Heron Therapeutics, Inc./DE – ‘10-K’ for 12/31/97

As of:  Monday, 3/30/98   ·   For:  12/31/97   ·   Accession #:  818033-98-6   ·   File #:  0-16109

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         49±   225K 
 2: EX-10.E     Lease Agreement                                       66±   246K 
 3: EX-27       Financial Data Schedule (Pre-XBRL)                     2      7K 

10-K   —   Annual Report
Document Table of Contents

10-K
1st “Page” of 19
TOC
↑Top
Previous
Next
↓Bottom
Just 1st
 
SECURITIES AND EXCHANGE COMMISSION      
Washington, D.C.  20549       

Form 10-K         

(Mark One)                                                                      

[X]  Annual report pursuant to Section 13 or 15(d) of the Securities            
Exchange Act of 1934                                                  
For the fiscal year ended December 31, 1997 or                        

[ ]  Transition report pursuant to Section 13 or 15(d) of the                   
Securities Exchange Act of 1934                                       
For the transition period from             to                         
                  ----------      ----------

Commission File Number  0-16109       

ADVANCED POLYMER SYSTEMS, INC.      
(Exact name of registrant as specified in its charter)        

Delaware                                       94-2875566           
-------------------------------              -----------------------            
(State or other jurisdiction of                     (I.R.S. Employer            
incorporation or organization)               Identification  Number)            

123 Saginaw Drive, Redwood City, California                    94063            
-------------------------------------------                ---------            
(Address of principal executive offices)                   (Zip Code)           

Registrant's telephone number, including area code:   (650) 366-2626            
                                          --------------

Securities registered pursuant to Section 12 (b) of the Act:    None            
                                                    ----

Securities registered pursuant to Section 12 (g) of the Act:                    
                             Common Stock ($.01 par value)
                           -----------------------------

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.                                                               [X]            
                                                     ---

The aggregate market value of the voting stock of the registrant held by        
non-affiliates of the registrant as of February 28, 1998, was $91,391,637.      
(1)                                                                             

As of February 28, 1998, 19,465,009 shares of registrant's Common Stock,        
$.01 par value, were outstanding.                                               

--------------------------------------------------------------------------      
(1)Excludes 6,292,389 shares held by directors, officers and shareholders       
whose ownership exceeds 5% of the outstanding shares at February 28,            
1998.  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.            

10-K
2nd “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 2nd
DOCUMENTS INCORPORATED BY REFERENCE                                             

          Form
          10-K
Document                                   Part                                 
--------                                   ----                                 

Definitive Proxy Statement to be used                                           
in connection with the Annual Meeting                                         
of Stockholders.                           III                                

10-K
3rd “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 3rd
TABLE OF CONTENTS                 

PART I                

ITEM  1.  Business                                                              

ITEM  2.  Properties                                                            

ITEM  3.  Legal Proceedings                                                     

ITEM  4.  Submission of Matters to a Vote of Security Holders                   

PART II               

ITEM  5.  Market for the Registrant's Common Equity and Related                 
Shareholder Matters                                         

ITEM  6.  Selected Financial Data                                               

ITEM  7.  Management's Discussion and Analysis of Financial                     
Condition and Results of Operations                         

ITEM  8.  Financial Statements and Supplementary Data                           

ITEM  9.  Changes in and Disagreements with Accountants on                      
Accounting and Financial Disclosure                         

PART III              

ITEM 10.  Directors and Executive Officers of the Registrant                    

ITEM 11.  Executive Compensation                                                

ITEM 12.  Security Ownership of Certain Beneficial Owners                       
and Management                                              

ITEM 13.  Certain Relationships and Related Transactions                        

PART IV               

ITEM 14.  Exhibits, Financial Statement Schedules, and                          
Reports on Form 8-K                                         

Signatures                                                  

10-K
4th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 4th
PART I                                                                          

Item 1.  BUSINESS                                                               

INTRODUCTION-FORWARD LOOKING STATEMENTS                                         
---------------------------------------                                         

To the extent that this report discusses future financial projections,          
information or expectations about our products or markets, or otherwise         
makes statements about future events, such statements are forward-looking       
and are subject to a number of risks and uncertainties that could cause         
actual results to differ materially from the statements made.  These            
include, among others, uncertainty associated with timely approval, launch      
and acceptance of new products, the costs associated with new product           
introductions, as well as other factors described below under the headings      
"APS Technology", "Products", "Manufacturing", "Marketing", "Government         
Regulation", "Patents and Trade Secrets" and "Competition".  In addition,       
such risks and uncertainties also include the matters discussed under           
Management's Discussion and Analysis of Financial Condition and Results of      
Operations in Item 7 below.                                                     

THE COMPANY                                                                     
-----------                                                                     

Advanced Polymer Systems, Inc. and subsidiaries ("APS" or the "Company")        
is using its patented Microsponge(R) delivery systems and related               
proprietary technologies to enhance the safety, effectiveness and               
aesthetic quality of topical prescription, over-the-counter ("OTC") and         
personal care products.  The Company is currently manufacturing and             
selling Microsponge systems for use by corporate customers in almost 100        
different skin care products sold worldwide.  APS holds 190 issued U.S.         
and foreign patents on its technology and has over 69 other patent              
applications pending.                                                           

The Company, founded in February 1983 as a California corporation under         
the name AMCO Polymerics, Inc., changed its name to Advanced Polymer            
Systems, Inc. in 1984 and was reincorporated in Delaware in 1987.               

Products under development or in the marketplace utilize the Company's          
Microsponge systems in three primary ways: 1) as reservoirs releasing           
active ingredients over an extended period of time, 2) as receptacles for       
absorbing undesirable substances, such as excess skin oils, or  3) as           
closed containers holding ingredients away from the skin for therapeutic        
action.  The resulting benefits include extended efficacy, reduced skin         
irritation, cosmetic elegance, formulation flexibility and improved             
product stability.                                                              

In February 1997, the Company received Food and Drug Administration             
("FDA") approval for the first ethical pharmaceutical product based on its      
patented Microsponge technology Retin A(R)-Micro(TM) which has been             
licensed to Ortho-McNeil Pharmaceutical Corporation, a member of the            
Johnson & Johnson ("J&J") family of companies.  This product was launched       
in March 1997.  In September 1994, the Company submitted a New Drug             
Application ("NDA") for a melanin-Microsponge sunscreen.  The NDA was           
found to be non-approvable pending additional information the Company is        
generating.                                                                     

APS has established several alliances with multinational corporations           
including J&J, Avon and Rhone-Poulenc Rorer for products which incorporate      
Microsponge systems.  The alliance partners receive certain marketing           
rights to the products developed.  In return, APS typically receives an         
initial cash infusion in the form of license fees, future payments              
contingent on the achievement of certain milestones, revenues from the          
manufacture of Microsponge systems, and royalty payments based on third         
party product sales or a share of partner revenues.  For products               
requiring FDA approval, these alliances provide for the partners to pay         
the costs of product development, clinical testing, regulatory approval         
and commercialization.  J&J and Rhone-Poulenc Rorer also have made equity       
investments in the Company.  APS and Dow Corning Corporation formed a           
joint venture alliance in 1992 to develop and commercialize Polytrap(R) and     
Microsponge systems for use in the manufacture of cosmetics and personal        
care products.  In the first quarter of 1996, APS acquired all rights to        
the Polytrap technology from Dow Corning in exchange for 200,000 shares of      
APS common stock.                                                               

Effective January 1997, the Company licensed certain of its consumer            
products to Lander Company in the United States and Canada in return for        
guaranteed minimum royalties, revenues from the sale of Microsponge             
systems and research and development funding for new consumer products.         
Lander is responsible for all aspects of commercialization including            
selling, marketing, manufacturing, distribution and customer service.           

To maintain quality control over manufacturing, APS has committed               
significant resources to its production processes and polymer systems           
development programs.  The Company's manufacturing facility in Lafayette,       
Louisiana, is responsible for large-scale production of Microsponge             
systems and related technologies.  All products are manufactured according      
to Current Good Manufacturing Practices guidelines ("CGMPs") established        
by the FDA.  In addition, APS has a process development pilot plant in its      
Louisiana facility.  APS also has established relationships with contract       
manufacturers, which provide second-source production capabilities to           
handle growing product demand.  The Company's objective is to utilize           
these third parties selectively, so that it can maintain its flexibility        
and direct the bulk of APS' capital resources to other areas such as            
product and technology development.                                             

APS TECHNOLOGY                                                                  
--------------                                                                  

The fundamental appeal of the Company's Microsponge technology stems from       
the difficulty experienced with conventional formulations in releasing          
active ingredients over an extended period of time.  Cosmetics and skin         
care preparations are intended to work only on the outer layers of the          
skin.  Yet, the typical active ingredient in conventional products is           
present in a relatively high concentration and, when applied to the skin,       
may be rapidly absorbed.  The common result is over-medication, followed        
by a period of under-medication until the next application.  Rashes and         
more serious side effects can occur when the active ingredients rapidly         
penetrate below the skin's surface.  APS' Microsponge technology is             
designed to allow a prolonged rate of release of the active ingredients,        
thereby offering potential reduction in the side effects while maintaining      
the therapeutic efficacy.                                                       

Microsponge Systems.  The Company's Microsponge systems are based on            
microscopic, polymer-based microspheres that can bind, suspend or entrap a      
wide variety of substances and then be incorporated into a formulated           
product, such as a gel, cream, liquid or powder.  A single Microsponge is       
as tiny as a particle of talcum powder, measuring less than one-thousandth      
of an inch in diameter.  Like a true sponge, each microsphere consists of       
a myriad of interconnecting voids within a non-collapsible structure that       
can accept a wide variety of substances. The outer surface is typically         
porous, allowing the controlled flow of substances into and out of the          
sphere.  Several primary characteristics, or parameters, of the                 
Microsponge system can be defined during the production phase to obtain         
spheres that are tailored to specific product applications and vehicle          
compatibility.                                                                  

Polytrap Systems.  In January 1996, the Company signed a definitive             
agreement with Dow Corning Corporation, one of the world's largest              
suppliers of ingredients used in cosmetics and personal care products, to       
acquire full rights to Dow Corning's Polytrap technology and full               
responsibility for the continuing commercialization of Polytrap systems in      
exchange for 200,000 shares of APS common stock.  Polytrap systems are          
designed to: 1) absorb skin oils and eliminate shine, 2) provide a smooth       
and silky feel to product formulation, 3) entrap and deliver various            
ingredients in personal care products and 4) convert liquids into powders.      

Microsponge and Polytrap systems are made of biologically inert polymers.       
Extensive safety studies have demonstrated that the polymers are non-           
irritating, non-mutagenic, non-allergenic, non-toxic and non-                   
biodegradable.  As a result, the human body cannot convert them into other      
substances or break them down.  Furthermore, although they are microscopic      
in size, these systems are too large to pass through the stratum corneum        
(skin surface) when incorporated into topical products.                         

Colon-specific Systems.  A Microsponge system offers the potential to hold      
active ingredients in a protected environment and provide controlled            
delivery of oral medication to the lower gastrointestinal ("GI") tract.         
This approach, if successful, should open up entirely new opportunities         
for APS.                                                                        

Bioerodible Systems.  The Company is also developing systems based on new       
bioerodible polymers for the delivery of small and large molecule drugs,        
including proteins and peptides, which, if successful, should open up new       
fields of opportunity in systemic drug delivery arenas.                         

PRODUCTS                                                                        
--------                                                                        

APS is focusing its efforts primarily on the ethical dermatology, OTC skin      
care and personal care markets in which Microsponge and Polytrap systems        
can provide substantial advantages.  Certain additional applications for        
the Company's technology are also under development, as noted below.            

Ethical Dermatology                                                             
-------------------                                                             

APS defines "ethical dermatology" products as prescription and non-             
prescription drugs that are promoted primarily through the medical              
profession for the prevention and treatment of skin problems or diseases.       
The Company is developing several ethical dermatology products which will       
require approval of the FDA before they can be sold in the United States.       
Although these pharmaceuticals are likely to take longer to reach the           
marketplace than OTC and personal care products, due to the regulatory          
approval process, the Company believes that the benefits offered by             
Microsponge delivery systems will allow valuable product differentiation        
in this large and potentially profitable market.  Results from various          
human clinical studies reaffirm that this technology offers the potential       
to reduce the drug side effects, maintain the therapeutic efficacy and          
potentially increase patient compliance with the treatment regimen.  The        
following ethical dermatology products have been developed or are under         
development by APS:                                                             

Tretinoin Acne Medication.  In February 1997, the Company received FDA          
approval for Microsponge-entrapped tretinoin for improved acne treatment.       
This submission to the FDA represented the culmination of an intensive          
research and clinical development program involving approximately 1,150         
patients.  Tretinoin has been marketed in the U.S. by Ortho                     
Dermatological, a Johnson & Johnson subsidiary, under the brand name            
RETIN-A(R) since 1971.  It has proven to be a highly effective topical          
acne medication.  However, skin irritation among sensitive individuals can      
limit patient compliance with the prescribed therapy.  The Company              
believes its patented approach to drug delivery reduces the potentially         
irritating side effects of tretinoin. Ortho Dermatological began marketing      
this product in March 1997.                                                     

Melanin-Microsponge Sunscreen.  Concern about the sun's harmful effects         
and its role in aging and skin cancer has resulted in heightened awareness      
of preventative measures in the sunscreen  market.  APS has developed a         
sun protectant designed to provide the highest-available protection             
against the sun's UVA rays as well as protection from the burning UVB           
rays.  This unique APS product candidate incorporates the Company's             
melanin-Microsponge system containing genetically engineered melanin, a         
natural pigment found in skin.                                                  

The Company filed its NDA in September 1994 for marketing clearance.            
Since it involves an entirely new ethical pharmaceutical ingredient and         
application, the regulatory review process is lengthier and more complex.       
The NDA was found to be non-approvable pending additional information           
which the Company is generating. There can be no assurance that U.S. FDA        
approval will be received.  The Company has, however, begun to                  
commercialize melanin-Microsponge systems through strategic partners in         
Europe and South America, where regulatory approval is not required for         
the sale of sunscreen products.  If approval is received in the U.S., the       
Company plans to market this product through a strategic partner.               

