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, 1998
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 August 31, 1998, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of the
registrant was approximately $10,000,000.
As of August 31, 1998, 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 (the
Inhaler)for use in the nicotine replacement therapy ("NRT")
market. ATP receives product payments from Pharmacia & Upjohn equal
to 3% of its net sales of the Inhaler to pharmacy distributors in
Europe. Product payments from the sales of the Inhaler in the U.
S. are 9.9% of Pharmacia & Upjohns net sales to McNeil Consumer
Products Company (McNeil), a Johnson & Johnson Company, who then
markets the Inhaler to pharmacies. See Pharmacia & Upjohn
Technology Purchase Agreement.
In early September l998, McNeil launched the Inhaler
nationwide in the U.S. as a prescription product after an initial
introduction earlier in 1998 in Houston, Baltimore and
Washington, D.C. The U.S. represents almost 50% of the worldwide
NRT market.
Since September 1996, Pharmacia & Upjohn has introduced the
Inhaler in Denmark, Sweden, Italy, Austria, The Netherlands,
Belgium, Finland, Iceland, Gibralter and the United Kingdom. The
Inhaler is sold as an over-the-counter product in most of these
European countries. The Company understands that additional
country launches are planned by Pharmacia & Upjohn to occur as
regulatory approvals are granted.
The Inhaler is the first and only form of NRT designed to help
control a smokers cravings for cigarettes and provide 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. The
Inhaler provides 30% of the nicotine a smoker gets from cigarettes.
It does not contain any of the harmful substances like tar and
carbon monoxide found in tobacco smoke which cause smoking related
diseases like lung cancer.
Current Operations
In September 1992, the Company obtained an exclusive worldwide
license to certain dry powder nicotine inhaler technology from Duke
University. The Company has obtained three patents covering this
technology. 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 Inhaler as follows:
Royalty payments of three percent (3%) of Net Sales
(generally, sales by Pharmacia & Upjohn 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 is not disclosed, as is
the case with regard to McNeil, Net Sales are determined by
multiplying the net sales of Pharmacia & Upjohn to McNeil by
3.3 (in effect, 9.9% of Pharmacia & Upjohns sales to
McNeil). There are royalty limitations in the event of the
sale of a nicotine vapor product competitive with the
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 OTC Bulletin Board quotation system under the symbol AVTH.
The Companys website is at
http://www/prnewswire.com/comp/117857.html. 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
1997 1998 1997 1998 1997 1998 1997 1998
HIGH .69 1.00 1.03 .91 1.13 .94 1.00 2.63
LOW .30 .69 .30 .75 .75 .75 .69 .75
b) Holders
There were approximately 1875 shareholders of record of
the Company's Common Stock at June 30, 1998.
c) Dividends
On September 21, 1998, the Company declared its initial
dividend of $.07 per share payable on January 6, 1999, to
shareholders of record as of October 30, 1998. The Company
anticipates declaring and paying dividends from time to time while
substantial royalty revenues are received from the sale of products
under the Company's agreements with Pharmacia & Upjohn.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth for the indicated periods selected
historical financial information for the Company. Such
information is derived from the financial statements of the
Company included under Item 8 and should be read in conjunction
with such financial statements, the related notes thereto and the
information included under Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Year Ended June 30
1994 1995 1996 1997 1998
Revenues $ 39,733 $ $ $ 157,200 $ 516,600
Net Income (loss) $ (66,675) $ (3,061)$ (14,957)$ 94,758 $ 467,121
Net Income (loss) per
share of common stock $(.008) $(.001) $(.002) $.01 $.06
Net Income (loss) per
share of common stock
assuming dilution $(.008) $(.001) $(.002) $.01 $.06
Weighted average number
of shares of common
stock outstanding 7,848,424 7,792,136 7,831,588 8,051,094 8,092,136
Weighted average number
of shares of common
stock outstanding
assuming dilution 7,848,424 7,792,136 7,831,588 8,168,504 8,205,502
Cash provided by (used
in) operations $ 308,340 $ (62,048) $ (98,664) $ (51,211)$ 93,005
Increase (decrease)
in cash and cash
equivalents $ (760,325)$ (217,069) $ (1,472) $ (46,041)$ 52,554
Balance sheet data at
end of indicated
periods working
capital $ 515,679 $ 384,314 $ 318,824 $ 566,084$ 939,872
Total assets $ 1,480,861 $1,495,268 $1,484,998 $1,600,488$2,063,651
+Total shareholder's
equity $ 1,479,488 $1,476,427 $1,481,470 $1,593,728$2,060,849
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
a) Results of Operations
For fiscal 1998, operating revenues were $516,600 from the
recognition of income from sales of the Nicotrol/Nicorette
Inhaler and the Nicotrol/Nicorette Patch by Pharmacia & Upjohn,
compared to operating revenues of $157,200 from such sources in
1997. There were no operating revenues in fiscal 1996, although
the Company had $76,889 of interest income.
