UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-12984
ADVANCED TOBACCO PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
State of Texas 74-2285214
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16607 Blanco Road, Suite 1504 78232
San Antonio, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 408-7077
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure or delinquent files
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of November 30, 1999, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the
registrant was approximately $6,000,000.
As of November 30, 1999, the number of outstanding shares of
Common Stock, $0.01 par value, of the registrant was 8,092,136.
PART I
ITEM 1. BUSINESS
Advanced Tobacco Products, Inc., d/b/a Advanced Therapeutic
Products, Inc. ("ATP"), maintains a website at
http://www/prnewswire.com/comp/117857.html.
History and Relationship with Pharmacia & Upjohn, Inc.
ATP, 16607 Blanco Road, Suite 1504, San Antonio, Texas 78232,
(210) 408-7077, is a Texas corporation formed in April 1983.
ATP was organized to develop and market a product based upon
nicotine technology. In 1987, ATP sold its nicotine technology and
related assets to what is now known as Pharmacia & Upjohn, Inc.
("PNU"), a worldwide pharmaceutical company that manufactures the
Nicorette Chewing Gum, the Nicotrol/Nicorette Patch, the
Nicotrol/Nicorette Nasal Spray and the Nicotrol/Nicorette Inhaler.
The nicotine technology acquired from ATP forms the basis of
the Nicotrol/Nicorette Inhaler ("Inhaler") developed by PNU for
use in the nicotine replacement therapy ("NRT") market. ATP
receives product payments from PNU's non U.S. sales of the Inhaler
equal to 3% of PNU's net sales to pharmacy distributors. Product
payments from the sales of the Inhaler in the U. S. are 9.9% of
PNU's net sales to McNeil Consumer Health Care ("McNeil"), a
Johnson & Johnson Company, which markets the Inhaler to pharmacies.
See "Pharmacia & Upjohn Technology Purchase Agreement."
McNeil launched the Inhaler nationwide in the U.S. as a
prescription product in 1998. PNU has introduced the Inhaler,
primarily as an over the counter product, in the United Kingdom,
Mexico, Australia, Norway, Sweden, Denmark, Italy, Austria,
Switzerland, The Netherlands, Belgium, Finland, Iceland, Gibralter,
New Zealand, Ireland and Hong Kong. ATP understands that
additional country launches are planned by PNU to occur as
regulatory approvals are granted.
The Inhaler is the first and only form of NRT designed to help
control a smoker's cravings for cigarettes and while providing a
key behavioral component of smoking--the hand-to-mouth ritual. The
Inhaler consists of a mouthpiece and a cartridge containing
nicotine. The user puffs on the mouthpiece to inhale the nicotine
which is then absorbed through the lining of the mouth.
Current Operations
In September 1992, ATP obtained an exclusive worldwide license
to certain dry powder nicotine inhaler technology from Duke
University. ATP has obtained several patents covering this
technology. ATP believes that a dry powder nicotine inhaler has
the potential to be a future generation NRT.
Effective as of October 1993, ATP has an agreement with PNU
under which, among other matters, ATP has the right to receive a
royalty equal to .1% of net revenues received by PNU from the sale
of any product using a nicotine impermeable copolymer technology.
Under the terms of the agreement, ATP now receives royalties from
the sales of the Nicotrol/Nicorette Patch ("Patch") by PNU.
ATP's operations include no material dependence on any
computer operations or on the preparation for year 2000 of any
computer operations.
Pharmacia & Upjohn Technology Purchase Agreement
ATP has the right to receive product payments from PNU with
respect to the Inhaler as follows:
Product payments of three percent (3%) of Net Sales
(generally, sales by PNU to wholesale distributors) payable on a
country by country basis for the greater of 10 years following the
date of the first commercial sales or the expiration of all issued
patents enforceable in such countries. If the Net Sales to
wholesale distributors cannot be obtained or are not disclosed, as
is the case with regard to McNeil, Net Sales are computed by
multiplying the net sales of PNU to McNeil by 3.3 (in effect,
product payments are 9.9% of PNU's sales to McNeil). There are
product payment limitations in the event of the sale of a nicotine
vapor product competitive with the Inhaler.
As of October 1999, ATP entered into a Modification Agreement
(the "Modification Agreement") with PNU to revise ATP's 1987
nicotine technology agreements with PNU. The Modification
Agreement provides:
Quarterly product payments instead of biannual
product payments.
Deferral until 2003 of the fifty percent (50%)
reduction of product payments in excess of
$1,000,000 per year. This deferral will allow ATP
the opportunity to reduce its taxable income by
maximizing the potential use of ATP's net operating
loss carryforwards, which begin to expire in 2001
(see discussion in the following paragraphs).
Clarification and/or definition of other
administrative matters.
Under ATP's original agreements with PNU, product payments in
excess of $1,000,000 per year are to be reduced by fifty percent
(50%) until the aggregate of such reductions equal the sum of
$4,400,000 (the $4,400,000 is solely part of the product payment
calculation and not an obligation of ATP). Under the Modification
Agreement, the $4,400,000 amount remains; however, reductions in
product payments are deferred as further described herein.
