ITEM 1. BUSINESS
History and Relationship with Pharmacia & Upjohn, Inc.
Advanced Tobacco Products, Inc. d/b/a Advanced Therapeutic Products, Inc. (the "Company"), 16607 Blanco Road, Suite 1504, San Antonio, Texas 78232, (210) 408-7077, is a Texas corporation formed in April 1983.
The Company was organized to develop and market a product based upon nicotine technology. In 1987, the Company sold its nicotine technology and related assets to what is now known as Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"), a worldwide pharmaceutical company that manufactures the Nicorette Chewing Gum, the Nicotrol/Nicorette Patch, the Nicotrol/Nicorette Nasal Spray and the Nicotrol/Nicorette Inhaler.
Based upon the nicotine technology acquired from the Company, Pharmacia & Upjohn developed the Nicotrol/Nicorette Inhaler (the Inhaler)for use in the nicotine replacement therapy ("NRT") market. ATP receives product payments from Pharmacia & Upjohn equal to 3% of its net sales of the Inhaler to pharmacy distributors in Europe. Product payments from the sales of the Inhaler in the U. S. are 9.9% of Pharmacia & Upjohns net sales to McNeil Consumer Products Company (McNeil), a Johnson & Johnson Company, who then markets the Inhaler to pharmacies. See Pharmacia & Upjohn Technology Purchase Agreement.
In early September l998, McNeil launched the Inhaler nationwide in the U.S. as a prescription product after an initial introduction earlier in 1998 in Houston, Baltimore and Washington, D.C. The U.S. represents almost 50% of the worldwide NRT market.
Since September 1996, Pharmacia & Upjohn has introduced the Inhaler in Denmark, Sweden, Italy, Austria, The Netherlands, Belgium, Finland, Iceland, Gibralter and the United Kingdom. The Inhaler is sold as an over-the-counter product in most of these European countries. The Company understands that additional country launches are planned by Pharmacia & Upjohn to occur as regulatory approvals are granted.
The Inhaler is the first and only form of NRT designed to help control a smokers cravings for cigarettes and provide a key behavioral component of smoking--the hand-to-mouth ritual. The Inhaler consists of a mouthpiece and a cartridge containing nicotine. The user puffs on the mouthpiece to inhale the nicotine which is then absorbed through the lining of the mouth. The Inhaler provides 30% of the nicotine a smoker gets from cigarettes. It does not contain any of the harmful substances like tar and carbon monoxide found in tobacco smoke which cause smoking related diseases like lung cancer.
Current Operations
In September 1992, the Company obtained an exclusive worldwide license to certain dry powder nicotine inhaler technology from Duke University. The Company has obtained three patents covering this technology. The Company believes that a dry powder nicotine inhaler has the potential to be a future generation NRT. The Company is continuing to seek a strategic partner to develop this technology.
Effective as of October 1993, the Company has an agreement with Pharmacia & Upjohn under which, among other matters, the Company has the right to receive a royalty equal to .1% of net revenues received by Pharmacia & Upjohn from the sale of any product using a nicotine impermeable copolymer technology covered by, and subsequent to, the issuance of a patent in March 1996. Under the terms of the agreement, the Company now receives royalties from the sales of the Nicotrol/Nicorette patch by Pharmacia & Upjohn.
Pharmacia & Upjohn Technology Purchase Agreement
The Company has the right to receive royalty payments from Pharmacia & Upjohn with respect to the Inhaler as follows:
Royalty payments of three percent (3%) of Net Sales (generally, sales by Pharmacia & Upjohn to wholesale distributors) payable on a country by country basis for the greater of 10 years following the date of the first commercial sales or the expiration of all issued patents enforceable in such countries. If the Net Sales to wholesale distributors cannot be obtained or is not disclosed, as is the case with regard to McNeil, Net Sales are determined by multiplying the net sales of Pharmacia & Upjohn to McNeil by 3.3 (in effect, 9.9% of Pharmacia & Upjohns sales to McNeil). There are royalty limitations in the event of the sale of a nicotine vapor product competitive with the Inhaler.
Royalty payments in excess of $1,000,000 per year are to be reduced by fifty percent (50%) until the aggregate of such reductions equal the sum of $4,400,000.
The Company has the right to receive royalty payments for other nicotine product applications, if any, both pharmaceutical and non-pharmaceutical. Pharmacia & Upjohn is not obligated to develop or sell any products using the technology developed by the Company.
ITEM 2.
