UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___to___
Commission File Number [0-27282]
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ATLANTIC TECHNOLOGY VENTURES, INC.
(Exact name of issuer as specified in its charter)
Delaware 36-3898269
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
350 Fifth Avenue, Suite 5507, New York, New York
------------------------------------------------
10118 (Address of principal executive offices,
including zip code)
(212) 267-2503
--------------
(Issuer's telephone number)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Units, each consisting of one share of Common Stock and one Redeemable Warrant
Common Stock, $.001 par value
Redeemable Warrants
Indicate by check mark whether the issuer (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 issuer 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 of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]
The issuer's revenues for the fiscal year ended December 31, 2001 were
$2,711,922.
As of March 20, 2002 there were 16,004,599 outstanding shares of common stock,
par value $.001 per share.
The aggregate market value of the voting common stock of the issuer held by
non-affiliates of the issuer on March 20, 2002 based on the closing price of the
common stock as quoted by the NASD Over-the-Counter Bulletin Board on such date
was $3,360,965.
Transitional Small Business Disclosure Format: Yes __ No _X_
TABLE OF CONTENTS
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Page
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PART I............................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS................................................................................1
General...............................................................................................1
Corporate Structure...................................................................................1
Atlantic and Its Subsidiaries.........................................................................1
Optex and the Catarex(TM)Technology...............................................................1
CT-3 Anti-inflammatory/Analgesic Compound.........................................................2
Gemini and the 2-5A Antisense Technology..........................................................2
Forward-Looking Statements............................................................................2
Risk Factors..........................................................................................3
Risks Related to Our Financial Condition..........................................................3
Risks Related to Our Operations...................................................................4
Risks Related to Our Securities...................................................................7
ITEM 2. Description of Property................................................................................9
ITEM 3. LEGAL PROCEEDINGS.....................................................................................10
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................10
PART II..........................................................................................................11
ITEM 5. Market for Common Equity and Related Stockholder Matters..............................................11
Recent Sales of Unregistered Securities..............................................................11
ITEM 6. Management's Discussion and Analysis OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................................................12
Overview.............................................................................................12
Liquidity And Capital Resources......................................................................15
Critical Accounting Policies.........................................................................18
Recently Issued Accounting Standards.................................................................18
ITEM 7. consolidated Financial Statements.....................................................................18
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................................18
PART III.........................................................................................................19
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.....................................................19
Information Concerning Directors and Executive Officers..............................................19
Section 16(a) Beneficial Ownership Reporting Compliance..............................................20
ITEM 10. Executive Compensation................................................................................20
Compensation of Executive Officers...................................................................20
Options and Stock Appreciation Rights................................................................22
Option Exercise and Holdings.........................................................................22
Long Term Incentive Plan Awards......................................................................23
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Compensation of Directors............................................................................23
Employment Contracts and Termination of Employment and Change of Control Agreements..................23
ITEM 11. Security Ownership of Certain Beneficial Owners and Management........................................24
ITEM 12. Certain Relationships and Related Transactions........................................................27
ITEM 13. Exhibits List, and Reports on Form 8-K................................................................27
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We are engaged in the business of developing and commercializing
early-stage technologies. Specifically, we aim to do the following:
o identify development-stage biomedical, pharmaceutical, medical
devices or other technologies that we believe could be
commercially viable;
o acquire proprietary rights to these technologies, either by
license or by acquiring an ownership interest;
o fund research and development of these technologies; and
o bring these technologies to market, either directly or by selling
or licensing these technologies to other companies willing to make
the necessary investment to conduct the next level of research or
seek required regulatory approvals.
We have in the past focused on biomedical and pharmaceutical
technologies. We are currently developing one such technology that we believe
may be useful in treating pain and inflammation. We are also entitled to
royalties and other revenues in connection with commercialization of
technologies relating to cataract surgery.
CORPORATE STRUCTURE
We were incorporated in Delaware on May 18, 1993. Any technologies or
rights to royalties or other revenues are held either by Atlantic or by our
subsidiaries Optex Ophthalmologics, Inc., or "Optex," and Gemini Technologies,
Inc., or "Gemini."
We seek to minimize our administrative costs, thereby maximizing the
capital available for research and development. We do so by providing a
centralized management team that oversees the transition of products and
technologies from the early development stage to commercialization. In addition,
we budget and monitor funds and other resources among Atlantic and our
subsidiaries, which gives us the flexibility to allocate resources among
technologies based on how their development is progressing.
We currently have five employees.
ATLANTIC AND ITS SUBSIDIARIES
Optex and the Catarex(TM) Technology
Our majority-owned (81.2%) subsidiary, Optex, is entitled to royalties
and other revenues in connection with commercialization of the Catarex
technology. Bausch & Lomb, a multinational ophthalmics company, is developing
this technology under the new trade name "Avantix" to overcome the limitations
and deficiencies of traditional cataract extraction techniques. Optex had been
the owner of this technology and was developing it pursuant to a development
agreement with Bausch & Lomb, but on March 2, 2001, Optex sold to Bausch & Lomb
substantially all of its assets (mostly intangible assets with no book value),
including those related to the Catarex technology, and delivered 2,400
"First-Generation" Catarex handpieces to Bausch & Lomb for use in Human
Feasibility Studies and Clinical Trials.
Bausch & Lomb, which has committed over $15 million on the project to date, has
assumed full responsibility for developing and marketing the technology and will
pay Optex royalties on sales of the device and associated system. Under the
agreement governing Bausch & Lomb's purchase of Optex's assets, Bausch & Lomb is
required to meet certain development milestones. The next such milestone is
completion by December 31, 2002, of a clinical study designed by Bausch & Lomb
to assess the functionality of the Catarex handpiece in human cataract surgery.
We continue to work closely with Bausch & Lomb to monitor their progress in
developing this technology, and, to the extent permitted by our agreement with
Bausch & Lomb, we will report achievement of any development milestones.
CT-3 Anti-inflammatory/Analgesic Compound
We are developing our proprietary compound CT-3, a patented synthetic
derivative of carboxylic tetrahydrocannabinol (THC-7C), as an alternative to
nonsteroidal anti-inflammatory drugs, or "NSAIDs," such as aspirin and
ibuprofen. Over 130 million Americans suffer from chronic pain and 40 million
suffer from arthritis. Worldwide prescription sales of
analgesic/anti-inflammatory drugs exceeded $9 billion in 1999. Preliminary
studies have shown that CT-3 demonstrates analgesic/anti-inflammatory properties
at microgram doses without central nervous system or gastrointestinal side
effects and also reduces joint damage caused by rheumatoid arthritis.
Since CT-3 appears to possess a wide range of therapeutic activity, we
are carefully choosing an indication that we feel CT-3 would be most efficacious
for and one that will strategically allow us to increase the licensing value of
CT-3 in the most timely and cost-effective manner. We are continuing our efforts
by conducting additional preclinical tests to study the analgesic activity of
CT-3, particularly with reference to neuropathic pain (pain caused by an
abnormal or degenerative state of the nervous system). Preliminary results show
that CT-3 dramatically reduces allodynia (a painful response to typically
non-painful stimulus) in neuropathic rats with a partial sciatic nerve ligation
(an animal model for pain induced by neuropathic nerve injury induced pain). We
are planning to initiate shortly a Phase I/II clinical trial of safety,
tolerability, and efficacy to determine the upper limits of safe dosing with
CT-3 and to measure the potential for CT-3 to act as a pain reliever in patients
with neuropathic pain. In addition, we have recently initiated a development
plan for CT-3 to test its efficacy in multiple-sclerosis. In an animal model for
multiple sclerosis, CT-3 induced a significant decrease in spasticity,
demonstrated a rapid inhibition of limb stiffness and the effect was relatively
long-lived. The results of the study validated spasticity as a potential
indication for CT-3 use. We are also preparing to conduct Phase II clinical
trials to evaluate the efficacy of CT-3 in multiple-sclerosis-associated tremors
and spasticity.
We are continuing to develop CT-3 for use in the treatment of a variety
of indications. In order to significantly increase the potential value of a
sublicensing deal, we have determined to delay sublicensing CT-3, to suitable
strategic partners to assist in clinical development, regulatory approval
filing, manufacturing and marketing of CT-3 until after successful completion of
the Phase II Clinical Trials.
Gemini and the 2-5A Antisense Technology
Gemini, our majority-owned (84.7%) subsidiary, sublicensed from the
Cleveland Clinic Foundation, or "CCF," had license rights to an aerosolized 2-5A
antisense compound to inhibit respiratory syncytial virus (RSV). Pursuant to an
asset purchase agreement dated April 23, 2001, between Atlantic, Gemini, CCF,
and CCF's affiliate IFN, Inc., on May 4, 2001, Gemini sold to IFN substantially
all its assets (mostly intangible assets with no book value), including all
those related to the 2-5A antisense compound.
As the purchase price for Gemini's assets, IFN agreed to pay Gemini,
upon receipt, an amount equal to 20%, subject to adjustment, of all amounts that
CCF is entitled to pursuant to CCF's sublicense agreement with Gemini, Gemini's
rights and obligations thereunder having been assigned to IFN. The amount to
which we are entitled will be reduced by 1% of the sublicense fees received by
CCF for each $150,000 expended by IFN to develop the technology, subject to a
floor of 5%. In addition, upon closing CCF withdrew its outstanding arbitration
demand against Gemini and Atlantic, with prejudice, and each party paid its own
costs and attorneys' fees related thereto.
We feel that this solution represents a satisfactory alternative to two
undesirable alternatives, namely (1) termination of the Cleveland sublicense
with no compensation to Gemini and substantial shutdown costs and (2) continued
development of 2-5A at levels that Gemini would not be able to justify or
sustain.
