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 September 30, 2001
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 703 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. [X ]
As of November 30, 2001, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2,300,000.
As of November 30, 2001, the number of outstanding shares of Common Stock, $0.01 par value, of the registrant was 8,222,136.
PART I
ITEM 1.BUSINESS AND CURRENT OPERATIONS
Advanced Tobacco Products, Inc., d/b/a Advanced Therapeutic Products, Inc. ("ATP"), maintains a website athttp://www.businesswire.com/cnn/avth.htm
History and Relationship with Pharmacia Corporation
ATP, 16607 Blanco Road, Suite 703, San Antonio, Texas 78232, (210) 408-7077, is a Texas corporation formed in April 1983.
In 1987, ATP sold patented nicotine technology, know how and related assets to what is now Pharmacia Corporation ("PHA"), a worldwide pharmaceutical company that manufactures the Nicotrol®/Nicorette® Inhaler, Nicorette® Chewing Gum, the Nicotrol®/Nicorette® Patch and the Nicotrol®/Nicorette® Nasal Spray.
The nicotine technology acquired from ATP forms the basis of the Nicotrol®/Nicorette® Inhaler ("Inhaler") developed by PHA for use in the nicotine replacement therapy market. ATP receives product payments from sales of the Inhaler by PHA equal to 3% of PHA's net sales. See "Pharmacia Corporation Agreement."
The Inhaler was launched nationwide in the U.S. as a prescription product in 1998. PHA has introduced the Inhaler, primarily as an over-the-counter product, in Australia, Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, Hong Kong, Iceland, Ireland, Italy, Malta, Mexico, Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, Sweden, Switzerland, Taiwan, and United Kingdom
The Inhaler is the only nicotine replacement product designed to help control a smoker's cravings for cigarettes while providing 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, inhaling the nicotine, which is then absorbed through the lining of the mouth.
ATP also has an agreement with PHA under which, among other matters, ATP has the right to receive a royalty equal to .1% of net revenues received by PHA from the sale of any product using a nicotine impermeable copolymer technology. Under the terms of the agreement, ATP receives royalties from the sales of the Nicotrol®/Nicorette® Patch ("Patch") by PHA.
In addition, ATP has an exclusive worldwide license to certain dry powder nicotine inhaler technology from Duke University. ATP has obtained several patents covering this technology. ATP believes that a dry powder nicotine inhaler has the potential to be a future generation nicotine replacement product.
Pharmacia Corporation Agreement
ATP has the right to receive product payments from PHA with respect to the Inhaler as follows:
Product payments of three percent (3%) of net sales (generally, sales by PHA 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 are not disclosed, net sales are computed by multiplying the net sales of PHA to pre-wholesale distributors by 3.3. There are product payment limitations in the event of the sale of a nicotine vapor product competitive with the Inhaler.
The expiration date for applicable patents in most countries is June 6, 2011. In the United States it is June 8, 2010.
ATP has the right to receive product payments for other nicotine product applications, if any, both pharmaceutical and non-pharmaceutical. PHA is not obligated to develop or sell any products using the technology developed by ATP.
ITEM 2.PROPERTIES
ATP does not own any tangible fixed assets.
ITEM 3.LEGAL PROCEEDINGS
ATP 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 STOCKHOLDER 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 following table sets forth the high and low bid price of ATP'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 | |||||
HIGH | .97 | .39 | .53 | .32 | .38 | .34 | .28 | .36 |
LOW | .66 | .19 | .34 | .20 | .25 | .29 | .22 | .30 |
b) Holders
There were approximately 1,750 shareholders of record of ATP's Common Stock at September 30, 2001.
c) Dividends
ATP anticipates declaring and paying dividends from time to time while substantial product payments are received from the sale of products under ATP's agreements with PHA.
On November 27, 2001, ATP declared a dividend of $.05 per share payable on January 9, 2002, to shareholders of record as of December 21, 2001.