ITEM 2. PROPERTIES
The Company does not own any tangible fixed assets.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has no outstanding legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Part II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK- HOLDER MATTERS
a) Market Information
The Common Stock trades in the over-the-counter market through the OTC Bulletin Board quotation system under the symbol AVTH. The Companys website is at http://www/prnewswire.com/comp/117857.html. The following table sets forth the high and low bid price of the Company's Common Stock reported for the fiscal periods indicated. Bid prices represent prices between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER
1997 1998 1997 1998 1997 1998 1997 1998
HIGH .69 1.00 1.03 .91 1.13 .94 1.00 2.63
LOW .30 .69 .30 .75 .75 .75 .69 .75
b) Holders
There were approximately 1875 shareholders of record of the Company's Common Stock at June 30, 1998.
c) Dividends
On September 21, 1998, the Company declared its initial dividend of $.07 per share payable on January 6, 1999, to shareholders of record as of October 30, 1998. The Company anticipates declaring and paying dividends from time to time while substantial royalty revenues are received from the sale of products under the Company's agreements with Pharmacia & Upjohn.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth for the indicated periods selected historical financial information for the Company. Such information is derived from the financial statements of the Company included under Item 8 and should be read in conjunction with such financial statements, the related notes thereto and the information included under Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended June 30 1994 1995 1996 1997 1998
Revenues $ 39,733 $ $ $ 157,200 $ 516,600 Net Income (loss) $ (66,675) $ (3,061)$ (14,957)$ 94,758 $ 467,121 Net Income (loss) per share of common stock $(.008) $(.001) $(.002) $.01 $.06 Net Income (loss) per share of common stock assuming dilution $(.008) $(.001) $(.002) $.01 $.06 Weighted average number of shares of common stock outstanding 7,848,424 7,792,136 7,831,588 8,051,094 8,092,136 Weighted average number of shares of common stock outstanding assuming dilution 7,848,424 7,792,136 7,831,588 8,168,504 8,205,502 Cash provided by (used in) operations $ 308,340 $ (62,048) $ (98,664) $ (51,211)$ 93,005 Increase (decrease) in cash and cash equivalents $ (760,325)$ (217,069) $ (1,472) $ (46,041)$ 52,554 Balance sheet data at end of indicated periods working capital $ 515,679 $ 384,314 $ 318,824 $ 566,084$ 939,872 Total assets $ 1,480,861 $1,495,268 $1,484,998 $1,600,488$2,063,651 +Total shareholder's equity $ 1,479,488 $1,476,427 $1,481,470 $1,593,728$2,060,849
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
a) Results of Operations
For fiscal 1998, operating revenues were $516,600 from the recognition of income from sales of the Nicotrol/Nicorette Inhaler and the Nicotrol/Nicorette Patch by Pharmacia & Upjohn, compared to operating revenues of $157,200 from such sources in 1997. There were no operating revenues in fiscal 1996, although the Company had $76,889 of interest income.
General and administrative expenses were $91,846, $141,176 and $126,796 in fiscal 1996, 1997, and 1998, respectively. Expenses were greater in 1997 and 1998 compared to 1996 primarily due to the costs associated with press releases and mailings to shareholders as a result of the Inhaler marketing introduction and to the award of a one-time bonus in the amount of $17,500 to a consultant and a Director of the Company in 1997.
Income from operations in fiscal 1998 increased to $389,804 from $16,024 in 1997 primarily due to the increase of income recognized from the sales of the Inhaler and the Nicotrol/Nicorette Patch by Pharmacia & Upjohn. The Company's net income for fiscal 1998 was $467,121 with the addition of $77,317 in interest income to the operating income. Losses from operations in fiscal 1996 were $91,846, primarily due to the lack of operating revenues; however, the Company's net losses for fiscal 1996 were only $14,957, primarily due to the receipt of $76,889 in interest income.
b) Liquidity and Capital Resources
Cash and investments available on June 30, 1997, were approximately $1,520,000. The Company believes that its cash and investment resources are sufficient to meet its foreseeable needs.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other matters required by this Item 8 are included on Pages and following.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None Part III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. James E. Turner, age 49, has been a Director of the Company since November 1986 and a consultant to the Company since its inception. Mr. Turner was one of the founders and the Business Manager of NCC Group, Ltd., a research and development limited partnership which was a predecessor of the Company. Mr. Turner is also a consultant to Pharmacia & Upjohn.
Mr. J. H. Uptmore, age 67, has been a Director of the Company since August 1987. Mr. Uptmore has been the President and Chairman of the Board of J. H. Uptmore & Associates, Inc., a construction contracting and development company, since 1974.