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-KSB that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
expectations, beliefs,
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intentions or strategies regarding the future. We intend that all
forward-looking statements be subject to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
In particular, the "Risk Factors" section and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in Item 6 of this annual report include forward-looking statements that
reflect our current views with respect to future events and financial
performance. We use words such as we "expect," "anticipate," "believe," and
"intend" and similar expressions to identify forward-looking statements.
Investors should be aware that actual results may differ materially from our
expressed expectations because of risks and uncertainties inherent in future
events, particularly those risks identified in the "Risk Factors" section of
this Annual Report, and should not unduly rely on these forward looking
statements.
RISK FACTORS
Investing in our common stock is very risky, and you should be able to
bear losing your entire investment. You should carefully consider the risks
presented by the following factors.
Risks Related to Our Financial Condition
Because we have not completed developing any of our products or generated any
product sales, we expect to incur significant operating losses over the next
several years. Our ability to generate profits in the future is uncertain.
We have never been profitable and we may never become profitable. As of
December 31, 2001, we had an accumulated deficit of $26,728,406. All of our
technologies are in the research-and-development stage, which requires
substantial expenditures. Our operating loss from inception includes revenues
consisting of milestone payments and development revenue, including a profit
component, paid to us by Bausch & Lomb in connection with development of the
Catarex device, and a government grant. In March 2001, we received $2.4 million
of net proceeds from the sale of substantially all of the assets of Optex
Ophthalmologics, Inc., our 81.2%-owned subsidiary. At the conclusion of this
sale of assets, we terminated the agreement with Bausch & Lomb under which we
generated the revenue described above. We do not have a current source of
revenue nor do we expect to generate any additional revenues in the near future.
We expect to incur significant operating losses over the next several years,
primarily due to continued and expanded research-and-development programs,
including preclinical studies and clinical trials for our products and
technologies under development, as well as costs incurred in identifying and
possibly acquiring additional technologies.
If we do not obtain additional funding, our ability to develop our technologies
will be materially adversely affected.
We will need substantial additional funds to develop our technologies.
We will seek those funds through public or private equity or debt financings,
through collaborative arrangements or from other sources (including exercise of
the warrants we have issued giving the holder the right to purchase shares of
our capital stock for a stated exercise price). Funding may not, however, be
available on acceptable terms, if at all. Additionally, because our common stock
has been delisted from Nasdaq, it may be more difficult to obtain additional
funding. Furthermore, under the common stock purchase agreement with Fusion
Capital, and until its termination, we have agreed not to issue any
variable-priced equity or variable-priced equity-like securities unless we have
obtained Fusion Capital's prior written consent. This may further impede our
ability to raise additional funding. In addition, because our stock price is
below the floor price of $0.68, we will not be able to draw funds under our
agreement with Fusion Capital unless our stock price is at least $0.68 or Fusion
Capital elects to waive the floor price. If we are unable to obtain additional
financing as needed, we may be forced to reduce the scope of our operations,
which would have a material adverse effect on our business.
As of December 31, 2001, we had a cash-and-cash-equivalents balance of
$1,591,761. We anticipate that our current resources (including the $2 million
proceeds of the first closing of our recent private placement in December 2001)
will be sufficient to finance for the next several months our currently
anticipated needs for operating and capital expenditures. We plan to achieve
this by continuing to reduce expenses, including by means of voluntary salary
reductions and postponement of certain development expenses. As a result of
these changes we expect that our average monthly cash outlay will be
approximately $129,000. If the investors in our recent private placement elect
to invest an additional $1,000,000, we anticipate that our resources would be
sufficient to finance our currently anticipated needs for operating and capital
expenditures for at least the next 12 months. We can, however, give no assurance
that we will receive any additional proceeds from the recent private placement.
3
We plan on performing further tests on our compound CT-3 during the
next six months. If the results of these tests are not promising, our ability to
raise additional funds may be adversely affected.
Risks Related to Our Operations
We have a limited operating history upon which to base an investment decision.
We are a development-stage company and have not demonstrated our
ability to perform the functions necessary for the successful commercialization
of any of our product candidates. Successful commercialization of our product
candidates will require us to perform a variety of functions, including:
o continuing to undertake pre-clinical development and clinical
trials;
o participating in regulatory approval processes;
o formulating and manufacturing products; and
o conducting sales and marketing activities.
Our operations have been limited to organizing and staffing our
company, acquiring, developing and securing our proprietary technology, and
undertaking pre-clinical trials and clinical trials of our principal product
candidates. These operations provide a limited basis for you to assess our
ability to commercialize our product candidates and the advisability of
investing in our common stock.
We are in the early stages of developing our technologies and may not succeed in
developing commercially viable products.
To be profitable, we must, alone or with others, successfully
commercialize our technologies. Our technologies are, however, in early stages
of development, will require significant further research, development and
testing, and are subject to the risks of failure inherent in developing products
based on innovative or novel technologies. They are also rigorously regulated by
the federal government, particularly the U.S. Food and Drug Administration, or
"FDA," and by comparable agencies in state and local jurisdictions and in
foreign countries. Each of the following is possible with respect to any one of
our products:
o that we will not be able to maintain our current research and
development schedules;
o that, in the case of one of our pharmaceutical technologies, we
will not be able to enter into human clinical trials because of
scientific, governmental or financial reasons, or that we will
encounter problems in clinical trials that will cause us to delay
or suspend development of one of the technologies;
o that the product will be found to be ineffective or unsafe;
o that government regulation will delay or prevent the product's
marketing for a considerable period of time and impose costly
procedures upon our activities;
o that the FDA or other regulatory agencies will not approve a given
product or will not do so on a timely basis;
o that the FDA or other regulatory agencies may not approve the
process or facilities by which a given product is manufactured;
o that our dependence on others to manufacture our products may
adversely affect our ability to develop and deliver the products
on a timely and competitive basis;
4
o that, if we are required to manufacture our own products, we will
be subject to similar risks regarding delays or difficulties
encountered in manufacturing the products, will require
substantial additional capital, and may be unable to manufacture
the products successfully or in a cost-effective manner;
o that the FDA's policies may change and additional government
regulations and policies may be instituted, both of which could
prevent or delay regulatory approval of our potential products; or
o that we will be unable to obtain, or will be delayed in obtaining,
approval of a product in other countries, given that the approval
process varies from country to country and the time needed to
secure approval may be longer or shorter than that required for
FDA approval.
Similarly, it is possible that, for the following reasons, we may be
unable to commercialize, or receive royalties from the sale of, any given
technology, even if it is shown to be effective:
o if it is uneconomical;
o if it is not eligible for third-party reimbursement from
government or private insurers;
o if others hold proprietary rights that preclude us from
commercializing it;
o if others have brought to market equivalent or superior products;
o if others have superior resources to market similar products or
technologies;
o if government regulation imposes limitations on the indicated uses
of a product, or later discovery of previously unknown problems
with a product results in added restrictions on the product or
results in the product being withdrawn from the market; or
o if it has undesirable or unintended side effects that prevent or
limit its commercial use.
We are dependent on others for the clinical development and regulatory approvals
of our products.
We anticipate that we will in the future seek to enter into
collaborative agreements with pharmaceutical companies to develop, conduct
clinical tests of, obtain regulatory approval for, and commercialize certain of
our pharmaceutical products. We may in the future grant to our collaborative
partners, if any, rights to license and commercialize any pharmaceutical
products developed under these collaborative agreements and such rights would
limit our flexibility in considering alternatives for the commercialization of
such products. Although we believe that our collaborative partners will have an
economic motivation to commercialize any pharmaceutical products that they
license, the amount and timing of resources devoted to these activities
generally will be controlled by each such individual partner. To the extent that
we decide not to, or are unable to, enter into any such collaborative
arrangements, significant capital expenditures, management resources and time
will be required instead to establish and develop in-house capabilities. There
can be no assurance that we will be successful in establishing any collaborative
arrangements, or that, if established, such future partners will be successful
in commercializing products or that we will derive any revenues from such
arrangements. In addition, if we are unsuccessful in establishing such future
collaborative arrangements, there can be no assurance that we will be able to
establish in-house the necessary capabilities.
We lack manufacturing experience and will rely on third parties to manufacture
our potential products.
We do not have a manufacturing facility. We have contracted with Iris
Pharmaceuticals, Inc. for clinical trial materials for CT-3. While we believe
that this arrangement should provide us with sufficient clinical trial materials
through Phase II human clinical testing, we do not currently have a second
manufacturer of clinical trial materials for commercialization and there can be
no assurance that we will be able to identify and qualify any such
manufacturers, and, if we are able to do so, that any such manufacturing
agreements will be on terms that are favorable to us. We have relied on contract
manufacturers to produce quantities of products and substances necessary for
research and development, pre-clinical trials, human clinical trials and product
commercialization, and we expect that we will continue to do so for the
foreseeable future. It may not be possible to manufacture such products at a
cost or in quantities necessary to make them commercially viable, and
third-party manufacturers may not be able to meet our needs with respect to
timing, quantity and quality. If we are unable to contract for a
5
sufficient supply of required products and substances on acceptable terms, or if
we encounter delays or difficulties in our relationships with manufacturers, our
research and development, pre-clinical and clinical testing would be delayed,
thereby delaying the submission of products for regulatory approval or the
market introduction and subsequent sales of such products. Moreover, any
contract manufacturers that we use must adhere to current Good Manufacturing
Practice ("GMP") regulations enforced by the FDA through its facilities
inspection program. If the facilities of such manufacturers cannot pass a
pre-approval plant inspection, the FDA will not grant pre-market approval of our
products. To the extent that we decide not to, or are unable to, enter into
further collaborative arrangements with respect to the manufacture of clinical
trial materials for our products, or in the event that our contract
manufacturing agreement with Iris Pharmaceuticals, Inc. is terminated or proves
to be inadequate for our manufacturing needs, significant capital expenditures,
management resources and time will be required to establish and develop a
manufacturing facility and to assemble a team of professionals with the
technical expertise to perform such manufacturing, and we may not succeed in
doing so.
