tax credits aggregating approximately $1,692,000 and $909,000 for federal
and California purposes, respectively. The federal credit carryforwards
expire beginning in 1999 through the year 2018. The California credits
carry over indefinitely until utilized.
In addition, there are California credit carryforwards for qualified
manufacturing and research and development equipment of approximately
$20,000; these credits expire beginning in 2003 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 as of
December 31, 1998 and 1997 are presented below:
1998 1997
------------ -----------
Deferred tax assets:
Deferred research expenditures $ 1,544,000 1,367,000
Accruals and reserves not
currently deductible for tax
purposes 977,000 1,934,000
Net operating loss carryforwards 25,260,000 25,680,000
Credit carryforwards 2,621,000 2,445,000
Other 286,000 246,000
---------- ----------
Gross deferred tax assets 30,688,000 31,672,000
Less valuation allowance (29,927,000) (31,522,000)
---------- ----------
Total deferred tax assets 761,000 150,000
---------- ----------
Deferred tax liabilities:
Property and equipment (761,000) (150,000)
---------- ----------
Total deferred tax liabilities (761,000) (150,000)
---------- ----------
Net deferred taxes $ -- --
========== ==========
The net change in the valuation allowance for the year ended December 31,
1998 was a decrease of approximately $1,595,000. The net change in the
valuation allowance for the years ended December 31, 1997 and 1996 was an
increase of approximately $340,000 and $3,756,000, respectively.
Management believes that sufficient uncertainty exists regarding the
realizability of its deferred asset and, accordingly, a valuation allowance
is required.
Gross deferred tax assets as of December 31, 1998 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 15 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 R&D 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, 1998, J&J owned approximately 7% 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 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.
Note 16 Subsequent Event (Unaudited)
In March 1999, the Company received a $4,000,000 term loan with a fixed
interest rate of 13.87%. The loan is secured by the assets of the
Company's manufacturing facility in Louisiana. Principal and interest
payments are due in equal monthly installments over a period of forty-eight
months commencing March 1999.
The term loan was obtained mainly to refinance the scheduled debt
repayments made in the first quarter of 1999.
Note 17 Restatement
Subsequent to the issuance of the Company's 1998 financial statements and the
filing of its 1998 Form 10-K with the Securities and Exchange Commission
(SEC), and following discussions with the staff of the SEC concerning its
review of the Company's financial statements, APS decided to restate its
financial statements for fiscal years ended December 31, 1992 through 1998.
The accompanying consolidated financial statements reflect the cumulative
effect of the restatement as of December 31, 1995. The cumulative effect of
the change as of December 31, 1995 is to increase total deferred revenue by
$4,000,000 from $750,000 to $4,750,000, increase accumulated deficit by
$4,000,000 from $62,202,906 to $66,202,906 and decrease total shareholders'
equity by $4,000,000 from $5,233,301 to $1,233,301. The accompanying
consolidated financial statements for the years ended December 31, 1998, 1997
and 1996 present restated results to reflect a change in accounting such that
license fees are amortized over the estimated life of the product to which
they relate. In prior presentations, the Company recognized as earned
license fees which were non-refundable and not subject to material
contingencies or obligations. The change results in a difference in the
timing of revenue recognition of license fees and has no effect on the
Company's cash flows.