Mr. J. W. Linehan, age 55, has been Director of the Company since June 1991 and President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company since July 1, 1990. Since August 1, 1995, Mr. Linehan has been President and Chief Executive Officer of Linehan Engineering, Inc., an independent engineering company wholly owned by him. Mr. Linehan was a Vice President, a director and a principal shareholder of GE Reaves Engineering, Inc., an engineering and consulting company, from May 1990 through July 31, 1995. Mr. Linehan was a Vice President, Chief Financial Officer, Secretary, a director and a principal shareholder of NET FONE, INC., an alternative long distance telephone company, from April 1991, and President from June 1993, to May 1994. Mr. Linehan's prior experience also includes Owner and Chief Operating Officer of Texas Trunk Co., Inc., a military hardware manufacturer, a consultant at Arthur Andersen LLP, a public accounting and consulting firm, and President of BIOGLAS Corporation, a manufacturer of support material for the biotechnology industry.
Ms. Brenda Ray, age 49, has been a Director of the Company since March 1989. Ms. Ray assisted in the original research and development of the Company's nicotine vapor inhalation technology. She is a consultant and has been President of Brenda Ray, Inc. since 1985.
Mr. David A. Monroe, age 45, has been a Director of the Company since March 1989. Mr. Monroe has been President and CEO of PTEL Corporation and is General Manager of the Photo Telesis Division of Raytheon TI Systems, Inc., formerly PhotoTelesis Corporation, a government electronics manufacturing company. Mr. Monroe's prior experience includes Founder & Chief Technical Officer of Image Data Corporation, a communications technology company, and Vice-President of Research & Development and Vice-President, Product Line Manager, at Datapoint Corporation, a computer equipment manufacturer.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Cash Compensation
Mr. Linehan, President and Chief Executive Officer of the Company and its sole executive officer, receives no salary or fees, but indirectly benefits from consulting or other payments made to Linehan Engineering, Inc. (See Item 13, "Certain Relationships and Related Transactions.") Each Director is entitled to receive travel expenses incurred by them in order to attend Directors' meetings.
Compensation Pursuant to Plans
Nonqualified Stock Options
The Company has a nonqualified stock option plan authorizing the granting by the board of directors of stock options covering common stock to directors, officers, key management employees, independent contractors providing services to the Company or consultants to the Company. The exercise price per share cannot be less than 100 percent (or 110 percent in the case of options granted to holders of 10 percent or more of the then outstanding common stock) of the fair market value of the Company's common stock as determined by the board of directors on the date the options are granted, and the exercise period for the options cannot exceed 10 years from the date the options are granted. The options are immediately exercisable. Options are not transferable except by will or the laws of descent or distribution, and options expire within one year following termination of association with the Company. The aggregate number of options outstanding as of June 30, 1997, and 1998, was 200,000, all exercisable at $.4375.
Summary of Option Transactions
The following table sets forth as to the directors of the Company the stock options outstanding during fiscal 1998. No options were exercised during 1998.
Aggregated Options Exercised in Last Fiscal Year and Fiscal Year End Stock Option Values
Number of Unexercised Shares Stock Options Value of Acquired or at FY-End (All Unexercised Expiration Name Exercised Exercisable) Stock Options* Date
J. H. Uptmore None 100,000 $125,000 9/27/00 D. A. Monroe None 100,000 $125,000 9/27/00
* all outstanding options held by Messrs. Uptmore and Monroe are exercisable at $.4375 per share. The market value of the Company's common stock at year end was $1.25.
ITEM 12.
ITEM 12. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information about the Directors of the Company, which includes all persons known by the Company to own more than 5% of the Common Stock as of August 31, 1998, and all officers and Directors of the Company as a group as of June 30, 1998. Except as indicated, the Company believes that each of the below named persons has sole voting and investment power with respect to the shares shown and owns the shares indicated beneficially and of record. All of the Common Stock held by the persons described in the following table is available for sale under Rule 144 of the Securities and Exchange Commission. During 1998 261,784 shares were sold by such persons or their affiliates pursuant to Rule 144.
Director Number Percent Name Since of Shares of Class (1)
Brenda Ray (2) 12544 Judson Road San Antonio, TX 78233 1989 1,455,964 17.99%
James E. Turner 307 Wayside Drive San Antonio, TX 78213 1986 370,221 4.58%
J. H. Uptmore (3) P.O. Box 29389 San Antonio, TX 78229 1987 196,921 1.20%
David A. Monroe (4) 7800 I.H. 10 W San Antonio, TX 78230 1989 147,229 .58%
J.W. Linehan 16607 Blanco Road Suite 1504 San Antonio, TX 78232 1991 101,000 1.25%
Officers and Directors as a Group (5 persons) 2,271,335 25.60% ____________________
(1) Excludes shares under options referred to in notes 3 and 4.
