SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the registrant |X|
Filed by a party other than the registrant |_|
Check the appropriate box:
|X| Preliminary proxy statement |_| Confidential, for Use of the
Commission Only (as permitted by Rule
|_| Definitive proxy statement
14a-6(e)(2))
|_| Definitive additional materials
|_| Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
ATLANTIC TECHNOLOGY VENTURES, INC.
----------------------------------
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) filing proxy statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
|X| No Fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
ATLANTIC TECHNOLOGY VENTURES, INC.
350 Fifth Avenue
Suite 5507
New York, New York 10188
__________, 2003
Dear Shareholder:
You are cordially invited to attend the annual meeting of shareholders of
Atlantic Technology Ventures, Inc. to be held at 10:00 a.m. New York time on
__________, 2003, at the offices of Kramer Levin Naftalis & Frankel LLP, at 919
Third Avenue, 40th Floor, New York, New York 10022, and at any adjournment.
At the annual meeting, Atlantic's shareholders will be voting on proposals
to do the following:
o to amend Atlantic's certificate of incorporation to increase the total
number of authorized shares of Atlantic's common stock from 50 million
to 150 million;
o to amend Atlantic's Series A preferred certificate of designations;
o to amend Atlantic's certificate of incorporation to change our name to
"Manhattan Pharmaceuticals, Inc.";
o to elect Steven H. Kanzer, Peter O. Kliem, A. Joseph Rudick, David
Tanen and Frederic P. Zotos as members of Atlantic's board of
directors;
o to ratify our board of directors' selection of J.H. Cohn, LLP to audit
Atlantic's financial statements for the fiscal year ending December
31, 2002; and
o to transact such other business as may properly come before the annual
meeting and any one or more adjournments thereof.
The purpose of the first two proposals is to permit Atlantic to merge its
wholly owned subsidiary into Manhattan Pharmaceuticals, Inc., a
development-stage biopharmaceutical company engaged in discovering and
commercializing novel therapies to treat obesity. We will not change our name if
we do not consummate the merger.
The proposals are more fully described in the enclosed proxy statement.
Our board of directors unanimously recommends that you vote in favor of each of
them.
To ensure that you are represented at the annual meeting, whether or not
you plan to attend, please read carefully the enclosed proxy statement, which
describes the matters to be voted upon, and complete, sign, and date the
enclosed proxy card and return it as soon as possible in the accompanying
postage-prepaid return envelope. Your prompt return of your proxy card will
assist us in preparing for the annual meeting.
By Order of the Board of Directors,
Frederic P. Zotos
President and Chief Executive
Officer
New York, New York
ATLANTIC TECHNOLOGY VENTURES, INC.
350 Fifth Avenue
Suite 5507
New York, New York 10188
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________, 2003
Dear Shareholder:
You are cordially invited to attend the annual meeting of shareholders of
Atlantic Technology Ventures, Inc., which will be held at 10:00 a.m. New York
time on ________, 2003, at the offices of Kramer Levin Naftalis & Frankel LLP,
at 919 Third Avenue, 40th Floor, New York, New York 10022, and at any
adjournment.
At the annual meeting, certain proposals will be voted upon by the holders
of Atlantic's common and Series A preferred stock. These proposals are described
in the enclosed proxy statement. Atlantic's board of directors has unanimously
approved each of these proposals and recommends that you vote in favor of each
of them.
To assure that you are represented at the annual meeting, whether or not
you plan to attend, please read carefully the accompanying proxy statement,
which describes the matters to be voted upon, and complete, sign, and date the
enclosed proxy card and return it in the reply envelope provided.
A letter from Atlantic's President is also enclosed.
We look forward to seeing you at the annual meeting.
Sincerely,
Frederic P. Zotos
President and Chief Executive
Officer
New York, New York
________, 2003
Table of Contents
-----------------
Page
----
Summary Term Sheet...........................................................__
Contact Information..........................................................__
Description of Business Conducted by Atlantic................................__
Description of Property......................................................__
Legal Proceedings............................................................__
Forward-Looking Statements...................................................__
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................__
Description of Atlantic's Securities.........................................__
Market for Common Equity and Related Shareholder Matters.....................__
Business Conducted by Manhattan..............................................__
Manhattan Plan of Operations.................................................__
Manhattan Market for Common Equity...........................................__
Terms of the Transaction.....................................................__
Risk Factors.................................................................__
Matters to be Considered At The Annual Meeting...............................__
Executive Compensation and Other Information.................................__
Security Ownership of Management and Certain Beneficial Owners...............__
Deadline for Receipt of Shareholder Proposals................................__
Additional Materials.........................................................__
Other Matters................................................................__
Index to Financial Statements................................................__
ATLANTIC TECHNOLOGY VENTURES, INC.
350 Fifth Avenue
Suite 5507
New York, New York 10118
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON _________, 2003
General Information for Shareholders
The enclosed proxy card is solicited on behalf of the board of directors
of Atlantic Technology Ventures, Inc., a Delaware corporation, for use at the
2002 annual meeting of shareholders to be held at 10:00 a.m. New York time on
_________, 2003, at the offices of Kramer Levin Naftalis & Frankel LLP, at 919
Third Avenue, 40th Floor, New York, New York 10022, and at any adjournment.
This proxy statement was first mailed to the shareholders entitled to vote
at the annual meeting on or about ________, 2003.
At the annual meeting, Atlantic's shareholders will be voting on proposals
to do the following:
(1) to amend Atlantic's certificate of incorporation to increase the total
number of authorized shares of Atlantic's common stock from 50 million
to 150 million;
(2) to amend Atlantic's Series A preferred certificate of designations;
(3) to amend Atlantic's certificate of incorporation to change our name to
"Manhattan Pharmaceuticals, Inc.";
(4) to elect Steven H. Kanzer, Peter O. Kliem, A. Joseph Rudick, David
Tanen and Frederic P. Zotos as members of Atlantic's board of
directors;
(5) to ratify our board of directors' selection of J.H. Cohn, LLP to audit
Atlantic's financial statements for the fiscal year ending December
31, 2002; and
(6) to transact such other business as may properly come before the annual
meeting and any one or more adjournments thereof.
Atlantic recently signed a merger agreement with Manhattan
Pharmaceuticals, Inc. providing for the merger of a wholly owned subsidiary of
Atlantic into Manhattan. If the merger is consummated, shareholders of Manhattan
will be issued shares representing 80% of Atlantic's post-merger outstanding
capital stock. While the merger is not subject to approval by Atlantic
shareholders, approval of proposals 1 and 2 are necessary to give effect to the
merger. If the merger is not consummated, we will not change our name, even if
proposal 3 is approved by a majority of our shareholders.
The proposals to be considered and acted upon at the annual meeting are
described in detail in this proxy statement.
Record Date and Voting
Shareholders of record at the close of business on the record date of
January __, 2003, are entitled to notice of, and to vote at, the annual meeting.
As of the close of business on that date, there were outstanding and entitled to
vote __________ shares of Atlantic's common stock and ________ shares of
Atlantic's Series A convertible preferred stock. Each holder of common stock is
entitled to one vote for each share of common stock held by that shareholder on
the record date. Each holder of Series A preferred stock is entitled to one vote
for each share of common stock into which that holder's shares of Series A
preferred stock were convertible as of the record date. As of the record date,
each share of Series A preferred stock was convertible into [8.22] shares of
common stock, and as a class the Series A preferred stock is entitled to an
aggregate of ________ votes, or _____% of the total vote.
1
At the annual meeting, all holders of shares of common stock and Series A
preferred stock will be asked to vote on proposals 1, 2, 3, 4 and 5. The
affirmative vote of a majority of the outstanding shares of common stock and
Series A preferred stock, voting together as one class, is required in order to
approve proposals 1, 2, 3 and 5. In addition, the affirmative vote of a majority
of the outstanding shares of common stock, voting separately, is required to
approve proposal 1, and the affirmative vote of a majority of the outstanding
shares of Series A preferred stock, voting separately, is required to approve
proposal 2. A plurality of the votes cast by holders of the outstanding shares
of common stock and Series A preferred stock, voting together, is required to
elect each candidate for director listed in proposal 4. Since, however, the
number of candidates is equal to the number of vacancies, receipt of any votes
in favor of any candidate will ensure that that candidate is elected.
If a choice as to the matters coming before the annual meeting has been
specified by a shareholder on a returned proxy card, the shares will be voted
accordingly. If no choice is specified, the shares will be voted in favor of
proposals 1, 2, 3 and 5 and in favor of election of each of the directors
proposed by the board.
Abstentions and broker non-votes (that is, a proxy card submitted by a
broker or nominee that specifically indicates the lack of discretionary
authority to vote on the proposals) are counted for purposes of determining the
presence or absence of a quorum for the transaction of business. Abstentions
will have the same effect as negative votes, whereas broker non-votes will not
be counted for purposes of determining whether a proposal has been approved or
not.
If you receive more than one proxy card because your shares are registered
in different names or with different addresses or because you own shares of both
common stock and Series A preferred stock, please return each of them to ensure
that all your shares are voted. If you hold your shares of Atlantic in street
name and decide to attend the annual meeting and vote your shares in person,
please notify your broker to obtain a ballot so that you may vote your shares.
If you are a holder of record of Atlantic shares and submit the enclosed proxy
card and then vote by ballot, your proxy vote will be revoked automatically and
only your vote by ballot will be counted. Your prompt return of your proxy card
will assist us in preparing for the annual meeting.
To ensure that your shares are voted at the annual meeting, please
complete, date, and sign the enclosed proxy card and return it in the
accompanying postage-prepaid return envelope as soon as possible.
Revocability of Proxies
Any shareholder giving a proxy as a result of this solicitation may revoke
it at any time before it is exercised. A shareholder of record may revoke a
proxy by filing with Nicholas J. Rossettos, the corporate secretary of Atlantic,
at our principal executive offices at 350 Fifth Avenue, Suite 5507, New York,
New York 10118, a duly executed proxy bearing a later date or by attending the
annual meeting and voting that shareholder's shares in person. Persons who hold
Atlantic shares in street name may revoke their proxy by contacting their broker
to obtain a legal ballot and filing that ballot bearing a later date with the
corporate secretary of Atlantic at its principal executive offices or by
attending the annual meeting and voting that ballot in person.
Solicitation
We will bear the entire cost of solicitation, including preparing,
assembling, printing and mailing the notice of annual meeting, this proxy
statement, the proxy card and any additional solicitation materials furnished to
shareholders. Copies of solicitation materials will be furnished to any
brokerage house, fiduciary or custodian holding shares in its name that are
beneficially owned by others, so that they may forward the solicitation
materials to the beneficial owners. To assure that a quorum is present in person
or by proxy at the annual meeting, it may be necessary for certain officers,
directors, employees or other agents of the Atlantic to solicit proxies by
telephone, facsimile or other means or in person.
2
SUMMARY TERM SHEET
A number of proposals will be voted on at the annual meeting, and they are
described in detail in this proxy statement. Below is a brief overview of the
terms of the proposed merger of our wholly owned subsidiary into Manhattan
Pharmaceuticals, Inc. Proposals 1 and 2 address certain changes to our
certificate of incorporation that would have to be made in order for us to be
able to consummate this transaction. To more fully understand the transaction,
you should read this entire proxy statement.
On December 17, 2002, we entered into an agreement and plan of merger with
Manhattan Pharmaceuticals, Inc., a Delaware corporation and Manhattan
Pharmaceuticals Acquisition Corp., or "MPAC," a Delaware corporation and a
wholly owned subsidiary of Atlantic. A copy of the merger agreement is attached
to this proxy statement as Exhibit A. The following are the material terms of
the merger agreement.
Merger structure (page __) o MPAC, our wholly owned subsidiary formed under
Delaware law, will merge into Manhattan, with
Manhattan becoming our wholly owned subsidiary.
Merger consideration o At the closing of the merger, the shareholders
exchange ratio (page __) of Manhattan will be issued shares representing
approximately 80% of our post-merger outstanding
capital stock.
Treatment of Manhattan o Each option or warrant to purchase shares of
stock options and warrants Manhattan common stock immediately prior to the
(page ___) effective time of the merger will be converted
into an option or warrant to purchase our common
stock. We will adjust the number of shares
issuable upon exercise of the option or warrant
and the exercise price of the options and
warrants to reflect the merger's exchange ratio.
Board of directors and o In this proxy statement we are asking the
executive officers (page shareholders to re-elect the current board of
__) Steven H. Kanzer, Peter O. Kliem, A. Joseph
Rudick, David M. Tanen and Frederic P. Zotos. If
the merger is consummated, however, these board
members will step down immediately following the
effective time of the merger, with the exception
of Mr. Tanen, who is also currently a director
of Manhattan.
o If the merger is consummated, our board of
directors will replace our officers with the
officers of Manhattan immediately following the
effective time of the merger.
Tax treatment (page __) o Atlantic and Manhattan intend that the merger
qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Internal
Revenue Code. If the merger qualifies as a
tax-free reorganization, no gain or loss will be
recognized by us, our shareholders, Manhattan or
its shareholders as a result of the merger.
Shareholder approvals o Our shareholders must approve the proposed
(page __) increase in our authorized common stock from 50
million shares to 150 million shares, as more
fully detailed in this proxy statement. As of
January __, 2003, there were __________ shares
of our common stock outstanding and ________
shares of our common stock in reserve. As of the
same date, there were ________ shares of our
Series A preferred stock outstanding and _______
shares of our Series A preferred stock in
reserve. If proposal 2 in this proxy statement
is approved we will convert all of our Series A
preferred stock into shares of our common stock
and exchange certain warrants for shares of our
common stock. Therefore, immediately prior to
the consummation of the merger, there will be
__________ shares of our common stock
outstanding. After the merger is consummated,
there will be __________ shares of our common
stock outstanding and __________ shares of
common stock in reserve.
3
o Our shareholders must approve an amendment to
our certificate of designations so that the
Series A preferred stock will immediately prior
to the effective time of the merger
automatically convert into shares of our common
stock.
o Manhattan's shareholders must approve the merger
agreement. Holders of 95% of Manhattan's
outstanding common stock entitled to vote for
the merger have entered into voting agreements
with Atlantic in which they agreed to vote their
shares in favor of the merger.
Merger termination rights o Atlantic and Manhattan can agree to terminate
(page __) the merger agreement without completing the
merger. In addition, each party may terminate
the merger agreement if the other party's
representations contained in the merger
agreement are inaccurate, if the other party
breaches any obligation under the merger
agreement, or the other party fails to satisfy
certain conditions. The parties may also
terminate the merger agreement if the merger has
not been completed before February 7, 2003. Each
party may also terminate the merger agreement if
the results of its due diligence investigation
of the other party reveals any event that would
reasonably be expected to have a materially
adverse effect on that party.
"No Solicitation" o The merger agreement contains "no solicitation"
provisions (page__) provisions that prohibit Atlantic and Manhattan
from seeking an alternative merger or
acquisition proposal. The merger agreement does
not, however, prohibit the parties or their
respective boards of directors from considering
an unsolicited merger or acquisition proposal.
Fairness opinion (page __) o Empire Valuation Consultants, Inc. has issued to
our board a fairness opinion to the effect that
the merger agreement is fair, from a financial
point of view, to our shareholders. The fairness
opinion is attached to this proxy statement as
Exhibit B.
Conditions to the merger o Our shareholders must approve the proposed
(page __) increase in our authorized common stock from 50
million shares to 150 million shares.
o Our shareholders must approve our amending the
certificate of designations of our Series A
preferred stock so that the Series A preferred
stock will immediately prior to the effective
time of the merger automatically convert into
shares of our common stock.
o Each of our officers and directors, with the
exception of David M. Tanen must tender his
resignation.
o We must amend the employment agreements with our
employees to provide for deferred payment of
accrued salary and bonuses.
o We must exchange the warrants we granted as part
of a private placement we conducted in December
2001 for shares of our common stock.
o Manhattan's shareholders must approve the merger
agreement.
4
o Manhattan must have $500,000 positive cash
balance.
o The merger agreement contains other customary
closing conditions.
Registration rights (page o The holders of Manhattan stock exchanging their
__) stock for Atlantic stock have the right, in
certain instances, to require Atlantic to
register Atlantic stock issued in the merger.
CONTACT INFORMATION
Requests for documents relating to Atlantic should be directed to:
Atlantic Technology Ventures, Inc.
350 Fifth Avenue, Suite 5507
New York, NY 10188
Attention: Frederic P. Zotos
President and Chief Executive Officer
Telephone: (212) 267-2503
Requests for information relating to Manhattan should be directed to:
Manhattan Pharmaceuticals, Inc.
c/o Paramount Capital, Inc.
787 Seventh Avenue, 48th Floor
New York, NY 10019
Attention: Joshua Kazam
Telephone: (212) 554-4184
Copies of this proxy statement can be inspected by anyone without charge
at the public reference room of the SEC, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at 233
Broadway, New York, New York 10279, and 500 West Madison Street, Chicago,
Illinois 60601. Please call the SEC at 1-800-SEC-0330 for further information on
the operation of the public reference room. Copies of these materials can be
obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a
Web site (http://www.sec.gov) that contains information regarding registrants
that file electronically with the SEC.
5
DESCRIPTION OF BUSINESS CONDUCTED BY ATLANTIC
General
We are a development-stage company engaged in the business of developing
and commercializing early-stage technologies. Specifically, we aim to do the
following:
o identify development-stage biomedical, pharmaceutical, medical devices
or other technologies that we believe could be commercially viable;
o acquire proprietary rights to these technologies, either by license or
by acquiring an ownership interest;
o fund research and development of these technologies; and
o bring these technologies to market, either directly or by selling or
licensing these technologies to other companies willing to make the
necessary investment to conduct the next level of research or seek
required regulatory approvals.
We have in the past focused on biomedical and pharmaceutical technologies.
We are entitled to royalties and other revenues in connection with
commercialization of technologies relating to cataract surgery and to pain and
inflammation.
Corporate Structure
We were incorporated in Delaware on May 18, 1993. Any technologies or
rights to royalties or other revenues are held either by Atlantic or by our
subsidiaries Optex Ophthalmologics, Inc. and CryoComm, Inc.
We currently have five employees.
Atlantic and Its Subsidiaries
Optex and the Avantix(TM) (formerly Catarex(TM)) Technology
Our majority-owned (81.2%) subsidiary, Optex, is entitled to royalties and
other revenues in connection with commercialization of the Catarex technology.
Bausch & Lomb Incorporated, a multinational ophthalmics company, is developing
this technology under the new trade name "Avantix" to overcome the limitations
and deficiencies of traditional cataract-extraction techniques. Optex had been
the owner of this technology and was developing it under a development agreement
with Bausch & Lomb, but on March 2, 2001, Optex sold to Bausch & Lomb
substantially all of its assets (mostly intangible assets with no book value),
including those related to the Avantix technology, and delivered 2,400
"First-Generation" Avantix handpieces to Bausch & Lomb for use in human
feasibility studies and clinical trials.
Bausch & Lomb, which has committed over $15 million on the project to
date, has assumed full responsibility for developing and marketing the
technology and will pay Optex royalties on sales of the device and the
associated system. Under the agreement governing Bausch & Lomb's purchase of
Optex's assets, Bausch & Lomb is required to meet certain development
milestones. The next such milestone, scheduled for December 31, 2002, is
completion of a clinical study designed by Bausch & Lomb to assess the
functionality of the Avantix handpiece in human cataract surgery. We continue to
work closely with Bausch & Lomb to monitor their progress in developing this
technology, and, to the extent permitted by our agreement with Bausch & Lomb, we
will report achievement of any development milestones.
6
CT-3 Anti-inflammatory/Analgesic Compound
In 1994, we acquired exclusive worldwide rights to CT-3 from its inventor,
Dr. Sumner Burstein. CT-3 is a patented synthetic derivative of carboxylic
tetrahydrocannabinol (THC-7C) and is an alternative to nonsteroidal
anti-inflammatory drugs, or "NSAIDs," such as aspirin and ibuprofen. Over 130
million Americans suffer from chronic pain and 40 million suffer from arthritis.
Worldwide prescription sales of analgesic/anti-inflammatory drugs exceeded $9
billion in 1999. The overall field of inflammation and pain management is large
and not fully satisfied, and a compound such as CT-3 may have broad applications
in these major markets.
CT-3 is being developed as a new medication for painful inflammatory
conditions such as arthritis, post-operative pain, musculoskeletal injuries,
headache and neuropathic pain. In addition, the compound possesses activity in
preclinical models of multiple sclerosis and the cutaneous inflammation
associated with exposure to the chemical warfare blister agent sulfur mustard.
The U.S. Army Medical Research Institute is pursuing further work on this
application.
The principle mechanism of action of the compound appears to be the potent
inhibition of the inflammatory cytokines, particularly interleukin-1 and
TNF-alpha. Preliminary studies have shown that CT-3 demonstrates
analgesic/anti-inflammatory properties at microgram doses without central
nervous system or gastrointestinal side effects and also reduces joint damage
caused by rheumatoid arthritis.
An Investigational New Drug application, or "IND," has been filed with the
U.S. Food and Drug Administration, or "FDA," for CT-3, and an initial Phase I
clinical trial designed to assess the safety of CT-3 showed that it was well
tolerated, with no clinical significant adverse events and no evidence of
psychotropic activity. The compound is currently being studied in Europe in a
small Phase II study in patients with chronic neuropathic pain.
Under the Burstein license, Dr. Burstein received 15,000 shares of
Atlantic common stock and initial licensing fees of $24,000. Dr. Burstein is
also entitled to a royalty of 3% of the net sales of all licensed products sold
by Atlantic, and a royalty of 8% of the royalties which Atlantic receives from
sublicensees from net sales by any such sublicensee of the licensed products or
processes.
On June 28, 2002, we licensed exclusive world wide rights of CT-3 to
Indevus Pharmaceuticals, Inc. On acquiring CT-3, Indevus paid us an initial
licensing fee of $400,000 and an inventory transfer fee of $100,000. Under the
terms of our licensing agreement with Indevus it is required to pay us
development milestones and royalties. Indevus will be responsible for developing
and commercializing CT-3 and obtaining any required approvals. A director of
Indevus is one of our shareholders; the transaction was approved by all the
disinterested directors of Indevus.
On July 23, 2002, Atlantic received a letter from attorneys representing
Dr. Burstein with their analysis of his rights under the Burstein license. In
the letter they concluded that the $500,000 Atlantic received from Indevus, as
well as any future milestone payments should be considered royalty payments
under the terms of the Burstein license and therefore subject to the 8%
sublicensing royalty.
On September 16, 2002, Atlantic's counsel responded to this letter,
stating that Atlantic recognizes its obligation to pay an 8% royalty to Dr.
Burstein only on those payments that it receives from Indevus based on the "net
sales" of products and processes covered by the Burstein license. The Indevus
license agreement does not merely include a sublicense to patent rights of CT-3,
but also the transfer of Atlantic's know-how, FDA regulatory filings, inventory
of CT-3 compound and third party contracts. Presently, there are no net sales on
any products covered by the Burstein license. Atlantic's counsel concluded that
it has not received any royalty payments pursuant to the Indevus license,
therefore no payments are due to Dr. Burstein at this time.
On November 20, 2002, Atlantic received a letter from attorneys
representing Dr. Burstein purporting to terminate the Burstein license. We
believe that this purported termination is invalid under the terms of the
Burstein agreement and that Dr. Burstein's current royalty and termination
claims are without merit. We intend to vigorously defend our position that the
Burstein license is not terminated.
7
Under the terms of the Burstein license, Dr. Burstein is not permitted to
terminate the agreement over a bona fide dispute regarding the payment of
royalties. Instead, the Burstein license states that disputes regarding royalty
payments are to be settled through binding arbitration.
Accordingly, we intend to file a claim shortly for binding arbitration to
resolve these issues before the American Arbitration Association in accordance
with the terms of the arbitration provision of the Burstein license. We believe
that even an unfavorable binding arbitration ruling that concludes a breach of
the Burstein license by Atlantic for failure to pay royalties would be capable
of being readily cured by Atlantic thereby also avoiding termination of the
Burstein license.
ATV-02 Antimicrobial Agent (N-Chlorotaurine)
We have licensed from its inventors the worldwide rights to ATV-02, a
potent and broad-spectrum antimicrobial agent for the local treatment of topical
infections. This compound is more commonly known as N-Chlorotaurine, or "NCT."
The compound has completed safety and tolerability studies in a limited number
of subjects and has begun a series of Phase II human clinical studies for the
treatment of several indications, including viral and bacterial conjunctivitis
and acute and chronic sinusitis.
Under the terms of the agreement, Atlantic has exclusively licensed,
including the right to sublicense, the inventors' rights pertaining to any novel
therapeutic use or formulation of NCT and any of its derivatives or analogs,
including pending and future patent applications for methods of using NCT for a
variety of clinical indications. Under the terms of the agreement there was no
initial license fee, but we are required to pay the inventors milestone payments
payable in cash or company stock at our discretion of (a) $100,000 upon the
first new patent issuance, (b) $250,000 upon successful completion of a Phase
III clinical trial, and (c) $1,000,000 upon receiving new drug approval. We are
also required to pay the inventors a total royalty of 4% of the net sales of the
licensed products sold by Atlantic, and 20% of the royalties which Atlantic
receives from sublicensees. Although Atlantic has no clinical development
obligations under the license agreement, it plans to continue developing NCT in
Europe in cooperation with the inventors using their philanthropic funding
sources and begin filing an IND in the U.S. to develop it according to FDA
regulations for approval in the U.S. Atlantic has assumed the responsibility for
the preparation, filing, prosecution and maintenance of the patent applications
and patent rights.
As a broad-spectrum drug with bacterial, virucidal and fungicidal
activity, NCT has the potential to be a viable alternative to the use of
antibiotics for the treatment of local infections. Since their discovery over a
half a century ago, the misuse and overuse of antibiotics has caused a crisis of
antibiotic resistant bacteria. In contrast to antibiotics, NCT is a human
disinfectant that is not expected to promote drug resistant bacteria.
NCT is a long-lived endogenous oxidant that is normally produced in the
body by human granulocytes and monocytes. It demonstrates immune modulatory
properties exerted by down regulation of pro-inflammatory cytokines such as
tumor necrosis factor, nitric oxide, and protaglandins. Oxidants are important
tools that stimulate human phagocytes used to attack and kill pathogens. Besides
its immune controlling function, NCT has demonstrated broad-spectrum
bactericidal, virucidal, fungicidal and vermicidal activity, along with very low
cytotoxicity against human cells and sufficient stability.
All the human clinical studies completed to date have been conducted at
the University of Innsbruck, Austria under the direction of the inventors: Dr.
Waldemar Gottardi, Dr. Markus Nagl and Dr. Andreas Neher. These studies have all
been approved by the Innsbruck Ethics Committee, were registered by the Austrian
Ministry of Health, and funded by various philanthropic sources including the
Austrian Science Fund and the Jubilee Research Fund of the Austrian National
Bank.
CryoComm
In October 2001, Atlantic stopped work on technologies owned by CryoComm,
Inc., a subsidiary of Atlantic formed under the laws of Delaware. These
technologies primarily consist of superconducting electronics for Internet
packet switching and transport products. Atlantic continues to prosecute the
patents on the CryoComm technology.
8
DESCRIPTION OF PROPERTY
On March 19, 2001, we moved into our current executive offices at 350
Fifth Avenue, Suite 5507, New York, New York 10118. The lease for this space is
for a term of two years and two and a half months with a monthly lease payment
of $7,175, subject to cost-of-living adjustments. Prior to that, we leased space
at 150 Broadway, Suite 1009, New York, New York 10038, for a monthly lease
payment of $1,026. The lease for the space at 150 Broadway expired on January
31, 2002.
To facilitate our exploring investment opportunities in fiberoptics, we
leased space at One Executive Park East, 135 Bolton Road in the Town of Vernon,
County of Tolland, Connecticut 06066. This lease is for a term of three years
ending May 14, 2003, with monthly lease payments of $1,250. We no longer need
this space, as we have discontinued this line of business, and so, as of March
1, 2002, we sublet 60% of this space for $750 per month for the remainder of the
lease term. We are currently looking to sublease the remainder of these
premises. As of December 31, 2001, we have accrued for our estimated loss
obligation in the amount of $11,026.
We believe that our existing facilities are adequate to meet our current
requirements. We do not own any real property.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which Atlantic or any of its
subsidiaries is a party or to which any of their properties is subject.
FORWARD-LOOKING STATEMENTS
The statements contained in this proxy statement that are not historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including statements regarding the expectations,
beliefs, intentions or strategies regarding the future. We intend that all
forward-looking statements be subject to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
In particular, the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and the "Risk Factors" section
include forward-looking statements that reflect our current views with respect
to future events and financial performance. We use words such as we "expect,"
"anticipate," "believe," and "intend" and similar expressions to identify
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties inherent in future events, particularly those risks identified in
the "Risk Factors" section, and should not unduly rely on these forward looking
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
9
Nine-Month Period Ended September 30, 2002 vs. 2001
In the nine-month period ended September 30, 2002, Indevus
Pharmaceuticals, Inc. paid us a $500,000 license fee as part of the
consideration for our having licensed to Indevus, under a license agreement
effective June 28, 2002, exclusive worldwide rights to CT-3, our novel
anti-inflammatory and analgesic compound currently in clinical development.
Indevus will be responsible for all further development of CT-3, and we will
have no future involvement with Indevus or CT-3 other than in connection with
our rights to royalties and milestone payments under the license agreement.
Those milestone payments are contingent on occurrence of certain events
specified in the agreement, including commencement and completion of various
clinical trials, the FDA's acceptance for filing of an NDA, and Indevus securing
other regulatory approvals for CT-3 in the United States and Europe. In
accordance with SAB No. 101, "Revenue Recognition," we recognized $500,000 of
licensing revenue during the nine months ended September 30, 2002, since we have
no further obligations under the license agreement. We will record as additional
revenue any additional payments we receive under the license agreement.
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid our subsidiary, Optex Ophthalmologics, Inc. for
developing its Avantix (formerly known as Catarex) technology. For the nine
months ended September 30, 2002, this agreement provided no development revenue
and no related cost-of-development revenue as compared with $2,461,922 of
development revenue (including $1,067,345 in project-completion bonuses paid out
and recognized at the completion of the project in March 2001) and related
cost-of-development revenue of $2,082,568 for the nine months ended September
30, 2001. The decrease in revenues and related expenses from Bausch & Lomb over
last year was due to the fact that there were no revenues and related expenses
since termination of the agreement in March 2001.
For the nine months ended September 30, 2002, research and development
expense was $467,153 as
10
compared to $774,340 for the nine months ended September 30, 2001. The cessation
of research and development activities on our antisense technology as a result
of the sale of the assets of our subsidiary, Gemini Technologies, Inc.,
accounted for approximately $159,000 of this decrease. In addition, research and
development consulting expense decreased by approximately $86,000 and research
and development salaries decreased by approximately $58,000 primarily as a
result of the sale of substantially all of the assets of Gemini in May of 2001.
For the nine months ended September 30, 2002, general and administrative
expense was $1,225,201 as compared to $2,333,567 for the nine months ended
September 30, 2001. A significant portion of this decrease is a result of a
finder's fee of $120,000 and the $444,000 estimated fair value of the 600,000
commitment shares we issued to Fusion Capital Fund II, LLC in conjunction with a
common stock purchase agreement with Fusion we entered into during 2001.
Fusion's obligation to purchase our shares under this agreement is subject to
certain conditions. A material contingency that affects our ability to raise
funds under this agreement is our stock price. Currently, our stock price is
below the floor price of $0.68 specified in the Fusion agreement and as a result
we are currently unable to draw funds pursuant to that agreement. As the Fusion
agreement is currently structured, we cannot guarantee that we will be able to
draw any funds. In addition, in the nine months ended September 30, 2001, we had
expenses associated with the issuance of 35,000 shares of our common stock to
each of BH Capital Investments, L.P. and Excalibur Limited Partnership in August
2001 in return for their commitment to provide us with $3.5 million of financing
in connection with an asset purchase for which we had submitted a bid. We did
not consummate the asset purchase, but we were obligated to issued these shares.
Those shares had an estimated fair value of $44,100 which was recorded as a
general and administrative expense for the nine months ended September 30, 2001.
The decrease in general and administrative expenses was also due to reduced
spending as a result of increased efforts to conserve cash as well as reduced
levels of general and administrative activity. We had a decrease in payroll of
approximately $96,000 partially as a result of the sale of substantially all of
the assets of our subsidiary Gemini in May of 2001, a decrease in legal expenses
of approximately $180,000, a decrease in investor relations services of about
$118,000, a decrease in due diligence fees and Nasdaq fees of approximately
$59,000 and a decrease in travel and conference expenses of approximately
$48,000.
For the nine months ended September 30, 2002, we had a reduction in
previously recognized compensation expense relating to stock warrants of $5,845
as compared to an expense relating to stock warrants of $70,634 in the prior
year. This expense was associated with warrants issued to Dian Griesel during
March 2001 as partial compensation for investor relations services provided to
us by IRG. The reduction of compensation expense associated with these warrants
is due to the decrease in our stock price as compared to 2001 and the reversal
of previously recorded expense associated with 45,000 unvested warrants which
were terminated as of May 31, 2002. Compensation expense relating to these
investor relations services represents a general and administrative expense.
With the termination of the agreement with IRG there will be no more vesting of
warrants and therefore we will not incur any additional compensation expense
associated with the Dian Griesel warrants.
For the nine months ended September 30, 2002, interest and other income
was $10,255, compared to $40,618 for the nine months ended September 30, 2001.
The decrease in interest income is primarily due to the decline in our cash
reserves.
Net loss applicable to common shares for the nine months ended September
30, 2002, was $1,242,014 as compared to $2,044,369 for the nine months ended
September 30, 2001. This decrease in net loss applicable to common shares is
attributable in part to the recognition of a gain on the sale of the assets of
our subsidiary, Optex during the nine months ended September 30, 2001 in the
amount of $2,569,451, partially offset by a distribution to the minority
shareholders of Optex of $837,274. In addition, with the termination of our
agreement with Bausch & Lomb, we no longer have available to us the revenue or
profits associated with that agreement; as a result, we had no profit from this
agreement for the nine months ended September 30, 2002 as compared with $379,354
of profit for the same period in 2001. We recorded grant revenue of $250,000 for
the nine months ended September 30, 2001 that we did not have in nine months
ended September 30, 2002. In the nine months ended September 30, 2001, we also
recorded a loss of $334,408 on sale of the assets of our subsidiary Gemini.
Partially offsetting the decrease in net loss, we recognized $500,000 of
licensing revenue we recorded in connection with our licensing to Indevus
exclusive worldwide rights to CT-3. The net loss applicable to common shares was
further decreased by a reduction in research and development expenses and
general and administrative expenses, including compensation expense relating to
stock options and warrants of $307,187 and $1,184,845, respectively, for the
nine months ended September 30, 2002 as compared with the nine months ended
September 30, 2001.
11
Net loss applicable to common shares for the nine months ended September
30, 2001 also included a beneficial conversion on our Series B preferred stock
in the amount of $600,000 and a dividend of $167,127 paid on our repurchase of
the outstanding Series B preferred stock. We also issued preferred stock
dividends on our Series A preferred stock, for which the estimated fair value of
$65,760 and $107,449 was included in the net loss applicable to common shares
for the nine months ended September 30, 2002 and 2001, respectively. The
decrease in the estimated fair value of these dividends as compared to the prior
year is primarily a reflection of a decline in our stock price.
Liquidity and Capital Resources
From inception to September 30, 2002, we incurred an accumulated deficit
of $27,904,660, and we expect to continue to incur additional losses through the
year ending December 31, 2002 and for the foreseeable future. This loss has been
incurred primarily through research and development activities related to the
various technologies under our control.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb Incorporated, a Bausch & Lomb affiliate, Atlantic, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all its assets (mostly
intangible assets with no book value), including all those related to the
Avantix (formerly known as Catarex) technology. As a result of this sale,
Atlantic and Optex no longer have any obligations to Bausch & Lomb in connection
with development of the Avantix technology. The purchase price was $3 million
paid at closing (approximately $564,000 of which was distributed to minority
shareholders). In addition, Optex is entitled to receive additional
consideration, namely $1 million once Bausch & Lomb receives regulatory approval
to market the Avantix device in Japan, royalties on net sales on the terms
stated in the original development agreement dated May 14, 1998, between Bausch
& Lomb and Optex, as amended, and minimum royalties of $90,000, $350,000, and
$750,000 for the first, second, and third years, respectively, starting on first
commercial use of the Avantix device or January 1, 2004, whichever is earlier.
Optex also has the option to repurchase the acquired assets from Bausch & Lomb
if it ceases developing the Avantix technology at fair value. Upon the sale of
Optex assets, Bausch & Lomb's development agreement with Optex was terminated.
In the asset purchase agreement, Optex agreed to forgo future contingent
payments provided for in the earlier development agreement. As a result of this
transaction, we recorded a gain on the sale of Optex assets of $2,569,451.
During the first nine months of 2001, we made a profit distribution of $837,274
to Optex's minority shareholders, representing their share of the cumulative
profit from the development agreement with Bausch & Lomb and the proceeds from
the sale of Optex' assets. (This figure includes the $564,000 distributed to
minority shareholder referred to above.)
On November 6, 2001, we entered into an agreement with Joseph Stevens &
Company, Inc. in which Joseph Stevens agreed to act as placement agent for a
private placement of shares of our common stock. In that private placement, the
price of each share of our common stock was $0.24 and the minimum and maximum
subscription amounts were $2,000,000 and $3,000,000, respectively. In addition,
each investor received a warrant to purchase one share of our common stock for
every share of our common stock purchased by that investor. The warrants have an
exercise price of $0.29 and are exercisable for five years from the closing
date. On December 3, 2001, we issued to certain investors an aggregate of
8,333,318 shares of common stock for the minimum subscription of $2,000,000. In
connection with the private placement, we paid Joseph Stevens a placement fee of
$140,000, equal to 7% of the aggregate subscription amount, a warrant to
purchase 833,331 shares of Atlantic's common stock, which represented 10% of the
number of shares issued to the investors and 833,331 shares of our common stock.
The term of this warrant is five years and the per share exercise price is
$0.29. In conjunction with this private placement, we received net proceeds of
approximately $1,848,000 in December 2001.
On June 28, 2002, we licensed to Indevus Pharmaceuticals, Inc. the
exclusive worldwide rights to CT-3 in exchange for a $500,000 licensing fee.
Atlantic is also entitled to additional milestone payments on occurrence of
certain events specified in the license agreement, including commencement and
completion of various clinical trials, the FDA's acceptance for filing of a New
Drug Application, or "NDA," and Indevus securing other regulatory approvals for
CT-3 in the United States and Europe, and Atlantic will be entitled to royalties
once the compound begins to generate revenue. Under the license agreement,
Indevus is responsible for the clinical development, regulatory activities and
commercializing this compound.
We have financed our operations since inception primarily through equity
and debt financing, our now-
12
terminated collaborative arrangement with Bausch & Lomb and our licensing of
CT-3 to Indevus. During the three- and nine-month periods ended September 30,
2002, we had a net decrease in cash and cash equivalents of $69,530 (including
the receipt of the $500,000 licensing fee from Indevus in July 2002) and
$1,215,916, respectively.
This decrease primarily resulted from net cash used in operating
activities for the nine months ended September 30, 2002 of $1,175,782. Total
cash resources as of September 30, 2002 were $375,845 compared to $1,591,761 at
December 31, 2001.
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs,
our progress in and the cost of ongoing and planned pre-clinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in our existing collaborative and licensing relationships, the resources
that we devote to developing manufacturing and commercializing capabilities,
technological advances, the status of our competitors, our ability to establish
collaborative arrangements with other organizations and our need to purchase
additional capital equipment.
Our current liabilities as of September 30, 2002 were $503,945 compared to
$508,613 at December 31, 2001, a decrease of $4,668. The decrease was primarily
due to reduced spending due to an increased effort to conserve cash. As of
September 30, 2002, our current liabilities exceeded our current assets and we
had a working capital deficit of $46,486, which reflects our receiving a
$500,000 licensing fee from Indevus and our receiving $1,948,000 in net proceeds
from two private placements of our common stock during December 2001.
Our continued operations will depend on whether we are able to raise
additional funds through various potential sources, such as equity and debt
financing, other collaborative agreements, strategic alliances, and our ability
to realize the full potential of our technology in development. Such additional
funds may not become available as we need them or be available on acceptable
terms. To date, a significant portion of our financing has been through private
placements of common and preferred stock and warrants, the issuance of common
stock for stock options and warrants exercised, and debt financing. Until our
operations generate significant revenues, we will continue to fund operations
from cash on hand and through the similar sources of capital previously
described. We can give no assurances that any additional capital that we are
able to obtain will be sufficient to meet our needs.
We anticipate that our current resources will be sufficient to fund for
approximately the next two months our currently anticipated needs for operating
and capital expenditures. We plan to achieve this by deferring payments on
currently outstanding obligations to certain service providers. We expect that
our average monthly outlay will be approximately $130,000 per month (including
approximately $35,000 per month on research and preclinical development expenses
and approximately $95,000 for general and administrative expenses). Our major
outstanding contractual obligations relate to our operating (facilities) leases.
Our facilities lease expense in future years extends through May 2003 at an
aggregate rate of approximately $7,700 per month, net of monthly sublease income
of $750 per month which commenced March 2002.
The report of our independent auditors on our 2001 consolidated financial
statements includes an explanatory paragraph that states that our recurring
losses and our limited liquid resources raise substantial doubt about our
ability to continue as a going concern. Our consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Subsequent to an oral hearing before a Nasdaq Listing Qualifications
Panel, on August 23, 2001, our securities were delisted from The Nasdaq Stock
Market for failing to meet the minimum-bid-price requirements set forth in the
NASD Marketplace Rules, as our common stock had traded for less than $1.00 for
more than 30 consecutive business days. Our common stock trades now on the OTC
Bulletin Board under the symbol "ATLC.OB". Delisting our common stock from
Nasdaq could have a material adverse effect on our ability to raise additional
capital, our shareholders' liquidity and the price of our common stock.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in
13
management's discussion and analysis of financial condition and results of
operations. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of Atlantic's financial condition and results
and requires management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Our significant accounting policies are described in Note
1 to our consolidated financial statements included in our annual report filed
on Form 10-KSB as amended for the year ended December 31, 2001, however, we
believe that none of them are considered to be critical.
DESCRIPTION OF ATLANTIC'S SECURITIES
General
Our certificate of incorporation authorizes us to issue 50,000,000 shares
of common stock and 10,000,000 shares of preferred stock. Of the authorized
preferred stock, 1,375,000 shares have been designated Series A convertible
preferred stock and 1,647,312 shares have been designated Series B convertible
preferred stock. As of January __, 2003, _________ shares of our common stock
were issued and outstanding, ________ shares of our Series A preferred stock
were issued and outstanding, and no shares of our Series B preferred stock were
issued and outstanding. As of January __, 2003, there were ________ shares of
our common stock in reserve and _________ shares of our Series A preferred stock
in reserve. For the effects of the merger on these numbers, see "Terms of the
Transaction - The Merger Agreement."
Common Stock
Holders of our common stock are entitled to one vote for each share on all
matters to be voted on by our shareholders. Holders of our common stock have no
cumulative voting rights. They are entitled to share ratably any dividends that
may be declared from time to time by the board of directors in its discretion
from funds legally available for dividends. Holders of our common stock have no
preemptive rights to purchase our common stock. There are no conversion rights
or sinking fund provisions for the common stock.
Our common stock is listed on the NASD Over-the-Counter Bulletin Board.
Series A Preferred Stock
In this proxy statement, we are asking our stockholders to approve our
amending the certificate of designations of the Series A preferred stock to
state that our Series A preferred stock will automatically convert to common
stock immediately prior to the consummation of the merger. Holders of our Series
A preferred stock will receive ____ shares of common stock in exchange for each
share of Series A preferred stock they surrender. For more details on this
amendment, see "Proposal 2."
If, however, this amendment is not approved, holders of shares of our
Series A preferred stock can convert each share into [8.22] shares of our common
stock without paying us any cash. The conversion price of shares of Series A
preferred stock is $___ per share of common stock. Both the conversion rate and
the conversion price may be adjusted in favor of holders of shares of Series A
preferred stock upon certain triggering events.
On matters to be voted on by our shareholders, holders of shares of Series
A preferred stock are entitled to the number of votes equal to the number of
votes that could be cast in such vote by a holder of the common stock into which
those shares of Series A preferred stock are convertible on the record date for
that vote, or if no record date has been established, on the date that vote is
taken. So long as at least 50% of the shares of Series A preferred stock are
outstanding, the affirmative vote or consent of the holders of at least 66.67%
of all outstanding Series A preferred stock voting separately as a class is
necessary to effect certain actions, including, but not limited to, declaration
of dividends or distribution on any of our securities other than the Series A
preferred stock pursuant to the provisions of the certificate of designations of
the Series A preferred stock and approval of any liquidation, dissolution or
sale of substantially all of our assets. Currently there are outstanding fewer
than 50% of the shares of Series A preferred stock outstanding.
14
Each February 7 and August 7 we are obligated to pay dividends, in
arrears, to the holders of shares of Series A preferred stock, and the dividends
consist of 0.065 additional shares of Series A preferred stock for each
outstanding share of Series A preferred stock.
If we are liquidated, sold to or merged with another entity (and we are
not the surviving entity after the merger), we will be obligated to pay holders
of shares of Series A preferred stock a liquidation preference of $13.00 per
share before any payment is made to holders of shares of our common stock.
The holders of shares of Series A preferred stock have rights in addition
to those summarily described. A complete description of the rights of the Series
A preferred stock is contained in the certificate of designations of the Series
A preferred stock filed with the Delaware Secretary of State, a copy of which
was included with our current report on Form 8-K filed with the Securities and
Exchange Commission on June 9, 1997.
Series B Preferred Stock
We are currently authorized to issue 1,647,312 shares of Series B
preferred stock, with the voting rights, designations, preferences, limitations
and relative rights contained in the certificate of designations of the Series B
preferred stock, as amended, filed with the Secretary of State of the State of
Delaware. Currently there are no shares of Series B preferred stock outstanding.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock was listed on the Nasdaq SmallCap Market until August 23,
2001, when our stock was delisted. Since that date our common stock has been
listed on the Over-the-Counter Bulletin Board, or "OTC Bulletin Board." The
following table lists the high and low price for our common stock as quoted, in
U.S. dollars, by the Nasdaq SmallCap Market and the OTC Bulletin Board, as
applicable, during each quarter within the last two fiscal years:
================================================
Quarter Ended High Low
================================================
March 31, 2001 $1.438 $0.625
------------------------------------------------
June 30, 2001 $1.00 $0.51
------------------------------------------------
September 30, 2001 $0.80 $0.16
------------------------------------------------
December 31, 2001 $0.51 $0.16
------------------------------------------------
March 31, 2002 $0.30 $0.16
------------------------------------------------
June 30, 2002 $0.34 $0.12
------------------------------------------------
September 30, 2002 $0.19 $0.10
------------------------------------------------
December 31, 2002 $0.17 $0.06
================================================
The quotations from the OTC Bulletin Board reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
The number of holders of record of our common stock as of January __, 2003
was [153].
