-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FhoxK4MPlW7NJ4DcuPHHD91dRLZMeWE0BfdKG99L2Lxd6P9PQMeeR9dmznsgvmEr LxZg2VMa2+Akeq2KqflIVg== 0001046375-97-000004.txt : 19970930 0001046375-97-000004.hdr.sgml : 19970930 ACCESSION NUMBER: 0001046375-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED TOBACCO PRODUCTS INC CENTRAL INDEX KEY: 0000737717 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 742285214 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12984 FILM NUMBER: 97687069 BUSINESS ADDRESS: STREET 1: 16607 BLANCO RD STREET 2: STE 1504 CITY: SAN ANTONIO STATE: TX ZIP: 78232 BUSINESS PHONE: 2104087077 MAIL ADDRESS: STREET 1: 16607 BLANCO RD STREET 2: STE 1504 CITY: SAN ANTONIO STATE: TX ZIP: 78232 10-K 1 UNITED STATES 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 June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission file number 0-12984 ADVANCED TOBACCO PRODUCTS, INC. (Exact name of registrant as specified in its charter) State of Texas 74-2285214 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16607 Blanco Road, Suite 1504 78232 San Antonio, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (210) 408-7077 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) 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 or delinquent files pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ] As of August 31, 1997, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $8,000,000. As of August 31, 1997, the number of outstanding shares of Common Stock, $0.01 par value, of the registrant was 8,092,136. Part I 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 for use in the nicotine replacement therapy ("NRT") market. ATP receives product payments of 3% of sales of the Inhaler to wholesale distributors (See "Pharmacia & Upjohn Technology Purchase Agreement). Pharmacia & Upjohn launched its Inhaler commercially in Denmark in September 1996, in Sweden in December 1996, in Italy in February 1997 and in the Netherlands in July, 1997, under the trade name of the Nicorette Inhaler. Additional worldwide launches are planned by Pharmacia & Upjohn to occur as regulatory approvals are granted. Applications for regulatory approvals are pending in ten countries, including the United Kingdom. The Inhaler was recently approved for sale as a prescription product by the United States Food and Drug Administration, and the Company anticipates that the Inhaler will be initially offered in the U.S. in the first half of 1998 as the Nicotrol Inhaler by McNeil Consumer Products, a Johnson & Johnson company. The U.S. represents approximately 50% of the world NRT market. The Inhaler is the only NRT to help smokers quit by addressing the hand-to-mouth motions of smokers, as well as providing a sensation in the back of the throat similar to the feeling of inhaling smoke. Current Operations In September 1992, the Company obtained an exclusive worldwide license to certain dry powder nicotine inhaler technology from Duke University which has been developed at Duke University. In February 1993, the Company filed a patent application covering this technology resulting in the issuance of a U.S. patent in 1995. Additional U.S. and foreign patent applications are pending. 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 Nicotrol/Nicorette Inhaler discussed above as follows: Royalty payments of three percent (3%) of Net Sales (defined generally as sales by Pharmacia & Upjohn and McNeil Consumer Products 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 (latest patent issued 3/26/96). There are royalty limitations in the event of the sale of a nicotine vapor product competitive with the Nicotrol/Nicorette 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. PROPERTIES The Company does not own any tangible fixed assets. ITEM 3. LEGAL PROCEEDINGS The Company has no outstanding legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE Part II 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 National Association of Securities Dealers "Bulletin Board" quotation system. 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 1996 1997 1996 1997 1996 1997 1996 1997 HIGH .19 .69 .19 1.03 .25 1.13 .875 1.00 LOW .125 .30 .09 .30 .125 .75 .125 .69 b) Holders There were approximately 850 shareholders of record of the Company's Common Stock at June 30, 1997, excluding shareholders with "street" accounts. c) Dividends The Company has not declared or paid any dividends on its Common Stock and does not anticipate earnings from which dividends can be paid unless substantial royalty revenues are received from the sale of products under the Company's agreements with Pharmacia & Upjohn. 