A comparison of the restated and previously reported statements of operations
for the years ended December 31, 1998, 1997 and 1996 and balance sheets as of
December 31, 1998 and December 31, 1997 follows:
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
For the Years Ended December 31,
--------------------------------
1998 1998 1997 1997 1996 1996
---- ---- ---- ---- ---- ----
(As (As (As
(As Previously (As Previously (As Previously
Restated) Reported) Restated) Reported) Restated) Reported)
--------- ---------- --------- ---------- --------- ----------
Product revenues $13,637,093 $13,637,093 $12,441,484 $12,441,484 $ 6,138,094 $ 6,138,094
Royalties, license and
option fees and R&D fees 6,983,702 6,354,186 3,266,095 4,391,175 1,055,935 2,059,301
Consumer products -- -- -- -- 10,467,512 10,467,512
Milestone payments -- -- 1,500,000 1,500,000 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 20,620,795 19,991,279 17,207,579 18,332,659 17,661,541 18,664,907
Cost of sales 7,126,573 7,126,573 7,164,120 7,164,120 10,771,766 10,771,766
Operating expenses:
Research & development, net 4,381,913 4,381,913 3,740,337 3,740,337 3,506,161 3,506,161
Selling & marketing 2,999,424 2,999,424 3,806,030 3,806,030 5,404,774 5,404,774
Advertising & promotion -- -- -- -- 3,050,180 3,050,180
General & administration 3,009,488 3,009,488 3,551,977 3,551,977 2,984,213 2,984,213
Loss on purchase
commitments -- -- -- -- 1,400,000 1,400,000
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 10,390,825 10,390,825 11,098,344 11,098,344 16,345,328 16,345,328
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 3,103,397 2,473,881 (1,054,885) 70,195 (9,455,553) (8,452,187)
Interest income 246,260 246,260 370,478 370,478 322,986 322,986
Interest expense (805,364) (805,364) (1,052,715) (1,052,715) (1,223,303) (1,223,303)
Other expense, net (19,252) (19,252) (71,119) (71,119) (25,595) (25,595)
---------- ---------- ---------- ---------- ----------- ----------
Net income (loss) $ 2,525,041 $ 1,895,525 $(1,808,241) $ (683,161)$(10,381,465)$ (9,378,099)
========== ========== ========== ========= =========== ==========
Basic earnings (loss) per
common share $ 0.13 $ 0.10 $ (0.10) $ (0.04)$ (0.58)$ (0.52)
========== ========== ========== ========== =========== ===========
Diluted earnings (loss) per
common share $ 0.12 $ 0.09 $ (0.10) $ (0.04)$ (0.58)$ (0.52)
========== ========== ========== ========== =========== ===========
Weighted average common
shares outstanding
- basic 19,854,103 19,854,103 18,778,921 18,778,921 17,987,153 17,987,153
========== ========== ========== ========== =========== ===========
Weighted average common
shares outstanding
- diluted 20,380,832 20,380,832 19,814,833 19,814,833 19,494,412 19,494,412
========== ========== ========== ========== =========== ==========
CONSOLIDATED BALANCE SHEETS
- ---------------------------
As of December 31, 1998 As of December 31, 1997
----------------------- -----------------------
(As Previously (As Previously)
(As Restated) Reported) (As Restated) Reported)
------------- -------------- ------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,088,173 $ 4,088,173 $ 8,672,021 $ 8,672,021
Accounts receivable less allowance
for doubtful accounts of $96,284
and $57,453 at December 31, 1998
and 1997, respectively 2,532,527 2,532,527 2,288,297 2,288,297
Receivables for royalties,
license fees and R&D fees 2,296,852 2,296,852 1,100,368 1,100,368
Accrued interest receivable 3,801 3,801 13,606 13,606
Inventory 2,959,443 2,959,443 2,639,129 2,639,129
Advances to officers and employees 338,947 338,947 96,706 96,706
Prepaid expenses and other 592,599 592,599 430,839 430,839
---------- ---------- ---------- -----------
Total current assets 12,812,342 12,812,342 15,240,966 15,240,966
Property and equipment, net 8,643,856 8,643,856 6,771,173 6,771,173
Deferred loan costs, net 90,428 90,428 353,693 353,693