We have not paid or declared any dividends on our common stock and we do
not anticipate paying dividends on our common stock in the foreseeable future.
The certificate of designations for our Series A preferred stock provides that
we may not pay dividends on our common stock unless a special dividend is paid
on our Series A preferred stock.
15
BUSINESS CONDUCTED BY MANHATTAN
Manhattan Pharmaceuticals, Inc. is a privately held, New York-based
development-stage biopharmaceutical company formed under Delaware law on
August 6, 2001. It is engaged in the business of discovering and
commercializing novel therapies for treating obesity.
On February 15, 2002, Manhattan entered into a license agreement with
Oleoyl-Estrone Developments, SL, or "OED," a Spanish corporation, for the
worldwide rights to oleoyl-estrone, or "OE." OE is an orally administered small
molecule. Extensive preclinical studies have shown that OE is successful in
causing significant weight loss without the need for change in diet or exercise.
The National Institutes of Health estimated that direct costs for the
treatment of obesity in the U.S. for 1999 was $102.2 billion. According to a
1999 National Health and Nutritional Examination Survey, nearly 61% of all
Americans are considered to be overweight and 26% are considered to be obese.
Manhattan believes that none of the currently available treatments, namely diet
and exercise, over-the-counter medications, prescription medication and
bariatric surgery, are truly safe and effective. In contrast, in preclinical
animal studies, OE appears to be safe and effective with no evidence of rebound
weight gain after treatment has been discontinued.
OE is a human hormone attached to a fatty acid developed by researchers at
the University of Barcelona. These researchers suggest that when cells become
filled with fat, they produce OE to trigger the brain to suppress the appetite,
the result being weight loss. They suggest that cells in obese people do not
produce sufficient levels of OE to signal the brain to suppress appetite and
induce weight loss. Based on this concept, these researchers believe that
increasing the level of OE in obese patients may induce weight loss without the
need for a change in diet.
As a treatment that appears to cause weight loss by acting both centrally
in the brain and locally at the cellular level, Manhattan believes that OE has
the potential to result in a greater level of weight loss than existing
treatments.
First, OE appears to act on the hypothalamus of the brain, which is the
neurological center that regulates metabolism and body weight. Manhattan
believes that increasing the level of OE in the blood causes the brain to
believe that a lower body weight is normal, much the way a thermostat resests
room temperature. This results in a decreased appetite leading to weight loss.
Further, Manhattan believes that weight loss is maintained after OE treatment is
discontinued.
Second, fat cells treated in vitro with OE appear to shrink in size. This
indicates that there may be a local effect by OE acting directly on fat tissue.
Current research indicates that OE stimulates cells to burn fat by making them
more receptive to hormones like norepinephrine and other triggers leading to
fat-burning.
In preclinical animal studies, obese rats treated with OE demonstrated
significant weight loss even in the presence of abundant food and water. In
other studies, OE appeared to be a safe and effective method to lose weight with
no evidence of "rebound" weight gain after the conclusion of OE treatment.
As part of the process to commercialize OE, Manhattan will have to obtain
approval from regulatory bodies in the United States and in foreign
jurisdictions. These regulatory bodies require clinical testing of OE showing
that it is safe for humans and effective for its intended use. Manhattan has
contacted several manufacturers regarding their ability to supply Manhattan with
the quantity of OE that would be required to permit Manhattan to conduct
clinical trials.
If the proposed merger takes place, Atlantic's business would primarily
consist of the business conducted by Manhattan. Manhattan's business is subject
to various risks. See "Risk Factors."
Under the terms of the license agreement, Manhattan licensed, including
the right to sublicense, OED's rights to OE. Manhattan has paid OED a license
fee of $175,000 and is required to make certain milestone payments. In
consideration for the OE license rights, Manhattan issued to OED 1,000,000
shares of Manhattan common stock representing 20% of Manhattan's outstanding
stock. Manhattan, OED and Dr. Lindsay A. Rosenwald, a principal shareholder of
Manhattan, are party to a shareholders agreement granting OED the right to
appoint one individual to serve as a member of the Manhattan board of directors,
granting OED certain anti-dilution rights, rights
16
of first refusal, co-sale rights and tag-along rights. In connection with equity
financings only, OED will be issued a number of additional shares of Manhattan
to keep its equity ownership in Manhattan at 20%. OED's anti-dilution protection
will terminate when Manhattan obtains $5 million in equity financing.
MANHATTAN PLAN OF OPERATIONS
Overview
Since its inception on August 6, 2001 to September 30, 2002, Manhattan has
incurred a cumulative deficit of $630,325. Manhattan expects its operating
losses to increase significantly over the next several years, primarily due to
expansion of its research and development programs, including clinical trials
for its existing technologies and other products and technologies that it may
acquire or develop.
Since its inception, Manhattan has not generated any revenues. Manhattan
estimates that the regulatory process for an obesity drug normally takes four to
five years from the filing date of an Investigational New Drug Application, or
"IND." Manhattan has not filed an IND for OE. In order to commercialize OE in
the U.S., we will have to file and receive approval for a new Drug Application,
or "NDA." An NDA is the vehicle through which drug sponsors formally propose
that the FDA approve a new pharmaceutical product for sale and marketing in the
U.S. Data gathered during the animal studies and human clinical trials of an IND
become part of an NDA. Revenues from an obesity treatment such as OE can,
however, can be realized in advance of receiving approval for an NDA. This may
happen if a licensing agreement is reached with a pharmaceuticals company that
provides milestone payments to Manhattan in exchange for marketing rights or
the right to develop the drug exclusively. There can be no assurance that an IND
will be filed or that NDA approval will ever be received.
Working Capital Requirements
As of September 30, 2002, Manhattan had a working capital deficiency of
$839,482 and only approximately $3,200 in cash. On December 31, 2002, in
connection with a private placement, Manhattan sold 1,196,875 shares of its
common stock and warrants to purchase an additional 119,678 shares of common
stock for which it received aggregate gross proceeds of approximately $1,915,000
before expenses and commissions. Manhattan anticipates that its current cash on
hand will be sufficient to fund its operations through June 2003. Manhattan's
management believes that actions taken to obtain additional financing and its
business plan to achieve profitable operations will provide the opportunity to
fund Manhattan's research and development efforts and to otherwise satisfy its
cash obligations for more than the next twelve months.
Research and Development
Over the next twelve months, numerous studies must be completed in order
to support the filing of an IND for OE. These studies include extensive
repeat-dose animal studies that test for specific types of toxicity, along with
pharmacokinetic studies that demonstrate the absorption, distribution,
metabolism and excretion of the drug compound. Manhattan has identified a
certified "Good Manufacturing Process" manufacturer; that manufacturer will
begin making batches of certified material that will be ready within six months
for human clinical trials. During this period, we expect the manufacturer to
make interim batches that will be used for final stability testing.
Capital Expenditures; Employees
Manhattan does not anticipate purchasing or selling any significant
equipment during the next twelve months. Manhattan does, however, anticipate
hiring additional employees during the next twelve months. Specifically,
Manhattan intends to hire a chief executive officer and other members of a
management team with the requisite knowledge and experience to lead Manhattan in
its research and development efforts.
17
Trends and Uncertainties
Manhattan's future capital requirements will depend on many factors. These
factors include:
o expenses associated with completing the merger;
o problems, delays, expenses and complications frequently encountered by
development-stage companies;
o the progress of Manhattan's research, development, pre-clinical, and
clinical trial programs;
o the extent and terms of any future collaborative research,
manufacturing, marketing, or other funding arrangements;
o the cost and timing of, and any delays in, seeking and obtaining
regulatory approvals of Manhattan's products;
o its ability to enter into corporate partnerships and collaborations to
in-license, acquire, research, develop, and commercialize Manhattan
products;
o the success of Manhattan's sales and marketing programs;
o the costs of filing, prosecuting, defending, and enforcing any patent
claims and other intellectual property rights; and
o changes in economic, regulatory, or competitive conditions of
Manhattan's planned business.
Estimates of the adequacy of funding for Manhattan's activities are based
on certain assumptions, including the assumption that testing and regulatory
procedures relating to Manhattan's products can be conducted at projected costs.
There can be no assurance that changes in Manhattan's development plans,
acquisitions or other events will not result in accelerated or unexpected
expenditures.
MANHATTAN MARKET FOR COMMON EQUITY
Manhattan's stock is not publicly traded. Manhattan's certificate of
incorporation authorizes it to issue 10,000,000 shares of common stock and
5,000,000 shares of preferred stock. As of January 2, 2003, 6,657,688 shares of
Manhattan's common stock were outstanding and no shares of preferred stock were
outstanding. In addition, Manhattan has issued to members of its scientific
advisory board warrants to purchase 40,000 shares of common stock at an exercise
price of $0.01 per share and issued to investors warrants to purchase 562,531
shares of common stock at an exercise price at $1.60.
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The number of holders of Manhattan's common stock as of __________, 2003
was [38]. Manhattan has not paid or declared any dividends on its common stock
and does not anticipate paying any dividends on its common stock in the near
future.
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TERMS OF THE TRANSACTION
Background to the Merger
On December 17, 2002, we entered into a merger agreement providing for the
merger of our wholly owned subsidiary Manhattan Pharmaceuticals Acquisition
Corp., or "MPAC," into Manhattan Pharmaceuticals, Inc., which would become our
wholly owned subsidiary. We formed MPAC under Delaware law for the sole purpose
of consummating the merger. Below is an overview of the background to this
transaction and a summary of its principal terms.
On ________, 2002, Manhattan approached our officers with a merger
proposal. After Atlantic and Manhattan entered into a confidentiality agreement
dated April 17, 2002, Manhattan provided us with confidential information
regarding OE, the weight-loss technology licensed by Manhattan. On May 1, 2002,
representatives from Manhattan and Oleoyl-Estrone Developments, SL, or "OED,"
the licensor of OE, met with our officers to present a complete technical review
of OE.
On May 30, 2002, the parties agreed to temporarily suspend merger
discussions until we licensed CT-3, our synthetic cannabinoid technology, and
Manhattan prepared a private placement financing memorandum. On July 19, 2002,
after both of these events occurred, our officers presented to our board the
results of their due diligence analysis. Frederic P. Zotos and Michael Ferrari
reported that OE had a favorable patent position, positive pre-clinical results,
and optimistic evaluations from three respected endocrinologists. David M.
Tanen, who is a director of both Atlantic and a Manhattan, presented to our
board the goals of the merger. Our board then discussed the proposed merger and
resolved to retain a valuation firm to value the two companies and prepare a
fairness opinion for the proposed merger.
On September 4, 2002, Atlantic held a board meeting to review the draft
valuation of Atlantic and Manhattan prepared by Empire Valuation Consultants,
Inc. Empire had prepared the draft valuations by determining the values of the
companies' underlying assets on the basis of both discounted cash flow and
trailing-average stock prices. At this meeting, representatives of Manhattan
discussed OE and the potential for growth in the anti-obesity therapeutic
business. At the conclusion of the meeting, our board (with the exception of Mr.
Tanen) discussed possible terms of a merger agreement. As a result of this
discussion, Atlantic's board proposed to Manhattan's management that Manhattan
shareholders be issued in the merger a number of shares of Atlantic common stock
that would result in the Manhattan shareholders owning 70% of Atlantic's capital
stock.
In the following days, Fred Zotos discussed this issue further with
Manhattan's management and with the other Atlantic board members. On September
23, 2002, Manhattan responded to Atlantic's offer by indicating that they would
only agree to go forward with the transaction if, after the merger, Manhattan
shareholders own 80% of Atlantic's capital stock and Atlantic shareholders own
20% of Atlantic's capital stock. Atlantic's directors agreed to the 80/20 split.
Atlantic's Reasons for the Merger
There are several reasons why our board is recommending that you approve
the proposed merger. First, it is our only alternative to our ceasing to do
business. We expect that our average monthly outlay is approximately $130,000
per month, and we are running out of cash to fund our day-to-day operations. Our
investment banker, Joseph Stevens & Co., Inc., has advised our board that it
would be essentially impossible for us to raise funds from any other source in
the necessary time period to avoid our filing for bankruptcy. Our board
concluded that the merger will likely make it easier for us to raise funds in
the future. Atlantic's post-merger business will be devoted primarily to
Manhattan's anti-obesity therapeutics business. The board considers this to be
an area of potential high growth, which means it would easily attract more
investors than does our current business. This would in turn make it more likely
that we would be able to relist our common stock on
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the Nasdaq SmallCap Market, which would be an important step towards increasing
the liquidity of our stock and consequently its value.
Interest of Certain Persons in the Merger
In considering the discussion of the merger agreement and our
recommendations in favor of proposals 1 and 2 (which are prerequisites to
consummation of the merger), you should be aware of interests of certain persons
to the transaction.
David M. Tanen serves as a member of the board of directors of both
Atlantic and Manhattan. He has served on our board of directors since January
28, 2002, and on Manhattan's board of directors since its inception on August 6,
2001. In addition, Dr. Lindsay Rosenwald beneficially owns approximately 28% of
the outstanding Atlantic common stock as well as 14.2% of the outstanding
Manhattan common stock.
As part of the merger, Atlantic will license its rights to the compound
NCT to an entity owned by Fred Zotos, Joe Rudick, both of whom serve as Atlantic
directors, and Mike Ferrari, Atlantic's vice president of development. Atlantic
will transfer its shares in CryoComm, Inc., a subsidiary of Atlantic, to an
entity owned by Mr. Zotos and Walter Glomb, a consultant of Atlantic. The
disinterested members of our board of directors were aware of these interests.
Mr. Tanen recused himself from any votes taken by Atlantic's board relating to
the proposed merger. Mr. Zotos and Mr. Rudick recused themselves from any votes
taken by Atlantic's board relating to the NCT license, and Mr. Zotos recused
himself from any votes taken by Atlantic's board relating to the transfer of
Atlantic's interest in CryoComm.
The Merger Agreement
On December 17, 2002, we entered into a merger agreement with Manhattan
and MPAC. The merger agreement provides that MPAC will merge into Manhattan,
with Manhattan becoming our wholly owned subsidiary. The merger agreement is
attached as Exhibit A to this proxy statement. While the terms of the merger are
described in greater detail below, for a more complete understanding of this
transaction you should refer to the complete document.
The merger will become effective when a certificate of merger is filed
with the Secretary of State of Delaware. We plan to file the certificate of
merger promptly after closing conditions are satisfied.
We will issue to Manhattan shareholders a number of shares representing
approximately 80% of the outstanding post-merger shares, meaning that the
pre-merger shares will constitute approximately 20% of the shares of our common
stock outstanding after the merger. One closing condition of the merger
agreement is that Atlantic have enough shares to issue to Manhattan
shareholders. This is the reason we are including in this proxy statement, as
proposal 1, the proposal that we amend our certificate of incorporation to
increase the number of authorized shares of Atlantic common stock.
As of January __, 2003, there were outstanding ________ shares of our
common stock and ________ shares of our Series A preferred stock. If
shareholders approve proposal 2, we will convert all of our outstanding Series A
preferred stock into shares of our common stock prior to consummation of the
merger. We are also required, prior to the consummation of the merger, to
exchange certain warrants for shares of our common stock. Therefore, immediately
prior to the consummation of the merger, there will be ________ shares of our
common stock outstanding. After the merger is consummated there will be ________
shares of our common stock outstanding; __________ shares will be owned by
current Atlantic shareholders and ____________ shares will be owned by Manhattan
shareholders.
Each option or warrant to purchase shares of Manhattan common stock
immediately prior to the effective time of the merger will be converted into an
option or warrant to purchase our common stock. We will adjust the number of
shares issuable upon exercise of the option or warrant and the exercise price of
the options and warrants to reflect the merger's exchange ratio.
21
At the effective time of the merger, the shares of MPAC owned by Atlantic
will convert into one share of surviving company.
The shares issued to former holders of Manhattan common stock are not
transferable unless they are registered under the Securities Act or if legal
counsel renders an opinion that these shares are transferable under an exemption
from the registration requirements of the Securities Act.
Atlantic will be required, at the request of holders of at least half of
the shares issued to former holders of Manhattan shares, to register all of the
shares of Atlantic common stock issued to holders of Manhattan stock in the
merger or include those shares in any registration statement it proposes to file
with the SEC prior to the first anniversary of the merger agreement.
In the merger agreement the parties make representations that are standard
for a transaction of this kind. The merger agreement also contains standard
provisions governing our conduct and that of Manhattan during the period prior
to closing with the exception that we will be permitted to enter into the
transactions listed in the "Related Transactions" section of this proxy
statement and take any action necessary to satisfy the closing conditions of the
merger agreement.
We are restricted from seeking to engage in an alternative merger or
acquisition, except in response to an unsolicited proposal to merge and then
only when necessary to permit our board to comply with its fiduciary
obligations. If we receive a merger proposal that our board considers to be
superior to the merger with Manhattan, we are required to promptly notify
Manhattan. Manhattan is similarly restricted from soliciting and accepting an
alternative merger proposal.
In this proxy statement we are asking the shareholders to re-elect the
current board of Steven H. Kanzer, Peter O. Kliem, A. Joseph Rudick, David M.
Tanen, and Frederic P. Zotos. According to the terms of the merger agreement,
however, the directors of Atlantic must voluntarily resign after the
consummation of the merger, with the exception of Mr. Tanen, who is also a
director of Manhattan. The officers of Atlantic are also required under the
merger agreement to voluntarily resign immediately after the consummation of the
merger. Mr. Tanen, as sole director of Atlantic, will then appoint the other
Manhattan directors to Atlantic's board of directors and will appoint the
officers of Manhattan as the new officers of Atlantic.
We must amend the employment agreements with our employees to provide for
deferred payment of deferred salary and accrued bonus payable to each employee.
The merger agreeemnt does not require Manhattan to change its officers of
directors.
The closing of the transaction is subject to a range of standard closing
conditions. In addition, Manhattan shareholders must approve the merger
agreement at a special meeting and Manhattan must have at least a $500,000
positive cash balance at closing. Atlantic shareholders must approve the
amendment of the certificate of incorporation to increase the number of
outstanding shares and to amend its certificate of designations to provide that
all shares of Series A preferred stock convert into Atlantic common stock
immediately prior to the consummation of a merger between Manhattan and a
wholly-owned subsidiary of Atlantic. These proposals are more fully described in
this proxy statement. It is also a condition to Manhattan's obligation to
consummate the merger that we exchange all of the warrants granted in our
private placement of December 3, 2001 for shares of our common stock. These
warrants are exercisable for $0.29 per share. One share of our common stock will
be granted for every three warrants surrendered. If all such warrants are
surrendered, we will issue an aggregate of ___ shares of our common stock.
Another closing condition of the merger agreement is that Atlantic have
received a written opinion that the merger is fair, from a financial point of
view, to Atlantic's shareholders. Empire Valuation Consultants, Inc. has issued
a fairness opinion to our board, dated _________, 2003, which is attached to
this proxy statement as Exhibit B.
Under the Delaware General Corporation Law, any Manhattan shareholder that
does not vote its shares to approve the proposed merger would be entitled to an
appraisal by the Delaware Court of Chancery of the fair value of its Manhattan
shares. It is a condition to Atlantic's obligation to consummate the merger that
holders of not more than 2% of Manhattan's outstanding shares have validly
exercised, or remain entitled to exercise, their appraisal
22
rights. Holders of 95% of Manhattan's outstanding shares have signed a voting
agreement in which they agreed to vote to approve the proposed merger. Atlantic
shareholders are not entitled to appraisal rights.
The merger agreement can be terminated by either Atlantic or Manhattan on
the grounds of one or more inaccurate representations or breach of one or more
obligations that is not timely cured. Atlantic and Manhattan each may also
terminate the merger agreement if its due diligence investigation reveals any
event not previously disclosed that would reasonably be expected to cause a
material adverse effect on that party. Atlantic and Manhattan each may terminate
if the closing has not taken place by February 7, 2003, or if each of their
boards terminates the agreement by a majority vote. Also, either of them can
terminate if its shareholders do not approve any merger-related proposal.
Reports, Opinions, Appraisals and Negotiations
[Information regarding fairness opinion; to be included in the definitive proxy
statement.]
Related Transactions
As discussed above in "Business Conducted by Manhattan," Manhattan is
primarily engaged in the business of commercializing therapies for treating
obesity. Manhattan's board has indicated that, if the merger takes place, it
will not devote resources to developing Atlantic's technologies. Consequently,
Atlantic anticipates that, prior to the effective time of the merger, it will
license its rights to the compound NCT to an entity owned by Fred Zotos, Joe
Rudick, and Mike Ferrari, Atlantic's vice president of development. At the same
time, Atlantic will also transfer its shares in CryoComm, Inc., a subsidiary of
Atlantic formed under the laws of Delaware, to an entity owned by Fred Zotos and
Walter Glomb, a consultant of Atlantic. Atlantic will receive in exchange a 10%
share of any milestone, royalty, or other revenue generated by either NCT or the
technology owned by CryoComm. It is the view of Atlantic's board that these
transfers are fair to Atlantic. Developing NCT and CryoComm's technologies would
require significant resources with no assurance of success. We do not think that
it would be realistic to expect that we would be able to license out our rights
to NCT and CryoComm's technologies, since we were only able to acquire those
rights in the first place because NCT and CryoComm's technologies had attracted
little interest from other companies.
Accounting Treatment; Certain Federal Income Tax Consequences of the Merger
We anticipate that the merger will close in the first quarter of 2003. The
merger will be recorded as a reverse acquisition since the Manhattan
stockholders become the controlling stockholders of Atlantic. Based on the
recent thirty-day average price of Atlantic's common stock of [$0.12], the
preliminary estimate of the total purchase price is approximately [$2,979,413].
On completion of a valuation, it is expected that the combined company will
record a charge to operations of approximately [$2,779,413] (23,161,775 shares
of Atlantic common stock effectively issued to Atlantic's shareholders at $0.12
per share in connection with the merger) for in-process research and
development.
The following discussion sets forth the material U.S. federal income tax
consequences of the merger. It is based on the U.S. Internal Revenue Code of
1986, as amended, Treasury Regulations promulgated thereunder, administrative
rulings and pronouncements and judicial decisions as of the date of this proxy
statement, all of which are subject to change, possibly with retroactive effect.
Any such change could alter the tax consequences discussed herein. We have not
sought any ruling from the Internal Revenue Service or an opinion of counsel
with respect to the federal tax consequences discussed in this proxy statement,
and there can be no assurance that the IRS or a court will not take a position
contrary to the federal tax consequences discussed in this proxy statement or
that any such contrary position taken by the IRS or a court would not be
sustained.
Atlantic and Manhattan intend that the merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. If the merger qualifies as a tax-free reorganization, no gain or loss will
be recognized by Atlantic or its shareholders or Manhattan or its shareholders
as a result of the merger.
Since Manhattan shareholders will receive more than 50% of the fair market
value of Atlantic's stock in the reorganization, the transaction will constitute
a "reverse acquisition" for tax purposes. As a result, the existing Atlantic
consolidated group will terminate for tax purposes and the combined
Atlantic/Manhattan group may thereafter be subject to special rules involving,
among other things, tax elections, tax year-end, limitation on losses and the
calculation of earnings and profits.
23
Manhattan Director and Officer Information
As explained above, on consummation of the merger, Atlantic's board
members, with the exception of David Tanen, will resign. Atlantic's new board
will consist of Mr. Tanen, Joshua Kazam, Michael Weiser, and Joan Pons--each of
which currently serves as a director of Manhattan. The new board will replace
current Atlantic officers with Manhattan's officers.
There follows biographical information about the individuals, other than
Mr. Tanen, who would be appointed as new board members and officers of Atlantic
on consummation of the merger. For Mr. Tanen's biographical information, see
"Proposal 4."
Manhattan Directors
Michael Weiser, M.D., Ph.D., 38, has served as a member of Manhattan's
board of directors since December 2001 and as its Chief Medical Officer from
Manhattan's inception until August, 2001. Dr. Weiser concurrently serves as the
Director of Research of Paramount Capital Asset Management. Dr. Weiser also
serves on the board of directors of several privately held development-stage
biotechnology companies. Dr. Weiser holds an M.D. from New York University
School of Medicine and a Ph.D. in Molecular Neurobiology from Cornell University
Medical College. Dr. Weiser completed a Postdoctoral Fellowship in the
Department of Physiology and Neuroscience at New York University School of
Medicine and performed his post-graduate medical training in the Department of
Obstetrics and Gynecology and Primary Care at New York University Medical
Center. Dr. Weiser will dedicate only a portion of his time to our business.
Joan Pons, 53, has served as a member of Manhattan's board of directors
since September 2002. Mr. Pons holds a degree in Economics from the University
of Barcelona. From 1972 to 1999 he worked for Gallina Blanca Purina S.A. (a
joint venture between Ralston Purina Co. and a Spanish holding company,
Agrolimen) reaching the position of national sales & marketing director. For the
last three years he was director of franchising for Pans & Company, a fast-food
company with revenues of $152 million and a network of 190 franchisees. In
August 2002, Mr. Pons was appointed chief executive officer of OED SL.
Joshua A. Kazam, 25, has served as a member of Manhattan's board of
directors since December 2001. Mr. Kazam is the Director of Investment for the
Orion Biomedical Fund, a New York based private equity fund focused on
biotechnology investments. Mr. Kazam currently handles the operations for
Manhattan, including the co-ordination and execution of preclinical studies.
Prior to joining Manhattan, Mr. Kazam attended The Wharton School of the
University of Pennsylvania where he graduated with a ____ degree in [finance and
entrepreneurial management].
Manhattan Officers
Stephen C. Rocamboli, 31, has served as secretary of Manhattan since
its inception. Mr. Rocamboli is currently deputy general counsel of
Paramount Capital, Inc., an NASD member broker dealer. Mr. Rocamboli is also
currently a member of the board of directors of Adherex Technologies, Inc.
(TSX:ADH), a Canadian bio-pharmaceutical company specializing in the
development of therapeutics for the treatment of cancer. Mr. Rocamboli also
serves as an officer and/or director of several privately held
development-stage biotechnology companies. Prior to joining Paramount
Capital, Mr. Rocamboli practiced law in the health care field. Mr. Rocamboli
received his B.A. from the State University of New York at Albany and his
J.D. from Fordham University School of Law.
John Knox, 34, has served as treasurer of Manhattan since its
inception. He has been the controller of Paramount Capital since March
1995. Previously, he worked as an auditor at Eisner LLP (formerly known as
Richard A. Eisner & Company, LLP) from October 1991 to February 1995. Mr.
Knox served as an officer of several other privately held development-stage
biotechnology companies. Mr. Knox currently serves as the treasurer of
Chiral Quest, LLC and Oxiquant, Inc. Mr. Knox received his B.A. in
Accounting from Emory University.
24
RISK FACTORS
Risks Relating to the Merger
If the merger is consummated, your equity will be diluted.
As of January __, 2003, there were _________ shares of our common stock
outstanding. In this proxy statement we are asking you to approve an amendment
to our certificate of incorporation to increase the total number of authorized
shares of Atlantic's common stock from 50 million to 150 million. If the
proposed merger of MPAC into Manhattan is consummated, we will issue to
Manhattan shareholders a number of shares representing approximately 80% of the
outstanding post-merger shares, meaning that the pre-merger shares will
constitute approximately 20% of the shares of our common stock outstanding after
the merger. As a result, each share of our common stock that you currently hold
would represent a substantially smaller percentage ownership interest in
Atlantic.
If the merger is consummated, former Manhattan shareholders will be able to
control Atlantic following the merger.
On the effective date of the merger, each of our executive officers and
directors (other than David Tanen) will resign and Manhattan's executive
officers and directors (including David Tanen) will become our executive officer
and directors. After the merger, former Manhattan shareholders, including those
who become directors and officers of our company, will hold approximately 80% of
the total number of shares of our common stock outstanding. As a result,
Manhattan shareholders will then be able to control the election of directors
and other matter submitted for approval by our shareholders.
If the merger is not consummated, we will run out funds with which to operate
our business.
We have never been profitable and we may never become profitable. As of
September 30, 2002, we had an accumulated deficit of $27,503,776. We do not have
a current source of revenue nor do we expect to generate any additional revenues
in the near future. As of September 30, 2002, we had a cash and cash-equivalents
balance of $375,845. We anticipate that if the merger is not consummated our
current resources will be sufficient to finance for the next two months our
currently anticipated needs for operating and capital expenditures.
Risks Relating to Manhattan
Manhattan expects to incur significant operating losses over the next several
years.
Manhattan has never been profitable and may never become profitable.
Manhattan's sole product candidate, OE, is in the research-and-development
stage, which requires substantial expenditures. Manhattan does not have a
current source of revenue nor does it expect to generate any additional revenues
in the near future. Manhattan expects to incur significant operating losses over
the next several years, primarily due to continued and expanded
research-and-development programs, including preclinical studies and clinical
trials for OE, as well as costs incurred in identifying and possibly acquiring
additional technologies.
Manhattan currently owns rights to only one technology.
While Manhattan plans to obtain rights to additional technologies in the
future, Manhattan currently only owns rights to OE. Manhattan cannot predict
whether or when OE will become a commercially viable technology. Even if
Manhattan successfully develops OE, Manhattan cannot be certain that OE will
produce a profit. If Manhattan does not successfully develop OE or if its
development is inordinately delayed, and if Manhattan does not obtain rights to
other technologies, Manhattan cannot be certain it will be able to continue
operations.
25
If Manhattan does not obtain additional funding, its ability to develop its
technologies will be materially adversely affected.
Manhattan will need substantial additional funds to develop OE. Funding
may not, however, be available on acceptable terms, if at all. If Manhattan is
unable to obtain additional financing as needed, it may be forced to reduce the
scope of its operations, which would have a material adverse effect on its
business. Manhattan plans on performing further tests on OE during the next few
months. If the results of these tests are not promising, its ability to raise
additional funds may be adversely affected.
Manhattan may not obtain regulatory approvals necessary to commercialize its
product candidates.
To be profitable, Manhattan must, alone or with others, successfully
commercialize OE or other product candidates it may acquire. OE, however, is in
the early stages of development, will require significant further research,
development, and testing, and is subject to the risks of failure inherent in
developing products based on an innovative or novel technology. Novel
technologies, like OE, are also rigorously regulated by the federal government,
particularly the U.S. Food and Drug Administration, or "FDA," and by comparable
agencies in state and local jurisdictions and in foreign countries. In order to
obtain FDA approval for OE or any of our product candidates, we must submit to
the FDA an Independent New Drug application, or "IND," demonstrating that the
product candidate is safe for humans and effective for its intended use. This
demonstration requires significant research and animal and human tests.
Manhattan cannot predict with any certainty when it might submit an IND for
regulatory approval of OE. Manhattan may not satisfy the FDA's regulatory
requirements at all or only after many years. Manhattan cannot predict whether
its research and clinical approaches will result in products that the FDA
considers safe for humans and effective for indicated uses. The FDA has
substantial discretion in the drug approval process and may require us to
conduct additional pre-clinical and clinical testing. The approval process may
also be delayed by changes in government regulation, future legislation or
administrative action or changes in FDA policy that occur prior to or during our
regulatory review.
The results of the OE clinical trials may not support Manhattan's claims.
Manhattan cannot be certain that the results of the OE clinical trials
will support Manhattan's claims, or that OE is safe for humans and effective for
indicated uses. If the clinical trials are not successful, Manhattan may abandon
or delay developing OE. Any delay in, or termination of, Manhattan's clinical
trials will delay its filing of INDs with the FDA and, ultimately, its ability
to commercialize OE and generate product revenues.
Manhattan relies on third parties to develop, manufacture and market its product
candidates.
Manhattan relies on collaborators to develop, conduct clinical tests of,
obtain regulatory approval for, and commercialize its pharmaceutical product
candidates. For example, Manhattan's OE collaborator is Oleoyl-Estrone
Developments, SL, a Spanish company and stockholder of Manhattan. Although
Manhattan believes that its collaborative partners will have an economic
motivation to commercialize any pharmaceutical products that they license, the
amount and timing of resources devoted to these activities generally will be
controlled by each such individual partner.
Manhattan does not have a manufacturing facility. Manhattan is evaluating
candidates to manufacture OE for clinical trial testing. It may not be possible
to manufacture OE or future Manhattan product candidates at a cost or in
quantities necessary to make them commercially viable, and third-party
manufacturers may not be able to meet our needs with respect to timing,
quantity, and quality. If Manhattan is unable to contract for a sufficient
supply of required products and substances on acceptable terms, or if Manhattan
encounters delays or difficulties in its relationships with manufacturers,
Manhattan's research and development and pre-clinical and clinical testing would
be delayed, thereby delaying the submission of products for regulatory approval
or the market introduction and subsequent sales of those products.
Manhattan has no experience in sales, marketing, or distribution.
Manhattan's future success may depend, in part, on its ability to enter into and
maintain collaborative relationships to market, sell, and distribute its product
candidates. Manhattan may be unable to establish or maintain such collaborative
arrangements, and even if Manhattan is, they may prove unsuccessful. To the
extent that Manhattan depends on third parties for marketing
26
and distribution, any revenues Manhattan receives will depend upon the efforts
of such third parties, and there can be no assurance that such efforts will be
successful.
27
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
Proposal 1
Amendment to the Certificate of Incorporation
to Increase the Number of Outstanding Shares
Our board of directors has unanimously approved, subject to shareholder
approval, an amendment to our certificate of incorporation increasing the number
of authorized shares of common stock from 50 million to 150 million. The full
text of the proposed changes to our certificate of incorporation has been
incorporated into the proposed certificate of amendment of Atlantic's
certificate of incorporation included as Exhibit C.
As of the close of business on January __, 2003, there were _________
shares of Atlantic's common stock outstanding and an aggregate of __________
shares of common stock reserved for issuance under the 1995 Stock Option Plan,
upon exercise of non-plan options, upon exercise of outstanding warrants, upon
conversion of outstanding shares of Series A preferred stock, upon exercise (and
subsequent conversion into shares of common stock) of outstanding warrants
exercisable for Series A preferred stock. Accordingly, based on the number of
fully-diluted shares of common stock as of the close of business on January 3,
2003, Atlantic would have remaining __________ shares of common stock to issue
if the certificate of incorporation were amended to increase to 150 million the
number of authorized shares of common stock.
On December 17, 2002, we entered into a merger agreement with Manhattan
and MPAC. The merger agreement provides that MPAC will merge into Manhattan,
with Manhattan becoming our wholly owned subsidiary. See "The Terms of the
Transaction."
Under the terms of the merger, which is subject to Manhattan shareholder
approval, it is expected that Manhattan shareholders will receive approximately
______ shares of Atlantic common stock for each outstanding share of Manhattan
common stock they owned immediately prior to the effective time of the merger.
Atlantic will issue a total of approximately _________ shares of common stock to
holders of Manhattan stock. The number of shares of our common stock currently
available would not be sufficient to permit us to consummate the proposed
merger.
Issuance of additional shares of Atlantic common stock will have the
effect of diluting the ownership of our current shareholders. See "Risk
Factors."
The proposed increase in authorized shares would also increase our
Delaware franchise tax liability. The franchise tax is based, in part, on the
number of shares of stock authorized in a corporation's certificate of
incorporation. We expect, however, that the increase in our 2002 franchise tax
would be less than $10,000.
If our shareholders approve this proposed amendment we will promptly file
an appropriate certificate of amendment with the Delaware Secretary of State.
The affirmative vote of a majority of the outstanding shares of our common
stock and Series A preferred stock, voting together, is required in order to
approve each of this proposals. In addition, the affirmative vote of a majority
of the outstanding shares of our common stock, voting separately, is required to
approve this proposal.
The board of directors deems this proposal to be in the best interests
of Atlantic and its shareholders and recommends that you vote "FOR" this
proposal.
Proposal 2
Amendment to the Certificate of Designations
One of the closing conditions of the merger agreement is that we amend the
certificate of designations of our Series A preferred stock--which constitutes
part of our certificate of incorporation--to state that our Series A preferred
stock will automatically convert into shares of our common stock immediately
prior to any merger of Manhattan into a wholly-owned subsidiary of Atlantic. The
proposed certificate of amendment to the certificate of designations is attached
as Exhibit D. Unless the certificate of designations is amended, Atlantic would,
on
28
consummation of the merger, be required to pay to holders of the Series A
preferred stock the "Liquidation Amount" as defined in the certificate of
designations. The Liquidation Amount is currently $4,928,976. Given Atlantic's
limited resources, this requirement would force Atlantic to cease doing
business, with the proceeds of liquidation being paid to the Series A holders.
Having the Series A convert into common stock immediately prior to the merger
would allow Atlantic to avoid having to pay the Liquidation Amount, and without
amending the certificate of designations as described in proposal 2, Atlantic
would not be authorized to bring about that conversion. Note also that having
the Series A shares convert would also mean that the Series A shares would not
gain the benefit of any antidilution adjustments to which they would otherwise
be entitled, but this is a theoretical rather than practical entitlement, since
the requirement to pay the Liquidation Amount would supersede it and render it
moot.
If this proposal 2 is approved by our shareholders but proposal 1 is not
approved, then we will not amend the certificate of designations in accordance
with this proposal.
The affirmative vote of a majority of the shares of our common stock and
Series A preferred stock, voting together as a class is required to approve this
proposal. In addition, the affirmative vote of a majority of the shares of
Series A preferred stock, voting separately, is required to approve this
proposal. (Since the number of Series A shares currently outstanding is less
than 50% of the number of Series A shares originally issued, provision of the
Series A certificate of designations requiring a two-thirds vote for this and
other changes is no longer in effect.)
The board recommends that shareholders vote "FOR" amending the
certificate of incorporation to amend the terms of the Series A certificate
of designations.
Proposal 3
Amendment to the Certificate of Incorporation
to Change our Name to "Manhattan Pharmaceuticals, Inc."
As described above, if the merger is consummated, Manhattan shareholders
will hold 80% of Atlantic's post-merger outstanding capital stock and our
business will be primarily devoted to the business of Manhattan. Therefore, in
order to signify these changes, we propose to change the name of our company to
"Manhattan Pharmaceuticals, Inc."
The full text of the proposed changes to Atlantic's certificate of
incorporation has been incorporated into the proposed certificate of amendment
of Atlantic's certificate of incorporation included as Exhibit C. If proposal 3
is not approved but proposal 1 is approved, we will revise the certificate of
amendment accordingly. If proposals 1 and 2 are not approved, then we will not
change our name, even if we receive enough votes to do so.
We believe this name change will have no adverse effect on its business.
Instead, this supports our strategy of focusing exclusively on Manhattan's
development of its anti-obesity products.
Stockholders will not be required to submit their stock certificates for
exchange. Following the effective date of the amendment changing our name, all
new stock certificates that we issue will be overprinted with our new name.
The affirmative vote of the holders of a majority of the votes of our
common stock and preferred stock issued and outstanding on the record date,
voting together as a class, is required to approve this proposal.
The board of directors deems this proposal to be in the best interests
of Atlantic and its stockholders and recommends that you vote "FOR" this
proposal.
Proposal 4
Election of Directors
At the annual meeting, a board of directors consisting of five directors
will be elected to serve until the next annual meeting of shareholders and until
their successors have been duly elected and qualified or until their earlier
resignation or removal. The board has selected five nominees, all of whom are
current directors of Atlantic. Each person nominated for election has agreed to
serve if elected, and management has no reason to believe that any
29
nominee will be unavailable to serve. Unless otherwise instructed, the proxy
holders will vote the proxies received by them in favor of the nominees named
below. Holders of shares of common stock and holders of shares of Series A
preferred stock vote together as a class to elect directors. If any nominee is
unable or declines to serve as a director, the proxies may be voted for a
substitute nominee designated by the current board.
If proposals 1 and 2 are approved by the shareholders, upon the closing of
the merger, all of Atlantic's directors, with the exception of David M. Tanen,
will resign from their directorships, meaning that the directors appointed as a
result of shareholder voting for the nominees listed in proposal 4 would only
hold office for a brief period--probably less than a day--until the proposed
merger become effective. The new board will consist of Mr. Tanen, Joshua Kazam,
Michael Weiser and Joan Pons, each of whom currently serves as a member of
Manhattan's board of directors. The new board of directors will replace current
Atlantic officers with Manhattan's officers. For biographies of these new board
members and officers, see "Manhattan Director and Officer Information."
A plurality of the votes cast by holders of the outstanding shares of
common stock and Series A preferred stock, voting together, is required to elect
each candidate for director listed in proposal 4. Since, however, the number of
candidates is equal to the number of vacancies, receipt of any votes in favor of
any candidate will ensure that that candidate is elected.
The board recommends that shareholders vote "FOR" the election of each
of the following nominees to serve as directors of Atlantic.
Information With Respect to Nominees
Set forth below is information regarding the nominees.
NAME OF NOMINEE AGE POSITION DIRECTOR SINCE
- --------------- --- -------- --------------
Frederic P. Zotos, Esq 37 Director, President, and
Chief Executive Officer 1999
Steve H. Kanzer, C.P.A.,
Esq 38 Director 1993
Peter O. Kliem 64 Director 2000
A. Joseph Rudick, M.D 45 Director 1999
David M. Tanen 31 Director 2002
Business Experience of Nominees
Frederic P. Zotos, Esq., 37, has been a member of our board of
directors since May 1999, our President since April 3, 2000, and our Chief
Executive Officer since February 15, 2001. From June 1999 to April 2000, Mr.
Zotos was Director of Due Diligence and Internal Legal Counsel of Licent
Capital, LLC, an intellectual property royalty finance company located in
Jericho, New York. From September 1998 until June 1999, Mr. Zotos practiced
as an independent patent attorney and technology licensing consultant in
Cohasset, Massachusetts. From December 1996 until August 1998, Mr. Zotos was
Assistant to the President and Patent Counsel of Competitive Technologies,
Inc., a publicly-traded technology licensing agency located in Fairfield,
Connecticut. From July 1994 until November 1996, Mr. Zotos was an
Intellectual Property Associate of Pepe & Hazard, a general practice law firm
located in Hartford, Connecticut. Mr. Zotos is a registered patent attorney
with the United States Patent and Trademark Office, and is also registered to
practice law in Massachusetts and Connecticut. He earned a B.S. in
Mechanical Engineering from Northeastern University in 1987, a joint
J.D./M.B.A. degree from Northeastern University in 1993, and successfully
completed an M.S. in Electrical Engineering Prerequisite Program from
Northeastern University in 1994.
Steve H. Kanzer, CPA, Esq., 38, has been a member of our board of
directors since its inception in 1993. He is currently a member of our Audit
Committee and Compensation Committee. From December 1997 to November 2001,
Mr. Kanzer was President and Chief Executive Officer of Corporate Technology
Development,
30
Inc., a biotechnology holding company based in Miami, Florida. Since December
2000 Mr. Kanzer has also been Chairman, Chief Executive Officer and President of
Accredited Equities, Inc., a venture capital and investment banking firm based
in Miami, and President of several private biopharmaceutical companies also
based in Miami. From 1992 until December 1998, Mr. Kanzer was a founder and
Senior Managing Director of Paramount Capital, Inc. and Senior Managing
Director--Head of Venture Capital of Paramount Capital Investments, LLC, a
biotechnology and biopharmaceutical venture capital and merchant banking firm
that is an affiliate of Paramount Capital, Inc. From 1993 until June 1998, Mr.
Kanzer was a founder and a member of the board of directors of Boston Life
Sciences, Inc., a publicly-traded pharmaceutical research and development
company. From 1994 until June 2000, Mr. Kanzer was a founder and Chairman of
Discovery Laboratories, Inc., a publicly-traded pharmaceutical research and
development company. Mr. Kanzer is a founder and a member of the board of
directors of DOR BioPharma, Inc., a publicly-traded pharmaceutical research and
development company. Prior to joining Paramount, Mr. Kanzer was an attorney with
Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York from September
1988 to October 1991. He received his J.D. from New York University School of
Law in 1988 and a B.B.A. in Accounting from Baruch College in 1985. In his
capacity as employee and director of other companies in the venture capital
field, Mr. Kanzer is not required to present to Atlantic opportunities that
arise outside the scope of his duties as a director of Atlantic.
Peter O. Kliem, 64, has been a member of our board of directors since
March 21, 2000 and is a member of our Compensation Committee. Mr. Kliem is a
co-founder and Chief Executive Officer of SelectX Pharmaceuticals, Inc., as well
as member of the board of directors of SelectX, a privately held drug discovery
company. Prior to that, Mr. Kliem was co-founder, Executive Vice-President,
Chief Operating Officer and member of the board of directors of Enanta
Pharmaceuticals, a Boston based biotechnology start-up. Prior to this start-up,
he worked with Polaroid Corporation for 36 years, most recently in the positions
of Senior Vice President, Business Development, Senior VP, Electronic Imaging
and Senior VP and Director of Research & Development. During his tenure with
Polaroid, he initiated and executed major strategic alliances with corporations
in the U.S., Europe, and the Far East. Mr. Kliem also introduced a broad range
of innovative products such as printers, lasers, CCD and CID imaging, fiber
optics, flat panel display, magnetic/optical storage and medical diagnostic
products in complex technological environments. Mr. Kliem is a member of the
board of directors of Amnis Corporation, a Seattle-based privately held company
engaged in developing novel flow cytometry and image analysis instrumentation
for the biotech industry. He serves as trustee of the Boston Biomedical Research
Institute, which is funded by the National Institute of Health, and served as
Chairman of PB Diagnostics. In addition, he serves as Industry Advisor to
TVM-Techno Venture Management. Mr. Kliem earned his M.S. in Chemistry from
Northeastern University.
A. Joseph Rudick, M.D., 45, was our Chief Executive Officer from April 10,
2000 until February 15, 2001, and has been a member of our board of directors
since May 1999. He was also our President from May 1999 to April 3, 2000, and
was a founder of Atlantic and two of its majority-owned subsidiaries, Optex and
Channel. Dr. Rudick served as a business consultant to Atlantic from January
1997 until November 1998. From June 1994 until November 1998, Dr. Rudick was a
Vice President of Paramount Capital, Inc., an investment bank specializing in
the biotechnology and biopharmaceutical industries. Since 1988, he has been a
Partner of Associate Ophthalmologists P.C., a private ophthalmology practice
located in New York, and from 1993 to 1998 he served as a director of Healthdesk
Corporation, a publicly-traded medical information company of which he was a
co-founder. Dr. Rudick earned a B.A. in Chemistry from Williams College in 1979
and an M.D. from the University of Pennsylvania in 1983.
David M. Tanen, 31, has served as a member of our board of directors since
January 28, 2002. Since 1996, Mr. Tanen has served as an associate director of
Paramount Capital, Inc., where he has been involved in the founding of a number
of biotechnology start-up companies. Mr. Tanen also serves as an officer and/or
director on several other privately held development-stage biotechnology
companies. Mr. Tanen received his B.A. from George Washington University and his
J.D. from Fordham University School of Law.
Number of Directors; Relationships
On January 28, 2002, Mr. Tanen was named as a member of the board; this
increased to five the number of directors of our board. Each director holds
office until the annual meeting of shareholders following the initial
31
election or appointment of that director and until that director's successor has
been duly elected and qualified, or until that director's earlier resignation or
removal. Officers are appointed to serve at the discretion of the board.
