UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-12984
ADVANCED TOBACCO PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
State of Texas 74-2285214
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16607 Blanco Road, Suite 1504 78232
San Antonio, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 408-7077
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure or delinquent files
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of August 31, 1997, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the
registrant was approximately $8,000,000.
As of August 31, 1997, the number of outstanding shares of
Common Stock, $0.01 par value, of the registrant was 8,092,136.
Part I
ITEM 1. BUSINESS
History and Relationship with Pharmacia & Upjohn, Inc.
Advanced Tobacco Products, Inc. d/b/a Advanced Therapeutic
Products, Inc. (the "Company"), 16607 Blanco Road, Suite 1504, San
Antonio, Texas 78232, (210) 408-7077, is a Texas corporation formed
in April 1983.
The Company was organized to develop and market a product
based upon nicotine technology. In 1987, the Company sold its
nicotine technology and related assets to what is now known as
Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn"), a worldwide
pharmaceutical company that manufactures the Nicorette Chewing
Gum, the Nicotrol/Nicorette Patch, the Nicotrol/Nicorette Nasal
Spray and the Nicotrol/Nicorette Inhaler.
Based upon the nicotine technology acquired from the Company,
Pharmacia & Upjohn developed the Nicotrol/Nicorette Inhaler for
use in the nicotine replacement therapy ("NRT") market. ATP
receives product payments of 3% of sales of the Inhaler to
wholesale distributors (See "Pharmacia & Upjohn Technology Purchase
Agreement). Pharmacia & Upjohn launched its Inhaler commercially
in Denmark in September 1996, in Sweden in December 1996, in Italy
in February 1997 and in the Netherlands in July, 1997, under the
trade name of the Nicorette Inhaler. Additional worldwide
launches are planned by Pharmacia & Upjohn to occur as regulatory
approvals are granted. Applications for regulatory approvals are
pending in ten countries, including the United Kingdom.
The Inhaler was recently approved for sale as a prescription
product by the United States Food and Drug Administration, and the
Company anticipates that the Inhaler will be initially offered in
the U.S. in the first half of 1998 as the Nicotrol Inhaler by
McNeil Consumer Products, a Johnson & Johnson company. The U.S.
represents approximately 50% of the world NRT market.
The Inhaler is the only NRT to help smokers quit by addressing
the hand-to-mouth motions of smokers, as well as providing a
sensation in the back of the throat similar to the feeling of
inhaling smoke.
Current Operations
In September 1992, the Company obtained an exclusive worldwide
license to certain dry powder nicotine inhaler technology from Duke
University which has been developed at Duke University. In
February 1993, the Company filed a patent application covering this
technology resulting in the issuance of a U.S. patent in 1995.
Additional U.S. and foreign patent applications are pending. The
Company believes that a dry powder nicotine inhaler has the
potential to be a future generation NRT. The Company is continuing
to seek a strategic partner to develop this technology.
Effective as of October 1993, the Company has an agreement
with Pharmacia & Upjohn under which, among other matters, the
Company has the right to receive a royalty equal to .1% of net
revenues received by Pharmacia & Upjohn from the sale of any
product using a nicotine impermeable copolymer technology covered
by, and subsequent to, the issuance of a patent in March 1996.
Under the terms of the agreement, the Company now receives
royalties from the sales of the Nicotrol/Nicorette patch by
Pharmacia & Upjohn.
Pharmacia & Upjohn Technology Purchase Agreement
The Company has the right to receive royalty payments from
Pharmacia & Upjohn with respect to the Nicotrol/Nicorette Inhaler
discussed above as follows:
Royalty payments of three percent (3%) of Net Sales
(defined generally as sales by Pharmacia & Upjohn and
McNeil Consumer Products to wholesale distributors)
payable on a country by country basis for the greater of
10 years following the date of the first commercial sales
or the expiration of all issued patents (latest patent
issued 3/26/96). There are royalty limitations in the
event of the sale of a nicotine vapor product competitive
with the Nicotrol/Nicorette Inhaler.
Royalty payments in excess of $1,000,000 per year are to be
reduced by fifty percent (50%) until the aggregate of such
reductions equal the sum of $4,400,000.
The Company has the right to receive royalty payments for
other nicotine product applications, if any, both pharmaceutical
and non-pharmaceutical. Pharmacia & Upjohn is not obligated to
develop or sell any products using the technology developed by the
Company.
ITEM 2. PROPERTIES
The Company does not own any tangible fixed assets.