General and administrative expenses were $91,846, $141,176 and
$126,796 in fiscal 1996, 1997, and 1998, respectively. Expenses
were greater in 1997 and 1998 compared to 1996 primarily due to
the costs associated with press releases and mailings to
shareholders as a result of the 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 in 1997.
Income from operations in fiscal 1998 increased to $389,804 from
$16,024 in 1997 primarily due to the increase of income recognized
from the sales of the Inhaler and the Nicotrol/Nicorette Patch
by Pharmacia & Upjohn. The Company's net income for fiscal 1998
was $467,121 with the addition of $77,317 in interest income to
the operating income. Losses from operations in fiscal 1996 were
$91,846, primarily due to the lack of operating revenues; however,
the Company's net losses for fiscal 1996 were only $14,957,
primarily due to the receipt of $76,889 in interest income.
b) Liquidity and Capital Resources
Cash and investments available on June 30, 1997, were
approximately $1,520,000. The Company believes that its cash and
investment resources are sufficient to meet its foreseeable needs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other matters required by
this Item 8 are included on Pages F-1 and following.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. James E. Turner, age 49, 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 67, 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 55, 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.
Ms. Brenda Ray, age 49, has been a Director of the
Company since March 1989. Ms. Ray assisted in the original
research and development of the Company's nicotine vapor
inhalation technology. She is a consultant and has been President
of Brenda Ray, Inc. since 1985.
Mr. David A. Monroe, age 45, 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 as of
June 30, 1997, and 1998, was 200,000, all exercisable at $.4375.
Summary of Option Transactions
The following table sets forth as to the directors of
the Company the stock options outstanding during fiscal 1998. No
options were exercised during 1998.
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 $125,000 9/27/00
D. A. Monroe None 100,000 $125,000 9/27/00
* all outstanding options held by Messrs. Uptmore and Monroe are
exercisable at $.4375 per share. The market value of the
Company's common stock at year end was $1.25.
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, 1998, and all officers and Directors of the Company as
a group as of June 30, 1998. 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. 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 1998 261,784 shares were sold 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 1,455,964 17.99%
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 101,000 1.25%
Officers and Directors
as a Group (5 persons) 2,271,335 25.60%
____________________
(1) Excludes shares under options referred to in notes 3 and 4.
(2) Includes 420,104 shares of Common Stock owned by the Jon
Phillip 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 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, the Company believes that during the year ended June
30, 1998, all Section 16(a) filing requirements were satisfied.
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 1998, 1997 and 1996,
the Company paid LEI $37,540, $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, the Company paid GE Reaves $3,100 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 1998, 1997 and 1996, the Company paid Turner -0-,
$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 party entity
owned by a director of the Company. In 1998 and 1997, the Company
paid Ray $12,000 and $9,000, respectively, 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 consent 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 1998,
1997
or 1996.
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:
1. On September 17, 1998, the Company 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, thereunto duly authorized,
in the City of San Antonio, State of Texas, as of September 28,
1998.
ADVANCED TOBACCO PRODUCTS, INC.