There are no family relationships among the executive officers or
directors of Atlantic.
Board Meetings and Committees
The board held six meetings during the 2001 fiscal year.
The board has an Audit Committee and a Compensation Committee, but not a
standing Nominating Committee. The Audit Committee, which is currently composed
of Mr. Zotos, Mr. Kanzer and Mr. Kliem, reviews the professional services
provided by our independent auditors and monitors the scope and results of the
annual audit; reviews proposed changes in our financial and accounting standards
and principles; reviews our policies and procedures with respect to its internal
accounting and financial controls; makes recommendations to the board on the
engagement of the independent auditors and addresses other matters that may come
before it or as directed by the board of directors. Neither Mr. Kanzer nor Mr.
Kliem are currently an officer of Atlantic or any of its subsidiaries, and both
are "independent" under Rule 4200(a)(15) of the NASD listing standards as
currently in effect. The Audit Committee held one meeting during the 2001 fiscal
year.
The Audit Committee operates pursuant to a charter approved by Atlantic's
board of directors. A copy of this charter is attached to this proxy statement
as Exhibit E.
The Compensation Committee, which is currently composed of Mr. Zotos, Mr.
Kanzer and Mr. Kliem, sets the compensation for certain of our personnel and
administers our 1995 Stock Option Plan, as amended and restated. The
Compensation Committee held one meeting during the 2001 fiscal year.
Director Compensation
Non-employee directors are eligible to participate in an automatic stock
option grant program under the 1995 stock option plan. Non-employee directors
are granted an option for 10,000 shares of common stock on their initial
election or appointment to the board and an option for 2,000 shares of common
stock on the date of each annual meeting of our shareholders for those
non-employee directors continuing to serve after that meeting. On August 8,
2001, under the automatic stock option grant program, we granted each of Steve
Kanzer and Peter Kliem options for 2,000 shares of common stock at an exercise
price of $0.61 per share, the fair market value of our common stock on the date
of grant.
Additionally, on February 20, 2001, Atlantic granted each of Steve Kanzer
and Peter Kliem options for 50,000 shares of common stock at an exercise price
of $0.875 per share, the fair market value of our common stock on the date of
the grant.
The board agreed that effective October 21, 1999, each non-employee member
of the board is to receive $6,000 per year for his services as a director,
payable semi-annually in arrears, plus $1,500 for each board meeting attended in
person, $750 for each board meeting attended via telephone conference call and
$500 for each meeting of a committee of the board attended.
Board members are reimbursed for reasonable expenses incurred in
connection with attending meetings of the board and of committees of the board.
Proposal 5
Ratification of Selection
of Independent Auditors
On December 5, 2002, KPMG LLP notified us that it would not stand for
re-election as our auditor. KPMG LLP began auditing Atlantic's annual financial
statements in December 1995. The board has appointed the firm of J.H. Cohn, LLP,
independent auditors, to audit our consolidated financial statements for the
year ending December 31, 2002, and is asking the shareholders to ratify this
appointment. The decision of the board to appoint
32
J.H. Cohn, LLP is based on the recommendation of the audit committee. In making
its recommendation, the audit committee reviewed the auditor's independence, the
audit scope, and its audit fees. During Atlantic's two most recent fiscal years
and the subsequent interim period preceding the engagement of J.H. Cohn,
Atlantic did not consult J.H. Cohn on matters such as applying accounting
principles to a transaction, redering an opinion or a report, or on any matter
that was subject to an accounting disagreement or a reportable event.
During the years ended December 31, 2001 and 2000 and any subsequent
interim period, KPMG has not disagreed with Atlantic on any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure that, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject mater of the disagreement in its report.
KPMG's report on the financial statements for the last two years did not contain
an adverse opinion or disclaimer of opinion, nor was it modified as to
uncertainty (with the exception of the 2001 report containing a statement
related to our ability to continue as a going concern), audit, scope, or
accounting principles.
The aggregate fees billed by KPMG LLP for professional services rendered
in connection with its audit of our financial statements for the fiscal year
2001, including review of the consolidated financial statements included in our
Quarterly Reports on Form 10-QSB for that fiscal year, were $85,500. KPMG LLP's
fees for all other professional services provided to Atlantic during 2001
totaled $82,725. Of these fees, $52,700 were audit-related services (review of
registration statements filed with the SEC and various technical accounting
consultations) and $30,025 were for non-audit-related services (tax compliance
and planning services).
We expect representatives of J.H. Cohn, LLP to be present at the annual
meeting of shareholders. They will be given an opportunity to make a statement
if they so desire, and we expect them to be available to respond to appropriate
questions.
In the event the shareholders fail to ratify the appointment, the board
will reconsider its selection. Even if the selection is ratified, the board in
its discretion may direct the appointment of a different independent auditing
firm at any time during the year if the board believes that such a change would
be in the best interests of Atlantic and its shareholders. The affirmative vote
of the holders of a majority of the shares of common stock and shares of Series
A preferred stock, voting together as a class, present or represented by proxy
at the annual meeting and entitled to vote is required to approve this proposal.
The board recommends that shareholders vote in favor of ratifying the
selection of J.H. Cohn, LLP to serve as Atlantic's independent auditors for
the year ending December 31, 2002.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive Officers
Certain information regarding the sole executive officer other than
Frederic P. Zotos is set forth below (information concerning Atlantic's
directors is contained in proposal 1):
NAME AGE POSITION
- ---- --- --------
Nicholas J. Rossettos 37 Chief Financial Officer, Treasurer and Secretary
Nicholas J. Rossettos, CPA, 37, has been our Chief Financial Officer
since April 2000. Previously, Mr. Rossettos was from 1999, Manager of
Finance for Centerwatch, a pharmaceutical trade publisher headquartered in
Boston, Massachusetts, that is a wholly owned subsidiary of Thomson
Corporation of Toronto, Canada. Prior to that, from 1994, he was Director of
Finance and Administration for EnviroBusiness, Inc., an environmental and
technical management-consulting firm headquartered in Cambridge,
Massachusetts. He holds an A.B. in Economics from Princeton University and a
M.S. in Accounting and M.B.A. from Northeastern University.
Compensation of Executive Officers
Pursuant to our 1995 stock option plan, on February 20, 2001, Frederic P.
Zotos was granted options for 100,000 shares of common stock at an exercise
price of $0.875. Additionally, on February 20, 2001, Mr. Zotos was granted
options for 150,000 shares of common stock at an exercise price of $0.875.
Pursuant to our 1995 stock
33
option plan, on February 20, 2001, Dr. Rudick was granted options for 100,000
shares of common stock at an exercise price of $0.875. Additionally, on February
20, 2001, A. Joseph Rudick was granted options for 25,000 shares of common stock
at an exercise price of $0.875. Pursuant to our 1995 stock option plan, on
February 20, 2001, Nicholas J. Rossettos was granted options for 50,000 shares
of common stock at an exercise price of $0.875.
The following table sets forth, for the last three fiscal years, the
compensation earned for services rendered in all capacities by our chief
executive officer and the other highest-paid executive officers serving as such
at the end of 2001 whose compensation for that fiscal year was in excess of
$100,000. The individuals named in the table will be hereinafter referred to as
the "Named Officers." No other executive officer of Atlantic received
compensation in excess of $100,000 during fiscal year 2001. No executive officer
who would otherwise have been included in this table on the basis of 2001 salary
and bonus resigned or terminated employment during that year.
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation All Other
Annual Compensation Awards Compensation ($)
- ---------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Other Annual Securities
Compensation Underlying
($) ($) ($) Options/SARs(#)
- ---------------------------------------------------------------------------------------------------------------------------
Frederic P. Zotos (1) 2001 208,750 50,000 10,000(2) 250,000 0
Chief Executive Officer and 2000 131,250 50,000 10,000(2) 250,000 14,750(3)
President 1999 0 0 0 2,600(4)
- ---------------------------------------------------------------------------------------------------------------------------
A. Joseph Rudick (5) 2001 87,500 25,000 0 125,000 0
Chief Scientific and Medical 2000 123,750 111,174 0 125,000 84,674(6)
Officer 1999 0 23,502 0 87,000(7) 81,523(8)
- ---------------------------------------------------------------------------------------------------------------------------
Nicholas J. Rossettos (9) 2001 125,000 25,000 10,000(2) 50,000 0
Chief Financial Officer, 2000 91,146 25,000 10,000(2) 50,000 0
Treasurer and Secretary 1999 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------
- -----------------------
(1) Mr. Zotos was promoted to be our Chief Executive Officer on February 15,
2001. Mr. Zotos became our President on April 3, 2000.
(2) Represents matching contributions by Atlantic pursuant to Atlantic's
SAR-SEP retirement plan.
(3) Represents $8,000 in fees paid for consulting services rendered and $6,750
in director's fees.
(4) Represents fees paid for consulting services rendered.
(5) Dr. Rudick became Chief Scientific and Medical Officer on February 15,
2001. From April 10, 2000 to February 15, 2001, he was our Chief Executive
Officer.
(6) Represents $86,174 paid to Dr. Rudick in recognition of his role in
negotiating an amendment to Optex's contract with Bausch & Lomb, less
$1,500 returned to Atlantic by him due to mistaken overpayment of
director's fees for the 1999 fiscal year.
(7) Excludes options for 50,000 shares of common stock granted to Dr. Rudick
on August 9, 1999, but rescinded in the 2000 fiscal year to correct the
grant to him in the 1999 fiscal year of options for 37,000 shares of
common stock above the amount permitted by the stock option plan for that
fiscal year.
(8) Represents $50,516 in fees paid to Dr. Rudick for consulting services
rendered, $7,500 in director's fees, of which $1,500 was paid in error and
therefore returned to Atlantic by him in 2000, and $23,507 paid in
recognition of his role in negotiating an amendment to Optex's contract
with Bausch & Lomb (see Item 12 below for a more detailed explanation).
34
(9) Mr. Rossettos became our Chief Financial Officer on April 10, 2000.
Options and Stock Appreciation Rights
The following table contains information concerning the grant of stock
options under the 1995 stock option plan and otherwise to the Named Officers
during the 2001 fiscal year. Except as described in footnote (1) below, no stock
appreciation rights were granted during the 2001 fiscal year.
Option/SAR Grants in Last Fiscal Year
- -------------------------------------------------------------------------------
Individual Grants
- -------------------------------------------------------------------------------
Number of % of Underlying
Securities Options/SARs
Underlying Granted to
Options/ Employees in Exercise
SARs Fiscal Year(2) Price Expiration
Name Granted(#)(1) ($/Share)(3) Date
- -------------------------------------------------------------------------------
Frederic P. Zotos 250,000 43% $0.875 2/20/11
- -------------------------------------------------------------------------------
A. Joseph Rudick 125,000 22% $0.875 2/20/11
- -------------------------------------------------------------------------------
Nicholas J. Rossettos 50,000 9% $0.875 2/20/11
- -------------------------------------------------------------------------------
- ------------------------
(1) Each option has a maximum term of ten years, subject to earlier
termination in the event of the optionee's cessation of service with
Atlantic. The options are exercisable as follows: 25% upon granting and
25% each of the first three anniversaries of the date of granting. Each
option will become immediately exercisable in full upon an acquisition of
Atlantic by merger or asset sale, unless the option is assumed by the
successor entity. Each option includes a limited stock appreciation right
pursuant to which the optionee may surrender the option, to the extent
exercisable for vested shares, upon the successful completion of a hostile
tender for securities possessing more than 50% of the combined voting
power of Atlantic's outstanding voting securities. In return for the
surrendered option, the optionee will receive a cash distribution per
surrendered option share equal to the excess of (1) the highest price paid
per share of common stock in that hostile tender offer over (2) the
exercise price payable per share under the cancelled option.
(2) Calculated based on total option grants to employees of 575,000 shares of
common stock during the 2001 fiscal year.
(3) The exercise price may be paid in cash, mature shares of common stock,
through arrangements with independent brokerage firms, or by other means
at the discretion of the Plan Administrator. Atlantic may also finance the
option exercise by loaning the optionee sufficient funds to pay the
exercise price for the purchased shares and the federal and state income
tax liability incurred by the optionee in connection with exercise. The
optionee may be permitted, subject to the approval of the plan
administrator, to apply a portion of the shares purchased under the option
(or to deliver existing shares of common stock) in satisfaction of that
tax liability.
Option Exercise and Holdings
The following table provides information with respect to the Named
Officers concerning the exercisability of options during the 2001 fiscal year
and unexercisable options held as of the end of the 2001 fiscal year. No stock
appreciation rights were exercised during the 2001 fiscal year, and, except for
the limited rights described in footnote (1) to the preceding table, no stock
appreciation rights were outstanding at the end of that fiscal year.
35
Aggregated Option Exercises in Last Fiscal Year ("FY") and FY-End Option Values
Value of Unexercised In-the-Money
Shares No. of Securities Underlying Options/SARs at FY-End (Market
Acquired Value Unexercised Options/SARs at price of shares at FY-End less
Name on Exercise Realized (1) FY-End (#) exercise price) ($)(2)
----------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- -------------- -------------- ---------------- ---------------- ------------------ -----------------
Frederic P. Zotos 0 -- 221,166 315,834 0 0
- --------------------------- -------------- -------------- ---------------- ---------------- ------------------ -----------------
A. Joseph Rudick 0 -- 174,916 172,084 0 0
- --------------------------- -------------- -------------- ---------------- ---------------- ------------------ -----------------
Nicholas J. Rossettos 0 -- 37,500 62,500 0 0
- --------------------------- -------------- -------------- ---------------- ---------------- ------------------ -----------------
- ------------------
(1) Equal to the fair market value of the purchased shares at the time of the
option exercise over the exercise price paid for those shares.
(2) Based on the fair market value of our common stock on December 31, 2001 of
$0.28 per share, the closing sales price per share on that date on the
Over-the-Counter Bulletin Board.
Long Term Incentive Plan Awards
No long term incentive plan awards were made to a Named Officer during the
last fiscal year.
Employment Contracts and Termination of Employment and Change of Control
Agreements
Effective April 3, 2000, Mr. Zotos became our President pursuant to an
employment agreement, as amended as of April 1, 2002. This agreement has a
three-year term ending on April 2, 2004. As President, Mr. Zotos reports to the
Chief Executive Officer. Mr. Zotos and his dependents are eligible to receive
paid medical and long term disability insurance and such other health benefits
as Atlantic makes available to other senior officers and directors. Effective
February 15, 2001, Mr. Zotos was also appointed Chief Executive Officer of
Atlantic at which time the employment agreement was amended to reflect a new
compensation structure.
Effective April 10, 2000, Dr. Rudick became our Chief Executive Officer
pursuant to an employment agreement as amended as of April 1, 2002. This
agreement has a three-year term ending on April 10, 2004. Effective February 15,
2001, Dr. Rudick resigned as our Chief Executive Officer at which time the
employment agreement was amended to reflect a new compensation structure.
Effective April 10, 2000, Mr. Rossettos became our Chief Financial Officer
pursuant to an employment agreement as amended as of April 1, 2002. This
agreement has a three-year term ending on April 10, 2003. Mr. Rossettos reports
to the Chief Executive Officer and President. Mr. Rossettos and his dependents
are eligible to receive paid medical and long term disability insurance and such
other health benefits as Atlantic makes available to other senior officers and
directors.
The Compensation Committee has the discretion under the 1995 stock option
plan to accelerate options granted to any officers in connection with a change
in control of Atlantic or upon the subsequent termination of the officer's
employment following the change of control.
Change of Control Transactions
Atlantic is not aware of any transactions resulting in a change of control
during fiscal year 2001.
36
Certain Relationships and Related Transactions
On January 4, 2000, we entered into a financial advisory and consulting
agreement with Joseph Stevens & Company, Inc. In this agreement, we engaged
Joseph Stevens to provide us with financial advisory services from January 4,
2000 until January 4, 2001. As partial compensation for the services to be
rendered by Joseph Stevens, we issued them three warrants to purchase an
aggregate of 450,000 shares of our common stock. The exercise price and exercise
period of each warrant is as follows:
=============================================================================
Warrant No. of Exercise
Number Shares Price Exercise Period
=============================================================================
No.1 150,000 $2.50 1/4/00 through 1/4/05
- -----------------------------------------------------------------------------
1/4/01 through 1/4/06 (which vested
in equal monthly increments during
No.2 150,000 $3.50 1/4/00-1/4/01)
- -----------------------------------------------------------------------------
1/4/02 through 1/4/07 (which vested
in equal monthly increments during
No.3 150,000 $4.50 1/4/00-1/4/01)
=============================================================================
In addition, each warrant may only be exercised when the market price of a
share of common stock is at least $1.00 greater than the exercise price of that
warrant. In connection with issuance of the warrants, Atlantic and Joseph
Stevens entered into a letter agreement granting Joseph Stevens registration
rights in respect of the shares of common stock issuable upon exercise of the
warrants.
Pursuant to our restated certificate of incorporation and bylaws, we have
entered into indemnification agreements with each of our directors and executive
officers.
All transactions between us and our officers, directors, principal
shareholders and their affiliates are approved by a majority of the board of
directors, including a majority of the independent and disinterested outside
directors on the board of directors. We believe that the transaction set forth
above was made on terms no less favorable to us than could have been obtained
from unaffiliated third parties.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Atlantic's officers, directors and persons who are the beneficial owners of more
than 10% of the common stock to file initial reports of ownership and reports of
changes in ownership of the common stock with the SEC. Officers, directors and
beneficial owners of more than 10% of the common stock are required by SEC
regulations to furnish Atlantic with copies of all Section 16(a) forms they
file.
With the exception of the following transactions, each of Atlantic's
directors and executive officers who held office in 2001 timely filed the forms
required by Section 16(a) of the Exchange Act during fiscal year 2001. On
February 20, 2001, Atlantic granted Frederic P. Zotos options to purchase
150,000 shares. Mr. Zotos reported this transaction on a Form 5 filed February
14, 2002. On February 20, 2001, Atlantic granted A. Joseph Rudick options to
purchase 25,000 shares. Mr. Rudick reported this transaction on a Form 5 filed
February 14, 2002. On February 20, 2001, Atlantic granted Steve Kanzer options
to purchase 50,000 shares. Mr. Kanzer reported this transaction on a Form 5
filed February 14, 2002. On February 20, 2001, Atlantic granted Peter Kliem
options to purchase 50,000 shares. Mr. Kliem reported this transaction on a Form
5 filed February 14, 2002.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock as of January __, 2003,
by (1) all persons who are beneficial owners of 5% or more of our common stock,
(2) each director and nominee, (3) the Named Officers in the Summary
Compensation Table above, and (4) all directors and executive officers as a
group. We do not know of any person who beneficially owns more than 5% of the
Series A preferred stock and none of our directors or the Named Officers owns
any shares of Series A preferred stock. Consequently, the following table does
not contain information with respect to the Series A preferred stock.
The number of shares beneficially owned is determined under rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment
37
power and also any shares which the individual has the right to acquire within
60 days of January __, 2003, 2002, through the exercise or conversion of any
stock option, convertible security, warrant or other right. Including those
shares in the tables does not, however, constitute an admission that the named
shareholder is a direct or indirect beneficial owner of those shares. Unless
otherwise indicated, each person or entity named in the table has sole voting
power and investment power (or shares that power with that person's spouse) with
respect to all shares of capital stock listed as owned by that person or entity.
The common stock represented here includes the common stock that the beneficial
holders would directly possess if they converted all shares of Series A
Preferred Stock held by them.
NUMBER OF % OF TOTAL SHARES
NAME AND ADDRESS SHARES OUTSTANDING (1)
- ---------------- --------- -----------------
CERTAIN BENEFICIAL HOLDERS:
Lindsay A. Rosenwald, M.D.(2) __________ __%
787 Seventh Avenue
New York, NY 10019
Joseph Stevens & Company, Inc.(3) __________ __%
59 Maiden Lane, 32nd Floor
New York, NY 10038
MANAGEMENT:
Frederic P. Zotos (4) __________ __%
A. Joseph Rudick (5) __________ __%
Steve H. Kanzer (6) __________ *
Peter O. Kliem(7) __________ *
David Tanen(8) __________ *
Nicholas J. Rossettos (9) __________ __%
All current executive
officers and directors as
a group (6 persons) __________ __%
- ------------------------
* Less than 1.0%
(1) Percentage of beneficial ownership is calculated assuming __________
shares of common stock were outstanding on January __, 2003.
(2) Includes 388,000 shares of common stock issuable upon conversion of 47,202
shares of Series A preferred stock convertible within 60 days of
January __, 2003. Also includes 190 shares of common stock held by June
Street Corporation and 190 shares of common stock held by Huntington
Street Corporation. Dr. Rosenwald is the sole proprietor of both June
Street Corporation and Huntington Street Corporation.
(3) Includes 450,000 shares of common stock issuable upon exercise of three
warrants exercisable within 60 days of January __, 2003. Also includes
833,331 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of January __, 2003.
(4) Represents options exercisable within 60 days of January __, 2003. 250,000
shares of commons stock were exercisable pursuant to stock options granted
on March 28, 2002, all of which were immediately
38
exercisable; 62,500 shares of common stock were exercisable pursuant to
stock options granted on February 19, 2002 for 250,000 shares, of which
25% or 62,500 were exercisable on issuance, then an additional 25%
thereafter; an additional 50,000 shares of common stock were exercisable
pursuant to stock options granted on February 20, 2001 for 100,000 shares,
of which 25% or 25,000 shares were exercisable on issuance, then an
additional 25% annually thereafter; an additional 75,000 shares of common
stock were exercisable pursuant to stock options granted on February 20,
2001 for 150,000 shares, of which 25% or 37,500 shares were exercisable on
issuance, then an additional 25% annually thereafter; an additional 75,000
shares of common stock are exercisable pursuant to stock options granted
on April 12, 2000 for 100,000 shares, of which 25% or 25,000 shares were
exercisable on issuance, then an additional 25% annually thereafter; an
additional 112,500 shares are exercisable pursuant to stock options
granted on April 12, 2000 for 150,000, of which 25% or 37,500 were
exercisable on issuance, then an additional 25% annually thereafter; an
additional 25,000 shares are exercisable pursuant to stock options granted
October 21, 1999, all of which were immediately exercisable; an additional
2,000 shares are exercisable pursuant to stock options granted September
23, 1999 for 2,000 shares, all of which were exercisable after one year;
and an additional 10,000 shares are exercisable pursuant to stock options
granted May 28, 1999 for 10,000 shares, exercisable in three equal annual
amounts exercisable starting one year from grant date.
(5) Represents options exercisable within 60 days of January __, 2003. 125,000
shares of commons stock were exercisable pursuant to stock options granted
on March 28, 2002, all of which were immediately exercisable; an
additional 31,250 shares of common stock were exercisable pursuant to
stock options granted on February 19, 2002 for 125,000 shares, of which
25% or 31,250 shares were exercisable on issuance, then an additional 25%
annually thereafter; an additional 50,000 shares of common stock were
exercisable pursuant to stock options granted on February 20, 2001 for
100,000 shares, of which 25% or 25,000 shares were exercisable on
issuance, then an additional 25% annually thereafter; an additional 12,500
shares of common stock were exercisable pursuant to stock options granted
on February 20, 2001 for 25,000 shares, of which 25% or 6,250 shares were
exercisable on issuance, then an additional 25% annually thereafter; an
additional 75,000 shares of common stock are exercisable pursuant to stock
options granted under the plan on April 12, 2000 for 100,000 shares, of
which 50% or 50,000 shares were exercisable as of April 3, 2001, then an
additional 25% annually thereafter; an additional 18,750 shares are
exercisable pursuant to stock options granted on April 12, 2000 for 25,000
shares, of which 25% or 6,250 were exercisable immediately, then an
additional 25% annually thereafter; an additional 25,000 shares are
exercisable pursuant to stock options granted October 21, 1999, all of
which were immediately exercisable; an additional 2,000 shares are
exercisable pursuant to stock options granted on September 23, 1999, all
of which were exercisable on September 23, 2000; an additional 32,500
shares are exercisable pursuant to stock options granted on August 9, 1999
for 50,000 shares, of which 25% or 12,500 were exercisable on issuance,
then an additional 25% annually thereafter; an additional 10,000 shares
are exercisable pursuant to stock options granted on May 28, 1999 for
10,000 shares, exercisable in three equal amounts starting one year from
grant date; and an additional 10,000 shares are exercisable pursuant to
stock options granted on August 7, 1998 for 10,000 shares, of which one
third were exercisable after one year, with the remainder exercisable
monthly (or 277.79 per month) over two years.
(6) Represents options exercisable within 60 days of January __, 2003. 12,500
shares of common stock were exercisable pursuant to stock options granted
on January 28, 2002 for 50,000 shares, of which 25% were exercisable on
issuance, then an additional 25% annually thereafter; an additional 2,000
shares of common stock were exercisable pursuant to stock options granted
on August 8, 2001, all of which were immediately exercisable; an
additional 50,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001, all of which were immediately
exercisable; an additional 25,000 shares are exercisable pursuant to stock
options granted on February 29, 2000, all of which were immediately
exercisable; an additional 2,000 shares are exercisable pursuant to stock
options granted on September 29, 2000, all of which were immediately
exercisable; an additional 25,000 shares are exercisable pursuant to stock
options granted on October 21, 1999, all of which were immediately
exercisable; an additional 2,000 shares are exercisable pursuant to stock
options granted September 23, 1999, all of which were exercisable on
September 23, 2000; an additional 2,000 shares are exercisable pursuant to
stock options granted August 28, 1998; an additional 2,000 shares are
exercisable pursuant to stock options granted on June 17, 1997; and an
additional 2,000 shares are exercisable pursuant to stock options granted
on July 24, 1996.
39
(7) Represents options exercisable within 60 days of January __, 2003. 12,500
shares of common stock were exercisable pursuant to stock options granted
on January 28, 2002 for 50,000 shares, of which 25% were exercisable on
issuance, then an additional 25% annually thereafter; an additional 2,000
shares of common stock were exercisable pursuant to stock options granted
on August 8, 2001, all of which were immediately exercisable; an
additional 50,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001, all of which were immediately
exercisable; an additional 25,000 shares of common stock are exercisable
pursuant to stock options granted September 29, 2000, all of which were
immediately exercisable; an additional 2,000 shares are exercisable
pursuant to stock options granted September 29, 2000, all of which were
immediately exercisable; an additional 17,250 shares are exercisable
pursuant to stock options for 23,000 shares granted on April 6, 2000, of
which 25% or 5,570 were exercisable on issuance, and then an additional
25% annually thereafter; and an additional 6,666 shares of common stock
were exercisable pursuant to stock options granted on March, 21 2000 for
10,000 shares, which are exercisable in three equal annual amounts
starting from one year of the grant date.
(8) Represents options exercisable within 60 days of January __, 2003. These
10,000 shares of common stock were exercisable pursuant to stock options
granted on January 28, 2002, all of which were immediately exercisable.
(9) Represents options exercisable within 60 days of January __, 2003. 125,000
shares of commons stock were exercisable pursuant to stock options granted
on March 28, 2002 all of which were immediately exercisable; 12,500 shares
of common stock were exercisable pursuant to stock options granted on
February 19, 2002 for 50,000 shares, of which 25% or 12,500 shares were
exercisable on issuance, then an additional 25% annually thereafter; an
additional 25,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001 for 50,000 shares, of which 25%
or 12,500 shares were exercisable on issuance, then an additional 25%
annually thereafter; and an additional 37,500 shares of common stock are
exercisable pursuant to stock options for 50,000 shares granted April 4,
2000, of which 25% or 12,500 were exercisable on issuance, and then an
additional 25% annually thereafter.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Under the present rules of the SEC, the deadline for shareholders to
submit proposals to be considered for inclusion in our proxy statement for the
next year's annual meeting of shareholders is __________, 2003. Such proposals
may be included in next year's proxy statement if they comply with certain rules
and regulations promulgated under the Securities Exchange Act. The date of next
year's annual meeting of shareholders has not yet been fixed; if we fix a date
that is more than 30 days earlier or later than the date of this year's annual
meeting, we will specify a revised deadline in a Form 10-QSB filed with the SEC.
ADDITIONAL MATERIALS
A letter from our President has been mailed with the notice of annual
meeting and this proxy statement to all shareholders entitled to notice of and
to vote at the annual meeting. The President's letter is not incorporated into
this proxy statement and is not considered proxy soliciting material.
OTHER MATTERS
Atlantic knows of no other matters that will be presented for
consideration at the annual meeting. If any other matters properly come before
the annual meeting, it is the intention of the persons named in the enclosed
form of proxy to vote the shares they represent as the board may recommend.
Discretionary authority with respect to such other matters is granted by the
execution of the enclosed proxy card.
THE BOARD OF DIRECTORS
Dated: __________, 2003
40
INDEX TO FINANCIAL STATEMENTS
Page
----
ATLANTIC FINANCIAL STATEMENTS FOR THE MOST RECENT INTERIM PERIOD
Consolidated Balance Sheets (unaudited) as of September 30, 2002...........F-1
Consolidated Statements of Operations (unaudited) for the
nine months ended September 30, 2002 and for the period from
July 13, 1993 (inception) to September 30, 2002............................F-2
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2002 and for the period from
July 13, 1993 (inception) to September 30, 2002............................F-3
Notes of Consolidated Financial Statements (unaudited).....................F-4
ATLANTIC FINANCIAL STATEMENTS FOR THE LAST THREE FISCAL YEARS
Independent Auditors' Report...............................................F-9
Consolidated Balance Sheets as of December 31, 2001 and 2000...............F-10
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 and for the period from July 13,
1993 (inception) to December 31, 2001......................................F-11
Consolidated Statements of Stockholders' Equity for the period
from July 13, 1993 (inception) to December 31, 2001........................F-12
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999 and for the period from July 13,
1993 (inception) to December 31, 2001......................................F-16
Notes to Consolidated Financial Statements.................................F-17
MANHATTAN FINANCIAL STATEMENTS FOR THE MOST RECENT FISCAL YEAR
AND MOST RECENT INTERIM PERIOD
Independent Auditors' Report...............................................F-38
Balance Sheets as of September 30, 2002 and December 31, 2001..............F-39
Statements of Operations for the Nine Months Ended September 30,
2002, for the period from August 6, 2001 (inception) to December
31, 2001 and for the period from August 6, 2001 (inception) to
September 30, 2002.........................................................F-40
Statements of Changes in Stockholders' Deficiency for the period
from August 6, 2001, (inception) to September 30, 2002.....................F-41
Statements of Cash Flows for the Nine Months Ended
September 30, 2002, for the period from August 6, 2001
(inception) to December 31, 2001 and for the period from
August 6, 2001 (inception) to September 30, 2002...........................F-42
Notes to Financial Statements as of September 30, 2002 and
December 31, 2001..........................................................F-43
PRO FORMA FINANCIAL STATEMENTS
General Information........................................................F-50
Pro Forma Condensed Combined Balance Sheet as of September 30,
2002 (unaudited)...........................................................F-51
Pro Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 2002 (unaudited)...................F-52
Pro Forma Condensed Combined Statement of Operations for
the year ended December 31, 2002...........................................F-53
Notes to Pro Forma Condensed Combined Financial Statements.................F-54
41
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
Assets 2002 2001
------------- --------------
Current assets:
Cash and cash equivalents $ 375,845 1,591,761
Prepaid expenses 81,614 38,593
------------ ------------
Total current assets 457,459 1,630,354
Property and equipment, net 70,237 105,153
Other assets 19,938 22,838
------------ ------------
Total assets $ 547,634 1,758,345
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 503,945 508,613
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value
Authorized 1,375,000 shares; 379,152 and 346,357 shares issued and
outstanding at September 30, 2002 and December 31, 2001, respectively
(liquidation preference aggregating $4,928,976 and $4,502,641 at
September 30, 2002 and December 31, 2001, respectively) 379 346
Convertible preferred stock warrants, 112,896 issued and outstanding at
September 30, 2002 and December 31, 2001 520,263 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 16,989,596 and 15,965,359 shares issued and outstanding
at September 30, 2002 and December 31, 2001, respectively 16,990 15,965
Common stock subscribed. 182 shares at September 30, 2002
and December 31, 2001 -- --
Additional paid-in capital 27,411,259 27,442,106
Deficit accumulated during development stage (27,904,660) (26,728,406)
------------ ------------
44,231 1,250,274
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------ ------------
Total stockholders' equity 43,689 1,249,732
------------ ------------
Total liabilities and stockholders' equity $ 547,634 1,758,345
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-1
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Cumulative
period from
July 13, 1993
Nine months ended (inception) to
September 30, September 30,
2002 2001 2002
------------ ------------ ------------
Revenues:
Development revenue $ -- $ 2,461,922 $ 8,713,720
License revenue 500,000 -- 3,000,000
Grant revenue -- 250,000 616,659
------------ ------------ ------------
Total revenues 500,000 2,711,922 12,330,379
------------ ------------ ------------
Costs and expenses:
Cost of development revenue -- 2,082,568 7,084,006
Research and development 467,153 774,340 10,858,779
Acquired in-process research and
development -- -- 2,653,382
General and administrative 1,225,201 2,333,567 19,899,834
Compensation expense (benefit) relating to (5,845) 70,634 1,093,631
stock warrants (general and
administrative), net
License fees -- -- 173,500
------------ ------------ ------------
Total operating expenses 1,686,509 5,261,109 41,763,132
------------ ------------ ------------
Operating loss (1,186,509) (2,549,187) (29,432,753)
Other (income) expense:
Interest and other income (10,255) (40,618) (1,303,401)
Gain on sale of Optex assets -- (2,569,451) (2,569,451)
Loss on sale of Gemini assets -- 334,408 334,408
Interest expense -- -- 625,575
Equity in loss of affiliate -- 58,993 146,618
Distribution to minority shareholders -- 837,274 837,274
------------ ------------ ------------
Total other (income) expense (10,255) (1,379,394) (1,928,977)
------------ ------------ ------------
Net loss $ (1,176,254) $ (1,169,793) $(27,503,776)
============ ============ ============
Imputed convertible preferred stock
dividend -- 600,000 5,931,555
Dividend paid upon repurchase of
Series B -- 167,127 400,884
Preferred stock dividend issued in
preferred shares 65,760 107,449 1,456,272
------------ ------------ ------------
Net loss applicable to common shares $ (1,242,014) $ (2,044,369) $(35,292,487)
============ ============ ============
Net loss per common share:
Basic and diluted $ (0.07) $ (0.30)
============ ============
Weighted average shares of common stock
outstanding:
Basic and diluted 16,949,797 6,734,788
============ ============
See accompanying notes to unaudited consolidated financial statements.
F-2
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
Cumulative
period from
July 13, 1993
(inception) to
Nine months ended September 30, September 30,
------------------------------------
2002 2001 2002
--------------- -------------- --------------
Cash flows from operating activities:
Net loss $(1,176,254) (1,169,793) (27,503,776)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and development -- -- 1,800,000
Expense relating to issuance
of common stock and warrants 13,500 488,100 799,802
Expense relating to the issuance of options -- -- 81,952
Expense related to Channel merger -- -- 657,900
Change in equity of affiliate -- 58,993 146,618
Compensation expense (benefit) relating to
stock options and warrants (5,845) 70,634 1,301,676
Discount on notes payable - bridge financing -- -- 300,000
Depreciation 37,113 55,015 609,844
Gain on sale of Optex assets -- (2,569,451) (2,569,451)
Distribution to Optex minority shareholders -- 837,274 837,274
Loss on sale of Gemini assets -- 334,408 334,408
Loss on disposal of furniture and equipment 493 -- 73,880
Changes in assets and liabilities:
Decrease in accounts receivable -- 192,997 --
Increase in prepaid expenses (43,021) (4,595) (81,614)
Decrease in deferred revenue -- (1,294,615) --
Decrease in accrued expenses (4,668) (664,637) (123,213)
Increase (decrease) in accrued interest -- -- 172,305
Decrease (increase) in other assets 2,900 (19,937) (19,938)
----------- ----------- -----------
Net cash used in operating activities (1,175,782) (3,685,607) (23,182,333)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (2,690) (108,250) (924,021)
Investment in affiliate -- -- (146,618)
Proceeds from sale of Optex assets -- 3,000,000 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100
----------- ----------- -----------
Net cash provided by (used in) investing
activities (2,690) 2,891,750 1,935,461
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500
Proceeds from exercise of stock options -- -- 397,098
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing -- -- 1,200,000
Proceeds from issuance of warrants -- -- 300,000
Repayment of notes payable - bridge financing -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Preferred stock dividend paid (807) (987) (2,112)
Net proceeds from the issuance of common stock (36,637) -- 9,450,872
Proceeds from issuance of convertible preferred stock -- -- 11,441,672
Repurchase of convertible preferred stock -- (617,067) (1,128,875)
Distribution to Optex minority shareholders -- (811,114) (811,114)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (37,444) (1,429,168) 21,622,717
----------- ----------- -----------
Net decrease in cash and cash equivalents (1,215,916) (2,223,025) 375,845
Cash and cash equivalents at beginning of period 1,591,761 2,663,583 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 375,845 440,558 375,845
=========== =========== ===========
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- 2,442,304
Cashless exercise of preferred warrants -- -- 49,880
Conversion of preferred to common stock 40 409 2,889
Preferred stock dividend issued in shares 65,760 107,449 1,299,089
=========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
F-3
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Financial Statements (unaudited)
September 30, 2002
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, the
financial statements do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete annual financial statements. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments,
consisting of only normal recurring adjustments, considered necessary for fair
presentation. Interim operating results are not necessarily indicative of
results that may be expected for the year ending December 31, 2002 or for any
subsequent period. These consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-KSB, as amended, of Atlantic
Technology Ventures, Inc. and its subsidiaries ("Atlantic") as of and for the
year ended December 31, 2001.
(2) LIQUIDITY
Atlantic has reported net losses of $1,734,945, $5,802,478, and $2,446,515
for the years ended December 31, 2001, 2000 and 1999, respectively. Atlantic has
reported a net loss of $1,176,254 for the nine months ended September 30, 2002.
The net loss from date of inception, July 13, 1993, to September 30, 2002
amounts to $27,503,776. Also, Atlantic has $375,845 in cash and cash equivalents
as of September 30, 2002. Atlantic's cash reserves are primarily the result of
Atlantic's receipt of a licensing fee of $500,000 in July 2002 resulting from
Atlantic's licensing the exclusive worldwide rights to the CT-3 compound to
Indevus Pharmaceuticals, Inc. Aside from this, Atlantic currently has no
revenue-generating activities which continues to increase Atlantic's working
capital deficit. Atlantic anticipates that its current resources will be
sufficient to fund for approximately the next two months its currently
anticipated needs for operating and capital expenditures. Atlantic plans to
achieve this by deferring payments on currently outstanding obligations to
certain service providers. Atlantic expects that its average monthly cash outlay
will be approximately $130,000. Atlantic does not currently have any committed
sources of financing, and due to the trading price of its common stock it is not
currently able to access funding under its agreement with Fusion Capital Fund
II, LLC. These factors raise substantial doubt about its ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of reported asset
amounts or the amounts or classification of liabilities which might result from
the outcome of this uncertainty.
Atlantic's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances and its ability to
realize the full potential of its technology in development. As stated above, in
June 2002, Atlantic licensed the rights to the CT-3 compound to Indevus
Pharmaceuticals, Inc. in exchange for, among other things, a licensing fee of
$500,000. During December 2001, Atlantic received net proceeds of approximately
$1,848,000 from the private placement of securities with various individual
investors and $100,000 from Fusion Capital. During the nine months ended
September 30, 2002, Fusion also purchased 10,000 shares of Atlantic common stock
for $1,667. Additional funds are currently not available on acceptable terms and
may not become available, and there can be no assurance that any additional
funding that Atlantic does obtain will be sufficient to meet Atlantic's needs in
the short and long term. To date, a significant portion of Atlantic's financing
has been through private placements of common stock and warrants, the issuance
of common stock for stock options and warrants exercised, debt financing and the
licensing of its technologies. Until Atlantic's operations generate significant
revenues, Atlantic will continue to fund operations from cash on hand and
through the sources of capital previously described.
Atlantic's common stock was delisted from the Nasdaq SmallCap Market
effective at the close of business August 23, 2001 for failing to meet the
minimum-bid-price requirements set forth in the NASD Marketplace Rules. As of
August 23, 2001, Atlantic's common stock trades on the Over-the-Counter Bulletin
Board under the symbol "ATLC.OB". Delisting of Atlantic's common stock from
Nasdaq could have a material adverse effect on its ability to raise additional
capital, its stockholders' liquidity and the price of its common stock.
F-4
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Financial Statements (unaudited)
September 30, 2002
(3) COMPUTATION OF NET LOSS PER COMMON SHARE
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common shares
outstanding for the period plus contingently issuable shares for little or no
consideration. Diluted net loss per common share equals basic net loss per
common share, since common stock equivalents from stock options, stock warrants,
stock subscriptions and convertible preferred stock would have an anti dilutive
effect because Atlantic incurred a net loss during each period presented. The
common stock equivalents from stock options, stock warrants, stock
subscriptions, and convertible preferred stock which have not been included in
the diluted calculations since their effect is antidilutive were 17,705,984 and
3,929,352 for the nine months ended September 30, 2002 and 2001 respectively.
(4) INCOME TAXES
Atlantic incurred a net loss for the nine months ended September 30, 2002.
In addition, Atlantic does not expect to generate book income for the year ended
December 31, 2002. Therefore, no income taxes have been reflected for the three-
and nine-month periods ended September 30, 2002.
(5) PREFERRED STOCK DIVIDEND
On February 7, 2002 and August 15, 2002, Atlantic's board of directors
declared a payment-in-kind dividend of 0.065 of a share of Series A convertible
preferred stock for each share of Series A convertible preferred stock held as
of a specified record date. The estimated fair value of these dividends of
$26,598 and $65,760 was included in Atlantic's calculation of net loss per
common share for the three- and nine-month periods ended September 30, 2002,
respectively. The equivalent dividends for the three- and nine-month periods
ended September 30, 2001 had an estimated fair value of $43,305 and $107,449,
respectively and are recorded in the same manner.
(6) ISSUANCE OF STOCK, STOCK OPTIONS AND WARRANTS
On March 8, 2001, Atlantic entered into an agreement with The Investor
Relations Group, Inc. ("IRG") under which IRG provided Atlantic investor
relations services. Pursuant to this agreement, Atlantic issued to Dian Griesel,
the principal of IRG, warrants to purchase 120,000 shares of its common stock at
an exercise price of $0.875 per share and agreed to pay IRG $7,500 per month.
These warrants vested monthly in 5,000 share increments over a 24-month period.
As part of its effort to reduce expenses, Atlantic concluded the agreement with
IRG as of May 31, 2002 and therefore, the 45,000 unvested warrants have
terminated. In addition, in lieu of paying $15,000 for services rendered in
April and May 2002, IRG agreed to accept 75,000 common shares. The estimated
fair value of these shares of $13,500 was recorded as a general and
administrative expense during the nine months ended September 30, 2002. In
addition, pursuant to EITF Issue No. 96-18, "Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring or in Conjunction with
Selling Goods or Services," Atlantic recorded compensation expense of $34,666
for the nine-month period ended September 30, 2001 relating to the original
issuance of the stock warrants to purchase 120,000 shares. As a result of a
decline in Atlantic's common stock price during the nine-month period ended
September 30, 2002 and the termination of 45,000 warrants, the cumulative
expense associated with these warrants was reduced. The reduction in the
estimated fair value of the warrants previously recorded and the current period
expense resulted in a net reversal of compensation expense of $5,845, which
reversal is recorded as a benefit during the nine-month period ended September
30, 2002.
Compensation for these warrants relates to investor relations services and
represents a general and administrative expense (benefit).
During the nine months ended September 30, 2002, Atlantic granted
employees an aggregate of 2,000,000 options outside of the Atlantic
Pharmaceuticals, Inc. 1995 Stock Option Plan. Of these options, 475,000 options
represent the annual issuance of stock options to Atlantic employees on terms
similar to those of prior year. They vest 25% upon issuance and the remaining
options vest in 25% increments on an annual basis. In addition, 950,000 of these
options were issued as incentive options and will vest upon the earlier of the
achievement of certain
F-5
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Financial Statements (unaudited)
September 30, 2002
milestones by Atlantic or five years. The remaining 575,000 options were issued
and fully vested in March 2002 as part of voluntary revisions to compensation
arrangements with certain employees which principally resulted in the employees
deferring a significant portion of their salary. This deferred salary is payable
on the earlier of Atlantic's discretion, the employee's termination, and, in
certain cases, at the conclusion of the employee's contracts and as such
Atlantic continues to accrue for those salary costs. The 2,000,000 options were
granted at the stock price on the day of issuance, and are exercisable for a
period of ten years regardless of whether the grantee continues to be employed
by Atlantic.
(7) REDEEMABLE SERIES B PREFERRED SHARES
As described further in Atlantic's Form 10-KSB for the year ended December
31, 2001, Atlantic entered into a convertible preferred stock and warrants
purchase agreement (the "Purchase Agreement"), with BH Capital Investments, L.P.
and Excalibur Limited Partnership (together, the "Investors"), for the issuance
of Atlantic's Series B convertible preferred stock and warrants.
Pursuant to Atlantic's subsequent renegotiations with the Investors, the
conversion price per share of the Series B preferred stock on any given day was
amended to be the lower of (1) $1.00 or (2) 90% of the average of the two lowest
closing bid prices on the principal market of the common stock out of the
fifteen trading days immediately prior to conversion. The change in conversion
price upon the renegotiations on January 9, 2001 resulted in a difference
between the conversion price of the Series B preferred stock and the market
price of the common stock on the effective date of the renegotiation. This
amount, estimated at $600,000, was recorded as an imputed preferred-stock
dividend within equity and is deducted from net loss to arrive at net loss
applicable to common shares during the nine-month period ended September 30,
2001.
On January 19, 2001, 41,380 shares of Series B preferred stock were
converted by the Investors into 236,422 shares of Atlantic's common stock. On
March 9, 2001, Atlantic and the Investors entered into a second stock repurchase
agreement pursuant to which Atlantic repurchased from the Investors, for an
aggregate purchase price of $617,067, all 165,518 shares of Atlantic's Series B
preferred stock held by the Investors on March 9, 2001. The carrying amount of
the 165,518 shares was equal to $480,000; therefore the amount in excess of the
carrying amount, plus the estimated fair value of the warrants retained by the
Investors, which equals $167,127, was recorded as a dividend upon repurchase of
shares of Series B preferred stock and is deducted from net loss to arrive at
net loss applicable to common shares.
(8) DEVELOPMENT REVENUE
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid Atlantic's subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for developing its Avantix (formerly known as Catarex) technology.
For the nine months ended September 30, 2002, this agreement provided no
development revenue and no related cost-of-development revenue as compared to
$2,461,922 of development revenue (including $1,067,345 in project-completion
bonuses paid out and recognized at the completion of the project in March 2001)
and related cost-of-development revenue of $2,082,568 for the nine months ended
September 30, 2001. The decrease in revenues and related expenses from Bausch &
Lomb over last year was due to the fact that there were no revenues and related
expenses since termination of the agreement in March 2001. With termination of
the above agreement at the conclusion of the sale of substantially all of
Optex's assets (mostly intangible assets with no book value) in March 2001, as
described in note 9 below, Atlantic no longer has the revenues or profits
associated with that agreement.