We lack sales and marketing experience and will rely on third parties.
We have no experience in sales, marketing or distribution. We do not
anticipate having the resources in the foreseeable future to allocate to the
sales and marketing of our proposed products. Our future success may depend, in
part, on our ability to enter into and maintain such collaborative
relationships, our collaborators' strategic interest in the products under
development, and our collaborators' ability to successfully market and sell any
such products. We may be unable to establish or maintain such collaborative
arrangements, and even if we are, they may prove unsuccessful. To the extent
that we decide not to, or are unable to, enter into such collaborative
arrangements, we may need to make significant capital expenditure, and devote
significant management resources and time to establishing and developing an
in-house marketing and sales force with technical expertise, and we may not
succeed in doing so. To the extent that we depend on third parties for marketing
and distribution, any revenues we receive will depend upon the efforts of such
third parties, and there can be no assurance that such efforts will be
successful. In addition, there can also be no assurance that we will be able to
market and sell our product in the United States or overseas.
If we fail to adequately protect or enforce our intellectual property rights or
secure rights to patents of others, the value of our intellectual property
rights would diminish.
Our success, competitive position and future revenues will depend in
part on our ability and the abilities of our licensors to obtain and maintain
patent protection for our products, methods, processes and other technologies,
to preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights of
third parties. We cannot predict the following:
o the degree and range of protection any patents will afford us
against competitors, including whether third parties will find
ways to invalidate or otherwise circumvent our patents;
o if and when patents will issue;
o whether or not others will obtain patents claiming aspects similar
to those covered by our patents and patent applications; or
o whether we will need to initiate litigation or administrative
proceedings, which may be costly whether we win or lose.
If our products, methods, processes and other technologies infringe the
proprietary rights of other parties, we could incur substantial costs and we may
have to do the following:
o obtain licenses, which may not be available on commercially
reasonable terms, if at all;
o redesign our products or processes to avoid infringement;
o stop using the subject matter claimed in the patents held by
others;
o pay damages; or
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o defend litigation or administrative proceedings which may be
costly whether we win or lose, and which could result in a
substantial diversion of our valuable management resources.
We rely on technologies that are licensed from third parties.
We have entered into certain agreements with, and licensed certain
technology and compounds from, third parties. We have relied on scientific,
technical, clinical, commercial and other data supplied and disclosed by others
in entering into these agreements and will rely on such data in support of
development of certain products. Although we have no reason to believe that this
information contains errors of omission or fact, there can be no assurance that
there are no errors of omission or fact that would materially adversely affect
the future approvability or commercial viability of these products.
We may incur substantial liabilities and may be required to limit
commercialization of our products in response to product liability lawsuits.
Testing and marketing medical products entails an inherent risk of
product liability. Some of our license agreements require us to obtain product
liability insurance when we begin clinical testing or commercialization of our
proposed products and to indemnify our licensors against product liability
claims brought against them as a result of the products developed by us. If we
cannot successfully defend ourselves against product liability claims, we may
incur substantial liabilities or be required to limit commercialization of our
products. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims could
prevent or inhibit the commercialization of pharmaceutical products we develop,
alone or with corporate collaborators. We, or any corporate collaborators, may
not be able to obtain insurance at a reasonable cost, if at all. Even if our
agreements with any future corporate collaborators entitle us to indemnification
against losses, such indemnification may not be available or adequate should any
claim arise.
Any breach by us of environmental regulations could result in our incurring
significant costs.
Federal, state and local laws govern our use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes. Although we believe that we have complied with these laws
in all material respects and have not been required to take any action to
correct any noncompliance, we may be required to incur significant costs to
comply with environmental and health and safety regulations in the future. In
addition, our research and development activities involve the controlled use of
hazardous materials and we cannot eliminate the risk of accidental contamination
or injury from these materials, although we believe that our safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations. In the event of an accident, we
could be held liable for any resulting damages, and we do not have insurance to
cover this contingency.
Risks Related to Our Securities
We have been delisted from Nasdaq, and the resulting market illiquidity could
adversely affect our ability to raise funds.
On August 22, 2001, our securities were delisted from trading on
Nasdaq. Since then, any trading in our securities has been conducted on the
National Association of Securities Dealers' Over-the-Counter Bulletin Board, or
"OTC Bulletin Board." This could affect adversely the liquidity of our
securities, not only in terms of the number of securities that can be bought and
sold at a given price, but also through delays in the timing of transactions and
reduction in security analysts' and the media's coverage of us. This may result
in lower prices for our securities than might otherwise be obtained and could
also result in a larger spread between the bid and asked prices for our
securities. In addition, our delisting could adversely affect our ability to
raise funds.
In addition, our common stock is a "penny stock." Broker-dealers who
sell penny stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. This document provides information
about penny stocks and the nature and level of risks involved in investing in
the penny-stock market. A broker must also give a purchaser, orally or in
writing, bid and offer quotations and information
7
regarding broker and salesperson compensation, make a written determination that
the penny stock is a suitable investment for the purchaser, and obtain the
purchaser's written agreement to the purchase. The penny stock rules may make it
difficult for you to sell your shares of our stock. Because of the rules, there
is less trading in penny stocks. Also, many brokers choose not to participate in
penny-stock transactions.
Our stock price is, and we expect it to remain, volatile, which could limit
investors' ability to sell stock at a profit.
The volatile price of our stock makes it difficult for investors to
predict the value of their investment, to sell shares at a profit at any given
time, or to plan purchases and sales in advance. A variety of factors may affect
the market price of our common stock. These include, but are not limited to:
o publicity regarding actual or potential clinical results relating
to products under development by our competitors or us;
o delay or failure in initiating, completing or analyzing
pre-clinical or clinical trials or the unsatisfactory design or
results of these trials;
o achievement or rejection of regulatory approvals by our
competitors or us;
o announcements of technological innovations or new commercial
products by our competitors or us;
o developments concerning proprietary rights, including patents;
o developments concerning our collaborations;
o regulatory developments in the United States and foreign
countries;
o economic or other crises and other external factors;
o period-to-period fluctuations in our revenues and other results of
operations;
o changes in financial estimates by securities analysts; and
o sales of our common stock.
We will not be able to control many of these factors, and we believe
that period-to-period comparisons of our financial results will not necessarily
be indicative of our future performance.
In addition, the stock market in general, and the market for
biotechnology companies in particular, has experienced extreme price and volume
fluctuations that may have been unrelated or disproportionate to the operating
performance of individual companies. These broad market and industry factors may
seriously harm the market price of our common stock, regardless of our operating
performance.
Trading in our stock over the last 12 months has been limited, so investors may
not be able to sell as much stock as they want at prevailing prices.
Over the last 12 months, the average daily trading volume in our common
stock was approximately 21,000 shares. If limited trading in our stock
continues, it may be difficult for investors to sell their shares in the public
market at any given time at prevailing prices. Also, the sale of a large block
of our securities could depress the price of our securities to a greater degree
than a company that typically has higher volume of trading of securities.
Because holders of our Series A preferred stock have rights superior to those of
the holders of our common stock, in certain circumstances holders of our common
stock may be adversely affected.
Holders of shares of our outstanding Series A preferred stock can
convert each share into 3.27 shares of our common stock without paying us any
cash. The conversion price of shares of Series A preferred stock is $3.06 per
share of common stock. Both the conversion rate and the conversion price may be
adjusted in favor of holders of shares of Series A preferred stock upon certain
triggering events. Accordingly, the number of shares of common stock that
holders of shares of Series A preferred stock receive upon conversion may
increase, which may result in
8
substantial dilution to the common stockholders and could adversely affect the
prevailing market price of our securities.
In addition, each February 7 and August 7 we are obligated to pay
dividends, in arrears, to the holders of shares of Series A preferred stock, and
the dividends consist of 0.065 additional shares of Series A preferred stock for
each outstanding share of Series A preferred stock. Our issuing additional
shares of Series A preferred stock without payment of any cash to us could
adversely affect the prevailing market price of our securities.
We are in the process of determining changes to the conversion rate of
the Series A preferred stock required by recent issuances of Atlantic stock and
warrants, including in connection with our recent private placement. Certain of
these changes will be retroactive and so we expect that we will be issuing
make-up shares to certain former Series A holders.
If we are liquidated, sold to or merged with another entity (and we are
not the surviving entity after the merger), we will be obligated to pay holders
of shares of Series A preferred stock a liquidation preference of $13.00 per
share before any payment is made to holders of shares of common stock. After
payment of the liquidation preference, we might not have any assets remaining to
pay the holders of shares of common stock. The liquidation preference could
adversely affect the market price of our securities.
The holders of shares of Series A preferred stock have rights in
addition to those described above. A complete description of the rights of the
Series A preferred stock is contained in the certificate of designations of the
Series A preferred stock filed with the Secretary of State of Delaware.
Sale of shares of our common stock to Fusion Capital may cause dilution, and
sale of those shares by Fusion Capital could cause the price of our common stock
to decline.
Under an equity-line-of-credit arrangement, Fusion Capital has
committed to purchasing $6,000,000 of our common stock. Our stock price is
currently below the $0.68 minimum required in order for us to be able to sell
shares of our common stock to Fusion, but if in the future our stock price
exceeds this minimum, we may elect to sell shares of our common stock to Fusion
under the equity-line-of-credit arrangement. In addition, on November 30, 2001,
Fusion Capital waived the $0.68 minimum and purchased from us under the
equity-line-of-credit arrangement 416,667 shares of our common stock at a price
per share of $0.24, representing an aggregate purchase price of $100,000.
The purchase price for the common stock to be issued to Fusion Capital
under our common stock purchase agreement with Fusion Capital will fluctuate
based on the closing price of our common stock. Fusion Capital may at any time
sell none, some or all of the shares of common stock purchased from us.