5-Fluorouracil.  Another ethical dermatology product candidate,                 
Microsponge-entrapped 5-Fluorouracil ("5-FU"), was the subject of an            
Investigational New Drug ("IND") filing in early 1995.  5-FU is an              
effective chemotherapeutic agent for treating actinic keratosis, a pre-         
cancerous, hardened-skin condition caused by excessive exposure to              
sunlight.  However, patient compliance with the treatment regimen is poor,      
due to significant, adverse side effects.  Through a joint agreement with       
Rhone-Poulenc Rorer, the Company is developing a Microsponge-enhanced           
topical formulation that potentially offers a less irritating solution for      
treating actinic keratosis.  Phase III clinical studies have been               
initiated.                                                                      

Tretinoin Photodamage Treatment.  Initial product development was               
undertaken in 1994 to develop a Microsponge system product for the              
treatment of photodamage, which contributes to the premature aging of skin      
and has been implicated in skin cancer.  Should an IND be filed for this        
product, funding for this second tretinoin treatment indication will be         
provided by J&J's Ortho-McNeil Pharmaceutical subsidiary.                       

Cosmeceutical Products                                                          
----------------------                                                          

Retinol.  Retinol is a highly pure form of Vitamin A which has                  
demonstrated a remarkable ability for maintaining the skin's youthful           
appearance.  However, it has been available only on a limited basis             
because it becomes unstable when mixed with other ingredients.  APS has         
been able to stabilize retinol in a formulation which is cosmetically           
elegant and which has a low potential for skin irritation.  The Company         
has executed agreements with five companies, each of which has marketing        
strength in a particular channel of distribution.  The channels for which       
the Company has licensed retinol are direct marketing (Avon),                   
dermatologists (Medicis), salons and spas (Sothys), plastic surgery             
(BioMedic), and prestige (La Prairie).  The Company retains full rights to      
alternate channels of distribution, including department stores and other       
mass merchandisers.  Additionally, the Company formed an alliance with          
R.P. Scherer to develop and commercialize unit-dose skin care treatments        
for aging skin, combining retinol and/or Vitamin C.                             

In May 1997, the Company entered into an agreement under which it licensed      
exclusive rights to broad-based patents covering the topical use of             
Vitamin K.  Potential applications include bruises from surgery or              
traumatic injury, spider veins, age-related purpura, rosacea and a variety      
of other cosmetic dermatological conditions.  Subsequently, the Company         
licensed rights to commercialize Vitamin K to Avon in the direct-to-            
consumer channel, to BioMedic for recommendation by plastic surgeons and        
to Medicis for recommendation by dermatologists in the U.S.  Again, the         
Company retains full rights to alternate channels of distribution.              

Personal Care and OTC Products                                                  
------------------------------                                                  

APS technologies are ideal for skin and personal care products.  They can       
retain several times their weight in liquids, respond to a variety of           
release stimuli, and absorb large amounts of excess skin oil, all while         
retaining an elegant feel on the skin's surface.  In fact, APS                  
technologies are currently employed in almost 100 products sold by major        
cosmetic and toiletry companies worldwide.  Among these products are skin       
cleansers, conditioners, oil control lotions, moisturizers, deodorants,         
razors, lipsticks, makeup, powders, and eye shadows.                            

Entrapping cosmetic ingredients in APS' proprietary Microsponge delivery        
systems offers several advantages, including improved physical and              
chemical stability, greater available concentrations, controlled release        
of the active ingredients, reduced skin irritation and sensitization, and       
unique tactile qualities.                                                       

Other Product Applications                                                      
--------------------------                                                      

While not the principal focus of APS development efforts, other products        
could benefit from the value-added application of the Company's polymer         
technology.  To date, the Company has chosen to apply its technology to         
the following non-skin-care field:                                              

Analytical Standards.  APS initially developed microsphere precursors to        
the Microsponge for use as a testing standard for gauging the purity of         
municipal drinking water.  Marketed by APS nationwide, these microspheres       
are suspended in pure water to form an accurate, stable, reproducible           
turbidity standard for the calibration of turbidimeters used to test water      
purity.                                                                         

APS believes its Analytical Standards technology has much broader               
application than testing the turbidity of water.  The Company has begun to      
develop standards for industrial use for the calibration of                     
spectrophotometers and colorimeters.                                            

MANUFACTURING                                                                   
-------------                                                                   

Polymer Raw Material.  Raw materials for the Company's polymers are             
petroleum-based monomers which are widely available at low cost.  The           
monomers have not been subject to unavailability or significant price           
fluctuations.                                                                   

Process Engineering and Development.  The Company employs chemical              
engineers and operates a pilot-plant facility for developing production         
processes.  The equipment used for manufacturing and process development        
is commercially available in industrial sizes and is installed in the           
Company's production facility in Lafayette, Louisiana.                          

Microsponge Production.  APS has committed significant resources to the         
production process and polymer systems development required to                  
commercialize its products.  The Company has to date manufactured most          
Microsponge systems in company-owned and operated facilities.                   

The Company's manufacturing facility in Lafayette, Louisiana, is                
responsible for large-scale production of Microsponge systems and related       
technologies.  The Company initiated a plant expansion project during 1997      
in anticipation of higher volume requirements.  This is expected to be          
completed during 1998.  APS also has established relationships with             
contract manufacturers which provide second-source production                   
capabilities.  The Company's objective is to utilize these third parties        
selectively, so that it can maintain its flexibility and direct the bulk        
of APS' capital resources to other areas, such as product development and       
marketing.  All products are manufactured according to CGMP.  In addition,      
APS has a process development pilot plant in its Louisiana facility.            

MARKETING                                                                       
---------                                                                       

A key part of APS' business strategy is to ally the Company with major          
marketing partners.  The Company has therefore negotiated several               
agreements for the development of Microsponge delivery systems, the supply      
of entrapped ingredients, and the marketing of formulated products.  To         
create an incentive for APS to develop products as quickly as possible,         
these development and license agreements provide, in some cases, for            
substantial payments by the client companies during the period of product       
development and test marketing.  Additionally, some agreements provide for      
non-refundable payments on the achievement of certain key milestones,           
royalties on sales of formulated products, and minimum annual payments to       
maintain exclusivity.  APS has, in some product areas, retained co-             
marketing rights.                                                               

In general, APS grants limited marketing exclusivity in defined markets to      
client companies, while retaining the right to manufacture the Microsponge      
delivery systems it develops for these clients.  However, after                 
development is completed and a client commercializes a formulated product       
utilizing the Company's delivery systems, APS can exert only limited            
influence over the manner and extent of the client's marketing efforts.         
APS' client companies may cancel their agreements without penalty.              

The Company's key relationships are set forth below:                            

Johnson & Johnson Inc.  In May 1992, APS and Ortho-McNeil Pharmaceutical        
Corporation ("Ortho"), a subsidiary of J&J, entered into a licensing            
agreement related to tretinoin-based products incorporating APS'                
Microsponge technology.  As part of the agreement, in 1992, license fees        
of $6,000,000 were paid to APS.  In addition, J&J purchased 723,006 shares      
of newly issued APS common stock for $8,000,000.  In 1994, J&J purchased        
1,000,000 additional shares of newly issued common stock for $5,000,000.        
J&J also received 200,000 warrants that expired in 1996.  The number of         
shares issued to J&J was increased by 432,101 pursuant to an agreed upon        
formula tied to the trading price of APS stock prior to January 1996.  In       
March 1998, J&J announced that it had divested its initial investment of        
723,006 shares of the Company's stock as part of a rebalancing of its           
investment portfolio.  The license fee provides Ortho with exclusive            
distribution or license rights for all Ortho tretinoin products utilizing       
the APS Microsponge system.  Ortho's exclusivity will continue as long as       
certain annual minimum payments are made.  In addition, Ortho will pay          
license fees and milestone payments over time to APS.  APS also receives        
royalty payments on net product sales worldwide.                                

In February 1997, APS received FDA approval for the first product covered       
by this agreement, Microsponge-entrapped tretinoin.  This product is being      
marketed by Ortho Dermatological beginning March 1997 as Retin-A(R) Micro       
(TM).  APS received a payment of $3,000,000 from Ortho upon receipt of the      
approval, of which half is a milestone payment which was recognized as          
revenue in 1997 and half is prepaid royalties which was recorded as             
deferred revenues.                                                              

Rhone-Poulenc Rorer.  In March 1992, APS and Rhone-Poulenc Rorer ("RPR")        
restructured their 1989 joint venture agreement to give APS more freedom        
in developing products.  Under the new terms, APS regained from RPR             
worldwide marketing rights to products in the prescription dermatology          
field, including the melanin-based sunscreen product in which RPR had           
invested approximately $4,000,000 in development costs.  APS also gained        
ownership of a partially-completed manufacturing facility in Vacaville,         
California, which the Company sold in December 1995.  Also under the new        
terms, RPR invested $2,000,000 in cash in APS and relieved APS of the           
obligation to repay a $1,500,000 advance.  In return, RPR received 705,041      
shares of APS stock and maintains a minority share in the potential net         
profits of the melanin-based sunscreen product.  Furthermore, RPR has           
agreed to continue funding the exploration and development of certain           
dermatology applications of APS' technology in which APS shares marketing       
rights.  Product applications include a 5-FU treatment for pre-cancerous        
actinic keratosis.  In 1995, RPR filed an IND application to begin human        
clinical testing of 5-FU.  Phase III clinical trials have commenced.            

Dow Corning.  In July 1991, APS and Dow Corning Corporation formed a            
collaborative alliance to manufacture and sell both APS' Microsponge and        
Dow Corning's Polytrap technologies worldwide in the cosmetics and              
toiletries field.  Under the agreement, Dow Corning provided financial          
assistance in this venture, as well as worldwide sales and support              
services; APS contributed its technology, research and development,             
technical support and manufacturing capability for both the Microsponge         
and Polytrap products.  In the first quarter of 1996, APS acquired full         
rights to the Polytrap technology and full responsibility for the               
continuing commercialization in exchange for 200,000 shares of APS common       
stock.                                                                          

Lander Company.  In March 1996, the Company formed a collaboration with         
Lander Company, Inc. to develop and provide premium quality, store-brand        
personal care products based on the Company's patented delivery system          
technology.  Under terms of the agreement, the Company received a $3            
million equity investment and license fees and will receive additional          
royalties on product sales and research and development funding for new         
consumer products.  APS and Lander will collaborate on product                  
formulations and marketing preparations and Lander will be responsible for      
sales, manufacturing and distribution to retailers.                             

Effective January 1997, APS established a new strategic alliance with           
Lander under which Lander was granted full marketing rights in the United       
States and Canada to Microsponge-based Exact(R) acne medications, Take-         
Off(R) facial cleansers, Everystep(R) Foot Powder, as well as in-licensed       
consumer products.  Under terms of the agreement, Lander is responsible         
for all aspects of commercialization including selling, marketing,              
manufacturing, distribution and customer service.  APS receives guaranteed      
minimum royalties, revenues from the sale of Microsponge systems and            
research and development funding for new branded consumer products.             

Avon.  In August 1996, APS signed a license and supply agreement with Avon      
under which APS is providing Avon with a formulation incorporating              
Microsponge delivery systems and retinol, an ingredient developed to            
improve the appearance of aging skin. Under terms of the agreement, APS         
received upfront licensing fees and will receive manufacturing revenues on      
supply of product.  In January 1998, the Company announced that it had          
signed a new agreement with Avon, substantially expanding Avon's access to      
Microsponge systems technology.  The expanded agreement provides Avon with      
exclusive worldwide rights in Avon's channel of distribution to additional      
cosmetic products utilizing the Company's technology.  In order for Avon        
to maintain exclusivity the Company will receive annual royalties on            
worldwide sales and research and development funding.  Jointly developed        
products can be marketed independently by the Company.                          

Medicis.  In October 1996, APS entered into an agreement with Medicis           
Pharmaceutical Corporation for the commercialization of certain                 
dermatology products.  Medicis will initially be responsible for marketing      
two newly developed APS products in the United States.  In return, APS          
received licensing fees and a share of revenues, with guaranteed minimums.      
In November 1997, the Company licensed Vitamin K to Medicis for sale in         
the U.S. to dermatologists.  In return, the Company received an additional      
fee and will share revenues on product sales.                                   

Procter & Gamble.  In the first quarter of 1992, Scott Paper Company began      
the regional U.S. launch of Baby Fresh with Ultra Guard baby wipes.  Ultra      
Guard is Scott's trademark for an APS Microsponge system that contains          
dimethicone to help protect a baby's skin from diaper rash.  In the first       
quarter of 1996, Kimberly-Clark completed its acquisition of Scott Paper        
Company.  One of the conditions of the acquisition imposed by the Federal       
Trade Commission was that Kimberly-Clark divest the acquired baby wipe          
business.  Procter & Gamble bought the baby wipe business in 1996 and now       
markets the product under the Pampers brand name.  In July 1997, Procter &      
Gamble expanded its agreement with the Company to include adult wipe.           
These have been launched under the Attends(R) name to healthcare                
institutions.                                                                   

Pharmacia and Upjohn.  In January 1998, the Company announced an agreement      
with Pharmacia and Upjohn to develop and commercialize a new product for a      
major global category.  Advanced Polymer's Microsponge system technology        
will be utilized to deliver a proprietary Pharmacia and Upjohn therapeutic      
agent topically.                                                                

GOVERNMENT REGULATION                                                           
---------------------                                                           

Ethical Products                                                                
----------------                                                                

In order to clinically test, produce and sell products for human                
therapeutic use, mandatory procedures and safety evaluations established        
by the FDA and comparable agencies in foreign countries must be followed.       
The procedure for seeking and obtaining the required governmental               
clearances for a new therapeutic product includes pre-clinical animal           
testing to determine safety and efficacy, followed by human clinical            
testing, and can take many years and require substantial expenditures.  In      
the case of third-party agreements, APS expects that the corporate client       
will fund the testing and the approval process with guidance from APS.          
The Company intends to seek the necessary regulatory approvals for its          
proprietary dermatology products as they are being developed.                   