On November 22, 2000, ATP declared a dividend of $.05 per share payable on January 10, 2001, to shareholders of record as of December 22, 2000.
On November 23, 1999, ATP declared a dividend of $.15 per share payable on January 10, 2000, to shareholders of record as of December 17, 1999.
On September 21, 1998, ATP declared a dividend of $.07 per share payable on January 6, 1999, to shareholders of record as of October 30, 1998.
ITEM 6.SELECTED FINANCIAL DATA
The following table sets forth for the indicated periods selected historical financial information for ATP. Such information is derived from the financial statements of ATP 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."
Three Months | |||||||
Year Ended | Ended | ||||||
June 30 | September 30, | Year Ended September 30 | |||||
1997 | 1998 | 1998 | 1999 | 2000 | 2001 | ||
Revenues | $ 157,200 | $ 516,600 | $ 352,000 | $ 964,582 | $ 496,516 | $ 643,399 | |
Net income | 94,758 | 467,121 | 331,758 | 909,893 | 447,328 | 529,091 | |
Net income per share of common stock - basic | .01 | .06 | .04 | .11 | .05 | .06 | |
Net income per share of common stock - diluted | .01 | .06 | .04 | .11 | .05 | .06 | |
Weighted-average number of shares of common stock outstanding - basic | 8,051,094 | 8,092,136 | 8,092,136 | 8,092,136 | 8,173,010 | 8,217,040 | |
Weighted-average number of shares of common stock outstanding - diluted | 8,168,504 | 8,205,502 | 8,216,836 | 8,195,340 | 8,180,833 | 8,217,191 | |
Cash provided by (used in) operations | (51,211) | 93,005 | 360,279 | 1,048,490 | 435,978 | 462,466 | |
Increase (decrease) in cash and cash equivalents | (46,041) | 52,554 | 356,791 | 241,579 | (566,055) | 69,752 | |
Balance sheet data to end of indicated periods | |||||||
Working capital | 566,084 | 939,872 | 687,338 | 1,608,228 | 772,654 | 857,335 | |
Total assets | 1,600,488 | 2,063,651 | 2,411,756 | 2,750,124 | 2,022,345 | 2,164,881 | |
Total stockholders' equity | 1,593,728 | 2,060,849 | 1,826,157 | 2,736,050 | 1,998,308 | 2,124,731 | |
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
a)Results of Operations
Operating revenues were $964,582, $496,516 and $643,399 for the twelve months ended September 30, 1999, 2000 and 2001, respectively.
All revenues resulted from the recognition of product payments from PHA's sales of the Inhaler and the Patch. Product payments generated by the Patch were $15,369, $11,693 and $18,104 in fiscal 1999, 2000 and 2001, respectively.
General and administrative expenses were $151,091, $140,735 and $203,310 in fiscal 1999, 2000 and 2001, respectively. The increase in General and Administrative expense incurred in 2001 was primarily accountants' and attorneys' fees related to corporate tax planning and review of corporate opportunities.
Income from operations was $813,491, $355,781 and $440,089, in fiscal 1999, 2000 and 2001, respectively. The variances in income from operations from 1999 through 2001 were primarily due to the variances in product payments from PHA's sales of the Inhaler. ATP's net income for fiscal 2001 was $529,091, which included $89,002 of interest income.
b) Liquidity and Capital Resources
Cash and investments available on September 30, 2001, were approximately $1,857,998. ATP 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 53, has been a Director of ATP since November 1986 and a consultant to ATP 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 ATP. Mr. Turner was a consultant to PHA from August of 1987 until September of 2000.
Mr. J. H. Uptmore, age 70, has been a Director of ATP 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 58, has been Director of ATP since June 1991, and President, Chief Executive Officer, Chief Financial Officer and Secretary of ATP 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.
Ms. Brenda Ray, age 52, has been a Director of ATP since March 1989. Ms. Ray assisted in the original research and development of ATP's nicotine vapor inhalation technology. She is a consultant and has been President of Brenda Ray, Inc. since 1985.