(9) SALE OF OPTEX ASSETS
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb Incorporated, a Bausch & Lomb affiliate, Atlantic, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its assets
(mostly intangible assets with no book value), including all those related to
the Avantix (formerly known as Catarex) technology. The purchase price was $3
million paid at closing (of which approximately $564,000 has
F-6
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Financial Statements (unaudited)
September 30, 2002
been distributed to Optex's minority shareholders). In addition, Optex is
entitled to receive additional consideration, namely $1 million once Bausch &
Lomb receives regulatory approval to market the Avantix device in Japan,
royalties on net sales on the terms stated in the original development agreement
dated May 14, 1998, between Bausch & Lomb and Optex, as amended, and minimum
royalties of $90,000, $350,000, and $750,000 for the first, second, and third
years, respectively, starting on first commercial use of the Avantix device or
January 1, 2004, whichever is earlier. Optex also has the option to repurchase
the acquired assets from Bausch & Lomb at fair value if it ceases developing the
Avantix technology.
Upon the sale of Optex assets, Bausch & Lomb's development agreement with
Optex was terminated and Optex has no further involvement with Bausch & Lomb. As
a result of this transaction, Atlantic recorded a net gain on the sale of Optex
assets of $2,569,451 for the nine-month period ended September 30, 2001. This
includes a net loss of $240,000 for the quarter ended June 30, 2001, as
described below. The purchase price of $3,000,000 is nonrefundable and upon the
closing of the asset purchase agreement in March 2001, Optex had no further
obligation to Bausch & Lomb or with regard to the assets sold. In the asset
purchase agreement, Optex agreed to forgo future contingent payments provided
for in the earlier development agreement. Optex has recorded a profit
distribution for the nine months ended September 30, 2001 of $837,274,
representing the minority shareholders' percentage of the cumulative profit from
the Bausch & Lomb development and asset purchase agreements up to and including
proceeds from the sale of Optex's assets. (This figure includes the $564,000
referred to above.)
On May 9, 2001, Atlantic's board of directors, after considering all the
relevant facts and circumstances and consulting counsel agreed to authorize an
aggregate payment of $240,000 to three former employees of Optex (who became
employed by Bausch & Lomb). The payments were made on May 11, 2001, and
represented the settlement of claims made by the employees subsequent to the
asset purchase agreement referred to above for severance monies allegedly due
under their employment agreement. Atlantic did not believe these monies were due
pursuant to the terms of the transaction or the respective employment
agreements. The board of directors elected to acquiesce to the demands of the
former employees and resolve the matter in light of the potential future
royalties from Bausch & Lomb and the importance of these individuals to the
ongoing development activities. The payment was recorded as an expense netted
against gain on the sale of Optex assets during the second quarter of 2001.
(10) PRIVATE PLACEMENT OF COMMON SHARES
On November 6, 2001, Atlantic entered into an agreement with Joseph
Stevens & Company, Inc. in which Joseph Stevens agreed to act as placement agent
for a private placement of shares of Atlantic's common stock. In that private
placement, the price of each share of Atlantic's common stock was $0.24 and the
minimum and maximum subscription amounts were $2,000,000 and $3,000,000,
respectively. In addition, each investor received a warrant to purchase one
share of Atlantic's common stock for every share of Atlantic's common stock
purchased by that investor. The warrants have an exercise price of $0.29 and are
exercisable for five years from the closing date. On December 3, 2001, Atlantic
issued to certain investors an aggregate of 8,333,318 shares of common stock for
the minimum subscription of $2,000,000. In connection with the private
placement, Atlantic paid Joseph Stevens a placement fee of $140,000, equal to 7%
of the aggregate subscription amount, a warrant to purchase 833,331 shares of
Atlantic's common stock, which represented 10% of the number of shares issued to
the investors and 833,331 shares of Atlantic common stock. The term of the
warrant is five years and the per share exercise price is $0.29. In conjunction
with this private placement, Atlantic received net proceeds of approximately
$1,848,000 in December 2001.
(11) SERIES A ANTIDILUTION PROVISION
The conversion price and conversion rate of the Series A preferred stock
is subject to adjustment upon the occurrence of certain events, including the
issuance of common stock at a per-share price less than either the conversion
price or the then market price. Recent issuances of stock, options and warrants,
including in connection with Atlantic's private placement in 2001, have
necessitated that Atlantic adjust the conversion rate and conversion price of
the Series A preferred stock. Accordingly, the conversion price of the Series A
preferred stock was decreased from $3.058 to $1.22, and the conversion rate has
been increased from 3.27 to 8.21 to reflect all recent
F-7
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Financial Statements (unaudited)
September 30, 2002
issuances of stock options and warrants through December 31, 2001. In connection
with these changes, Atlantic issued 66,666 make-up shares of common stock to
certain former Series A preferred stock holders which are included in the net
loss per common share calculation for the nine months ended September 30, 2002.
During the nine months ended September 30, 2002, the conversion rate was
increased further to 8.22 as a result of the issuance of 75,000 shares to IRG
and 10,000 shares to Fusion Capital.
(12) LICENSING OF CT-3 TO INDEVUS PHARMACEUTICALS, INC.
On June 28, 2002, Atlantic entered into a license agreement with Indevus
Pharmaceuticals, Inc. in which Atlantic licensed to Indevus the exclusive
worldwide rights to CT-3, its novel anti-inflammatory and analgesic compound
currently in clinical development. Indevus will be responsible for all further
development of CT-3, and Atlantic will have no future involvement with Indevus
or CT-3 other than its rights under the license agreement to royalties and
milestone payments. Under the license agreement, Atlantic received an initial
licensing fee of $500,000. In accordance with SAB No. 101, "Revenue
Recognition," Atlantic recognized $500,000 of licensing revenue during the nine
months ended September 30, 2002, since it has no further obligations under the
license agreement. Atlantic is entitled to additional milestone payments on
occurrence of certain events specified in the license agreement, including
commencement and completion of various clinical trials, the FDA's acceptance for
filing of a New Drug Application, or "NDA," and Indevus securing other
regulatory approvals for CT-3 in the United States and Europe, and Atlantic will
be entitled to royalties once the compound begins to generate revenue.
(13) LICENSING OF ANTIMICROBIAL AGENT ATV-02
Atlantic has licensed from its inventors the worldwide rights to ATV-02, a
potent and broad-spectrum antimicrobial agent for the local treatment of topical
infections. This compound is more commonly known as N-Chlorotaurine, or "NCT."
This compound has completed safety and tolerability studies in a limited number
of subjects and has begun a series of Phase II human clinical studies for the
treatment of several indications, including viral and bacterial conjunctivitis
and acute and chronic sinusitis.
Under the terms of the license agreement, Atlantic has exclusively
licensed the inventors' rights (including the right to sublicense) pertaining to
any novel therapeutic use or formulation of the compound. Atlantic has no
clinical-development obligations under the license agreement, but it plans to
continue developing ATV-02 in Europe in cooperation with the inventors using
their philanthropic funding sources and plans to file an IND in the United
States to develop the compound according to FDA regulations for approval in the
United States. Atlantic was not required to pay a license fee under the license
agreement, but if Atlantic proceeds with clinical development of the compound it
would be required to make payments to the investors upon achieving certain
milestones. Such payments would be payable in cash or company stock, at
Atlantic's discretion. The milestone payments as set forth in the license
agreement include (a) $100,000 upon the first new patent issuance, (b) $250,000
upon successful completion of a Phase III clinical trial, and (c) $1,000,000
upon receiving new drug approval. Atlantic would also be required to pay the
inventors a total royalty of 4% of the net sales of the licensed products sold
by Atlantic and 20% of the royalties which Atlantic receives from sublicensees.
Atlantic is responsible for preparing, filing, prosecuting, and maintaining the
patent applications and patent rights.
F-8
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Technology Ventures, Inc.:
We have audited the consolidated financial statements of Atlantic Technology
Ventures, Inc. and subsidiaries (a development stage company) as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Technology
Ventures, Inc and subsidiaries (a development stage company) as of December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2001, and for the
period from July 13, 1993 (inception) to December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has limited liquid resources that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Short Hills, New Jersey
March 22, 2002
F-9
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
As of December 31,
-----------------------------
Assets 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 1,591,761 2,663,583
Accounts receivable -- 192,997
Prepaid expenses 38,593 22,599
------------ ------------
Total current assets 1,630,354 2,879,179
Property and equipment, net 105,153 227,088
Investment in affiliate -- 67,344
Other assets 22,838 2,901
------------ ------------
Total assets $ 1,758,345 3,176,512
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 508,613 785,838
Deferred revenue -- 1,294,615
------------ ------------
Total current liabilities $ 508,613 2,080,453
Redeemable Series B convertible preferred stock Authorized 1,647,312 shares; 0
and 206,898 shares issued and
outstanding at December 31, 2001 and 2000 respectively -- 600,000
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value
Authorized 1,375,000 shares; 346,357 and 359,711 shares issued and
outstanding at December 31, 2001 and 2000 respectively (liquidation
preference aggregating $4,502,641 and $4,676,243 at December 31, 2001 and
2000 respectively) 346 360
Convertible preferred stock warrants, 112,896
issued and outstanding at December 31, 2001 and 2000 520,263 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 15,965,359 and 6,122,135 shares issued and
outstanding at December 31, 2001 and 2000 respectively 15,965 6,122
Common stock subscribed. 182 shares at December 31, 2001
and 2000 -- --
Additional paid-in capital 27,442,106 24,796,190
Deficit accumulated during development stage (26,728,406) (24,826,334)
------------ ------------
1,250,274 496,601
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------ ------------
Total stockholders' equity 1,249,732 496,059
------------ ------------
Total liabilities and stockholders' equity $ 1,758,345 3,176,512
============ ============
See accompanying notes to consolidated financial statements.
F-10
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
period from
July 13, 1993
Years ended December 31, (inception) to
-------------------------------------------------- December 31,
2001 2000 1999 2001
------------- -------------- ------------- ----------------
Revenues:
Development revenue $ 2,461,922 $ 5,169,288 $ 1,082,510 $ 8,713,720
License revenue -- -- -- 2,500,000
Grant revenue 250,000 189,658 77,069 616,659
------------- -------------- ------------- ----------------
Total revenues 2,711,922 5,358,946 1,159,579 11,830,379
------------- -------------- ------------- ----------------
Costs and expenses:
Cost of development revenue 2,082,568 4,135,430 866,008 7,084,006
Research and development 886,716 1,130,345 1,091,291 10,391,626
Acquired in-process research and
development -- 2,653,382 -- 2,653,382
General and administrative 2,771,407 2,235,535 1,941,425 18,674,633
Compensation expense relating to stock
warrants (general and administrative), net 78,611 1,020,128 -- 1,099,476
License fees -- -- -- 173,500
------------- -------------- ------------- ----------------
Total operating expenses 5,819,302 11,174,820 3,898,724 40,076,623
------------- -------------- ------------- ----------------
Operating loss (3,107,380) (5,815,874) (2,739,145) (28,246,244)
Other (income) expense:
Interest and other income (42,010) (92,670) (292,630) (1,293,146)
Gain on sale of Optex assets (2,569,451) -- -- (2,569,451)
Loss on sale of Gemini assets 334,408 -- -- 334,408
Interest expense -- -- -- 625,575
Equity in loss of affiliate 67,344 79,274 -- 146,618
Distribution to minority shareholders 837,274 -- -- 837,274
------------- -------------- ------------- ----------------
Total other income (1,372,435) (13,396) (292,630) (1,918,722)
------------- -------------- ------------- ----------------
Net loss $ (1,734,945) $ (5,802,478) $ (2,446,515) $ (26,327,522)
Imputed convertible preferred stock
dividend 600,000 -- -- 5,931,555
Dividend paid upon repurchase of Series B 167,127 233,757 -- 400,884
Preferred stock dividend issued in
preferred shares 107,449 811,514 314,366 1,390,512
------------- -------------- ------------- ----------------
Net loss applicable to common shares $ (2,609,521) $ (6,847,749) $ (2,760,881) $ (34,050,473)
============= ============== ============= ================
Net loss per common share:
Basic and diluted $ (0.36) $ (1.21) $ (0.59)
============= ============== =============
Weighted average shares of common
stock outstanding, basic and diluted: 7,209,916 5,656,741 4,692,912
============= ============== =============
See accompanying notes to consolidated financial statements.
F-11
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Series A Series B
convertible convertible
preferred stock preferred stock
------------------------ -----------------------
Shares Amount Shares Amount
--------- ----------- ----------- -----------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 -- -- -- --
Issued and subscribed common stock at $.05
per share, August 1994 -- -- -- --
Payments of common stock subscriptions -- -- -- --
Issuance of warrants, September 1995 -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- -- --
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- -- --
Repurchase of common stock -- -- -- --
Compensation related to grant of stock
options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1995 -- -- -- --
Issuance of warrants, April 1996 -- -- -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1996 -- -- -- --
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) 1,237,200 1,237 -- --
Channel merger -- -- -- --
Conversion of preferred to common stock (22,477) (22) -- --
Issuance of convertible preferred stock
warrants -- -- -- --
Issuance of warrants -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1997 1,214,723 1,215 -- --
Conversion of preferred to common stock (584,265) (585) -- --
Cashless exercise of preferred warrants 2,010 2 -- --
Exercise of options -- -- -- --
Exercise of warrants -- -- -- --
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1998 632,468 632 -- --
Conversion of preferred to common stock (95,599) (95) -- --
Preferred stock dividend 73,219 73 -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1999 610,088 $ 610 -- $ --
Conversion of preferred to common stock (309,959) (310) -- --
Preferred stock dividend 59,582 60 -- --
Cashless exercise of preferred warrants
Exercise of options -- -- -- --
Issuance of common stock to TeraComm shareholders -- -- -- --
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- 344,828 345
Costs related to issuance of Series B preferred stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- (137,931) (138)
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- (206,897) (207)
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 2000 359,711 $ 360 -- $ --
Conversion of preferred to common stock (57,132) (58) -- --
Preferred stock dividend 43,778 44 -- --
Issuance of common stock as commitment shares -- -- -- --
Issuance of common stock for services -- -- -- --
Issuance of common stock pursuant to Fusion agreement -- -- -- --
Issuance of common stock in private placement -- -- -- --
Conversion of Series B convertible preferred stock
to common stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- -- --
Compensation expense relating to stock warrants -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 2001 346,357 $ 346 -- $ --
========= =========== =========== ===========
F-12
Convertible
preferred
stock warrants Common stock
------------------------ ------------------------
Number Amount Shares Amount
---------- ------------ ------------ -----------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 -- -- 84 --
Issued and subscribed common stock at $.05
per share, August 1994 -- -- 860 1
Payments of common stock subscriptions -- -- 5,061 5
Issuance of warrants, September 1995 -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 1,872,750 1,873
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 785,234 785
Repurchase of common stock -- -- (269) --
Compensation related to grant of stock
options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1995 -- -- 2,663,720 2,664
Issuance of warrants, April 1996 -- -- -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 250,000 250
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1996 -- -- 2,913,720 2,914
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- --
Channel merger -- -- 103,200 103
Conversion of preferred to common stock -- -- 47,651 48
Issuance of convertible preferred stock
warrants 123,720 570,143 -- --
Issuance of warrants -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1997 123,720 570,143 3,064,571 3,065
Conversion of preferred to common stock -- -- 1,367,817 1,367
Cashless exercise of preferred warrants (6,525) (30,069) -- --
Exercise of options -- -- 70,000 70
Exercise of warrants -- -- 1,000 1
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1998 117,195 540,074 4,503,388 4,503
Conversion of preferred to common stock -- -- 312,602 313
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1999 117,195 $ 540,074 4,815,990 $ 4,816
Conversion of preferred to common stock -- -- 1,011,038 1,011
Preferred stock dividend -- -- -- --
Cashless exercise of preferred warrants (4,299) (19,811) 9,453 9
Exercise of options -- -- 85,654 86
Issuance of common stock to TeraComm shareholders -- -- 200,000 200
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- -- --
Costs related to issuance of Series B preferred stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- -- --
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 2000 112,896 $ 520,263 6,122,135 $ 6,122
Conversion of preferred to common stock -- -- 186,817 187
Preferred stock dividend -- -- -- --
Issuance of common stock as commitment shares -- -- 600,000 600
Issuance of common stock for services -- -- 70,000 70
Issuance of common stock pursuant to Fusion agreement -- -- 416,667 417
Issuance of common stock in private placement -- -- 8,333,318 8,333
Conversion of Series B convertible preferred stock
to common stock -- -- 236,422 236
Repurchase of Series B convertible preferred stock -- -- -- --
Compensation expense relating to stock warrants -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 2001 112,896 $ 520,263 15,965,359 $ 15,965
========== ============ ============ ===========
F-13
Deficit
Common stock accumulated
subscribed Additional during
------------------- paid-in development
Number Amount capital stage
------- ---------- ----------- -------------
Common stock subscribed at $.001 per share
July-November 1993 5,231 $ 5 6,272 --
Issued common stock at $.001 per share,
June 1994 -- -- 101 --
Issued and subscribed common stock at $.05
per share, August 1994 12 -- 52,374 --
Payments of common stock subscriptions (5,061) (5) -- --
Issuance of warrants, September 1995 -- -- 300,000 --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 6,034,827 --
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 2,441,519 --
Repurchase of common stock -- -- -- --
Compensation related to grant of stock
options -- -- 208,782 --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- (4,880,968)
------- ---------- ----------- -------------
Balance at December 31, 1995 182 -- 9,043,875 (4,880,968)
Issuance of warrants, April 1996 -- -- 139,000 --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 1,452,063 --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- (3,557,692)
------- ---------- ----------- -------------
Balance at December 31, 1996 182 -- 10,634,938 (8,438,660)
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- 10,611,947 --
Channel merger -- -- 657,797 --
Conversion of preferred to common stock -- -- (26) --
Issuance of convertible preferred stock
warrants -- -- (570,143) --
Issuance of warrants -- -- 159,202 --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- (3,703,304) --
Imputed convertible preferred stock dividend -- -- 3,703,304 --
Net loss -- -- -- (5,151,396)
------- ---------- ----------- -------------
Balance at December 31, 1997 182 -- 21,493,715 (13,590,056)
Conversion of preferred to common stock -- -- (782) --
Cashless exercise of preferred warrants -- -- 30,067 --
Exercise of options -- -- 52,430 --
Exercise of warrants -- -- 5,499 --
Expense related to grant of stock options -- -- 81,952 --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- (1,628,251) --
Imputed convertible preferred stock dividend -- -- 1,628,251 --
Net loss -- -- -- (2,753,528)
------- ---------- ----------- -------------
Balance at December 31, 1998 182 -- 21,662,881 (16,343,584)
Conversion of preferred to common stock -- -- (218) --
Preferred stock dividend -- -- (391) --
Net loss -- -- -- (2,446,515)
------- ---------- ----------- -------------
Balance at December 31, 1999 182 $ -- 21,662,272 (18,790,099)
Conversion of preferred to common stock -- -- (701) --
Preferred stock dividend -- -- (60) --
Cashless exercise of preferred warrants -- -- 19,802 --
Exercise of options -- -- 344,512 --
Issuance of common stock to TeraComm shareholders -- -- 1,799,800 --
Expense related to grant of stock warrants -- -- 1,020,128 --
Issuance of Series B convertible preferred stock -- -- 975,943 --
Costs related to issuance of Series B preferred stock -- -- (147,800) --
Repurchase of Series B convertible preferred stock -- -- (399,862) --
Dividend upon repurchase of Series B convertible
preferred stock -- -- 121,949 (233,757)
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- (599,793) --
Net loss -- -- -- (5,802,478)
------- ---------- ----------- -------------
Balance at December 31, 2000 182 $ -- 24,796,190 (24,826,334)
Conversion of preferred to common stock -- -- (129) --
Preferred stock dividend -- -- (1,031) --
Issuance of common stock as commitment shares -- -- 443,400 --
Issuance of common stock for services -- -- 44,030 --
Issuance of common stock pursuant to Fusion agreement -- -- 99,583 --
Issuance of common stock in private placement -- -- 1,831,628 --
Conversion of Series B convertible preferred stock
to common stock -- -- 119,764 --
Repurchase of Series B convertible preferred stock -- -- 30,060 (167,127)
Compensaton expense relating to stock warrants -- -- 78,611 --
Net loss -- -- -- (1,734,945)
------- ---------- ----------- -------------
Balance at December 31, 2001 182 $ -- 27,442,106 (26,728,406)
======= ========== =========== =============
F-14
Common Total
stock stock-
Deferred subscrip- holders'
compen- tions Treasury equity
sation receivable stock (deficit)
-------- -------- -------- ------------
Common stock subscribed at $.001 per share
July-November 1993 -- (6,277) -- --
Issued common stock at $.001 per share,
June 1994 -- -- -- 101
Issued and subscribed common stock at $.05
per share, August 1994 -- (750) -- 51,625
Payments of common stock subscriptions -- 6,809 -- 6,809
Issuance of warrants, September 1995 -- -- -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- -- 6,036,700
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- -- 2,442,304
Repurchase of common stock -- -- (324) (324)
Compensation related to grant of stock
options (144,000) -- -- 64,782
Amortization of deferred compensation 12,000 -- -- 12,000
Net loss -- -- -- (4,880,968)
-------- -------- -------- ------------
Balance at December 31, 1995 (132,000) (218) (324) 4,033,029
Issuance of warrants, April 1996 -- -- -- 139,000
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- -- 1,452,313
Amortization of deferred compensation 28,800 -- -- 28,800
Net loss -- -- -- (3,557,692)
-------- -------- -------- ------------
Balance at December 31, 1996 (103,200) (218) (324) 2,095,450
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- 10,613,184
Channel merger -- -- -- 657,900
Conversion of preferred to common stock -- -- -- --
Issuance of convertible preferred stock
warrants -- -- -- --
Issuance of warrants -- -- -- 159,202
Amortization of deferred compensation 28,800 -- -- 28,800
Imputed convertible preferred stock dividend -- -- -- (3,703,304)
Imputed convertible preferred stock dividend -- -- -- 3,703,304
Net loss -- -- -- (5,151,396)
-------- -------- -------- ------------
Balance at December 31, 1997 (74,400) (218) (324) 8,403,140
Conversion of preferred to common stock -- -- -- --
Cashless exercise of preferred warrants -- -- -- --
Exercise of options -- -- -- 52,500
Exercise of warrants -- -- -- 5,500
Expense related to grant of stock options -- -- -- 81,952
Amortization of deferred compensation 74,400 -- -- 74,400
Imputed convertible preferred stock dividend -- -- -- (1,628,251)
Imputed convertible preferred stock dividend -- -- -- 1,628,251
Net loss -- -- -- (2,753,528)
-------- -------- -------- ------------
Balance at December 31, 1998 -- (218) (324) 5,863,964
Conversion of preferred to common stock -- -- -- --
Preferred stock dividend -- -- -- (318)
Net loss -- -- -- (2,446,515)
-------- -------- -------- ------------
Balance at December 31, 1999 -- (218) (324) 3,417,131
Conversion of preferred to common stock -- -- -- --
Preferred stock dividend -- -- -- --
Cashless exercise of preferred warrants -- -- -- --
Exercise of options -- -- -- 344,598
Issuance of common stock to TeraComm shareholders -- -- -- 1,800,000
Expense related to grant of stock warrants -- -- -- 1,020,128
Issuance of Series B convertible preferred stock -- -- -- 976,288
Costs related to issuance of Series B preferred stock -- -- -- (147,800)
Repurchase of Series B convertible preferred stock -- -- -- (400,000)
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- (111,808)
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- -- (600,000)
Net loss -- -- -- (5,802,478)
-------- -------- -------- ------------
Balance at December 31, 2000 -- (218) (324) 496,059
Conversion of preferred to common stock -- -- -- --
Preferred stock dividend -- -- -- (987)
Issuance of common stock as commitment shares -- -- -- 444,000
Issuance of common stock for services -- -- -- 44,100
Issuance of common stock pursuant to Fusion agreement -- -- -- 100,000
Issuance of common stock in private placement -- -- -- 1,839,961
Conversion of Series B convertible preferred stock
to common stock -- -- -- 120,000
Repurchase of Series B convertible preferred stock -- -- -- (137,067)
Compensation expense relating to stock warrants -- -- -- 78,611
Net loss -- -- -- (1,734,945)
-------- -------- -------- ------------
Balance at December 31, 2001 -- (218) (324) 1,249,732
======== ======== ======== ============
See accompanying notes to consolidated financial statements.
F-15
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
period from
July 13, 1993
Years ended December 31, (inception) to
----------------------------------------- December 31,
2001 2000 1999 2001
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (1,734,945) (5,802,478) (2,446,515) (26,327,522)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and development -- 1,800,000 -- 1,800,000
Expense relating to issuance of common stock and warrants 488,100 -- -- 786,302
Expense relating to the issuance of options -- -- -- 81,952
Expense related to Channel merger -- -- -- 657,900
Change in equity of affiliate 67,344 79,274 -- 146,618
Compensation expense relating to
stock options and warrants 78,611 1,020,128 -- 1,307,521
Discount on notes payable - bridge financing -- -- -- 300,000
Depreciation 66,226 76,095 113,771 572,731
Gain on sale of Optex assets (2,569,451) -- -- (2,569,451)
Distribution to Optex minority shareholders 837,274 -- -- 837,274
Loss on sale of Gemini assets 334,408 -- -- 334,408
Loss on disposal of furniture and equipment -- -- 73,387 73,387
Changes in assets and liabilities:
Decrease in accounts receivable 192,997 144,326 43,692 --
(Increase) decrease in prepaid expenses (15,994) (5,185) 24,694 (38,593)
Increase (decrease) in deferred revenue (1,294,615) 1,294,615 -- --
Increase (decrease) in accrued expenses (904,383) 243,079 (114,242) (118,545)
Increase (decrease) in accrued interest -- -- -- 172,305
Increase in other assets (19,937) (2,901) -- (22,838)
------------ ------------ ------------ ------------
Net cash used in operating activities (4,474,365) (1,153,047) (2,305,213) (22,006,551)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (108,250) (171,351) (62,917) (921,331)
Investment in affiliate -- (146,618) -- (146,618)
Proceeds from sale of Optex assets 3,000,000 -- -- 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100 6,100
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 2,891,750 (317,969) (56,817) 1,938,151
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- -- 5,500
Proceeds from exercise of stock options -- 344,598 -- 397,098
Proceeds from issuance of demand notes payable -- -- -- 2,395,000
Repayment of demand notes payable -- -- -- (125,000)
Proceeds from the issuance of notes payable - bridge financing -- -- -- 1,200,000
Proceeds from issuance of warrants -- -- -- 300,000
Repayment of notes payable - bridge financing -- -- -- (1,500,000)
Repurchase of common stock -- -- -- (324)
Preferred stock dividend paid (987) -- (318) (1,305)
Net proceeds from the issuance of common stock 1,939,961 -- -- 9,487,509
Proceeds from issuance of convertible preferred stock -- 828,488 -- 11,441,672
Repurchase of convertible preferred stock (617,067) (511,808) -- (1,128,875)
Distribution to Optex minority shareholders (811,114) -- -- (811,114)
------------ ------------ ------------ ------------
Net cash provided (used in) by financing activities 510,793 661,278 (318) 21,660,161
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents (1,071,822) (809,738) (2,362,348) 1,591,761
Cash and cash equivalents at beginning of period 2,663,583 3,473,321 5,835,669 --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,591,761 2,663,583 3,473,321 1,591,761
============ ============ ============ ============
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- -- 2,442,304
Cashless exercise of preferred warrants -- 19,811 -- 49,880
Conversion of preferred to common stock 423 1,011 313 2,849
Preferred stock dividend issued in shares 107,449 811,514 314,366 1,233,329
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-16
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Organization, Liquidity and Basis of Presentation
Organization
Atlantic Technology Ventures, Inc. (the Company) was incorporated on May
18, 1993, began operations on July 13, 1993, and is the majority owner of
two subsidiaries--Gemini Technologies, Inc. (Gemini), and Optex
Ophthalmologics, Inc. (Optex) and one wholly-owned subsidiary--Channel
Therapeutics, Inc. (Channel) (collectively, the Operating Companies).
Gemini (an 84.7%-owned subsidiary) was incorporated on May 18, 1993, to
exploit a new proprietary technology which combines 2'-5' oligoadenylate
(2-5A) with standard antisense compounds to alter the production of
disease-causing proteins. Pursuant to an asset purchase agreement dated
April 23, 2001, between Atlantic, Gemini Technologies, Inc., the
Cleveland Clinic Foundation, or "CCF," and CCF's affiliate IFN, Inc., on
May 4, 2001, Gemini sold to IFN substantially all its assets (mostly
intangible assets with no book value), including all those related to the
2-5A antisense enhancing technology for future contingent royalty
payments and withdrawal of arbitration.
Optex (an 81.2%-owned subsidiary) was incorporated on October 19, 1993,
to develop its principal product, a novel cataract-removal device. On
March 2, 2001, the Company concluded the sale of substantially all of
Optex's assets to Bausch & Lomb, Inc. (see note 13).
Channel was incorporated on May 18, 1993, to develop pharmaceutical
products in the fields of cardiovascular disease, pain and inflammatory
disorders. Prior to 1997, Channel was an 88%-owned subsidiary. The
Company purchased the remaining 12% of Channel in 1997 for $657,900
through the issuance of common stock (see note 8). Channel ceased
operations during 1999. The Company also holds a 14.4% ownership in a
fiber optic switching company, TeraComm Research, Inc. (see note 5).
The Company and each of its operating companies are in the development
stage, devoting substantially all efforts to obtaining financing and
performing research and development activities.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Liquidity
The Company has reported net losses of $1,734,945, $5,802,478, and
$2,446,515 for the years ended December 31, 2001, 2000 and 1999,
respectively. The loss from date of inception, July 13, 1993, to December
31, 2001 amounts to $26,327,522. Also, the Company has $1,591,761 in cash
and cash equivalents as of December 31, 2001 which is primarily a result
of a private placement of its common stock in December 2001 and currently
has no revenue generating activities. The Company anticipates that its
current resources (including the $2 million proceeds of the first closing
of the Company's recent private placement in December 2001) will be
sufficient to finance for the next several months its currently
anticipated needs for operating and capital expenditures. The Company
plans to achieve this by continuing to reduce expenses, including by
means of voluntary salary reductions and postponement of certain
development expenses. As a result of these changes the Company expects
that its average monthly cash outlay will be approximately $129,000. The
Company does not currently have any committed sources of financing, and
due to the trading price of its common stock it is not currently able to
access funding under its agreement with Fusion Capital. These factors
raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the
amounts or classification of liabilities which might result from the
outcome of this uncertainty.
F-17
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and
debt financing, collaborative agreements, strategic alliances and its
ability to realize the full potential of its technology in development.
During December 2001, the Company received net proceeds of approximately
$1,848,000 from the private placement of various individual investors and
$100,000 from Fusion Capital. Additional funds are currently not
available on acceptable terms and may not become available, and there can
be no assurance that any additional funding that the Company does obtain
will be sufficient to meet the Company's needs in the short and long
term. To date, a significant portion of the Company's financing has been
through private placements of common stock and warrants, the issuance of
common stock for stock options and warrants exercised and debt financing.
Until the Company's operations generate significant revenues, the Company
will continue to fund operations from cash on hand and through the
sources of capital previously described.
The Company's common stock was delisted from the Nasdaq SmallCap Market
effective at the close of business August 23, 2001 for failing to meet
the minimum bid price requirements set forth in the NASD Marketplace
Rules. As of August 23, 2001, the Company's common stock trades on the
Over-The-Counter Bulletin Board under the symbol "ATLC.OB". Delisting of
the Company's common stock from Nasdaq could have a material adverse
effect on its ability to raise additional capital, its stockholders'
liquidity and the price of its common stock.
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS)
No. 7, "Accounting and Reporting by Development Stage Enterprises," which
requires development stage enterprises to employ the same accounting
principles as operating companies.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Property and
Equipment
Property and equipment are recorded at cost. Depreciation is calculated
principally using straight-line methods over their useful lives,
generally five years, except for leasehold improvements which are
depreciated over the lesser of five years or the term of the lease.
Research and Development
All research and development costs are expensed as incurred and include
costs of consultants who conduct research and development on behalf of
the Company and the Operating Companies. Costs related to the acquisition
of technology rights and patents for which development work is still in
process, are expensed as incurred and considered a component of research
and development costs.
Revenue Recognition
Revenue under research contracts is recorded as earned under the
contracts as services are provided. In accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," revenues from the achievement of research and development
milestones, which represent the achievement of
F-18
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
a significant step in the research and development process, will be
recognized when and if the milestones are achieved. Continuation of
certain contracts and grants are dependent upon the Company achieving
specific contractual milestones; however, none of the payments received
to date are refundable regardless of the outcome of the project. Grant
revenue is recognized in accordance with the terms of the grant and as
services are performed, and generally equals the related research and
development expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities, and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income," the
Company applies the rules for the reporting and display of comprehensive
income and its components. The net loss is equal to the comprehensive
loss for all periods presented.
Computation of Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common
shares outstanding for the period. Diluted net loss per common share is
the same as basic net loss per common share, as common equivalent shares
from stock options, stock warrants, stock subscriptions, and convertible
preferred stock would have an antidilutive effect because the Company
incurred a net loss during each period presented. The amount of common
stock equivalents excluded from the calculation were 12,973,106,
3,277,625 and 6,600,165 in 2001, 2000 and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25," issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has
F-19
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements
of SFAS No. 123.
Options or stock awards issued to non-employees and consultants are
recorded at their fair value as determined in accordance with SFAS No.
123 and EITF No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" and recognized as expense over the related
vesting period.
Financial Instruments and Derivatives
At December 31, 2001 and 2000, the fair values of cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and
accrued expenses, and deferred revenue approximate carrying values due to
the short-term nature of these instruments.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging
Activities--an amendment of SFAS No. 133" and SFAS No. 133, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." SFAS
No. 138 amends the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and certain hedging activities. SFAS No.
133 requires a company to recognize all derivative instruments as assets
and liabilities in its balance sheet and measure them at fair value. The
adoption of these statements had no impact on the Company's consolidated
financial position, results of operations or cash flows, as the Company
is currently not party to any derivative instruments. Any future
transactions involving derivative instruments will be accounted for based
on SFAS No. 133 and 138.
(3) Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141 "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations be accounted for under a single
method--the purchase method. SFAS No. 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment.
The amortization of goodwill ceases upon adoption of the Statement, which
for calendar year-end companies, will be January 1, 2002. SFAS No. 142
has no financial impact on the Company since the Company does not have
any goodwill or intangible assets which resulted from any previous
business combinations.
(4) Property and Equipment
Property and equipment consists of the following at December 31,:
2001 2000
-------------- --------------
Furniture and equipment $ 125,366 440,493
Leasehold improvements 28,635 83,861
-------------- --------------
154,001 524,354
Less accumulated depreciation (48,848) (297,266)
-------------- --------------
Net property and equipment $ 105,153 227,088
============== ==============
F-20
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(5) Investment in Affiliate
On May 12, 2000, the Company acquired shares of preferred stock
representing a 35% ownership interest in TeraComm Research, Inc.
(TeraComm), a privately-held company that is developing next-generation
high-speed fiberoptic communications technologies. The purchase price for
this ownership interest was $5,000,000 in cash, 200,000 shares of the
Company's common stock, and a warrant to purchase a further 200,000
shares of the Company's common stock. The warrants have a term of 3 years
and are exercisable at $8.975 per share of common stock, but only if the
market price of the Company's common stock is $30 or more. Of the
$5,000,000 cash portion of the purchase price, the Company paid
$1,000,000 in 2000. The Company was accounting for its investment in
TeraComm in accordance with the equity method of accounting for
investments since the Company has the ability to exert significant
influence over TeraComm, primarily through its representation on
TeraComm's board of directors.
On July 18, 2000, the Company and TeraComm amended the purchase
agreement. In the amendment, the parties agreed that the $4,000,000
balance of the $5,000,000 cash component of the purchase price would not
be due until TeraComm achieved a specified milestone. Within ten days
after TeraComm achieved that milestone or December 30, 2000, whichever
occurred earlier, the Company was required to pay TeraComm $1,000,000 and
thereafter make to TeraComm three payments of $1,000,000 at the
three-month intervals. If the Company failed to make any of these
payments, TeraComm's only recourse would be reducing proportionately the
Company's ownership interest. When the Company failed to make the first
$1,000,000 payment by midnight at the end of December 30, 2000, the
Company was deemed to have surrendered to TeraComm a proportion of the
Company's TeraComm shares equal to the proportion of the dollar value of
the purchase price for the Company's TeraComm shares ($6,795,000) that
was represented by the unpaid $4,000,000 of the cash portion of the
purchase price. This had the effect of reducing to 14.4% the Company's
ownership interest in TeraComm. The Company is accounting for its
investment in TeraComm in accordance with the equity method of accounting
for investments. However, the Company continues to hold a seat on
TeraComm's board of directors, and continues to have the ability to exert
significant influence through its involvement with TeraComm management.
Upon acquiring an interest in TeraComm, the Company allocated a portion
of the purchase price based on the fair value of the identifiable
tangible assets acquired and liabilities assumed. At the time of
acquisition, such assets and liabilities were minimal. TeraComm had no
other intangible assets beyond the technology then under development -- a
high-speed fiber-optic switch. This technology at the date of
acquisition, was not commercially viable, did not then have any
identifiable revenue stream and did not have any alternate future use.
This high-speed fiber-optic switch is TeraComm's only subscribable
technology. TeraComm is a very early-stage development company with no
identifiable revenue sources, therefore the excess of the purchase price
over the sum of the amounts assigned to identifiable assets acquired less
liabilities assumed is not considered to represent "goodwill". The
Company's acquisition of the interest in TeraComm was based solely on the
value of the future commercialized products and therefore the excess of
the purchase price as described above was attributed to the research and
development activities of TeraComm.
As such, of the $1,000,000 cash and common stock and common stock
warrants valued at $1,800,000 currently invested in TeraComm, the Company
has expensed approximately $2,650,000 as acquired in-process research and
development, as TeraComm's product development activity is in the very
early stages. The Company's share of TeraComm's net equity at December
31, 2000 was $67,344. During 2001, the entire value of the investment was
written down to zero due to TeraComm's additional losses. The Company is
under no obligation to provide further funding to TeraComm.
At December 31, 2001, all 200,000 of the warrants described above are
outstanding.
F-21
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(6) Demand Notes Payable to Related Parties
Demand notes payable at December 31, 1994 consisted of advances from one
of the founders of the Company, who served as a director and was, at that
time, the controlling shareholder of the Company (Controlling
Shareholder), totaling $485,000, advances from a partnership including
certain family members of the Controlling Shareholder (the Partnership)
totaling $400,000, and advances under a line of credit agreement with the
Controlling Shareholder totaling $500,000. All unpaid principal and
accrued interest through June 30, 1995, including a note payable of
$1,010,000 issued in 1995, was converted into 785,234 shares of common
stock of the Company upon the consummation of the initial public offering
(IPO).
Demand notes payable at December 31, 1995 totaling $125,000 consisted of
a loan provided to the Company by the Partnership in July 1995. This loan
had an interest rate of 10% annually. Terms of the loan required the
Company to repay the principal amount of such loan, together with the
interest accrued thereon, with a portion of the proceeds received by the
Company in the IPO. This loan and the related accrued interest was fully
repaid in January 1996.
(7) Notes Payable - Bridge Financing
On September 12, 1995, the Company closed the sale of thirty units with
each unit consisting of an unsecured 10% promissory note of the Company
in the principal amount of $50,000 and 50,000 warrants, each exercisable
to purchase one share of common stock of the Company at an initial
exercise price of $1.50 per share. The total proceeds received of
$1,500,000 were allocated to the notes payable and warrants based on the
estimated fair value as determined by the Board of Directors of the
Company of $1,200,000 and $300,000, respectively. The warrants were
reflected as additional paid-in capital.
Proceeds from the IPO were used to pay these notes payable, with $75,000
remaining unpaid at December 31, 1995. This remaining obligation was paid
in January 1996.
(8) Stockholders' Equity
Common Stock
In 1993, the Company received common stock subscriptions for 5,231 shares
of common stock from various individuals, including the Controlling
Shareholder and the Partnership, in exchange for common stock
subscriptions receivable of $6,277. In December 1994, the Company issued
2,606 shares of common stock upon receipt of payment of $3,127
representing a portion of these common stock subscriptions receivable.
In June 1994, the Company received common stock subscriptions for 84
shares of common stock from various individuals including directors and
employees. Payment of the related common stock subscriptions receivable
in the amount of $101 was received in December 1994 which resulted in the
issuance of 84 shares of common stock.
In August 1994, the Company received common stock subscriptions for 872
shares of common stock from certain investors. Payment of the related
common stock subscriptions receivable in the amount of $33,000 and
$18,625 was received in August 1994 and December 1994, respectively,
which resulted in the issuance of 860 shares of common stock.
In March 1995, June 1995, and August 1995, the Company repurchased 62,
20, and 187 shares of common stock, respectively, for an aggregate total
of $324.
F-22
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
In March 1995, May 1995, and June 1995, the Company issued 2,170, 125,
and 160 shares of common stock, respectively, upon receipt of payment of
$3,682 representing subscriptions receivable.
In December 1995, the Company issued 1,872,750 shares of common stock
through a public offering, resulting in net proceeds, after deducting
applicable expenses, of $6,036,700. Concurrent with this offering,
785,234 shares of common stock were issued upon the conversion of certain
demand notes payable and accrued interest totaling $2,442,304 (see note
6).
In August 1996, the Company sold in a private placement 250,000 shares of
common stock to certain investors resulting in net proceeds of
$1,452,313. In connection with this private placement, the Company paid
Paramount Capital, Inc. (Paramount) a finders fee of $76,438 and issued
an employee of Paramount a warrant to purchase 12,500 shares of the
Company's common stock at $6.73 per share, which expires August 16, 2001.
Paramount is owned by the Controlling Shareholder.
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Channel, and New Channel, Inc., a Delaware corporation, dated
February 20, 1997, all of the stockholders of Channel (except for the
Company) agreed to receive an aggregate of 103,200 shares of common stock
of the Company in exchange for their shares of common stock, par values
$0.001 per share, of Channel. On February 20, 1997, Channel became a
wholly-owned subsidiary of the Company. Subsequent to this transaction,
Channel issued a dividend to the Company consisting of all of Channel's
rights to the CT-3 technology, which is in the field of pain and
inflammation. On May 16, 1997, the Company issued 103,200 shares of
common stock of the Company to stockholders of Channel. In connection
with the issuance of these shares, the Company recognized an expense in
the amount of $657,900. This expense was recorded as research and
development expense in the consolidated statement of operations for the
year ended December 31, 1997.
In May 2000, the Company issued 200,000 shares of common stock to
shareholders of TeraComm (see note 5).
On May 7, 2001, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion
Capital agreed to purchase up to $6.0 million of the Company's common
stock over a 30-month period, subject to a 6-month extension or earlier
termination at the Company's discretion. This agreement replaced an
earlier common stock purchase agreement between the Company and Fusion
Capital dated March 16, 2001. Fusion's obligation to purchase shares of
the Company's common stock is subject to certain conditions, including
the effectiveness of a registration statement covering the shares to be
purchased. That registration statement was declared effective
on July 6, 2001. The selling price of the shares will be equal to the
lesser of (1) $20.00 or (2) a price based upon the future market price of
the common stock, without any fixed discount to the market price. A
material contingency that may affect the Company's operating plans and
ability to raise funds under this agreement is the Company's stock price.
Currently, the Company's stock price is below the floor price of $0.68
specified in the Fusion Capital agreement and as a result the Company is
currently unable to draw funds pursuant to the Fusion Capital agreement.
As the Fusion Capital agreement is currently structured, the Company
cannot guarantee that it will be able to draw any funds. The Company paid
a $120,000 finder's fee relating to this transaction to Gardner
Resources, Ltd. and issued to Fusion Capital Fund II, LLC 600,000 common
shares as a commitment fee. Those shares had an estimated fair value of
$444,000 which was recorded as a general and administrative expense as
there is no assurance that Fusion will ever provide financing to the
Company. The Company has amended its agreement with Fusion Capital to
allow Atlantic to draw funds pursuant to the agreement regardless of its
listing status on the Nasdaq SmallCap Market, but the $0.68 floor price
remains in place. On November 30, 2001, Fusion Capital waived the $0.68
floor price specified in the purchase agreement and purchased from the
Company under the agreement 416,667 shares of the Company's common stock
at a price of $0.24, representing an aggregate purchase price of
$100,000. Fusion Capital's waiver applied only to the November 30, 2001
purchase, so the $0.68 floor price remains an obstacle to the
F-23
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Company's obtaining additional financing from Fusion Capital unless the
Company's stock price increases or Fusion Capital elects in the future to
again waive the floor price.
On August 1, 2001, the Company agreed to issue 35,000 shares of its
common stock to each of BH Capital Investments, L.P. and Excalibur
Limited Partnership in return for their commitment to provide the Company
with $3.5 million of financing in connection with an asset purchase for
which the Company had submitted a bid. The Company subsequently issued
those shares, but the Company did not ultimately purchase those assets.
Those shares had an estimated fair value of $44,100, which is included as
a general and administrative expense for the year ended December 31,
2001.
On November 6, 2001, the Company entered into an agreement with Joseph
Stevens & Company, Inc. in which Joseph Stevens agreed to act as
placement agent for a private placement of shares of the Company's common
stock. In that private placement, the price of each share of the
Company's common stock was $0.24 and the minimum and maximum subscription
amounts were $2,000,000 and $3,000,000, respectively. In addition, each
investor received a warrant to purchase one share of the Company's common
stock for every share of the Company's common stock purchased by that
investor. The warrants have an exercise price of $0.29 and are
exercisable for five years from the closing date. On December 3, 2001,
the Company issued to certain investors an aggregate of 8,333,318 shares
of common stock for the minimum subscription of $2,000,000. In connection
with the private placement, the Company paid Joseph Stevens a placement
fee of $140,000 equal to 7% of the aggregate subscription amount plus a
warrant to purchase 833,331 shares of the Company's common stock, which
represented 10% of the number of shares issued to the investors. The term
of this warrant is five years and the per share exercise price is $0.29.
In conjunction with this private placement, the Company received net
proceeds of approximately $1,848,000 in December 2001.
Convertible Preferred Stock
Series A Preferred Stock
------------------------
In May and August, 1997, the Company sold in a private placement
1,237,200 shares of Series A convertible preferred stock to certain
investors resulting in net proceeds of $10,613,184.
Prior to August 7, 1998 (the Reset Date), each share of Series A
preferred stock was convertible into 2.12 shares of common stock
initially at a conversion price of $4.72 per share of common stock.