APS' facilities, utilized to manufacture pharmaceutical raw materials, are      
subject to periodic governmental inspections.  If violations of applicable      
regulations are noted during these inspections, significant problems may        
arise affecting the continued marketing of any products manufactured by         
the Company.                                                                    

The Company's plant in Lafayette, Louisiana operates according to CGMP          
prescribed by the FDA.  This compliance has entailed modifying certain          
manufacturing equipment, as well as implementing certain record keeping         
and other practices and procedures which are required of all                    
pharmaceutical manufacturers.  The Company believes it is in compliance         
with federal and state laws regarding occupational safety, laboratory           
practices, environmental protection and hazardous substance control.            

Personal Care Products                                                          
----------------------                                                          

Under current regulations, the market introduction of non-medicated             
cosmetics, toiletries and skin care products does not require prior formal      
registration or approval by the FDA or regulatory agencies in foreign           
countries, although this situation could change in the future.  The             
cosmetics industry has established self-regulating procedures and the           
Company, like most companies, performs its own toxicity and consumer            
tests.                                                                          

PATENTS AND TRADE SECRETS                                                       
-------------------------                                                       

As part of the Company's strategy to protect its current products and to        
provide a foundation for future products, APS has filed a number of United      
States patent applications on inventions relating to specific products,         
product groups, and processing technology.  The Company also has filed          
foreign patent applications on its polymer technology with the European         
Union, Japan, Australia, South Africa, Canada, Korea and Taiwan. The            
Company received U.S. patent protection for its basic Microsponge system        
in 1987 and now has a total of 41 issued U.S. patents and an additional         
149 issued foreign patents.  The Company has over 69 pending patent             
applications worldwide.                                                         

Although the Company believes the bases for these patents and patent            
applications are sound, they are untested, and there is no assurance that       
they will not be successfully challenged.  There can be no assurance that       
any patent already issued will be of commercial value, or that any patent       
applications will result in issued patents of commercial value, or that         
APS' technology will not be held to infringe on patents held by others.         

APS relies on unpatented trade secrets and know-how to protect certain          
aspects of its production technologies.  APS' employees, consultants,           
advisors and corporate clients have entered into confidentiality                
agreements with the Company.  These agreements, however, may not                
necessarily provide meaningful protection for the Company's trade secrets       
or proprietary know-how in the event of unauthorized use or disclosure.         
In addition, others may obtain access to, or independently develop, these       
trade secrets or know-how.                                                      

COMPETITION                                                                     
-----------                                                                     

Although Microsponge and Polytrap systems, by virtue of their highly            
porous structure, are unique delivery systems, there are many alternate         
delivery systems available.  However, in the cosmetic and cosmeceutical         
fields, Microsponge and Polytrap systems are particularly versatile at          
allowing the entrapment of active agents and controlled release by simple       
changes in vehicles.                                                            

Other delivery systems based on microparticulate materials could compete        
with Microsponge and Polytrap systems.  Among these are liposomes,              
microcapsules and microspheres.  Liposomes are small phospholipid vesicles      
capable of entrapping and releasing active agents.  However, they are           
significantly more expensive to manufacture, less versatile and their           
stability is a concern.  While they are primarily used in systemic              
applications, they are also used in the cosmetic arena.                         

The most closely related systems are microcapsules and microspheres.            
Microcapsules are spherical particles containing an active agent in the         
core, surrounded by a polymeric membrane.  Mircospheres are spherical           
particles containing the active agent dispersed in a polymeric matrix.          
The major distinguishing feature between Microsponge and Polytrap systems       
and microcapsules, or microspheres is that the structure of Microsponge         
and Polytrap systems is highly porous, while microspheres or microcapsules      
are solid particles with no internal voids.                                     

Thus, while one type of Microsponge system can be used to entrap a variety      
of active agents and release these at desired rates by vehicle changes,         
different active agents and different release profiles can only be              
achieved with microcapsules or microspheres by a complete change in             
polymer and fabrication methods.                                                

HUMAN RESOURCES                                                                 
---------------                                                                 

As of March 5, 1998, the Company had 94 full-time employees, 4 of whom          
hold PhDs.  There were 30 employees engaged in research and development         
and quality control, 36 in manufacturing and production activities and 28       
working in customer service, finance, marketing, human resources and            
administration.                                                                 

The Company considers its relations with employees to be satisfactory.          
None of the Company's employees is covered by a collective bargaining           
agreement.                                                                      

Item 2.  PROPERTIES                                                             

The Company occupied 23,040 square feet of laboratory, office and               
warehouse space in Redwood City, California as of December 31, 1997 and         
currently occupies 2,800 square feet of office space in Greenwich,              
Connecticut. Subsequent to year end, the Company relocated its Redwood          
City operations to a 26,067 square-foot facility in the same city.  The         
annual rent expense for such facility is expected to be approximately           
$642,000.  The annual rent expense for the Greenwich office is                  
approximately $76,000.                                                          

The Company occupies a production facility and warehouse in Lafayette,          
Louisiana, with a current annual capacity, depending upon the application,      
to produce 1,000,000 to 3,000,000 pounds of entrapped materials.  The           
existing plant, with contiguous acreage, has been designed to allow             
significant expansion.  The construction of the facility in 1986 was            
financed primarily by 15-year tax-exempt industrial development bonds.  In      
1990, the bonds were refinanced.  The maturity date of the bonds occurs in      
installments beginning June 30, 1993, and ending December 31, 2000.  The        
bonds bear a fixed interest rate of 10%.  In 1995, the Company                  
extinguished the bond liability through an "insubstance defeasance"             
transaction by placing U.S. government securities in an irrevocable trust       
to fund all future interest and principal payments.  In 1995 the Company        
sold certain assets and subsequently leased them back for a certain fixed       
monthly rent over a period of forty-eight months.  The Company reported         
this transaction as a financing transaction.                                    

The Company's existing research and development and administrative              
facilities are not yet being used at full capacity and management believes      
that such facilities are adequate and suitable for its current and              
anticipated needs.  Additional manufacturing capacity could be required as      
APS expands commercial production.  It is anticipated that any additional       
production facilities would be built on land the Company presently              
occupies in Lafayette, Louisiana.                                               

Item 3.  LEGAL PROCEEDINGS                                                      

In November, 1997 Biosource Technologies, Inc. ("Biosource") filed a            
complaint against the Company in the San Mateo Superior Court.  Biosource       
claims damages from the Company of an amount not less than $1,050,000, on       
the grounds that the Company has failed to pay certain minimum amounts          
allegedly due under a contract for the supply of melanin.  Biosource also       
claims interest on that sum and costs.                                          

The Company has denied liability, basing its defense on the assertion that      
obligations under the contract have been suspended, because the expected        
FDA approval of the Company's melanin based product has not yet been            
forthcoming.  The Company is vigorously defending the action, and has           
cross claimed for rescission of the contract and restitution of money paid      
thereunder, and for a declaratory judgment that it is not indebted to           
Biosource.                                                                      

The Company expects that the outcome of this legal proceeding will not          
have a material adverse effect on the consolidated financial statements         
considering amounts accrued at December 31, 1997.                               

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

None.                                                                     

10-K
5th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 5th
PART II                                                                         

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER          
MATTERS                                                       

Shares of the Company's common stock trade on the Nasdaq National Market,       
under the symbol APOS.  As of February 28, 1998, there were 570 holders of      
record of the Company's common stock.                                           

The Company has never paid cash dividends and does not anticipate paying        
cash dividends in the foreseeable future.  The following table sets forth       
for the fiscal periods indicated, the range of high and low sales prices        
for the Company's common stock on the NASDAQ National Market System.            

                                                                [Download Table]


1997             High      Low      1996               High     Low   
----------------------------------------------------------------------
                                                                      
First Quarter   10 3/8     7 3/8    First Quarter      9 1/4    5 1/4 
Second Quarter   8 1/2     6 7/8    Second Quarter    11 1/4    7 7/8 
Third Quarter    8 5/8     6 7/8    Third Quarter      9 5/8    5 7/8 
Fourth Quarter   8 3/4     6        Fourth Quarter     8 7/8    6 3/4 


Item 6.  SELECTED FINANCIAL DATA                                                
(in thousands, except per share data)                           

                                                                [Download Table]


For the Years Ended and as of                                                   
December 31                        1997      1996      1995      1994      1993 
--------------------------------------------------------------------------------
                                                                                
Statements of Operations                                                        
------------------------                                                        
Product and technology revenues  $16,833     8,197     6,254     7,260   10,266 
Consumer products                      -    10,468     9,104     8,624    8,916 
Milestone payments                 1,500         -       750         -      750 
Research and development, net      3,740     3,506     4,139     6,334    7,343 
Selling, marketing and                                                          
  advertising                      3,806     8,455     6,560     5,669    6,237 
General and administrative         3,552     2,984     3,082     2,844    2,988 
Loss on purchase commitment,                                                    
  including related inventory         --     1,400       600       685      950 
Net loss                            (683)   (9,378)   (9,359)   (9,759)  (9,877)

Basic and diluted                                                               
  loss per common share            (0.04)    (0.52)    (0.57)    (0.65)   (0.73)
Weighted average common                                                         
  shares outstanding              18,779    17,987    16,459    15,018   13,527 

Balance Sheets                                                                  
--------------                                                                  

Working capital                  $ 4,357     3,800     4,976     5,641     4,555
Total assets                      24,180    18,444    23,082    23,508    24,378
Long-term debt, excluding                                                       
  current portion                  3,055     5,579     6,355       979     3,355
Shareholders' equity              10,241     5,010     5,233    11,786    10,501


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)                              
--------------------------------------------------                              

                                                                [Download Table]

                              For the Years Ended December 31,  Annual % Change
                              --------------------------------  ---------------
                                 1997      1996      1995       97/96    96/95 
                                ------    ------    ------      -----    ----- 
                                                                               
Product and technology                                                         
  revenues                     $16,833     8,197     6,254       105%      31% 
Consumer products                   --    10,468     9,104      (100%)     15% 
Milestone payment                1,500        --       750       N/A     (100%)
                                ------    ------    ------      -----    ----- 
  Total revenues                18,333    18,665    16,108        (2%)     16% 

Cost of sales                    7,164    10,772    11,047       (33%)     (2%)
Research and development, net    3,740     3,506     4,139         7%     (15%)
Selling and marketing            3,806     5,405     4,756       (30%)     14% 
Advertising and promotion           --     3,050     1,805      (100%)     69% 
General and administrative       3,552     2,984     3,082        19%      (3%)
Loss on purchase commitments,                                                  
  Including related inventory       --     1,400       600      (100%)    133% 

                                                                [Download Table]

                                    1997        1996        1995
                                    ----        ----        ----
                                                                
Expenses expressed as a percentage                              
  of total revenues excluding                                   
  milestone payment:                                            
Cost of sales                        43%         58%         72%
Research and development, net        22%         19%         27%
Selling and marketing                23%         29%         31%
Advertising and promotion            --          16%         12%
General and administrative           21%         16%         20%
Loss on purchase commitments,                                   
  including related inventory        --           8%          4%

10-K
6th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 6th
Results of Operations for the years ended December 31, 1997 and 1996            
--------------------------------------------------------------------            

Except for statements of historical fact, the statements herein are             
forward-looking and are subject to a number of risks and uncertainties          
that could cause actual results to differ materially from the statements        
made.  These include, among others, uncertainty associated with timely          
approval, launch and acceptance of new products, development of new             
products, establishment of new corporate alliances, progress in research        
and development programs and other risks 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.  The Company is currently manufacturing and selling         
Microsponge(R) delivery systems for use by customers in almost 100              
different skin care products.  Under strategic alliance arrangements            
entered into with certain corporations, APS can receive an initial license      
fee, future milestone payments, royalties based on third party product          
sales or a share of partners' revenues, and revenues from the supply of         
Microsponge and Polytrap systems.                                               

These strategic alliances are intended to provide the Company with the          
marketing expertise and/or financial strength of other companies.  In this      
respect, the Company's periodic financial results are dependent upon the        
degree of success of current collaborations and the Company's ability to        
negotiate acceptable collaborative agreements in the future.                    

Product and technology revenues for 1997 totalled $16,833,000, an increase      
of $8,636,000 or 105% over the prior year.                                      

This increase resulted primarily from the launches of a variety of new          
products incorporating the Microsponge(R) system technology by the              
Company's marketing partners and technology revenues received from certain      
corporate partners.  These product launches included Retin-A(R) Micro(TM)       
by Ortho Dermatological, Anew Retinol Recovery Complex PM Treatment which       
is marketed by Avon, and TxSystems(TM) AFIRM retinol formulation and Beta       
Lift peel kits which are marketed by Medicis Pharmaceutical.                    

Total revenues for 1997 of $18,333,000 also included recognition of             
$1,500,000 as a portion of a milestone payment received from J&J upon           
receipt of marketing clearance from the FDA for Retin-A Micro in February       
1997.                                                                           

Total revenues of $18,665,000 for 1996 included $10,468,000 from sales of       
consumer products most of which were licensed out to Lander Company             
effective January 1, 1997.                                                      

Gross profit on total revenues excluding milestone payment for 1997 was         
$9,669,000, an increase of $1,776,000 over the prior year.  Expressed as a      
percentage of total revenues excluding milestone payment, gross profit          
increased from 42% to 57% due to increased sales of higher margin               
proprietary cosmeceutical products, technology revenues and increased           
manufacturing volume.                                                           

Operating expenses for 1997 of $11,098,000 represented a decrease of            
$5,247,000 or 32% from the prior year total of $16,345,000.  Operating          
expenses for the prior year included a loss on purchase commitment for the      
purchase of melanin for $1,400,000.                                             

Selling and marketing expense decreased by $1,599,000 or 30% from the           
year-ago period to $3,806,000 in 1997.  This substantial decrease was due       
primarily to the execution of the Company's strategic plan whereby it is        
no longer responsible for the direct selling, advertising and distribution      
of consumer products.  Effective January 1, 1997, the Company 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 $683,000 represented a decrease of 93% or          
$8,695,000 from the year-ago loss of $9,378,000.                                