ITEM 3. LEGAL PROCEEDINGS
The Company has no outstanding legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
HOLDER MATTERS
a) Market Information
The Common Stock trades in the over-the-counter market
through the National Association of Securities Dealers "Bulletin
Board" quotation system. The following table sets forth the high
and low bid price of the Company's Common Stock reported for the
fiscal periods indicated. Bid prices represent prices between
dealers, do not include retail markups, markdowns or commissions,
and may not represent actual transactions.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1996 1997 1996 1997 1996 1997 1996 1997
HIGH .19 .69 .19 1.03 .25 1.13 .875 1.00
LOW .125 .30 .09 .30 .125 .75 .125 .69
b) Holders
There were approximately 850 shareholders of record of
the Company's Common Stock at June 30, 1997, excluding shareholders
with "street" accounts.
c) Dividends
The Company has not declared or paid any dividends on its
Common Stock and does not anticipate earnings from which dividends
can be paid unless substantial royalty revenues are received from
the sale of products under the Company's agreements with Pharmacia
& Upjohn.<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth for the indicated periods selected historical
financial information for the Company. Such information is derived from the
financial statements of the Company included under Item 8 and should be read in
conjunction with such financial statements, the related notes thereto and the
information included under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Year Ended June 30
<TABLE>
<S> <C> <C> <C> <C> <C>
<PAGE>
1993 1994 1995 1996 1997<PAGE>
Revenues<PAGE>
$466,600 $39,733 $ - $ - $157,200
Net Income (loss)<PAGE>
$314,193 $(66,675) $ (3,061) $(14,957) $94,758
Net Income (loss) per
share of common stock $ .040 ($.008) ($.001) ($.002) $ .011
Weighted average number
of shares of common
stock outstanding 7,913,175 7,848,424 7,792,136 7,831,588 8,248,090
Cash provided by (used
in) operations $318,231 $308,340 $(62,048) $(98,664) ($51,211)
Increase (decrease) in
cash and cash
equivalents $188,693 $(760,325) ($217,069) $(1,472) $(46,041)
Balance sheet data at end
of indicated periods
-Working capital $1,433,741 $515,679 $384,314 $318,824 $566,084
Total assets<PAGE>
$1,555,667 $1,480,861 $1,495,268 $1,484,998 $1,600,488
Total shareholder's
equity $1,552,711 $1,479,488 $1,476,427 $1,481,470 $1,593,728
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDI-
TION AND RESULTS OF OPERATIONS
a) Results of Operations
For fiscal 1997, operating revenues were $157,200 from the
recognition of income from sales of the Nicotrol/Nicorette
Inhaler and the Nicotrol/Nicorette Patch by Pharmacia & Upjohn.
There were no operating revenues in fiscal 1995 and 1996, although
$100,341 and $76,889 were derived from interest income during those
years, respectively.
General and administrative expenses were $103,402, $91,846,
and $141,176 in fiscal 1995, 1996, and 1997, respectively.
Expenses increased in 1997 compared to 1996 primarily due to the
costs associated with press releases and mailings to shareholders
as a result of the Nicotrol/Nicorette Inhaler marketing
introduction and to the award of a one-time bonus in the amount of
$17,500 to a consultant and a Director of the Company. Expenses
decreased in 1996 compared to 1995 primarily as a result of a
reduction in consulting fees paid by the Company.
Net income from operations in fiscal 1997 was $16,024
primarily due to the recognition of income from the sales of the
Nicotrol/Nicorette Inhaler and the Nicotrol/Nicorette Patch by
Pharmacia & Upjohn. The Company's net income for fiscal 1997 was
$94,758 with the addition of $78,734 in interest income to the
operating income. Net losses from operations in fiscal 1995 and
1996 were $103,402 and $91,846, respectively, primarily due to the
lack of operating revenues; however, the Company's net losses for
fiscal 1995 and 1996 were $3,061 and $14,957, respectively,
primarily due to the receipt of $100,341 and $76,889, respectively,
in interest income.
b) Liquidity and Capital Resources
Cash and investments available on June 30, 1997, were
approximately $1,400,000. The Company believes that its cash and
investment resources are sufficient to meet its foreseeable needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other matters required by this
Item 8 are included on Pages F-1 and following.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. James E. Turner, age 48, has been a Director of the
Company since November 1986 and a consultant to the Company since
its inception. Mr. Turner was one of the founders and the Business
Manager of NCC Group, Ltd., a research and development limited
partnership which was a predecessor of the Company. Mr. Turner is
also a consultant to Pharmacia & Upjohn.
Mr. J. H. Uptmore, age 66, has been a Director of the Company
since August 1987. Mr. Uptmore has been the President and Chairman
of the Board of J. H. Uptmore & Associates, Inc., a construction
contracting and development company, since 1974.
Mr. J. W. Linehan, age 54, has been Director of the Company
since June 1991 and President, Chief Executive Officer, Chief
Financial Officer and Secretary of the Company since July 1, 1990.