For ATP's tax years ending June 30, 1999, June 30, 2000 and
June 30, 2001, (see Item 7(a)) no reduction in product payments
earned during these three (3) tax years shall be made unless
product payments exceed the aggregate of $6,865,262, which
represents the amount of net operating loss carryforwards expiring
on June 30, 2001. For ATP's tax year ending June 30, 2002, no
reduction in product payments earned during this tax year shall be
made unless product payments exceed $1,938,997, which represents
the amount of net operating loss carryforwards expiring on June 30,
2002.
Any product payment earned in excess of the aggregate of
$6,865,262 for the 1999, 2000 and 2001 tax years and in excess of
$1,983,997 for the 2002 tax year will be applied to the $4,400,000
until such amounts aggregate $4,400,000. Beginning with the tax
year ending June 30, 2003, product payments in excess of $1,000,000
per year will not be paid until any product payments made in the
tax years ending June 1999, 2000, 2001 and 2002, that were in
excess of ATP's original agreements with PNU, if any, have been
applied against any remaining amount of the $4,400,000 and
thereafter, if necessary, product payments in excess of $1,000,000
per year will be reduced by fifty percent (50%) until the aggregate
of $4,400,000 is attained.
Under the Modification Agreement, ATP earned an additional
$22,178 for the tax year ending June 30, 1999.
ATP has the right to receive product payments for other
nicotine product applications, if any, both pharmaceutical and non-
pharmaceutical. PNU is not obligated to develop or sell any
products using the technology developed by ATP.
ITEM 2. PROPERTIES
ATP does not own any tangible fixed assets.
ITEM 3. LEGAL PROCEEDINGS
ATP has no outstanding legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
HOLDER MATTERS
a) Market Information
The Common Stock trades in the over-the-counter market
through the OTC Bulletin Board quotation system under the symbol
"AVTH." The following table sets forth the high and low bid price
of ATP's Common Stock reported for the fiscal periods indicated.
Bid prices represent prices between dealers, do not include retail
markups, markdowns or commissions, and may not represent actual
transactions.
FIRST SECOND THIRD FOURTH TRANSITION
QUARTER QUARTER QUARTER QUARTER QUARTER
1998 1999 1998 1999 1998 1999 1998 1999 7/1/98--9/30/98
HIGH 1.00 1.25 .91 1.16 .94 .97 2.63 .97 1.00
LOW .69 .72 .75 .69 .75 .63 .75 .66 .69
b) Holders
There were approximately, 1,835 shareholders of record of
ATP's Common Stock at September 30, 1999.
c) Dividends
ATP anticipates declaring and paying dividends from time
to time while substantial product payments are received from the
sale of products under ATP's agreements with PNU.
On September 21, 1998, ATP declared a dividend of $.07
per share payable on January 6, 1999, to shareholders of record as
of October 30, 1998.
On November 23, 1999, ATP declared a dividend of $.15 per
share payable on January 10, 2000, to shareholders of record as of
December 17, 1999. The $.15 per share dividend is based upon ATP's
earnings for fiscal 1999 and the transitional period July 1, 1998,
to September 30, 1998 (See "Change in Fiscal Year," Item 7).
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth for the indicated periods
selected historical financial information for the Company.
Such information is derived from the financial statements
of the Company included under Item 8 and should be read in
conjunction with such financial statements, the related
notes thereto and the information included under Item 7,
"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
3 months Year Ended
Year Ended June 30 September 30
1995 1996 1997 1998 1998 1999
Revenues - - 157,200 516,600 352,000 964,582
Net Income
(loss) (3,061) (14,957) 94,758 467,121 331,758 909,893
Net Income
(loss) per
share of
common
stock (0.001) (0.002) 0.01 0.06 0.04 0.11
Net Income
(loss) per
share of
common stock
assuming
dilution (0.001) (0.002) 0.01 0.06 0.04 0.11
Weighted average
number of
shares of
common stock
outstanding 7,792,136 7,831,588 8,051,094 8,092,136 8,092,136 8,092,136
Weighted
average
number of
shares
of common
stock
outstanding
assuming
dilution 7,792,136 7,831,588 8,168,504 8,205,502 8,216,836 8,195,340
Cash provided
by (used in)
operations (62,048) (98,664) (51,211) 93,005 360,279 1,048,490
Increase
(decrease)
in cash and
cash
equivalents (217,069) (1,472) (46,041) 52,554 356,791 241,579
Balance sheet
data at end of
indicated
periods
working
capital 384,314 318,824 566,084 939,872 687,338 1,608,228
Total assets 1,495,268 1,484,998 1,600,488 2,063,651 2,411,756 2,750,124
Total
shareholder's
equity 1,476,427 1,481,470 1,593,728 2,060,849 1,826,157 2,736,050
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
a) Change in Fiscal Year
Beginning with fiscal 1999, ATP has changed its fiscal
year end from June 30 to September 30. Because ATP believes that
the results of its operations for the transitional quarter ending
September 30, 1998, are not generally affected, ATP believes its
fiscal years 1997, 1998 and 1999 are comparable. ATP has not
changed its tax year which remains with a June 30 year end.
b) Results of Operations
Operating revenues were $157,200, $516,600 and $964,582,
respectively, in fiscal 1997, 1998 and 1999, all resulting from the
recognition of product payments from PNU's sales of the Inhaler and
the Patch. Product payments generated by the Patch were $53,029,
$11,165 and $15,369, in fiscal 1997, 1998 and 1999, respectively.
General and administrative expenses were $141,176,
$126,796 and $151,091, in fiscal 1997, 1998, and 1999,
respectively.