Results of Operations for the years ended December 31, 1996 and 1995            
--------------------------------------------------------------------            

Product and technology revenues for 1996 totalled $8,197,000, an increase       
of $1,943,000 or 31% over the prior year.  This increase was due primarily      
to increased shipments of Microsponge systems to manufacturers of               
cosmetics and personal care products and up-front fees received from            
corporate partners and licensees.                                               

Sales of consumer products increased by $1,364,000 or 15% to $10,468,000        
in 1996.  Most of these products were licensed to Lander Company effective      
January 1, 1997 in return for a royalty stream, as part of the Company's        
strategy to no longer be responsible for the direct marketing of its            
products.                                                                       

Revenues for 1995 also included a milestone payment of $750,000 received        
from J&J on the filing of the NDA for Retin-A Micro.                            

Total revenues for 1996 of $18,665,000 represented an increase of               
$2,557,000 or 16% over the prior year.                                          

Gross profit on total revenues excluding milestone payment totalled             
$7,893,000, compared to $4,311,000 in the prior year, due mainly to             
increased up-front fees received from corporate partners and increased          
manufacturing efficiencies.                                                     

Research and development expense decreased by $633,000 or 15% due               
primarily to a change in estimate.  Additionally, there was a continuing        
reduction in outside services as external costs are being borne                 
principally by corporate partners.  Selling and marketing expense               
increased by $649,000 or 14% to $5,405,000 due mainly to an increased           
focus on opening new markets for Microsponge systems and increased              
distribution expense attributable to higher sales volume.                       

Advertising and promotion expense increased by $1,245,000 or 69% due to a       
consumer products sampling program and expenditures relating to a full          
year's advertising for the Neet(R) depilatory product line which was            
licensed from Reckitt and Colman in September, 1995.                            

General and administrative expense decreased by $98,000 or 3% to                
$2,984,000 due mainly to reduced spending on external services.                 

The loss on purchase commitment relates to a contractual commitment for         
the purchase of melanin in excess of current estimated requirements.            
Melanin is the key ingredient in the manufacture of the APS-developed           
UVA/UVB sun protection cream for which an NDA was filed. This amount            
includes the final amount due under the contractual commitment.                 

The Company's operating loss decreased by $869,000 or 9% to $8,452,000 as       
a result of the factors discussed above.                                        

Interest income was essentially flat between 1996 and 1995, but interest        
expense increased by $778,000 to $1,223,000 in 1996 as a result of the          
debt financing arranged in the second half of 1995.                             

The net loss for the year of $9,378,000 was essentially flat with the loss      
in the prior year, with the increased gross profit being offset by              
increases in selling and promotional expense, interest expense and the          
increased loss on the purchase commitment.                                      

Capital Resources and Liquidity                                                 
-------------------------------                                                 

Total assets as of December 31, 1997 increased to $24,180,000 compared          
with $18,444,000 at December 31, 1996.  Working capital increased to            
$4,357,000 from $3,800,000 for the same period and cash and cash                
equivalents also increased to $8,672,000 from $5,395,000.  For the year         
ended December 31, 1997, the Company's operating activities used $30,000        
of cash compared to $6,117,000 in the prior year.  This was primarily due       
to the significant reduction in operating losses compared to the prior          
year as the Company's marketing partners launched several new products          
incorporating Microsponge systems during 1997.  In addition, the Company        
no longer bore the high cost of marketing and distributing products             
directly to consumers.  The Company invested approximately $3,740,000 in        
product research and development and $3,806,000 in selling and marketing        
the Company's products and technologies.                                        

Capital expenditures for the year ended December 31, 1997 totalled              
$2,800,000 compared to $720,000 in the prior year.  The increase was due        
primarily to plant expansion projects at the Company's manufacturing            
facility in Lafayette, Louisiana which are necessary to meet anticipated        
higher volume requirements.  This stage of the plant expansion is expected      
to be completed during 1998.                                                    

The Company has financed its operations, including product research and         
development, from amounts raised in debt and equity financings, the sale        
of Microsponge and Polytrap delivery systems and analytical standard            
products, payments received under licensing agreements, and interest            
earned on short-term investments.                                               

In February 1997, upon receipt of marketing clearance from the FDA to           
market Retin-A Micro for the treatment of acne, APS received $3,000,000         
from Ortho McNeil Pharmaceutical of which one half was prepaid royalties        
which was recorded as deferred revenue.  The Company also received              
$2,181,000 from Lander Company in the first half of 1997 as payment for         
assets held for sale pursuant to the agreement between the two companies.       

During 1997, the company received approximately $4,951,000 from the             
exercise of approximately 925,000 warrants to purchase common stock which       
had been issued in conjunction with a 1994 private placement.                   

The Company's existing cash and cash equivalents, collections of trade          
accounts receivable, together with interest income and other revenue            
producing activities including licensing fees and milestone payments, are       
expected to be sufficient to meet the Company's working capital                 
requirements for the foreseeable future, assuming no changes to existing        
business plans.                                                                 

Year 2000                                                                       
---------                                                                       

The Company is reviewing its internal computer systems to ensure that           
these systems and offerings are adequate to address the issues expected to      
arise in connection with the Year 2000.  The required systems and               
programming changes will be implemented on an enterprise-wide basis.  The       
Company is currently reviewing the costs of such actions that are required      
to address the Year 2000.  A significant proportion of the costs is not         
expected to be incremental in that they will represent redeployment of          
company resources that currently exist.                                         

The Company expects that the required modifications to its systems will be      
made on a timely basis.  The Company also expects that, with modifications      
to existing hardware and software or converting to new software, the Year       
2000 will not pose significant operational problems for the Company's           
systems.  There can be no assurance, however, that there will not be a          
delay in or increased costs associated with the implementation of such          
changes, and the Company's inability to implement such changes could have       
an adverse effect on future results of operations.                              

The Company has not fully determined the extent to which the Company's          
interface systems may be impacted by third parties' systems, which may not      
be Year 2000 compliant.  While the Company has begun efforts to seek            
reassurance from its suppliers and service providers, there can be no           
assurance that the systems of other companies with which the Company deals      
or on which the Company's systems rely will be converted in a timely            
manner.                                                                         

New Accounting Standards                                                        
------------------------                                                        

In June 1997, the Financial Accounting Standards Board issued Statement of      
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"         
("SFAS 130") which is effective for financial statements for periods            
beginning after December 15, 1997, and establishes standards for reporting      
and display of comprehensive income and its components in a full set of         
general purpose financial statements.  The Company will make the required       
reporting of comprehensive income in its consolidated financial statements      
for the first quarter ending March 31, 1998.                                    

In June 1997, the Financial Accounting Standards Board issued Statement of      
Financial Accounting Standards No. 131 "Disclosures about Segments of a         
Business Enterprise" ("SFAS 131") which is effective for financial              
statements beginning after December 15, 1997, and establishes standards         
for disclosures about segments of an enterprise.  In its consolidated           
financial statements for the year ending December 31, 1998, the Company         
will make the required disclosures.                                             

10-K
7th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 7th
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

Consolidated Balance Sheets                                                     
---------------------------                                                     

                                                                [Download Table]

                                                December 31,        
                                         -------------------------  
                                            1997           1996     
                                            ----           ----     
                                                                    
Assets                                                              
Current Assets:                                                     
 Cash and cash equivalents              $  8,672,021      5,394,509 
 Accounts receivable less allowance                                 
  for doubtful accounts of $57,453 and                              
  $47,527 at December 31, 1997 and 1996,                            
  respectively                             3,388,665      1,666,148 
 Accrued interest receivable                  13,606          3,963 
 Inventory                                 2,639,129      2,085,073 
 Prepaid expenses and other                  527,545        324,065 
 Assets held for sale                              -      2,181,004 
                                          ----------     ---------- 
  Total current assets                    15,240,966     11,654,762 

Property and equipment, net                6,771,173      4,681,292 
Deferred loan costs, net                     353,693        616,958 
Prepaid license fees, net                     82,880        165,752 
Goodwill and other intangibles, net of                              
 accumulated amortization of $1,102,480                             
 and $914,221 at December 31, 1997 and                              
 1996, respectively                        1,477,542      1,265,801 
Other long-term assets                       254,180         59,603 
                                          ----------     ---------- 
Total Assets                            $ 24,180,434     18,444,168 
                                          ==========     ========== 

Liabilities and Shareholders' Equity                                

Current Liabilities:                                                
 Accounts payable                          1,529,189      1,543,143 
 Accounts payable, Johnson & Johnson         107,000        814,509 
 Accrued expenses                          2,832,299      1,456,512 
 Accrued melanin purchase commitments      1,800,000      1,800,000 
 Current portion - long-term debt          2,523,389      1,490,779 
 Deferred revenue                          2,091,869        750,000 
                                          ----------     ---------- 
    Total current liabilities             10,883,746      7,854,943 

Long-term debt                             3,055,460      5,578,849 
                                          ----------     ---------- 
Total Liabilities                         13,939,206     13,433,792 

Commitments and Contingencies                                       

Shareholders' Equity                                                
 Preferred stock, authorized 2,500,000                              
  shares; none issued or outstanding at                             
  December 31, 1997 and 1996                      --             -- 
 Common stock, $.01 par value,                                      
  authorized 50,000,000 shares; issued                              
  and outstanding 19,464,821 and                                    
  18,359,744 at December 31, 1997 and                               
  1996, respectively                         194,648        183,597 
Warrants, issued and outstanding:                                   
  506,816 at December 31, 1997 and                                  
  1,431,974 at December 31, 1996             983,192      2,457,692 
 Additional paid-in capital               81,327,554     73,950,092 
 Accumulated deficit                     (72,264,166)   (71,581,005)
                                          ----------     ---------- 
Total Shareholders' Equity                10,241,228      5,010,376 
Total Liabilities and Shareholders'                                 
 Equity                                 $ 24,180,434     18,444,168 
                                          ==========     ========== 

<FN>                                                                
See accompanying notes.                                             
</FN>                                                               

10-K
8th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 8th
Consolidated Statements of Operations                                           
-------------------------------------                                           

                                                                [Download Table]

                                         For the Years Ended December 31,    
                                         --------------------------------    
                                          1997          1996          1995   
                                          ----          ----          ----   
                                                                             
Revenues:                                                                    
 Product and technology revenues     $16,832,659     8,197,395     6,253,831 
 Consumer products                             -    10,467,512     9,104,365 
 Milestone payments                    1,500,000             -       750,000 
                                      ----------    ----------    ---------- 
   Total revenues                     18,332,659    18,664,907    16,108,196 

Expenses                                                                     
 Cost of sales                         7,164,120    10,771,766    11,047,399 
 Research and development, net         3,740,337     3,506,161     4,139,441 
 Selling and marketing                 3,806,030     5,404,774     4,755,788 
 Advertising and promotion                     -     3,050,180     1,804,540 
 General and administrative            3,551,977     2,984,213     3,081,900 
 Loss on purchase commitment,                                                
  including related inventory                  -     1,400,000       600,000 
                                      ----------    ----------    ---------- 
    Operating income (loss)               70,195    (8,452,187)   (9,320,872)
                                      ----------    ----------    ---------- 
Interest expense                      (1,052,715)   (1,223,303)     (445,501)
Interest income                          370,478       322,986       317,948 
Other income (expense), net              (71,119)      (25,595)       89,895 
                                      ----------    ----------    ---------- 
Net loss                             $  (683,161)   (9,378,099)   (9,358,530)
                                      ==========    ==========    ========== 

Basic and diluted                                                            
  loss per common share              $     (0.04)        (0.52)        (0.57)
                                      ==========    ==========    ========== 
Weighted average common shares                                               
  outstanding                         18,778,921    17,987,153    16,459,446 
                                      ==========    ==========    ========== 
<FN>                                                                         
See accompanying notes.                                                      
</FN>                                                                        
</TABLE                                                                      

10-K
9th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 9th
Consolidated Statements of Shareholders' Equity                              
-----------------------------------------------                              

For the Years Ended December 31, 1997, 1996 and 1995                         

                                                        [Enlarge/Download Table]


                                                   Common Stock       Additional  Unrealized    Total                  
                              Common Stock           Warrants           Paid-In     Holding  Accumulated Shareholders' 
                           Shares     Amount    Shares      Amount      Capital      Gain       Deficit       Equity   
                        -----------  --------  ---------  ----------  ----------- ---------- ------------  ----------- 
                                                                                                                       