Since August 1, 1995, Mr. Linehan has been President and Chief
Executive Officer of Linehan Engineering, Inc., an independent
engineering company wholly owned by him. Mr. Linehan was a Vice
President, a director and a principal shareholder of GE Reaves
Engineering, Inc., an engineering and consulting company, from May
1990 through July 31, 1995. Mr. Linehan was a Vice President,
Chief Financial Officer, Secretary, a director and a principal
shareholder of NET FONE, INC., an alternative long distance
telephone company, from April 1991, and President from June 1993,
to May 1994. Mr. Linehan's prior experience also includes Owner
and Chief Operating Officer of Texas Trunk Co., Inc., a military
hardware manufacturer, a consultant at Arthur Andersen LLP, a
public accounting and consulting firm, and President of BIOGLAS
Corporation, a manufacturer of support material for the
biotechnology industry.
Mrs. Brenda Ray, age 48, has been a Director of the Company
since March 1989. Mrs. Ray was a research and lab assistant in the
development of the Company's nicotine vapor inhalation technology
from 1979 until 1985. She is a consultant and has been President
of Brenda Ray, Inc. since 1985.
Mr. David A. Monroe, age 44, has been a Director of the
Company since March 1989. Mr. Monroe has been President and CEO of
PTEL Corporation and is General Manager of the Photo Telesis
Division of Raytheon TI Systems, Inc., formerly PhotoTelesis
Corporation, a government electronics manufacturing company.
Mr. Monroe's prior experience includes Founder & Chief Technical
Officer of Image Data Corporation, a communications technology
company, and Vice-President of Research & Development and Vice-
President, Product Line Manager, at Datapoint Corporation, a
computer equipment manufacturer.
ITEM 11. EXECUTIVE COMPENSATION
Cash Compensation
Mr. Linehan, President and Chief Executive Officer of the
Company and its sole executive officer, receives no salary or fees,
but indirectly benefits from consulting or other payments made to
Linehan Engineering, Inc. (See Item 13, "Certain Relationships and
Related Transactions.") Each Director is entitled to receive
travel expenses incurred by them in order to attend Directors'
meetings.
Compensation Pursuant to Plans
Nonqualified Stock Options
The Company has a nonqualified stock option plan authorizing
the granting by the board of directors of stock options covering
common stock to directors, officers, key management employees,
independent contractors providing services to the Company or
consultants to the Company. The exercise price per share cannot be
less than 100 percent (or 110 percent in the case of options
granted to holders of 10 percent or more of the then outstanding
common stock) of the fair market value of the Company's common
stock as determined by the board of directors on the date the
options are granted, and the exercise period for the options cannot
exceed 10 years from the date the options are granted. The options
are immediately exercisable. Options are not transferable except
by will or the laws of descent or distribution, and options expire
within one year following termination of association with the
Company. The aggregate number of options outstanding and
exercisable at $.125 as of June 30, 1996 and 1997, were 140,000 and
- -0-, respectively, and the aggregate number of options outstanding
and exercisable at $.4375 as of June 30, 1996 and 1997, was
200,000.
Summary of Option Transactions
The following table sets forth as to the directors of the
Company the net value of securities (market value less exercise
price) and other information with respect to stock options
outstanding and exercised during fiscal 1997:
Aggregated Options Exercised in Last
Fiscal Year and Fiscal Year End Stock Option Values
<TABLE>
<C> <C> <C> <C> <C> <C>
Number of
Unexercised
Shares Stock Options Value of
Acquired or Value at FY-End (All Unexercised Expiration
Name Exercised Realized Exercisable) Stock Options* Date
J. E. Turner 140,000 $122,500 -0- -0-
J. H. Uptmore None N/A 100,000 $56,250 9/27/00
D. A. Monroe None N/A 100,000 $56,250 9/27/00
</TABLE>
* all outstanding options held by Messrs. Uptmore and Monroe are
exercisable at $.4375 per share. The market value of the Company's
common stock at year end was $1.00.
ITEM 12. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information about the
Directors of the Company, which includes all persons known by the
Company to own more than 5% of the Common Stock as of August 31,
1997, and all officers and Directors of the Company as a group as
of June 30, 1997. Except as indicated, the Company believes that
each of the below named persons has sole voting and investment
power with respect to the shares shown and owns the shares
indicated beneficially and of record.
Director Number Percent
Name Since of Shares of Class (1)
Brenda Ray (2)
12544 Judson Road
San Antonio, TX 78233 1989 1,607,748 19.87%
James E. Turner
18606 Heather Court
Homewood, IL 60430 1986 450,221 5.56%
J. H. Uptmore (3)
P.O. Box 29389
San Antonio, TX 78229 1987 196,921 1.20%
David A. Monroe (4)
7800 I.H. 10 W
San Antonio, TX 78230 1989 147,229 .58%
J.W. Linehan
16607 Blanco Road
Suite 1504
San Antonio, TX 78232 1991 131,000 1.62%
Officers and Directors
as a Group (5 persons) 2,533,119 28.83%
____________________
(1) Excludes shares under options referred to in notes 3 and 4.
(2) Includes 475,940 shares of Common Stock owned by the Jon
Phillip Ray Family Trust of which Brenda Ray is the Trustee.