Depending upon market liquidity at the time, sale by Fusion of shares we issue
to them could cause the trading price of our common stock to decline. Sale of a
substantial number of shares of our common stock by Fusion, or anticipation of
such sales, could make it more difficult for us to sell equity or equity related
securities in the future at a time and at a price that it might otherwise wish
to effect sales.
The existence of the agreement with Fusion Capital to purchase shares of our
common stock could cause downward pressure on the market price of our common
stock.
Both the actual dilution and the potential for dilution resulting from
any sales of our common stock to Fusion Capital could cause holders to elect to
sell their shares of our common stock, which could cause the trading price of
our common stock to decrease. In addition, prospective investors anticipating
the downward pressure on the price of our common stock due to the shares
available for sale by Fusion Capital could refrain from purchases or effect
sales in anticipation of a decline of the market price.
ITEM 2. DESCRIPTION OF PROPERTY
On March 19, 2001, we moved into our current executive offices at 350
Fifth Avenue, Suite 5507, New York, New York 10118. The lease for this space is
for a term of two years and two and a half months with a
9
monthly lease payment of $7,175, subject to cost-of-living adjustments. Prior to
that, we leased space at 150 Broadway, Suite 1009, New York, New York 10038, for
a monthly lease payment of $1,026. The lease for the space at 150 Broadway
expired on January 31, 2002.
To facilitate our exploring investment opportunities in fiber-optics,
we leased space at One Executive Park East, 135 Bolton Road in the Town of
Vernon, County of Tolland, Connecticut 06066. This lease is for a term of three
years ending May 14, 2003, with monthly lease payments of $1,250. We no longer
need this space, as we have discontinued this line of business, and so, as of
March 1, 2002, we sublet 60% of this space for $750 per month for the remainder
of the lease term. We are currently looking to sublease the remainder of these
premises. As of December 31,2001, we have accrued for our estimated loss
obligation in the amount of $11,026.
We believe that our existing facilities are adequate to meet our
current requirements. We do not own any real property.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which Atlantic or any of its
subsidiaries is a party or to which any of their properties is subject.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
10
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Our common stock was listed on the Nasdaq SmallCap Market until August
23, 2001, when our stock was delisted. Since that date our common stock has been
listed on the Over-the-Counter Bulletin Board, or "OTC Bulletin Board." The
following table lists the high and low price for our common stock as quoted, in
U.S. dollars, by the Nasdaq SmallCap Market and the OTC Bulletin Board, as
applicable, during each quarter within the last two fiscal years:
------------------------------------------------------
Quarter Ended High Low
------------------------------------------------------
December 31, 1999 $2.25 $1.25
------------------------------------------------------
March 31, 2000 $10.625 $1.375
------------------------------------------------------
June 30, 2000 $6.375 $2.50
------------------------------------------------------
September 30, 2000 $5.00 $2.50
------------------------------------------------------
December 31, 2001 $3.313 $0.406
------------------------------------------------------
March 31, 2001 $1.438 $0.625
------------------------------------------------------
June 30, 2001 $1.00 $0.51
------------------------------------------------------
September 30, 2001 $0.80 $0.16
------------------------------------------------------
December 31, 2001 $0.51 $0.16
------------------------------------------------------
The quotations from the OTC Bulletin Board reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
The number of holders of record of our common stock as of March 20,
2002 was 153.
We have not paid or declared any dividends on our common stock and we
do not anticipate paying dividends on our common stock in the foreseeable
future. The certificate of designations for our Series A preferred stock
provides that we may not pay dividends on our common stock unless a special
dividend is paid on our Series A preferred stock.
RECENT SALES OF UNREGISTERED SECURITIES
Issuance to Dian Griesel
On March 8, 2001, we entered into an agreement with The Investor
Relations Group, Inc., or "IRG," under which IRG will provide Atlantic investor
relations services. The issuance of the warrants did not involve any public
offering and therefore was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933. Pursuant to this agreement we issued to Dian Griesel
warrants to purchase 120,000 shares of its common stock. The term of the
warrants is five years and the exercise price of the warrants is $0.875, and
they will vest in 5,000 share monthly increments over a 24-month period. In
addition, should our stock price reach $2.50, we will grant Ms. Griesel an
additional 50,000 warrants. Should our stock price reach $5.00, we will grant
Ms. Griesel a further 50,000 warrants. As a result, we recorded compensation
expense relating to these stock warrants of $33,256 for the year ending December
31, 2001 and will remeasure the compensation expense at the end of each
reporting period until the final measurement date is reached in 14 months.
11
Issuance to Fusion Capital
On May 7, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC in which Fusion Capital agreed to purchase up to
$6.0 million of our common stock over a 30-month period, subject to a 6-month
extension or earlier termination at our discretion. We paid a $120,000 finder's
fee relating to this transaction to Gardner Resources, Ltd. and issued to Fusion
Capital Fund II, LLC 600,000 common shares as a commitment fee. Those shares had
an estimated fair value of $444,000. On November 30, 2001, Fusion Capital waived
the $0.68 floor price provided for in the purchase agreement and purchased from
us under the agreement 416,667 shares of our common stock at a price of $0.24,
representing an aggregate purchase price of $100,000. These issuances to Fusion
Capital did not involve any public offering and were therefore exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. Fusion
Capital's waiver applied only to the November 30, 2001 purchase, so the $0.68
floor price remains an obstacle to our obtaining additional financing from
Fusion Capital unless our stock price increases or Fusion Capital elects in the
future to again waive the floor price.
Issuance to BH Capital Investments, L.P. and Excalibur Limited Partnership
On August 1, 2001, we agreed to issue 35,000 shares of our common stock
to each of BH Capital Investments, L.P. and Excalibur Limited Partnership in
return for their commitment to provide us with $3.5 million of financing in
connection with an asset purchase for which we had submitted a bid. We issued
those shares but ultimately did not purchase those assets. Issuance of these
warrants did not involve any public offering and therefore was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
Issuance to Proteus Capital Corp.
On August 9, 2001, we entered into an agreement with Proteus Capital
Corp ("Proteus") in which Proteus agreed to assist us with raising additional
funds. Pursuant to this agreement, we granted Douglas J. Newby and Samuel
Gerszonowicz, both principals of Proteus, one warrant each to purchase 50,000
shares of our common stock at $0.59 per share, which was the average closing
stock price for the two weeks ending August 17, 2001. The warrants were fully
vested on the date of the agreement and were outstanding at December 31, 2001.
The term of the warrants is five years. As a result, we recorded compensation
expense relating to these stock warrants of $45,355 for the year ending December
31, 2001. Issuance of these warrants did not involve any public offering and
therefore was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
Issuance to Certain Investors
On December 3, 2001, we issued to certain investors in a private
placement an aggregate of 8,333,318 shares of our common stock and warrants
exercisable for a further 8,333,318 shares of our common stock. The purchase
price per share of common stock was $0.24. The term of the warrants is five
years and the per-share exercise price is $0.29.
In connection with this private placement, we issued to Joseph Stevens
& Company, Inc. on December 3, 2001, as part of their placement fee, warrants to
purchase 833,331 shares of our common stock. The term of the warrants is five
years and the per-share exercise price is $0.29.
The issuances did not involve any public offering and therefore were
exempt from the registration requirements of Section 5 of the Securities Act
pursuant to Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were incorporated in Delaware on May 18, 1993, and commenced
operations on July 13, 1993. We are engaged in developing biomedical and
pharmaceutical products and technologies. We have rights to technology we
believe may be useful in the treatment of a variety of diseases, including pain
and inflammation and multiple
12
sclerosis, and we are entitled to royalties and other revenues in connection
with a second technology, relating to the treatment of ophthalmic disorders. Our
existing technologies under development are each held either by us or our
subsidiaries. We have been unprofitable since inception and expect to incur
substantial additional operating losses over the next several years. The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-KSB.
Results of Operations
From the commencement of operations through December 31, 2001, we have
generated $11,830,379 of revenue.
2001 Versus 2000
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid our subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for developing its Catarex technology. For the year ended December
31, 2001, this agreement provided $2,461,922 of development revenue (including
$1,067,345 in project-completion bonuses paid out and recognized at the
completion of the project in March 2001) and related cost of development revenue
of $2,082,568. For the year ended December 31, 2000, this agreement provided
$5,169,288 of development revenue and related cost of development revenue of
$4,135,430. The decrease in revenues and related expenses from Bausch & Lomb
over last year was due to the fact that there were no revenues and related
expenses since termination of the agreement in March 2001. With termination of
the above agreement at the conclusion of the sale of substantially all of
Optex's assets (mostly intangible assets with no book value) in March 2001, as
described further below, we will no longer have the revenues or profits
associated with that agreement available to us.
Research and development expenditures consist primarily of costs
associated with research and development personnel, the cost of operating our
research and development laboratories, research and development consultants, the
cost of clinical trials and costs related to patent filings and maintenance. For
the year ended December 31, 2001, research and development expense was $886,716
as compared to $1,130,345 for the year ended December 31, 2000. This decrease is
due mainly to the cessation of research and development activities on the 2-5A
antisense technology as a result of the sale of substantially all of the assets
of Gemini. This decrease is offset somewhat by increased expenditures on certain
development projects, including our CT-3 during the first part of the year.
Through December 31, 2000, we made an investment in TeraComm Research,
Inc. of $1,000,000 in cash and common stock and warrants valued at $1.8 million.
For the year ended December 31, 2000, we expensed $2,653,382 of this payment as
acquired in-process research and development, since TeraComm's product
development activity was in its very early stages. As a result of TeraComm's not
meeting a technical milestone at December 31, 2000, we made no further
investments in TeraComm, and we are not required to provide TeraComm with any
additional funding. We have recorded our share of TeraComm's losses during 2000
and 2001 which has reduced the carrying value of our investment to zero as of
December 31, 2001.