Balance December 31,                                                                                                   
 1994                   16,043,121   $160,431  2,286,658 $ 4,059,500  $60,297,027 $113,166   $(52,844,376) $11,785,748 
                        ----------    -------  ---------   ---------   ----------  -------    -----------   ---------- 
Options exercised          236,992      2,370         --          --    1,078,929       --             --    1,081,299 
Private placement,                                                                                                     
 net of $112,383 in                                                                                                    
 offering costs            310,278      3,103    310,278     485,591      898,923       --             --    1,387,617 
Securities issued in                                                                                                   
 debt financing                                                                                                        
 arrangements                4,174         42    193,175     407,985       29,958       --             --      437,985 
Common stock to be                                                                                                     
 issued in connection                                                                                                  
 with the agreement with                                                                                               
 Johnson & Johnson         432,101      4,321         --          --       (4,321)      --             --           -- 
Warrants expired                --         -- (1,161,500) (2,300,000)   2,300,000       --             --           -- 
Change in unrealized                                                                                                   
 holding gain                   --         --         --          --           -- (100,818)            --     (100,818)
Net loss                        --         --         --          --           --       --     (9,358,530)  (9,358,530)
                        ----------    -------  ---------   ---------   ----------  -------    -----------   ---------- 
Balance December 31,                                                                                                   
 1995                   17,026,666    170,267  1,628,611   2,653,076   64,600,516   12,348    (62,202,906)   5,233,301 
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Options exercised          416,219      4,162         --          --    1,993,017       --             --    1,997,179 
Shares retired             (12,836)      (128)        --          --      (97,747)      --             --      (97,875)
Private placement,                                                                                                     
 net of $62,149 in                                                                                                     
 offering costs            201,922      2,019     86,538     295,751    1,640,081       --             --    1,937,851 
Common stock to be                                                                                                     
 issued in connection                                                                                                  
 with the agreement with                                                                                               
 Johnson & Johnson        (432,101)    (4,321)        --          --        4,321       --             --           -- 
Common stock issued in                                                                                                 
 connection with the                                                                                                   
 agreement with Johnson                                                                                                
 & Johnson                 432,101      4,321         --          --       (4,321)      --             --           -- 
Common stock issued in                                                                                                 
 connection with the                                                                                                   
 agreement with Lander                                                                                                 
 Company, net of $39,547                                                                                               
 in offering costs         356,761      3,567         --          --    2,956,976       --             --    2,960,543 
Common stock issued to                                                                                                 
 Dow Corning, net of                                                                                                   
 $4,000 in offering                                                                                                    
 costs                     200,000      2,000         --          --    1,194,000       --             --    1,196,000 
Common stock issued to                                                                                                 
 Biosource                  94,000        940         --          --      599,060       --             --      600,000 
Securities issued in                                                                                                   
 debt financing                                                                                                        
 arrangements               10,675        107      4,325     (50,935)      78,353       --             --       27,525 
Fair value of stock                                                                                                    
 options issued to                                                                                                     
 non-employees                  --         --         --          --      161,299       --             --      161,299 
Warrants exercised          66,337        663    (87,500)   (155,200)     539,537       --             --      385,000 
Warrants expired                --         --   (200,000)   (285,000)     285,000       --             --           -- 
Change in unrealized                                                                                                   
 holding gain                   --         --         --          --           --  (12,348)            --      (12,348)
Net loss                        --         --         --          --           --       --     (9,378,099)  (9,378,099)
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Balance December 31,                                                                                                   
 1996                   18,359,744   $183,597  1,431,974 $ 2,457,692  $73,950,092 $     --   $(71,581,005) $ 5,010,376 
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Options exercised          165,374      1,654         --          --      777,452       --             --      779,106 
Fair value of stock                                                                                                    
 options issued to                                                                                                     
 non-employees                  --         --         --          --       96,757       --             --       96,757 
Common stock issued to                                                                                                 
 employees under the                                                                                                   
 Employee Stock                                                                                                        
 Purchase Plan              14,545        145         --          --       87,125       --             --       87,270 
Warrants exercised         925,158      9,252   (925,158) (1,474,500)   6,416,128       --             --    4,950,880 
Net loss                        --         --         --          --           --       --       (683,161)    (683,161)
                        ----------    -------  ---------   ---------   ----------  -------     ----------   ---------- 
Balance, December 31,                                                                                                  
 1997                   19,464,821   $194,648    506,816 $   983,192  $81,327,554 $     --   $(72,264,166) $10,241,228 
                        ==========    =======  =========   =========   ==========  =======     ==========   ========== 
<FN>                                                                                                                   
See accompanying notes.                                                                                                
</FN>                                                                                                                  

10-K
10th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 10th
Consolidated Statements of Cash Flows                                           
--------------------------------------                                          

                                                        [Enlarge/Download Table]

                                                      For the Years Ended December 31,                        
                                                  --------------------------------------                      
                                                      1997         1996         1995                          
                                                   ---------     ---------    ---------                       
                                                                                                              
Cash flows from operating activities:                                                                         
 Net loss                                        $  (683,161)   (9,378,099)  (9,358,530)                      
  Adjustments to reconcile net loss to net                                                                    
   cash used in operating activities:                                                                         
    Depreciation and amortization                    980,933     1,393,805    1,377,614                       
    Provision for loss on purchase                                                                            
      commitments, including inventory                    --     1,400,000      600,000                       
    Allowance for doubtful accounts                   22,967       (21,123)       2,086                       
    Accretion of pledged long-term marketable                                                                 
      Securities                                          --            --     (121,572)                      
    Loss on sale of equipment and assets held                                                                 
      for sale                                            --            --      125,764                       
    Gain on sale of pledged marketable securities         --            --     (234,319)                      
    Provision for deferred compensation              216,757       161,299           --                       
    Amortization of deferred loan costs              263,265       215,366     (439,824)                      
  Changes in operating assets and liabilities:                                                                
    Accounts receivable                           (1,745,484)      791,790   (1,130,448)                      
    Accrued interest receivable                       (9,643)       12,510        9,570                       
    Inventory                                       (554,056)    5,573,511     (856,558)                      
    Prepaid expenses and other                      (203,480)      661,134       20,931                       
    Assets held for sale                                  --    (2,181,004)          --                       
    Other long-term assets                          (194,577)      129,425      (10,856)                      
    Accounts payable and accrued expenses          1,241,833    (1,460,693)      87,394                       
    Accounts payable, Johnson & Johnson             (707,509)   (3,415,128)     659,112                       
    Deferred revenue                               1,341,869            --      750,000                       
                                                   ---------     ---------   ----------                       
Net cash used in operating activities                (30,286)   (6,117,207)  (8,519,636)                      
                                                   ---------     ---------   ----------                       

Cash flows from investing activities:                                                                         
 Purchase of property and equipment               (2,799,683)     (719,640)    (901,288)                      
 Purchases of intangible assets                     (400,000)           --           --                       
 Proceeds from sale of equipment and                                                                          
   assets held for sale                            2,181,004            --      797,672                       
 Purchases of marketable securities                       --      (512,513)  (4,458,891)                      
 Maturities and sales of marketable                                                                           
   securities                                             --       500,165    5,935,087                       
                                                   ---------     ---------   ----------                       
Net cash provided by (used in)                                                                                
  investing activities                            (1,018,679)     (731,988)   1,372,580                       
                                                   ---------     ---------   ----------                       

Cash flows from financing activities:                                                                         
 Repayment of long-term debt                      (1,490,779)     (870,598)    (258,304)                      
 Proceeds from long-term debt and warrants                --       758,795    7,367,259                       
 Proceeds from private placements, net of                                                                     
   offering costs                                         --     1,937,851    1,387,617                       
 Proceeds from stock issued to Lander                                                                         
  Company, net of offering costs                          --     2,960,543           --                       
 Proceeds from the exercise of common                                                                         
  stock options and warrants, net of                                                                          
  common stock retired                             5,729,986     2,284,304    1,081,299                       
 Proceeds from issuance of shares under the                                                                   
  Employee Stock Purchase Plan                        87,270            --           --                       
                                                   ---------     ---------   ----------                       
Net cash provided by financing activities          4,326,477     7,070,895    9,577,871                       
                                                   ---------     ---------   ----------                       

Net increase in cash and cash equivalents          3,277,512       221,700    2,430,815                       

Cash and cash equivalents at the beginning                                                                    
  of the year                                      5,394,509     5,172,809    2,741,994                       
                                                   ---------     ---------   ----------                       
Cash and cash equivalents at the end of                                                                       
  the year                                      $  8,672,021     5,394,509    5,172,809                       
                                                   =========     =========   ==========                       
<FN>                                                                                                          
Supplemental disclosure of non-cash financing transactions:                                                   

During the first quarter of 1996, the Company acquired all rights to the Polytrap technology from Dow Corning 
Corporation ("DCC") in exchange for 200,000 shares of common stock valued at $1,200,000.                      
During the first quarter of 1996, the Company paid Biosource for the 1995 purchase commitment totaling        
$600,000 by issuing 94,000 shares of common stock.                                                            
The Company offset a deposit of approximately $188,000 and $755,000 for 1996 and 1995, respectively, with a   
creditor against a loan from the same creditor (Note 9).                                                      
In September, 1995, the Company offset its note payable to Dow Corning Corporation against its receivable from
DCC.  This resulted in a decrease in long-term debt, short-term debt and accounts receivable of $478,935,     
$100,000 and $578,935, respectively.                                                                          
In 1995, the Company extinguished a debt through an insubstance defeasance transaction by placing U.S.        
government securities in an irrevocable trust to fund all future scheduled payments on the debt.              

See accompanying notes.                                                                                       
</FN>                                                                                                         

10-K
11th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 11th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      
------------------------------------------                                      
DECEMBER 31, 1997, 1996 AND 1995                                                
--------------------------------                                                

Note 1   Business                                                               

Advanced Polymer Systems, Inc. ("APS" or the "Company") develops,               
manufactures and sells patented delivery systems that allow for the             
controlled release of active ingredients which have benefits in the             
ethical dermatology, cosmetic and personal care areas.  Certain projects        
are conducted under development and licensing arrangements with large           
companies, others are part of joint ventures in which APS is a major            
participant, and a number of projects are exclusive to APS.  Prior to           
1997, APS also marketed and distributed a range of consumer products for        
personal care through its subsidiary, Premier, Inc. ("Premier").                
Effective January 1, 1997, APS licensed the consumer products to a third        
party (Note 7).                                                                 

Note 2   Summary of Significant Accounting Policies                             

Principles of Consolidation:  The consolidated financial statements             
include the financial statements of the Company and its wholly owned            
subsidiaries, Premier, Advanced Consumer Products, Inc. ("ACP") and APS         
Analytical Standards.  All significant intercompany balances and                
transactions have been eliminated in consolidation.                             

Cash Equivalents and Marketable Securities                                      
------------------------------------------                                      

For purposes of the Consolidated Statements of Cash Flows and                   
Consolidated Balance Sheets, the Company considers all short-term               
investments that have original maturities of less than three months to          
be cash equivalents.  Short-term investments consist primarily of               
commercial paper, master notes and repurchase agreements.  All                  
investments were classified as cash equivalents in the accompanying             
financial statements since there were no investments with original              
maturities longer than three months.  The Company has classified its            
investments in certain debt and equity securities as "available-for-            
sale".                                                                          

Financial Instruments                                                           
---------------------                                                           

The Company's investments are recorded at fair value with unrealized            
holding gains and losses reported as a separate component of                    
shareholders' equity.  The carrying amounts reported in the balance             
sheets for cash, receivables, accounts payable, accrued liabilites and          
short-term and long-term debt approximate fair values due to the short-         
term maturities.                                                                

Inventory                                                                       
---------                                                                       

Inventory is stated at the lower of cost or market value, utilizing the         
average cost method (Note 6).                                                   

Property and Equipment                                                          
----------------------                                                          

Property and equipment are carried at cost.  Depreciation is computed           
using the straight-line method over the estimated useful lives of the           
assets, not exceeding twenty years (Note 8).                                    

Prepaid License Fees                                                            
--------------------                                                            

The fee paid to Biosource in 1992 is being amortized over a seven-year          
period consistent with the term of the agreement (Note 3). Amortization         
of prepaid license fees totalled $82,872, $137,880 and $137,868 in              
1997, 1996 and 1995, respectively.                                              

Deferred Loan Costs                                                             
-------------------                                                             

Deferred charges relate to costs incurred in obtaining certain loans.           
These charges are being amortized over the life of the loans using the          
effective interest method (Note 9).                                             

Long-Lived Assets, Including Goodwill and Other Intangibles                     
-----------------------------------------------------------                     

In accordance with SFAS No. 121, "Accounting for the Impairment of              
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the             
Company evaluates whether changes have occurred that would require              
revision of the remaining estimated lives of recorded long-lived                
assets, including goodwill, or render those assets not recoverable.             
If such circumstances arise, recoverability is determined by comparing          
the undiscounted net cash flows of long-lived assets to their                   
respective carrying values.  The amount of impairment, if any, is               
measured based on the projected discounted cash flows using an                  
appropriate discount rate.  At this time, the Company believes that no          
significant impairment of long-lived assets, including goodwill and             
other intangibles, has occurred and that no reduction of the estimated          
useful lives of such assets is warranted.                                       

In 1997, APS acquired all the rights to Exact(R) acne medication from           
Johnson & Johnson Consumer Products, Inc. for $350,000.  Effective              
January 1, 1997, APS licensed Exact and other consumer products to              
Lander Company (Note 7).  The rights are being amortized on a straight-         
line basis over the length of the licensing agreement with Lander.              

In the first quarter of 1996, APS acquired all patents and rights to            
the Polytrap technology from Dow Corning Corporation in exchange for            
200,000 shares of its common stock. APS recorded intangible assets              
totalling $1,200,000 relating to this transaction.  The intangible              
assets are being amortized on a straight-line basis over a period of            
approximately 10 years, which is the remaining life of the main patent          
acquired.                                                                       

In 1992, APS acquired for 157,894 shares of its common stock, the               
outstanding 25% interest in ACP, APS' over-the-counter                          
consumer products subsidiary.  The acquisition was accounted for as a           
purchase.  Excess of cost over net assets acquired arising from the             
purchase was amortized over five years on a straight-line basis.                

Amortization of intangible assets totalled $188,259, $279,756 and               
$188,875, in 1997, 1996 and 1995, respectively.                                 

Stock-Based Compensation                                                        
------------------------                                                        

The Company has chosen to account for stock-based compensation using            
the intrinsic value method prescribed in Accounting Principles Board            
Opinion No. 25, Accounting for "Stock Issued to Employees" and related          
interpretations.  Accordingly, except for stock options issued to non-          
employees, no compensation cost has been recognized for the Company's           
fixed stock option plans and stock purchase plan (Note 11).                     

Use of Estimates                                                                
----------------                                                                

The preparation of financial statements in conformity with generally            
accepted accounting principles requires management to make estimates            
and assumptions that affect the amounts reported in the consolidated            
financial statements and related notes to financial statements.                 
Changes in such estimates may affect amounts in future periods.                 

Revenue Recognition                                                             
-------------------                                                             

Product revenues are recorded upon shipment of products.                        

The Company has several licensing agreements that generally provide for         
the Company to receive periodic minimum payments, royalties,and/or non-         
refundable license fees.  These amounts are classified as Product and           
Technology Revenues in the accompanying consolidated statements of              
operations and are recognized when earned.                                      
Advertising and Promotion Costs                                                 
-------------------------------                                                 

Advertising and promotion costs are expensed as incurred.                       

Earnings (Loss) Per Share                                                       
-------------------------                                                       

The Company adopted SFAS No. 128 "Earnings per Share" (SFAS 128) in the         
quarter ended December 31,1997.  All prior period earnings per share            
data were restated by the Company upon adoption of SFAS 128.                    

Basic and diluted earnings (loss) per common share were computed based          
on the weighted average number of common shares outstanding during each         
year.  The computation assumes that no outstanding stock options and            
warrants were exercised as they would be anti-dilutive.                         