(3) Includes 46,921 shares of Common Stock owned by J. H. Uptmore
& Associates, Inc., of which Mr. Uptmore is President and
Chairman of the Board and 100,000 shares of Common Stock
underlying presently exercisable options held by Mr. Uptmore.
See "Compensation Pursuant to Plans."
(4) Includes 100,000 shares of Common Stock underlying presently
exercisable options held by Mr. Monroe. See "Compensation
Pursuant to Plans."
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, executive officers, and any persons
holding more than ten percent (10%) of the Company's Common Stock
to report their initial ownership of the Company's Common Stock and
any subsequent changes in that ownership to the Securities and
Exchange Commission and to provide copies of such reports to the
Company. Based upon the Company's review of copies of such reports
received by the Company and written representations of its
directors and executive officers, the Company believes that during
the year ended June 30, 1997, all Section 16(a) filing requirements
were satisfied, except for (i) an inadvertent late filing of a Form
4 for Brenda Ray, dated April 9, 1997, reporting the acquisition of
8,291 shares of the Company's Common Stock by Brenda Ray, Trustee
of the Jon Philip Ray Family Trust dated May 5, 1984, on June 6,
1991, and also reporting the acquisition of 8,292 shares of the
Company's Common Stock by herself, also on June 6, 1991; and (ii)
an inadvertent late filing of a Form 4 for James E. Turner, dated
April 1, 1997, reporting the acquisition of 160,000 shares of the
Company's Common Stock on April 12, 1996, and 140,00 shares of the
Company's Common Stock on October 23, 1996, both acquisitions
through the exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since August 1995, the Company has had an administrative
services agreement with Linehan Engineering, Inc. (LEI), a related-
party entity owned by the Company's president. In 1996 and 1997,
the Company paid LEI $28,050 and $39,450, respectively, for
administrative services.
From July 1990 to July 1995, the Company had an administrative
services agreement with GE Reaves Engineering, Inc. (GE Reaves), an
entity related to the Company through the association of the
Company's president. In 1995 and 1996, the Company paid GE Reaves
$30,000, $3,100, respectively, for administrative services.
In June 1994, the Company entered into a consulting services
agreement with James E. Turner (Turner) who is a director of the
Company. In 1995, 1996 and 1997, the Company paid Turner -0-,
$20,000, and $17,500, respectively, for consulting services.
In October, 1996, the Company entered into a Consulting
Services Agreement with Brenda Ray, Inc. ("Ray"), a related party
entity owned by a director of the Company. In 1997, the Company
paid Ray $9,000 for consulting services.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual
Report on Form 10-K:
1. Financial Statements and Independent Auditors'
Report
The financial statements and opinion listed in the
index to financial statements follows the signature
page of this report.
2. Financial Statement Schedules
The Company did not meet any of the requirements to
provide financial statement schedules for any of
the fiscal years ended 1996, 1995 or 1994.
3. Exhibits
The exhibits listed on the index to exhibits
follows the signature page of this report.
(b) The Company has filed the following Current Reports on
Form 8-K since the filing of the Company's last 10-K:
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on behalf by the undersigned, thereunto
duly authorized, in the City of San Antonio, State of Texas, as of
September 26, 1997.
ADVANCED TOBACCO PRODUCTS, INC.
Date: September 26, 1997 By: /s/ J. W. Linehan
J. W. Linehan, President,
Chief Executive Officer and
Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date: September 26, 1997 By: /s/ J. W. Linehan
J. W. Linehan, President,
Chief Executive Officer,
Chief Accounting Officer
and Director
Date: September 26, 1997 By: /s/ James E. Turner
James E. Turner, Director
Date: September 26, 1997 By: /s/ J. H. Uptmore
J. H. Uptmore, Director
Date: September 26, 1997 By: /s/ Brenda Ray
Brenda Ray, Director
Date: September 26, 1997 By: /s/ David A. Monroe
David A. Monroe, Director
<PAGE>
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
Item 8. Financial Statements
The following financial statements are included in response to
Item 14(a):
Page
Index to Financial Statements F-1
Financial Statements
Report of Independent Public Accountants F-2
Balance Sheets - - June 30, 1997 and 1996 F-3
Statements of Income (Loss) for the Years Ended
June 30, 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended
June 30, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Tobacco Products, Inc.:
We have audited the accompanying balance sheets of Advanced Tobacco
Products, Inc. (a Texas corporation), dba Advanced Therapeutic
Products, Inc., as of June 30, 1997 and 1996, and the related