Mr. David A. Monroe, age 49, has been a Director of ATP since March 1989. Mr. Monroe is President and CEO of PhotoTelesis Corporation, a government electronics manufacturing company, and e-Watch, Inc., a commercial electronics company. Mr. Monroe's prior experience includes Division General Manager of Raytheon TI Systems, Inc., Founder & Chief Technical Officer of Image Data Corporation, a communications technology company, and Vice-President of Datapoint Corporation, a computer equipment manufacturer.
ITEM 11.EXECUTIVE COMPENSATION
Cash Compensation
Mr. Linehan, President and Chief Executive Officer of ATP and its sole executive officer, receives no salary or fees, but indirectly benefits from 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.
Non-Statutory Stock Options
On October 1, 2000, ATP issued a non-statutory stock option to James A. Turner ("Turner"), a director of ATP, for 100,000 shares of ATP's common stock at an exercise price of $0.2813 per share, the approximate market value of a share of ATP common stock on October 1, 2000. 30,000 of the shares under option were subject to immediate purchase and the balance of 70,000 shares under option become exercisable in the event of a business combination or strategic alliance presented by Turner and approved by the Board of Directors of ATP prior to September 30, 2003. The option expires on September 30, 2005.
On June 15, 2001, ATP issued a non-statutory stock option to David A. Monroe, a director of ATP, for 100,000 shares of ATP's common stock at an exercise price of $0.335 per share, the approximate market value of a share of ATP common stock on June 15, 2001. The option expires on June 14, 2002.
Stock Option Exercises and 2001 Fiscal Year - End Option Values
The following table details the number and value of common stock underlying unexercised options held by directors as of September 30, 2001.
Name | Common Stock Underlying Options | Value of Unexercised In-the-Money Option | ||
Exercisable | Unexercisable | Exercisable | Unexercisable | |
James E. Turner | -0- | 70,000 | $ 1,309 | |
David A. Monroe | 100,000 | $ 0.00 | ||
Mr. Turner exercised an option to purchase 30,000 shares of common stock on December 1, 2000, at an exercise price of $0.2813 per share at an aggregate realized value of $0.00. On December 1, 2000, the approximate market value of ATP stock was $0.2813 per share.
ITEM 12.COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information about the Directors of ATP, which includes all persons known by ATP to own more than 5% of the Common Stock as of November 30, 2001, and all officers and Directors of ATP as a group as of September 30, 2001. Except as indicated, ATP 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.
Name | Director Since | Number of Shares | Percent of Class |
Brenda Ray (1) | 1989 | 1,397,464 | 17.00% |
James E. Turner (3) | 1986 | 400,221 | 4.87% |
J. H. Uptmore (2) | 1987 | 196,921 | 2.40% |
David A. Monroe (3) | 1989 | 47,229 | .57% |
J.W. Linehan | 1991 | 90,000 | 1.09% |
Officers and Directors | 2,231,836 | 27.14% |
________________________
(1) Includes 420,104 shares of Common Stock owned by the Jon Philip Ray Family Trust of which Brenda Ray is a beneficiary.
(2) 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.
(3) Does not include shares under outstanding stock options.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires ATP's directors, executive officers, and any persons holding more than ten percent (10%) of ATP's Common Stock to report their initial ownership of ATP's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission and to provide copies of such reports to ATP. Based upon ATP's review of copies of such reports received by ATP, ATP believes that during the year ended September 30, 2001, all Section 16(a) filing requirements were satisfied.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Since August 1995, ATP has had an Administrative Services Agreement with Linehan Engineering, Inc. ("LEI"), a related-party entity owned by ATP's president. In 1998, 1999 and 2000, ATP paid LEI $36,000, $39,780, and $40,980 respectively.