Pursuant to the Certificate of Designations for the Series A preferred
stock, the conversion price was adjusted on the Reset Date such that now
each share is convertible into 3.27 shares of common stock at a
conversion price of $3.06. This conversion price is subject to adjustment
upon the occurrence of certain events, including the issuance of common
stock at a per share price less than the conversion price, or the
occurrence of a merger, reorganization, consolidation, reclassification,
stock dividend or stock split which will result in an increase or
decrease in the number of common stock shares outstanding. The Company is
in the process of determining changes to the conversion rate of the
Series A preferred stock required by recent issuances of stock and
warrants, including in connection with the Company's recent private
placement. Certain of these changes will be retroactive and therefore the
Company expects that it will be issuing approximately 1,262 make-up
shares of common stock to certain former Series A preferred stock holders
as of December 31, 2001.
Holders of Series A preferred stock will be entitled to receive
dividends, as, when, and if declared by the Board of Directors.
Commencing on the Reset Date, the holders of the Series A preferred stock
are entitled to payment-in-kind dividends, payable semi-annually in
arrears, on their respective shares of Series A preferred stock at the
annual rate of 0.13 shares of Series A preferred stock for each
outstanding share of Series A preferred stock. The Company did not make
the February 7, 1999 dividend payment. On August 9, 1999, the Company
issued a payment-in-kind dividend of 0.13325 of a share of Series A
preferred stock for each share of Series A preferred stock held as of the
record date of August 2, 1999, amounting to an
F-24
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
aggregate of 73,219 shares. This dividend included the dividend payment
of 0.065 of a share of Series A preferred stock for each share of Series
A preferred stock held which had not been made on February 7, 1999, and
the portion of the dividend payment due August 9, 1999, was increased
from 0.065 of a share to 0.06825 of a share to reflect non-payment of the
February 7, 1999 dividend. In February and August 2001 and 2000, the
Company issued the respective payment-in-kind dividends based on the
holders as of the record date. The estimated fair value of these
dividends in the aggregate of $107,449, $811,514 and $314,366 were
included in the Company's calculation of net loss per common share for
2001, 2000 and 1999.
The holders of shares of Series A preferred stock have the right at all
meetings of stockholders of the Company to that number of votes equal to
the number of shares of common stock issuable upon conversion of the
Series A preferred stock at the record or vote date for determination of
the stockholders entitled to vote on such matters.
In connection with the issuance of the Series A preferred stock, the
Company recognized $1,628,251 and $3,703,304 in 1998 and 1997,
respectively, as an imputed preferred stock dividend in the calculation
of net loss per common share to record the difference between the
conversion price of the preferred stock and the market price of the
common stock on the effective date of the private placement.
Upon liquidation, the holders of shares of Series A preferred stock then
outstanding will first be entitled to receive, pro rata, and in
preference to the holders of common stock, Series B preferred stock and
any capital stock of the Company, an amount per share equal to $13.00
plus any accrued but unpaid dividends, if any.
The Certificate of Designations of Series A preferred stock provides that
the Company may not issue securities that have superior rights to Series
A preferred stock without the consent of the holders of Series A
preferred stock. Accordingly, so long as these convertible securities
remain unexercised and shares of Series A preferred stock remain
uncovered, the terms under which the Company could obtain additional
funding, if at all, may be adversely affected.
Redeemable Series B Preferred Stock
-----------------------------------
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement") the Company issued
to BH Capital Investments, L.P. and Excalibur Limited Partnership
(together, the "Investors") for a purchase price of $2,000,000, 689,656
shares of the Company's Series B convertible preferred stock and warrants
to purchase 134,000 shares of the Company's common stock. Half of the
shares of the Series B preferred stock (344,828 shares) and warrants to
purchase half of the shares of common stock (67,000 shares) were held in
escrow, along with half of the purchase price.
On December 4, 2000, the Company and the Investors entered into a stock
repurchase agreement (the "Repurchase Agreement") pursuant to which the
Company repurchased from the investors 137,930 of the outstanding shares
and agreed to the release from escrow to the Investors of the $1,000,000
purchase price of the 344,828 shares of Series B preferred stock held in
escrow. The Company also allowed the Investors to keep all of the
warrants issued under the purchase agreement including those released
from escrow and warrants for an additional 20,000 shares of the Company's
common stock at the same exercise price. In addition, the Company was
required to pay the legal expenses of the Investors, totaling $11,807.
The carrying amount of the 137,930 shares repurchased is equal to
$400,000; therefore, the amount paid in excess of the carrying amount
plus the value of the warrants given to the Investors, totaling $233,757,
was recorded as a dividend upon repurchase of Series B preferred stock
shares and deducted from net loss to arrive at net loss applicable to
common shares for the year ended December 31, 2000.
Pursuant to a second amendment to the purchase agreement, executed on
January 9, 2001, the fixed exercise price of the warrants was lowered
from $3.19, the fixed exercise price upon their issuance, to $1.00, the
F-25
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
market price of the Company's common stock at the time of the
renegotiations. Each warrant may be exercised any time during the five
years from the date of granting. The warrants may not be exercised if
doing so would result in the Company's issuing a number of shares of
common stock in excess of the limit imposed by the rules of the Nasdaq
SmallCap Market.
Pursuant to the Company's subsequent renegotiations with the Investors,
the Company was required, among other things, to redeem on March 28,
2002, all outstanding shares of Series B preferred stock for (A) 125% of
the original issue price per share or (B) the market price of the shares
of common stock into which they are convertible, whichever is greater
(the "Redemption Price"). The Company would have been able to at any time
redeem all outstanding shares of Series B preferred stock at the
Redemption Price. As a result of the renegotiations discussed in this
paragraph, the Series B preferred stock was considered redeemable and the
remaining outstanding shares at December 31, 2000 were classified outside
of permanent equity in the accompanying consolidated balance sheet. At
December 31, 2000, of the shares of Series B preferred stock issued to
the Investors, there were 206,898 shares outstanding at a carrying amount
of $2.90 per share.
Holders of shares of the Company's outstanding Series B preferred stock
could convert each share into shares of common stock without paying the
Company any cash. The conversion price per share of the Series B
preferred stock was also amended by the second amendment to the Purchase
Agreement. The conversion price per share of Series B preferred stock on
any given day is the lower of (1) $1.00 or (2) 90% of the average of the
two lowest closing bid prices on the principal market of the common stock
out of the fifteen trading days immediately prior to conversion. The
change in conversion price upon the renegotiations on January 9, 2001
resulted in a difference between the conversion price of the Series B
preferred stock and the market price of the common stock on the effective
date of the renegotiation. This amount, estimated at $600,000, was
recorded as an imputed preferred stock dividend within equity and is
deducted from net loss to arrive at net loss applicable to common shares
during the year ended December 31, 2001.
On January 19, 2001, 41,380 shares of Series B preferred stock were
converted by the Investors into 236,422 shares of the Company's common
stock. On March 9, 2001, the Company and the Investors entered into a
second stock repurchase agreement pursuant to which the Company
repurchased from the Investors, for an aggregate purchase price of
$617,067, all 165,518 shares of the Company's Series B preferred stock
held by the Investors on March 9, 2001. The carrying amount of the
165,518 shares is equal to $480,000; therefore the amount in excess of
the carrying amount, plus the estimated fair value of the warrants
retained by the Investors, which equals $167,127, was recorded as a
dividend upon repurchase of shares of Series B preferred stock and is
deducted from net loss to arrive at net loss applicable to common shares.
At December 31, 2001, all 154,000 of the warrants described above are
outstanding.
(9) Stock Options
In August 1995, in connection with a severance agreement entered into
between the Company and a former CEO, the Company granted options (not
pursuant to the 1995 Stock Option Plan) to purchase 23,557 shares of
common stock at an exercise price of $1.00 per share with immediate
vesting. Total compensation expense recorded at the date of grant with
regards to those options was $64,782 with the offset recorded as
additional paid-in capital.
Stock Option Plan
In July 1995, the Company established the 1995 Stock Option Plan (the
Plan), which provided for the granting of up to 650,000 options to
officers, directors, employees and consultants for the purchase of stock.
In July 1996, the Plan was amended to increase the total number of shares
authorized for issuance by 300,000 shares to a total of 950,000 shares
and beginning with the 1997 calendar year, by an amount equal to one
F-26
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
percent (1%) of the shares of common stock outstanding on December 31 of
the immediately preceding calendar year. At December 31, 2001 and 2000,
1,164,198 and 1,102,977 shares were authorized for issuance. The options
have a maximum term of 10 years and vest over a period determined by the
Company's Board of Directors (generally 4 years).
The Company applies APB Opinion No. 25 in accounting for its Plan.
Accordingly, compensation cost has been recognized for stock options
granted to employees and directors only to the extent that the quoted
market price of the Company's stock at the date of grant exceeded the
exercise price of the option.
During 1995, the Company granted options to purchase 246,598 shares of
the Company's common stock at exercise prices below the quoted market
prices of its common stock. Deferred compensation expense in the amount
of $144,000 was recorded at the date of grant with the offset recorded as
an increase to additional paid-in capital. Compensation expense in the
amount of $74,400, $28,800, $28,800 and $12,000 was recognized in 1998,
1997, 1996, and 1995, respectively.
In November 1997, the Company granted options to purchase 24,000 shares
of the Company's common stock at $9.50 per share to Investor Relations
Group (Investor). These options expire November 10, 2002. The Company
recognized expense of $81,952, which is included in general and
administrative expense in the consolidated statement of operations for
the year ended December 31, 1998. The expense represents the estimated
fair market value of the options, in accordance with SFAS No. 123.
During 2001, the Company granted employees and directors an aggregate of
404,000 Plan options and 275,000 options outside of the Plan, of which
70,000 options have been cancelled as a result of termination of the
employment of certain employees. All stock options granted during 2001,
2000 and 1999 were granted at the quoted market price on the date of
grant.
Had compensation costs been determined in accordance with the fair value
method prescribed by SFAS No. 123, the Company's net loss applicable to
common shares and net loss per common share (basic and diluted) for plan
options would have been increased to the pro forma amounts indicated
below:
2001 2000 1999
--------------- --------------- ---------------
Net loss applicable to common shares:
As reported $ 2,609,521 6,847,749 2,760,881
Pro forma 3,332,557 8,190,926 3,623,177
Net loss per common share - basic and diluted:
As reported 0.36 1.21 0.59
Pro forma 0.46 1.45 0.77
The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used for the grants in 2001, 2000 and 1999: dividend yield of
0%; expected volatility of 110% for 2001 and 94% for 2000 and 1999;
risk-free interest rate of 4.5% for 2001 and 6.5% for 2000 and 1999; and
expected lives of eight years for each year presented.
A summary of the status of the Company's stock options as of December 31,
2001, 2000 and 1999 and changes during the years then ended is presented
below:
F-27
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Weighted Weighted Weighted
average average average
2001 exercise 2000 exercise 1999 exercise
shares price shares price shares price
------------- ------------ ------------ ----------- ------------ -----------
At the beginning
of the year 804,200 $ 3.73 396,200 $ 3.25 837,798 $ 5.06
Granted 679,000 0.88 582,000 4.10 221,000 1.39
Exercised -- -- (14,000) 2.56 -- --
Cancelled (170,000) 2.44 (160,000) 3.97 (662,598) 4.93
------------- ------------ ------------ ----------- ------------ -----------
At the end of
the year 1,313,200 $ 2.40 804,200 $ 3.73 396,200 $ 3.25
============ =========== ===========
Options exercisable
at year-end 680,617 354,478 211,869
============= ============ ============
Weighted-average
fair value of
options granted
during the year $ 0.71 $ 4.05 $ 1.20
============= ============ ============
F-28
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The following table summarizes the information about Plan stock options
outstanding at December 31, 2001:
Remaining Number of
Exercise Number contractual options
price outstanding life exercisable
- ------------ ---------------- --------------- ---------------
0.610 4,000 9.61 years --
0.875 575,000 9.15 years 218,750
1.033 30,000 9.03 years 7,500
1.313 50,000 7.61 years 37,500
1.375 20,000 7.41 years 13,334
1.500 75,000 7.81 years 75,000
1.750 6,000 7.73 years 6,000
2.313 2,000 6.66 years 2,000
3.188 54,000 8.75 years 54,000
3.250 10,000 6.61 years 10,000
4.188 448,000 8.28 years 224,000
6.094 10,000 8.22 years 3,333
6.813 1,200 1.19 years 1,200
7.000 2,000 5.46 years 2,000
7.500 2,000 4.56 years 2,000
9.500 24,000 0.86 years 24,000
-------------- ---------------
1,313,200 680,617
============== ===============
(10) Stock Warrants
In connection with notes payable - bridge financing, the Company issued
warrants to purchase 1,500,000 shares of common stock at an initial
exercise price of $1.50 per share; subject to an upward adjustment upon
consummation of the IPO. Simultaneously with the consummation of the IPO,
these warrants were converted into redeemable warrants at an exercise
price of $5.50 per share on a one-for-one basis (see note 7). These
redeemable warrants expired unexercised on December 13, 2000.
As of December 14, 1996, the redeemable warrants are subject to
redemption by the Company at a redemption price of $0.05 per redeemable
warrant on 30 days prior written notice, provided that the average
closing bid price of the common stock as reported on Nasdaq equals or
exceeds $8.25 per share, subject to adjustment, for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of notice of the redemption.
In December 1995, in connection with the IPO, the Company issued
redeemable warrants to purchase 1,872,750 shares of common stock at an
exercise price of $5.50 per share. The remainder of these redeemable
warrants expired unexercised on December 13, 2000. Commencing December
14, 1996, these redeemable warrants are subject to redemption by the
Company at its option, at a redemption price of $.05 per warrant provided
that the average closing bid price of the common stock equals or exceeds
$8.25 per
F-29
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
share for a specified period of time, and the Company has obtained the
required approvals from the Underwriters of the Company's IPO. In January
1998, 1,000 warrants were exercised.
In connection with the IPO, the Company granted to Joseph Stevens & Co.,
L.P. (the Underwriter) warrants to purchase from the Company 165,000
units, each unit consisting of one share of common stock and one
redeemable warrant at an initial exercise price of $6.60 per unit. Such
warrants are exercisable during the four-year period commencing December
13, 1996. The redeemable warrants issuable upon exercise of these
warrants have an exercise price of $6.05 per share. As long as the
warrants remain unexercised, the terms under which the Company could
obtain additional capital may be adversely affected. These redeemable
warrants expired unexercised on December 13, 2000.
The Company entered into an agreement with Paramount effective April 15,
1996 pursuant to which Paramount will, on a non-exclusive basis, render
financial advisory services to the Company. Two warrants exercisable for
shares of the Company's common stock were issued to Paramount in
connection with this agreement. These included a warrant to purchase
25,000 shares of the Company's common stock at $10 per share, which
warrant expired unexercised on April 16, 2001 and a warrant to purchase
25,000 shares of the Company's common stock at $8.05 per share, which
warrant expired unexercised on June 16, 2001. In connection with the
issuance of these warrants, the Company recognized an expense in the
amount of $139,000 for the fair value of the warrants. This expense was
recorded as general and administrative in the consolidated statement of
operations for the year ended December 31, 1996.
In connection with the Channel merger discussed in note 8, the Company
issued a warrant to a director of the Company to purchase 37,500 shares
of the Company's common stock at $5.33 per share, which warrant expires
on July 14, 2006. The Company recognized expense of $48,562 for the fair
value of the warrants which was recorded as a research and development
expense in the consolidated statement of operations for the year ended
December 31, 1997.
The Company entered into an agreement with an investor pursuant to which
the investor will render investor relations and corporate communication
services to the Company. A warrant to purchase 24,000 shares of the
Company's common stock at $7.00 per share, which warrant expired
unexercised on November 22, 2001, was issued in 1996. The Company
recognized expense of $110,640 for the fair value of the warrants, which
was recorded as a general and administrative expense in the consolidated
statements of operations for the year ended December 31, 1997.
Concurrent with the private placement offering of Series A preferred
stock in 1997, the Company issued 123,720 warrants to designees of
Paramount, the placement agent. These warrants are initially exercisable
at a price equal to $11.00 per share and may be exercised at any time
during the 10-year period commenced February 17, 1998. The rights,
preferences and privileges of the shares of Series A preferred stock
issuable upon exercise of these warrants are identical to those offered
to the participants in the private placement. The warrants contain
anti-dilution provisions providing for adjustment of the number of
securities underlying the Series A preferred stock issuable upon exercise
of the warrants and the exercise price of the warrants under certain
circumstances. The warrants are not redeemable and will remain
outstanding, to the extent not exercised, notwithstanding any mandatory
redemption or conversion of the Series A preferred stock underlying the
warrants. In accordance with SFAS No. 123, the Company determined the
fair value of the warrants using the Black-Scholes Model and allocated
this value of $570,143, to convertible preferred stock warrants with a
corresponding reduction in additional paid-in capital. In April 2000 and
June 1998, 4,799 and 6,525 warrants, respectively, were exercised via a
cashless method for 6,955 and 2,010 shares of Series A preferred stock,
respectively.
On January 4, 2000, the Company entered into a Financial Advisory and
Consulting Agreement with the Underwriters. In this agreement, the
Company engaged the Underwriters to provide investment-banking
F-30
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
services for one year commencing January 4, 2000. As partial compensation
for the services to be rendered by the Underwriters, the Company issued
the Underwriters three warrants to purchase an aggregate of 450,000
shares of its common stock. The exercise price ranges between $2.50 and
$4.50 and the exercise period of each warrant is at various times through
2007. In addition, each warrant may only be exercised when the market
price per share of common stock is at least $1.00 greater than the
exercise price of that warrant. In connection with the issuance of the
warrants, the Company and the Underwriters entered into a letter
agreement granting registration rights in respect of the shares of common
stock issuable upon exercise of the warrants. In accordance with EITF
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services" and other relative accounting literature, the Company
recorded the estimated fair value of the warrants of $1,020,128, which
represents a general and administrative expense, as compensation expense
relating to stock options and warrants over the vesting period through
January 4, 2001.
On March 8, 2001, the Company entered into an agreement with The Investor
Relations Group, Inc., or "IRG," under which IRG will provide the Company
investor relations services. Pursuant to this agreement, the Company
issued to Dian Griesel of IRG warrants to purchase 120,000 shares of its
common stock. The term of the warrants is five years and the exercise
price of the warrants is $0.875, and they will vest in 5,000 share
monthly increments over a 24 month period. In addition, should the
Company's stock price reach $2.50, the Company will grant Ms. Griesel an
additional 50,000 warrants. Should the Company's stock price reach $5.00,
the Company will grant Ms. Griesel a further 50,000 warrants. As a
result, the Company recorded compensation expense relating to these stock
warrants of $33,256 for the year ended December 31, 2001 and will
remeasure the compensation expense at the end of each reporting period
until the final measurement date is reached in 14 months.
On August 9, 2001, the Company entered into an agreement with Proteus
Capital Corp in which Proteus agreed to assist the Company with raising
additional funds. Pursuant to this agreement, the Company granted Proteus
warrants to purchase 100,000 shares of the Company's common stock at
$0.59 per share, which was the average closing stock price for the two
weeks ended August 17, 2001. The warrants were fully vested on the date
of the agreement and were outstanding at December 31, 2001. The term of
the warrants is five years. As a result, the Company recorded
compensation expense relating to these stock warrants of $45,355 for the
year ending December 31, 2001.
(11) Related-Party Transactions
During 1999, the Company entered into consulting agreements with certain
members of its Board of Directors. Prior to 1999, the Company had several
consulting agreements with directors of the Company. These agreements,
all of which have been terminated, required either monthly consulting
fees or project-based fees. No additional agreements were entered into as
of December 31, 2001. Consulting expense under these agreements was $0,
$8,000 and $99,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(12) Income Taxes
There was no current or deferred tax expense for the years ended December
31, 2001, 2000 and 1999 because of the Company's operating losses.
The components of deferred tax assets and deferred tax liabilities as of
December 31, 2001 and 2000 are as follows:
F-31
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
2001 2000
--------------- --------------
Deferred tax assets:
Tax loss carryforwards $ 8,613,260 9,239,517
Research and development credit 805,633 743,286
Fixed assets -- 2,563
Deferred compensation 340,764 --
Unrealized loss on investment 1,083,774 --
Other 32,046 --
-------------- -------------
Gross deferred tax assets 10,875,477 9,985,366
Less valuation allowance (10,870,822) (9,985,366)
--------------- --------------
Net deferred tax assets 4,655 --
Deferred tax liabilities (4,655) --
--------------- --------------
Net deferred tax asset (liability) $ -- --
=============== ==============
F-32
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
The reasons for the difference between actual income tax expense
(benefit) for the years ended December 31, 2001, 2000 and 1999 and the
amount computed by applying the statutory federal income tax rate to
losses before income tax (benefit) are as follows:
2001 2000 1999
------------------------------- ------------------------------ ----------------------------
% of % of % of
pretax pretax pretax
Amount earnings Amount earnings Amount earnings
-------------- -------------- -------------- ------------- ------------- -----------
Income tax expense
at statutory rate $ (590,000) (34.0%) $ (1,973,000) (34.0%) $ (832,000) (34.0%)
State income taxes,
net of Federal
tax benefit (186,000) (10.7%) (640,000) (10.9%) (147,000) (6.0%)
Change in valuation
reserve 885,000 51.0% 2,476,000 42.1% 527,000 21.5%
Credits generated
in current year (62,000) (3.6%) (248,000) (4.2%) (74,000) (3.0%)
Adjustment to prior
estimated income
tax expense -- -- -- -- % 529,000 21.6%
Other, net (47,000) (2.7%) 385,000 7.0% (3,000) (0.1%)
-------------- -------------- -------------- ------------- ------------- -----------
Income tax benefit $ -- -- % $ -- -- $ -- -- %
============== ============== ============== ============= ============= ===========
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
net change in the total valuation allowance for the years ended December
31, 2001, 2000 and 1999 was an increase of $885,000, $2,476,000 and
$527,000, respectively. The tax benefit assumed using the federal
statutory tax rate of 34% has been reduced to an actual benefit of zero
due principally to the aforementioned valuation allowance.
At December 31, 2001, the Company had federal and state net operating
loss tax carryforwards of approximately $21,000,000. The net operating
loss carryforwards expire in various amounts starting in 2008 and 2002
for federal and state tax purposes, respectively. The Tax Reform Act of
1986 contains provisions which limit the ability to utilize net operating
loss carryforwards in the case of certain events including significant
changes in ownership interests. If the Company's net operating loss
carryforwards are limited, and the Company has taxable income which
exceeds the permissible yearly net operating loss carryforward, the
Company would incur a federal income tax liability even though net
operating loss carryforwards would be available in future years.
F-33
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(13) License Agreement
On May 14, 1998, Optex entered into a Development and License Agreement
(the Agreement) with Bausch & Lomb to complete the development of
Catarex, a cataract-removal technology owned by Optex. Under the terms of
the Agreement, Optex and Bausch & Lomb intend jointly to complete the
final design and development of the Catarex System. Bausch & Lomb was
granted an exclusive worldwide license to the Catarex technology for
human ophthalmic surgery and will assume responsibility for
commercializing Catarex globally. The Agreement is cancelable by Bausch &
Lomb at any time upon six months written notice.
The Agreement provided that Bausch & Lomb would pay Optex milestone
payments of (a) $2,500,000 upon the signing of the Agreement, (b)
$4,000,000 upon the successful completion of certain clinical trials, (c)
$2,000,000 upon receipt of regulatory approval to market the Catarex
device in the United States (this payment is creditable in full against
royalties), and (d) $1,000,000 upon receipt of regulatory approval to
market the Catarex device in Japan. Pursuant to the Agreement, Bausch &
Lomb would reimburse Optex for its research and development expenses not
to exceed $2,500,000. Bausch & Lomb would pay Optex a royalty of 7% of
net sales and an additional 3% royalty when certain conditions involving
liquid polymer lenses are met.
During 1998, the Company received the first nonrefundable milestone
payment of $2,500,000 and recorded this amount as license revenue. In
addition, the Company recorded $1,047,511 in 1998 as a reduction of
expenses related to the reimbursement of research and development costs
associated with the Catarex device.
On September 16, 1999, the Company and Bausch & Lomb amended the
Agreement to provide for an expanded role for Optex in development of the
Catarex surgical device. Under the amended Agreement, Optex, in addition
to the basic design work provided for in the original agreement, was
required to deliver to Bausch & Lomb within a stated period Catarex
devices for use in clinical trials, and was required to assist Bausch &
Lomb in connection with development of manufacturing processes for
scale-up of manufacture of the Catarex device. Additionally, Bausch &
Lomb would reimburse Optex for all costs, including labor, professional
services and materials, incurred by Optex in delivering those Catarex
devices and performing manufacturing services, and would pay Optex a
fixed profit component of 25% based upon certain of those costs.
During 2001, 2000 and 1999, Optex recorded revenue pursuant to the
amended Agreement of $2,461,922, $5,169,288 and $1,082,510, respectively.
The revenue recorded in 2001, 2000 and 1999 pursuant to the amended
Agreement is inclusive of the fixed profit component of 25% presented on
a gross basis with the related costs incurred presented separately as
cost of development revenue on the consolidated statements of operations.
Of these amounts, $0 and $192,992 are recorded as an account receivable
at December 31, 2001 and 2000, respectively. Prior to the amended
Agreement, the research and development expenses of the Catarex device
incurred and the related reimbursement were presented by the Company on a
net basis as the reimbursement reflects a dollar for dollar reimbursement
arrangement, effectively being a pass-through of expenses. The 1999
reimbursement received by the Company prior to the amendment to the
Agreement was $1,229,068. As of December 31, 2000, the Company recorded
$1,294,615 of deferred revenue related to the amended Agreement, which
amount represents expenses paid in advance by Bausch & Lomb during 2000
at a rate of 125%. This deferred revenue was recognized when the related
expense was recorded in operations during 2001.
As of December 31, 2000, Optex received reimbursement for costs,
including labor, professional services and materials, incurred by Optex
in delivering Catarex devices and performance manufacturing services
totaling $5 million. The amended agreement provided that Bausch & Lomb
would reimburse Optex for such costs up to $8 million. In connection with
the revised agreement, the Company agreed to pay a bonus to its President
F-34
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
totaling $141,000, payable monthly through March 2001. At December 31,
2001 and 2000, $0 and $23,502, respectively, were due and were included
in accounts payable and accrued expenses in the accompanying consolidated
balance sheets.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb, a Bausch & Lomb affiliate, the Company, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its
assets (mostly intangible assets with no book value), including all those
related to the Catarex technology. The purchase price was $3 million paid
at closing (of which approximately $564,000 has been distributed to
Optex's minority shareholders). In addition, Optex is entitled to receive
additional consideration, namely $1 million once Bausch & Lomb receives
regulatory approval to market the Catarex device in Japan, royalties on
net sales on the terms stated in the original development agreement dated
May 14, 1998, between Bausch & Lomb and Optex, as amended, and minimum
royalties of $90,000, $350,000, and $750,000 for the first, second, and
third years, respectively, starting on first commercial use of the
Catarex device or January 1, 2004, whichever is earlier. Optex also has
the option to repurchase the acquired assets from Bausch & Lomb at fair
value if it ceases developing the Catarex technology.
Upon the sale of Optex assets, Bausch & Lomb's development agreement with
Optex was terminated and Optex has no further involvement with Bausch &
Lomb. As a result of this transaction, the Company recorded a net gain on
the sale of Optex assets of $2,569,451 for the year ended December 31,
2001, net of severance payments to former Optex employees in the amount
of $240,000 as described below. The purchase price of $3,000,000 is
nonrefundable and upon the closing of the asset purchase agreement in
March 2001, Optex had no further obligation to Bausch & Lomb or with
regard to the assets sold. In the asset purchase agreement, Optex agreed
to forgo future contingent payments provided for in the earlier
development agreement. Pursuant to the Company's agreement with the
minority shareholders of Optex, Optex has recorded a profit distribution
for the year ended December 31, 2001 of $837,274 representing the
minority shareholders' percentage of the cumulative profit from the
Bausch & Lomb development and asset purchase agreements up to and
including proceeds from the sale of Optex' assets.
On May 9, 2001, the Company's board of directors, after consideration of
all the relevant facts and circumstances, including recommendation of
counsel, agreed to authorize an aggregate payment of $240,000 to three
former employees of Optex (who are now employed by Bausch & Lomb). The
payments were made on May 11, 2001, and represented the settlement of
claims made by the employees subsequent to the asset purchase agreement
referred to above for severance monies allegedly due under their
employment agreement. The Company did not believe these monies were due
pursuant to the terms of the transaction itself and the respective
employment agreements. The board of directors elected to acquiesce to the
demands of the former employees and resolve the matter in light of the
potential future royalties from Bausch & Lomb and the importance of these
individuals to the ongoing development activities. The payment was
recorded as an expense netted against the gain on sale of Optex assets in
the December 31, 2001 consolidated statement of operations.
(13) Commitments and Contingencies
Consulting and Research Agreements
The Company has entered into consulting agreements, under which stock
options may be issued in the foreseeable future. The agreements are
cancelable with no firm financial commitments.
Employment Agreements
The Company entered into employment agreements with four executives
during April and May, 2000. These agreements provide for the payment of
signing and year-end bonuses in 2000 totaling $225,000, and annual
F-35
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
base salaries aggregating $550,000. Certain agreements were amended in
February 2001 and one executive was terminated in October 2001. As of
December 31, 2001, the annual base salaries of four executives aggregate
to $485,000 and year-end bonuses aggregated to $105,000. The 2001 and
2000 bonuses are included in accrued liabilities in the accompanying
consolidated balance sheets at December 31, 2001 and 2000, respectively.
Each agreement has an initial term of three years and can be terminated
by the Company, subject to certain provisions, with the payment of
severance amounts that range from three to six months.
Proprietary Rights
The Company has an exclusive worldwide license to four U.S. patents and
corresponding foreign applications covering a group of compounds,
including CT-3. The licensor is Dr. Sumner Burstein, a professor at the
University of Massachusetts. This license extends until the expiration of
the underlying patent rights. The primary U.S. patent expires in 2012 and
the new analog patent 6,162,829 expires in 2017. The Company has the
right under this license to sublicense our rights under the license. The
license requires that the Company pay royalties of 3% to Dr. Burstein
based on sales of products and processes incorporating technology
licensed under the license, as well as 8% of any income derived from any
sublicense of the licensed technology. Furthermore, pursuant to the terms
of the license, the Company must satisfy certain other terms and
conditions in order to retain the license rights. If the Company fails to
comply with certain terms of the license, our license rights under the
license could be terminated.
Operating Leases
The Company rents certain office space under operating leases which
expire in various years through 2003.
Aggregate annual minimum lease payments for noncancelable operating
leases are as follows:
Year ending
December 31,
-------------------
2002 $ 94,528
2003 31,167
-------------
$ 125,695
=============
Beginning in March 2002, the Company entered into a sublease agreement to
cover a portion of its lease obligation. The minimum lease payments above
include noncancellable sublease income of $7,500 and $3,750 expected to
be received in 2002 and 2003, respectively. The Company has sublet 60% of
a facility in Connecticut which is no longer utilized by the Company. As
a result, the Company recorded an estimated loss on the remaining
operating lease obligation in the amount of $11,026 at December 31, 2001.
Rent expense related to operating leases for the years ended December 31,
2001, 2000 and 1999 was $135,662, $161,810 and $118,264, respectively.
F-36
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
Resignation of CEO
In July 1998, the CEO of the Company resigned. The Company recorded
$211,250 of expense for salary continuation through April 1999. Pursuant
to the resignation, all unvested stock options held by the CEO vested
immediately and the unexercised options expired in July 1999.
Termination of Agreement with the Trustees of the University of
Pennsylvania
On October 12, 1999, the Company and Channel announced the termination of
the license agreement dated as of June 16, 1994, between the Trustees of
the University of Pennsylvania (Penn) and Channel pursuant to which
Channel received the rights to use cyclodextrin technology. The Company
and Channel, on the one hand, and Penn, on the other hand, released each
other from any further obligations under the license agreement. The
Company paid Penn a portion of the patent costs for which Penn was
seeking reimbursement under the agreement.
CryoComm Technology
In October 2001, the Company stopped work on CryoComm, a wholly-owned
subsidiary of the Company that had been developing superconducting
electronics for Internet packet switching and transport products.
Discontinuing work on CryoComm will allow the Company to focus on its
core life-sciences technologies, although the Company will continue to
prosecute the patents on the CryoComm technology. As part of this
restructuring, Walter Glomb's position was eliminated effective October
16, 2001, although Mr. Glomb will receive a 7% success fee if he is able
to secure funding to further develop this technology. As stated in his
employment agreement, Mr. Glomb was also entitled to receive a total of
$62,500 in severance payments due under his employment agreement over the
six months following his termination. These amounts were recorded during
the fourth quarter of 2001 and $36,458 of these severance payments is
included in accrued liabilities in the accompanying consolidated balance
sheet as of December 31, 2001.
F-37
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of:
Manhattan Pharmaceuticals, Inc.
(A development stage company)
We have audited the accompanying balance sheets of Manhattan Pharmaceuticals,
Inc. (a development stage company) as of September 30, 2002 and December 31,
2001 and the related statements of operations, changes in stockholders'
deficiency and cash flows for the nine months ended September 30, 2002, for the
period from August 6, 2001 (inception) to December 31, 2001 and for the period
from August 6, 2001 (inception) to September 30, 2002. 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 of America. Those standards require that we plan and
perform the audits 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 Manhattan Pharmaceuticals, Inc. as
of September 30, 2002 and December 31, 2001, and the results of its operations
and its cash flows for the nine months ended September 30, 2002, for the period
from August 6, 2001 (inception) to December 31, 2001 and for the period from
August 6, 2001 (inception) to September 30, 2002, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has a net loss from operations of $892,365
since inception, a negative cash flow from operating activities of $626,721
since inception, a working capital deficiency of $839,482 and a stockholders'
deficiency of $830,776. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plan in regards
to these matters is also described in Note 9. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
November 1, 2002
F-38
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
------------- -----------
CURRENT ASSETS
Cash $ 3,279 $ --
Deferred consulting expense 45,442 --
--------- ---------
Total Current Assets 48,721 --
--------- ---------
OTHER ASSETS
Deferred offering costs 8,706 --
Total Other Assets 8,706 --
--------- ---------
TOTAL ASSETS $ 57,427 $ --
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 161,846 $ --
Accrued expenses 43,696 29,296
Note and interest payable 601,346 --
Due to stockholder 30,000 27,500
Due to affiliate 51,315 --
--------- ---------
Total Current Liabilities 888,203 56,796
--------- ---------
STOCKHOLDERS' DEFICIENCY
Common stock, $.001 par value, 10,000,000 shares authorized, 5,000,000
and 4,000,000 issued and outstanding in 2002 and 2001, respectively 5,000 4,000
Additional paid-in capital 60,589 --
Accumulated deficit during development stage (892,365) (56,796)
Subscription receivable (4,000) (4,000)
--------- ---------
Total Stockholders' Deficiency (830,776) (56,796)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 57,427 $ --
========= =========
See accompanying notes to financial statements.
F-39
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For the Period
from For the Period
For the Nine August 6, 2001 August 6, 2001
Months Ended (Inception) to (Inception) to
September 30, December 31, September 30,
2002 2001 2002
------------ -------------- --------------
REVENUE $ -- $ -- $ --
--------- --------- ---------
OPERATING EXPENSES
Consulting fees 217,885 27,736 245,621
Selling, general and administrative 186,250 1,560 187,810
Research and development 377,654 27,500 405,154
Salaries 41,667 -- 41,667
--------- --------- ---------
Total Operating Expenses 823,456 56,796 880,252
--------- --------- ---------
LOSS FROM OPERATIONS (823,456) (56,796) (880,252)
--------- --------- ---------
OTHER EXPENSE
Interest expense 12,113 -- 12,113
--------- --------- ---------
Total Other Expense 12,113 -- 12,113
--------- --------- ---------
NET LOSS $(835,569) $ (56,796) $(892,365)
========= ========= =========
See accompanying notes to financial statements.
F-40
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM AUGUST 6, 2001 (INCEPTION) TO SEPTEMBER 30, 2002
Additional
Common Stock Paid-In Subscription Accumulated Total
Shares Amount Capital Receivable Deficit Equity
--------- ---------- ------------ ------------- ------------- ----------
Stock issued for subscription receivable 4,000,000 $ 4,000 $ -- $ (4,000) $ -- $ --
Net loss for the period from August 6, 2001
(inception) to December 31, 2001 -- -- -- -- (56,796) (56,796)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2001 4,000,000 4,000 -- (4,000) (56,796) (56,796)
Stock issued for licensing fees 1,000,000 1,000 -- -- -- 1,000
Stock options issued for services -- -- 60,589 -- -- 60,589
Net loss for the period from January 1, 2002
to September 30, 2002 -- -- -- -- (835,569) (835,569)
--------- --------- --------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 2002 5,000,000 $ 5,000 $ 60,589 $ (4,000) $(892,365) $(830,776)
========= ========= ========= ========= ========= =========
See accompanying notes to financial statements.
F-41
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Period For the Period
from from
For the Nine August 6, 2001 August 6, 2001
Months Ended (Inception) to (Inception) to
September 30, December 31, September 30,
2002 2001 2002
-------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(835,569) $ (56,796) $(892,365)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Expense portion of stock and options issued for services 16,147 -- 16,147
Changes in operating assets and liabilities:
(Increase) in:
Deferred offering costs (8,706) -- (8,706)
Increase in:
Accounts payable 161,846 -- 161,846
Accrued expenses 14,400 29,296 43,696
Due to affiliate 51,315 -- 51,315
Interest payable 1,346 -- 1,346
--------- --------- ---------
Net Cash Used In Operating Activities (599,221) (27,500) (626,721)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES: -- -- --
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable - related parties, net
of repayments 2,500 27,500 30,000
Proceeds from notes payable 600,000 -- 600,000
--------- --------- ---------
Net Cash Provided by Financing Activities 602,500 27,500 630,000
--------- --------- ---------
NET INCREASE IN CASH 3,279 -- 3,279
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD -- -- --
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 3,279 $ -- $ 3,279
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 10,767 $ -- $ 10,767
========= ========= =========
See accompanying notes to financial statements.
F-42
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
Manhattan Pharmaceuticals, Inc. (the "Company") incorporated on August 6,
2001 under the laws of Delaware under the name CT-3 Acquisition Corp., is
a privately-held, New York based development stage biopharmaceutical
company that holds an exclusive, world-wide license to certain
intellectual property (the "Property") owned by Oleoyl-estrone
Developments, SL ("OED") of Barcelona, Spain (the "University"). The
Company's first drug candidate, oleoyl-estrone ("OE"), is an orally
administered small molecule that has been shown in extensive pre-clinical
animal studies to cause significant weight loss without the need for
dietary modifications (See Notes 2 and 7).
(B) 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.
(C) Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. There was no current or deferred income tax expense
(benefit) recorded for period from August 6, 2001 (inception) to December
31, 2001 and for the nine months ended September 30, 2002 because of the
Company's continued losses from operations. Any deferred tax asset
arising from the Company's available net operating loss carryforwards has
been offset by an equal valuation allowance.
(D) New Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards.
F-43
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
Statement No. 141, "Business Combinations" supersedes APB Opinion 16 and
various related pronouncements. Pursuant to the new guidance in Statement
No. 141, all business combinations must be accounted for under the
purchase method of accounting; the pooling-of-interests method is no
longer permitted. SFAS 141 also establishes new rules concerning the
recognition of goodwill and other intangible assets arising in a purchase
business combination and requires disclosure of more information
concerning a business combination in the period in which it is completed.
This statement is generally effective for business combinations initiated
on or after July 1, 2001.
Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB
Opinion 17 and related interpretations. Statement No. 142 establishes new
rules on accounting for the acquisition of intangible assets not acquired
in a business combination and the manner in which goodwill and all other
intangibles should be accounted for subsequent to their initial
recognition in a business combination accounted for under SFAS No. 141.
Under SFAS No. 142, intangible assets should be recorded at fair value.
Intangible assets with finite useful lives should be amortized over such
period and those with indefinite lives should not be amortized. All
intangible assets being amortized as well as those that are not, are both
subject to review for potential impairment under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS No. 142 also requires that goodwill
arising in a business combination should not be amortized but is subject
to impairment testing at the reporting unit level to which the goodwill
was assigned to at the date of the business combination.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 and must be applied as of the beginning of such year to all goodwill
and other intangible assets that have already been recorded in the
balance sheet as of the first day in which SFAS No. 142 is initially
applied, regardless of when such assets were acquired. Goodwill acquired
in a business combination whose acquisition date is on or after July 1,
2001, should not be amortized, but should be reviewed for impairment
pursuant to SFAS No. 121, even though SFAS No. 142 has not yet been
adopted. However, previously acquired goodwill should continue to be
amortized until SFAS No. 142 is first adopted.
Statement No. 143 "Accounting for Asset Retirement Obligations"
establishes standards for the initial measurement and subsequent
accounting for obligations associated with the sale, abandonment, or
other type of disposal of long-lived tangible assets arising from the
acquisition, construction, or development and/or normal operation of such
assets. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002, with earlier application encouraged.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and Long-lived
Assets to be Disposed of" and APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a
F-44
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
Segment of Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 established a single accounting
model for assets to be disposed of by sale whether previously held and
used or newly acquired. SFAS No. 144 retains the provision of APB No. 30
for presentation of discontinued operations in the income statement but
broadens the presentation to include a component of an entity. SFAS No.
144 is effective for fiscal years beginning after December 15, 2001 and
the interim periods within.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments
as extraordinary items, eliminates the provisions of SFAS No. 44
regarding transition to the Motor Carrier Act of 1980 and amends the
provisions of SFAS No. 13 to require that certain lease modifications be
treated as sale leaseback transactions. The provisions of SFAS 145
related to classification of debt extinguishments are effective for
fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The Company does not believe the adoption of this standard
will have a material impact the financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel.
Under SFAS 146, the Company will record a liability for a cost associated
with an exit or disposal activity when that liability is incurred and can
be measured at fair value. SFAS 146 will require the Company to disclose
information about its exit and disposal activities, the related costs,
and changes in those costs in the notes to the interim and annual
financial statements that include the period in which an exit activity is
initiated and in any subsequent period until the activity is completed.
SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged.
Under SFAS 146, a company cannot restate its previously issued financial
statements and the new statement grandfathers the accounting for
liabilities that a company had previously recorded under Emerging Issues
Task Force Issue 94-3.
The Company believes that the adoption of these pronouncements will not
have a material impact on the Company's financial position or results of
operations.
NOTE 2 RIGHTS TO INTELLECTUAL PROPERTY
The Company's exclusive right to OED's Property, in the aggregate, are of
material importance for the Company's survival. Protection for OED's
individual products extends for varying periods in accordance with the
date of grant and the legal life of patents in the various countries. The
protection afforded, which may also vary from country to country,
F-45
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
depends upon the type of patent and its scope of coverage. The Company is
financially responsible for all aspects of OED's inventions, including
legal and research and development expenses associated with the product
developments.
During the periods ended September 30, 2002 and December 31, 2001, the
Company expensed approximately $236,303 and $25,000, respectively, in
legal fees, U.S. Patent office handling fees and other expenses that OED
incurred in relation to the patents and licensing fees (See Note 7).
Expenses incurred for research and development of the patents were also
expensed in the period ended September 30, 2002.
The Intellectual Property Rights and licensing fees are currently being
expensed, but will be capitalized and amortized over the lives of the
underlying patents (which generally are twenty years) upon the first
final approval of the first new drug application for the first licensed
product by the United States Food and Drug Administration (See Note 7).
The Company will evaluate the recoverability of any future capitalized
Intellectual Property Rights, where indicators of impairment are present,
by reviewing current and projected profitability or undiscounted cash
flows of such assets. Intangible assets that are subject to amortization
will be reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable.
Intangible assets not subject to amortization will be tested for
impairment at least annually.
NOTE 3 NOTE PAYABLE
During the period ended September 30, 2002, the Company received $600,000
from an independent financial institution with an annual interest rate of
3.23%. During the period ended September 30, 2002, the Company paid
$10,767 and accrued $1,346 of the $12,113 total interest expense
incurred. The note is due in January 2003 and is secured by a
stockholder's personal investment account of $600,000. The note and
related interest payable are recorded in current liabilities in the
accompanying financial statements.
NOTE 4 DUE TO STOCKHOLDER
In order to provide operating funds for the Company, a stockholder (the
"Stockholder") loaned the Company $30,000 during September 2002. The loan
is payable on the earlier to occur of (a) one year from the date of
issuance or (b) a financing in which gross proceeds to the Company
exceeds $1,000,000. The loan bears interest at 5% and is unsecured. Since
the proceeds were received in late September 2002, no interest expense
has been recognized for this loan as of September 30, 2002 because the
Company deems it to be immaterial.
As discussed in Note 10, the Company received an additional $80,000 from
the Stockholder during October 2002 as additional operating funds. The
total proceeds from the Stockholder since inception is $110,000 (See Note
10).
F-46
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
NOTE 5 DUE TO AFFILIATE
During the period ended September 30, 2002, an affiliate, owned by the
Stockholder as defined in Note 4, paid $6,315 for deferred offering
expenses on behalf of the Company. The Company also owes $45,000 at
September 30, 2002 for office space rental expense to the affiliate.
These expenses are included in selling, general and administrative
expense on the accompanying financial statements. These non-interest
bearing payables are due on demand and unsecured.
NOTE 6 STOCKHOLDERS' DEFICIENCY
The Company accounts for equity based compensation in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The standard requires the Company to adopt the
"fair value" method with respect to equity-based compensation of
consultants and other non-employees. For financial statement disclosure
purposes, the fair market value of each stock option granted during the
period ended September 30, 2002 was estimated on the date of grant using
the Black-Scholes Pricing Model in accordance with FASB No. 123 using the
following weighted average assumptions: expected dividend yield 0%,
risk-free interest rate of 3.21%, volatility of 0% and expected term of
five years.
The Company issued a total of 40,000 options to four consultants to
purchase 40,000 shares of the Company's common stock at an exercise price
of $.01 during August 2002. The fair value of the option issuances was
estimated, using the Black-Scholes Pricing Model as described in the
previous paragraph, at $60,589. The option issuances were granted as
payment in full for four one-year consulting contracts, which all
terminate in August 2003. Therefore the Company has expensed $15,147 as
consulting fee expense in the accompanying statement of operations and
has deferred $45,442 over the remaining lives of the contracts, which is
presented as deferred consulting expense on the balance sheet of the
accompanying financial statements.
There were no options exercised during the period ended September 30,
2002.
The Company did not adopt the fair value method, in accordance with SFAS
123, with respect to employee stock options. The Company accounts for
employee stock options under the "intrinsic value" method in accordance
with APB 25. For the period from August 6, 2001 (inception) through
September 30, 2002, the Company did not issue options to employees.
Therefore, there was no financial statement impact for employee option
issuances for the periods presented.
The Company issued 4,000,000 shares of common stock to thirty-eight
investors during December 2001 for a subscription receivable of $4,000.