statements of income (loss), stockholders' equity and cash flows
for each of the years in the three-year period ended June 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Advanced Tobacco Products, Inc., as of June 30, 1997 and 1996, and
the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
August 5, 1997
<PAGE>
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
BALANCE SHEETS - - JUNE 30, 1997, AND 1996
<TABLE>
<S> <C> <C>
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,877 $ 84,918
Royalties receivable 79,539 -
Investments 454,428 237,434
Total current assets 572,844 322,352
LICENSE AGREEMENTS, less accumulated
amortization of $31,965 and $25,285
in 1997 and 1996, respectively 159,074 154,809
INVESTMENTS 868,570 1,007,837
Total assets $ 1,600,488 $ 1,484,998
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 6,760 $ 3,528
Total liabilities 6,760 3,528
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value;
500,000 shares authorized; none issued - -
Common stock, $.01 par value;
30,000,000 shares authorized;
8,092,136 and 7,952,136 shares issued
and outstanding as of June 30, 1997,
and 1996, respectively 80,922 79,522
Additional paid-in capital 12,544,878 12,528,778
Accumulated deficit (11,032,072) (11,126,830)
Total stockholders' equity 1,593,728 1,481,470
Total liabilities and stockholders' equity $ 1,600,488 $ 1,484,998
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
REVENUES:
Royalties $ 157,200 $ - $
Total operating revenues 157,200 - -
EXPENSES:
General and administrative 141,176 91,846 103,402
Total operating expenses 141,176 91,846 103,402
INCOME (LOSS) FROM OPERATIONS 16,024 (91,846) (103,402)
OTHER INCOME (EXPENSES):
Interest income 78,734 76,889 100,341
Total other income (expense) 78,734 76,889 100,341
INCOME (LOSS) BEFORE INCOME TAXES 94,758 (14,957) (3,061)
NET INCOME (LOSS) $ 94,758 $ (14,957) $ (3,061)
INCOME (LOSS) PER COMMON SHARE $ .011 $ (.002) $ (.001)
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 8,248,090 7,831,588 7,792,136
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<S> <PAGE>
<C> <C> <C> <C> <C>
Additional
Common Stock Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
BALANCE, June 30, 1994 $7,792,136 $77,922 <PAGE>
$12,510,378 $(11,108,812) $1,479,488
Net loss - - - (3,061) (3,061)
BALANCE, June 30, 1995 7,792,136 77,922 12,510,378 (11,111,873) $1,476,427
Net loss - - - (14,957) (14,957)
Exercise of stock options 160,000 1,600 18,400 - 20,000
BALANCE, June 30, 1996 7,952,136 79,522 12,528,778 (11,126,830) 1,481,470
Net income - - - 94,758 94,758
Exercise of stock options 140,000 1,400 16,100 - 17,500
BALANCE, June 30, 1997 8,092,136 $80,922 $12,544,878 $(11,032,072) $1,593,728
</TABLE>
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 94,758 $ (14,957) $(3,061)
Adjustments to reconcile net income (loss) to
net cash used in operating activities-
Amortization 6,680 6,680 6,680
Amortization of discount on investments (76,342) (75,074) (86,740)
Increase (decrease) in cash flows from changes
in operating assets and liabilities-
Royalties receivable (79,539) - 3,605
Accounts payable 3,232 (15,313) 17,468
Net cash used in operating activities (51,211) (98,664) (62,048)
CASH FLOWS FROM INVESTMENTS ACTIVITIES:
Purchase of license agreements 10,945 (29,279) (5,022)
and patent expenses
Purchase of investments (343,385) (219,529) (463,999)
Sale of investments 342,000 326,000 314,000
Net cash provided by (used in) investing
activities (12,330) 77,192 (155,021)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 17,500 20,000 -
Net cash provided by financing activities 17,500 20,000 -
NET DECREASE IN CASH AND CASH EQUIVALENTS (46,041) (1,472) (217,069)
CASH AND CASH EQUIVALENTS, beginning of year 84,918 86,390 303,459
CASH AND CASH EQUIVALENTS, end of year $ 38,877 $ 84,918 $ 86,390
</TABLE>
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Advanced Tobacco Products, Inc., d/b/a Advanced Therapeutic
Products, Inc. since 1992 (the Company), was formed in April
1983. Through September 1987, the Company was engaged in the
manufacturing and marketing of a product based upon nicotine
technology. In September 1987, the Company sold its nicotine
technology and related assets to Pharmacia & Upjohn, Inc.
(Pharmacia & Upjohn), a worldwide pharmaceutical company.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Income (Loss) Per Share
Earnings per share of common stock is computed by dividing net
income (loss) for the period by the weighted average number of
shares of common stock outstanding. Common stock options are
common stock equivalents but have been excluded from the per
share computations for the years ended June 30, 1996 and 1995,
as the effect is antidilutive.
Statements of Cash Flows
For purposes of determining cash flows, the Company considers
all investments with original maturities of less than three
months to be cash equivalents. There were no amounts paid by
the Company for interest or income taxes for the years ended
June 30, 1997, 1996 and 1995.