General and administrative expenses consist primarily of expenses
associated with corporate operations, legal, finance and accounting, human
resources and other general operating costs. For the year ended December 31,
2001, general and administrative expense was $2,771,407 as compared to
$2,235,535 for the year ended December 31, 2000. This increase is primarily due
to an increase in expenses incurred in conjunction with a common stock purchase
agreement entered into during the second quarter of 2001 with Fusion Capital
Fund II, LLC. These expenses include the cost of our issuing 600,000 commitment
shares to Fusion Capital ($444,000) and a finder's fee of $120,000. Fusion's
obligation to purchase our shares is subject to certain conditions, including
the effectiveness of a registration statement covering the shares to be
purchased. That registration statement was declared effective on July 6, 2001. A
material contingency that may affect our operating plans and our ability to
raise funds under this agreement is our stock price. Currently, our stock price
is below the floor price of $0.68 specified in the Fusion Capital agreement and
as a result we are currently unable to draw funds pursuant to that agreement. As
the Fusion Capital agreement is currently structured, we cannot guarantee that
we will be able to draw any funds. On November 30, 2001, Fusion Capital waived
the floor price and purchased from us under the
13
agreement 416,667 shares of our common stock at a price of $0.24, representing
an aggregate purchase price of $100,000. See "Liquidity and Capital Resources"
for further details on this agreement. Fusion Capital's waiver applied only to
the November 30, 2001 purchase, so the $0.68 floor price remains an obstacle to
our obtaining additional financing from Fusion Capital unless our stock price
increases or Fusion Capital elects in the future to again waive the floor price.
Also, rent expense and investor relations expenses increased by $86,000 and
$70,000 respectively. Rent expense for 2001 includes an $11,026 commitment
obligation related to rental of space that is no longer being used. These
expenses are partially offset by a reduction of legal and moving expenses by
$200,000 and $50,000 respectively. In addition, we incurred expenses associated
with the issuance of 35,000 shares of our common stock to each of BH Capital
Investments, L.P. and Excalibur Limited Partnership in August 2001 in return for
their commitment to provide us with $3.5 million of financing in connection with
an asset purchase for which we had submitted a bid. We did not ultimately
purchase those assets. Those shares had an estimated fair value of $44,100,
which we recorded as a general and administrative expense for year ended
December 31, 2001.
For the year ended December 31, 2001, we had compensation expense
relating to stock warrants of $78,611 as compared to $1,020,128 in the prior
year. The current-year expense consists of $33,256 associated with warrants
issued to Dian Griesel of The Investor Relations Group during March 2001 as
partial compensation for investor relations services and $45,355 associated with
fully vested warrants issued to Proteus Capital Corp. in August 2001 as partial
compensation for fundraising services. Additional expense associated with the
warrants issued to Dian Griesel will continue to be incurred over the remainder
of the two-year term of the agreement. As long as these warrants continue to
vest, that expense will be directly affected by the movement in the price of our
common stock. For the year ended December 31, 2000, we had $1,020,128 of expense
associated with warrants issued to Joseph Stevens & Company, Inc. as partial
compensation for financial advisory services. Compensation expense relating to
these investor relations and financial advisory services represent a general and
administrative expense.
For the year ended December 31, 2001, interest and other income was
$42,010, compared to $92,670 for the year ended December 31, 2000. The decrease
in interest income is primarily due to the decline in our cash reserves.
Net loss applicable to common shares for the year ended December 31,
2001, was $2,609,521 as compared to $6,847,749 for the year ended December 31,
2000. This decrease in net loss applicable to common shares is attributable in
part to the net effect of (1) the gain of $2,569,451 we recognized on sale of
the assets of our subsidiary Optex, (2) a distribution by Optex to its minority
shareholders of $837,274 of earnings, and (3) the loss of $334,408 recorded on
sale of the assets of our subsidiary Gemini. (These transactions took place
during 2001; see below for further information.) In addition, the decrease is
due to our having acquired in 2000 $2,653,382 of in-process research and
development as part of our investment in TeraComm Research, Inc. and our having
incurred in 2000 compensation expense of $1,020,128 relating to stock warrants
issued to Joseph Stevens. The loss differential is partially reduced by the cost
of our having issued during 2001 600,000 commitment shares to Fusion Capital
Fund II, LLC (valued at $444,000). In addition, with the termination of our
agreement with Bausch & Lomb, we no longer have available to us the revenue or
profits associated with that agreement; as a result, the profit we earned from
this agreement in 2001 was $654,504 less than the profit earned in 2000.
Net loss applicable to common shares for the year ended December 31,
2001 also included a beneficial conversion on shares of our Series B preferred
stock in the amount of $600,000 during the year ended December 31, 2001 and
dividends of $167,127 and $233,757 paid upon the repurchase of the outstanding
shares of Series B preferred stock recorded during the year ended December 31,
2001 and 2000, respectively. We also issued preferred stock dividends on our
Series A preferred stock for which the estimated fair value of $107,449 and
$811,514 was included in the net loss applicable to common shares for the year
ended December 31, 2001 and 2000, respectively. The decrease in the estimated
fair value of these dividends as compared to the prior year is primarily a
reflection of the decline in our stock price and a reduction of the number of
preferred shares issued.
2000 Versus 1999
In accordance with a development agreement, as amended in September
1999, Bausch & Lomb Surgical paid certain fees to our subsidiary, Optex, for
developing its Catarex technology, plus a profit component. For the
14
year ended December 31, 2000, this agreement provided $5,169,288 of development
revenue, and the related cost of development revenue was $4,135,430. For the
year ended December 31, 1999, this agreement provided $1,082,510 of development
revenue, and the related cost of development revenue was $866,008 which solely
represented the activity for the fourth quarter of 1999. On March 2, 2001, Optex
sold substantially all of its assets, including those related to the Catarex
technology, to Bausch & Lomb. As described below, the development agreement was
terminated and we will no longer receive development revenue under that
agreement.
For the year ended December 31, 2000, our research and development
expense was $1,130,345 as compared to $1,091,291 for the year ended December 31,
1999. The 1999 expense is presented net of nine months of Bausch & Lomb
reimbursements of $1,044,708 received prior to the September 1999 amendment
described in the preceding paragraph. This increase was due to increased
expenditures for the year on certain development projects, including the costs
associated with the completion of a successful Phase I study for our CT-3
compound during 2000.
During 2000, we made an investment in TeraComm Research, Inc. accounted
for under the equity method of accounting of $1,000,000 cash as well as common
stock and a warrant to purchase common stock, together valued at $1,800,000. Of
the $2,800,000 purchase price, we expensed $2,653,382 as acquired in-process
research and development, as no capitalizable intangible assets are present at
TeraComm, as its product development activity is in the very early stages and
has no alternative future use at this time.
For the year ended December 31, 2000, our general and administrative
expense was $2,235,535 as compared to $1,941,425, which is net of Bausch & Lomb
reimbursements of $184,360 for the year ended December 31, 1999 received prior
to the September 1999 amendment. This increase was due to costs incurred in
hiring and relocating executives, an increase in payroll costs over last year,
and an increase in fees for professional services attributable to legal filings
and due diligence relating to fundraising efforts and certain investments.
In 2000, we had $1,020,128 of expense associated with warrants issued
to Joseph Stevens & Company, Inc. as partial compensation for financial advisory
services provided by Joseph Stevens during 2000. Compensation expense relating
to these financial advisory services represents a general and administrative
expense.
For the year ended December 31, 2000, our interest and other income was
$92,670 compared to $292,630 for the year ended December 31, 1999. This decrease
was primarily due to a decline in our cash reserves, which resulted in decreased
interest income. For the year ended December 31, 2000, our share of losses of
TeraComm amounted to $79,274.
Net loss applicable to common shares for the year ended December 31,
2000, was $6,847,749 as compared to $2,760,881 for the year ended December 31,
1999. This increase in net loss applicable to common shares is primarily due to
our having acquired in 2000 $2,653,382 of in-process research and development as
part of our investment in TeraComm Research, Inc. and our having incurred in
2000 compensation expense of $1,020,128 relating to stock warrants issued to
Joseph Stevens. Net loss applicable to common shares in 2000 also included a
dividend paid upon the repurchase of the outstanding Series B preferred stock of
$233,757 that was not paid in 1999. We also issued preferred stock dividends on
our Series A preferred stock for which the estimated fair value of $811,514 and
$314,366 was included in the net loss applicable to common shares for the years
ended December 2000 and 1999, respectively. The increase in the estimated fair
value of these dividends as compared to the prior year is partially a reflection
of an increase in our stock price. Going forward, with the termination of our
agreement with Bausch & Lomb, described below, we will no longer have the
revenue or profits associated with that agreement available to us. For the year
ended December 31, 2000, we received $5,169,288 in development revenue from
Bausch & Lomb as compared with $1,082,510 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
From inception to December 31, 2001, we incurred an accumulated deficit
of $26,728,406, and we incurred additional losses through the year ended
December 31, 2001 and expect to for the foreseeable future. We incurred these
losses primarily through research and development activities related to the
various technologies under our control.