Since October, 2000, ATP has had a Consulting Services Agreement with James E. Turner ("Turner"), a director of ATP. During the year ended September 30, 2001, ATP paid Turner $66,000. Under the Consulting Services Agreement, Turner was granted an option to purchase up to 100,000 shares of Common Stock, exercisable as to 30,000 shares immediately and an additional 70,000 shares becoming exercisable in the event of a business combination or strategic alliance presented by Turner and approved by the Board of Directors of ATP prior to September 30, 2003. The options include an exercise price of $0.2813 per share and exercisable options expire September 30, 2005. In addition, ATP can terminate the Consulting Services Agreement upon 30 day's written notice to Turner and payment to Turner of $21,000; however, if ATP terminates the Consulting Services Agreement prior to June 30, 2002, as the result of the completion of a business combination or strategic alliance generated by Turner, ATP s hall pay turner $42,000.
Since October 1996, ATP has had a Consulting Services Agreement with Brenda Ray, Inc. ("Ray"), a related-party entity owned by a director of ATP. In 1999, 2000 and 2001, ATP paid Ray $12,000, $12,000, and $12,000, respectively.
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 listed in the index to financial statements follows the signature page of this report.
2. Financial Statement Schedules
ATP did not meet any of the requirements to provide financial statement schedules for any of the fiscal years ended 2001, 2000, or 1999.
3. Exhibits
The exhibits listed on the index to exhibits follows the signature page of this report.
(b) ATP has not filed any Current Reports on Form 8-K since the filing of ATP's last 10-K.
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, there unto duly authorized, in the City of San Antonio, State of Texas, as of December 21, 2001.
ADVANCED TOBACCO PRODUCTS, INC.
Date: December 21, 2001 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: December 21, 2001 By: /s/J. W. Linehan
Chief Executive Officer and
Chief Accounting Officer
Date: December 21, 2001 By: /s/James E. Turner
James E. Turner, Director
Date: December 21, 2001 By: /s/J.H. Uptmore
J.H. Uptmore, Director
Date: December 21, 2001 By: /s/Brenda Ray
Brenda Ray, Director
>
Date: December 21, 2001 By: /s/David A. Monroe
David A. Monroe, Director
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a 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
Report of Independent Public Accountants F-2
Balance Sheets - - September 30, 2001 and 2000 F-3
Statements of Income for the Years Ended September 30, 2001, 2000 and 1999 F-4
Statements of Stockholders' Equity for the Years Ended September 30, 2001, 2000 and 1999 F-5
Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999 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., d/b/a
Advanced Therapeutic Products, Inc.:
We have audited the accompanying balance sheets of Advanced Tobacco Products, Inc. (a Texas corporation), d/b/a Advanced Therapeutic Products, Inc., as of September 30, 2001 and 2000, and the related statements of income, stockholders' equity and cash flows for the years ended September 30, 2001, 2000 and 1999. 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 auditing standards generally accepted in the United States. 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., d/b/a Advanced Therapeutic Products, Inc., as of September 30, 2001 and 2000, and the results of its operations and its cash flows for the years ended September 30, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States.
San Antonio, Texas
November 27, 2001
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a ADVANCED THERAPEUTIC PRODUCTS, INC.