(2) Includes 420,104 shares of Common Stock owned by the Jon Phillip Ray Family Trust of which Brenda Ray is a beneficiary.
(3) Includes 46,921 shares of Common Stock owned by J. H. Uptmore & Associates, Inc., of which Mr. Uptmore is President and Chairman of the Board and 100,000 shares of Common Stock underlying presently exercisable options held by Mr. Uptmore. See "Compensation Pursuant to Plans."
(4) Includes 100,000 shares of Common Stock underlying presently exercisable options held by Mr. Monroe. See "Compensation Pursuant to Plans."
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers, and any persons holding more than ten percent (10%) of the Company's Common Stock to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission and to provide copies of such reports to the Company. Based upon the Company's review of copies of such reports received by the Company, the Company believes that during the year ended June 30, 1998, all Section 16(a) filing requirements were satisfied.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since August 1995, the Company has had an administrative services agreement with Linehan Engineering, Inc. (LEI), a related-party entity owned by the Company's president. In 1998, 1997 and 1996, the Company paid LEI $37,540, $39,450 and $28,050, respectively, for administrative services.
From July 1990 to July 1995, the Company had an administrative services agreement with GE Reaves Engineering, Inc. (GE Reaves), an entity related to the Company through the association of the Company's president. In 1996, the Company paid GE Reaves $3,100 for administrative services.
In June 1994, the Company entered into a consulting services agreement with James E. Turner (Turner) who is a director of the Company. In 1998, 1997 and 1996, the Company paid Turner -0-, $17,500 and $20,000, respectively, for consulting services.
In October 1996, the Company entered into a Consulting Services Agreement with Brenda Ray, Inc. ("Ray"), a related party entity owned by a director of the Company. In 1998 and 1997, the Company paid Ray $12,000 and $9,000, respectively, for consulting services.
Part IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1.Financial Statements and Independent Auditors' Report
The financial statements and consent listed in the index to financial statements follows the signature page of this report.
2. Financial Statement Schedules
The Company did not meet any of the requirements to provide financial statement schedules for any of the fiscal years ended 1998, or 1996.
3. Exhibits
The exhibits listed on the index to exhibits follows the signature page of this report.
(b) The Company has filed the following Current Reports on Form 8-K since the filing of the Company's last 10-K:
1. On September 17, 1998, the Company filed a Current Report on Form 8-K to disclose its intention to change its fiscal year end from June 30 to September 30 beginning the fiscal year ending September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, State of Texas, as of September 28, 1998.
ADVANCED TOBACCO PRODUCTS, INC.
Date: September 28, 1998 By: /s/ J. W. Linehan J. W. Linehan, President, Chief Executive Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: September 28, 1998 By: /s/ J. W. Linehan J. W. Linehan, President, Chief Executive Officer, Chief Accounting Officer and Director
Date: September , 1998 By: _____________________________ James E. Turner, Director
Date: September 28, 1998 By: /s/ J H. Uptmore J. H. Uptmore, Director
Date: September 28, 1998 By: /s/ Brenda Ray Brenda Ray, Director
Date: September , 1998 By: _______________________ David A. Monroe, Director
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
Item 8. Financial Statements
The following financial statements are included in response to Item 14(a):
Page
Index to Financial Statements
Financial Statements
Report of Independent Public Accountants
Balance Sheets - - June 30, 1998 and 1997
Statements of Income (Loss) for the Years Ended June 30, 1998, 1997 and 1996
Statements of Stockholders' Equity for the Years Ended June 30, 1998, 1997 and 1996
Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996
Notes to Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Advanced Tobacco Products, Inc.:
We have audited the accompanying balance sheets of Advanced Tobacco Products, Inc. (a Texas corporation), dba Advanced Therapeutic Products, Inc., as of June 30, 1998 and 1997, and the related statements of income (loss), stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of Advanced Tobacco Products, Inc., as of June 30, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas July 30, 1998
ADVANCED TOBACCO PRODUCTS, INC. dba ADVANCED THERAPEUTIC PRODUCTS, INC. BALANCE SHEETS - - JUNE 30, 1998, AND 1997
1998 1997 ASSETS