In connection with the subscription receivable, the Company entered into
thirty-eight note receivable agreements with the
F-47
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
respective investors, which all mature during 2002. (See Note 10 for
discussion of subsequent proceeds from subscriptions receivable). During
February 2002, the Company issued 1,000,000 shares of common stock to OED
related to the license agreement discussed in Note 7 and capitalized the
full amount as licensing fees.
NOTE 7 LICENSE AND CONSULTING AGREEMENTS
On February 15, 2002, the company entered into a License Agreement (the
"Agreement") with OED. Under the terms of the Agreement, OED grants to
the Company a worldwide license to make, use, lease and sell the licensed
products as the Company's sees fit. OED also grants the right to the
Company to sublicense to third parties the Property or aspects of the
Property with prior written consent of OED. OED retains an irrevocable,
non-exclusive, royalty-free right to use the Property solely for its
internal, non-commercial use. The Agreement will terminate on (i) the
date that the Company files a petition for bankruptcy, (ii) within thirty
days notice that the University's research agreement ceases to be in full
force, (iii) within sixty days notice by either party for due reason as
specified in the Agreement or (iv) the date for the last patent to expire
under the Agreement.
Under the Agreement, the Company agreed to pay to OED certain equity and
milestone licensing fees, which are currently being expensed as they are
paid in the accompanying financial statements. As of September 30, 2002
and 2001, the Company paid $175,000 and $25,000, respectively, in
licensing fees which is included in research and development expense (See
Note 2).
In connection with the Agreement, the Company has agreed to future
milestone payments to OED as follows:
(i) $250,000 upon the treatment of the first patient in a Phase I
clinical trial under a Company sponsored Investigational New Drug
Application ("IND"); (ii) $250,000 upon the treatment of the first
patient in a Phase II clinical trial under a Company sponsored IND; (iii)
$750,000 upon the first successful completion of a Company sponsored
Phase II clinical trial under a Company sponsored IND; (iv) $2,000,000
upon the first successful completion of a Company sponsored Phase III
clinical trial under a Company sponsored IND; (v) $6,000,000 upon the
first final approval of the first New Drug Application ("NDA") for the
first Licensed Product by the United States Food and Drug Administration
(the "FDA").
In relation to the Agreement, the Company entered into a consulting
agreement with Oleoyl-estrone Developments, SL ("OED"). The agreement
became effective during February 2002, at a fee of $6,250 per month, and
will terminate when the license agreement terminates. The fees associated
with the consulting agreement are expensed in the accompanying financial
statements. OED agreed to serve as a member of the Company's Scientific
Advisory Board and to render consultative and advisory services to the
Company. Such services include research, development and clinical testing
of the Company's
F-48
MANHATTAN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
technology as well as the reporting of the findings of such tests,
assistance in filing of patents and oversight and direction of efforts in
regards to personnel for clinical development.
NOTE 8 PRIVATE PLACEMENT
During the period ended September 30, 2002, the Company commenced a
private placement share offering wherein it offered to accredited
investors a minimum amount of 312,500 shares and a maximum amount of
937,500 shares of common stock. The purchase price per share was $1.60
per share with an individual minimum investment of $50,000, although the
Company may accept, at their discretion, subscriptions for lesser
amounts. As of September 30, 2002, the Company had not closed on any
proceeds related to the offering. In connection with this private
placement offering the Company incurred offering costs of $8,706 which
have been deferred.
NOTE 9 GOING CONCERN
The Company's financial statements have been prepared on a going concern
basis which contemplated the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
has a net loss from operations of $892,365 since inception, a negative
cash flow from operating activities of $626,721 since inception, a
working capital deficiency of $839,482 and a stockholders' deficiency of
$830,776. The Company's working capital deficiency may not enable it to
meet such objectives as presently structured. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The ability of the Company to continue as a going concern is dependent on
the Company's ability to obtain additional financing and achieve
profitable operations. Management believes that actions presently taken
to obtain additional financing and its business plan to achieve
profitable operations will provide the opportunity for the Company to
continue as a going concern.
NOTE 10 SUBSEQUENT EVENTS
During October 2002, the Company received an additional $80,000 of
operating funds from the Stockholder referred to in Note 4. The loans are
unsecured and bear interest at 5%.
During October 2002, the Company received proceeds of $4,000 as payment
in full of the $4,000 subscription receivable.
F-49
INTRODUCTION TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
Atlantic Technology Ventures, Inc. recently signed a merger agreement with
Manhattan Pharmaceuticals, Inc. providing for the merger of a wholly owned
subsidiary of Atlantic into Manhattan. If the merger is consummated,
shareholders of Manhattan will be issued approximately 92,647,100 shares of
Atlantic which represents 80% of Atlantic's post-merger outstanding capital
stock. We anticipate that the merger will close in the first quarter of 2003.
The merger will be recorded as a reverse acquisition since the Manhattan
stockholders become the controlling stockholders of Atlantic. Based on the
recent thirty-day average price of Atlantic's common stock of [$0.12], the
preliminary estimate of the total purchase price is approximately [$2,979,413].
On completion of a valuation, it is expected that the combined company will
record a charge to operations of approximately [$2,779,413] (23,161,775 shares
of Atlantic common stock effectively issued to Atlantic shareholders at $0.12
per share in connection with the merger) for in-process research and
development.
The Unaudited Pro Forma Condensed Combined Statements of Operations
combine the historical consolidated statements of operations of Atlantic and
Manhattan. The Unaudited Pro Forma Condensed Combined Balance Sheet combines the
historical consolidated balance sheet of Atlantic and the historical
consolidated balance sheet of Manhattan, giving effect to the merger as if it
had been consummated on September 30, 2002.
You should read this information in conjunction with the:
o accompanying notes to the Unaudited Pro Forma Condensed Combined
Financial Statements;
o separate historical unaudited financial statements of Atlantic as of
and for the nine months ended September 30, 2002 and for the period
from July 13, 1993 (inception) to September 30, 2002 included in
Atlantic's Quarterly Report on Form 10-QSB for the nine month period
ended September 30, 2002, which is included in this document;
o separate historical financial statements of Manhattan as of and for
the nine months ended September 30, 2002 and for the period ended
December 31, 2001; and
o separate historical financial statements of Atlantic for the year
ended December 31, 2001 included in Atlantic's Annual Report on Form
10-KSB for the year ended December 31, 2001, and for the period from
July 13, 1993 (inception) to December 31, 2001, which is included in
this document.
We present the unaudited pro forma condensed combined financial
information for informational purposes only. The pro forma information is not
necessarily indicative of what our financial position or results of operations
actually would have been had we completed the merger on September 30, 2002. In
addition, the unaudited pro forma condensed combined financial information does
not purport to project the future financial position or operating results of the
combined company.
We prepared the unaudited pro forma condensed combined financial
information using the purchase method of accounting with Manhattan treated as
the acquirer. Accordingly, Manhattan's cost to acquire Atlantic will be
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values as of the date of acquisition. The allocation is dependent
upon certain valuations and other studies that have not progressed to a stage
where there is sufficient information to make a definitive allocation.
Accordingly, the purchase price allocation pro forma adjustments are preliminary
and have been made solely for the purpose of providing unaudited pro forma
condensed combined financial information.
F-50
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
(DEVELOPMENT STAGE COMPANIES)
As of September 30, 2002
Atlantic Manhattan
Technology Pharmaceuticals, Pro forma Pro forma
Assets Ventures, Inc Inc. Adjustments Combined
-------------- ---------------- -------------- -----------
Current assets:
Cash and cash equivalents $ 375,845 3,279 (200,000) (e) 179,124
Prepaid expenses 81,614 -- -- 81,614
Deferred consulting expense -- 45,442 -- 45,442
------------ ------------ ------------ -----------
Total current assets 457,459 48,721 (200,000) 306,180
Property and equipment, net 70,237 -- (55,000) (f) 15,237
Other assets 19,938 8,706 -- 28,644
------------ ------------ ----------- -----------
Total assets $ 547,634 57,427 (255,000) 350,061
============ ============ =========== ===========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued expenses $ 503,945 205,542 -- 709,487
Note and interest payable -- 601,346 -- 601,346
Due to stockholder -- 30,000 -- 30,000
Due to affiliate -- 51,315 -- 51,315
------------ ------------ ------------ -----------
Total current liabilities $ 503,945 888,203 -- 1,392,148
Stockholders' equity (deficiency):
Preferred stock 379 -- (379) (a) --
Preferred warrants 520,263 -- (520,263) (a) --
Common Stock 16,990 5,000 93,819 (b) 115,809
Additional paid-in capital 27,411,259 60,589 (24,753,966) (g) 2,717,882
Deficit accumulated during development stage (27,904,660) (892,365) 24,925,247 (c) (3,871,778)
------------ ------------ ------------ -----------
44,231 (826,776) (255,542) (1,038,087)
Less common stock subscriptions receivable (218) (4,000) 218 (d) (4,000)
Less treasury stock, at cost (324) -- 324 (d) --
------------ ------------ ------------ -----------
Total stockholders' equity
(deficiency) 43,689 (830,776) (255,000) (1,042,087)
------------ ------------ ------------ -----------
Total liabilities and
stockholders' equity (deficiency) $ 547,634 57,427 (255,000) 350,061
============ ============ ============ ===========
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-51
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(DEVELOPMENT STAGE COMPANIES)
For the Nine Months Ended September 30, 2002
Atlantic Manhattan
Technology Pharmaceuticals, Pro forma Pro forma
Ventures, Inc. Inc. Adjustments Combined
--------------- --------------- --------------- -------------
License Revenues: $ 500,000 $ -- $ -- $ --
------------- ------------- --------------- -------------
Costs and expenses:
Research and development 467,153 377,654 -- 844,807
Acquired in-process research and
development -- -- -- --
Consulting fees -- 217,885 -- 217,885
General and administrative 1,219,356 227,917 -- 1,447,273
------------- ------------- --------------- -------------
Total operating expenses 1,686,509 823,456 -- 2,509,965
------------- ------------- --------------- -------------
Operating loss (1,686,509) (823,456) -- (2,509,965)
Other (income) expense:
Interest and other (income) expense (10,255) 12,113 -- 1,858
------------- ------------- --------------- -------------
Total other (income) expense (10,255) 12,113 -- 1,858
------------- ------------- --------------- -------------
Net loss $ (1,176,254) $ (835,569) $ -- (2,511,823)
============= ============= =============== =============
Preferred stock dividend issued in
preferred shares 65,760 -- -- 65,760
------------- ------------- --------------- -------------
Net loss applicable to common shares $ (1,242,014) $ (835,569) $ -- (2,577,583)
============= ============= =============== =============
Net loss per common share:
Basic and diluted (0.02)
=============
Weighted average shares of common stock outstanding:
Basic and diluted 115,808,875
=============
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-52
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(DEVELOPMENT STAGE COMPANIES)
For the year ended December 31, 2002
Manhattan
Pharmaceuticals,
Inc.
Atlantic Technology For the period from
Ventures, Inc. August 6, 2001
For the year ended (inception) to Pro forma Pro forma
December 31, 2001 December 31, 2001 Adjustments Combined
-------------------- ------------------- ------------ -------------
Revenues:
Development revenue $ 2,461,922 $ -- $ -- 2,461,922
Grant revenue 250,000 -- -- 250,000
------------- ------------- --------------- -------------
Total revenues $ 2,711,922 $ -- $ -- $ 2,711,922
------------- ------------- --------------- -------------
Costs and expenses:
Cost of development revenue 2,082,568 -- -- 2,082,568
Research and development 886,716 27,500 -- 914,216
Acquired in-process research and
development -- -- -- --
Consulting Fees -- 27,736 -- 27,736
General and administrative 2,771,407 1,560 -- 2,772,967
Compensation expense (benefit) relating to
stock warrants (general and administrative),
net 78,611 -- -- 78,611
------------- ------------- --------------- -------------
Total operating expenses 5,819,302 56,796 -- 5,876,098
------------- ------------- --------------- -------------
Operating loss (3,107,380) (56,796) -- (3,164,176)
Other (income) expense:
Interest and other income (42,010) -- -- (42,010)
Gain on sale of Optex assets (2,569,451) -- -- (2,569,451)
Loss on sale of Gemini assets 334,408 -- -- 334,408
Equity in loss of affiliate 67,344 -- -- 67,344
Distribution to minority shareholders 837,274 -- -- 837,274
------------- ------------- --------------- -------------
Total other income (1,372,435) -- -- (1,372,435)
------------- ------------- --------------- -------------
Net loss $ (1,734,945) $ (56,796) $ -- (1,791,741)
============= ============= =============== =============
Imputed convertible preferred stock
dividend 600,000 -- -- 600,000
Dividend paid upon repurchase of Series B 167,127 -- -- 167,127
Preferred stock dividend issued in
preferred shares 107,449 -- -- 107,449
------------- ------------- --------------- -------------
Net loss applicable to common shares $ (2,609,521) $ (56,796) $ -- (2,666,317)
============= ============= =============== =============
Net loss per common share:
Basic and diluted (0.02)
=============
Weighted average shares of common stock outstanding:
Basic and diluted 115,808,875
=============
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-53
NOTES TO
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(DEVELOPMENT STAGE COMPANIES)
(1) DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
The merger is expected to be completed in the first quarter of 2003. The
Unaudited Pro Forma Condensed Combined Statements of Operations combine the
historical consolidated statements of operations of Atlantic, a public company,
and Manhattan. The merger agreement, dated December __, 2002, provides for the
stockholders of Manhattan exchanged all of their shares of Manhattan stock for
92,647,100 shares of common stock of Atlantic. The merger, which is subject to
shareholder approval, will be recorded as a reverse acquisition since the
Manhattan stockholders become the controlling stockholders of Atlantic. Based on
the recent thirty-day average price of Atlantic's common stock of [$0.12], the
preliminary estimate of the total purchase price approximates [$2,979,413]. Upon
completion of a valuation, it is expected that the combined company will record
a charge to operations of approximately [$2,779,413] (23,161,775 shares of
Atlantic common stock effectively issued to Atlantic's shareholders at $0.12 per
share in connection with the merger) for in process research and development. As
required by Financial Accounting Standards Board Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method" ("FIN 4"), the purchase price that is allocated to
in-process research and development will be immediately expensed.
We recognize that if the final valuation, which is expected to be
completed within three to six weeks from the completion of the merger, derives
different amounts from our preliminary estimate, we will adjust the combined
condensed financial statements.
The merger will be accounted for as a purchase by Manhattan under
accounting principles generally accepted in the United States of America. Under
the purchase method of accounting, the assets and liabilities of Atlantic will
be recorded as of the acquisition date, at their respective fair values, and
combined with those of Manhattan. The reported financial condition and results
of operations of Manhattan after completion of the merger will reflect these
values, but will not be restated retroactively to reflect the historical
financial position or results of operations of Atlantic. The merger is subject
to customary closing conditions, including regulatory approvals, as well as
approval by Atlantic and Manhattan shareholders of certain merger-related
proposals.
(2) PRO FORMA ADJUSTMENTS
(a) To reflect conversion of preferred stock and preferred warrants to
4,044,634 shares of common stock.
(b) To reflect issuance of 92,647,100 shares to the common shareholders
of Manhattan and the conversion of Atlantic's preferred stock and
preferred warrants and the exchange of certain common stock warrants
in connection with the merger.
(c) To eliminate deficit accumulated during development stage of
Atlantic and to record (1) the estimated in-process research and
development charge based on the preliminary estimated purchase price
of Atlantic and (2) estimated expenses associated with the merger.
(d) To eliminate subscriptions receivable and treasury stock of
Atlantic.
(e) To reflect estimated merger expenses.
(f) To reflect the fair value of property and equipment.
(g) To eliminate historical paid in capital of Atlantic and to reflect
issuance of new common shares in connection with the merger.
F-54
Exhibit A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as of
December 17, 2002, by and among Manhattan Pharmaceuticals, Inc., a company duly
organized and existing under the laws of the State of Delaware, having a place
of business located at 787 Seventh Avenue, 48th Floor, New York, New York 10019
("Manhattan"), Atlantic Technology Ventures, Inc., a company duly organized and
existing under the laws of the State of Delaware, having a place of business
located at 350 Fifth Avenue, Suite 5507, New York, New York 10118 ("Atlantic"),
and Manhattan Pharmaceuticals Acquisition Corp., a company duly organized and
existing under the laws of the State of Delaware, having a place of business
located at 350 Fifth Avenue, Suite 5507 New York, New York 10118 (hereinafter
referred to "MPAC").
W I T N E S S E T H
WHEREAS, the Boards of Directors of Manhattan, Atlantic and MPAC have
determined that it is in the best interests of such corporations and their
respective stockholders to consummate the merger of MPAC with and into Manhattan
with Manhattan as the surviving corporation (the "Merger");
WHEREAS, Atlantic, as the sole stockholder of MPAC, has approved this
Agreement, the Merger and the transactions contemplated by this Agreement
pursuant to action taken by written consent in accordance with the requirements
of the Delaware General Corporation Law ("DGCL") and the Bylaws of MPAC;
WHEREAS, pursuant to the Merger, among other things, the outstanding
shares of common stock of Manhattan shall be converted into the right to receive
upon Closing (as hereinafter defined) and thereafter, the Merger Consideration
(as hereinafter defined);
WHEREAS, the parties to this Agreement intend to adopt this Agreement as a
plan of reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations promulgated
thereunder, and intend that the Merger and the transactions contemplated by this
Agreement be undertaken pursuant to that plan; and
WHEREAS, the parties to this Agreement intend that the Merger qualify as a
"reorganization," within the meaning of Section 368(a) of the Code, and that
Atlantic, MPAC and Manhattan will each be a "party to a reorganization," within
the meaning of Section 368(b) of the Code, with respect to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
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ARTICLE I
DEFINITIONS
As used herein, the following terms shall have the following meanings
(such meaning to be equally applicable to both the singular and plural forms of
the terms defined):
"Affiliate" has the meaning as defined in Rule 12b-2 promulgated under the
Exchange Act, as such regulation is in effect on the date hereof.
"Atlantic Common Stock" shall mean the common stock, par value $.001 per
share, of Atlantic.
"Atlantic 10-K Reports" shall have the meaning ascribed thereto in Section
4.4.
"Atlantic 10-Q Reports" shall have the meaning ascribed thereto in Section
4.4.
"Atlantic Proposals" has the meaning ascribed thereto in Section 6.9.
"Certificate of Merger" shall mean the certificate of merger in
substantially the form attached hereto as Exhibit A.
"Code" has the meaning ascribed thereto in the preambles to this
Agreement.
"Copyrights" has the meaning ascribed thereto in Section 3.20(a).
"Delaware General Corporation Law" or "DGCL" shall mean Title 8, Chapter 1
of the Delaware Code, as amended.
"Effective Date" shall have the meaning as set forth in Section 2.1(e)
hereof.
"Effective Time" shall have the meaning ascribed thereto in Section 2.1(e)
hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974 or any
successor law and the regulations thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Ratio" means the quotient resulting from dividing (A) four (4)
times the number of shares of Atlantic Common Stock outstanding immediately
prior to the Effective Time, by (B) the number of shares of Manhattan Common
Stock outstanding immediately prior to the Effective Time.
"GAAP" shall mean United States generally accepted accounting principles
as in effect from time to time.
"Intellectual Property" has the meaning ascribed thereto in Section
3.20(a).
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"Know-How" has the meaning ascribed thereto in Section 3.20(a).
"Knowledge" means, with respect to an individual, that such individual is
actually aware of a particular fact or other matter, with no obligation to
conduct any inquiry or other investigation to determine the accuracy of such
fact or other matter. A person other than an individual shall be deemed to have
Knowledge of a particular fact or other matter if the officers, directors or
other management personnel of such person had Knowledge of such fact or other
matter.
"Manhattan Common Stock" means the common stock, par value $.001, of
Manhattan.
"Material Adverse Effect" shall, with respect to an entity, mean a
material adverse effect on the business, operations, results of operations or
financial condition of such entity on a consolidated basis.
"Merger" shall have the meaning ascribed thereto in the preambles of this
Agreement.
"Merger Consideration" means the shares of Atlantic Common Stock issuable
in connection with the Merger to the holders of Manhattan Common Stock based on
the Exchange Ratio.
"Patents" has the meaning ascribed thereto in Section 3.20(a).
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, governmental
authority or other entity.
"Proxy Statement" shall have the meaning ascribed thereto in Section 6.4.
"Requisite Manhattan Stockholder Vote" shall have the meaning ascribed
thereto in Section 3.2.
"Requisite Atlantic Stockholder Votes" shall have the meaning ascribed
thereto in Section 4.2.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subsidiary" shall, with respect to any entity, mean each corporation in
which such entity owns directly or indirectly fifty percent (50%) or more of the
voting securities of such corporation and shall, unless otherwise indicated, be
deemed to refer to both direct and indirect subsidiaries of such entity.
"Surviving Company" shall have the meaning ascribed thereto in Article II.
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"Tax or Taxes" shall mean any federal, state, local or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, property or windfall profits taxes, environmental taxes,
customs duties, capital stock, franchise, employees' income withholding, foreign
or domestic withholding, social security, unemployment, disability, workers'
compensation, employment-related insurance, real property, personal property,
sales, use, transfer, value added, alternative or add-on minimum or other
governmental tax, fee, assessment or charge of any kind whatsoever including any
interest, penalties or additions to any Tax or additional amounts in respect of
the foregoing.
"Trademarks" has the meaning ascribed thereto in Section 3.20(a).
ARTICLE II
MERGER
Subject to the satisfaction or waiver of the conditions set forth in
Article VII, at the Effective Time, (i) MPAC will merge with and into Manhattan,
and (ii) Manhattan will become a wholly-owned subsidiary of Atlantic. The term
"Surviving Company" as used herein shall mean Manhattan, as a wholly-owned
subsidiary of Atlantic after giving effect to the Merger. The Merger will be
effected pursuant to the Certificate of Merger in accordance with the provisions
of, and with the effect provided in, Section 251 of the DGCL.
2.1 Effects of Merger.
(a) From and after the Effective Time and until further amended in
accordance with law, (i) the Certificate of Incorporation of Manhattan as in
effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Company, and (ii) the Bylaws of Manhattan as in
effect immediately prior to the Effective Time shall be the Bylaws of the
Surviving Company.
(b) Atlantic, Manhattan and MPAC, respectively, shall each use its
best efforts to take all such action as may be necessary or appropriate to
effectuate the Merger in accordance with the DGCL at the Effective Time. If at
any time after the Effective Time, any further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the Surviving Company
with full right, title and possession to all properties, rights, privileges,
immunities, powers and franchises of either Manhattan or MPAC, the officers of
the Surviving Company are fully authorized in the name of Atlantic, Manhattan
and MPAC or otherwise to take, and shall take, all such lawful and necessary
action.
(c) Subject to the provisions of Articles VII and VIII hereof, the
closing (the "Closing") of the transactions contemplated hereby shall take place
at such location, on such date (the "Closing Date") and at such time as
Manhattan and Atlantic mutually agree at the earliest practicable time after the
satisfaction or waiver of the conditions in Article VII, but in no event later
than ten (10) business days after all such conditions have been satisfied or
waived, or on such other date as may be mutually agreed by the parties hereto.
On the Closing Date, to effect the Merger, the parties hereto will cause the
Certificate of Merger to be filed with the Delaware Secretary of State in
accordance with the DGCL. The Merger shall be effective when
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the Certificate of Merger is filed with the Delaware Secretary of State (the
"Effective Time"). As used herein, the term "Effective Date" shall mean the date
on which the Certificate of Merger is filed with the Delaware Secretary of
State.
2.2 Effect on Manhattan Capital Stock and MPAC Capital Stock. To
effectuate the Merger, and subject to the terms and conditions of this
Agreement, at the Effective Time:
(a) Each issued and outstanding share of Manhattan Common Stock
immediately prior to the Effective Time (other than shares to be extinguished
pursuant to this Section 2.2 and Dissenting Shares as defined in Section 2.5
below) shall be converted into and exchangeable for such number of fully paid
and non-assessable shares of Atlantic Common Stock equal to the Exchange Ratio,
and Atlantic shall issue to each holder of Manhattan Common Stock (other than
holders of shares extinguished pursuant to this Section 2.2 and Dissenting
Shares) the number of shares of Atlantic Common Stock equal to the number of
shares of Manhattan Common Stock held by such stockholder multiplied by the
Exchange Ratio, rounded to the nearest whole share;
(b) All shares of Manhattan Common Stock held at the Effective Time
by Manhattan as treasury stock will be canceled and no payment will be made with
respect to those shares;
(c) All outstanding options and warrants to purchase shares of
Manhattan Common Stock outstanding immediately prior to the Effective Time shall
convert to the right to purchase the same number of shares of Atlantic Common
Stock based on the Exchange Ratio as the holder thereof would have been entitled
to receive if such option or warrant had been exercised immediately prior to the
Effective Time, except that any fractional shares of Atlantic Common Stock
subject to any such converted option or warrant must be rounded to the nearest
share; and the exercise price per share of Atlantic Common Stock under each such
converted option or warrant will be equal to the quotient obtained by dividing
the exercise price per share of Manhattan Common Stock under each outstanding
Manhattan option or warrant by the Exchange Ratio, except that the exercise
price under each converted option or warrant must be rounded to the nearest
cent;
(d) Each share of Manhattan Common Stock issued and outstanding
immediately prior to the Effective Time and owned by MPAC or Atlantic, if any,
shall be cancelled and extinguished without any conversion thereof and no
payment shall be made with respect thereto; and
(e) All issued and outstanding shares of common stock, $0.01 par
value per share, of MPAC held by Atlantic immediately prior to the Effective
Time will be converted into and become one validly issued, fully paid and
nonassessable share of common stock of the Surviving Company.
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2.3 Rights of Holders of Manhattan Capital Stock.
(a) On and after the Effective Date and until surrendered for
exchange, each outstanding stock certificate that immediately prior to the
Effective Date represented shares of Manhattan Common Stock (except Dissenting
Shares and shares cancelled or extinguished pursuant to Section 2.2) shall be
deemed for all purposes, to evidence ownership of and to represent the number of
whole shares of Atlantic Common Stock into which such shares of Manhattan Common
Stock shall have been converted pursuant to Section 2.2(a) above. The record
holder of each such outstanding certificate representing shares of Manhattan
Common Stock, shall, after the Effective Date, be entitled to vote the shares of
Atlantic Common Stock into which such shares of Manhattan Common Stock shall
have been converted on any matters on which the holders of record of the
Atlantic Common Stock, as of any date subsequent to the Effective Date, shall be
entitled to vote. In any matters relating to such certificates of Manhattan
Common Stock, Atlantic may rely conclusively upon the record of stockholders
maintained by Manhattan containing the names and addresses of the holders of
record of Manhattan Common Stock on the Effective Date.
(b) On and after the Effective Date, Atlantic shall reserve a
sufficient number of authorized but unissued shares of Atlantic Common Stock for
issuance in connection with (i) the conversion of Manhattan Common Stock into
Atlantic Common Stock and (ii) the exercise of all options and warrants to
purchase shares of Manhattan Common Stock outstanding immediately prior to the
Effective Time.
2.4 Procedure for Exchange of Manhattan Common Stock.
(a) After the Effective Time, holders of certificates theretofore
evidencing outstanding shares of Manhattan Common Stock (except Dissenting
Shares and shares cancelled or extinguished pursuant to Section 2.2), upon
surrender of such certificates to the registrar or transfer agent for Atlantic
Common Stock, shall be entitled to receive certificates representing the number
of whole shares of Atlantic Common Stock into which shares of Manhattan Common
Stock theretofore represented by the certificates so surrendered shall have been
converted as provided in Section 2.2(a) hereof. Atlantic shall not be obligated
to deliver the Merger Consideration to which any former holder of shares of
Manhattan Common Stock is entitled until such holder surrenders the certificate
or certificates representing such shares. Upon surrender, each certificate
evidencing Manhattan Common Stock shall be canceled. If there is a transfer of
Manhattan Common Stock ownership which is not registered in the transfer records
of Manhattan, a certificate representing the proper number of shares of Atlantic
Common Stock may be issued to a person other than the person in whose name the
certificate so surrendered is registered if: (x) upon presentation to the
Secretary of Atlantic, such certificate shall be properly endorsed or otherwise
be in proper form for transfer, (y) the person requesting such payment shall pay
any transfer or other taxes required by reason of the issuance of shares of
Atlantic Common Stock to a person other than the registered holder of such
certificate or establish to the reasonable satisfaction of Atlantic that such
tax has been paid or is not applicable, and (z) the issuance of such Atlantic
Common Stock shall not, in the sole discretion of Atlantic, violate the
requirements of the Regulation D "safe harbor" of the Securities Act with
respect to the private placement of Atlantic Common Stock that will result from
the Merger.
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(b) All shares of Atlantic Common Stock issued upon the surrender
for exchange of Manhattan Common Stock in accordance with the above terms and
conditions shall be deemed to have been issued and paid in full satisfaction of
all rights pertaining to such shares of Manhattan Common Stock.
(c) No holder surrendering a certificate representing shares of
Manhattan Common Stock will be issued in exchange a certificate representing
other than a whole number of shares of Atlantic Common Stock.
(d) Any shares of Atlantic Common Stock issued in the Merger will
not be transferable except (1) pursuant to an effective registration statement
under the Securities Act or (2) upon receipt by Atlantic of a written opinion of
counsel reasonably satisfactory to Atlantic to the effect that the proposed
transfer is exempt from the registration requirements of the Securities Act and
relevant state securities laws. Restrictive legends must be placed on all
certificates representing shares of Atlantic Common Stock issued in the Merger,
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND CERTAIN OTHER CONDITIONS.
NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION
OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT (A)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER
AND ALL APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS (SUCH FEDERAL AND
STATE LAWS, THE "SECURITIES LAWS") OR (B) IF ATLANTIC TECHNOLOGY VENTURES,
INC. HAS BEEN FURNISHED WITH AN OPINION OF COUNSEL FOR THE HOLDER, WHICH
OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO ATLANTIC
TECHNOLOGY VENTURES, INC., TO THE EFFECT THAT SUCH TRANSFER, SALE,
ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE
PROVISIONS OF THE SECURITIES LAWS."
(e) In the event any certificate for Manhattan Common Stock shall
have been lost, stolen or destroyed, Atlantic shall issue and pay in exchange
for such lost, stolen or destroyed certificate, upon the making of an affidavit
of that fact by the holder thereof, such shares of the Atlantic Common Stock and
cash for fractional shares, if any, as may be required pursuant to this
Agreement; provided, however, that Atlantic, in its discretion and as a
condition precedent to the issuance and payment thereof, may require the owner
of such lost, stolen or destroyed certificate to deliver a bond in such sum as
it may direct as indemnity against any claim that may be made against Atlantic
or any other party with respect to the certificate alleged to have been lost,
stolen or destroyed.
2.5 Dissenting Shares.
(a) Shares of capital stock of Manhattan held by stockholders of
Manhattan who have properly exercised and preserved appraisal rights with
respect to those shares in
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accordance with Section 262 of the DGCL ("Dissenting Shares") shall not be
converted into or represent a right to receive shares of Atlantic Common Stock
pursuant to Section 2.2(a) above, but the holders thereof shall be entitled only
to such rights as are granted by Section 262 of the DGCL. Each holder of
Dissenting Shares who becomes entitled to payment for such shares pursuant to
Section 262 of the DGCL shall receive payment therefor from the Surviving
Company in accordance with such laws; provided, however, that if any such holder
of Dissenting Shares shall have effectively withdrawn such holder's demand for
appraisal of such shares or lost such holder's right to appraisal and payment of
such shares under Section 262 of the DGCL, such holder or holders (as the case
may be) shall forfeit the right to appraisal of such shares and each such share
shall thereupon be deemed to have been canceled, extinguished and converted, as
of the Effective Time, into and represent the right to receive payment from
Atlantic of shares of Atlantic Common Stock as provided in Section 2.2(a) above.
(b) Any payments in respect of Dissenting Shares will be deemed made
by the Surviving Company.
2.6 Directors and Officers of the Surviving Corporation. From and after
the Effective Time, the directors and officers of the Surviving Company shall be
the persons who were directors of Manhattan immediately prior to the Effective
Time and the officers of Manhattan immediately prior to the Effective Time.
These directors and officers of the Surviving Company shall hold office for the
term specified in, and subject to the provisions contained in, the Certificate
of Incorporation and Bylaws of the Surviving Company and applicable law. If, at
or after the Effective Time, a vacancy shall exist on the board of directors or
in any of the offices of the Surviving Company, such vacancy shall be filled in
the manner provided in the Certificate of Incorporation and Bylaws of the
Surviving Company.
2.7 Directors and Officers of Atlantic. Immediately after the Effective
Time, the board of directors of Atlantic will consist of the following four (4)
persons: David M. Tanen, Joshua Kazam, Michael Weiser and Joan Pons. Immediately
after the Effective Time, the board of directors of Atlantic will elect the
officers of Manhattan immediately prior to the Effective Time as the officers of
Atlantic. The initial directors and officers of Atlantic shall hold office for
the term specified in, and subject to the provisions contained in, the
Certificate of Incorporation and Bylaws of Atlantic and applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MANHATTAN
Manhattan hereby represents and warrants as follows:
3.1 Organization and Qualification. Manhattan is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the requisite corporate power to carry on its business as now
conducted. The copies of the Certificate of Incorporation and Bylaws of
Manhattan that have been made available to Atlantic prior to the date of this
Agreement are correct and complete copies of such documents as in effect as of
the date hereof. Manhattan is licensed or qualified to do business in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be licensed or qualified, except
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where the failure to be so licensed or qualified would not have a Material
Adverse Effect on Manhattan or the Surviving Company.
3.2 Authority Relative to this Agreement; Non-Contravention. Manhattan has
the requisite corporate power and authority to enter into this Agreement and to
carry out its obligations hereunder. The execution and delivery of this
Agreement by Manhattan and the consummation by Manhattan of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
Manhattan and, except for approval of this Agreement and the Merger by the
requisite vote of Manhattan's stockholders (the "Requisite Manhattan Stockholder
Vote"), no other corporate proceedings on the part of Manhattan are necessary to
authorize the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Manhattan and, assuming it is a valid and binding obligation of
Atlantic and MPAC, constitutes a valid and binding obligation of Manhattan
enforceable in accordance with its terms except as enforcement may be limited by
general principles of equity whether applied in a court of law or a court of
equity and by bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally. Except as set forth in Schedule 3.2, Manhattan is
not subject to, or obligated under, any provision of (a) its Certificate of
Incorporation or Bylaws, (b) any agreement, arrangement or understanding, (c)
any license, franchise or permit or (d) subject to obtaining the approvals
referred to in the next sentence, any law, regulation, order, judgment or
decree, which would conflict with, be breached or violated, or in respect of
which a right of termination or acceleration or any security interest, charge or
encumbrance on any of its assets would be created, by the execution, delivery or
performance of this Agreement, or the consummation of the transactions
contemplated hereby, other than any such conflicts, breaches, violations, rights
of termination or acceleration or security interests, charges or encumbrances
which, in the aggregate, could not reasonably be expected to result in a
Material Adverse Effect on Manhattan or the Surviving Company. Except for (a)
approvals under applicable Blue Sky laws, (b) the filing of the Certificate of
Merger with the Secretary of State of Delaware, and (c) such filings,
authorizations or approvals as may be set forth in Schedule 3.2, no
authorization, consent or approval of, or filing with, any public body, court or
authority is necessary on the part of Manhattan for the consummation by
Manhattan of the transactions contemplated by this Agreement, except for such
authorizations, consents, approvals and filings as to which the failure to
obtain or make the same would not, in the aggregate, reasonably be expected to
have a Material Adverse Effect on Manhattan or the Surviving Company or
adversely affect the consummation of the transactions contemplated hereby.
3.3 Capitalization.
(a) The authorized, issued and outstanding shares of capital stock
of Manhattan as of the date hereof are correctly set forth on Schedule 3.3(a).
The issued and outstanding shares of capital stock of Manhattan are duly
authorized, validly issued, fully paid and nonassessable and have not been
issued in violation of any preemptive rights, and to Manhattan's Knowledge, are
free from any restrictions on transfer (other than restrictions under the
Securities Act or state securities laws) or any option, lien, pledge, security
interest, encumbrance or charge of any kind. Other than as described on Schedule
3.3, Manhattan has no other equity securities or securities containing any
equity features authorized, issued or
9
outstanding. Except as set forth in Schedule 3.3(a) hereto, there are no
agreements or other rights or arrangements existing which provide for the sale
or issuance of capital stock by Manhattan and there are no rights,
subscriptions, warrants, options, conversion rights or agreements of any kind
outstanding to purchase or otherwise acquire from Manhattan any shares of
capital stock or other securities of Manhattan of any kind. Except as set forth
on Schedule 3.3, there are no agreements or other obligations (contingent or
otherwise) which may require Manhattan to repurchase or otherwise acquire any
shares of its capital stock.
(b) Schedule 3.3(b) contains a list of the names and addresses of
the owners of record as of the date of this Agreement of all issued and
outstanding shares of Manhattan Common Stock and the number of shares of
Manhattan Common Stock each of them holds. Each of the Manhattan stockholders
noted in Schedule 3.3(b) as having done so has entered into a voting agreement
with Atlantic in the form attached as Exhibit B. Such Manhattan stockholders
collectively hold a majority of the outstanding shares of Manhattan Common
Stock.
(c) Manhattan does not own, and is not party to any contract to
acquire, any equity securities or other securities of any entity or any direct
or indirect equity or ownership interest in any other entity. To Manhattan's
Knowledge, there exist no voting trusts, proxies, or other contracts with
respect to the voting of shares of capital stock of Manhattan.
3.4 Litigation. There are no actions, suits, proceedings, orders or
investigations pending or, to the Knowledge of Manhattan, threatened against
Manhattan, at law or in equity, or before or by any federal, state or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
3.5 No Brokers or Finders. Except as disclosed on Schedule 3.5, there are
no claims for brokerage commissions, finders' fees, investment advisory fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement, understanding, commitment or agreement made
by or on behalf of Manhattan.
3.6 Tax Matters.
(a) (i) Manhattan has timely filed (or has had timely filed on its
behalf) all returns, declarations, reports, estimates, information returns, and
statements, including any schedules and amendments to such documents ("Manhattan
Returns"), required to be filed or sent by it in respect of any Taxes or
required to be filed or sent by it by any taxing authority having jurisdiction;
(ii) all such Manhattan Returns are complete and accurate in all material
respects; (iii) Manhattan has timely and properly paid (or has had paid on its
behalf) all Taxes required to be paid by it; (iv) Manhattan has established on
the Manhattan Latest Balance Sheet, in accordance with GAAP, reserves that are
adequate for the payment of any Taxes not yet due and payable; (v) Manhattan has
complied with all applicable laws, rules, and regulations relating to the
collection or withholding of Taxes from third parties (including without
limitation employees) and the payment thereof (including, without limitation,
withholding of Taxes under Sections 1441 and 1442 of the Code, or similar
provisions under any foreign laws).
(b) There are no liens for Taxes upon any assets of Manhattan,
except liens for Taxes not yet due.
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(c) No deficiency for any Taxes has been proposed, asserted or
assessed against Manhattan that has not been resolved and paid in full or is not
being contested in good faith. Except as disclosed in Schedule 3.6, no waiver,
extension or comparable consent given by Manhattan regarding the application of
the statute of limitations with respect to any Taxes or Returns is outstanding,
nor is any request for any such waiver or consent pending. Except as disclosed
in Schedule 3.6, there has been no Tax audit or other administrative proceeding
or court proceeding with regard to any Taxes or Manhattan Returns, nor is any
such Tax audit or other proceeding pending, nor has there been any notice to
Manhattan by any Taxing authority regarding any such Tax audit or other
proceeding, or, to the Knowledge of Manhattan, is any such Tax audit or other
proceeding threatened with regard to any Taxes or Manhattan Returns. Manhattan
does not expect the assessment of any additional Taxes of Manhattan for any
period prior to the date hereof and has no Knowledge of any unresolved
questions, claims or disputes concerning the liability for Taxes of Manhattan
which would exceed the estimated reserves established on its books and records.
(d) Except as set forth on Schedule 3.6, Manhattan is not a party to
any agreement, contract or arrangement that would result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the meaning
of Section 280G of the Code and the consummation of the transactions
contemplated by this Agreement will not be a factor causing payments to be made
by Manhattan not to be deductible (in whole or in part) under Section 280G of
the Code. Manhattan is not liable for Taxes of any other person, and is not
currently under any contractual obligation to indemnify any person with respect
to Taxes, or a party to any tax sharing agreement or any other agreement
providing for payments by Manhattan with respect to Taxes. Manhattan is not a
party to any joint venture, partnership or other arrangement or contract which
could be treated as a partnership for federal income tax purposes. Manhattan has
not agreed and is not required, as a result of a change in method of accounting
or otherwise, to include any adjustment under Section 481 of the Code (or any
corresponding provision of state, local or foreign law) in taxable income.
Schedule 3.6 contains a list of all jurisdictions in which Manhattan is required
to file any Manhattan Return and no claim has ever been made by a taxing
authority in a jurisdiction where Manhattan does not currently file Manhattan
Returns that Manhattan is or may be subject to taxation by that jurisdiction.
There are no advance rulings in respect of any Tax pending or issued by any
Taxing authority with respect to any Taxes of Manhattan. Manhattan has not
entered into any gain recognition agreements under Section 367 of the Code and
the regulations promulgated thereunder. Manhattan is not liable with respect to
any indebtedness the interest of which is not deductible for applicable federal,
foreign, state or local income tax purposes. Manhattan has not filed or been
included in a combined, consolidated or unitary Tax return (or the substantial
equivalent thereof) of any person.
(e) Manhattan has been neither a "distributing corporation" nor a
"controlled corporation" (within the meaning of Section 355 of the Code) in a
distribution of stock qualifying for tax-free treatment under Section 355 of the
Code.
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(f) Except as set forth on Schedule 3.6, Manhattan has not requested
any extension of time within which to file any Manhattan Return, which return
has not since been filed.
3.7 Contracts and Commitments. Contracts and Commitments.
(a) Schedule 3.7 hereto lists the following agreements, whether oral
or written, to which Manhattan is a party, which are currently in effect, and
which relate to the operation of Manhattan's business: (i) collective bargaining
agreement or contract with any labor union; (ii) bonus, pension, profit sharing,
retirement or other form of deferred compensation plan; (iii) hospitalization
insurance or other welfare benefit plan or practice, whether formal or informal;
(iv) stock purchase or stock option plan; (v) contract for the employment of any
officer, individual employee or other person on a full-time or consulting basis
or relating to severance pay for any such person; (vi) confidentiality
agreement; (vii) contract, agreement or understanding relating to the voting of
Manhattan Common Stock or the election of directors of Manhattan; (viii)
agreement or indenture relating to the borrowing of money or to mortgaging,
pledging or otherwise placing a lien on any of the assets of Manhattan; (ix)
guaranty of any obligation for borrowed money or otherwise; (x) lease or
agreement under which Manhattan is lessee of, or holds or operates any property,
real or personal, owned by any other party, for which the annual rental exceeds
$10,000; (xi) lease or agreement under which Manhattan is lessor of, or permits
any third party to hold or operate, any property, real or personal, for which
the annual rental exceeds $10,000; (xii) contract which prohibits Manhattan from
freely engaging in business anywhere in the world; (xiii) license agreement or
agreement providing for the payment or receipt of royalties or other
compensation by Manhattan in connection with the intellectual property rights
listed in Schedule 3.20(b) hereto; (xiv) contract or commitment for capital
expenditures in excess of $10,000; (xv) agreement for the sale of any capital
asset; or (xvi) other agreement which is either material to Manhattan's business
or was not entered into in the ordinary course of business.
(b) To Manhattan's Knowledge, Manhattan has performed all
obligations required to be performed by it in connection with the contracts or
commitments required to be disclosed in Schedule 3.7 hereto and is not in
receipt of any claim of default under any contract or commitment required to be
disclosed under such caption; Manhattan has no present expectation or intention
of not fully performing any material obligation pursuant to any contract or
commitment required to be disclosed under such caption; and Manhattan has no
Knowledge of any breach or anticipated breach by any other party to any contract
or commitment required to be disclosed under such caption.
3.8 Affiliate Transactions. Except as set forth in Schedule 3.8 hereto,
and other than pursuant to this Agreement, no officer, director or employee of
Manhattan, or any member of the immediate family of any such officer, director
or employee, or any entity in which any of such persons owns any beneficial
interest (other than any publicly-held corporation whose stock is traded on a
national securities exchange or in the over-the-counter market and less than
five percent of the stock of which is beneficially owned by any of such persons)
(collectively "Manhattan Insiders"), has any agreement with Manhattan (other
than normal employment arrangements) or any interest in any property, real,
personal or mixed, tangible or intangible, used in or pertaining to the business
of Manhattan (other than ownership of capital stock of
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Manhattan). Except as set forth on Schedule 3.8, Manhattan is not indebted to
any Manhattan Insider (except for amounts due as normal salaries and bonuses and
in reimbursement of ordinary business expenses) and no Manhattan Insider is
indebted to Manhattan (except for cash advances for ordinary business expenses).
None of the Manhattan Insiders has any direct or indirect interest in any
competitor, supplier or customer of Manhattan or in any person, firm or entity
from whom or to whom Manhattan leases any property, or in any other person, firm
or entity with whom Manhattan transacts business of any nature. For purposes of
this Section 3.8, the members of the immediate family of an officer, director or
employee shall consist of the spouse, parents, children and siblings of such
officer, director or employee.
3.9 Compliance with Laws; Permits.
(a) Except for any noncompliance that would not reasonably be
expected to have a Material Adverse Effect on Manhattan or the Surviving
Company, Manhattan and its officers, directors, agents and employees have
complied with all applicable laws, regulations and other requirements,
including, but not limited to, federal, state, local and foreign laws,
ordinances, rules, regulations and other requirements pertaining to equal
employment opportunity, employee retirement, affirmative action and other hiring
practices, occupational safety and health, workers' compensation, unemployment
and building and zoning codes, and no claims have been filed against Manhattan,
and Manhattan has not received any notice, alleging a violation of any such
laws, regulations or other requirements. Manhattan is not relying on any
exemption from or deferral of any such applicable law, regulation or other
requirement that would not be available to Atlantic after it acquires
Manhattan's properties, assets and business.
(b) Manhattan has, in full force and effect, all licenses, permits
and certificates, from federal, state, local and foreign authorities (including,
without limitation, federal and state agencies regulating occupational health
and safety) necessary to conduct its business and operate its properties
(collectively, the "Manhattan Permits"). A true, correct and complete list of
all the Manhattan Permits is set forth in Schedule 3.9 hereto. To the Knowledge
of Manhattan, Manhattan has conducted its business in compliance with all
material terms and conditions of the Manhattan Permits, except for any
noncompliance that would not reasonably be expected to have a Material Adverse
Effect on Manhattan or the Surviving Company.