BALANCE SHEETS - - SEPTEMBER 30, 2001 AND 2000
2001 | 2000 | |
ASSETS | ||
CURRENT ASSETS: | ||
Cash and cash equivalents | $ 193,498 | $ 123,746 |
Product payments receivable | 142,095 | 107,792 |
Other receivables | 2,436 | - |
Investments | 559,456 | 565,153 |
Total current assets | 897,485 | 796,691 |
LICENSE AGREEMENTS, less accumulated amortization of $90,359 and $62,855 as of 2001 and 2000, respectively | 162,352 | 189,856 |
LONG-TERM INVESTMENTS | 1,105,044 | 1,035,798 |
Total assets | $ 2,164,881 | $ 2,022,345 |
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
LIABILITIES: | ||
Accrued liabilities | $ 40,150 | $ 24,037 |
Total liabilities | 40,150 | 24,037 |
STOCKHOLDERS' EQUITY: | ||
Preferred stock, $100 par value; 500,000 shares authorized; none issued | - | - |
Common stock, $.01 par value; 30,000,000 shares authorized; 8,222,136 and 8,192,136 issued and outstanding | 82,222 | 81,922 |
Additional paid-in capital | 12,595,767 | 12,587,628 |
Accumulated deficit | (10,553,258) | (10,671,242) |
Total stockholders' equity | 2,124,731 | 1,998,308 |
Total liabilities and stockholders' equity | $ 2,164,881 | $ 2,022,345 |
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF INCOME
For the Year Ended September 30 | |||
2001 | 2000 | 1999 | |
REVENUES: | |||
Product payments | $ 643,399 | $ 496,516 | $ 964,582 |
Total operating revenues | 643,399 | 496,516 | 964,582 |
EXPENSES: | |||
General and administrative | 203,310 | 140,735 | 151,091 |
Total operating expenses | 203,310 | 140,735 | 151,091 |
INCOME FROM OPERATIONS | 440,089 | 355,781 | 813,491 |
OTHER INCOME: | |||
Interest income | 89,002 | 91,547 | 96,402 |
Total other income | 89,002 | 91,547 | 96,402 |
INCOME BEFORE INCOME TAXES | 529,091 | 447,328 | 909,893 |
INCOME TAX EXPENSE | - | - | - |
NET INCOME | $ 529,091 | $ 447,328 | $ 909,893 |
INCOME PER COMMON SHARE - BASIC | $.06 | $.05 | $.11 |
WEIGHTED-AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING - BASIC | 8,217,040 | 8,173,010 | 8,092,136 |
INCOME PER COMMON SHARE - DILUTED | $.06 | $.05 | $.11 |
WEIGHTED-AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING - DILUTED | 8,217,191 | 8,180,833 | 8,195,340 |
CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK | $.05 | $.15 | $.07 |
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock | Additional | Accumulated | |||
Shares | Amount | Capital | Deficit | Total | |
BALANCE, September 30, 1998 | 8,092,136 | $ 80,922 | $ 12,544,878 | $ (10,799,643) | $ 1,826,157 |
Net income | - | - | - | 909,893 | 909,893 |
BALANCE, September 30, 1999 | 8,092,136 | 80,922 | 12,544,878 | (9,889,750) | 2,736,050 |
Net income | - | - | - | 447,328 | 447,328 |
Exercise of stock options | 100,000 | 1,000 | 42,750 | - | 43,750 |
Dividends declared | - | - | - | (1,228,820) | (1,228,820) |
BALANCE, September 30, 2000 | 8,192,136 | 81,922 | 12,587,628 | (10,671,242) | 1,998,308 |
Net income | - | - | - | 529,091 | 529,091 |
Exercise of stock options | 30,000 | 300 | 8,139 | - | 8,439 |
Dividends declared | - | - | - | (411,107) | (411,107) |
BALANCE, September 30, 2001 | 8,222,136 | $ 82,222 | $ 12,595,767 | $ (10,553,258) | $ 2,124,731 |
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended September 30 | |||
2001 | 2000 | 1999 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |||
Net income | $ 529,091 | $ 447,328 | $ 909,893 |
Adjustments to reconcile net income to net cash provided by operating activities- | |||
Amortization of license agreements | 27,504 | 15,860 | 6,680 |
Amortization of discount on investments | (73,503) | (71,046) | (73,343) |
(Increase) decrease in payments receivable | (34,303) | 32,286 | 211,922 |
(Increase) decrease in other receivables | (2,436) | 1,587 | (1,587) |
Increase (decrease) in accrued liabilities | 16,113 | 9,963 | (5,075) |
Net cash provided by operating activities | 462,466 | 435,978 | 1,048,490 |
CASH FLOWS FROM INVESTING ACTIVITIES: | |||
Purchase of license agreements and patent costs | - | (31,273) | (19,319) |
Purchase of investments | (565,046) | (585,690) | (899,142) |
Maturity of investments | 575,000 | 800,000 | 678,000 |