15
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all its assets (mostly intangible
assets with no book value), including all those related to the Catarex
technology. As a result of this sale, Atlantic and Optex no longer have any
obligations to Bausch & Lomb in connection with development of the Catarex
technology. The purchase price was $3 million paid at closing (approximately
$564,000 of which was distributed to the minority shareholders). In addition,
Optex is entitled to receive additional consideration, namely $1 million once
Bausch & Lomb receives regulatory approval to market the Catarex device in
Japan, royalties on net sales on the terms stated in the original development
agreement dated May 14, 1998, between Bausch & Lomb and Optex, as amended, and
minimum royalties of $90,000, $350,000, and $750,000 for the first, second, and
third years, respectively, starting on first commercial use of the Catarex
device or January 1, 2004, whichever is earlier. Optex also has the option to
repurchase the acquired assets from Bausch & Lomb at fair value if it ceases
developing the Catarex technology. Upon the sale of Optex's assets, Bausch &
Lomb's development agreement with Optex was terminated. In the asset purchase
agreement Optex agreed to forgo future contingent payments provided for in the
earlier development agreement. As a result of this transaction, we recorded a
gain on the sale of Optex's assets of $2,569,451. We made a profit distribution
of $837,274 to Optex's minority shareholders, representing their share of the
cumulative profit from the development agreement with Bausch & Lomb and the
proceeds from the sale of Optex's assets.
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement"), we issued to BH Capital
Investments, L.P. and Excalibur Limited Partnership (together, the "Investors")
for a purchase price of $2,000,000, 689,656 shares of our Series B convertible
preferred stock and warrants to purchase 134,000 shares of our common stock.
Half of the shares of Series B preferred stock (344,828 shares) and warrants to
purchase half of the shares of common stock (67,000 shares) were held in escrow,
along with half of the purchase price. On December 4, 2000, Atlantic and the
Investors entered into a stock repurchase agreement pursuant to which we
repurchased from the Investors for $500,000 137,930 shares of Series B preferred
stock and agreed to the release from escrow to the Investors of the $1,000,000
purchase price of the 344,828 shares of Series B preferred stock held in escrow.
We also allowed the Investors to keep all of the warrants issued under the
purchase agreement and issued to the Investors warrants to purchase a further
20,000 shares of our common stock at the same exercise price. On January 19,
2001, 41,380 shares of Series B preferred stock were converted by the Investors
into 236,422 shares of our common stock. On March 9, 2001, Atlantic and the
Investors entered into a second stock repurchase agreement pursuant to which we
repurchased from the Investors, for an aggregate purchase price of $617,067, all
165,518 shares of our Series B preferred stock held by the Investors. The
repurchase price represented 125% of the purchase price originally paid by the
investors for the repurchased shares, as well as an amount equal to the annual
dividend on the Series B preferred stock at a rate per share of 8% of the
original purchase price. The repurchased shares constitute all remaining
outstanding shares of Series B preferred stock; we have cancelled those shares.
On May 7, 2001, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to purchase
up to $6.0 million of our common stock over a 30-month period, subject to a
6-month extension or earlier termination at our discretion. This agreement
replaced an earlier common stock purchase agreement between Atlantic and Fusion
Capital dated March 16, 2001. Fusion's obligation to purchase shares of our
common stock is subject to certain conditions, including the effectiveness of a
registration statement covering the shares to be purchased. That registration
statement was declared effective on July 6, 2001. The selling price of the
shares will be equal to the lesser of (1) $20.00 or (2) a price based upon the
future market price of the common stock, without any fixed discount to the
market price. A material contingency that may affect our operating plans and
ability to raise funds under this agreement is our stock price. Currently, our
stock price is below the floor price of $0.68 specified in the Fusion Capital
agreement and as a result we are currently unable to draw funds pursuant to the
Fusion Capital agreement. As the Fusion Capital agreement is currently
structured, we cannot guarantee that we will be able to draw any funds. We paid
a $120,000 finder's fee relating to this transaction to Gardner Resources, Ltd.
and issued to Fusion Capital Fund II, LLC 600,000 common shares as a commitment
fee. Those shares had an estimated fair value of $444,000. We have amended our
agreement with Fusion Capital to allow Atlantic to draw funds pursuant to the
agreement regardless of its listing status on the Nasdaq SmallCap Market. On
November 30, 2001, Fusion Capital waived the floor price and purchased from us
under the agreement 416,667 shares of our common stock at a price of $0.24,
representing an aggregate purchase price of $100,000. Fusion Capital's waiver
applied only to the November 30, 2001 purchase, so the $0.68 floor price remains
an
16
obstacle to our obtaining additional financing from Fusion Capital unless our
stock price increases or Fusion Capital elects in the future to again waive the
floor price.
On November 6, 2001, we entered into an agreement with Joseph Stevens &
Company, Inc. in which Joseph Stevens agreed to act as placement agent for a
private placement of shares of our common stock. In that private placement, the
price of each share of our common stock was $0.24 and the minimum and maximum
subscription amounts were $2,000,000 and $3,000,000, respectively. On December
3, 2001, we issued to certain investors an aggregate of 8,333,318 shares of our
common stock for the minimum subscription of $2,000,000. In addition, each
investor received a warrant to purchase one share of our common stock for every
share of our common stock purchased by that investor. The warrants have an
exercise price of $0.29 and are exercisable for five years from the closing
date. In connection with the private placement, we paid Joseph Stevens a
placement fee equal to 7% of the aggregate subscription amount, namely $140,000,
plus a warrant to purchase 833,331 shares of our common stock, which represented
10% of the number of shares issued to the investments. The term of this warrant
is five years and the per share exercise price is $0.29.
We have financed our operations since inception primarily through
equity and debt financing, and collaborative arrangements with Bausch & Lomb
which terminated during 2001. During 2001, we had a net decrease in cash and
cash equivalents of $1,071,822.
This decrease primarily resulted from net cash used in operating
activities of $4,474,365 offset by net cash provided from the sale of
substantially all of Optex's assets for a purchase price of $2,436,000, which is
net of a distribution to the minority stakeholders. Financing activities during
2001 included raising $1,939,961 from the private placement of common stock and
warrants. Total cash resources as of December 31, 2001 were $1,630,354 compared
to $2,879,179 at December 31, 2000.
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs,
our progress in and the cost of ongoing and planned pre-clinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in our existing collaborative and licensing relationships, the resources
that we devote to developing manufacturing and commercializing capabilities,
technological advances, the status of our competitors, our ability to establish
collaborative arrangements with other organizations and our need to purchase
additional capital equipment.
Our current liabilities as of December 31, 2001 were $508,613 compared
to $2,080,453 at December 31, 2000, a decrease of $1,571,840. The decrease was
primarily due to the recognition of $1,294,615 in deferred revenues during 2001
and reduced spending due to an increased effort to conserve cash. As of December
31, 2001, our working capital was $1,121,741, primarily as a result of receiving
$1,948,000 in net proceeds from two private placements of our common stock
during December 2001.
Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing, other
collaborative agreements, strategic alliances and our ability to realize the
full potential of our technology candidate. Such additional funds may not become
available as we need them or be available on acceptable terms. To date, a
significant portion of our financing has been through private placements of
common and preferred stock and warrants, the issuance of common stock for stock
options and warrants exercised, and debt financing. Until our operations
generate significant revenues, we will continue to fund operations from cash on
hand and through the sources of capital previously described. No assurances can
be provided that the additional capital will be sufficient to meet the Company's
needs. We anticipate that our current resources (including the $2 million
proceeds of the first closing of our recent private placement in December 2001)
will be sufficient to finance for the next several months our currently
anticipated needs for operating and capital expenditures. We plan to achieve
this by continuing to reduce expenses, including by means of voluntary salary
reductions and postponement of certain development expenses.
We expect that after implementing these cost-saving measures, our cash
utilized for operations for the next year will be approximately $129,000 per
month (including approximately $35,000 per month for research and
17
preclinical development expenses and approximately $94,000 for general and
administrative expenses). Our major outstanding contractual obligations relate
to our operating (facilities) leases. Our facilities lease expense in future
years extends through May 2003 at an aggregate rate of $7,675 per month, net of
monthly sublease income of $750 per month commencing March 2002. In addition, we
had a monthly obligation of $1,026 under the lease for another facility. That
lease expired on January 31, 2002.
The report of our independent auditors on our consolidated financial
statements includes an explanatory paragraph which states that our recurring
losses, and limited liquid resources raise substantial doubt about our ability
to continue as a going concern. Our consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
On August 9, 2001, we retained Proteus Capital Corp. on a non-exclusive
basis as our financial advisors to assist us with raising additional funds. We
currently have no firm financing commitments, and we cannot be certain that we
will be able to raise additional funds on terms acceptable to us, or at all.
Subsequent to an oral hearing before a Nasdaq Listing Qualifications
Panel, on August 23, 2001, our securities were delisted from the Nasdaq Stock
Market for failing to meet the minimum bid price requirements set forth in the
NASD Marketplace Rules, as our common stock had traded for less than $1.00 for
more than 30 consecutive business days. Our common stock trades now on the OTC
Bulletin Board under the symbol "ATLC.OB". Delisting our common stock from
Nasdaq could have a material adverse effect on our ability to raise additional
capital, our stockholders' liquidity and the price of our common stock.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are described in Note 1 to our consolidated
financial statements included in this annual report, however, we believe that
none of them are considered to be critical.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
all business combinations be accounted for under a single method -- the purchase
method. Use of the pooling-of-interests method no longer is permitted. SFAS No.
141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon adoption of the Statement, which for calendar year-end
companies, will be January 1, 2002. SFAS No. 142 has no financial impact on the
us as we do not have any goodwill or intangible assets which resulted from
business combinations.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
For a list of the consolidated financial statements filed as part of
this report, see the Index to Consolidated Financial Statements following the
exhibits to this annual report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
Frederic P. Zotos, Esq., 36, has been a member of our board of
directors since May 1999, our President since April 3, 2000, and our Chief
Executive Officer since February 15, 2001. From June 1999 to April 2000, Mr.
Zotos was Director of Due Diligence and Internal Legal Counsel of Licent
Capital, LLC, an intellectual property royalty finance company located in
Jericho, New York. From September 1998 until June 1999, Mr. Zotos practiced as
an independent patent attorney and technology licensing consultant in Cohasset,
Massachusetts. From December 1996 until August 1998, Mr. Zotos was Assistant to
the President and Patent Counsel of Competitive Technologies, Inc., a
publicly-traded technology licensing agency located in Fairfield, Connecticut.