Income from operations was $16,024, $389,804 and
$813,491, in fiscal 1997, 1998 and 1999, respectively. The
increases of income from operations from 1997 through 1999 were
primarily due to the increase of product payments from PNU's sales
of the Inhaler. ATP's net income for fiscal 1999 was $909,893,
with the addition of $96,402 in interest income to the operating
income.
b) Liquidity and Capital Resources
Cash and investments available on September 30, 1999,
were approximately $2,435,000. ATP believes that its cash and
investment resources are sufficient to meet its foreseeable needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other matters required by this
Item 8 are included on Pages F-1 and following.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. James E. Turner, age 51, has been a Director of ATP since
November 1986. Mr. Turner was one of the founders and the Business
Manager of NCC Group, Ltd., a research and development limited
partnership which was a predecessor of ATP. Mr. Turner has been a
consultant to PNU for in excess of the last five years.
Mr. J. H. Uptmore, age 68, has been a Director of ATP since
August 1987. Mr. Uptmore has been the President and Chairman of
the Board of J. H. Uptmore & Associates, Inc., a construction
contracting and development company, since 1974.
Mr. J. W. Linehan, age 56, has been Director of ATP since June
1991, and President, Chief Executive Officer, Chief Financial
Officer and Secretary of ATP since July 1, 1990. Since August 1,
1995, Mr. Linehan has been President and Chief Executive Officer of
Linehan Engineering, Inc., an independent engineering company
wholly owned by him. Mr. Linehan's prior experience also includes
shareholder and owner of Net Fone, Inc., shareholder and Vice
President of GE Reaves Engineering, Inc., shareholder and Chief
Operating Officer of Texas Trunk Co., Inc., a consultant at Arthur
Andersen LLP, and President of BIOGLAS Corporation.
Ms. Brenda Ray, age 50, has been a Director of ATP since March
1989. Ms. Ray assisted in the original research and development of
ATP's nicotine vapor inhalation technology. She is a consultant
and has been President of Brenda Ray, Inc. since 1985.
Mr. David A. Monroe, age 46, has been a Director of ATP since
March 1989. Mr. Monroe is President and CEO of PhotoTelesis
Corporation, a government electronics manufacturing company.
Mr. Monroe's prior experience includes being General Manager of the
PhotoTelesis' Division of Raytheon TI Systems, Inc., Founder &
Chief Technical Officer of Image Data Corporation, a communications
technology company, and Vice-President of Research & Development
and Vice-President, Product Line Manager, at Datapoint Corporation,
a computer equipment manufacturer.
ITEM 11. EXECUTIVE COMPENSATION
Cash Compensation
Mr. Linehan, President and Chief Executive Officer of ATP and
its sole executive officer, receives no salary or fees, but
indirectly benefits from payments made to Linehan Engineering, Inc.
(See Item 13, "Certain Relationships and Related Transactions").
Each Director is entitled to receive travel expenses incurred by
them in order to attend Directors' meetings.
Compensation Pursuant to Plans
Nonqualified Stock Options
ATP has a nonqualified stock option plan authorizing the
granting by the board of directors of stock options covering common
stock to directors, officers, key management employees, independent
contractors providing services to ATP or consultants to ATP. The
exercise price per share cannot be less than 100 percent (or 110
percent in the case of options granted to holders of 10 percent or
more of the then outstanding common stock) of the fair market value
of ATP's common stock as determined by the board of directors on
the date the options are granted, and the exercise period for the
options cannot exceed 10 years from the date the options are
granted. The options are immediately exercisable. Options are not
transferable except by will or the laws of descent or distribution,
and options expire within one year following termination of
association with ATP. The aggregate number of options outstanding
as of June 30, 1998, and September 30, 1999, was 200,000, all
exercisable at $.4375.
Summary of Option Transactions
The following table sets forth as to the directors of ATP the
stock options outstanding during fiscal 1999. No options were
exercised during fiscal 1999.
Aggregated Options Exercised in Last
Fiscal Year and Fiscal Year End Stock Option Values
Number of
Unexercised
Shares Stock Options Value of
Acquired or at FY-End (All Unexercised Expiration
Name Exercised Exercisable) Stock Options* Date
J. H. Uptmore None 100,000 $ 75,000 9/27/00
D. A. Monroe None 100,000 $ 75,000 9/27/00
* all outstanding options held by Messrs. Uptmore and Monroe are
exercisable at $.4375 per share. The market value of ATP's common
stock at year end was $.75.
ITEM 12. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information about the
Directors of ATP, which includes all persons known by ATP to own
more than 5% of the Common Stock as of November 30, 1999, and all
officers and Directors of ATP as a group as of September 30, 1999.
Except as indicated, ATP believes that each of the below named
persons has sole voting and investment power with respect to the
shares shown and owns the shares indicated beneficially and of
record. All of the Common Stock held by the persons described in
the following table is available for sale under Rule 144 of the
Securities and Exchange Commission. During 1999, 73,500 shares
were divested by such persons or their affiliates pursuant to Rule
144.