Net cash provided by (used in) investing activities | 9,954 | 183,037 | (240,461) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |||
Exercise of stock options | 8,439 | 43,750 | - |
Dividends paid | (411,107) | (1,228,820) | (566,450) |
Net cash used in financing activities | (402,668) | (1,185,070) | (566,450) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 69,752 | (566,055) | 241,579 |
CASH AND CASH EQUIVALENTS, beginning of year | 123,746 | 689,801 | 448,222 |
CASH AND CASH EQUIVALENTS, end of year | $ 193,498 | $ 123,746 | $ 689,801 |
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a ADVANCED THERAPEUTIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Advanced Tobacco Products, Inc. (a Texas corporation), d/b/a Advanced Therapeutic Products, Inc. (ATP), was formed in April 1983. In 1987, ATP sold certain nicotine technology and related assets to what is now Pharmacia Corporation (PHA), a worldwide pharmaceutical company, for $3.6 million and the right to future product payments.
Revenue Recognition and Current Operations
The nicotine technology acquired from ATP forms the basis of the NicotrolÒ /NicoretteÒ Inhaler (Inhaler) developed by PHA for use in the nicotine replacement therapy market. Product payments from sales of the Inhaler, outside the U.S., are 3 percent of PHA's net sales to pharmacy distributors. Until June 30, 2000, payments from U.S. sales of the Inhaler were 9.9 percent of PHA's net sales to McNeil Consumer Health Care (McNeil), a Johnson & Johnson Company, which marketed the Inhaler to pharmacies. Effective July 1, 2000, PHA reacquired, from McNeil, the rights to market the Inhaler in the U.S. Payments from the U.S. sales of the Inhaler are now 3 percent of PHA's net sales. PHA is under no obligation to market these products. The agreement with PHA provides for quarterly product payments. The agreement also provides for certain reduction of product payments paid to ATP if these payments exceed $1,000,000 in a given year. ATP recognized revenues from PHA at the time PHA has sales of its related product.
In addition, ATP has an agreement with PHA under which, among other matters, ATP has the right to receive a royalty equal to .1 percent of net revenues received by PHA from the sale of any product using a nicotine impermeable copolymer technology. Under the terms of the agreement, ATP receives royalties from the sales of PHA's NicotrolÒ /Nicoretteâ Patch.
ATP also has an exclusive worldwide license to certain dry powder nicotine inhaler technology from Duke University. ATP has obtained several patents covering this technology. ATP believes that a dry powder nicotine inhaler has the potential to be a future generation nicotine replacement product.
Concentration of Credit Risk
ATP's product payments and payments receivable are derived solely from PHA. ATP believes its associated exposure to credit risk is minimal. No allowance for doubtful accounts is considered necessary at September 30, 2001 or 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires ATP 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.
Net Income Per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," requires presentation of basic earning per share and diluted earnings per share, simplifies computational guidelines and increases the comparability of earnings per share on an international basis. Basic earnings per common share is based on the weighted-average number of common shares outstanding during the respective years. Diluted earnings per share is based on the weighted-average number of common shares outstanding and dilutive common stock equivalents.
The following is a reconciliation of the denominators of the basic and diluted per-share computations for net income:
Weighted-average |
Effect of | Weighted-average | |
For the year ended September 30- | |||
2001 | 8,217,040 | 150 | 8,217,191 |
2000 | 8,173,010 | 7,823 | 8,180,833 |
1999 | 8,092,136 | 103,204 | 8,195,340 |
Cash and Cash Equivalents
ATP considers all investments with original maturities of less than three months to be cash equivalents.