Prepaid license fees, net -- -- 82,880 82,880
Goodwill and other intangibles, net
of accumulated amortization of
$1,286,873 and $1,102,480 at
December 31, 1998 and 1997,
respectively 1,351,813 1,351,813 1,477,542 1,477,542
Other long-term assets 182,892 182,892 254,180 254,180
---------- ---------- ---------- ----------
Total assets $ 23,081,331 $ 23,081,331 $ 24,180,434 $ 24,180,434
========== ========== ========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,347,737 $ 1,347,737 1,636,189 1,636,189
Accrued expenses 1,057,287 1,057,287 2,832,299 2,832,299
Accrued settlement liability 1,300,000 1,300,000 1,800,000 1,800,000
Current portion - long-term debt 3,055,460 3,055,460 2,523,389 2,523,389
Deferred revenue 1,291,540 750,000 1,297,970 306,014
---------- ---------- ---------- ----------
Total current liabilities 8,052,024 7,510,484 10,089,847 9,097,891
Deferred revenue - long-term 5,993,245 1,035,855 6,922,345 1,785,855
Long-term debt -- -- 3,055,460 3,055,460
---------- ---------- ---------- ----------
Total liabilities 14,045,269 8,546,339 20,067,652 13,939,206
---------- ---------- ---------- ----------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, authorized
2,500,000 shares; none issued
or outstanding at December 31,
1998 and 1997 -- -- -- --
Common stock, $.01 par value,
authorized 50,000,000 shares;
issued and outstanding 19,993,311
and 19,464,821 at December 31,
1998 and 1997, respectively 199,933 199,933 194,648 194,648
Warrants, issued and outstanding:
196,538 at December 31, 1998 and
506,816 at December 31, 1997 497,192 497,192 983,192 983,192
Additional paid-in capital 84,206,508 84,206,508 81,327,554 81,327,554
Accumulated deficit (75,867,571) (70,368,641) (78,392,612) (72,264,166)
---------- ---------- ---------- ----------
Total shareholders' equity 9,036,062 14,534,992 4,112,782 10,241,228
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity $ 23,081,331 $ 23,081,331 $ 24,180,434 $ 24,180,434
========== ========== ========== ==========
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, 1998 and 1997,
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, 1998. 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, 1998
and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998, 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.
As discussed in note 17 to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
/s/KPMG LLP
San Francisco, California
March 12, 1999, except as to note 17, which is dated as of November, 18,
1999
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/A (Amendment No. 2) 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. (11)
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 Lander Company.
(8)
10-W-License, Assignment and Supply Agreement between Registrant
and Lander Company. (10)
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/A (Amendment No. 2)
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/A (Amendment No. 2).
- --------------------------------------------------------------------------
(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.
(10)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
(11)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
* Management Contract or Compensatory plans.
(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.
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, 33-50640, 333-06841, 333-35151 and
333-60585 filed on April 25, 1990, May 12, 1988, September 30, 1991,
August 11, 1992, June 26, 1996, September 8, 1997 and August 4, 1998,
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, the registrant has duly caused this
report to behas been signed on its behalf by the undersigned, thereunto duly authorized.
ADVANCED POLYMER SYSTEMS, INC.
By: /s/John J. Meakem, Jr.
----------------------------------------------following persons in the capacities and on the
dates indicated.