Director Number Percent
Name Since of Shares of Class (1)
Brenda Ray (2)
12544 Judson Road
San Antonio, TX 78233 1989 1,397,464 17.27%
James E. Turner
307 Wayside Drive
San Antonio, TX 78213 1986 370,221 4.58%
J. H. Uptmore (3)
P.O. Box 29389
San Antonio, TX 78229 1987 196,921 1.20%
David A. Monroe (4)
7800 I.H. 10 W
San Antonio, TX 78230 1989 147,229 .58%
J.W. Linehan
16607 Blanco Road
Suite 1504
San Antonio, TX 78232 1991 85,000 1.05%
Officers and Directors
as a Group (5 persons) 2,196,835 24.68%
____________________
(1) Excludes shares under options referred to in notes 3 and 4.
(2) Includes 420,104 shares of Common Stock owned by the Jon
Philip Ray Family Trust of which Brenda Ray is a beneficiary.
(3) Includes 46,921 shares of Common Stock owned by J. H. Uptmore
& Associates, Inc., of which Mr. Uptmore is President and Chairman
of the Board and 100,000 shares of Common Stock underlying
presently exercisable options held by Mr. Uptmore. (See
"Compensation Pursuant to Plans").
(4) Includes 100,000 shares of Common Stock underlying presently
exercisable options held by Mr. Monroe. (See "Compensation
Pursuant to Plans").
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires
ATP's directors, executive officers, and any persons holding more
than ten percent (10%) of ATP's Common Stock to report their
initial ownership of ATP's Common Stock and any subsequent changes
in that ownership to the Securities and Exchange Commission and to
provide copies of such reports to ATP. Based upon ATP's review of
copies of such reports received by ATP, ATP believes that during
the year ended September 30, 1999, all Section 16(a) filing
requirements were satisfied, except for two inadvertently late
filings of Form 4's, by Brenda Ray, one filed January 19, 1999, for
a sale of 21,500 shares in November 1998, another filed July 20,
1999, for a sale of 37,000 shares on June 23, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since August 1995, ATP has had an administrative services
agreement with Linehan Engineering, Inc. ("LEI"), a related-party
entity owned by ATP's president. In 1999, 1998 and 1997, ATP paid
LEI $36,000, $37,540 and $39,450, respectively.
In June 1994, ATP entered into a Consulting Services Agreement
with James E. Turner ("Turner") who is a director of ATP. In 1997,
ATP paid Turner $17,500.
In October 1996, ATP entered into a Consulting Services
Agreement with Brenda Ray, Inc. ("Ray"), a related party entity
owned by a director of ATP. In 1999, 1998 and 1997, ATP paid Ray
$12,000, $12,000 and $9,000, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual
Report on Form 10-K:
1. Financial Statements and Independent Auditors'
Report
The financial statements and consent listed in the
index to financial statements follows the signature
page of this report.
2. Financial Statement Schedules
ATP did not meet any of the requirements to provide
financial statement schedules for any of the fiscal
years ended 1998, 1997 or 1996.
3. Exhibits
The exhibits listed on the index to exhibits
follows the signature page of this report.
(b) ATP has filed the following Current Reports on Form 8-K
since the filing of ATP's last 10-K:
1. On September 17, 1998, ATP filed a Current Report
on Form 8-K to disclose its intention to change its
fiscal year end from June 30 to September 30
beginning the fiscal year ending September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on behalf by the undersigned, there unto
duly authorized, in the City of San Antonio, State of Texas, as of
December 23, 1999.
ADVANCED TOBACCO PRODUCTS, INC.
Date: December 23, 1999 By: /s/ J. W. Linehan
J. W. Linehan, President,
Chief Executive Officer and
Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date: December 23, 1999 By: /s/ J. W. Linehan
J. W. Linehan, President,
Chief Executive Officer,
Chief Accounting Officer
and Director
Date: December 23, 1999 By: /s/ James E. Turner
James E. Turner, Director
Date: December 23, 1999 By: /s/ J. H. Uptmore
J. H. Uptmore, Director
Date: December 23, 1999 By: /s/ Brenda Ray
Brenda Ray, Director
Date: By:
David A. Monroe, Director
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
Item 8. Financial Statements
The following financial statements are included in response to
Item 14(a):
Page
Index to Financial Statements F-1
Financial Statements
Report of Independent Public Accountants F-2
Balance Sheets - - Sept. 30, 1999 and 1998 F-3
Statements of Income for the Year Ended
Sept. 30, 1999, for the Three Month Period
Ended Sept. 30, 1998, and for the Years Ended
June 30, 1998 and 1997 F-4
Statements of Stockholders' Equity for the Year
Ended Sept. 30, 1999, for the Three Month Period
Ended Sept. 30, 1998, and for the Years Ended
June 30, 1998 and 1997 F-5
Statements of Cash Flows for the Year Ended
Sept. 30, 1999, for the Three Month Period
Ended Sept. 30, 1998, and for the Years Ended
June 30, 1998 and 1997 F-6
Notes to Financial Statements F-7
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of Advanced Tobacco Products, Inc.:
We have audited the accompanying balance sheets of Advanced
Tobacco Products, Inc. (a Texas corporation) as of September 30,
1999, and 1998, and the related statements of income, stock-
holders' equity and cash flows for the year ended September 30,
1999, the three month period ended September 30, 1998, and the
years ended June 30, 1998, and 1997. These financial statements
are the responsibility of the Company's management. Our respon-
sibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the 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 Advanced Tobacco Products, Inc. as of September 30, 1999, and
1998, and the results of its operations and its cash flows for
the year ended September 30, 1999, the three month period ended
September 30, 1998, and the years ended June 30, 1998, and 1997,
in conformity with generally accepted accounting principles.