License Agreement
In fiscal year 1993, ATP 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. ATP capitalized the direct costs incurred in obtaining the license agreement plus patent prosecution costs. These costs are being amortized on a straight-line basis over 20 years.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets." Statement No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of Statement No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. This Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of Statement No. 142 are to be reported as resulting from a change in accounting principle. The Company has reviewed the requirements of Statement No. 142 and does not expect to be impacted by this Statement.
Non-Statutory Stock Options
ATP accounts for non-statutory stock options using the "intrinsic value" method of accounting set forth in APB Opinion No.25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for options is measured as the excess, if any, of the quoted market price of ATP's common stock at the date of the grant over the amount an employee must pay to acquire the stock. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to measure and recognize in their financial statements a compensation cost for stock-based compensation based on the "fair value" method of accounting set forth in the statement.
Investments in Securities
ATP accounts for investments in debt securities as held-to-maturity securities, as set forth in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are stated in the accompanying financial statements at historical cost plus accretion of related discount (for U.S. Treasury and Agency Bonds). Debt securities with a maturity of less than one year are classified in the balance sheet as current assets, while debt securities with a maturity of greater than one year are classified as long-term assets.
2.INVESTMENTS:
ATP's investments consist of U.S. Treasury and Agency zero coupon bonds which were purchased at a discount from their face value and certificates of deposit. ATP intends to hold all investments held at September 30, 2001, to their respective maturities, which range from November 2001 to May 2005.
Investments classified as current assets at September 30, 2001, include the following:
Book | Fair | |
United States Treasury Bonds | $ 559,456 | $ 562,065 |
Investments classified as long-term assets at September 30, 2001, include the following:
Book | Fair | |
United States Treasury | $ 925,044 | $ 959,962 |
Certificates of Deposit | 180,000 | 180,000 |
$ 1,105,044 | $1,139,962 |
Investments classified as current assets at September 30, 2000, include the following:
Book | Fair | |
United States Treasury Bonds | $ 465,153 | $ 463,609 |
Certificates of Deposit | 100,000 | 100,000 |
$ 565,153 | $ 563,609 |
Investments securities classified as long-term assets at September 30, 2000, include the following:
Book | Fair | |
United States Treasury Bonds | $ 1,035,798 | $ 1,030,529 |
The difference between cost and fair value for the investments discussed above represent unrealized holding gains and losses. Fair value was obtained from ATP's securities broker using quoted market prices.
Investment income by asset classification is as follows:
September 30 | |||
2001 | 2000 | 1999 | |
United States Treasury | $ 75,933 | $ 72,771 | $ 71,872 |
Certificates of Deposits | 4,891 | 3,043 | 9,202 |
Money Market Mutual Funds | 8,178 | 15,733 | 15,328 |
Total | $ 89,002 | $ 91,547 | $ 96,402 |
3.FEDERAL INCOME TAXES:
Income taxes are recognized for (a) amounts payable or refundable in the current year and (b) deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's financial statements. Deferred tax assets and liabilities are determined by applying the statutory rate in effect at the balance sheet date to differences between the book and tax basis of assets and liabilities.
As of September 30, 2001, ATP had remaining tax net operating loss carryforwards of $3,172,206 which may be used to reduce taxes against future earnings. The net operating loss carryforwards expire between 2002 and 2011 as follows: $1,938,997 on June 30, 2002, $988,839 on June 30, 2003, $118,883 on June 30, 2004, $91,380 on June 30, 2005, and $34,107 on June 30, 2011. ATP believes that it is "more likely than not" that the Company will not realize its deferred tax assets, accordingly, a valuation allowance equivalent to the deferred tax assets has been established.