Date: September 28, 1998 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 28, 1998 By: /s/ J. W. Linehan
J. W. Linehan, President,
Chief Executive Officer,
Chief Accounting Officer
and Director
Date: September , 1998 By: _____________________________
James E. Turner, Director
Date: September 28, 1998 By: /s/ J H. Uptmore
J. H. Uptmore, Director
Date: September 28, 1998 By: /s/ Brenda Ray
Brenda Ray, Director
Date: September , 1998 By: _______________________
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, 1998 and 1997 F-3
Statements of Income (Loss) for the Years Ended
June 30, 1998, 1997 and 1996 F-4
Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Tobacco Products, Inc.:
We have audited the accompanying balance sheets of Advanced Tobacco
Products, Inc. (a Texas corporation), dba Advanced Therapeutic
Products, Inc., as of June 30, 1998 and 1997, and the related
statements of income (loss), stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
/s/ ARTHUR
ANDERSEN LLP
San Antonio, Texas
July 30, 1998
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
BALANCE SHEETS - - JUNE 30, 1998, AND 1997
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 91,431 $ 38,877
Royalties receivable 384,059 79,539
Investments 467,184 454,428
Total current assets 942,674 572,844
LICENSE AGREEMENTS, less accumulated
amortization of $38,645 and $31,965
in 1998 and 1997, respectively 159,986 159,074
INVESTMENTS 960,991 868,570
Total assets $ 2,063,651 $ 1,600,488
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 2,802 $ 6,760
Total liabilities 2,802 6,760
COMMITMENTS AND CONTINGENCIES
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
shares issued and outstanding as of
June 30, 1998, and 1997 80,922 80,922
Additional paid-in capital 12,544,878 12,544,878
Accumulated deficit (10,564,951) (11,032,072)
Total stockholders' equity 2,060,849 1,593,728
Total liabilities and stockholders'
equity $ 2,063,651 $ 1,600,488
The accompanying notes are an integral part of these financial
statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
REVENUES:
Royalties $ 516,600 $ 157,200 $ -
Total operating revenues 516,600 $ 157,200 $ -
EXPENSES:
General and administrative $ 126,796 141,176 91,846
Total operating expenses 126,796 141,176 91,846
INCOME (LOSS) FROM OPERATIONS 389,804 16,024 (91,846)
OTHER INCOME (EXPENSES):
Interest income 77,317 78,734 76,889
Total other income (expense) 77,317 78,734 76,889
INCOME (LOSS) BEFORE INCOME TAXES 467,121 94,758 (14,957)
NET INCOME (LOSS) $ 467,121 $ 94,758 $ (14,957)
INCOME (LOSS) PER COMMON SHARE -
BASIC AND ASSUMING DILUTION $ .06 $ .01 $ (.002)
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 8,092,136 8,051,094 7,831,588
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING ASSUMING 8,205,502 8,168,504 7,831,588
DILUTION
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ - $ - $ -
The accompanying notes are an integral part of these financial statements.
ADVANCED TOBACCO PRODUCTS, INC.
dba ADVANCED THERAPEUTIC PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Additional
Common Stock Common Stock Paid-In Accumulated
Shares Shares Capital Deficit Total
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 -
- -
BALANCE, June 30, 1996 7,792,136 $ 79,522 $12,528,778$(11,126,830)$1,481,470
Net loss - - - 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
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, 1998, 1997 AND 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 467,121 $ 94,758 $ (14,957)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Amortization 6,680 6,680 6,680
Amortization of discount on investments (72,318) (76,342) (75,074)
Increase (decrease) in cash flows from
changes in operating assets and
liabilities-
Royalties receivable (304,520) (79,539) -
Accounts payable (3,958) 3,232 (15,313)
Net cash provided by (used in)
operating activities 93,005 (51,211) (98,664)
CASH FLOWS FROM INVESTMENTS ACTIVITIES:
Purchase of license agreements and
patent expenses (7,592) (10,945) (29,279)
Purchase of investments (500,859) (343,385) (219,529)
Sale of investments 468,000 342,000 326,000
Net cash provided by (used in)
investing activities (40,451) (12,330) 77,192
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - 17,500 20,000
Net cash provided by financing
activities - 17,500 20,000
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 52,554 (46,041) (1,472)
CASH AND CASH EQUIVALENTS,
beginning of year 38,877 84,918 86,390
CASH AND CASH EQUIVALENTS, end of year $ 91,431 $ 38,877 $ 84,918
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 certain nicotine technology and
related assets to Pharmacia & Upjohn, Inc. (Pharmacia & Upjohn), a
worldwide pharmaceutical company, for $3.6 million and the right to
future royalties.
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
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.
A reconciliation of the numerators and denominators of the basic and
diluted per-share computations for net income (loss)
is as follows:
Year Ended June 30
1998 1997 1996
Per- Per- Per-
Share Share Share
Income Shares Amount Income Shares Amount Loss Shares Amount
Net Income
(loss) $467,121 $94,758 $(14,957)
Basic earnings
per share:
Income (loss)
available to
common
stock
holders $467,121 8,092,136$.06$94,758 8,051,094$.01$(14,957)7,831,588$(.002)
Effect of dilutive
securities:
Stock options - 113,366 - 117,410 - -
Diluted earnings
per share:
Income (loss)
available to
common stockholders
plus assumed
conver-
sions $467,121 8,205,502$.06$94,758 8,168,504$.01 $(14,957)7,831,588$(.002)
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 during the years ended June 30, 1998, 1997
and 1996.