License Agreement
In fiscal year 1993, the Company entered into a license
agreement for nicotine technology with Duke University. The
term of the license agreement is for any period such nicotine
technology is under patent. A patent was applied for in 1993
and an initial patent was issued in 1995. In 1997, 1996 and
1995, the Company capitalized the direct costs incurred in
obtaining the license agreement plus patent prosecution
expenses. These costs are being amortized on a straight-line
basis over 20 years.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 121 (SFAS
No. 121), Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires
companies to review long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If the carrying amount of a companys long-
lived assets is not recoverable, an impairment loss will be
recognized equal to the difference between the assets book
carrying amount and its discounted fair value. Adoption of SFAS
No. 121 is required for fiscal years beginning after
December 15, 1995, and must be adopted on a prospective basis.
Restatement of previously issued financial statements is not
permitted. The Company adopted SFAS No. 121 prospectively in
1997. The adoption of SFAS No. 121 did not have a material
impact on the financial position or results of operations of the
Company.
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation. SFAS No. 123 defines a fair value
based method of accounting for employee and nonemployee stock
options or similar equity instruments and encourages all
entities to adopt that method of accounting for all of their
stock-based compensation arrangements. Under the fair value
method, the compensation cost is based on the fair value of the
consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
However, SFAS No. 123 allows entities to measure compensation
cost using the intrinsic value method of accounting prescribed
by APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), provided that the necessary disclosures
required by SFAS No. 123 are made. For the year ended June 30,
1997, nonemployee transactions are properly recorded under
APB 25 and are not impacted by SFAS No. 123.
In February 1997, the FASB issued SFAS No. 128, Earnings per
Share, superseding Accounting Principles Board (APB) Opinion
No. 15, Earnings per Share. This statement replaces primary
earnings per share (EPS) with basic EPS. Basic EPS is computed
by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for
potentially dilutive securities is included in basic EPS. Fully
diluted EPS, now called dilutive EPS, is still required. This
statement changes or eliminates several other requirements of
APB 15. This statement is effective for financial statements
for both interim and annual periods ending after December 15,
1997. Early application is prohibited and, upon adoption, all
prior period EPS data presented must be restated to conform with
this statement. Management believes implementation of this
statement would not have a material effect on the income (loss)
per share amounts which have been reported by the Company in the
accompanying financial statements.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure. This statement continues
the existing requirements to disclose the pertinent rights and
privileges of all securities other than ordinary common stock
but expands the number of companies subject to portions of its
requirements. Specifically, this statement requires all
entities to provide the capital structure disclosures previously
required by APB 15. Companies that were exempt from the
provisions of APB 15 will now need to make those disclosures.
This statement is effective for financial statements for periods
ending after December 15, 1997. Management believes
implementation of this statement would not have a significant
impact on the disclosures in the Companys financial statements.
2. INVESTMENTS:
The Companys investments consist of U.S. Treasury zero coupon
bonds which were purchased at a discount from their face value.
Investments are carried at amortized cost which as of June 30,
1997 and 1996, approximates fair value. The Company intends to
hold all investments to their respective maturities which range
from November 1997 to November 2000. Investments maturing
within one year of the balance sheet date are classified as
current assets while those investments maturing later than one
year of the balance sheet date are classified as noncurrent
assets in the accompanying balance sheets.
<PAGE>
U.S. Treasury zero coupon bonds held at 1997 and 1996 were as
follows:
Carry Gross Fair
Amount Unrealized Value
Holding
(Gain) Loss
1997:
Current $ 454,428 $ 1,836 $ 452,592
Long Term 868,570 10,565 858,005
$1,322,998 $ 2,401 $1,310,597
1996:
Current $ 237,434 $ 182 $ 237,252
Long Term 1,007,837 8,728 999,109
$1,245,271 $ 8,910 $1,236,161
3. STOCKHOLDERS' EQUITY:
During 1997 and 1996, 140,000 and 160,000 shares of common
stock, respectively, were issued in connection with the exercise
of stock options by a director of the Company.
4. SALE OF ASSETS AND REVENUE RECOGNITION:
The aggregate sales price of the Companys 1987 sale of assets
consisted of $3,600,000 and the right to future royalties.
Royalties from Pharmacia & Upjohn are based upon a percentage of
any net sales of products (Products) which utilize the Company's
assets sold to Pharmacia & Upjohn. During 1997, Pharmacia &
Upjohn received approval from regulatory authorities of various
countries in which Pharmacia & Upjohn plan to market the
Products and as of June 30, 1997, Products were being marketed
by Pharmacia & Upjohn in Denmark, Sweden and Italy. For the
year ended June 30, 1997, the Company earned royalties of
$157,200 from the sale of such Products.
The Companys revenues and royalties receivable are derived
solely from Pharmacia & Upjohn. The Company believes its
associated exposure to credit risk is minimal. No allowance for
doubtful accounts is considered necessary as of June 30, 1997.
5. FEDERAL INCOME TAXES:
As of June 30, 1997, the Company has remaining tax net operating
loss, corporate capital loss and tax credit carryforwards of
approximately $10.5 million, $70,000 and $102,000, respectively,
which may be used to reduce taxes against future earnings. The
net operating loss carryforwards expire between 2000 and 2005,
corporate capital losses expire in 1999 while the tax credit
carryforwards expire between 1999 and 2001. For financial
reporting purposes, the Company has not recognized a deferred
tax asset or liability resulting from temporary differences as
the tax effects of such differences are immaterial.