Deferred Revenue                                                                
----------------                                                                

Prepaid royalties paid to APS by Ortho-McNeil Pharmaceutical                    
Corporation ("Ortho"), a subsidiary of Johnson & Johnson Inc. ("J&J"),          
as part of the retinoid licensing agreement are reported as deferred            
revenues (Note 14).                                                             

In accordance with the licensing agreement, a portion of the royalties          
earned by APS is applied against the deferred revenues after certain            
annual minimum royalty payments are met.                                        

Concentrations of Credit Risk                                                   
-----------------------------                                                   

Financial instruments which potentially expose the Company to                   
concentrations of credit risk, as defined by Statement of Financial             
Accounting Standards No. 105, consist primarily of trade accounts               
receivable.  Approximately 51% and 53% of the recorded trade                    
receivables were concentrated with five and two customers in the                
cosmetic and personal care industries as of December 31, 1997 and 1996,         
respectively.  To reduce credit risk, the Company performs ongoing              
credit evaluations of its customers' financial conditions.  The Company         
does not generally require collateral.                                          

Reclassifications                                                               
-----------------                                                               

Certain reclassifications have been made to the prior year financial            
statements to conform with the presentation in 1997.                            

Note 3   Related Party Transactions                                             

APS has entered into agreements with Biosource.  One director serves on         
the Board of Directors of both Biosource and APS.  All agreements between       
APS and Biosource have been, and will continue to be, considered and            
approved by a vote of the disinterested directors.  The agreements provide      
APS worldwide rights to use and sell Biosource's biologically-synthesized       
melanin in Microsponge systems for all sun protection, cosmetic, ethical        
dermatology and over-the-counter skin care purposes.  In return, APS was        
required to make annual minimum purchases of melanin, pay royalties on          
sales of APS melanin-Microsponge products and was required to prepay            
$500,000 of royalties.   For estimated losses on purchase commitments and       
related inventory, the Company accrued $0, $1,400,000 and $600,000 in           
1997, 1996 and 1995, respectively.  All minimum financial commitments           
under the current agreements have been expensed by APS.                         

In 1996, APS paid Biosource the 1995 minimum purchase commitment by             
issuing Biosource 94,000 shares of APS common stock.                            

In November, 1997 Biosource filed a complaint against the Company in the        
San Mateo Superior Court (Note 4).                                              

Note 4   Legal Proceeding                                                       

In November, 1997 Biosource filed a complaint against the Company in the        
San Mateo Superior Court.  Biosource claims damages from the Company of an      
amount not less than $1,050,000, on the grounds that the Company has            
failed to pay certain minimum amounts allegedly due under a contract for        
the supply of melanin.  Biosource also claims interest on that sum and          
costs.                                                                          

The Company has denied liability, basing its defense on the assertion that      
obligations under the contract have been suspended, because the expected        
FDA approval of the Company's melanin based product has not yet been            
forthcoming.  The Company is vigorously defending the action, and has           
cross claimed for rescission of the contract and restitution of money paid      
thereunder, and for a declaratory judgment that it is not indebted to           
Biosource.                                                                      

The Company expects that the outcome of this legal proceeding will not          
have a material adverse effect on the consolidated financial statements         
considering amounts accrued at December 31, 1997.                               

Note 5   Cash Equivalents                                                       

All investments in debt securities have been classified as cash                 
equivalents in the accompanying balance sheets as they mature in less than      
three months.                                                                   

At December 31, 1997 and 1996, the amortized cost and estimated market          
value of investments in debt securities are set forth in the tables below:      

   December 31, 1997
    --------------------------------
                         Estimated
     Cost               Fair Value
    --------------------------------
Available-for-Sale:                                                             
Corporate debt securities $6,726,919           6,726,919                        
Other debt securities        869,634             869,634                        
   ---------           ---------
Totals                    $7,596,553           7,596,553                        
   =========           =========

   December 31, 1996
    --------------------------------
                         Estimated
     Cost               Fair Value
    --------------------------------
Available-for-Sale:                                                             
Corporate debt securities $3,556,052           3,556,052                        
Other debt securities        214,790             214,790                        
   ---------           ---------
Totals                    $3,770,842           3,770,842                        
   =========           =========

Note 6  Inventory                                                               

The major components of inventory are as follows:                               

                  December 31,
                   ---------------------------
                1997            1996
                ----            ----
Raw materials and work-in-process $  834,496         604,852                    
Finished goods                     1,804,633       1,480,221                    
               ---------       ---------
Total inventory                   $2,639,129       2,085,073                    
               =========       =========

Consumer products inventory was classified as Assets Held for Sale in the       
accompanying December 31, 1996 balance sheet (Note 7).                          

Note 7   Assets Held for Sale                                                   

In January 1997, APS entered into an agreement with Lander Company under        
which Lander commercialized the APS consumer products as part of the            
Company's long-term strategic plan to move away from the direct marketing       
of consumer products.  Under the terms of the agreement, certain consumer       
products inventory, manufacturing equipment and prepaid advertising             
credits were sold to Lander in January 1997 at the December 31, 1996 book       
value.  In addition, APS receives revenue from royalties on consumer            
product sales and the supply of Microsponge systems to Lander.  Also, the       
Company discontinued the marketing of the suncare products licensed from        
J&J; the related inventory amounted to approximately $198,000 at December       
31, 1996.  For financial reporting purposes, these consumer product assets      
are classified as Assets Held for Sale in the accompanying December 31,         
1996 balance sheet and consist of the following:                                

Inventory                     $1,703,764                                  
Prepaid Asset                    388,021                                  
Property Plant and Equipment      89,219                                  
---------   
$2,181,004    
=========   

Note 8   Property and Equipment                                                 

Property and equipment consist of the following:                                

              December 31,
             ---------------------------
             1997           1996
             ----------     ----------
Building                         $ 1,823,625      1,611,039                     
Land and improvements                163,519        163,519                     
Leasehold improvements             1,233,074        571,223                     
Furniture and equipment           13,001,437     11,119,307                     
             ----------     ----------
Total property and equipment      16,221,655     13,465,088                     
Accumulated depreciation                                                        
and amortization                 (9,450,482)    (8,783,796)                   
             ----------     ----------
Property and equipment, net      $ 6,771,173      4,681,292                     
             ==========     ==========

Depreciation expense amounted to $709,802, $976,163 and $980,779 for the        
years ended December 31, 1997, 1996, and 1995, respectively.                    

Certain consumer products manufacturing equipment is classified as Assets       
Held for Sale in the accompanying December 31, 1996 balance sheet (Note         
7).                                                                             

Note 9   Long-Term Debt                                                         

Long-term debt consists of the following:                                       

                                                                [Download Table]


                                                     December 31    
                                                --------------------
                                                  1997        1996  
                                                  ----        ----  
                                                                    
Bank loan, interest payable monthly, principal                      
 due in non-equal installments commencing                           
 December 1, 1996 through March 1, 1999,                            
 secured by the assets and operating cash                           
 flow of a subsidiary of the Company and                            
 guaranteed by the Company                     $2,550,000  2,950,000

Term loan, subordinated to bank loan, interest                      
 payable quarterly, principal due in non-equal                      
 installments commencing December 1, 1996                           
 through March 1, 1999, secured by the assets                       
 and operating cash flows of a subsidiary of                        
 the Company and guaranteed by the Company      1,402,500  1,622,500

Term loan, principal and interest due in equal                      
 monthly installments commencing October 1996                       
 through December 1999, secured by certain                          
 real and personal property                     1,626,349  2,497,128
                                                ---------  ---------
Total                                           5,578,849  7,069,628
Less current portion                            2,523,389  1,490,779
                                                ---------  ---------
Long-term debt                                 $3,055,460  5,578,849
                                                =========  =========


Maturities of the long-term debt are as follows:                                

Years ending December 31      Amount                                  
------------------------    ----------                                
1998               $2,523,389                       
1999                3,055,460                       
---------   
$5,578,849    
=========   

In 1995, the Company received an aggregate amount of $8,122,334 from three      
financing arrangements.                                                         

The first financing arrangement was a $3,000,000 bank loan with an              
interest rate equal to two percentage points above the Prime Rate (8.5% as      
of December 31, 1997).  The loan is secured by the assets and operating         
cash flows of a subsidiary of the Company and guaranteed by the Company.        

The second financing arrangement was originally a $1,500,000 term loan          
with a syndicate of lenders and a fixed interest rate of 14%.  In January       
1996, an incremental $150,000 was received under this financing                 
arrangement.  The loan is also secured by the assets and operating cash         
flows of a subsidiary of the Company and guaranteed by the Company.  The        
security interest of the debt holders is subordinated to the bank loan's        
security interest.                                                              

In the third quarter of 1995, the Company consummated a transaction             
whereby certain assets were sold to a third party and subsequently leased       
back for a fixed rental stream over a period of forty-eight months.  The        
Company has the option either to purchase all the properties at the             
expiration of the term of the lease or extend the term of the lease.  The       
Company reported this transaction as a financing transaction since the          
requirements for consummation of a sale were not met.  A deposit of             
$188,000 with the lender was offset against the loan balance as of              
December 31, 1997 and 1996.  In 1996, the Company received a refund of          
$567,000 of the deposit upon satisfaction of certain conditions identified      
in the financing agreement.  This transaction has been reflected in the         
table above as a term loan.                                                     

The terms of certain financing agreements contain, among other provisions,      
requirements for a subsidiary of the Company to maintain defined levels of      
earnings, net worth and various financial ratios, including debt to net         
worth.  In conjunction with the debt financing agreements, APS issued a         
total of 197,500 warrants with an original exercise price of $7.00 per          
share of common stock.  In accordance with the original terms of the            
warrant agreements, the exercise price on 110,000 of the warrants               
outstanding at December 31, 1997 was reduced to $3.00 per share on              
December 31, 1997 as a result of the Company reporting a net loss for the       
1997 fiscal year.                                                               

All costs incurred in obtaining the financing arrangements have been            
capitalized as deferred charges, and are being amortized over the life of       
the loans using the effective interest method.  Interest paid in 1997,          
1996 and 1995 approximated interest expense reflected in the Consolidated       
Statements of Operations.                                                       

In September 1995, the Company extinguished $2,500,000 of Industrial            
Revenue Bonds through an "insubstance defeasance" transaction by placing        
approximately $2,500,000 of U.S. government securities in an irrevocable        
trust to fund all future interest and principal payments.  The defeased         
debt balance outstanding as of December 31, 1997 was $2,500,000.  The           
purchase of the government securities to offset this debt was achieved          
through the sale of the Company's pledged marketable security.  The debt        
extinguishment did not have a material impact on the Company's earnings.        

Note 10   Commitments                                                           

Lease Commitments:  Total rental expense for property and equipment was         
$770,187, $655,283 and $639,807 for 1997, 1996 and 1995, respectively.          

The Company's future minimum lease payments under noncancellable operating      
leases for facilities as of December 31, 1997, are as follows:                  

Years Ending                     Minimum            
December 31,                     Payments           
------------                    -----------         
1998                         $  739,871     
1999                            723,027     
2000                            717,181     
2001                            725,233     
2002                            735,095     
Thereafter                    1,248,609     
                        ----------
                        $4,889,016
                        ==========

Note 11   Shareholders' Equity                                                  

Private Placements and Common Stock Warrants:  In January 1996, in              
accordance with a 1994 private placement agreement, APS issued J&J 432,101      
shares of common stock as a result of the APS stock price not achieving         
certain predetermined levels.  The 200,000 warrants issued to J&J in            
conjunction with this private placement expired in 1996 (Note 14).              

During 1997, 925,158 warrants issued in connection with a 1994 private          
placement were exercised.  As of December 31, 1997, 310,278 warrants from       
the 1994 private placement are outstanding with an exercise price of $5.32      
per warrant.  The outstanding warrants expire on March 30, 1998.                

In conjunction with certain debt financing agreements made in 1995 (Note        
9), APS issued a total of 197,500 warrants with an original exercise price      
of $7.00 per share of common stock.  In accordance with the warrant             
agreements, the exercise price was reduced to $3.00 on December 31, 1997        
as a result of the Company reporting a net loss for the 1997 fiscal year.       
These warrants will expire on March 27, 2000.                                   

In the first quarter of 1995, 1,161,500 warrants issued in a 1992 private       
placement expired.                                                              

In the first quarter of 1996, the Company formed a collaborative agreement      
with the Lander Company under which the Company received $2,961,000 in net      
proceeds from the sale of 356,761 shares of common stock.  In addition,         
the Company will receive licensing fees, research and development funding       
and royalties on product sales in the future.                                   

In 1996, APS acquired all patents and rights to the Polytrap technology         
from Dow Corning in exchange for 200,000 shares of APS common stock (Note       
2).                                                                             

During the second quarter of 1996, APS received $1,937,851 net of offering      
costs, through a private placement and sale of 201,922 shares of common         
stock and 86,538 warrants exercisable over a three-year period.  The            
warrants are exercisable at the following prices:                               

Number of Shares      Exercise Price                                  
----------------      --------------                                  
28,846                $ 7.43                                    
28,846                  9.90                                    
28,846                 12.38                                    

Shareholders Rights Plan:  On August 19, 1996, the Board of Directors           
approved a Shareholders Rights Plan under which shareholders of record on       
September 3, 1996 received a dividend of one Preferred Stock purchase           
right ("Rights") for each share of common stock outstanding.  The Rights        
were not exercisable until 10 business days after a person or group             
acquired 20% or more of the outstanding shares of common stock or               
announced a tender offer which could have resulted in a person or group         
beneficially owning 20% or more of the outstanding shares of common stock       
(an "Acquisition") of the Company.  The Board of Directors approved an          
increase in threshold to 30% in December 1997.  Each Right, should it           
become exercisable, will entitle the holder (other than acquirer) to            
purchase company stock at a discount.  The Board of Directors may               
terminate the Rights plan or, under certain circumstances, redeem the           
rights.                                                                         

In the event of an Acquisition without the approval of the Board, each          
Right will entitle the registered holder, other than an acquirer and            
certain related parties, to buy at the Right's then current exercise price      
a number of shares of common stock with a market value equal to twice the       
exercise price.                                                                 

In addition, if at the time when there was a 30% shareholder, the Company       
were to be acquired by merger, shareholders with unexercised Rights could       
purchase common stock of the acquirer with a value of twice the exercise        
price of the Rights.                                                            

The Board may redeem the Rights for $0.01 per Right at any time prior to        
Acquisition.  Unless earlier redeemed, the Rights will expire on August         
19, 2006.                                                                       

Stock-Based Compensation Plans:  The Company has two types of stock-based       
compensation plans, a stock purchase plan and a stock option plan.              