CURRENT ASSETS: Cash and cash equivalents $ 91,431 $ 38,877 Royalties receivable 384,059 79,539 Investments 467,184 454,428 Total current assets 942,674 572,844
LICENSE AGREEMENTS, less accumulated amortization of $38,645 and $31,965 in 1998 and 1997, respectively 159,986 159,074
INVESTMENTS 960,991 868,570 Total assets $ 2,063,651 $ 1,600,488
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES: Accounts payable $ 2,802 $ 6,760 Total liabilities 2,802 6,760
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: Preferred stock, $100 par value; 500,000 shares authorized; none issued - - Common stock, $.01 par value; 30,000,000 shares authorized; 8,092,136 shares issued and outstanding as of June 30, 1998, and 1997 80,922 80,922 Additional paid-in capital 12,544,878 12,544,878 Accumulated deficit (10,564,951) (11,032,072) Total stockholders' equity 2,060,849 1,593,728 Total liabilities and stockholders' equity $ 2,063,651 $ 1,600,488
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC. dba ADVANCED THERAPEUTIC PRODUCTS, INC. STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 REVENUES: Royalties $ 516,600 $ 157,200 $ - Total operating revenues 516,600 $ 157,200 $ -
EXPENSES: General and administrative $ 126,796 141,176 91,846 Total operating expenses 126,796 141,176 91,846
INCOME (LOSS) FROM OPERATIONS 389,804 16,024 (91,846)
OTHER INCOME (EXPENSES): Interest income 77,317 78,734 76,889 Total other income (expense) 77,317 78,734 76,889
INCOME (LOSS) BEFORE INCOME TAXES 467,121 94,758 (14,957)
NET INCOME (LOSS) $ 467,121 $ 94,758 $ (14,957)
INCOME (LOSS) PER COMMON SHARE - BASIC AND ASSUMING DILUTION $ .06 $ .01 $ (.002)
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 8,092,136 8,051,094 7,831,588 WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ASSUMING 8,205,502 8,168,504 7,831,588 DILUTION
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ - $ - $ -
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Additional Common Stock Common Stock Paid-In Accumulated Shares Shares Capital Deficit Total BALANCE, June 30, 1995 7,792,136 $ 77,922 $12,510,378(11,111,873)$1,476,427 Net loss - - - (14,957) (14,957) Exercise of stock options 160,000 1,600 18,400 - - -
BALANCE, June 30, 1996 7,792,136 $ 79,522 $12,528,778$(11,126,830)$1,481,470 Net loss - - - 94,758 94,758 Exercise of stock options 140,000 1,400 16,100 - 17,500
BALANCE, June 30, 1997 8,092,136 $ 80,922 $12,544,878$(11,032,072)$1,593,728 Net Income - - - 467,121 467,121
BALANCE, June 30, 1998 8,092,136 $ 80,922 $12,544,878$(10,564,951)$2,060,849
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC. dba ADVANCED THERAPEUTIC PRODUCTS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 467,121 $ 94,758 $ (14,957) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Amortization 6,680 6,680 6,680 Amortization of discount on investments (72,318) (76,342) (75,074) Increase (decrease) in cash flows from changes in operating assets and liabilities- Royalties receivable (304,520) (79,539) -
Accounts payable (3,958) 3,232 (15,313) Net cash provided by (used in) operating activities 93,005 (51,211) (98,664)
CASH FLOWS FROM INVESTMENTS ACTIVITIES: Purchase of license agreements and patent expenses (7,592) (10,945) (29,279) Purchase of investments (500,859) (343,385) (219,529) Sale of investments 468,000 342,000 326,000 Net cash provided by (used in) investing activities (40,451) (12,330) 77,192
CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options - 17,500 20,000 Net cash provided by financing activities - 17,500 20,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 52,554 (46,041) (1,472)
CASH AND CASH EQUIVALENTS, beginning of year 38,877 84,918 86,390
CASH AND CASH EQUIVALENTS, end of year $ 91,431 $ 38,877 $ 84,918
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC. dba ADVANCED THERAPEUTIC PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Advanced Tobacco Products, Inc., d/b/a Advanced Therapeutic Products, Inc. since 1992 (the Company), was formed in April 1983. Through September 1987, the Company was engaged in the manufacturing and marketing of a product based upon nicotine technology. In September 1987, the Company sold certain nicotine technology and related assets to Pharmacia & Upjohn, Inc. (Pharmacia & Upjohn), a worldwide pharmaceutical company, for $3.6 million and the right to future royalties.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share, superseding Accounting Principles Board (APB) Opinion No. 15, Earnings per Share. This statement replaces primary earnings per share (EPS) with basic EPS. Basic EPS is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding. No dilution for potentially dilutive securities is included in basic EPS. Fully diluted EPS, now called dilutive EPS, is still required. This statement changes or eliminates several other requirements of APB 15.