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, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Year Ended June 30 1993 1994 1995 1996 1997 Revenues $466,600 $39,733 $ - $ - $157,200 Net Income (loss) $314,193 $(66,675) $ (3,061) $(14,957) $94,758 Net Income (loss) per share of common stock $ .040 ($.008) ($.001) ($.002) $ .011 Weighted average number of shares of common stock outstanding 7,913,175 7,848,424 7,792,136 7,831,588 8,248,090 Cash provided by (used in) operations $318,231 $308,340 $(62,048) $(98,664) ($51,211) Increase (decrease) in cash and cash equivalents $188,693 $(760,325) ($217,069) $(1,472) $(46,041) Balance sheet data at end of indicated periods -Working capital $1,433,741 $515,679 $384,314 $318,824 $566,084 Total assets $1,555,667 $1,480,861 $1,495,268 $1,484,998 $1,600,488 Total shareholder's equity $1,552,711 $1,479,488 $1,476,427 $1,481,470 $1,593,728
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDI- TION AND RESULTS OF OPERATIONS a) Results of Operations For fiscal 1997, operating revenues were $157,200 from the recognition of income from sales of the Nicotrol/Nicorette Inhaler and the Nicotrol/Nicorette Patch by Pharmacia & Upjohn. There were no operating revenues in fiscal 1995 and 1996, although $100,341 and $76,889 were derived from interest income during those years, respectively. General and administrative expenses were $103,402, $91,846, and $141,176 in fiscal 1995, 1996, and 1997, respectively. Expenses increased in 1997 compared to 1996 primarily due to the costs associated with press releases and mailings to shareholders as a result of the Nicotrol/Nicorette 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. Expenses decreased in 1996 compared to 1995 primarily as a result of a reduction in consulting fees paid by the Company. Net income from operations in fiscal 1997 was $16,024 primarily due to the recognition of income from the sales of the Nicotrol/Nicorette Inhaler and the Nicotrol/Nicorette Patch by Pharmacia & Upjohn. The Company's net income for fiscal 1997 was $94,758 with the addition of $78,734 in interest income to the operating income. Net losses from operations in fiscal 1995 and 1996 were $103,402 and $91,846, respectively, primarily due to the lack of operating revenues; however, the Company's net losses for fiscal 1995 and 1996 were $3,061 and $14,957, respectively, primarily due to the receipt of $100,341 and $76,889, respectively, in interest income. b) Liquidity and Capital Resources Cash and investments available on June 30, 1997, were approximately $1,400,000. The Company believes that its cash and investment resources are sufficient to meet its foreseeable needs. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and other matters required by this Item 8 are included on Pages F-1 and following. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Mr. James E. Turner, age 48, 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 66, 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 54, 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. Mrs. Brenda Ray, age 48, has been a Director of the Company since March 1989. Mrs. Ray was a research and lab assistant in the development of the Company's nicotine vapor inhalation technology from 1979 until 1985. She is a consultant and has been President of Brenda Ray, Inc. since 1985. Mr. David A. Monroe, age 44, 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. 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 and exercisable at $.125 as of June 30, 1996 and 1997, were 140,000 and - -0-, respectively, and the aggregate number of options outstanding and exercisable at $.4375 as of June 30, 1996 and 1997, was 200,000. Summary of Option Transactions The following table sets forth as to the directors of the Company the net value of securities (market value less exercise price) and other information with respect to stock options outstanding and exercised during fiscal 1997: Aggregated Options Exercised in Last Fiscal Year and Fiscal Year End Stock Option Values Number of Unexercised Shares Stock Options Value of Acquired or Value at FY-End (All Unexercised Expiration Name Exercised Realized Exercisable) Stock Options* Date J. E. Turner 140,000 $122,500 -0- -0- J. H. Uptmore None N/A 100,000 $56,250 9/27/00 D. A. Monroe None N/A 100,000 $56,250 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 $1.00. 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, 1997, and all officers and Directors of the Company as a group as of June 30, 1997. 