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. 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.
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, 1998
and 1997, approximates fair value. The Company intends to hold all
investments to their respective maturities which range from November
1998 to May 2001. 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 1998 and 1997 were as
follows:
Gross
Unrealized
Carry Holding Fair
Amount (Gain) Loss Value
1998:
Current $ 467,184 $ (1,857) $ 469,041
Long Term 960,991 2,489 958,502
$1,428,175 $ 632 $1,427,543
1997:
Current $ 454,428 $ 1,836 $ 452,592
Long Term 868,570 10,565 858,005
$1,322,998 $ 12,401 $1,310,597
3. 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. For the year ended June 30, 1998, the Company
earned royalties of $516,600 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, 1998 or 1997.
4. FEDERAL INCOME TAXES:
As of June 30, 1998, the Company has remaining tax net operating
loss, corporate capital loss and tax credit carryforwards of
approximately $10 million, $23,800 and $102,000, respectively, which
may be used to reduce taxes against future earnings. The net
operating loss carryforwards expire between 2000 and 2005, corporate
capital losses expire in 1999 while the tax credit carryforwards
expire between 1999 and 2001. For financial reporting purposes, the
Company has not recognized a deferred tax asset or liability
resulting from temporary differences as the tax effects of such
differences are immaterial.
The tax effects of the various loss and credit carryforwards are as
follows:
June 30
1997 1998
Deferred income tas
assets -
Net operating loss
carryforwards $ 3,410,000 $ 3,570,000
Corporate capital loss
carryforward 23,800 23,800
Tax credit
carryforwards 102,000 102,000
Total gross deferred
tax assets 3,535,800 3,695,800
Less - Valuation
allowance (3,535,800) (3,695,800)
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
$3,535,800 has been established at June 30, 1998. The Company will
reevaluate the necessity for such valuation allowance in the future.
5. 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 Issued to
Employees (APB 25), provided that the necessary disclosures required by
SFAS No. 123 are made. The Company has elected to continue to apply APB 25
in
accounting for its 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 $.4375 per share which
expire
in September 2000 was 200,000 as of June 30, 1998 and 1997. The following
table summarizes the activity in the Companys stock option plan for the
years
ended June 30, 1998, 1997 and 1996:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of
period 200,000 $.4375 340,000 $.3088 300,000 $.1250
Granted - - - - 200,000 .4375
Exercised - - (140,000) .1250 (160,000) .1250
Outstanding at
end of period 200,000 .4375 200,000 .4375 340,000 .3088
Execrcisable at
end of period 200,000 .4375 200,000 .4375 340,000 .3088
6. 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 1998, 1997 and 1996,
the Company paid LEI $37,540, $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
Companys president. In 1996, the Company paid GE Reaves $3,100 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 1998, 1997 and 1996, the Company paid Turner
$-0-, $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 1998 and 1997, the Company paid Ray
$12,000 and $9,000, respectively, for consulting services.
7. SUBSEQUENT EVENTS:
On September 17, 1998, the Company 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 with the fiscal year ended
September 30, 1999.
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 Registrants
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 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 an
exhibit to this Form 10-K, dated August 29, 1997.
23.4 Consent of Independent Public Accountants filed as an
exhibit to this Form 10-K, dated July 30, 1998.
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
Companys previously filed Registration Statement on Form S-8
(File No. 33-15694) .
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
July 30, 1998
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<ARTICLE> 5
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<PERIOD-TYPE> YEAR
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<PERIOD-END> JUN-30-1998
<CASH> 91,431
<SECURITIES> 960,991
<RECEIVABLES> 384,059
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 942,674
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,063,651
<CURRENT-LIABILITIES> 2,802
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0
0
<COMMON> 8,092,136
<OTHER-SE> 2,060,849
<TOTAL-LIABILITY-AND-EQUITY> 2,063,651
<SALES> 0
<TOTAL-REVENUES> 516,600
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 126,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,317
<INCOME-PRETAX> 467,121
<INCOME-TAX> 467,121
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