A reconciliation of the numerators and denominators of the basic and diluted per-share computations for net income (loss) is as follows:
Year Ended June 30
1998 1997 1996 Per- Per- Per- Share Share Share Income Shares Amount Income Shares Amount Loss Shares Amount
Net Income (loss) $467,121 $94,758 $(14,957)
Basic earnings per share: Income (loss) available to common stock holders $467,121 8,092,136$.06$94,758 8,051,094$.01$(14,957)7,831,588$(.002)
Effect of dilutive securities: Stock options - 113,366 - 117,410 - -
Diluted earnings per share: Income (loss) available to common stockholders plus assumed conver- sions $467,121 8,205,502$.06$94,758 8,168,504$.01 $(14,957)7,831,588$(.002)
Statements of Cash Flows
For purposes of determining cash flows, the Company considers all investments with original maturities of less than three months to be cash equivalents. There were no amounts paid by the Company for interest or income taxes during the years ended June 30, 1998, 1997 and 1996.
License Agreement
In fiscal year 1993, the Company entered into a license agreement for nicotine technology with Duke University. The term of the license agreement is for any period such nicotine technology is under patent. In 1997, 1996 and 1995, the Company capitalized the direct costs incurred in obtaining the license agreement plus patent prosecution expenses. These costs are being amortized on a straight-line basis over 20 years.
2. INVESTMENTS:
The Companys investments consist of U.S. Treasury zero coupon bonds which were purchased at a discount from their face value. Investments are carried at amortized cost which as of June 30, 1998 and 1997, approximates fair value. The Company intends to hold all investments to their respective maturities which range from November 1998 to May 2001. Investments maturing within one year of the balance sheet date are classified as current assets while those investments maturing later than one year of the balance sheet date are classified as noncurrent assets in the accompanying balance sheets.
U.S. Treasury zero coupon bonds held at 1998 and 1997 were as follows:
Gross Unrealized Carry Holding Fair Amount (Gain) Loss Value
1998: Current $ 467,184 $ (1,857) $ 469,041 Long Term 960,991 2,489 958,502 $1,428,175 $ 632 $1,427,543
1997: Current $ 454,428 $ 1,836 $ 452,592 Long Term 868,570 10,565 858,005 $1,322,998 $ 12,401 $1,310,597
3. SALE OF ASSETS AND REVENUE RECOGNITION:
The aggregate sales price of the Companys 1987 sale of assets consisted of $3,600,000 and the right to future royalties. Royalties from Pharmacia & Upjohn are based upon a percentage of any net sales of products (Products) which utilize the Company's assets sold to Pharmacia & Upjohn. For the year ended June 30, 1998, the Company earned royalties of $516,600 from the sale of such Products.
The Companys revenues and royalties receivable are derived solely from Pharmacia & Upjohn. The Company believes its associated exposure to credit risk is minimal. No allowance for doubtful accounts is considered necessary as of June 30, 1998 or 1997.
4. FEDERAL INCOME TAXES:
As of June 30, 1998, the Company has remaining tax net operating loss, corporate capital loss and tax credit carryforwards of approximately $10 million, $23,800 and $102,000, respectively, which may be used to reduce taxes against future earnings. The net operating loss carryforwards expire between 2000 and 2005, corporate capital losses expire in 1999 while the tax credit carryforwards expire between 1999 and 2001. For financial reporting purposes, the Company has not recognized a deferred tax asset or liability resulting from temporary differences as the tax effects of such differences are immaterial. The tax effects of the various loss and credit carryforwards are as follows:
June 30
1997 1998
Deferred income tas assets - Net operating loss carryforwards $ 3,410,000 $ 3,570,000 Corporate capital loss carryforward 23,800 23,800 Tax credit carryforwards 102,000 102,000
Total gross deferred tax assets 3,535,800 3,695,800
Less - Valuation allowance (3,535,800) (3,695,800)
Net deferred tax assets $ - $ -
As the Company has generated net operating losses in prior years, and there is no assurance of future income, a valuation allowance of $3,535,800 has been established at June 30, 1998. The Company will reevaluate the necessity for such valuation allowance in the future.