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. Director Number Percent Name Since of Shares of Class (1) Brenda Ray (2) 12544 Judson Road San Antonio, TX 78233 1989 1,607,748 19.87% James E. Turner 18606 Heather Court Homewood, IL 60430 1986 450,221 5.56% 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 131,000 1.62% Officers and Directors as a Group (5 persons) 2,533,119 28.83% ____________________ (1) Excludes shares under options referred to in notes 3 and 4. (2) Includes 475,940 shares of Common Stock owned by the Jon Phillip Ray Family Trust of which Brenda Ray is the Trustee. (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 and written representations of its directors and executive officers, the Company believes that during the year ended June 30, 1997, all Section 16(a) filing requirements were satisfied, except for (i) an inadvertent late filing of a Form 4 for Brenda Ray, dated April 9, 1997, reporting the acquisition of 8,291 shares of the Company's Common Stock by Brenda Ray, Trustee of the Jon Philip Ray Family Trust dated May 5, 1984, on June 6, 1991, and also reporting the acquisition of 8,292 shares of the Company's Common Stock by herself, also on June 6, 1991; and (ii) an inadvertent late filing of a Form 4 for James E. Turner, dated April 1, 1997, reporting the acquisition of 160,000 shares of the Company's Common Stock on April 12, 1996, and 140,00 shares of the Company's Common Stock on October 23, 1996, both acquisitions through the exercise of stock options. 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 1996 and 1997, the Company paid LEI $28,050 and $39,450, 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 1995 and 1996, the Company paid GE Reaves $30,000, $3,100, respectively, 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 1995, 1996 and 1997, the Company paid Turner -0-, $20,000, and $17,500, 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 1997, the Company paid Ray $9,000 for consulting services. Part IV 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 opinion 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 1996, 1995 or 1994. 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: None. 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 26, 1997. ADVANCED TOBACCO PRODUCTS, INC. Date: September 26, 1997 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 26, 1997 By: /s/ J. W. Linehan J. W. Linehan, President, Chief Executive Officer, Chief Accounting Officer and Director Date: September 26, 1997 By: /s/ James E. Turner James E. Turner, Director Date: September 26, 1997 By: /s/ J. H. Uptmore J. H. Uptmore, Director Date: September 26, 1997 By: /s/ Brenda Ray Brenda Ray, Director Date: September 26, 1997 By: /s/ David A. Monroe 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 F-1 Financial Statements Report of Independent Public Accountants F-2 Balance Sheets - - June 30, 1997 and 1996 F-3 Statements of Income (Loss) for the Years Ended June 30, 1997, 1996 and 1995 F-4 Statements of Stockholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 F-5 Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 F-6 Notes to Financial Statements F-7 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, 1997 and 1996, and the related statements of income (loss), stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Antonio, Texas August 5, 1997 ADVANCED TOBACCO PRODUCTS, INC. dba ADVANCED THERAPEUTIC PRODUCTS, INC. BALANCE SHEETS - - JUNE 30, 1997, AND 1996 1997 1996 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 38,877 $ 84,918 Royalties receivable 79,539 - Investments 454,428 237,434 Total current assets 572,844 322,352 LICENSE AGREEMENTS, less accumulated amortization of $31,965 and $25,285 in 1997 and 1996, respectively 159,074 154,809 INVESTMENTS 868,570 1,007,837 Total assets $ 1,600,488 $ 1,484,998 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $ 6,760 $ 3,528 Total liabilities 6,760 3,528 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 and 7,952,136 shares issued and outstanding as of June 30, 1997, and 1996, respectively 80,922 79,522 Additional paid-in capital 12,544,878 12,528,778 Accumulated deficit (11,032,072) (11,126,830) Total stockholders' equity 1,593,728 1,481,470 Total liabilities and stockholders' equity $ 1,600,488 $ 1,484,998