<PAGE>
The tax effects of deferred income tax assets are as follows:
June 30
1997 1996
Deferred income tax
assets -
Net operating loss
carry forward $ 3,570,000 $ 3,604,000
Corporate capital loss
carry forward 23,800 23,800
Tax credit carry
forward 102,000 102,000
Total gross deferred
tax assets 3,695,800 3,729,800
Less - Valuation
allowance (3,695,800) (3,729,800)
Net deferred tax
assets $ - $ -
As the Company has generated net operating losses in prior years,
and there is no assurance of future income, a valuation allowance
of $3,695,800 has been established at June 30, 1997. The Company
will reevaluate the necessity for such valuation allowance in the
future.
6. NONQUALIFIED STOCK OPTION PLAN:
The Company has a nonqualified stock option plan authorizing the
granting by the board of directors of stock options to officers,
key management employees, independent contractors providing
services to the Company or consultants of the Company. The
exercise price per share cannot be less than 100 percent (or
110 percent in the case of options granted to holders of
10 percent or more of the then outstanding common stock) of the
fair market value of the Company's common stock on the date the
options are granted, and the exercise period for the options
cannot exceed 10 years from the date the options are granted.
Options are immediately exercisable, are not transferable except
by will or the laws of descent or distribution and expire within
one year following termination of association with the Company.
The aggregate number of options outstanding and exercisable at
$.125 per share as of June 30, 1996, was 140,000. No options
were outstanding and exercisable at $.125 per share as of
June 30, 1997. The aggregate number of options outstanding and
exercisable at $.4375 per share which expire in September 2000
was 200,000 as of June 30, 1997 and 1996.
7. RELATED-PARTY TRANSACTIONS:
Since August 1995, the Company has had an administrative
services agreement with Linehan Engineering, Inc. (LEI), a
related-party entity owned by the Companys president. In 1997
and 1996, the Company paid LEI $39,450 and $28,050,
respectively, for administrative services.
From July 1990 to July 1995, the Company had an administrative
services agreement with GE Reaves Engineering, Inc. (GE Reaves),
an entity related to the Company through the association of the
Company's president. In 1996 and 1995, the Company paid GE
Reaves $3,100 and $30,000, respectively, for administrative
services.
In June 1994, the Company entered into a consulting services
agreement with James E. Turner (Turner) who is a director of the
Company. During 1997 and 1996, the Company paid Turner $17,500
and $20,000, respectively, for consulting services.
In October 1996, the Company entered into a consulting services
agreement with Brenda Ray, Inc. (Ray), a related entity owned by
a director of the Company. During 1997, the Company paid Ray
$9,000 for consulting services.
ABB0F1A1
<PAGE>
ADVANCED TOBACCO PRODUCTS, INC.
INDEX TO EXHIBITS
Item 14(a)
Exhibit No. Description
1 Form of Agreement Among Underwriters, including
Underwriting Agreement and Selected Dealers
Agreement incorporated by reference to Exhibit 1 of
Registrant's Statement of Form S-1 (Registration
No. 2-88812, as amended on May 23, 1984), the
effective date thereof hereinafter, the
"Registrant's Registration Statement."
2 Agreement to Raise Capital and acquire technology
dated September 19, 1983, between the Registrant
and NCC Group, Ltd. by reference to Exhibit 2 of
the Registrant's Registration Statement.
3.1 Restated Articles of Incorporation of the
Registrant by reference to Exhibit 3.1 of the
Registrant's Registration Statement.
3.2 Bylaws of the Registrant by reference to Exhibit
3.2 of the Registrant's Registration Statement.
4.1 Specimen Common Stock Certificate by reference to
Exhibit 4.1 of the Registrant's Regis-tration
Statement.
4.2 Specimen of Warrant Certificate by reference to
Exhibit 4.2 of the Registrant's Regis-tration
Statement.
4.3 Warrant Agreement between Registrant and Frost
National Bank as Warrant Agent by reference to
Exhibit 4.3 of the Registrant's Registration
Statement.
4.4 Articles Four, Nine and Ten of the Articles of
Incorporation of the Registrant (included in
Exhibit 3.1) by reference to Exhibit 4.4 of the
Registrant's Registration Statement.
4.5 Form of Warrant Agreement and Representative Unit
Purchase Warrant by reference to Exhibit 4.5 of the
Registrant's Registration State-ment.
5.1 Opinion of Matthews & Branscomb regarding legality
of securities by reference to Exhibit 5.1 of the
Registrant's Registration State-ment.
5.2 Opinion of Matthews & Branscomb regarding FDA and
other governmental regulation by reference to
Exhibit 5.2 of the Registrant's Regis-tration
Statement.