San Antonio, Texas
October 27, 1999 /s/ Arthur Andersen LLP
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
BALANCE SHEETS SEPTEMBER 30, 1999 AND 1998
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 689,801 $ 448,222
Royalties receivable 140,078 352,000
Other receivables 1,587 -
Investments 790,836 472,715
Total current assets 1,622,302 1,272,937
LICENSE AGREEMENTS, less accumulated
amortization of $46,995 and $40,315
in 1999 and 1998, respectively 174,443 161,804
INVESTMENTS 953,379 977,015
Total assets $ 2,750,124 $ 2,411,756
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued liabilities $ 14,074 585,599
Total liabilities 14,074 585,599
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value;
500,000 shares authorized;
none issued
Common stock, $.01 par value;
30,000,000 shares authorized
8,092,136 issued and outstanding 80,922 80,922
Additional paid-in capital 12,544,878 12,544,878
Accumulated deficit (9,889,750) (10,799,643)
Total stockholders' equity 2,736,050 1,826,157
Total liabilities and stockholders'
equity $2,750,124 $2,411,756
The accompanying notes are an integral part
of these financial statements
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF INCOME
For the three For the year ended
For the year ended month period ended June 30
September 30, 1999 September 30, 1998 1998 1997
REVENUES:
Product Payment $ 964,582 $ 352,000 $ 516,600 $ 157,200
Total operating
revenues 964,582 352,000 516,600 157,200
EXPENSES:
General and
administrative 151,091 40,866 126,796 141,176
Total operating expenses 151,091 40,866 126,796 141,176
INCOME FROM OPERATIONS 813,491 311,134 389,804 16,024
OTHER INCOME:
Interest income 96,402 20,624 77,317 78,734
Total other income 96,402 20,624 77,317 78,734
INCOME BEFORE INCOME TAXES 909,893 331,758 467,121 94,758
NET INCOME $ 909,893 $ 331,758 $ 467,121 $ 94,758
INCOME PER COMMON SHARE -
BASIC AND ASSUMING
DILUTION $ 0.11 $ 0.04 $ 0.06 $ 0.01
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 8,092,136 8,092,136 8,092,136 8,051,094
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON STOCK
OUTSTANDING -
ASSUMING DILUTION 8,195,340 8,216,836 8,205,502 8,168,504
CASH DIVIDENDS DECLARED
PER SHARE OF COMMON
STOCK $ -- $ 0.07 $ -- $ --
The accompanying notes are an integral part of these
financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS,
INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
BALANCE,
June 30, 1996 7,952,136 $ 79,522 $12,528,778 $(11,126,830) $1,481,470
Net income - - - 94,758 94,758
Exercise of stock
options 140,000 1,400 16,100 - 17,500
BALANCE,
June 30, 1997 8,092,136 80,922 12,544,878 (11,032,072) 1,593,728
Net income - - - 467,121 467,121
BALANCE,
June 30, 1998 8,092,136 80,922 12,544,878 (10,564,951) 2,060,849
Net income - - - 331,758 331,758
Dividends declared - - - (566,450) (566,450)
BALANCE,
September 30, 1998 8,092,136 80,922 12,544,878 (10,799,643) 1,826,157
Net income - - - 909,893 909,893
BALANCE,
September 30, 1999 8,092,136 $ 80,922 $12,544,878 $ (9,889,750) $2,736,050
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
For the three For the year ended
For the year ended month period ended June 30
September 30, 1999 September 30, 1998 1998 1997
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net income $ 909,893 $ 331,758 $ 467,121 $ 94,758
Adjustments to
reconcile net
income to net
cash provided
by(used in)
operating
activities:
Amortization 6,680 1,670 6,680 6,680
Amortization of
discount on
investments (73,343) (21,551) (72,318) (76,342)
(Increase) decrease in
royalties receivable 211,922 32,059 (304,520) (79,539)
Increase in other
receivables (1,587) -- -- --
Increase (decrease)
in accrued liabilities (5,075) 16,343 (3,958) 3,232
Net cash provided by
(used in) operating
activities 1,048,490 360,279 93,005 (51,211)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of license
agreements and
patent expenses (19,319) (3,488) (7,592) (10,945)
Purchase of investments (899,142) -- (500,859) (343,385)
Sale of investments 678,000 -- 468,000 342,000
Net cash used in
investing activities (240,461) (3,488) (40,451) (12,330)
CASH FLOWS FROM
FINANCING ACTIVITIES
Exercise of
stock options -- -- -- 17,500
Dividends paid (566,450) -- -- --
Net cash provided by
(used in) financing
activities (566,450) -- -- 17,500
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS 241,579 356,791 52,554 (46,041)
CASH AND CASH EQUIVALENTS,
beginning of year 448,222 91,431 38,877 84,918
CASH AND CASH EQUIVALENTS,
end of year $ 689,801 $ 448,222 $ 91,431 $ 38,877
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
d/b/a ADVANCED THERAPEUTIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Advanced Tobacco Products, Inc., d/b/a Advanced Therapeutic
Products, Inc. ("ATP"), was formed in April 1983. Through
September 1987, ATP was engaged in the manufacturing and marketing
of a product based upon nicotine technology. In 1987, ATP sold
certain nicotine technology and related assets to what is now
known as Pharmacia & Upjohn, Inc. ("PNU"), a worldwide
pharmaceutical company, for $3.6 million and the right to
future product payments.