3.10 Financial Statements. Manhattan has made available to Atlantic
audited balance sheets of Manhattan as of December 31, 2001 and as of September
30, 2002, and the related audited statements of income, changes in stockholders'
equity, and cash flows of Manhattan for the periods then ended (the "Manhattan
Financial Statements"). The Manhattan Financial Statements have been prepared in
accordance with GAAP consistently applied with past practice (except in each
case as described in the notes thereto) and on that basis present fairly, in all
material respects, the financial position and the results of operations, changes
in stockholders' equity, and cash flows of Manhattan as of the date of and for
the period referred to in the Manhattan Financial Statements.
3.11 Books and Records. The books of account, minute books, stock record
books, and other records of Manhattan, complete copies of which have been made
available to Atlantic, have been properly kept and contain no inaccuracies
except for inaccuracies that would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on
13
Manhattan or the Surviving Company. At the Closing, all of Manhattan's records
will be in the possession of Manhattan.
3.12 Real Property. Manhattan does not own any real property. Schedule
3.12 contains an accurate list of all leaseholds and other interests of
Manhattan in any real property. Manhattan has good and valid title to those
leaseholds and other interests free and clear of all liens and encumbrances, and
the real property to which those leasehold and other interests pertain
constitutes the only real property used in Manhattan's business.
3.13 Insurance. The insurance policies owned and maintained by Manhattan
that are material to Manhattan are in full force and effect, all premiums due
and payable thereon have been paid (other than retroactive or retrospective
premium adjustments that Manhattan is not currently required, but may in the
future be required, to pay with respect to any period ending prior to the date
of this Agreement), and Manhattan has received no notice of cancellation or
termination with respect to any such policy that has not been replaced on
substantially similar terms prior to the date of such cancellation.
3.14 No Undisclosed Liabilities. Except as reflected in the audited
balance sheet of Manhattan at September 30, 2002 (the "Manhattan Latest Balance
Sheet"), Manhattan has no liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise except (i) liabilities which have arisen after the
date of the Manhattan Latest Balance Sheet in the ordinary course of business
(none of which is a material uninsured liability for breach of contract, breach
of warranty, tort, infringement, claim or lawsuit), or (ii) as otherwise set
forth in Schedule 3.14.
3.15 Environmental Matters. None of the operations of Manhattan involves
the generation, transportation, treatment, storage or disposal of hazardous
waste, as defined under 40 C.F.R. Parts 260-270 or any state, local or foreign
equivalent.
3.16 Absence of Certain Developments. Except as set forth in Schedule 3.16
or as disclosed in the Manhattan Financial Statements or as otherwise
contemplated by this Agreement, since September 30, 2002, Manhattan has
conducted its business only in the ordinary course consistent with past practice
and there has not occurred (i) any event having a Material Adverse Effect on
Manhattan or the Surviving Company, (ii) any event that would reasonably be
expected to prevent or materially delay the performance of Manhattan's
obligations pursuant to this Agreement, (iii) any material change by Manhattan
in its accounting methods, principles or practices, (iv) any declaration,
setting aside or payment of any dividend or distribution in respect of the
shares of capital stock of Manhattan or any redemption, purchase or other
acquisition of any of Manhattan's securities, (v) any increase in the
compensation or benefits or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan of Manhattan, or any other increase in
the compensation payable or to become payable to any employees, officers,
consultants or directors of Manhattan, (vi) other than issuances of options
pursuant to duly adopted option plans, any issuance, grants or sale of any
stock, options, warrants, notes, bonds or other securities, or entry into any
agreement with respect thereto by Manhattan, (vii) any amendment to the
Certificate of Incorporation or Bylaws of Manhattan, (viii) other than in the
ordinary course of business consistent with past practice, any (w) capital
14
expenditures by Manhattan, (x) purchase, sale, assignment or transfer of any
material assets by Manhattan, (y) mortgage, pledge or existence of any lien,
encumbrance or charge on any material assets or properties, tangible or
intangible of Manhattan, except for liens for taxes not yet due and such other
liens, encumbrances or charges which do not, individually or in the aggregate,
have a Material Adverse Effect on Manhattan or the Surviving Company, or (z)
cancellation, compromise, release or waiver by Manhattan of any rights of
material value or any material debts or claims, (ix) any incurrence by Manhattan
of any material liability (absolute or contingent), except for current
liabilities and obligations incurred in the ordinary course of business
consistent with past practice, (x) damage, destruction or similar loss, whether
or not covered by insurance, materially affecting the business or properties of
Manhattan, (xi) entry into any agreement, contract, lease or license other than
in the ordinary course of business consistent with past practice, (xii) any
acceleration, termination, modification or cancellation of any agreement,
contract, lease or license to which Manhattan is a party or by which it is
bound, (xiii) entry by Manhattan into any loan or other transaction with any
officers, directors or employees of Manhattan, (xiv) any charitable or other
capital contribution by Manhattan or pledge therefore, (xv) entry by Manhattan
into any transaction of a material nature other than in the ordinary course of
business consistent with past practice, or (xvi) any negotiation or agreement by
the Manhattan to do any of the things described in the preceding clauses (i)
through (xv).
3.17 Employee Benefit Plans. (a) Schedule 3.17(a) lists all material (i)
"employee benefit plans," within the meaning of Section 3(3) of ERISA, of
Manhattan, (ii) bonus, stock option, stock purchase, stock appreciation right,
incentive, deferred compensation, supplemental retirement, severance, and fringe
benefit plans, programs, policies or arrangements, and (iii) employment or
consulting agreements, for the benefit of, or relating to, any current or former
employee (or any beneficiary thereof) of Manhattan, in the case of a plan
described in (i) or (ii) above, that is currently maintained by Manhattan or
with respect to which Manhattan has an obligation to contribute, and in the case
of an agreement described in (iii) above, that is currently in effect (the
"Manhattan Plans"). Manhattan has heretofore made available to Atlantic true and
complete copies of the Manhattan Plans and any amendments thereto, any related
trust, insurance contract, summary plan description, and, to the extent required
under ERISA or the Code, the most recent annual report on Form 5500 and
summaries of material modifications.
(b) No Manhattan Plan is (1) a "multiemployer plan" within the
meaning of Sections 3(37) or 4001(a)(3) of ERISA, (2) a "multiple employer plan"
within the meaning of Section 3(40) of ERISA or Section 413(c) of the Code, or
(3) is subject to Title IV of ERISA or Section 412 of the Code.
(c) Except as set forth in Schedule 3.17(c), there is no proceeding
pending or, to Manhattan's Knowledge, threatened against the assets of any
Manhattan Plan or, with respect to any Manhattan Plan, against Manhattan other
than proceedings that would not reasonably be expected to result in a material
liability, and to Manhattan's Knowledge there is no proceeding pending or
threatened in writing against any fiduciary of any Manhattan Plan other than
proceedings that would not reasonably be expected to result in a material
liability.
(d) Each of the Manhattan Plans has been operated and administered
in all material respects in accordance with its terms and applicable law,
including, but not limited to, ERISA and the Code.
15
(e) Each of the Manhattan Plans that is intended to be "qualified"
within the meaning of Section 401(a) of the Code has received a favorable
determination, notification, or opinion letter from the IRS.
(f) Except as set forth in Schedule 3.17(f), no director, officer,
or employee of Manhattan will become entitled to retirement, severance or
similar benefits or to enhanced or accelerated benefits (including any
acceleration of vesting or lapsing of restrictions with respect to equity-based
awards) under any Manhattan Plan solely as a result of consummation of the
transactions contemplated by this Agreement.
3.18 Employees.
(a) Schedule 3.18 lists the following information for each employee
and each director of Manhattan as of the date of this Agreement, including each
employee on leave of absence or layoff status: (1) name; (2) job title; (3)
current annual base salary or annualized wages; (4) bonus compensation earned
during 2001; (5) vacation accrued and unused; (6) service credited for purposes
of vesting and eligibility to participate under Manhattan Plans; and (7) the
number of shares of Manhattan Common Stock beneficially owned by each such
employee. Schedule 3.18 also lists the following information for each consultant
or advisory board member of Manhattan, as of the date of this Agreement: (x)
name; (y) services performed in 2001 and 2002; and (z) compensation received
from Manhattan with respect to services performed in 2001 and 2002.
(b) Except as otherwise set forth in Schedule 3.18, or as
contemplated by this Agreement, to the Knowledge of Manhattan, (i) neither any
executive employee of Manhattan nor any group of Manhattan's employees has any
plans to terminate his, her or its employment; (ii) Manhattan has no material
labor relations problem pending and its labor relations are satisfactory; (iii)
there are no workers' compensation claims pending against Manhattan nor is
Manhattan aware of any facts that would give rise to such a claim; (iv) to the
Knowledge of Manhattan, no employee of Manhattan is subject to any secrecy or
noncompetition agreement or any other agreement or restriction of any kind that
would impede in any way the ability of such employee to carry out fully all
activities of such employee in furtherance of the business of Manhattan; and (v)
no employee or former employee of Manhattan has any claim with respect to any
intellectual property rights of Manhattan set forth in Schedule 3.20(b) hereto.
3.19 Proprietary Information and Inventions. Each current Manhattan
employee, consultant, and advisory board member is party to either a
non-disclosure agreement in the form attached as Schedule 3.19 or other
agreement relating to employment with Manhattan and containing comparable
non-disclosure provisions. To Manhattan's Knowledge, no current or former
Manhattan employee, consultant or advisory board member who is party to a
non-disclosure agreement has breached that non-disclosure agreement. To
Manhattan's Knowledge, no current Manhattan employee, consultant or advisory
board member who is party to an alternative employment agreement with Manhattan
has breached the non-disclosure provisions of that agreement.
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3.20 Intellectual Property. (a) Except as set forth in Schedule 3.20(a),
Manhattan owns or has valid and enforceable licenses to use all of the following
used in or necessary to conduct its business as currently conducted
(collectively, the "Manhattan Intellectual Property"):
(1) patents (including any registrations, continuations,
continuations in part, renewals, and any applications for any of the
foregoing) (collectively, "Patents");
(2) registered and unregistered copyrights and copyright
applications (collectively, "Copyrights");
(3) registered and unregistered trademarks, service marks, trade
names, slogans, logos, designs and general intangibles of the like nature,
together with all registrations and applications therefor (collectively,
"Trademarks");
(4) trade secrets, confidential or proprietary technical
information, know-how, designs, processes, research in progress,
inventions and invention disclosures (whether patentable or unpatentable)
(collectively, "Know-How");
(5) software (together with Patents, Copyrights, Trademarks, and
Know-How, "Intellectual Property").
(b) Set forth on Schedule 3.20(b) is a complete and accurate list of
all Patents, Trademarks, registered or material Copyrights and software owned or
licensed by Manhattan. Schedule 3.20(b) sets forth a complete and accurate list
of all Persons from which or to which Manhattan licenses any material
Intellectual Property.
(c) Manhattan is the sole and exclusive owner of the Manhattan
Intellectual Property its purports to own, free and clear of all liens and
encumbrances and free of all licenses except those set forth in Schedule 3.20(c)
and licenses relating to off-the-shelf software having a per-application
acquisition price of less than $5,000. No Copyright registration, Trademark
registration, or Patent set forth in Schedule 3.20(b) has lapsed, expired or
been abandoned or cancelled, or is subject to any pending or, to Manhattan's
Knowledge, threatened opposition or cancellation proceeding in any country.
(d) Except as set forth in Schedule 3.20(d), to Manhattan's
Knowledge (1) neither the conduct of Manhattan's business nor the manufacture,
marketing, licensing, sale, distribution or use of its products or services
infringes upon the proprietary rights of any Person, and (2) there are no
infringements of the Manhattan Intellectual Property by any Person. Except as
set forth in Schedule 3.20(a) and Schedule 3.20(c), there are no claims pending
or, to Manhattan's Knowledge, threatened (1) alleging that Manhattan's business
as currently conducted infringes upon or constitutes an unauthorized use or
violation of the proprietary rights of any Person, or (2) alleging that the
Manhattan Intellectual Property is being infringed by any Person, or (3)
challenging the ownership, validity or enforceability of the Manhattan
Intellectual Property.
(e) Manhattan has not entered into any consent agreement,
indemnification agreement, forbearance to sue, settlement agreement or
cross-licensing arrangement with any
17
Person relating to the Manhattan Intellectual Property other than as part of the
license agreements listed in Schedule 3.20(b) or set forth in Schedule 3.20(c).
(f) Except as set forth in Schedule 3.20(f), Manhattan is not, nor
will it be as a result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach of any license,
sublicense or other contract relating to the Manhattan Intellectual Property
that would reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect on Manhattan or the Surviving Company.
3.21 Tax-Free Reorganization. Neither Manhattan nor, to Manhattan's
Knowledge, any of its Affiliates has through the date of this Agreement taken or
agreed to take any action that would prevent the Merger from qualifying as a
reorganization under Section 368(a) of the Code.
3.22 Vote Required. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Manhattan Common Stock are entitled to cast
is the only vote of the holders of any class or series of Manhattan capital
stock necessary to approve the Merger.
3.23 Full Disclosure. The representations and warranties of Manhattan
contained in this Agreement (and in any schedule, exhibit, certificate or other
instrument to be delivered under this Agreement) are true and correct in all
material respects, and such representations and warranties do not omit any
material fact necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading. There is no fact
of which Manhattan has Knowledge that has not been disclosed to Atlantic
pursuant to this Agreement, including the schedules hereto, all taken together
as a whole, which has had or could reasonably be expected to have a Material
Adverse Effect on Manhattan or the Surviving Company or materially adversely
affect the ability of Manhattan to consummate in a timely manner the
transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ATLANTIC AND MPAC
Atlantic and MPAC hereby represent and warrant to Manhattan as follows:
4.1 Organization and Qualification. Atlantic and MPAC are each
corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware, and each has the requisite corporate power to
carry on their respective businesses as now conducted. Each of the Atlantic
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation. The copies of the
Certificate of Incorporation and Bylaws of Atlantic and MPAC which have been
made available to Manhattan on or prior to the date of this Agreement are
correct and complete copies of such documents as in effect as of the date of
this Agreement. Each of Atlantic and the Atlantic Subsidiaries is licensed or
qualified to do business in every jurisdiction which the nature of its business
or its ownership of property requires it to be licensed or qualified, except
where the failure to be so licensed or qualified would not have a Material
Adverse Effect on Atlantic or any Atlantic Subsidiary.
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4.2 Authority Relative to this Agreement; Non-Contravention. Each of
Atlantic and MPAC has the requisite corporate power and authority to enter into
this Agreement, and to carry out its obligations hereunder. The execution and
delivery of this Agreement by Atlantic and MPAC, and the consummation by
Atlantic and MPAC of the transactions contemplated hereby have been duly
authorized by the Boards of Directors of Atlantic and MPAC. Except for approval
by the Atlantic stockholders of the Atlantic Proposals in accordance with the
DGCL and the Atlantic Certificate of Incorporation and Bylaws (collectively, the
"Requisite Atlantic Stockholder Votes"), no other corporate proceedings on the
part of Atlantic or MPAC are necessary to authorize the execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
or will otherwise be sought by Atlantic. This Agreement has been duly executed
and delivered by Atlantic and MPAC and, assuming it is a valid and binding
obligation of Manhattan, constitutes a valid and binding obligation of Atlantic
and MPAC enforceable in accordance with its terms except as enforcement may be
limited by general principles of equity whether applied in a court of law or a
court of equity and by bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally. Except as set forth in Schedule 4.2,
neither Atlantic nor any of the Atlantic Subsidiaries is subject to, nor
obligated under, any provision of (a) its Articles or Bylaws, (b) any agreement,
arrangement or understanding, (c) any license, franchise or permit, nor (d)
subject to obtaining the approvals referred to in the next sentence, any law,
regulation, order, judgment or decree, which would conflict with, be breached or
violated, or in respect of which a right of termination or acceleration or any
security interest, charge or encumbrance on any of its assets would be created,
by the execution, delivery or performance of this Agreement or the consummation
of the transactions contemplated hereby, other than any such conflicts,
breaches, violations, rights of termination or acceleration or security
interests, charges or encumbrances which, in the aggregate, could not reasonably
be expected to have a Material Adverse Effect on Atlantic or any Atlantic
Subsidiaries. Except for (a) approvals under applicable Blue Sky laws, (b) the
filing of the Certificate of Merger with the Delaware Secretary of State, and
(c) such filings, authorizations or approvals as may be set forth in Schedule
4.2, no authorization, consent or approval of, or filing with, any public body,
court or authority is necessary on the part of Atlantic or any Atlantic
Subsidiary for the consummation by Atlantic or MPAC of the transactions
contemplated by this Agreement, except for such authorizations, consents,
approvals and filings as to which the failure to obtain or make the same would
not, in the aggregate, reasonably be expected to have a Material Adverse Effect
on Atlantic or MPAC.
4.3 Capitalization.
(a) The authorized, issued and outstanding shares of capital stock
of Atlantic as of the date hereof are correctly set forth on Schedule 4.3(a).
The issued and outstanding shares of capital stock of Atlantic are duly
authorized, validly issued, fully paid and nonassessable and have not been
issued in violation of any preemptive rights. Other than as described on
Schedule 4.3, Atlantic has no other equity securities or securities containing
any equity features authorized, issued or outstanding. Except as set forth in
Schedule 4.3(a) hereto, there are no agreements or other rights or arrangements
existing which provide for the sale or issuance of capital stock by Atlantic and
there are no rights, subscriptions, warrants, options, conversion rights or
agreements of any kind outstanding to purchase or otherwise acquire from
Atlantic any shares of capital stock or other securities of Atlantic of any
kind. Except as set forth
19
on Schedule 4.3, there are no agreements or other obligations (contingent or
otherwise) which may require Atlantic to repurchase or otherwise acquire any
shares of its capital stock.
(b) To Atlantic's Knowledge, there exist no voting trusts, proxies,
or other contracts with respect to the voting of shares of capital stock of
Atlantic.
(c) The authorized capital of MPAC consists of 1,000 shares of
common stock, par value $.01 per share, all of which are issued and outstanding
and held of record by Atlantic as of the date hereof. The issued and outstanding
shares of capital stock of MPAC are duly authorized, validly issued, fully paid
and nonassessable and have not been issued in violation of any preemptive
rights. Except as disclosed on Schedule 4.3(c), there are no options, warrants,
conversion privileges or other rights, agreements, arrangements or commitments
obligating MPAC to issue, sell, purchase or redeem any shares of its capital
stock or securities or obligations of any kind convertible into or exchangeable
for any shares of its capital stock
4.4 Exchange Act Reports. Prior to the date of this Agreement, Atlantic
has delivered or made available to Manhattan complete and accurate copies of (a)
Atlantic's Annual Reports on Form 10-KSB (as amended) for the years ended
December 31, 1999, 2000 and 2001 (the "Atlantic 10-K Reports") as filed with the
SEC, (b) all Atlantic proxy statements and annual reports to stockholders used
in connection with meetings of Atlantic stockholders held since January 1, 2000,
other than the Proxy Statement (the "Atlantic Proxy Statements"); (c) Atlantic's
Quarterly Reports on Form 10-QSB for the quarters ended March 31, 2002, June 30,
2002 and September 30, 2002, respectively (the "Atlantic 10-Q Reports"), as
filed with the SEC; and (d) all current reports on Form 8-K filed with the SEC
after December 31, 2001 (the "Atlantic 8-K Reports," and together with the
Atlantic 10-K Reports, Atlantic Proxy Statements and Atlantic 10-Q Reports, the
"Atlantic SEC Filings"). As of their respective dates or as subsequently amended
prior to the date hereof, each of the Atlantic SEC Filings (i) did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading and (ii)
complied as to form in all material respects with the applicable rules and
regulations of the SEC. Since January 1, 2001, Atlantic has filed in a timely
manner all reports that it was required to file with the SEC pursuant to Section
13(a), 14(a), 14(c) and 15(d) of the Exchange Act. The financial statements
(including footnotes thereto) included in or incorporated by reference into the
Atlantic 10-K Reports and the Atlantic 10-Q Reports were prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except as
otherwise noted therein) and fairly present, in all material respects, the
financial condition of Atlantic as of the dates thereof and results of
operations for the periods referred to therein.
4.5 Subsidiaries. Schedule 4.5 correctly sets forth the name and
jurisdiction of incorporation of each subsidiary of Atlantic (each a "Atlantic
Subsidiary" and collectively, the "Atlantic Subsidiaries"). Except as disclosed
on Schedule 4.5, all of the issued and outstanding shares of capital stock of
each Atlantic Subsidiary are owned directly by Atlantic free and clear of any
option, lien, pledge, security interest, encumbrance or charge of any kind. All
of the outstanding shares of capital stock of each Atlantic Subsidiary have been
duly and validly authorized and issued and are fully paid and nonassessable.
Except as set forth in Schedule 4.5,
20
Atlantic does not own any stock, partnership interest, joint venture interest or
any other security or ownership interest issued by any other corporation,
organization or entity.
4.6 Absence of Certain Developments. Except as set forth in Schedule 4.6
or as disclosed in the Atlantic SEC Filings or as otherwise contemplated by this
Agreement, since September 30, 2002, Atlantic and each Atlantic Subsidiary have
conducted their business only in the ordinary course consistent with past
practice and there has not occurred (i) any event having a Material Adverse
Effect on Atlantic or any Atlantic Subsidiary, (ii) any event that would
reasonably be expected to prevent or materially delay the performance of
Atlantic's obligations pursuant to this Agreement, (iii) any material change by
Atlantic or any Atlantic Subsidiary in its accounting methods, principles or
practices, (iv) any declaration, setting aside or payment of any dividend or
distribution in respect of the shares of capital stock of Atlantic or any
Atlantic Subsidiary or any redemption, purchase or other acquisition of any of
Atlantic's or any of Atlantic Subsidiary's securities, (v) any increase in the
compensation or benefits or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan of Atlantic or any Atlantic Subsidiary,
or any other increase in the compensation payable or to become payable to any
employees, officers, consultants or directors of Atlantic or any Atlantic
subsidiary, (vi) other than issuances of options pursuant to duly adopted option
plans, any issuance, grants or sale of any stock, options, warrants, notes,
bonds or other securities, or entry into any agreement with respect thereto by
Atlantic and any Atlantic Subsidiary, (vii) any amendment to the Certificate of
Incorporation or Bylaws of Atlantic or any Atlantic Subsidiary, (viii) other
than in the ordinary course of business consistent with past practice, any (w)
capital expenditures by Atlantic or any Atlantic Subsidiary, (x) purchase, sale,
assignment or transfer of any material assets by Atlantic or any Atlantic
Subsidiary, (y) mortgage, pledge or existence of any lien, encumbrance or charge
on any material assets or properties, tangible or intangible of Atlantic or any
Atlantic Subsidiary, except for liens for taxes not yet due and such other
liens, encumbrances or charges which do not, individually or in the aggregate,
have a Material Adverse Effect on Atlantic, or (z) cancellation, compromise,
release or waiver by Atlantic or any Atlantic Subsidiary of any rights of
material value or any material debts or claims, (ix) any incurrence by Atlantic
or any Atlantic Subsidiary of any material liability (absolute or contingent),
except for current liabilities and obligations incurred in the ordinary course
of business consistent with past practice, (x) damage, destruction or similar
loss, whether or not covered by insurance, materially affecting the business or
properties of Atlantic, (xi) entry by Atlantic or any Atlantic Subsidiary into
any agreement, contract, lease or license other than in the ordinary course of
business consistent with past practice, (xii) any acceleration, termination,
modification or cancellation of any agreement, contract, lease or license to
which Atlantic or any Atlantic Subsidiary is a party or by which any of them is
bound, (xiii) entry by Atlantic or any Atlantic Subsidiary into any loan or
other transaction with any officers, directors or employees of Atlantic or any
Atlantic Subsidiary, (xiv) any charitable or other capital contribution by
Atlantic or any Atlantic Subsidiary or pledge therefore, (xv) entry by Atlantic
or any Atlantic Subsidiary into any transaction of a material nature other than
in the ordinary course of business consistent with past practice, or (xvi) any
negotiation or agreement by the Atlantic or any Atlantic Subsidiary to do any of
the things described in the preceding clauses (i) through (xv).
21
4.7 Absence of Undisclosed Liabilities. Except as reflected in the
unaudited consolidated balance sheet of Atlantic at September 30, 2002 included
in Atlantic's Quarterly Report on Form 10-QSB for such period (the "Atlantic
Latest Balance Sheet"), Atlantic has no liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise except (i) liabilities which have arisen
after the date of the Atlantic Latest Balance Sheet in the ordinary course of
business (none of which is a material uninsured liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), or (ii) as
otherwise set forth in Schedule 4.7 attached hereto.
4.8 Litigation. Except as set forth in Schedule 4.8, as of the date
hereof, there are no actions, suits, proceedings, orders or investigations
pending or, to the Knowledge of Atlantic, threatened against Atlantic, at law or
in equity, or before or by any federal, state or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign.
4.9 No Brokers or Finders. Except as disclosed on Schedule 4.9, there are
no claims for brokerage commissions, finders' fees, investment advisory fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement, understanding, commitment or agreement made
by or on behalf of Atlantic.
4.10 Validity of the Atlantic Common Stock. The shares of Atlantic Common
Stock to be issued to holders of Manhattan Common Stock pursuant to this
Agreement will be, when issued, duly authorized, validly issued, fully paid and
nonassessable.
4.11 Tax Matters.
(a) (i) Atlantic and each Atlantic Subsidiary has timely filed (or
has had timely filed on its behalf) all returns, declarations, reports,
estimates, information returns, and statements, including any schedules and
amendments to such documents ("Atlantic Returns"), required to be filed or sent
by it in respect of any Taxes or required to be filed or sent by it by any
taxing authority having jurisdiction; (ii) all such Atlantic Returns are
complete and accurate in all material respects; (iii) Atlantic and each Atlantic
Subsidiary has timely and properly paid (or has had paid on its behalf) all
Taxes required to be paid by it; (iv) Atlantic has established on the Atlantic
Latest Balance Sheet, in accordance with GAAP, reserves that are adequate for
the payment of any Taxes not yet due and payable; (v) Atlantic and each Atlantic
Subsidiary has complied with all applicable laws, rules, and regulations
relating to the collection or withholding of Taxes from third parties (including
without limitation employees) and the payment thereof (including, without
limitation, withholding of Taxes under Sections 1441 and 1442 of the Code, or
similar provisions under any foreign laws).
(b) There are no liens for Taxes upon any assets of Atlantic or any
Atlantic Subsidiary, except liens for Taxes not yet due.
(c) No deficiency for any Taxes has been proposed, asserted or
assessed against Atlantic or any Atlantic Subsidiary that has not been resolved
and paid in full or is not being contested in good faith. Except as disclosed in
Schedule 4.11, no waiver, extension or comparable consent given by Atlantic or
any Atlantic Subsidiary regarding the application of the
22
statute of limitations with respect to any Taxes or Returns is outstanding, nor
is any request for any such waiver or consent pending. Except as disclosed in
Schedule 4.11, there has been no Tax audit or other administrative proceeding or
court proceeding with regard to any Taxes or Atlantic Returns, nor is any such
Tax audit or other proceeding pending, nor has there been any notice to Atlantic
or any Atlantic Subsidiary by any Taxing authority regarding any such Tax audit
or other proceeding, or, to the Knowledge of Atlantic, is any such Tax audit or
other proceeding threatened with regard to any Taxes or Atlantic Returns.
Atlantic does not expect the assessment of any additional Taxes of Atlantic or
any Atlantic Subsidiary for any period prior to the date hereof and has no
Knowledge of any unresolved questions, claims or disputes concerning the
liability for Taxes of Atlantic or any Atlantic Subsidiary which would exceed
the estimated reserves established on its books and records.
(d) Except as set forth on Schedule 4.11, neither Atlantic nor any
Atlantic Subsidiary is a party to any agreement, contract or arrangement that
would result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be a
factor causing payments to be made by Atlantic or any Atlantic Subsidiary not to
be deductible (in whole or in part) under Section 280G of the Code. Neither
Atlantic nor any Atlantic Subsidiary is liable for Taxes of any other person nor
is currently under any contractual obligation to indemnify any person with
respect to Taxes, or a party to any tax sharing agreement or any other agreement
providing for payments by Atlantic or any Atlantic Subsidiary with respect to
Taxes. Neither Atlantic nor any Atlantic Subsidiary is a party to any joint
venture, partnership or other arrangement or contract which could be treated as
a partnership for federal income tax purposes. Neither Atlantic nor any Atlantic
Subsidiary has agreed and is required, as a result of a change in method of
accounting or otherwise, to include any adjustment under Section 481 of the Code
(or any corresponding provision of state, local or foreign law) in taxable
income. Schedule 4.11 contains a list of all jurisdictions in which Atlantic or
any Atlantic Subsidiary is required to file any Atlantic Return and no claim has
ever been made by a taxing authority in a jurisdiction where Atlantic or any
Atlantic Subsidiary does not currently file Atlantic Returns that Atlantic or
any Atlantic Subsidiary is or may be subject to taxation by that jurisdiction.
There are no advance rulings in respect of any Tax pending or issued by any
Taxing authority with respect to any Taxes of Atlantic or any Atlantic
Subsidiary. Neither Atlantic nor any Atlantic Subsidiary has entered into any
gain recognition agreements under Section 367 of the Code and the regulations
promulgated thereunder. Neither Atlantic nor any Atlantic Subsidiary is liable
with respect to any indebtedness the interest of which is not deductible for
applicable federal, foreign, state or local income tax purposes.
(c) Atlantic has been neither a "distributing corporation" nor a
"controlled corporation" (within the meaning of Section 355 of the Code) in a
distribution of stock qualifying for tax-free treatment under Section 355 of the
Code.
(d) Except as set forth on Schedule 4.11, neither Atlantic nor any
Atlantic Subsidiary has requested any extension of time within which to file any
Atlantic Return, which return has not since been filed.
23
4.12 Contracts and Commitments.
(a) Schedule 4.12 hereto lists the following agreements, whether
oral or written, to which Atlantic or any Atlantic Subsidiary is a party, which
are currently in effect, and which relate to the operation of Atlantic's
business, or where applicable, the business of any Atlantic Subsidiary: (i)
collective bargaining agreement or contract with any labor union; (ii) bonus,
pension, profit sharing, retirement or other form of deferred compensation plan;
(iii) hospitalization insurance or other welfare benefit plan or practice,
whether formal or informal; (iv) stock purchase or stock option plan; (v)
contract for the employment of any officer, individual employee or other person
on a full-time or consulting basis or relating to severance pay for any such
person; (vi) confidentiality agreement; (vii) contract, agreement or
understanding relating to the voting of Atlantic Common Stock or the election of
directors of Atlantic; (viii) agreement or indenture relating to the borrowing
of money or to mortgaging, pledging or otherwise placing a lien on any of the
assets of Atlantic or any Atlantic Subsidiary; (ix) guaranty of any obligation
for borrowed money or otherwise; (x) lease or agreement under which Atlantic or
any Atlantic Subsidiary is lessee of, or holds or operates any property, real or
personal, owned by any other party, for which the annual rental exceeds $10,000;
(xi) lease or agreement under which Atlantic or any Atlantic Subsidiary is
lessor of, or permits any third party to hold or operate, any property, real or
personal, for which the annual rental exceeds $10,000; (xii) contract which
prohibits Atlantic or any Atlantic Subsidiary from freely engaging in business
anywhere in the world; (xiii) license agreement or agreement providing for the
payment or receipt of royalties or other compensation by Atlantic or any
Atlantic Subsidiary in connection with the intellectual property rights listed
in Schedule 4.13(b) hereto; (xiv) contract or commitment for capital
expenditures in excess of $10,000; (xv) agreement for the sale of any capital
asset; (xvi) contract with any Atlantic Subsidiary any affiliate thereof which
in any way relates to Atlantic (other than for employment on customary terms);
or (xvii) other agreement which is either material to Atlantic's business or was
not entered into in the ordinary course of business.
(b) To Atlantic's Knowledge, Atlantic and each Atlantic Subsidiary
has performed all obligations required to be performed by them in connection
with the contracts or commitments required to be disclosed in Schedule 4.12
hereto and is not in receipt of any claim of default under any contract or
commitment required to be disclosed under such caption; Atlantic and each
Atlantic Subsidiary, where applicable, have no present expectation or intention
of not fully performing any material obligation pursuant to any contract or
commitment required to be disclosed under such caption; and Atlantic has no
Knowledge of any breach or anticipated breach by any other party to any contract
or commitment required to be disclosed under such caption.
4.13 Intellectual Property.
(a) Except as set forth in Schedule 4.13(a), Atlantic owns or has
licenses to use all of the following used in or necessary to conduct its
business as currently conducted (collectively, the "Atlantic Intellectual
Property"): (i) Patents; (ii) Copyrights; (iii) Trademarks; (iv) Know-How; and
(v) software.
24
(b) Set forth on Schedule 4.13(b) is a complete and accurate list of
all Patents, Trademarks, registered or material Copyrights and Software owned or
licensed by Atlantic. Schedule 4.13(b) sets forth a complete and accurate list
of all Persons from which or to which Atlantic licenses any material
Intellectual Property.
(c) Atlantic is the sole and exclusive owner of the Atlantic
Intellectual Property its purports to own, free and clear of all liens and
encumbrances and free of all licenses except those set forth in Schedule 4.13(c)
and licenses relating to off-the-shelf software having a per-application
acquisition price of less than $5,000. No Copyright registration, Trademark
registration, or Patent set forth in Schedule 4.13(b) has lapsed, expired or
been abandoned or cancelled, or is subject to any pending or, to Atlantic's
Knowledge, threatened opposition or cancellation proceeding in any country.
(d) Except as set forth in Schedule 4.13(d), to Atlantic's Knowledge
(1) neither the conduct of Atlantic's business nor the manufacture, marketing,
licensing, sale, distribution or use of its products or services infringes upon
the proprietary rights of any Person, and (2) there are no infringements of the
Atlantic Intellectual Property by any Person. Except as set forth in Schedule
4.13(a) and Schedule 4.13(c), there are no claims pending or, to Atlantic's
Knowledge, threatened (1) alleging that Atlantic's business as currently
conducted infringes upon or constitutes an unauthorized use or violation of the
proprietary rights of any Person, or (2) alleging that the Atlantic Intellectual
Property is being infringed by any Person, or (3) challenging the ownership,
validity or enforceability of the Atlantic Intellectual Property.
(e) Atlantic has not entered into any consent agreement,
indemnification agreement, forbearance to sue, settlement agreement or
cross-licensing arrangement with any Person relating to the Atlantic
Intellectual Property other than as part of the license agreements listed in
Schedule 4.13(b) or set forth in Schedule 4.13(c).
(f) Except as set forth in Schedule 4.13(f), Atlantic is not, nor
will it be as a result of the execution and delivery of this Agreement or the
performance of its obligations under this Agreement, in breach of any license,
sublicense or other Contract relating to the Atlantic Intellectual Property that
would reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect on Atlantic.
4.14 Employee Benefit Plans.
(a) Schedule 4.14(a) lists all material (i) "employee benefit
plans," within the meaning of Section 3(3) of ERISA, of Atlantic, (ii) bonus,
stock option, stock purchase, stock appreciation right, incentive, deferred
compensation, supplemental retirement, severance, and fringe benefit plans,
programs, policies or arrangements, and (iii) employment or consulting
agreements, for the benefit of, or relating to, any current or former employee
(or any beneficiary thereof) of Atlantic, in the case of a plan described in (i)
or (ii) above, that is currently maintained by Atlantic or with respect to which
Atlantic has an obligation to contribute, and in the case of an agreement
described in (iii) above, that is currently in effect (the "Atlantic Plans").
Atlantic has heretofore made available to Manhattan true and complete copies of
the Atlantic Plans and any amendments thereto, any related trust, insurance
contract, summary plan
25
description, and, to the extent required under ERISA or the Code, the most
recent annual report on Form 5500 and summaries of material modifications.
(b) No Atlantic Plan is (1) a "multiemployer plan" within the
meaning of Sections 3(37) or 4001(a)(3) of ERISA, (2) a "multiple employer plan"
within the meaning of Section 3(40) of ERISA or Section 413(c) of the Code, or
(3) is subject to Title IV of ERISA or Section 412 of the Code.
(c) Except as set forth in Schedule 4.14(c), there is no proceeding
pending or, to Atlantic's Knowledge, threatened against the assets of any
Atlantic Plan or, with respect to any Atlantic Plan, against Atlantic other than
proceedings that would not reasonably be expected to result in a material
liability, and to Atlantic's Knowledge there is no proceeding pending or
threatened in writing against any fiduciary of any Atlantic Plan other than
proceedings that would not reasonably be expected to result in a material
liability.
(d) Each of the Atlantic Plans has been operated and administered
in all material respects in accordance with its terms and applicable law,
including, but not limited to, ERISA and the Code.
(e) Each of the Atlantic Plans that is intended to be "qualified"
within the meaning of Section 401(a) of the Code has received a favorable
determination, notification, or opinion letter from the IRS.
(f) Except as set forth in Schedule 4.14(f), no director, officer,
or employee of Atlantic will become entitled to retirement, severance or similar
benefits or to enhanced or accelerated benefits (including any acceleration of
vesting or lapsing of restrictions with respect to equity-based awards) under
any Atlantic Plan solely as a result of consummation of the transactions
contemplated by this Agreement.
4.15 Employees.
(a) Schedule 4.15 lists the following information for each employee
and each director of Atlantic as of the date of this Agreement, including each
employee on leave of absence or layoff status: (1) name; (2) job title; (3)
current annual base salary or annualized wages; (4) bonus compensation earned
during 2001; (5) vacation accrued and unused; (6) service credited for purposes
of vesting and eligibility to participate under Manhattan Plans; and (7) the
number of shares of Atlantic Common Stock beneficially owned by each such
employee.
(b) Except as otherwise set forth in Schedule 4.15, or as
contemplated by this Agreement, to the Knowledge of Atlantic, neither any
executive employee of Atlantic nor any group of Atlantic's employees has any
plans to terminate his, her or its employment; (b) Atlantic has no material
labor relations problem pending and its labor relations are satisfactory; (c)
there are no workers' compensation claims pending against Atlantic nor is
Atlantic aware of any facts that would give rise to such a claim; (d) to the
Knowledge of Atlantic, no employee of Atlantic is subject to any secrecy or
noncompetition agreement or any other agreement or restriction of any kind that
would impede in any way the ability of such employee to carry out fully all
activities of such employee in furtherance of the business of Atlantic; and (f)
no employee or former
26
employee of Atlantic has any claim with respect to any intellectual property
rights of Atlantic set forth in Schedule 4.13 hereto.
4.16 Affiliate Transactions. Except as set forth in Schedule 4.16 hereto,
and other than pursuant to this Agreement, no officer, director or employee of
Atlantic, any Atlantic Subsidiary or any member of the immediate family of any
such officer, director or employee, or any entity in which any of such persons
owns any beneficial interest (other than any publicly-held corporation whose
stock is traded on a national securities exchange or in the over-the-counter
market and less than one percent of the stock of which is beneficially owned by
any of such persons) (collectively "Atlantic Insiders"), has any agreement with
Atlantic (other than normal employment arrangements) or any interest in any
property, real, personal or mixed, tangible or intangible, used in or pertaining
to the business of Atlantic (other than ownership of capital stock of Atlantic).
Atlantic is not indebted to any Atlantic Insider (except for amounts due as
normal salaries and bonuses and in reimbursement of ordinary business expenses)
and no Atlantic Insider is indebted to Atlantic) except for cash advances for
ordinary business expenses). None of the insiders has any direct or indirect
interest in any competitor, supplier or customer of Atlantic or in any person,
firm or entity from whom or to whom Atlantic leases any property, or in any
other person, firm or entity with whom Atlantic transacts business of any
nature. For purposes of this Section 4.16, the members of the immediate family
of an officer, director or employee shall consist of the spouse, parents and
children of such officer, director or employee.
4.17 Compliance with Laws; Permits.
(a) Except for any noncompliance that would not reasonably be
expected to have a Material Adverse Effect on Atlantic, Atlantic, each Atlantic
Subsidiary and their respective officers, directors, agents and employees have
complied with all applicable laws, regulations and other requirements,
including, but not limited to, federal, state, local and foreign laws,
ordinances, rules, regulations and other requirements pertaining to equal
employment opportunity, employee retirement, affirmative action and other hiring
practices, occupational safety and health, workers' compensation, unemployment
and building and zoning codes, and no claims have been filed against Atlantic,
and Atlantic has not received any notice, alleging a violation of any such laws,
regulations or other requirements. Atlantic is not relying on any exemption from
or deferral of any such applicable law, regulation or other requirement that
would not be available to Manhattan after it acquires Atlantic's properties,
assets and business.
(b) Each of Atlantic and the Atlantic Subsidiaries has, in full
force and effect, all licenses, permits and certificates from federal, state,
local and foreign authorities (including, without limitation, federal and state
agencies regulating occupational health and safety) necessary to permit it to
conduct its business and own and operate its properties (collectively, the
"Atlantic Permits"). A complete list of all the Permits is set forth in Schedule
4.17 hereto. Each of Atlantic and the Atlantic Subsidiaries has conducted its
business in compliance with terms and conditions of the Atlantic Permits.
4.18 Books and Records. The books of account, minute books, stock record
books, and other records of Atlantic, all of which have been made available to
Manhattan, have been properly kept and contain no inaccuracies except for
inaccuracies that would not, individually or
27
in the aggregate, reasonably be expected to have a Material Adverse Effect on
Atlantic. At the Closing, all of Atlantic's records will be in the possession of
Atlantic.
4.19 Real Property. Neither Atlantic nor any Atlantic Subsidiary owns any
real property. Schedule 4.19 contains an accurate list of all leaseholds and
other interests of Atlantic any each Atlantic Subsidiary in any real property.
Atlantic and such Atlantic Subsidiaries have good and valid title to those
leaseholds and other interests free and clear of all liens and encumbrances, and
the real property to which those leasehold and other interests pertain
constitutes the only real property used in Atlantic's business.
4.20 Insurance. The insurance policies owned and maintained by Atlantic
that are material to Atlantic are in full force and effect, all premiums due and
payable thereon have been paid (other than retroactive or retrospective premium
adjustments that Atlantic is not currently required, but may in the future be
required, to pay with respect to any period ending prior to the date of this
Agreement), and Atlantic has received no notice of cancellation or termination
with respect to any such policy that has not been replaced on substantially
similar terms prior to the date of such cancellation.
4.21 Environmental Matters. None of the operations of Atlantic or any
Atlantic Subsidiary involves the generation, transportation, treatment, storage
or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any
state, local or foreign equivalent.
4.22 Proprietary Information and Inventions. Each current Atlantic
employee, consultant, and advisory board member is party to either a
non-disclosure agreement in the form attached as Schedule 4.22 or an alternative
employment agreement with Atlantic containing comparable non-disclosure
provisions. To Atlantic's Knowledge, no current or former Atlantic employee,
consultant or advisory board member who is party to a non-disclosure agreement
has breached that non-disclosure agreement. To Atlantic's Knowledge, no current
Atlantic employee, consultant or advisory board member who is party to an
alternative employment agreement with Atlantic has breached the non-disclosure
provisions of that agreement.
4.23 Vote Required. The affirmative vote of a majority of the votes that
holders of the outstanding shares of Atlantic Common Stock and Series A
convertible preferred stock of Atlantic, voting together as one class, are
entitled to cast is the only vote of the holders of any class or series of
Atlantic capital stock necessary to approve the matters to be considered at the
Atlantic Stockholders Meeting.
4.24 Tax Free Reorganization. Neither Atlantic nor, to Atlantic's
Knowledge, any of its Affiliates has through the date of this Agreement taken or
agreed to take any action that would prevent the Merger from qualifying as a
reorganization under Section 368(a) of the Code.
4.25 Full Disclosure. The representations and warranties of Atlantic and
MPAC contained in this Agreement (and in any schedule, exhibit, certificate or
other instrument to be delivered under this Agreement) are true and correct in
all material respects, and such representations and warranties do not omit any
material fact necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading.
28
There is no fact of which Atlantic or MPAC has Knowledge that has not been
disclosed to Manhattan pursuant to this Agreement, including the schedules
hereto, all taken together as a whole, which has had or could reasonably be
expected to have a Material Adverse Effect on Atlantic or MPAC, or materially
adversely affect the ability of Atlantic or MPAC to consummate in a timely
manner the transactions contemplated hereby.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1 Conduct of Business by Atlantic. From the date of this Agreement to
the Effective Date, unless Manhattan shall otherwise agree in writing or as
otherwise expressly contemplated or permitted by other provisions of this
Agreement, including but not limited to this Section 5.1, Atlantic shall not,
directly or indirectly, (a) amend its Certificate of Incorporation or Bylaws,
except as set forth on Schedule 5.1, (b) split, combine or reclassify any
outstanding shares of capital stock of Atlantic, (c) declare, set aside, make or
pay any dividend or distribution in cash, stock, property or otherwise with
respect to the capital stock of Atlantic, (d) default in its obligations under
any material debt, contract or commitment which default results in the
acceleration of obligations due thereunder, except for such defaults arising out
of Atlantic's entry into this Agreement for which consents, waivers or
modifications are required to be obtained as set forth on Schedule 4.2, (e)
conduct its business other than in the ordinary course on an arms-length basis
and in accordance in all material respects with all applicable laws, rules and
regulations and Atlantic's past custom and practice (except that Atlantic may
license its rights to the NCT technologies and transfer its shares of stock in
CryoComm, Inc. to Persons wholly or partially owned by one or more Atlantic
directors or officers in return for a 10% share of any royalty, milestone or
other revenues generated by the NCT technologies and shares of CryoComm, Inc.),
(f) issue or sell any additional shares of, or options, warrants, conversions,
privileges or rights of any kind to acquire any shares of, any of its capital
stock, except as otherwise set forth in Schedule 5.1 hereto or in connection
with the exercise or conversion of Atlantic securities outstanding on the date
of this Agreement or payment of stock dividends on Atlantic's Series A
convertible preferred stock in accordance with the terms of the certificate of
designation of Atlantic's Series A convertible preferred stock, (g) acquire (by
merger, exchange, consolidation, acquisition of stock or assets or otherwise)
any corporation, partnership, joint venture or other business organization or
division or material assets thereof or (h) make or change any material tax
elections, settle or compromise any material tax liability or file any amended
tax return.
5.2 Conduct of Business by Manhattan. From the date of this Agreement to
the Effective Date, unless Atlantic shall otherwise agree in writing or as
otherwise expressly contemplated or permitted by other provisions of this
Agreement, including but not limited to this Section 5.2, Manhattan shall not,
directly or indirectly, (a) amend its Certificate of Incorporation or Bylaws,
(b) split, combine or reclassify any outstanding shares of capital stock of
Manhattan, (c) declare, set aside, make or pay any dividend or distribution in
cash, stock, property or otherwise with respect to the capital stock of
Manhattan, (d) default in its obligations under any material debt, contract or
commitment which default results in the acceleration of obligations due
thereunder, except for such defaults arising out of Manhattan's entry into this
Agreement for which consents, waivers or modifications are required to be
obtained as set forth on Schedule 3.2, (e) conduct its business other than in
the ordinary course on an arms-length
29
basis and in accordance in all material respects with all applicable laws, rules
and regulations and Manhattan's past custom and practice, (f) issue or sell any
additional shares of, or options, warrants, conversions, privileges or rights of
any kind to acquire any shares of, any of its capital stock, except as otherwise
described on Schedule 5.2 hereto or in connection with exercise or conversion of
Manhattan securities outstanding on the date of this Agreement, (g) acquire (by
merger, exchange, consolidation, acquisition of stock or assets or otherwise)
any corporation, partnership, joint venture or other business organization or
division or material assets thereof or (h) make or change any material tax
elections, settle or compromise any material tax liability or file any amended
tax return.