5. NONQUALIFIED STOCK OPTION PLAN:
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 defines a fair value based method of accounting for employee and nonemployee stock options or similar equity instruments and encourages all entities to adopt that method of accounting for all of their stock-based compensation arrangements. Under the fair value method, the compensation cost is based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. However, SFAS No. 123 allows entities to measure compensation cost using the intrinsic value method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), provided that the necessary disclosures required by SFAS No. 123 are made. The Company has elected to continue to apply APB 25 in accounting for its stock option plan.
The Company has a nonqualified stock option plan authorizing the granting by the board of directors of stock options to officers, key management employees, independent contractors providing services to the Company or consultants of the Company. The exercise price per share cannot be less than 100 percent (or 110 percent in the case of options granted to holders of 10 percent or more of the then outstanding common stock) of the fair market value of the Company's common stock on the date the options are granted, and the exercise period for the options cannot exceed 10 years from the date the options are granted. Options are immediately exercisable, are not transferable except by will or the laws of descent or distribution and expire within one year following termination of association with the Company. The aggregate number of options outstanding and exercisable at $.4375 per share which expire in September 2000 was 200,000 as of June 30, 1998 and 1997. The following table summarizes the activity in the Companys stock option plan for the years ended June 30, 1998, 1997 and 1996:
1998 1997 1996
Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of period 200,000 $.4375 340,000 $.3088 300,000 $.1250 Granted - - - - 200,000 .4375 Exercised - - (140,000) .1250 (160,000) .1250
Outstanding at end of period 200,000 .4375 200,000 .4375 340,000 .3088
Execrcisable at end of period 200,000 .4375 200,000 .4375 340,000 .3088
6. RELATED-PARTY TRANSACTIONS:
Since August 1995, the Company has had an administrative services agreement with Linehan Engineering, Inc. (LEI), a related-party entity owned by the Companys president. In 1998, 1997 and 1996, the Company paid LEI $37,540, $39,450 and $28,050, respectively, for administrative services.
From July 1990 to July 1995, the Company had an administrative services agreement with GE Reaves Engineering, Inc. (GE Reaves), an entity related to the Company through the association of the Companys president. In 1996, the Company paid GE Reaves $3,100 for administrative services.
In June 1994, the Company entered into a consulting services agreement with James E. Turner (Turner) who is a director of the Company. During 1998, 1997 and 1996, the Company paid Turner $-0-, $17,500 and $20,000, respectively, for consulting services.
In October 1996, the Company entered into a consulting services agreement with Brenda Ray, Inc. (Ray), a related entity owned by a director of the Company. During 1998 and 1997, the Company paid Ray $12,000 and $9,000, respectively, for consulting services.
7. SUBSEQUENT EVENTS:
On September 17, 1998, the Company filed a Current Report on Form 8-K to disclose its intention to change its fiscal year end from June 30 to September 30 beginning with the fiscal year ended September 30, 1999.
ADVANCED TOBACCO PRODUCTS, INC.
INDEX TO EXHIBITS
Item 14(a)
Exhibit No. Description
1 Form of Agreement Among Underwriters, including Underwriting Agreement and Selected Dealers Agreement incorporated by reference to Exhibit of Registrant's Statement of Form S-1 (Registration No. 2-88812, as amended on May 23, 1984), the effective date thereof hereinafter, the "Registrant's Registration Statement."
2 Agreement to Raise Capital and acquire technology dated September 19, 1983, between the Registrant and NCC Group, Ltd. by reference to Exhibit 2 of the Registrant's Registration Statement.
3.1 Restated Articles of Incorporation of the Registrant by reference to Exhibit 3.1 of the Registrant's Registration Statement.
3.2 Bylaws of the Registrant by reference to Exhibit 3.2 of the Registrant's Registration Statement.
4.1 Specimen Common Stock Certificate by reference to Exhibit 4.1 of the Registrant's Registration Statement.
4.2 Specimen of Warrant Certificate by reference to Exhibit 4.2 of the Registrant's Registration Statement.
4.3 Warrant Agreement between Registrant and Frost National Bank as Warrant Agent by reference to Exhibit 4.3 of the Registrant's Registration Statement.
4.4 Articles Four, Nine and Ten of the Articles of Incorporation of the Registrant (included in Exhibit 3.1) by reference to Exhibit 4.4 of the Registrant's Registration Statement.
4.5 Form of Warrant Agreement and Representative Unit Purchase Warrant by reference to Exhibit 4.5 of the Registrant's Registration Statement.