Revenue Recognition and Current Operations
The nicotine inhaler technology acquired from ATP forms the
basis of the Nicotrol/Nicorette Inhaler ("Inhaler") developed by
PNU for use in the nicotine replacement therapy ("NRT") market.
ATP receives product payments from PNU's non-U.S. sales of the
Inhaler equal to 3% of PNU's net sales to pharmacy distributors.
Product payments from the sales of the Inhaler in the U.S. are
9.9% of PNU's net sales to McNeil Consumer Health Care, a Johnson
& Johnson Company, which markets the Inhaler to pharmacies.
In September 1992, ATP obtained an exclusive worldwide license
to certain dry powder nicotine inhaler technology from Duke
University. ATP has obtained several patents covering this
technology. ATP believes that a dry powder nicotine inhaler has
the potential to be a future generation NRT.
Effective as of October 1993, ATP has an agreement with PNU
under which, among other matters, ATP has the right to receive a
royalty equal to .1% of net revenues received by PNU from the sale
of any product using a nicotine impermeable copolymer technology.
Under the terms of the agreement, ATP now receives royalties from
the sales of the Nicotrol/Nicorette Patch ("Patch") by PNU.
Concentration of Credit Risk
ATP's revenues and product payments receivable are derived
solely from PNU. ATP believes its associated exposure to credit
risk is minimal. No allowance for doubtful accounts is considered
necessary as of September 30, 1999, or 1998.
Fiscal Year Change
Effective September 1998, ATP changed its fiscal year ending
June 30 to a fiscal year ending September 30; however, ATP's tax
year continues to end on June 30. The three month transition
period ended September 30, 1998, bridges the gap between ATP's old
and new fiscal year ends. For comparative purposes, ATP's
unaudited income statement for the three month period ended
September 30, 1997, was as follows:
For the three months ended
September 30, 1997
(Unaudited)
REVENUES:
Product payments $ 20,656
Total operating revenues 20,656
EXPENSES:
General and administrative 45,700
Total operating expenses 45,700
LOSS FROM OPERATIONS (25,044)
OTHER INCOME:
Interest income 19,666
Total other income 19,666
LOSS BEFORE INCOME TAXES (5,378)
NET LOSS $ (5,378)
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires ATP to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Income Per Share
In February 1997, the Financial Accounting Standards Board
(the FASB) issued Statement of Financial Accounting Standard
(SFAS)No. 128, "Earnings per Share," superseding Accounting
Principles Board (APB) Opinion No. 15, "Earnings per Share." This
statement replaces primary earnings per share (EPS) with basic
EPS. Basic EPS is computed by dividing reported earnings
available to common stockholders by weighted average shares
outstanding. No dilution for potentially dilutive securities is
included in basic EPS. Fully diluted EPS, now called dilutive
EPS, is still required. This statement changes or eliminates
several other requirements of APB 15.
SFAS No. 128 also requires the disclosures of a reconciliation of
the numerators and denominators of the basic and diluted per-
share computations for net income. The sole reconciling item for
the year ended September 30, 1999, the three month period ended
September 30, 1998, and the years ended June 30, 1998, and 1997,
is the dilutive effect of stock options. These stock options had
no effect on the numerator of the basic and diluted per-share
computations for net income. The effects of the stock options on
the denominator of the basic and diluted per-share computations of
net income were as follows:
Weighted average
Weighted average number of shares
number of shares Effect of of Common Stock
of Common Stock dilutive outstanding -
outstanding Stock Options assuming dilution
For the year ended
September 30, 1999 8,092,136 103,204 8,195,340
For the three month
period ended
September 30, 1998 8,092,136 124,700 8,216,836
For the year ended
June 30, 1998 8,092,136 113,3661 8,205,502
For the year ended
June 30, 1997 8,051,094 117,410 8,168,504
Statements of Cash Flows
For purposes of determining cash flows, ATP considers
all investments with original maturities of less than three
months to be cash equivalents. There were no amounts paid by
ATP for interest or income taxes during the years ended
September 30, 1999, June 30, 1998, and 1997, or during the three
months ended September 30, 1998.
License Agreement
In fiscal year 1993, ATP entered into a license agreement for
nicotine technology with Duke University. The term of the
license agreement is for any period such nicotine
technology is under patent. ATP capitalized the direct
costs incurred in obtaining the license agreement plus patent
prosecution expenses. These costs are being amortized on a
straight-line basis over 20 years.
2. INVESTMENTS:
ATP's investments consist of U.S. Treasury zero coupon
bonds which were purchased at a discount from their face value
and are carried at amortized cost, which as of September 30,
1999, and 1998, approximates fair value. ATP intends to hold all
investments to their respective maturities which range from
November 1999, to May 2002. Investments maturing within one year of
the balance sheet date are classified as current assets, while
those investments maturing later than one year of the balance sheet
date are classified as noncurrent assets in the accompanying
balance sheets.