ARTICLE VI
ADDITIONAL COVENANTS AND AGREEMENTS
6.1 Governmental Filings. Each party will use all reasonable efforts and
will cooperate with the other party in the preparation and filing, as soon as
practicable, of all filings, applications or other documents required under
applicable laws, including, but not limited to, the Exchange Act, to consummate
the transactions contemplated by this Agreement. Prior to submitting each
filing, application, registration statement or other document with the
applicable regulatory authority, each party will, to the extent practicable,
provide the other party with an opportunity to review and comment on each such
application, registration statement or other document to the extent permitted by
applicable law. Each party will use all reasonable efforts and will cooperate
with the other party in taking any other actions necessary to obtain such
regulatory or other approvals and consents at the earliest practicable time,
including participating in any required hearings or proceedings. Subject to the
terms and conditions herein provided, each party will use all reasonable efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
6.2 Expenses. Except as otherwise provided in this Agreement, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and
expenses.
6.3 Due Diligence; Access to Information; Confidentiality.
(a) Between the date hereof and the date of filing the Proxy Statement
with the SEC, Manhattan and Atlantic shall afford to the other party and their
authorized representatives the opportunity to conduct and complete a due
diligence investigation of the other party as described herein. In light of the
foregoing, each party shall permit the other party full access on reasonable
notice and at reasonable hours to its properties and shall disclose and make
available (together with the right to copy) to the other party and its officers,
employees, attorneys, accountants and other representatives, all books, papers
and records relating to the assets, stock, properties, operations, obligations
and liabilities of such party and its subsidiaries, including, without
limitation, all books of account (including, without limitation, the general
ledger), tax records, minute books of directors' and stockholders' meetings,
organizational documents, bylaws, contracts and agreements, filings with any
regulatory authority, accountants' work papers, litigation files (including,
without limitation, legal research memoranda), attorney's audit response
letters, documents relating to assets and title thereto (including, without
limitation,
30
abstracts, title insurance policies, surveys, environmental reports, opinions of
title and other information relating to the real and personal property), plans
affecting employees, securities transfer records and stockholder lists, and any
books, papers and records relating to other assets or business activities in
which such party may have a reasonable interest, and otherwise provide such
assistance as is reasonably requested in order that each party may have a full
opportunity to make such investigation and evaluation as it shall reasonably
desire to make of the business and affairs of the other party; provided,
however, that the foregoing rights granted to each party shall, whether or not
and regardless of the extent to which the same are exercised, in no way affect
the nature or scope of the representations, warranties and covenants of the
respective party set forth herein. In addition, each party and its officers and
directors shall cooperate fully (including providing introductions, where
necessary) with such other party to enable the party to contact third parties,
including customers, prospective customers, specified agencies or others as the
party deems reasonably necessary to complete its due diligence; provided that
such party agrees not to initiate such contacts without the prior approval of
the other party, which approval will not be unreasonably withheld.
(b) Either Atlantic or Manhattan may, in its sole discretion, elect not to
proceed with the Merger based upon its due diligence investigation performed
pursuant to Section 6.3(a) above, if the results of such due diligence
investigation, in Atlantic's or Manhattan's reasonable judgment, reveals any
event, condition or occurrence (not previously disclosed in this Agreement or
the schedules attached hereto) that would reasonably be expected to have a
Material Adverse Effect on the other party, by providing such other party with
written notice thereof on or before the date of the Proxy Statement.
(c) Prior to Closing and if, for any reason, the transactions contemplated
by this Agreement are not consummated, neither Atlantic nor Manhattan nor any of
their officers, employees, attorneys, accountants and other representatives
shall disclose to third parties or otherwise use any confidential information
received from the other party in the course of investigating, negotiating, and
performing the transactions contemplated by this Agreement; provided, however,
that nothing shall be deemed to be confidential information which:
(i) is known to the party receiving the information at the time of
disclosure, unless any individual who knows the information is
under an obligation to keep that information confidential;
(ii) becomes publicly known or available without the disclosure
thereof by the party receiving the information in violation of
this Agreement; or
(iii) is received by the party receiving the information from a
third party not under an obligation to keep that information
confidential.
This provision shall not prohibit the disclosure of information required to be
made under federal or state securities laws. If any disclosure is so required,
the party making such disclosure shall consult with the other party prior to
making such disclosure, and the parties shall use all reasonable efforts, acting
in good faith, to agree upon a text for such disclosure which is satisfactory to
both parties.
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6.4 Proxy Statement.
(a) In connection with the solicitation of proxies for the Atlantic
Stockholder Meeting, the parties hereto shall cooperate in the preparation of an
appropriate proxy statement (such proxy statement, together with any and all
amendments or supplements thereto, being herein referred to as the "Proxy
Statement").
(b) Manhattan shall furnish such information concerning Manhattan as
is necessary in order to cause the Proxy Statement, insofar as it relates to
Manhattan and Manhattan securities, to be prepared in accordance with Section
6.4(a). Manhattan shall also furnish to Atlantic, for purposes of its
preparation of the Proxy Statement in accordance with Section 6.4(a), any
required information regarding any Manhattan stockholders or Affiliates or any
Manhattan nominees to Atlantic's board of directors. That information must be
true and correct in all material respects and must not omit any material fact
necessary to make that information not misleading. Manhattan agrees promptly to
advise Atlantic if at any time prior to the Atlantic Stockholders Meeting any
information provided by Manhattan in the Proxy Statement becomes incorrect or
incomplete in any material respect, and to provide Atlantic the information
needed to correct such inaccuracy or omission.
(c) Atlantic shall use all reasonable efforts to promptly prepare
and submit the Proxy Statement to the SEC. Atlantic shall use reasonable efforts
to file the definitive Proxy Statement at the earliest practicable date.
Atlantic agrees to provide Manhattan and its counsel with reasonable opportunity
to review and comment on the Proxy Statement and any amendment thereto before
filing with the SEC or any other governmental entity and agrees not to make such
filing if Manhattan and its counsel reasonably object to the completeness or
accuracy of any information contained therein. Manhattan authorizes Atlantic to
utilize in the Proxy Statement the information under Section 6.4(a) provided to
Atlantic for the purpose of inclusion in the Proxy Statement. Atlantic shall
advise Manhattan promptly when the definitive Proxy Statement has been filed and
shall furnish Manhattan with copies of all such documents.
(d) At the time the Proxy Statement is mailed to the stockholders of
Atlantic in order to obtain the Requisite Atlantic Stockholder Votes and at all
times subsequent to such mailing until the Requisite Atlantic Stockholder Votes
have been obtained, the Proxy Statement (including any amendments or supplements
thereto), with respect to all information set forth therein relating to Atlantic
and its stockholders, this Agreement, the Certificate of Merger, and all other
transactions contemplated hereby, will (i) comply in all material respects with
applicable provisions of the Exchange Act, including the rules and regulations
promulgated thereunder, and (ii) not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements contained therein, in light of the circumstances under
which they are made, not misleading, except that, in each case, no such
representations shall apply to any written information, including financial
statements, of or provided by Manhattan for such Proxy Statement.
(e) Atlantic shall bear all printing and mailing costs in connection
with the preparation and mailing of the Proxy Statement to Atlantic
stockholders. Manhattan and Atlantic shall each bear their own legal and
accounting expenses in connection with the Proxy Statement.
32
6.5 Tax Treatment. None of Atlantic, MPAC or Manhattan, or the Surviving
Company after the Effective Date, shall knowingly take any action which could
reasonably be expected to disqualify the Merger as a "reorganization" within the
meaning of Section 368(a) of the Code.
6.6 Press Releases. Manhattan and Atlantic shall agree with each other as
to the form and substance of any press release or public announcement related to
this Agreement or the transactions contemplated hereby; provided, however, that
nothing contained herein shall prohibit either party, following notification to
the other party, from making any disclosure which is required by law or
regulation. If any such press release or public announcement is so required, the
party making such disclosure shall consult with the other party prior to making
such disclosure, and the parties shall use all reasonable efforts, acting in
good faith, to agree upon a text for such disclosure which is satisfactory to
both parties.
6.7 Securities Reports. Atlantic agrees to provide to Manhattan copies of
all reports and other documents filed under the Securities Act or Exchange Act
with the SEC by it between the date hereof and the Effective Date within two (2)
days after the date such reports or other documents are filed with the SEC.
6.8 Private Placement. Each of Manhattan and Atlantic shall take all
necessary action on its part such that the issuance of the Merger Consideration
to Manhattan stockholders constitutes a valid "private placement" under the
Securities Act. Without limiting the generality of the foregoing, Manhattan
shall (1) provide each Manhattan stockholder with a stockholder qualification
questionnaire in the form reasonably acceptable to both Atlantic and Manhattan
(a "Stockholder Questionnaire") and (2) use its best efforts to cause each
Manhattan stockholder to attest that that stockholder either (A) is an
"accredited investor" as defined in Regulation D of the Securities Act, (B) has
such knowledge and experience in financial and business matters that the
stockholder is capable of evaluating the merits and risks of receiving the
Merger Consideration, or (C) has appointed an appropriate person reasonably
acceptable to both Atlantic and Manhattan to act as the stockholder's purchaser
representative in connection with evaluating the merits and risks of receiving
the Merger Consideration.
6.9 Stockholder Approvals. Atlantic shall call a meeting of its
stockholders (the "Atlantic Stockholder Meeting") for the purpose of obtaining
approval of (a) an increase in the number of authorized shares of Atlantic
Common Stock so as to permit Atlantic to issue the Merger Consideration and (b)
amendment of the certificate of designations of the Series A convertible
preferred stock of Atlantic to provide for mandatory conversion immediately
prior to the Effective Time of all outstanding shares of Series A convertible
preferred stock of Atlantic (the "Atlantic Proposals"). Such meeting shall be
held as soon as practicable following the date of this Agreement, but in no
event later than February 7, 2003. The Board of Directors of Atlantic and
Manhattan shall recommend approval of this Agreement and the Merger and use all
reasonable efforts (including, without limitation, soliciting proxies for such
approvals) to obtain approvals thereof from its stockholders; provided, however,
either party's Board of Directors may fail to make such recommendation, and/or
to seek to obtain the stockholder approval referred to in this sentence, or
withdraw, modify or change any such recommendation, if such Board of Directors
determines, in good faith, after consultation with counsel, that the making of
such recommendation, the seeking to obtain such stockholder approval, or the
failure to so
33
withdraw, modify or change its recommendation, may constitute a breach of the
fiduciary or legal obligations of such Board of Directors.
6.10 Manhattan Stockholders' Meeting; Materials to Stockholders.
(a) Manhattan shall, in accordance with Section 251 of the DGCL and
its certificate of incorporation and by-laws, duly call, give notice of, convene
and hold a special meeting of Manhattan Stockholders (the "Manhattan Stockholder
Meeting") as promptly as practicable after the date hereof for the purpose of
considering and taking action upon this Agreement and the Merger. In addition,
Manhattan shall use its best efforts to obtain, prior to the Manhattan
Stockholder Meeting, unanimous written consent of Manhattan stockholders
approving this Agreement and the Merger.
(b) Manhattan shall as promptly as practicable following the date of
this Agreement prepare and mail to Manhattan stockholders all information as may
required to comply with the DGCL, the Securities Act and the Exchange Act.
6.11 No Solicitation.
(a) Unless and until this Agreement shall have been terminated
pursuant to Section 8.1, neither Atlantic nor its officers, directors or agents
shall, directly or indirectly, encourage, solicit or initiate discussions or
negotiations with, or engage in negotiations or discussions with, or provide
non-public information to, any corporation, partnership, person or other entity
or groups concerning any merger, sale of capital stock, sale of substantial
assets or other business combination; provided that Atlantic may engage in such
discussion in response to an unsolicited proposal from an unrelated party if the
Board of Directors of Atlantic determines, in good faith, after consultation
with counsel, that the failure to engage in such discussions may constitute a
breach of the fiduciary or legal obligations of the Board of Directors of
Atlantic. Atlantic will promptly advise Manhattan if it receives a proposal or
inquiry with respect to the matters described above.
(b) Unless and until this Agreement shall have been terminated
pursuant to Section 8.1, neither Manhattan nor its officers, directors or agents
shall, directly or indirectly, encourage, solicit or initiate discussions or
negotiations with, or engage in negotiations or discussions with, or provide
non-public information to, any corporation, partnership, person or other entity
or groups concerning any merger, sale of capital stock, sale of substantial
assets or other business combination; provided that Manhattan may engage in such
discussion in response to any unsolicited proposal from an unrelated party if
the Board of Directors of Manhattan determines, in good faith, after
consultation with counsel, that the failure to engage in such discussions may
constitute a breach of the fiduciary or legal obligations of the Board of
Directors of Manhattan. Manhattan will promptly advise Atlantic if it receives a
proposal or inquiry with respect to the matters described above.
6.12 Failure to Fulfill Conditions. In the event that either of the
parties hereto determines that a condition to its respective obligations to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to the termination of this Agreement, it will promptly notify the other party.
34
6.13 Tax Opinion. Manhattan and Atlantic shall make such representations,
warranties and covenants as are reasonably requested by Maslon Edelman Borman &
Brand, LLP in order for it to render the tax opinion contemplated by Section
7.1(c).
6.14 Resignations and Election of Directors. Before the Effective Time,
Atlantic shall deliver the voluntary resignations of each officer of Atlantic
and each director of Atlantic not continuing to serve in that capacity following
the Effective Time. Such resignations shall be effective upon the Effective
Time. Immediately after the Effective Time, the remaining director(s) of
Atlantic shall appoint the persons identified in Section 2.7 to serve as
directors of Atlantic following the Effective Time.
6.15 Rule 144 Reporting and Rule 144. With a view to making it possible
for holders of shares of Atlantic Common Stock received in the Merger to sell
those shares under Rule 144 promulgated under the Securities Act ("Rule 144"),
Atlantic shall use commercially reasonable efforts to (1) make and keep
available current public information, as defined in Rule 144, (2) timely file
with the SEC all reports and other documents required to be filed by Atlantic
under the Securities Act and the Exchange Act, and (3) comply with all rules and
regulations of the SEC applicable in connection with the use of Rule 144 and
take such other actions and furnish each holder of shares of Atlantic Common
Stock received in the Merger with such other information as that holder
reasonably requests in order to avail itself of Rule 144.
6.16 Registration Rights.
(a) Subject to reasonable and customary black-out periods in the
case of certain public offerings by Atlantic as may be requested by the managing
underwriter in connection with such offerings (but in no event more than one
hundred eighty (180) days during any twelve month period), upon receipt of a
written request of holders of at least fifty percent (50%) of the Atlantic
Common Stock issued by Atlantic under this Agreement and unregistered through
the date of such request (the "Registrable Securities"), Atlantic shall use its
reasonable best efforts, at its own expense (excluding underwriting commissions
and discounts) for one demand, to file within thirty (30) days from the date of
such written notice, a registration statement with the SEC under the Securities
Act registering the Registrable Securities for public resale (the "Demand
Registration Statement") and shall use its best efforts to have such
registration statement declared effective by the SEC; provided, however, that
the registration rights granted under this Section shall not be assignable by
the stockholders of Manhattan immediately prior to the Effective Time, except
for transfers to family trusts or controlled Affiliates. Atlantic is not
required to maintain the effectiveness of any Demand Registration Statement
required to be filed in accordance with this paragraph (a) beyond the period
ending on the earlier of the following dates: (i) the date one year after the
effective date of the Demand Registration Statement; and (ii) the date on which
all Registrable Securities covered by the Demand Registration Statement have
been sold and the distribution thereby has been completed.
(b) If at any time prior to the first anniversary of the Effective
Date, Atlantic proposes to register under the Securities Act (except by a Form
S-4 or Form S-8 Registration Statement or any successor forms thereto or a
registration statement covering only (1) an employee stock option, stock
purchase or compensation plan or securities issued or issuable pursuant to any
such plan, or (2) a dividend reinvestment plan) or qualify for a public
35
distribution under Section 3(b) of the Securities Act, any of its equity
securities or debt with equity features (other than in accordance with Section
6.16(a)), it will give written notice to all holders of the Registrable
Securities of its intention to do so and, on the written request of the holders
of at least fifty percent (50%) of the Registrable Securities received within
twenty (20) after receipt of any such notice, Atlantic will use its best efforts
to cause all of the Registrable Securities to be included in such registration
statement proposed to be filed by Atlantic; provided, however, that nothing
herein shall prevent Atlantic from, at any time, abandoning or delaying any
registration. The right of the holders of the Registrable Securities to include
the such securities in any such registration statement may be subject to
approval by selling securityholders whose securities are being registered in the
registration statement. If any registration pursuant to this Section 6.16(b) is
underwritten in whole or in part, Atlantic may require that the Registrable
Securities be included in the underwriting on the same terms and conditions as
the securities otherwise being sold through the underwriters and each holder of
Registrable Securities shall execute any underwriting agreement, "lock-up"
letters or other customary agreements or documents executed by Atlantic in
connection with that underwritten offering. If, in the reasonable opinion of the
managing underwriter of the proposed offering, the number of Registrable
Securities offered for participation in the proposed offering cannot be
accommodated without adversely affecting the proposed offering, then the amount
of Registrable Securities proposed to be offered, as well as the number of
securities of any other selling stockholders participating in the registration
(other than holders of Registrable Securities being registered in accordance
with Section 6.16(a)), shall be proportionately reduced to a number deemed
satisfactory by the managing underwriter.
6.17 Notification of Certain Matters. On or prior to the Effective Date,
each party shall give prompt notice to the other party of (i) the occurrence or
failure to occur of any event or the discovery of any information, which
occurrence, failure or discovery would be likely to cause any representation or
warranty on its part contained in this Agreement to be untrue, inaccurate or
incomplete after the date hereof in any material respect or, in the case of any
representation or warranty given as of a specific date, would be likely to cause
any such representation or warranty on its part contained in this Agreement to
be untrue, inaccurate or incomplete in any material respect as of such specific
date, and (ii) any material failure of such party to comply with or satisfy any
covenant or agreement to be complied with or satisfied by it hereunder.
ARTICLE VII
CONDITIONS
7.1 Conditions to Obligations of Each Party. The respective obligations of
each party to effect the transactions contemplated hereby are subject to the
fulfillment or waiver at or prior to the Effective Date of the following
conditions:
(a) No Prohibitive Change of Law. There shall have been no law,
statute, rule or regulation, domestic or foreign, enacted or promulgated which
would prohibit or make illegal the consummation of the transactions contemplated
hereby.
36
(b) Federal Tax Opinion. Manhattan shall have received from Maslon
Edelman Borman & Brand, LLP a tax opinion dated as of the Closing Date to the
effect that for federal income tax purposes:
(i) The Merger will qualify as a reorganization under Section
368(a) of the Code. Atlantic and Manhattan will each be a party to
the reorganization within the meaning of Section 368(b) of the Code.
(ii) No gain or loss will be recognized by stockholders of
Manhattan upon the receipt of the Merger Consideration.
(c) Stockholder Approvals. This Agreement and the Merger shall have
been approved by the Requisite Manhattan Stockholder Vote and the Atlantic
Proposals shall have been approved by the Requisite Atlantic Stockholder Votes.
(d) Adverse Proceedings. There shall not be threatened, instituted
or pending any action or proceeding before any court or governmental authority
or agency (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain or prohibit, the consummation of the
transactions contemplated hereby or seeking to obtain material damages in
connection with such transactions, (ii) seeking to prohibit direct or indirect
ownership or operation by Atlantic or MPAC of all or a material portion of the
business or assets of Manhattan, or to compel Atlantic or MPAC or any of their
respective subsidiaries or Manhattan to dispose of or to hold separately all or
a material portion of the business or assets of Atlantic or any Atlantic
Subsidiary or of Manhattan, as a result of the transactions contemplated hereby;
(iii) seeking to invalidate or render unenforceable any material provision of
this Agreement or any of the other agreements attached as exhibits hereto or
contemplated hereby, or (iv) otherwise relating to and materially adversely
affecting the transactions contemplated hereby.
(e) Governmental Action. There shall not be any action taken, or any
statute, rule, regulation, judgment, order or injunction proposed, enacted,
entered, enforced, promulgated, issued or deemed applicable to the transactions
contemplated hereby, by any federal, state or other court, government or
governmental authority or agency, that would reasonably be expected to result,
directly or indirectly, in any of the consequences referred to in Section
7.1(d).
(f) Market Condition. There shall not have occurred any general
suspension of trading on the New York Stock Exchange, the Nasdaq Stock Markets,
or any suspension of trading in Atlantic Common Stock, or any general bank
moratorium or closing or any war, national emergency or other event affecting
the economy or securities trading markets generally that would make completion
of the Merger impossible.
(g) Conversion of Preferred Stock. Immediately prior to the
Effective Time all shares of Series A convertible preferred stock of Atlantic
shall have been converted into shares of Atlantic Common Stock, as contemplated
by the applicable Atlantic Proposal.
(h) Amendment of Employment Agreements. Atlantic shall have entered
into amended employment agreements with Frederic P. Zotos, Nicholas J.
Rossettos, A. Joseph Rudick, Michael Ferrari, and Sarah Laut, the terms of which
shall be subject to the consent of
37
Manhattan, which shall not be unreasonably withheld. Such amended agreements
shall provide that one-half of the deferred salary and accrued bonus payable to
each such employee upon the termination of his or her employment by Atlantic
without cause shall be paid at such time that Atlantic has received aggregate
cash funds of $3 million from financings or other sources on or after the
Effective Time; and the remaining one-half of the deferred salary and accrued
bonus shall be paid at such time as Atlantic has received aggregate cash funds
of $6 million from financings or other sources on or after the Effective Time.
(i) Manhattan Available Capital. Manhattan shall have at least
$500,000 in cash (or cash equivalents) available to the Surviving Company.
7.2 Additional Conditions to Obligation of Atlantic and MPAC. The
obligation of Atlantic and MPAC to consummate the transactions contemplated
hereby in accordance with the terms of this Agreement is also subject to the
fulfillment or waiver of the following conditions:
(a) Representations and Compliance. The representations of Manhattan
contained in this Agreement were accurate as of the date of this Agreement and
are accurate as of the Effective Time, in all respects (in the case of any
representation containing any materiality qualification) or in all material
respects (in the case of any representation without any materiality
qualification). Manhattan shall in all material respects have performed each
obligation and agreement and complied with each covenant to be performed and
complied with by it hereunder at or prior to the Effective Date.
(b) Officers' Certificate. Manhattan shall have furnished to
Atlantic a certificate of the Chief Executive Officer and the Treasurer of
Manhattan, dated as of the Effective Date, in which such officers shall certify
that, to their best Knowledge, the conditions set forth in Section 7.2(a) have
been fulfilled.
(c) Secretary's Certificate. Manhattan shall have furnished to
Atlantic (i) copies of the text of the resolutions by which the corporate action
on the part of Manhattan necessary to approve this Agreement, the Certificate of
Merger and the transactions contemplated hereby and thereby were taken, (ii) a
certificate dated as of the Effective Date executed on behalf of Manhattan by
its corporate secretary or one of its assistant corporate secretaries certifying
to Atlantic that such copies are true, correct and complete copies of such
resolutions and that such resolutions were duly adopted and have not been
amended or rescinded, (iii) an incumbency certificate dated as of the Effective
Date executed on behalf of Manhattan by its corporate secretary or one of its
assistant corporate secretaries certifying the signature and office of each
officer of Manhattan executing this Agreement, the Certificate of Merger or any
other agreement, certificate or other instrument executed pursuant hereto by
Manhattan, (iv) a copy of the Certificate of Incorporation of Manhattan,
certified by the Secretary of State of Delaware, and a certificate from the
Secretary of State of Delaware evidencing the good standing of Manhattan in such
jurisdiction.
(d) Consents and Approvals. Manhattan shall have obtained all
consents and approvals necessary to consummate the transactions contemplated by
this Agreement, including, without limitation, those set forth on Schedule 3.2,
in order that the transactions contemplated herein not constitute a breach or
violation of, or result in a right of termination or acceleration of,
38
or creation of any encumbrance on any of Manhattan's assets pursuant to the
provisions of, any agreement, arrangement or undertaking of or affecting
Manhattan or any license, franchise or permit of or affecting Manhattan.
(e) Dissenters' Rights. Holders of no more than two (2) percent of
the outstanding shares of Manhattan Common Stock shall have validly exercised,
or remained entitled to exercise, their appraisal rights under Section 262 of
the DGCL.
(f) Fairness Opinion. Atlantic shall have received a written opinion
addressed to it for inclusion in the Proxy Statement that the consideration to
be received by it in the Merger is fair to the stockholders of Atlantic from a
financial point of view, and that fairness opinion shall not have been revoked
or withdrawn.
(g) Merger Certificate. Manhattan shall have executed a copy of the
Certificate of Merger. (h) Stockholder Questionnaire. Each of the Manhattan
stockholders shall have executed and delivered to Atlantic a completed
Stockholder Questionnaire that is accurate in all material respects.
7.3 Additional Conditions to Obligation of Manhattan. The obligation of
Manhattan to consummate the transactions contemplated hereby in accordance with
the terms of this Agreement is also subject to the fulfillment or waiver of the
following conditions:
(a) Representations And Compliance. The representations of Atlantic
and MPAC contained in this Agreement were accurate as of the date of this
Agreement and are accurate as of the Effective Time, in all respects (in the
case of any representation containing any materiality qualification) or in all
material respects (in the case of any representation without any materiality
qualification). Atlantic and MPAC, respectively, shall in all material respects
have performed each obligation and agreement and complied with each covenant to
be performed and complied with by them hereunder at or prior to the Effective
Date.
(b) Officers' Certificate. Atlantic shall have furnished to
Manhattan a certificate of the Chief Executive Officer and the Chief Financial
Officer of Atlantic, dated as of the Effective Date, in which such officers
shall certify that, to their best Knowledge, the conditions set forth in Section
7.3(a) have been fulfilled.
(c) Secretary's Certificate. Atlantic shall have furnished to
Manhattan (i) copies of the text of the resolutions by which the corporate
action on the part of Atlantic necessary to approve this Agreement and the
Certificate of Merger, the election of the directors of Atlantic to serve
following the Effective Time and the transactions contemplated hereby and
thereby were taken, which shall be accompanied by a certificate of the corporate
secretary or assistant corporation secretary of Atlantic dated as of the
Effective Date certifying to Manhattan that such copies are true, correct and
complete copies of such resolutions and that such resolutions were duly adopted
and have not been amended or rescinded, (ii) an incumbency certificate dated as
of the Effective Date executed on behalf of Atlantic by its corporate secretary
or one of its assistant corporate secretaries certifying the signature and
office of each officer of Atlantic executing this Agreement, the Certificate of
Merger or any other agreement, certificate
39
or other instrument executed pursuant hereto, and (iii) a copy of the
Certificate of Incorporation of Atlantic, certified by the Secretary of State of
Delaware, and certificates from the Secretary of State of Delaware evidencing
the good standing of Atlantic in such jurisdiction.
(d) Consents and Approvals. Atlantic and MPAC shall have obtained
all consents and approvals necessary to consummate the transactions contemplated
by this Agreement, including, without limitation, those set forth on Schedule
4.2, in order that the transactions contemplated herein not constitute a breach
or violation of, or result in a right of termination or acceleration of, or
creation of any encumbrance on any of Atlantic's or MPAC's assets pursuant to
the provisions of, any agreement, arrangement or undertaking of or affecting
Atlantic or any Atlantic Subsidiary or any license, franchise or permit of or
affecting Atlantic or any Atlantic Subsidiary.
(e) Resignations. Each of the officers and non-continuing directors
of Atlantic immediately prior to the Effective Time shall deliver duly executed
resignations from their positions with Atlantic effective immediately after the
Effective Time.
(f) Atlantic Warrant Exchange. All of Atlantic's currently
outstanding warrants issued on or about December 3, 2001 to purchase an
aggregate of 9,166,649 shares of Atlantic Common Stock at $0.29 per share shall
have been exchanged for shares of Atlantic Common Stock on the basis of one (1)
share of Atlantic Common Stock for every three (3) warrants surrendered for
exchange.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1. Termination. This Agreement may be terminated prior to the Effective
Date:
(a) by mutual consent of Manhattan and Atlantic, if the Board of
Directors of each so determines by vote of a majority of the members of its
entire board;
(b) by Atlantic, if any representation of Manhattan set forth in
this Agreement was inaccurate when made or becomes inaccurate such that the
condition set forth in Section 7.2(a) could not be satisfied;
(c) by Manhattan if any representation of Atlantic set forth in this
Agreement was inaccurate when made or becomes inaccurate such that the condition
set forth in Section 7.3(a) could not be satisfied;
(d) by Atlantic if Manhattan fails to perform or comply with any of
the obligations that it is required to perform or to comply with under this
Agreement such that the condition set forth in Section 7.2(a) could not be
satisfied;
(e) by Manhattan if Atlantic fails to perform or comply with any of
the obligations that it is required to perform or to comply with under this
Agreement such that the condition set forth in Section 7.3(a) could not be
satisfied;
40
(f) by either Manhattan or Atlantic, if, following a vote by the
stockholders of each company at the Atlantic Stockholder Meeting and the
Manhattan Stockholder Meeting, the Merger and this Agreement are not duly
approved by the stockholders of each of Manhattan or Atlantic;
(g) by either Manhattan or Atlantic if the Effective Date is not on
or before February 7, 2003, or such later date as Manhattan and Atlantic may
mutually agree (unless the failure to consummate the Merger by such date shall
be due to the action or failure to act of the party seeking to terminate this
Agreement in breach of such party's obligations under this Agreement); or
(h) by either Atlantic or Manhattan pursuant to Section 6.3 above.
Any party desiring to terminate this Agreement shall give prior written
notice of such termination and the reasons therefor to the other party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be sufficiently given if made by hand delivery, by fax, by
telecopier, by overnight delivery service, or by registered or certified mail
(postage prepaid and return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by it by
like notice):
If to Manhattan: Manhattan Pharmaceuticals, Inc.
787 Seventh Avenue, 48th Floor
New York, New York 10019
Facsimile: (212) 554-4355
Attn: Joshua A. Kazam
With copies to: Maslon Edelman Borman & Brand, LLP
90 South Seventh Street, Suite 3300
Minneapolis, MN 55402
Facsimile: (612) 642-8358
Attn: William M. Mower, Esq.
If to Atlantic Atlantic Technology Ventures, Inc.
or MPAC: 350 Fifth Avenue, Suite 5507
New York, New York 10118
Facsimile: (212) 267-2159
Attn: Frederic P. Zotos, President
With copies to: Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Facsimile: (212) 715-8000
Attn: Ezra G. Levin, Esq.
41
All such notices and other communications shall be deemed to have been
duly given as follows: when delivered by hand, if personally delivered, when
received, if delivered by registered or certified mail (postage prepaid and
return receipt requested), when receipt acknowledged; if faxed or telecopied, on
the day of transmission or, if that day is not a business day, on the next
business day; and the next day delivery after being timely delivered to a
recognized overnight delivery service.
9.2 No Survival. The representations and warranties and obligations
contained in this Agreement will terminate at the Effective Time or on
termination of this Agreement in accordance with Section 8.1, except that the
obligations contained in Article II and any other obligation contained in this
Agreement requiring performance or compliance after the Effective Time
(including without limitation Section 6.3(c)) will survive the Effective Time
indefinitely.
9.3 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. References to Sections and Articles refer to
Sections and Articles of this Agreement unless otherwise stated. Words such as
"herein," "hereinafter," "hereof," "hereto," "hereby" and "hereunder," and words
of like import, unless the context requires otherwise, refer to this Agreement
(including the Exhibits and Schedules hereto). As used in this Agreement, the
masculine, feminine and neuter genders shall be deemed to include the others if
the context requires.
9.4 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties shall negotiate
in good faith to modify this Agreement and to preserve each party's anticipated
benefits under this Agreement.
9.5 Amendment. This Agreement may not be amended or modified except by an
instrument in writing approved by the parties to this Agreement and signed on
behalf of each of the parties hereto.
9.6 Waiver. At any time prior to the Effective Date, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of the other party hereto or (b) waive compliance with any of the agreements of
the other party or with any conditions to its own obligations, in each case only
to the extent such obligations, agreements and conditions are intended for its
benefit. Any such extension or waiver shall only be effective if made in writing
and duly executed by the party giving such extension or waiver.
9.7 Miscellaneous. This Agreement (together with all other documents and
instruments referred to herein): (a) constitutes the entire agreement, and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties, with respect to the subject matter hereof; and (b) shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, but shall not be assignable by either party hereto
without the prior written consent of the other party hereto.
42
9.8 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
9.9 Third Party Beneficiaries. Except as provided in the next following
sentence, each party hereto intends that this Agreement shall not benefit or
create any right or cause of action in or on behalf of any person other than the
parties hereto. The provisions of Section 6.16 are intended for the benefit of
the stockholders of Manhattan and their respective assigns.
9.10 Governing Law. This Agreement is governed by the internal laws of the
State of New York, except to the extent the mandatory law of the State of
Delaware applies.
9.11 Jurisdiction; Service of Process. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
must be brought against any of the parties in the courts of the State of New
York, County of New York, or, if it has or can acquire jurisdiction, in the
United States District Court for the Southern District of New York, and each of
the parties consents to the jurisdiction of those courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any such action or proceeding may be served by
sending or delivering a copy of the process to the party to be served at the
address and in the manner provided for the giving of notices in Section 9.1.
Nothing in this Section 9.11, however, affects the right of any party to serve
legal process in any other manner permitted by law.
[Remainder of Page Left Intentionally Blank - Signature Page to Follow]
43
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first written above by their respective officers.
MANHATTAN PHARMACEUTICALS, INC.
By: /s/ John Knox
------------------------------------
Name: John Knox
Title: Treasurer
ATLANTIC TECHNOLOGY VENTURES, INC.
By: /s/ Frederick P. Zotos
------------------------------------
Name: Frederick P. Zotos
Title: President and Chief Executive
Officer
MANHATTAN PHARMACEUTICALS ACQUISITION CORP.
By: /s/ Frederick P. Zotos
------------------------------------
Name: Frederick P. Zotos
Title: President and Chief Executive
Officer
44
Exhibit B
[Fairness Opinion not yet completed; to be filed with the definitive proxy.]
Exhibit C
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ATLANTIC TECHNOLOGY VENTURES, INC.
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
It is hereby certified that:
1. Atlantic Technology Ventures, Inc. is a corporation formed under the
laws of the State of Delaware, and its certificate of incorporation was filed in
the office of the Secretary of State on May 18, 1993.
2. The certificate of incorporation is hereby amended by deleting the
existing Article FIRST and replacing it in its entirety with the following
amendment:
"FIRST: The name of the corporation is Manhattan Pharmaceuticals, Inc."
3. The certificate of incorporation is hereby amended by deleting the text
of Article FOURTH, A. in its entirety and replacing it with the following:
The corporation is authorized to issue two classes of shares designated
"Common Stock" and "Preferred Stock," respectively. The total number of
shares of Common Stock authorized to be issued is [150,000,000], and each
such share will have a par value of $0.001. The total number of shares of
Preferred Stock authorized to be issued is 10,000,000, and each such share
will have a par value of $0.001. The rights, preferences, privileges and
restrictions granted to and imposed upon the two classes of shares are as
set forth in this Article and in the Certificate of Designations of Series
A Convertible Preferred Stock.
4. This amendment to the certificate of incorporation has been duly
adopted in accordance with Section 242 of the General Corporation Law of the
State of Delaware.
The undersigned is signing this certificate on ____________, 2003.
---------------------------
Frederic P. Zotos
President and Chief Executive Officer
Exhibit D
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ATLANTIC TECHNOLOGY VENTURES, INC.
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
It is hereby certified that:
1. Atlantic Technology Ventures, Inc. (the "Corporation") is a corporation
formed under the laws of the State of Delaware, and its certificate of
incorporation was filed in the office of the Secretary of State on May 18, 1993.
2. The certificate of incorporation is hereby amended by deleting the
existing Article FIRST and replacing it in its entirety with the following
amendment:
"FIRST: The name of the corporation is Manhattan Pharmaceuticals, Inc."
3. The certificate of designations of the Series A convertible preferred
stock is hereby amended by adding after the first paragraph of Section 5 a
paragraph that reads as follows:
Immediately prior to the execution of a merger agreement between the
Corporation, a wholly owned subsidiary of the Corporation, and Manhattan
Pharmaceuticals, Inc., a Delaware corporation, the Series A Preferred
Stock shall automatically convert into fully paid and nonassessable shares
of Common Stock at the Conversion Rate then in effect. Any shares of
Series A Preferred Stock so converted shall be treated as having been
surrendered by the holder thereof for conversion in accordance with
Section 4 on the date of such mandatory conversion.
4. These amendments to the certificate of incorporation has been duly
adopted in accordance with Section 151 of the General Corporation Law of the
State of Delaware.
The undersigned is signing this certificate on ____________, 2003.
---------------------------
Frederic P. Zotos
President and Chief Executive Officer
Exhibit E
CHARTER AND POWERS OF THE AUDIT COMMITTEE
RESOLVED, that the membership of the Audit Committee shall consist of at
least one independent member of the board of directors (in conformity with the
small business rules of the Nasdaq) who shall serve at the pleasure of the board
of directors.
RESOLVED, that the charter and powers of the Audit Committee of the Board
of Directors (the "Audit Committee") shall be:
o Assisting the Board of Directors in the oversight of the maintenance by
management of the reliability and integrity of the accounting policies and
financial reporting and disclosure practices of Atlantic.
o Assisting the Board of Directors in the oversight of the establishment and
maintenance by management of processes to assure that an adequate system
of internal control is functioning within Atlantic.
o Assisting the Board of Directors in the oversight of the establishment and
maintenance by management of process to assure compliance by Atlantic with
all applicable laws, regulations and Company policy.
RESOLVED, that the Audit Committee shall have the following specific
powers and duties:
1. Holding such regular meetings as may be necessary and such special
meetings as may be called by the Chairman of the Audit Committee or at the
request of the independent accountants;
2. Reviewing the performance of the independent accountants and making
recommendations to the Board of Directors regarding the appointment or
termination of the independent accountants;
3. Ensuring its receipt from the independent accountants of a formal written
statement delineating all relationships between the independent
accountants and Atlantic consistent with Independence Standards Board
Standard;
4. Actively engaging in a dialogue with the independent accountants with
respect to any disclosed relationships or services that may impact the
objectivity and independence of the independent accountants and for taking
or recommending that the Board of Directors take appropriate action to
oversee the independence of the outside auditor;
5. Selecting, evaluating and, where appropriate, replacing the independent
auditors (or nominating independent auditors to be proposed for
shareholder approval in any proxy statement, which independent auditors
shall ultimately be accountable to the Board of Directors and the Audit
Committee;
6. Conferring with the independent accountants concerning the scope of their
examinations of the books and records of Atlantic and its subsidiaries:
reviewing and approving the independent accountants' annual engagement
letter: reviewing and approving Atlantic's internal annual audit plans and
procedures: and authorizing the auditors to perform such supplemental
reviews or audits as the Committee may deem desirable;
7. Reviewing with management, the independent accountants significant risks
and exposures, audit activities and significant audit findings;
8. Reviewing the range and cost of audit and non-audit services performed by
the independent accountants;
9. Reviewing Atlantic's audited annual financial statements and the
independent accountants opinion rendered with respect to such financial
statements, including reviewing the nature and extent of any significant
changes in accounting principles or the application thereof;
10. Reviewing the adequacy of Atlantic's systems of internal control;
11. Obtaining from the independent accountants their recommendations regarding
internal controls and other matters relating to the accounting procedures
and the books and records of Atlantic and its subsidiaries and reviewing
the correction of controls deemed to be deficient;
12. Providing an independent, direct communication between the Board of
Directors, and independent accountants;
13. Reviewing the adequacy of internal controls and procedures related to
executive travel and entertainment;
14. Reviewing the programs and policies of Atlantic designed to ensure
compliance with applicable laws and regulations and monitoring the results
of these compliance efforts;
15. Reporting through its Chairman to the Board of Directors following the
meetings of the Audit Committee;
16. Reviewing the powers of the Committee annually and reporting and making
recommendations to the Board of Directors on these responsibilities;
17. Conducting or authorizing investigations into any matters within the Audit
Committee's scope of responsibilities; and
18. Considering such other matters in relation to the financial affairs of
Atlantic and its accounts, and in relation to the internal and external
audit of Atlantic as the Audit Committee may, in its discretion, determine
to be advisable.
IN WITNESS WHEREOF, the undersigned have executed this written Consent,
which written Consent may be signed in one or more counterparts which taken
together shall constitute one and the same written consent, as of this 13th day
of June, 2000.
/s/ Steve H. Kanzer
----------------------------------
Steve H. Kanzer
/s/ Peter O. Kliem
-----------------------------------
Peter O. Kliem
/s/ A. Joseph Rudick
-----------------------------------
A. Joseph Rudick
/s/ Frederic P. Zotos
Frederic P. Zotos
ATLANTIC TECHNOLOGY VENTURES, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS, _________, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF ATLANTIC
TECHNOLOGY VENTURES, INC.
The undersigned revokes all previous proxies, acknowledges receipt of the
notice of the annual meeting of shareholders to be held _________, 2003 and the
proxy statement and appoints Frederic P. Zotos and Mr. Nicholas J. Rossettos,
and each of them, the proxy of the undersigned, with full power of substitution,
to vote all shares of common stock of Atlantic Technology Ventures, Inc. that
the undersigned is entitled to vote, either on his or her own behalf or on
behalf of any entity or entities, at the annual meeting of shareholders of
Atlantic to be held at the offices of Kramer Levin Naftalis & Frankel LLP, at
919 Third Avenue, 40th Floor, New York, New York 10022, on _________, 2003 at
10:00 a.m. New York time, and at any adjournment or postponement thereof, with
the same force and effect as the undersigned might or could do if personally
present at the annual meeting. The shares represented by this proxy will be
voted in the manner set forth below.
1. To amend Atlantic's certificate of incorporation to increase the total
number of authorized shares of Atlantic common stock, par value $0.001, from 50
million to 150 million.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To amend the certificate of designations of Atlantic's Series A
preferred stock to provide for the mandatory conversion of all outstanding
shares of Series A preferred stock immediately prior to the effectiveness of a
merger of a wholly owned subsidiary of Atlantic into Manhattan Pharmaceuticals,
Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To amend our certificate of incorporation to change Atlantic's name to
"Manhattan Pharmaceuticals, Inc."
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To elect five directors to serve on Atlantic's board of directors for
the ensuing year and until their respective successors are duly elected and
qualified.
To withhold authority to vote for any
FOR nominees, enter their name or names below:
Frederic P. Zotos [ ] __________________________________________
Steve H. Kanzer [ ] __________________________________________
Peter O. Kliem [ ] __________________________________________
A. Joseph Rudick [ ] __________________________________________
David M. Tanen [ ] __________________________________________
5. To ratify the board of directors' selection of J.H. Cohn, LLP to serve
as Atlantic's independent auditors for the year ending December 31, 2002.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
The board of directors recommends a vote in favor of each of the directors
listed above and a vote in favor of the other proposals. This proxy, when
properly executed, will be voted as specified above. If no direction is made,
this proxy will be voted in favor of election of the directors listed above and
in favor of the other proposals.
Please print the shareholder name exactly as it appears on your stock
certificate. If the shares are registered in more than one name, the signature
of each person in whose name the shares are registered is required. A
corporation should sign in its full corporate name, with a duly authorized
officer signing on behalf of the corporation and stating his or her title.
Trustees, guardians, executors, and administrators should sign in their official
capacity, giving their full title as such. A partnership should sign in its
partnership name, with an authorized person signing on behalf of the
partnership.
------------------------------
(Print name)
------------------------------
(Authorized Signature)
Date: ________________________
ATLANTIC TECHNOLOGY VENTURES, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS, _________, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF ATLANTIC
TECHNOLOGY VENTURES, INC.
The undersigned revokes all previous proxies, acknowledges receipt of the
notice of the annual meeting of shareholders to be held _________, 2003 and the
proxy statement and appoints Frederic P. Zotos and Mr. Nicholas J. Rossettos,
and each of them, the proxy of the undersigned, with full power of substitution,
to vote all shares of Series A preferred stock of Atlantic Technology Ventures,
Inc. that the undersigned is entitled to vote, either on his or her own behalf
or on behalf of any entity or entities, at the annual meeting of Shareholders of
Atlantic to be held at the offices of Kramer Levin Naftalis & Frankel LLP, at
919 Third Avenue, 40th Floor, New York, New York 10022, on _________, 2003 at
10:00 a.m. New York time, and at any adjournment or postponement thereof, with
the same force and effect as the undersigned might or could do if personally
present at the annual meeting. The shares represented by this proxy will be
voted in the manner set forth below.
1. To amend Atlantic's certificate of incorporation to increase the total
number of authorized shares of Atlantic common stock, par value $0.001, from 50
million to 150 million.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To amend the certificate of designations of Atlantic's Series A
preferred stock to provide for the mandatory conversion of all outstanding
shares of Series A preferred stock immediately prior to the effectiveness of a
merger of a wholly owned subsidiary of Atlantic into Manhattan Pharmaceuticals,
Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To amend our certificate of incorporation to change Atlantic's name to
"Manhattan Pharmaceuticals, Inc."
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To elect five directors to serve on Atlantic's board of directors for
the ensuing year and until their respective successors are duly elected and
qualified.
To withhold authority to vote for any
nominees, enter their name or names
FOR below:
Frederic P. Zotos [ ] ________________________________________
Steve H. Kanzer [ ] ________________________________________
Peter O. Kliem [ ] ________________________________________
A. Joseph Rudick [ ] ________________________________________
David M. Tanen [ ] ________________________________________
5. To ratify the board of directors' selection of J.H. Cohn, LLP to serve
as Atlantic's independent auditors for the year ending December 31, 2002.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
The board of directors recommends a vote in favor of each of the directors
listed above and a vote in favor of the other proposals. This proxy, when
properly executed, will be voted as specified above. If no direction is made,
this proxy will be voted in favor of election of the directors listed above and
in favor of the other proposals.
Please print the shareholder name exactly as it appears on your stock
certificate. If the shares are registered in more than one name, the signature
of each person in whose name the shares are registered is required. A
corporation should sign in its full corporate name, with a duly authorized
officer signing on behalf of the corporation and stating his or her title.
Trustees, guardians, executors, and administrators should sign in their official
capacity, giving their full title as such. A partnership should sign in its
partnership name, with an authorized person signing on behalf of the
partnership.
------------------------------
(Print name)
------------------------------
(Authorized Signature)
Date: ________________________