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, 1997, 1996 AND 1995 1997 1996 1995 REVENUES: Royalties $ 157,200 $ - $ Total operating revenues 157,200 - - EXPENSES: General and administrative 141,176 91,846 103,402 Total operating expenses 141,176 91,846 103,402 INCOME (LOSS) FROM OPERATIONS 16,024 (91,846) (103,402) OTHER INCOME (EXPENSES): Interest income 78,734 76,889 100,341 Total other income (expense) 78,734 76,889 100,341 INCOME (LOSS) BEFORE INCOME TAXES 94,758 (14,957) (3,061) NET INCOME (LOSS) $ 94,758 $ (14,957) $ (3,061) INCOME (LOSS) PER COMMON SHARE $ .011 $ (.002) $ (.001) WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 8,248,090 7,831,588 7,792,136 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, 1997, 1996 AND 1995 Additional Common Stock Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total BALANCE, June 30, 1994 $7,792,136 $77,922 $12,510,378 $(11,108,812) $1,479,488 Net loss - - - (3,061) (3,061) 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 - 20,000 BALANCE, June 30, 1996 7,952,136 79,522 12,528,778 (11,126,830) 1,481,470 Net income - - - 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
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, 1997, 1996 AND 1995 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 94,758 $ (14,957) $(3,061) Adjustments to reconcile net income (loss) to net cash used in operating activities- Amortization 6,680 6,680 6,680 Amortization of discount on investments (76,342) (75,074) (86,740) Increase (decrease) in cash flows from changes in operating assets and liabilities- Royalties receivable (79,539) - 3,605 Accounts payable 3,232 (15,313) 17,468 Net cash used in operating activities (51,211) (98,664) (62,048) CASH FLOWS FROM INVESTMENTS ACTIVITIES: Purchase of license agreements 10,945 (29,279) (5,022) and patent expenses Purchase of investments (343,385) (219,529) (463,999) Sale of investments 342,000 326,000 314,000 Net cash provided by (used in) investing activities (12,330) 77,192 (155,021) CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options 17,500 20,000 - Net cash provided by financing activities 17,500 20,000 - NET DECREASE IN CASH AND CASH EQUIVALENTS (46,041) (1,472) (217,069) CASH AND CASH EQUIVALENTS, beginning of year 84,918 86,390 303,459 CASH AND CASH EQUIVALENTS, end of year $ 38,877 $ 84,918 $ 86,390
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 its nicotine technology and related assets to Pharmacia & Upjohn, Inc. (Pharmacia & Upjohn), a worldwide pharmaceutical company. 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 Earnings per share of common stock is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding. Common stock options are common stock equivalents but have been excluded from the per share computations for the years ended June 30, 1996 and 1995, as the effect is antidilutive. 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 for the years ended June 30, 1997, 1996 and 1995. 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. A patent was applied for in 1993 and an initial patent was issued in 1995. 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. Recent Accounting Pronouncements In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of a companys long- lived assets is not recoverable, an impairment loss will be recognized equal to the difference between the assets book carrying amount and its discounted fair value. Adoption of SFAS No. 121 is required for fiscal years beginning after December 15, 1995, and must be adopted on a prospective basis. Restatement of previously issued financial statements is not permitted. The Company adopted SFAS No. 121 prospectively in 1997. The adoption of SFAS No. 121 did not have a material impact on the financial position or results of operations of the Company. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 (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. For the year ended June 30, 1997, nonemployee transactions are properly recorded under APB 25 and are not impacted by SFAS No. 123. In February 1997, the FASB issued 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. This statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early application is prohibited and, upon adoption, all prior period EPS data presented must be restated to conform with this statement. Management believes implementation of this statement would not have a material effect on the income (loss) per share amounts which have been reported by the Company in the accompanying financial statements. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about Capital Structure. This statement continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. Specifically, this statement requires all entities to provide the capital structure disclosures previously required by APB 15. Companies that were exempt from the provisions of APB 15 will now need to make those disclosures. This statement is effective for financial statements for periods ending after December 15, 1997. Management believes implementation of this statement would not have a significant impact on the disclosures in the Companys financial statements. 