10.1 Acquisition Agreement between the Registrant and
NCC Group, Ltd. (previously filed as part of
Exhibit 2) by reference to Exhibit 10.1 of the
Registrant's Registration Statement.
10.2 Agreement dated October 31, 1983 between the
Registrant and The Richards Group, Inc. of Dallas,
Texas by reference to Exhibit 10.2 of the
Registrant's Registration Statement.
10.3 Commitment Letter dated January 9, 1984, from
American Filtrona Company (equipment supplier) by
reference to Exhibit 10.3 of the Regis-trant's
Registration Statement.
10.4 Commitment Letter dated January 6, 1984, from
Raynor Adams & Associates, Inc. (equipment
supplier) by reference to Exhibit 10.4 of the
Registrant's Registration Statement.
10.5 Commitment Letter dated June 20, 1983 from Harvey
Machine Company, Inc. (equipment supplier) by
reference to Exhibit 10.5 of the Registrant's
Registration Statement.
10.6 Commitment Letter dated January 9, 1984, from J. H.
Uptmore & Associates, Inc. (lease space
improvements) by reference to Exhibit 10.7 of the
Registrant's Registration Statement.
10.7 Advanced Tobacco Products, Inc. 1984 Incentive
Stock Option Plan by reference to Exhibit 10.7 of
the Registrant's Registration Statement.
10.8 Form of Option Agreement under 1984 Advanced
Tobacco Products, Inc. Incentive Stock Option Plan
by reference to Exhibit 10.8 of the Registrant's
Registration Statement.
10.9 S.A. Vend, Inc. 1983 Incentive Stock Option Plan by
reference to Exhibit 10.9 of the Registrant's
Registration Statement.
10.10 Employment Agreement dated December 7, 1983,
between the Registrant and Gerald R. Mazur by
reference to Exhibit 10.10 of the Registrant's
Registration Statement.
10.11 Employment Agreement dated December 7, 1983,
between the Registrant and J. P. Ray by reference
to Exhibit 10.11 of the Registrant's Registration
Statement.
10.12 Employment Agreement dated August 1, 1983, between
the Registrant and Edmund G. Vimond, Jr. by
reference to Exhibit 10.12 of the Registrant's
Registration Statement.
10.13 Employment Agreement dated November 27, 1983,
between the Registrant and James D. Simonsen by
reference to Exhibit 10.14 of the Regis-trant's
Registration Statement.
10.14 Patent Purchase Agreement, dated May 27, 1987,
between Advanced Tobacco Products, Inc. and
Pharmacia LEO, Inc. filed as an exhibit to the Form
8-K filed on or about July 29, 1987.
10.15 Asset Purchase Agreement between Advanced Tobacco
Products, Inc. and Pharmacia LEO, Inc., executed as
of June 1, 1987, and filed as an exhibit to the
Form 8-K filed on or about July 29, 1987.
10.16 Consultation Agreement between Advanced Tobacco
Products, Inc. and Pharmacia LEO, Inc. filed as an
exhibit to Registrant's 1987 10-K.
10.17 First Amendment to Patent Purchase Agreement dated
as of November 22, 1990, between the Registrant and
AB LEO, a Swedish corporation, and filed as an
exhibit to the Form 8-K, dated December 12, 1990.
10.18 Second Amendment to Asset Purchase Agreement dated
as of November 20, 1990, between the Registrant and
Pharmacia LEO, a New Jersey corporation, and filed
as an exhibit to the Form 8-K, dated December 12,
1990.
16.1 Letter regarding change in Certifying Accoun-tant,
filed as an exhibit to the Form 8-K, dated October
3, 1990.
16.2 Letter regarding change in Certifying Accoun-tant,
filed as an exhibit to the Form 8, Amendment No. 1,
dated December 12, 1991
23.1 Consent of Independent Public Accountants, filed as
an exhibit to the Form 10-K/A, dated March 29,
1996.
23.2 Consent of Independent Public Accountants, filed as
an exhibit to the Form 10-K/A, dated October 22,
1996.
23.3 Consent of Independent Public Accountants filed as
a exhibit to this Form 10-K, dated August 29, 1997.
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the
Company's previously filed Registration Statement on Form S-8 (File
No. 33-15694).
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Antonio, Texas
August 29, 1997
ABB0F1A2
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> year
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> jun-30-1997
<CASH> 38,877
<SECURITIES> 868,570
<RECEIVABLES> 79,539
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 572,844
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,600,488
<CURRENT-LIABILITIES> 6,760
<BONDS> 0
<COMMON> 8,092,136
0
0
<OTHER-SE> 1,594,728
<TOTAL-LIABILITY-AND-EQUITY> 1,600,488
<SALES> 0
<TOTAL-REVENUES> 157,200
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 141,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,734
<INCOME-PRETAX> 94,758
<INCOME-TAX> 94,758
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,758
<EPS-PRIMARY> $.011
<EPS-DILUTED> $.011
</TABLE>