The tax effects of the various loss and credit carryforwards are as follows:
September 30 | ||
2001 | 2000 | |
Deferred income tax assets- | ||
Net operating loss carryforwards | $ 1,079,550 | $ 2,870,000 |
Tax credit carryforwards | - | 1,000 |
Total gross deferred tax assets | 1,079,550 | 2,871,000 |
Less- Valuation allowance | (1,079,550) | (2,871,000) |
Net deferred tax assets | $ - | $ - |
4.NON-STATUTORY STOCK OPTIONS:
The following table summarizes the activity in ATP's non-statutory stock options:
Stock | Weighted-Average | |
Outstanding at September 30, 1999 | 200,000 | .4375 |
Exercised | 100,000 | .4375 |
Expired | 100,000 | .4375 |
Outstanding at September 30, 2000 | - | - |
Granted | 100,000 | .2813 |
Exercised | 30,000 | .2813 |
Granted | 100,000 | .3350 |
Outstanding at September 30, 2001 | 170,000 | .3129 |
On October 1, 2000, ATP granted James E. Turner 30,000 stock options at $.2813 per share with an additional 70,000 options exercisable upon certain conditions being met (see Note 5 for further discussion). The 30,000 options available to Mr. Turner were exercised on December 1, 2000, at $.2813 per share. On June 15, 2001, ATP granted David A. Monroe, a director of ATP, 100,000 options at $.335 per share.
If the Company had adopted fair value accounting method for its options under SFAS 123, the Company's net income would have been reduced in 2001 by approximately $5,000. However, there would be no change to either basic or diluted earnings per share for 2001. The fair value of these options was estimated using a Black-Scholes option pricing model with a risk-free interest rate of 2.38 percent, a volatility factor of .713, a dividend yield of 29 percent and a remaining option term of nine months.
5.RELATED-PARTY TRANSACTIONS:
Since October, 2000, ATP has had a Consulting Services Agreement with James E. Turner ("Turner"), a director of ATP. During the year ended September 30, 2001, ATP paid Turner $66,000. Under the Consulting Services Agreement, Turner was granted an option to purchase up to 100,000 shares of Common Stock, exercisable as to 30,000 shares immediately and an additional 70,000 shares becoming exercisable in the event of a business combination or strategic alliance presented by Turner and approved by the Board of Directors of ATP prior to September 30, 2003. The options include an exercise price of $0.2813 per share and exercisable options expire September 30, 2005. In addition, ATP can terminate the Consulting Services Agreement upon 30 day's written notice to Turner and payment to Turner of $21,000; however, if ATP terminates the Consulting Services Agreement prior to June 30, 2002, as the result of the completion of a business combination or strategic alliance generated by Turner, ATP s hall pay turner $42,000.
Since October 1996, ATP has had a Consulting Services Agreement with Brenda Ray, Inc. (Ray), a related-party entity owned by a director of ATP. During the years ended September 30, 2001, 2000 and 1999, ATP paid Ray $12,000, $12,000 and $12,000, respectively, for consulting services.
Since August 1995, ATP has had an administrative services agreement with Linehan Engineering, Inc. (LEI), a related-party entity owned by ATP's president. During the years ended September 30, 2001, 2000 and 1999, ATP paid LEI $40,980, $39,780 and $36,000, respectively, for administrative services.
6.QUARTERLY FINANCIAL DATA (UNAUDITED):
First | Second | Third | Fourth | |
2001- | ||||
Operating revenues | $ 193,719 | $ 163,063 | $ 144,522 | $ 142,095 |
Operating income | 158,619 | 111,969 | 75,844 | 93,657 |
Net income | 182,999 | 132,241 | 96,294 | 117,557 |
Basic and diluted income | .02 | .02 | .01 | .01 |
2000- | ||||
Operating revenues | $ 91,863 | $ 182,153 | $ 114,708 | $ 107,792 |
Operating income | 48,715 | 150,592 | 86,263 | 70,211 |
Net income | 80,176 | 168,742 | 110,343 | 88,067 |
Basic and diluted income | .01 | .02 | .01 | .01 |
7.SUBSEQUENT EVENTS:
On November 27, 2001, ATP declared a dividend of $.05 per share payable on January 9, 2002, to stockholders of record as of December 21, 2001.