5.1 Opinion of Matthews & Branscomb regarding legality of securities by reference to Exhibit 5.1 of the Registrant's Registration Statement.
5.2 Opinion of Matthews & Branscomb regarding FDA and other governmental regulation by reference to Exhibit 5.2 of the Registrant's Registration Statement.
10.1 Acquisition Agreement between the Registrant and NCC Group, Ltd. (previously filed as part of Exhibit 2) by reference to Exhibit 10.1 of the Registrant's Registration Statement.
10.2 Agreement dated October 31, 1983 between the Registrant and The Richards Group, Inc. of Dallas, Texas by reference to Exhibit 10.2 of the Registrant's Registration Statement.
10.3 Commitment Letter dated January 9, 1984, from American Filtrona Company (equipment supplier) by reference to Exhibit 10.3 of the Registrant's Registration Statement.
10.4 Commitment Letter dated January 6, 1984, from Raynor Adams & Associates, Inc. (equipment supplier) by reference to Exhibit 10.4 of the Registrant's Registration Statement.
10.5 Commitment Letter dated June 20, 1983 from Harvey Machine Company, Inc. (equipment supplier) by reference to Exhibit 10.5 of the Registrant's Registration Statement.
10.6 Commitment Letter dated January 9, 1984, from J. H. Uptmore & Associates, Inc. (lease space improvements) by reference to Exhibit 10.7 of the Registrant's Registration Statement.
10.7 Advanced Tobacco Products, Inc. 1984 Incentive Stock Option Plan by reference to Exhibit 10.7 of the Registrant's Registration Statement.
10.8 Form of Option Agreement under 1984 Advanced Tobacco Products, Inc. Incentive Stock Option Plan by reference to Exhibit 10.8 of the Registrant's Registration Statement.
10.9 S.A. Vend, Inc. 1983 Incentive Stock Option Plan by reference to Exhibit 10.9 of the Registrant's Registration Statement.
10.10 Employment Agreement dated December 7, 1983, between the Registrant and Gerald R. Mazur by reference to Exhibit 10.10 of the Registrant's Registration Statement.
10.11 Employment Agreement dated December 7, 1983, between the Registrant and J. P. Ray by reference to Exhibit 10.11 of the Registrant's Registration Statement.
10.12 Employment Agreement dated August 1, 1983, between the Registrant and Edmund G. Vimond, Jr. by reference to Exhibit 10.12 of the Registrant's Registration Statement.
10.13 Employment Agreement dated November 27, 1983, between the Registrant and James D. Simonsen by reference to Exhibit 10.14 of the Registrant's Registration Statement.
10.14 Patent Purchase Agreement, dated May 27, 1987, between Advanced Tobacco Products, Inc. and Pharmacia LEO, Inc. filed as an exhibit to the Form 8-K filed on or about July 29, 1987.
10.15 Asset Purchase Agreement between Advanced Tobacco Products, Inc. and Pharmacia LEO, Inc., executed as of June 1, 1987, and filed as an exhibit to the Form 8-K filed on or about July 29, 1987.
10.16 Consultation Agreement between Advanced Tobacco Products, Inc. and Pharmacia LEO, Inc. filed as an exhibit to Registrant's 1987 10-K.
10.17 First Amendment to Patent Purchase Agreement dated as of November 22, 1990, between the Registrant and AB LEO, a Swedish corporation, and filed as an exhibit to the Form 8-K, dated December 12, 1990.
10.18 Second Amendment to Asset Purchase Agreement dated as of November 20, 1990, between the Registrant and Pharmacia LEO, a New Jersey corporation, and filed as an exhibit to the Form 8-K, dated December 12, 1990. 16.1 Letter regarding change in Certifying Accountant, filed as an exhibit to the Form 8-K, dated October 3, 1990.
16.2 Letter regarding change in Certifying Accountant, filed as an exhibit to the Form 8, Amendment No. 1, dated December 12, 1991
16.3 Current Report on Form 8-K regarding the Registrants disclosure of its intention to change its fiscal year end from June 30 to September 30, beginning the fiscal year ending September 30, 1999.
23.1 Consent of Independent Public Accountants, filed as an exhibit to the Form 10-K/A, dated March 29, 1996.
23.2 Consent of Independent Public Accountants, filed as an exhibit to the Form 10-K/A, dated October 22, 1996.
23.3 Consent of Independent Public Accountants filed as an exhibit to this Form 10-K, dated August 29, 1997.
23.4 Consent of Independent Public Accountants filed as an exhibit to this Form 10-K, dated July 30, 1998.