In 1997, the stockholders approved the Company's 1997 Employee Stock            
Purchase Plan (the "Plan").  Under the 1997 Employee Stock Purchase Plan,       
the Company is authorized to issue up to 400,000 shares of common stock to      
its employees, nearly all of whom are eligible to participate.  Under the       
terms of the Plan, employees can elect to have up to a maximum of 10            
percent of their base earnings withheld to purchase the Company's common        
stock.  The purchase price of the stock is 85 percent of the lower of the       
closing prices for the Company's common stock on:  (i) the first trading        
day in the enrollment period, as defined in the Plan, in which the              
purchase is made, or (ii) the purchase date.  The length of the enrollment      
period may not exceed a maximum of 24 months.  Enrollment dates are the         
first business day of May and November provided that the first enrollment       
date was April 30, 1997.  Approximately 58 percent of eligible employees        
participated in the Plan in 1997.  Under the Plan, the Company issued           
14,545 shares in 1997 and no shares in 1996 and 1995.  The weighted             
average fair value of purchase rights granted during the year was $2.77.        
The weighted average exercise price of the purchase rights exercised            
during the year was $6.00.  As of December 31, 1997, the Company had            
385,455 shares reserved for issuance under the stock purchase plan.             

The Company has various stock option plans for employees, officers,             
directors and consultants.   The options are granted at fair market value       
and expire no later than ten years from the date of grant.  The options         
are exercisable in accordance with vesting schedules that generally             
provide for them to be fully exercisable four years after the date of           
grant.                                                                          

The following table summarizes option activity for 1997, 1996 and 1995:         

                                                        [Enlarge/Download Table]

     1997                 1996                 1995                                         
                               -----------------   ------------------   --------------------
                                        Weighted             Weighted              Weighted 
                                         Average              Average               Average 
                                        Exercise             Exercise              Exercise 
                                 Shares   Price     Shares     Price      Shares     Price  
                               -----------------   ------------------   --------------------
                                                                                            
Outstanding at beginning                                                                    
 of year                       2,901,440   $6.46   2,972,324   $5.98    2,677,162   $6.14   
Granted                          313,500    7.50     502,500    7.89      636,500    5.31   
Exercised                       (165,374)   4.71    (416,219)   4.80     (236,992)   4.59   
Expired or Cancelled            (101,811)   8.36    (157,165)   6.25     (104,346)   9.14   
                               ---------           ---------            ---------           
Outstanding at end of year     2,947,755    6.63   2,901,440    6.46    2,972,324    5.98   
                               =========           =========            =========           
Options exercisable at                                                                      
   year-end                    2,259,683           1,945,056           1,877,295            
Shares available for future                                                                 
 grant at year end               358,295             569,984             167,819            
Weighted-average fair                                                                       
 value of options granted                                                                   
 during the year                           $4.25               $5.12                $3.44   


The following table summarizes information about fixed stock options            
outstanding at December 31, 1997:                                               

                                                                [Download Table]


                            OPTIONS OUTSTANDING     OPTIONS EXERCISABLE  
                           ----------------------  ----------------------
                           Weighted     Weighted                Weighted 
                            Average      Average                 Average 
Range of        Number     Remaining   Remaining    Number      Remaining
Exercise      Outstanding  Contractual  Exercise  Exercisable    Exercise
Prices         12/31/97      Life        Price    at 12/31/97     Price  
-----------   -----------  ----------- ---------  -----------   ---------
                                                                         
$3.44-$5.25      788,251     5.8 years  $  4.67      618,005    $  4.54  
$5.38-$6.25      852,139     6.4           5.61      726,765       5.55  
$6.38-$8.13      795,365     7.7           7.41      402,913       7.18  
$9.25-$15.00     512,000     5.0          10.14      512,000      10.14  
               ---------                           ---------             
$3.44-$15.00   2,947,755     6.4           6.63    2,259,683       6.60  
               =========                           =========             


The Company has adopted the disclosure only provisions of Statement of          
Financial Accounting Standards No. 123, ("SFAS No. 123") "Accounting for        
Stock-Based Compensation."  Accordingly, except for stock options issued        
to non-employees, no compensation cost has been recognized for the various      
fixed stock option plans and stock purchase plan.  The compensation cost        
that has been charged against income for the stock options issued to non-       
employees was $96,800, $161,300 and $0 for 1997, 1996 and 1995,                 
respectively.  Had compensation cost for the Company's stock-based              
compensation plans been determined consistent with the fair value method        
provisions of SFAS No. 123, the Company's net loss and loss per common          
share would have increased to the pro-forma amounts indicated below:            

                     1997            1996           1995
                 -----------    -----------    ---------
Net loss - as reported       $  (683,161)   (9,378,099)   (9,358,530)           
Net loss - pro-forma          (2,010,319)  (10,462,871)   (9,815,235)           
Loss per common share                                                           
(basic and diluted)                                                         
- as reported                    (0.04)        (0.52)        (0.57)         
Loss per common share                                                           
(basic and diluted)                                                         
- pro-forma                      (0.11)        (0.58)        (0.60)         

For stock options, the fair value of each option grant is estimated on the      
date of grant using the Black-Scholes option pricing model with the             
following weighted-average assumptions used for grants in 1997, 1996 and        
1995, respectively:  dividend yield of 0 for all years; expected                
volatility of 60 percent, 85 percent and 85 percent; risk-free interest         
rates of 5.7 percent, 6.1 percent and 6.1 percent; and expected life of         
five years, four years and four years for all the stock option plans.           

For the stock purchase plan, the fair value of each award is also               
estimated using the Black-Scholes option pricing model.  The multiple           
option approach was used, with the following assumptions for expected           
terms of six, twelve, eighteen and twenty-four months, respectively:            
risk-free interest rates of 5.7 percent, 5.8 percent, 6.0 percent and 6.0       
percent; volatility of 40 percent for all terms; and dividend yield of          
zero for all terms.  There were no grants under the stock purchase plan in      
1996 and 1995.                                                                  

The amounts disclosed above under the fair value method of SFAS No. 123         
include compensation costs and fair values for options and purchase rights      
granted since January 1, 1995 and may not be representative of the effects      
in future years.                                                                

Note 12   Defined Contribution Plan                                             

The Company sponsors a defined contribution plan covering substantially         
all of its employees.  In the past three calendar years, the Company made       
matching contributions equal to 50% of each participant's contribution          
during the plan year up to a maximum amount equal to the lesser of 3% of        
each participant's annual compensation or $4,750, $4,750 and $4,500 for         
the 1997, 1996 and 1995 calendar years, respectively.  The Company may          
also contribute additional discretionary amounts as it may determine.  For      
the years ended December 31, 1997, 1996 and 1995, the Company contributed       
to the plan approximately $110,000, $110,000 and $89,000, respectively.         
No discretionary contributions have been made to the plan since its             
inception.                                                                      

Note 13   Income Taxes                                                          

A reconciliation of the federal statutory rate of 34% to the Company's          
effective tax rate is as follows:                                               

                             December 31
                              ------------------------
                             1997      1996     1995
                             ----      ----     ----
U.S. Federal statutory rate (benefit)    (34.00)%  (34.00)%  (34.00)%           
Net losses without tax benefits           31.40     33.75     33.50             
State income taxes, net of U.S.                                                 
Federal income tax effect                   --        --        --            
Nondeductible expenses                     2.60      0.25       0.5             
                             -----     -----     -----
Total tax expense (benefit)                  --        --        --             

At December 31, 1997, the Company had net federal operating loss                
carryforwards of approximately $73,576,000 for income tax reporting             
purposes and California operating loss carryforwards of approximately           
$7,512,000.  The federal net operating loss carryforwards expire beginning      
in 1998 through the year 2012.  The California net operating loss               
carryforwards expire beginning in 1998 through the year 2002.  A                
California net operating loss carryforward from 1990 in the approximate         
amount of $1,200,000 expired December 31, 1997.                                 

The Company also has investment tax credits and research and experimental       
tax credits aggregating approximately $1,688,000 and $744,000 for federal       
and California purposes, respectively.  The federal credit carryforwards        
expire beginning in 1998 through the year 2012.  The California credits         
carryover indefinitely until utilized.                                          

There are also California credit carryforwards for qualified manufacturing      
and research and development equipment of approximately $13,000; these          
credits expire beginning in 2005 through the year 2007.                         

The tax effects of temporary differences that give rise to significant          
portions of the deferred tax assets and deferred tax liabilities at             
December 31, 1997 and 1996 are presented below:                                 

                                                                [Download Table]

                                        1997         1996     
                                    ------------  ----------- 
                                                              
Deferred tax assets:                                          
 Deferred research expenditures   $  1,367,000      1,445,000 
 Accruals and reserves not                                    
  currently deductible for tax                                
  purposes                           1,934,000      1,771,000 
 Net operating loss carryforwards   25,680,000     25,407,000 
 Credit carryforwards                2,445,000      2,377,000 
 Other                                 246,000        406,000 
                                    ----------     ---------- 
Gross deferred tax assets           31,672,000     31,406,000 
 Less valuation allowance          (31,522,000)   (31,182,000)
                                    ----------     ---------- 
Total deferred tax assets              150,000        224,000 
                                    ----------     ---------- 
Deferred tax liabilities:                                     
 Property and equipment               (150,000)      (224,000)
                                    ----------     ---------- 
Total deferred tax liabilities        (150,000)      (224,000)
                                    ----------     ---------- 
 Net deferred taxes               $         --             -- 
                                    ==========     ========== 

The net change in the valuation allowance for the years ended December 31,      
1997, 1996 and 1995 was an increase of approximately $340,000, $3,756,000       
and $4,534,000, respectively.  Management believes that sufficient              
uncertainty exists regarding the realizability of these items and,              
accordingly, a valuation allowance is required.                                 

Gross deferred tax assets as of December 31, 1997 include approximately         
$2,800,000 relating to the exercise of stock options, for which any             
related tax benefits will be credited to equity when realized.                  

Note 14   Ortho-McNeil Pharmaceutical Corporation                               

In May 1992, APS entered into development, and licensing and investment         
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho") for the       
development of retinoid products.  The first product is a Microsponge           
system entrapment of tretinoin (trans-retinoic acid or "t-RA"), a               
prescription acne drug for which FDA approval was received in February          
1997.  A second product licensed to Ortho is a Microsponge entrapment of a      
retinoid to be used for the treatment of photodamaged skin.                     

The terms of the agreements included an $8,000,000 investment in APS for        
723,006 newly issued shares of APS common stock and the payment to APS of       
$6,000,000 in licensing fees by J&J.                                            

J&J made a second equity investment in the Company in May 1994.  Under          
this agreement, J&J purchased 1,000,000 shares of newly issued common           
stock in consideration for $5,000,000.  In January 1996, APS issued J&J         
432,101 shares of common stock as a result of the APS stock price not           
achieving certain predetermined levels.  The 200,000 warrants issued in         
1994 to J&J in conjunction with this equity investment expired in 1996.         
As of December 31, 1997, J&J owned approximately 11% of the APS common          
shares outstanding.  In March 1998, J&J announced that it had divested its      
initial investment of 723,006 shares of the Company's stock as part of a        
rebalancing of its investment portfolio.                                        

In February 1995, APS received $750,000 in prepaid royalties and an             
additional $750,000 as a milestone payment on the submission to the FDA of      
its New Drug Application for the tretinoin prescription acne treatment.         
The milestone payment was recognized as revenue upon receipt.  The prepaid      
royalties of $750,000 were recorded as deferred revenues.  In February          
1997, upon receipt of approval from the FDA to market Retin-A(R) Micro          
(tretinoin gel) microsphere for the treatment of acne, APS received             
$3,000,000 from Ortho of which one half is a milestone payment which was        
recognized as revenue in 1997 and half is prepaid royalties which was           
recorded as deferred revenues.  APS earns a mark-up on Microsponge systems      
supplied to Ortho and Ortho pays APS a royalty on product sales, subject        
to certain minimums.  Should these minimums not be achieved, Ortho would        
lose its exclusivity and APS would regain marketing rights to the retinoid      
products.  APS has the ability to earn an additional $4,750,000 in fees if      
certain research milestones are achieved.                                       

Note 15   Johnson & Johnson                                                     

Licensing Agreement:  The Company's wholly owned subsidiary, Premier,           
licensed from J&J the exclusive right to manufacture and distribute a           
product, Take-Off, in the U.S.  The agreement provided for Premier to           
remit royalty payments to J&J based on net sales, with minimum payments of      
$375,000 per year.  In December 1996, the Company purchased the rights to       
Take-Off from J&J for a 3% royalty on net sales for the five year period        
ending December 31, 2001.  In January 1997, as part of its long-term            
strategic plan to move away from the marketing of consumer products, the        
Company sub-licensed the right to manufacture and distribute Take-Off to        
Lander Company.                                                                 

Distribution Arrangement:  In 1992, Premier obtained the rights to market       
and distribute two suncare products, Sundown and Johnson's Baby Sunblock,       
in the U.S.  Premier & J&J shared the profits or losses on sales of             
suncare products.                                                               

As part of the Company's long-term strategic plan to move away from the         
direct marketing of consumer products, this distribution arrangement with       
J&J was terminated in 1997.  The remaining inventory on hand as of              
December 31, 1996 was sold in 1997.                                             

10-K
12th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 12th
Independent Auditors' Report                                                    

The Board of Directors and Shareholders                                         
Advanced Polymer Systems, Inc.:                                                 

We have audited the accompanying consolidated balance sheets of Advanced        
Polymer Systems, Inc. and subsidiaries as of December 31, 1997 and 1996,        
and the related consolidated statements of operations, shareholders'            
equity, and cash flows for each of the years in the three-year period           
ended December 31, 1997.  In connection with our audits of the                  
consolidated financial statements, we also have audited the consolidated        
financial statement schedule as listed in Item 14(a)2.  These consolidated      
financial statements and the consolidated financial statement schedule are      
the responsibility of the Company's management.  Our responsibility is to       
express an opinion on these consolidated financial statements and the           
financial statement schedule based on our audits.                               