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, 1997 and 1996, approximates fair value. The Company intends to hold all investments to their respective maturities which range from November 1997 to November 2000. 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 1997 and 1996 were as follows: Carry Gross Fair Amount Unrealized Value Holding (Gain) Loss 1997: Current $ 454,428 $ 1,836 $ 452,592 Long Term 868,570 10,565 858,005 $1,322,998 $ 2,401 $1,310,597 1996: Current $ 237,434 $ 182 $ 237,252 Long Term 1,007,837 8,728 999,109 $1,245,271 $ 8,910 $1,236,161 3. STOCKHOLDERS' EQUITY: During 1997 and 1996, 140,000 and 160,000 shares of common stock, respectively, were issued in connection with the exercise of stock options by a director of the Company. 4. 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. During 1997, Pharmacia & Upjohn received approval from regulatory authorities of various countries in which Pharmacia & Upjohn plan to market the Products and as of June 30, 1997, Products were being marketed by Pharmacia & Upjohn in Denmark, Sweden and Italy. For the year ended June 30, 1997, the Company earned royalties of $157,200 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, 1997. 5. FEDERAL INCOME TAXES: As of June 30, 1997, the Company has remaining tax net operating loss, corporate capital loss and tax credit carryforwards of approximately $10.5 million, $70,000 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 deferred income tax assets are as follows: June 30 1997 1996 Deferred income tax assets - Net operating loss carry forward $ 3,570,000 $ 3,604,000 Corporate capital loss carry forward 23,800 23,800 Tax credit carry forward 102,000 102,000 Total gross deferred tax assets 3,695,800 3,729,800 Less - Valuation allowance (3,695,800) (3,729,800) 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 $3,695,800 has been established at June 30, 1997. The Company will reevaluate the necessity for such valuation allowance in the future. 6. NONQUALIFIED 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 $.125 per share as of June 30, 1996, was 140,000. No options were outstanding and exercisable at $.125 per share as of June 30, 1997. The aggregate number of options outstanding and exercisable at $.4375 per share which expire in September 2000 was 200,000 as of June 30, 1997 and 1996. 7. 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 1997 and 1996, the Company paid LEI $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 and 1995, the Company paid GE Reaves $3,100 and $30,000, respectively, 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 1997 and 1996, the Company paid Turner $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 1997, the Company paid Ray $9,000 for consulting services. ABB0F1A1 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 1 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 Regis-tration Statement. 4.2 Specimen of Warrant Certificate by reference to Exhibit 4.2 of the Registrant's Regis-tration 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 State-ment. 5.1 Opinion of Matthews & Branscomb regarding legality of securities by reference to Exhibit 5.1 of the Registrant's Registration State-ment. 5.2 Opinion of Matthews & Branscomb regarding FDA and other governmental regulation by reference to Exhibit 5.2 of the Registrant's Regis-tration 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 Regis-trant'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 Regis-trant'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 Accoun-tant, filed as an exhibit to the Form 8-K, dated October 3, 1990. 16.2 Letter regarding change in Certifying Accoun-tant, filed as an exhibit to the Form 8, Amendment No. 1, dated December 12, 1991 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 a exhibit to this Form 10-K, dated August 29, 1997. EX-23 2 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement on Form S-8 (File No. 33-15694). /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP San Antonio, Texas August 29, 1997 ABB0F1A2 EX-27 3 FINANCIAL DATA SCHEDULE
5 year jun-30-1997 jun-30-1997 38,877 868,570 79,539 0 0 572,844 0 0 1,600,488 6,760 0 8,092,136 0 0 1,594,728 1,600,488 0 157,200 0 0 141,176 0 78,734 94,758 94,758 0 0 0 0 94,758 $.011 $.011
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