Signature Title Date
- -----------------------------------------------------------------------------
/S/ 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 persons in the capacities and on
the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------
/S/ John J. Meakem, Jr. Chairman, President,
- ------------------------- Chief Executive Officer April 29,November 18, 1999
John J. Meakem, Jr. --------------
/S/ Michael O'Connell Executive Vice President,
- ------------------------- Chief Administrative Officer
Michael O'Connell and Chief Financial Officer April 29, 1999
--------------
/S/ Carl Ehmann Director April 29, 1999
- ------------------------- --------------
Carl Ehmann
/S/ Jorge Heller Director April 29, 1999
- ------------------------- --------------
Jorge Heller
/S/ Peter Riepenhausen Director April 29, 1999
- ------------------------- --------------
Peter Riepenhausen
/S/ Toby Rosenblatt Director April 29, 1999
- ------------------------- --------------
Toby Rosenblatt
/S/ Gregory H. Turnbull Director April 29, 1999
- ------------------------- --------------
Gregory H. Turnbull
/S/ C. Anthony Wainwright Director April 29, 1999
- ------------------------- --------------
C. Anthony Wainwright
/S/ Dennis Winger Director April 29, 1999
- ------------------------- --------------
Dennis Winger
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
(7)*
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. (9)
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)
10-P-Warrant to Purchase Common Stock. (4)
10-S-Lease Agreement between Registrant and Financing for Science
International dated September 1, 1995 (5)
10-V-Investment Agreement between Registrant and Lander Company. (6)
10-W-License, Assignment and Supply Agreement between Registrant and
Lander Company. (8)
10-X-Employment Agreement between the Registrant and
John J. Meakem, Jr., as amended. *
10-Y-Master Loan -----------------
/S/ Michael O'Connell Executive Vice President,
- ------------------------- Chief Administrative Officer
Michael O'Connell and Security Agreement with Finova Capital Corporation
dated March 29,Chief Financial Officer November 18, 1999
with exhibits.-----------------
/S/ Stephen Drury Director November 18, 1999
- -----------------------------------------------------------------------
(1)Filed as an Exhibit with corresponding Exhibit No.------------------------- -----------------
Stephen Drury
/S/ Carl Ehmann Director November 18, 1999
- ------------------------- -----------------
Carl Ehmann
/S/ Jorge Heller Director November 18, 1999
- ------------------------- -----------------
Jorge Heller
/S/ Peter Riepenhausen Director November 18, 1999
- ------------------------- -----------------
Peter Riepenhausen
/S/ Toby Rosenblatt Director November 18, 1999
- ------------------------- -----------------
Toby Rosenblatt
/S/ Richard Spizzirri Director November 18, 1999
- ------------------------- -----------------
Richard Spizzirri
/S/ Gregory H. Turnbull Director November 18, 1999
- ------------------------- -----------------
Gregory H. Turnbull
/S/ C. Anthony Wainwright Director November 18, 1999
- ------------------------- -----------------
C. Anthony Wainwright
/S/ Dennis Winger Director November 18, 1999
- ------------------------- -----------------
Dennis Winger
Schedule II
Valuation Accounts
Additions
Beginning Charged 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)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.
(5)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.
(6)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.
(7)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on
Form S-8 (Registration No. 333-35151), and incorporated herein by
reference.
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on form 10-K for the year endedEnding
Balance Expense Deductions Balance
- ---------------------------------------------------------------------------
December 31, 1996
and incorporated herein by reference.Accounts receivable, allowance
for doubtful accounts $68,650 9,331 30,454 47,527
December 31, 1997
Accounts receivable, allowance
for doubtful accounts 47,527 22,967 13,040 57,454
December 31, 1998
Accounts receivable, allowance
for doubtful accounts 57,454 38,830 -- 96,284
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, 333-06841, 333-35151 and
333-60585) on Forms S-8 of Advanced Polymer Systems, Inc. and in the
Registration Statements (Nos. 33-47399, 33-51326, 33-67936, 33-82562, 33-
88972, 333-00759, 333-042527 and 333-69815) on Forms S-3 of Advanced
Polymer Systems, Inc. of our report dated March 12, 1999, except as to
note 17, which is dated as of November 18, 1999 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
restatement described in note 17), relating to the consolidated balance
sheets of Advanced Polymer Systems, Inc. and subsidiaries as of December
31, 1998 and 1997, 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, 1998, and the related schedule, which
report appears in the December 31, 1998 annual report on Form 10-K/A
(Amendment No. 2) of Advanced Polymer Systems, Inc.
/s/KPMG LLP
San Francisco, California
November 18, 1999
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. (11)
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 Lander Company. (8)
10-W-License, Assignment and Supply Agreement between Registrant and
Lander Company. (10)
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)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.
(10)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.
(11)Filed as an Exhibit with corresponding Exhibit No. to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
* Management Contract or Compensatory plans.