We conducted our audits in accordance with generally accepted auditing          
standards.  Those standards require that we plan and perform the audit to       
obtain reasonable assurance about whether the financial statements are          
free of material misstatement.  An audit includes examining, on a test          
basis, evidence supporting the amounts and disclosures in the financial         
statements.  An audit also includes assessing the accounting principles         
used and significant estimates made by management, as well as evaluating        
the overall financial statement presentation.  We believe that our audits       
provide a reasonable basis for our opinion.                                     

In our opinion, the consolidated financial statements referred to above         
present fairly, in all material respects, the financial position of             
Advanced Polymer Systems, Inc. and subsidiaries as of December 31, 1997         
and 1996, and the results of their operations and their cash flows for          
each of the years in the three-year period ended December 31, 1997, in          
conformity with generally accepted accounting principles.  Also in our          
opinion, the related financial statement schedule, when considered in           
relation to the basic consolidated financial statements taken as a whole,       
presents fairly, in all material respects, the information set forth            
therein.                                                                        

                          /s/KPMG Peat Marwick LLP

San Francisco, California                                                       
March 6, 1998                                                                   

Item 9.  Changes in and Disagreements with Accountants on Accounting            
and Financial Disclosure                                      

Not applicable.                                                           

10-K
13th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 13th
Part III                                                                        

Item 10.  Directors and Executive Officers of the Registrant                    

APS incorporates by reference the information set forth under the captions      
"Nomination and Election of Directors" and "Executive Compensation" of the      
Company's Proxy Statement (the "Proxy Statement") for the annual meeting        
of shareholders to be held on June 4, 1997.                                     

Item 11.  Executive Compensation                                                

APS incorporates by reference the information set forth under the caption       
"Executive Compensation" of the Proxy Statement.                                

Item 12.  Security Ownership of Certain Beneficial Owners and                   
Management                                                  

The Company incorporates by reference the information set forth under the       
caption "Beneficial Stock Ownership" of the Proxy Statement.                    

Item 13.  Certain Relationships and Related Transactions                        

The Company incorporates by reference the information set forth under the       
caption "Certain Transactions" of the Proxy Statement.                          

10-K
14th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 14th
Part IV                                                                         

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form          
8-K                                                         

(a) 1.  Financial Statements                                                    
The financial statements and supplementary data set forth in Part               
II of the 10-K Annual Report are incorporated herein by                         
reference.                                                                      
2.  Financial Statement Schedules                                       
Schedule II  Valuation Accounts                                                 
All other schedules have been omitted because the information is                
not required or is not so material as to require submission of                  
the schedule, or because the information is included in the                     
financial statements or the notes thereto.                                      
3.  Exhibits                                                            
3-A-Copy of Registrant's Certificate of Incorporation. (1)                      
3-B-Copy of Registrant's Bylaws. (1)                                            
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*                   
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March                 
5, 1997 (9)*                                                                    
10-E-Lease Agreement between Registrant and Metropolitan Life                   
Insurance Company for lease of Registrant's executive offices                   
in Redwood City dated as of November 17, 1997.                                  
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)                 
10-P-Warrant to Purchase Common Stock. (5)                                      
10-S-Lease Agreement between Registrant and Financing for Science               
International dated September 1, 1995 (6)                                       
10-T-Security and Loan Agreement between Registrant and Venture                 
Lending dated September 27, 1995 (6)                                            
10-U-Asset Purchase Agreement with Dow Corning Corporation dated                
January 23, 1996 (7)                                                            
10-V-Investment Agreement between Registrant and the Lander                     
Company. (8)                                                                    
10-W-License, Assignment and Supply Agreement between Registrant                
and Lander Company.                                                             
21-Proxy Statement for the Annual Meeting of Shareholders. (4)                  
23-Consent of Independent Auditors.                                             
27-Financial Data Schedule                                                      

(b) Reports on Form 8-K                                                         
None.                                                                 

(c) Exhibits                                                                    
The Company hereby files as part of this Form 10-K the exhibits listed          
in Item 14(a)3. As set forth above.                                             

(d) Financial Statement Schedules                                               
See Item 14(a)2. of this Form 10-K.                                             
--------------------------------------------------------------------------      
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Registration Statement on Form S-1 (Registration No. 33-15429) and              
incorporated herein by reference.                                               
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on          
Form S-8 (Registration No. 33- 50640), and incorporated herein by               
reference.                                                                      
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Annual Report on Form 10-K for the year ended December 31, 1992, and            
incorporated herein by reference.                                               
(4)To be filed supplementally.                                                  
(5)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3 and            
4.4 to Registrant's Registration Statement on Form S-3 (Registration            
No.33-82562) and incorporated herein by reference.                              
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Quarterly Report on Form 10-Q for the quarterly period ended                    
September 30, 1995.                                                             
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Annual Report on Form 10-K for the year ended December 31, 1995, and            
incorporated herein by reference.                                               
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Quarterly Report on Form 10-Q for the quarterly period ended March              
31, 1996, and incorporated herein by referenced.                                
(9)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on          
Form s-8 (Registration No. 333-35151), and incorporated herein by               
reference.                                                                      

*  Management Contract or Compensatory plans.                                   

10-K
15th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 15th
For purposes of complying with the amendments to the rules governing            
Registration Statements on Form S-8 (effective July 13, 1990) under the         
Securities Act of 1933 ("the Act"), as amended, the undersigned registrant      
hereby undertakes as follows, which undertaking shall be incorporated by        
reference into Part II of the registrant's Registration Statements on Form      
S-8 Nos. 33-18942, 33-21829, 33-29084 and 33-50640 filed on December 8,         
1987, May 13, 1988, June 6, 1989 and August 11, 1992, respectively.             

Insofar as indemnification for liabilities arising under the Securities         
Act of 1933 may be permitted to directors, officers and controlling             
persons of the registrant pursuant to the foregoing provisions, or              
otherwise, the registrant has been advised that in the opinion of the           
Securities and Exchange Commission such indemnification is against public       
policy as expressed in the Act and is, therefore, unenforceable.  In the        
event that a claim for indemnification against such liabilities (other          
than the payment by the registrant of expenses incurred or paid by a            
director, officer or controlling person of the registrant in the                
successful defense of any action, suit or proceeding) is asserted by such       
director, officer or controlling person in connection with the securities       
being registered, the registrant will, unless in the opinion of its             
counsel the matter has been settled by controlling precedent, submit to a       
court of appropriate jurisdiction the question whether such                     
indemnification by it is against public policy as expressed in the Act and      
will be governed by the final adjudication of such issue.                       

10-K
16th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 16th
    SIGNATURES

Pursuant to the requirement of Section 13 or 15 (d) of the Securities           
Exchange Act of 1934, the registrant has duly caused this report to be signed   
on its behalf by the undersigned, thereunto duly authorized.                    

ADVANCED POLYMER SYSTEMS, INC.                                                  

By:  /s/John J. Meakem, Jr.                                                     
----------------------------------------------                            
John J. Meakem, Jr.                                                   
Chairman, President, Chief Executive Officer                          

Pursuant to the requirements of the Securities Exchange Act of 1934, this       
report has been signed by the following person in the capacities and on the     
dates indicated.                                                                

                                                                [Download Table]


Signature                   Title                             Date          
--------------------------------------------------------------------------  
                                                                            
/S/ John J. Meakem, Jr.     Chairman, President,                            
-------------------------   Chief Executive Officer           March 27, 1998
John J. Meakem, Jr.                                           --------------

/S/ Michael O'Connell       Executive Vice President,                       
-------------------------   Chief Administrative Officer and                
Michael O'Connell           Chief Financial Officer           March 27, 1998
                                                              --------------

/S/ Carl Ehmann             Director                          March 27, 1998
-------------------------                                     --------------
Carl Ehmann                                                                 

/S/ Jorge Heller            Director                          March 27, 1998
-------------------------                                     --------------
Jorge Heller                                                                

/S/ Peter Riepenhausen      Director                          March 27, 1998
-------------------------                                     --------------
Peter Riepenhausen                                                          

/S/ Toby Rosenblatt         Director                          March 27, 1998
-------------------------                                     --------------
Toby Rosenblatt                                                             

/S/ Gregory H. Turnbull     Director                          March 27, 1998
-------------------------                                     --------------
Gregory H. Turnbull                                                         

/S/ C. Anthony Wainwright   Director                          March 27, 1998
-------------------------                                     --------------
C. Anthony Wainwright                                                       

/S/ Dennis Winger           Director                          March 27, 1998
-------------------------                                     --------------
Dennis Winger                                                               


10-K
17th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 17th
Schedule II                                                                     

Valuation Accounts                                                              

                                                                [Download Table]

                                             Additions                     
                                  Beginning  Charged to             Ending 
                             Balance    Expense   Deductions  Balance      
---------------------------------------------------------------------------
                                                                           
December 31, 1995                                                          
Accounts receivable, allowance                                             
  for doubtful accounts             $66,564    29,464     27,378    68,650 

December 31, 1996                                                          
Accounts receivable, allowance                                             
  for doubtful accounts              68,650     9,331     30,454    47,527 

December 31, 1997                                                          
Accounts receivable, allowance                                             
  for doubtful accounts              47,527    22,967     13,041    57,453 

10-K
18th “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 18th
CONSENT OF INDEPENDENT AUDITORS                                                 

The Board of Directors and Shareholders                                         
Advanced Polymer Systems, Inc.:                                                 

We consent to incorporation by reference in the Registration Statements         
(Nos. 33-18942, 33-21829, 33-29084, 33-50640 and 333-35151) on Forms S-8        
of Advanced Polymer Systems, Inc. and in the Registration Statements (Nos.      
33-47399, 33-51326, 33-82562, 33-88972 and 333-759) on Forms S-3 of             
Advanced Polymer Systems, Inc. of our report dated March 6, 1998, relating      
to the consolidated balance sheets of Advanced Polymer Systems, Inc. and        
subsidiaries as of December 31, 1997 and 1996, and the related                  
consolidated statements of operations, shareholders' equity and cash flows      
for each of the years in the three-year period ended December 31, 1997,         
and the related schedule, which report appears in the December 31, 1997         
annual report on Form 10-K of Advanced Polymer Systems, Inc.                    

              /s/KPMG Peat Marwick LLP

San Francisco, California                                                       
March 27, 1998                                                                  

10-K
Last “Page” of 19
TOC
1st
Previous
Next
↓Bottom
Just 19th
EXHIBIT INDEX 
Form 10-K Annual Report 

3-A-Copy of Registrant's Certificate of Incorporation. (1)                      
3-B-Copy of Registrant's Bylaws. (1)                                            
10-C-Registrant's 1992 Stock Plan dated August 11, 1992. (2)*                   
10-D-Registrant's 1997 Employee Stock Purchase Plan dated March 5, 1997         
(9)*                                                                            
10-E-Lease Agreement between Registrant and Metropolitan Life Insurance         
Company for lease of Registrant's executive offices in Redwood City             
dated as of November 17, 1997.                                                  
10-N-Agreement with Johnson & Johnson dated April 14, 1992. (3)                 
10-P-Warrant to Purchase Common Stock. (5)                                      
10-S-Lease Agreement between Registrant and Financing for Science               
International dated September 1, 1995 (6)                                       
10-T-Security and Loan Agreement between Registrant and Venture Lending         
dated September 27, 1995 (6)                                                    
10-U-Asset Purchase Agreement with Dow Corning Corporation dated January        
23, 1996 (7)                                                                    
10-V-Investment Agreement between Registrant and the Lander Company. (8)        
10-W-License, Assignment and Supply Agreement between Registrant and            
Lander Company.                                                                 
21-Proxy Statement for the Annual Meeting of Shareholders. (4)                  
23-Consent of Independent Auditors.                                             
27-Financial Data Schedules                                                     
--------------------------------------------------------------------------      
(1)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Registration Statement on Form S-1 (Registration No. 33-15429) and              
incorporated herein by reference.                                               
(2)Filed as Exhibit No. 28.1 to Registrant's Registration Statement on          
Form S-8 (Registration No. 33- 50640), and incorporated herein by               
reference.                                                                      
(3)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Annual Report on Form 10-K for the year ended December 31, 1992, and            
incorporated herein by reference.                                               
(4)To be filed supplementally.                                                  
(5)Filed as an Exhibit with corresponding Exhibits 4.1, 4.2, 4.3 and 4.4        
to Registrant's Registration Statement on Form S-3 (Registration                
No.33-82562) and incorporated herein by reference.                              
(6)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Quarterly Report on Form 10-Q for the quarterly period ended September          
30, 1995.                                                                       
(7)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Annual Report on Form 10-K for the year ended December 31, 1995, and            
incorporated herein by reference.                                               
(8)Filed as an Exhibit with corresponding Exhibit No. to Registrant's           
Quarterly Report on Form 10-Q for the quarterly period ended March 31,          
1996, and incorporated herein by referenced.                                    
(9)Filed an Exhibit No. 99.1 to Registrant's Registration Statement on          
Form s-8 (Registration No. 333-35151), and incorporated herein by               
reference.                                                                      
*  Management Contract or Compensatory plans.                                   

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		8/19/06		11
		12/31/01		11					10-K,  11-K,  5/A
		12/31/00		4					10-K,  11-K
		3/27/00		11
		3/1/99		11
		12/31/98		6					10-K,  10-K/A,  11-K
		3/31/98		6					10-Q
Filed on:		3/30/98		11					11-K
		3/27/98		16		18
		3/6/98		12		18
		3/5/98		4
		2/28/98		1		5
For Period End:		12/31/97		1		18			11-K
		12/15/97		6
		11/17/97		14		19
		6/4/97		13
		4/30/97		11					DEF 14A
		3/5/97		14		19
		1/1/97		6		11
		12/31/96		6		18			10-K,  11-K
		12/1/96		11
		9/3/96		11
		8/19/96		11					8-K
		3/31/96		14		19			10-Q
		1/23/96		14		19
		12/31/95		6		19			10-K405,  11-K
		9/30/95		14		19			10-Q
		9/27/95		14		19
		9/1/95		14		19
		1/1/95		11
		6/30/93		4
		12/31/92		14		19
		8/11/92		14		19
		4/14/92		14		19
									List all Filings