From July 1994 until November 1996, Mr. Zotos was an Intellectual Property
Associate of Pepe & Hazard, a general practice law firm located in Hartford,
Connecticut. Mr. Zotos is a registered patent attorney with the United States
Patent and Trademark Office, and is also registered to practice law in
Massachusetts and Connecticut. He earned a B.S. in Mechanical Engineering from
Northeastern University in 1987, a joint J.D. and M.B.A. degree from
Northeastern University in 1993, and successfully completed an M.S. in
Electrical Engineering Prerequisite Program from Northeastern University in
1994.
Steve H. Kanzer, CPA, Esq., 38, has been a member of our board of
directors since its inception in 1993. He is currently a member of our Audit
Committee and Compensation Committee. From December 1997 to November 2001, Mr.
Kanzer was President and Chief Executive Officer of Corporate Technology
Development, Inc., a biotechnology holding company based in Miami, Florida.
Since December 2000 Mr. Kanzer has also been Chairman, Chief Executive Officer
and President of Accredited Equities, Inc., a venture capital and investment
banking firm based in Miami, and President of several private biopharmaceutical
companies also based in Miami. From 1992 until December 1998, Mr. Kanzer was a
founder and Senior Managing Director of Paramount, and Senior Managing
Director--Head of Venture Capital of Paramount Capital Investments, LLC
("Paramount Investments"), a biotechnology and biopharmaceutical venture capital
and merchant banking firm that is associated with Paramount. From 1993 until
June 1998, Mr. Kanzer was a founder and a member of the board of directors of
Boston Life Sciences, Inc., a publicly-traded pharmaceutical research and
development company. From 1994 until June 2000, Mr. Kanzer was a founder and
Chairman of Discovery Laboratories, Inc., a publicly-traded pharmaceutical
research and development company. Mr. Kanzer is a founder and a member of the
board of directors of DOR BioPharma, Inc., a publicly-traded pharmaceutical
research and development company. Prior to joining Paramount, Mr. Kanzer was an
attorney with Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York
from September 1988 to October 1991. He received his J.D. from New York
University School of Law in 1988 and a B.B.A. in Accounting from Baruch College
in 1985. In his capacity as employee and director of other companies in the
venture capital field, Mr. Kanzer is not required to present to Atlantic
opportunities that arise outside the scope of his duties as a director of
Atlantic.
Peter O. Kliem, 63, has been a member of our board of directors since
March 21, 2000 and is a member of our Compensation Committee. Mr. Kliem is a
co-founder, Executive Vice-President, chief operating officer and member of the
board of directors of Enanta Pharmaceuticals, a Boston based biotechnology
start-up. Prior to this start-up, he worked with Polaroid Corporation for 36
years, most recently in the positions of Senior Vice President, Business
Development, Senior VP, Electronic Imaging and Senior VP and Director of
Research & Development. During his tenure with Polaroid, he initiated and
executed major strategic alliances with corporations in the U.S., Europe, and
the Far East. Mr. Kliem also introduced a broad range of innovative products
such as printers, lasers, CCD and CID imaging, fiber optics, flat panel display,
magnetic/optical storage and medical diagnostic products in complex
technological environments. Mr. Kliem is a member of the board of directors of
DOR BioPharma, Inc., a publicly-traded pharmaceutical research and development
company. He serves as trustee and vice president of the Boston Biomedical
Research Institute, which is funded by the National Institute of Health, and
served as Chairman of PB Diagnostics. In addition, he serves as Industry Advisor
to TVM-Techno Venture Management. Mr. Kliem earned his M.S. in chemistry from
Northeastern University.
19
A. Joseph Rudick, M.D., 45, was our Chief Executive Officer from April
10, 2000 until February 15, 2001, and has been a member of our board of
directors since May 1999. He was also our President from May 1999 to April 3,
2000, and was a founder of Atlantic and two of its majority-owned subsidiaries,
Optex and Channel. Dr. Rudick served as a business consultant to Atlantic from
January 1997 until November 1998. From June 1994 until November 1998, Dr. Rudick
was a Vice President of Paramount Capital, Inc., an investment bank specializing
in the biotechnology and biopharmaceutical industries. Since 1988, he has been a
Partner of Associate Ophthalmologists P.C., a private ophthalmology practice
located in New York, and from 1993 to 1998 he served as a director of Healthdesk
Corporation, a publicly-traded medical information company of which he was a
co-founder. Dr. Rudick earned a B.A. in Chemistry from Williams College in 1979
and an M.D. from the University of Pennsylvania in 1983.
David Tanen, 30, has served as a member of our board of directors since
January 28, 2002. Since 1996, Mr. Tanen has served as an associate director of
Paramount Capital, where he has been involved in the founding of a number of
biotechnology start-up companies. Mr. Tanen also serves as an officer and/or
director on several other privately held development-stage biotechnology
companies. Mr. Tanen also serves on the board of directors of Abington
Biomedical Offshore Fund and Abington Biomedical Master Fund, each a Cayman
Island company. Mr. Tanen received his B.A. from George Washington University
and his J.D. from Fordham University School of Law.
Nicholas J. Rossettos, CPA, 36, has been our Chief Financial Officer
since April 2000. Previously, Mr. Rossettos was from 1999, Manager of Finance
for Centerwatch, a pharmaceutical trade publisher headquartered in Boston,
Massachusetts, that is a wholly owned subsidiary of Thomson Corporation of
Toronto, Canada. Prior to that, from 1994, he was Director of Finance and
Administration for EnviroBusiness, Inc., an environmental and technical
management-consulting firm headquartered in Cambridge, Massachusetts. He holds
an A.B. in Economics from Princeton University and a M.S. in Accounting and
M.B.A. from Northeastern University.
There are no family relationships among the executive officers or
directors of Atlantic.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who are the beneficial owners of
more than 10% of our common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock. Officers,
directors and beneficial owners of more than 10% of our common stock are
required by SEC regulations to furnish us with copies of all Section 16(a) forms
they file.
Each of our directors and executive officers was late in filing the
forms that Section 16(a) of the Exchange Act required them to file during fiscal
year 2001.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to our 1995 stock option plan, on February 20, 2001, Frederic
P. Zotos was granted options for 100,000 shares of common stock at an exercise
price of $0.875. Additionally, on February 20, 2001, Mr. Zotos was granted
options for 150,000 shares of common stock at an exercise price of $0.875.
Pursuant to our 1995 stock option plan, on February 20, 2001, Dr. Rudick was
granted options for 100,000 shares of common stock at an exercise price of
$0.875. Additionally, on February 20, 2001, A. Joseph Rudick was granted options
for 25,000 shares of common stock at an exercise price of $0.875. Pursuant to
our 1995 stock option plan, on February 20, 2001, Nicholas J. Rossettos was
granted options for 50,000 shares of common stock at an exercise price of
$0.875.
The following table sets forth, for the last three fiscal years, the
compensation earned for services rendered in all capacities by our chief
executive officer and the other highest-paid executive officers serving as such
at the end of 2001 whose compensation for that fiscal year was in excess of
$100,000. The individuals named in the table will be hereinafter referred to as
the "Named Officers." No other executive officer of Atlantic received
20
compensation in excess of $100,000 during fiscal year 2001. No executive officer
who would otherwise have been included in this table on the basis of 2001 salary
and bonus resigned or terminated employment during that year.
SUMMARY COMPENSATION TABLE
---------------------------------- -------- ------------------------------------------------ -------------------- -----------------
Annual Compensation Long-Term All Other
Compensation Awards Compensation ($)
---------------------------------- -------- ------------------------------------------------ -------------------- -----------------
Name and Principal Position Year Salary($) Bonus($) Other Annual Securities
Underlying
Compensation ($) Options/SARs(#)
---------------------------------- -------- ----------- -------------- --------------------- -------------------- -----------------
Frederic P. Zotos, Esq. (1) 2001 208,750 50,000 10,000(2) 250,000 0
Chief Executive Officer and 2000 131,250 50,000 10,000(2) 250,000 14,750(3)
President 1999 0 0 0 0 2,600(4)
---------------------------------- -------- ----------- -------------- --------------------- -------------------- -----------------
A. Joseph Rudick, M.D.(5) 2001 87,500 25,000 0 125,000 0
Chief Scientific and Medical 2000 123,750 111,174 0 125,000 .8 4,674(6)
Officer 1999 0 23,502 0 87,000(7) 81,523(8)
---------------------------------- -------- ----------- -------------- --------------------- -------------------- -----------------
Nicholas J. Rossettos, CPA(9) 2001 125,000 25,000 10,000(2) 50,000 0
Chief Financial Officer, 2000 91,146 25,000 10,000(2) 50,000 0
Treasurer and Secretary 1999 0 0 0 0 0
---------------------------------- -------- ----------- -------------- --------------------- -------------------- -----------------
-------------------------
(1) Mr. Zotos was promoted to be our Chief Executive Officer on February 15,
2001. Mr. Zotos became our President on April 3, 2000.
(2) Represents matching contributions by Atlantic pursuant to Atlantic's
SAR-SEP retirement plan.
(3) Represents $8,000 in fees paid for consulting services rendered and
$6,750 in director's fees.
(4) Represents fees paid for consulting services rendered.
(5) Dr. Rudick became Chief Scientific and Medical Officer on February 15,
2001. From April 10, 2000 to February 15, 2001, he was our Chief
Executive Officer.
(6) Represents $86,174 paid to Dr. Rudick in recognition of his role in
negotiating an amendment to Optex's contract with Bausch & Lomb, less
$1,500 returned to Atlantic by him due to mistaken overpayment of
director's fees for the 1999 fiscal year.