U.S. Treasury zero coupon bonds held at September 30, 1999,
and 1998, were as follows:
Gross
Unrealized
Carry Holding Fair
Amount (Gain) Loss Value
1999:
Current $ 790,836 $ 2,077 $ 788,759
Long Term 953,379 15,931 937,448
$1,744,215 $ 18,008 $1,726,207
1998:
Current $ 472,715 $ 1,818 $ 470,897
Long Term 977,015 (15,957) 992,972
$1,449,730 $(14,139) $1,463,869
3. FEDERAL INCOME TAXES:
As of September 30, 1999, ATP has remaining tax net operating
loss and tax credit carryforwards of approximately $8,900,000 and
$48,000, respectively, which may be used to reduce taxes against
future earnings. The net operating loss carryforwards expire
between 2001 and 2011, while the tax credit carryforwards expire
in 2000 and 2001. Net operating loss carry forwards expire as
follows: $5,727,398 ($6,865,262 less $1,137,864 used for tax year
ending June 30, 1999) on June 30, 2001, $1,938,997 on June 30,
2002, $988,839 on June 30, 2003, $118,883 on June 30, 2004,
$91,380 on June 30, 2005, and $34,107 on June 30, 2011. For
financial reporting purposes, ATP has not recognized a deferred
tax asset or liability resulting from temporary differences as
the tax effects of such differences are immaterial.
The tax effects of the various loss and credit carryforwards are
as follows:
September 30
1999 1998
Deferred income tax
assets -
Net operating loss
carryforwards $ 3,026,000 $ 3,410,000
Corporate capital loss
carryforward -- 23,800
Tax credit
carryforwards 48,000 102,000
Total gross deferred
tax assets 3,074,000 3,535,800
Less - Valuation
allowance (3,074,000) (3,535,800)
Net deferred tax
assets $ - $ -
As ATP has generated significant net operating losses in prior
years. Given the historical loss history of ATP, a valuation
allowance of 3,074,000 has been established at September 30, 1999.
ATP will reevaluate the necessity for such valuation allowance in
the future.
4. NONQUALIFIED STOCK OPTION PLAN:
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for employee and nonemployee stock
options or similar equity instruments and encourages all
entities to adopt that method of accounting for all of their
stock-based compensation arrangements. Under the fair value
method, the compensation cost is based on the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
However, SFAS No. 123 allows entities to measure compensation
cost using the intrinsic value method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issue to Employees" (APB
25), provided that the necessary disclosures required by FAS No.
123 are made. ATP has elected to continue to apply APB 25 in
accounting for its stock option plan.
ATP has a nonqualified stock option plan authorizing the granting
by the board of directors of stock options to officers, key
management employees, independent contractors providing services to
ATP or consultants of ATP.
The exercise price per share cannot be less than 100 percent (or
110 percent in the case of options granted to holders of 10 percent
or more of the then outstanding common stock) of the fair market
value of ATP's common stock on the date the options are granted,
and the exercise period for the options cannot exceed 10 years
from the date the options are granted. Options are immediately
exercisabloe, are not transfersable except by will or the laws
of descent or distribution, and expire within one year following
termination of association with ATP. The aggregate number of
options outstanding and exercisable as of September 30, 1999, and
1998, was 200,000. Each of the outstanding options has
an exercise price of $.4375 per share and expire in September
2000. The following table summarizes the activity in the
Company's stock option plan:
For all periods subse- For the Year Ended
quent to June 30, 1997 June 30, 1997
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at
beginning of
period 200,000 $.4375 340,000 $.3088
Granted
Exercised (140,000) .1250
Outstanding at
end of period 200,000 $.4375 200,000 $.4375
Exercised at
end of period 200,000 $.4375 200,000 $.4375
5. RELATED-PARTY TRANSCTIONS:
Since August 1995, ATP has had an administrative services
agreement with Linehan Engineering, Inc. ("LEI"), a related-
party entity owned by ATP's president. During the year ended
September 30, 1999, the three months ended September 30, 1998,
and the years ended June 30, 1998, and 1997, ATP paid LEI
$36,000, $10,800, $37,540 and $39,450, respectively, for
administrative services.
In June 1994, ATP entered into a consulting services agreement
with James E. Turner ("Turner"), who is a director of ATP.
During the year ended June 30, 1997, ATP paid Turner $17,500
for conuslting services.
In October 1996, ATP entered into a consulting
services agreement with Brenda Ray, Inc. ("Ray"), a related
entity owned by a director of ATP. During the year ended
September 30, 1999, the three months ended September 30, 1998, and
the years ended June 30, 1998, and 1997, ATP paid Ray $12,000,
$3,000, $12,000 and $9,000, respectively, for consulting
services.
6. SUBSEQUENT EVENTS:
On November 23, 1999, ATP declared a dividend of $.15 per
share payable on January 10, 2000, to shareholders of record as
of December 17, 1999. The $.15 per share dividend is based upon
ATP's earnings for fiscal 1999 and the transitional period July
1, 1998, to September 30, 1998.
ADVANCED TOBACCO PRODUCTS, INC.
INDEX TO EXHIBITS
Item 14(a)
Exhibit No. Description
1 Form of Agreement Among Underwriters, including
Underwriting Agreement and Selected Dealers
Agreement incorporated by reference to Exhibit 1 of
Registrant's Statement of Form S-1 (Registration No.
2-88812, as amended on May 23, 1984), the effective
date thereof hereinafter, the "Registrant's
Registration Statement."
2 Agreement to Raise Capital and acquire technology
dated September 19, 1983, between the Registrant and
NCC Group, Ltd. by reference to Exhibit 2 of the
Registrant's Registration Statement.
3.1 Restated Articles of Incorporation of the
Registrant by reference to Exhibit 3.1 of the
Registrant's Registration Statement.
3.2 Bylaws of the Registrant by reference to Exhibit
3.2 of the Registrant's Registration Statement.
4.1 Specimen Common Stock Certificate by reference to
Exhibit 4.1 of the Registrant's Registration
Statement.
4.2 Specimen of Warrant Certificate by reference to
Exhibit 4.2 of the Registrant's Registration
Statement.
4.3 Warrant Agreement between Registrant and Frost
National Bank as Warrant Agent by reference to
Exhibit 4.3 of the Registrant's Registration
Statement.
4.4 Articles Four, Nine and Ten of the Articles of
Incorporation of the Registrant (included in Exhibit
3.1) by reference to Exhibit 4.4 of the Registrant's
Registration Statement.
4.5 Form of Warrant Agreement and Representative Unit
Purchase Warrant by reference to Exhibit 4.5 of the
Registrant's Registration Statement.
5.1 Opinion of Matthews & Branscomb regarding legality
of securities by reference to Exhibit 5.1 of the
Registrant's Registration Statement.
5.2 Opinion of Matthews & Branscomb regarding FDA and
other governmental regulation by reference to
Exhibit 5.2 of the Registrant's Registration
Statement.
10.1 Acquisition Agreement between the Registrant and
NCC Group, Ltd. (previously filed as part of Exhibit
2) by reference to Exhibit 10.1 of the Registrant's
Registration Statement.
10.2 Agreement dated October 31, 1983 between the
Registrant and The Richards Group, Inc. of Dallas,
Texas by reference to Exhibit 10.2 of the
Registrant's Registration Statement.
10.3 Commitment Letter dated January 9, 1984, from
American Filtrona Company (equipment supplier) by
reference to Exhibit 10.3 of the Registrant's
Registration Statement.
10.4 Commitment Letter dated January 6, 1984, from
Raynor Adams & Associates, Inc. (equipment supplier)
by reference to Exhibit 10.4 of the Registrant's
Registration Statement.
10.5 Commitment Letter dated June 20, 1983 from Harvey
Machine Company, Inc. (equipment supplier) by
reference to Exhibit 10.5 of the Registrant's
Registration Statement.
10.6 Commitment Letter dated January 9, 1984, from J. H.
Uptmore & Associates, Inc. (lease space
improvements) by reference to Exhibit 10.7 of the
Registrant's Registration Statement.
10.7 Advanced Tobacco Products, Inc. 1984 Incentive
Stock Option Plan by reference to Exhibit 10.7 of
the Registrant's Registration Statement.
10.8 Form of Option Agreement under 1984 Advanced
Tobacco Products, Inc. Incentive Stock Option Plan
by reference to Exhibit 10.8 of the Registrant's
Registration Statement.
10.9 S.A. Vend, Inc. 1983 Incentive Stock Option Plan by
reference to Exhibit 10.9 of the Registrant's
Registration Statement.
10.10 Employment Agreement dated December 7, 1983,
between the Registrant and Gerald R. Mazur by
reference to Exhibit 10.10 of the Registrant's
Registration Statement.
10.11 Employment Agreement dated December 7, 1983,
between the Registrant and J. P. Ray by reference to
Exhibit 10.11 of the Registrant's Registration
Statement.
10.12 Employment Agreement dated August 1, 1983, between
the Registrant and Edmund G. Vimond, Jr. by
reference to Exhibit 10.12 of the Registrant's
Registration Statement.
10.13 Employment Agreement dated November 27, 1983,
between the Registrant and James D. Simonsen by
reference to Exhibit 10.14 of the Registrant's
Registration Statement.
10.14 Patent Purchase Agreement, dated May 27, 1987,
between Advanced Tobacco Products, Inc. and
Pharmacia LEO, Inc. filed as an exhibit to the Form
8-K filed on or about July 29, 1987.
10.15 Asset Purchase Agreement between Advanced Tobacco
Products, Inc. and Pharmacia LEO, Inc., executed as
of June 1, 1987, and filed as an exhibit to the Form
8-K filed on or about July 29, 1987.
10.16 Consultation Agreement between Advanced Tobacco
Products, Inc. and Pharmacia LEO, Inc. filed as an
exhibit to Registrant's 1987 10-K.
10.17 First Amendment to Patent Purchase Agreement dated
as of November 22, 1990, between the Registrant and
AB LEO, a Swedish corporation, and filed as an
exhibit to the Form 8-K, dated December 12, 1990.
10.18 Second Amendment to Asset Purchase Agreement dated
as of November 20, 1990, between the Registrant and
Pharmacia LEO, a New Jersey corporation, and filed
as an exhibit to the Form 8-K, dated December 12,
1990.
16.1 Letter regarding change in Certifying Accountant,
filed as an exhibit to the Form 8-K, dated October
3, 1990.
16.2 Letter regarding change in Certifying Accountant,
filed as an exhibit to the Form 8, Amendment No. 1,
dated December 12, 1991
16.3 Current Report on Form 8-K regarding the
Registrant's disclosure of its intention to change
its fiscal year end from June 30 to September 30,
beginning the fiscal year ending September 30, 1999.
23.1 Consent of Independent Public Accountants filed as
an exhibit to this Form 10-K, dated December 27,
1999.