(7) Excludes options for 50,000 shares of common stock granted to Dr. Rudick
on August 9, 1999, but rescinded in the 2000 fiscal year to correct the
grant to him in the 1999 fiscal year of options for 37,000 shares of
common stock above the amount permitted by the stock option plan for that
fiscal year.
(8) Represents $50,516 in fees paid to Dr. Rudick for consulting services
rendered, $7,500 in director's fees, of which $1,500 was paid in error
and therefore returned to Atlantic by him in 2000, and $23,507 paid in
recognition of his role in negotiating an amendment to Optex's contract
with Bausch & Lomb (see Item 12 below for a more detailed explanation).
(9) Mr. Rossettos became our Chief Financial Officer on April 10, 2000.
21
OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock
options under the 1995 stock option plan and otherwise to the Named Officers
during the 2001 fiscal year. Except as described in footnote (1) below, no stock
appreciation rights were granted during the 2001 fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------------------------------------
Individual Grants
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Name Number of Securities % of Underlying Exercise Price Expiration
Underlying Options/ Options/SARs Granted to ($/Share)(3) Date
SARs Granted(#)(1) Employees in Fiscal
Year(2)
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Frederic P. Zotos, Esq. 250,000 43% $0.875 2/20/11
----------------------------------- ---------------------- ------------------------- ---------------- --------------
A. Joseph Rudick, M.D. 125,000 22% $0.875 2/20/11
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Nicholas J. Rossettos, CPA 50,000 9% $0.875 2/20/11
----------------------------------- ---------------------- ------------------------- ---------------- --------------
------------------------
(1) Each option has a maximum term of ten years, subject to earlier
termination in the event of the optionee's cessation of service with
Atlantic. The options are exercisable as follows: 25% upon granting and
25% each of the first three anniversaries of the date of granting. Each
option will become immediately exercisable in full upon an acquisition of
Atlantic by merger or asset sale, unless the option is assumed by the
successor entity. Each option includes a limited stock appreciation right
pursuant to which the optionee may surrender the option, to the extent
exercisable for vested shares, upon the successful completion of a
hostile tender for securities possessing more than 50% of the combined
voting power of Atlantic's outstanding voting securities. In return for
the surrendered option, the optionee will receive a cash distribution per
surrendered option share equal to the excess of (1) the highest price
paid per share of common stock in that hostile tender offer over (2) the
exercise price payable per share under the cancelled option.
(2) Calculated based on total option grants to employees of 575,000 shares of
common stock during the 2001 fiscal year.
(3) The exercise price may be paid in cash, mature shares of common stock,
through arrangements with independant brokerage firms, or by other means
at the discretion of the Plan Administrator. Atlantic may also finance
the option exercise by loaning the optionee sufficient funds to pay the
exercise price for the purchased shares and the federal and state income
tax liability incurred by the optionee in connection with exercise. The
optionee may be permitted, subject to the approval of the plan
administrator, to apply a portion of the shares purchased under the
option (or to deliver existing shares of common stock) in satisfaction of
that tax liability.
OPTION EXERCISE AND HOLDINGS
The following table provides information with respect to the Named
Officers concerning the exercisability of options during the 2001 fiscal year
and unexercisable options held as of the end of the 2001 fiscal year. No stock
appreciation rights were exercised during the 2001 fiscal year, and, except for
the limited rights described in footnote (1) to the preceding table, no stock
appreciation rights were outstanding at the end of that fiscal year.
22
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR ("FY")
AND FY-END OPTION VALUES
----------------------------- -------------- ---------------- -------------------------------- ------------------------------------
Name Shares Value No. of Securities Underlying Value of Unexercised In-the-Money
Acquired Realized (1) Unexercised Options/SARs at Options/SARs at FY-End (Market
on Exercise FY-End (#) price of shares at FY-End less
exercise price) ($)(2)
-------------------------------- ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
Frederic P. Zotos 0 -- 221,166 315,834 0 0
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
A. Joseph Rudick 0 -- 174,916 172,084 0 0
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
Nicholas J. Rossettos 0 -- 37,500 62,500 0 0
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
------------------
(1) Equal to the fair market value of the purchased shares at the time of the
option exercise over the exercise price paid for those shares.
(2) Based on the fair market value of our common stock on December 31, 2001
of $0.28 per share, the closing sales price per share on that date on the
OTC Bulletin Board.
LONG TERM INCENTIVE PLAN AWARDS
No long term incentive plan awards were made to a Named Officer during
the last fiscal year.
COMPENSATION OF DIRECTORS
Non-employee directors are eligible to participate in an automatic
stock option grant program pursuant to the 1995 stock option plan. Non-employee
directors are granted an option for 10,000 shares of common stock upon their
initial election or appointment to the board and an option for 2,000 shares of
common stock on the date of each annual meeting of our stockholders for those
non-employee directors continuing to serve after that meeting. On August 8,
2001, pursuant to the automatic stock option grant program, Atlantic granted
each of Steve Kanzer and Peter Kliem options for 2,000 shares of common stock at
an exercise price of $0.61 per share, the fair market value of our common stock
on the date of grant.
Additionally, on February 20, 2001, Atlantic granted each of Steve
Kanzer and Peter Kliem options for 50,000 shares of common stock at an exercise
price of $0.875 per share, the fair market value of our common stock on the date
of the grant.
The board agreed that effective October 21, 1999, each non-employee
member of the board is to receive $6,000 per year for his services as a
director, payable semi-annually in arrears, plus $1,500 for each board meeting
attended in person, $750 for each board meeting attended via telephone
conference call and $500 for each meeting of a committee of the board attended.
Board members are reimbursed for reasonable expenses incurred in
connection with attending meetings of the board and of committees of the board.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
AGREEMENTS
Effective April 3, 2000, Mr. Zotos became our President pursuant to an
employment agreement dated as of the effective date. This agreement has a
three-year term ending on April 2, 2003. As President, Mr. Zotos reports to the
Chief Executive Officer. Mr. Zotos and his dependents are eligible to receive
paid medical and long term disability insurance and such other health benefits
as Atlantic makes available to other senior officers and directors.
23
Effective February 15, 2001, Mr. Zotos was also appointed Chief Executive
Officer of Atlantic at which time the employment agreement was amended to
reflect a new compensation structure.
Effective April 10, 2000, Dr. Rudick became our Chief Executive Officer
pursuant to an employment agreement dated as of the effective date. This
agreement has a three-year term ending on April 10, 2003. Effective February 15,
2001, Dr. Rudick resigned as our Chief Executive Officer at which time the
employment agreement was amended to reflect a new compensation structure.
Effective April 10, 2000, Mr. Rossettos became our Chief Financial
Officer pursuant to an employment agreement dated as of the effective date. This
agreement has a three-year term ending on April 10, 2003. Mr. Rossettos reports
to the Chief Executive Officer and President. Mr. Rossettos and his dependents
are eligible to receive paid medical and long term disability insurance and such
other health benefits as Atlantic makes available to other senior officers and
directors.
The Compensation Committee has the discretion under the 1995 stock
option plan to accelerate options granted to any officers in connection with a
change in control of Atlantic or upon the subsequent termination of the
officer's employment following the change of control.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common stock as of March 20, 2002, by
(1) all persons who are beneficial owners of 5% or more of our common stock, (2)
each director and nominee, (3) the Named Officers in the Summary Compensation
Table above, and (4) all directors and executive officers as a group. We do not
know of any person who beneficially owns more than 5% of the Series A preferred
stock and none of our directors or the Named Officers owns any shares of Series
A preferred stock. Consequently, the following table does not contain
information with respect to the Series A preferred stock.
The number of shares beneficially owned is determined under rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual has
the right to acquire within 60 days of March 20, 2002, through the exercise or
conversion of any stock option, convertible security, warrant or other right.
Including those shares in the tables does not, however, constitute an admission
that the named stockholder is a direct or indirect beneficial owner of those
shares. Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power (or shares that power with that person's
spouse) with respect to all shares of capital stock listed as owned by that
person or entity. The common stock represented here includes the common stock
that the beneficial holders would directly possess if they converted all shares
of Series A Preferred Stock held by them.
NUMBER OF PERCENT OF TOTAL SHARES
NUMBER OF % OF TOTAL SHARES
NAME AND ADDRESS SHARES OUTSTANDING (1)
---------------- ------ -----------
CERTAIN BENEFICIAL HOLDERS:
Lindsay A. Rosenwald, M.D.(2) 4,665,904 28.9%
787 Seventh Avenue
New York, NY 10019
Joseph Stevens & Company, Inc.(3) 1,283,331 7.8%
59 Maiden Lane, 32nd Floor
New York, NY 10038
24
MANAGEMENT:
Frederic P. Zotos, Esq.(4) 408,666 2.5%
A. Joseph Rudick, M.D.(5) 263,666 1.6%
Steve H. Kanzer, CPA, Esq.(6) 112,000 *
Peter O. Kliem(7) 102,916 *
David Tanen(8) 10,000 *
Nicholas J. Rossettos, CPA(9) 75,000 *
All current executive
officers and directors as
a group (6 persons) 972,248 5.7%
------------------------
* Less than 1.0%
(1) Percentage of beneficial ownership is calculated assuming 16,004,599
shares of common stock were outstanding on March 20, 2002.
(2) Includes 154,350 shares of common stock issuable upon conversion of
47,202 shares of Series A preferred stock convertible within 60 days of
March 20, 2002. Also includes 190 shares of common stock held by June
Street Corporation and 190 shares of common stock held by Huntington
Street Corporation. Dr. Rosenwald is the sole proprietor of both June
Street Corporation and Huntington Street Corporation.
(3) Includes 450,000 shares of common stock issuable upon exercise of three
warrants exercisable within 60 days of March 20, 2002.
(4) Represents options exercisable within 60 days of March 20, 2002. 62,500
shares of common stock were exercisable pursuant to stock options granted
on February 19, 2002 for 250,000 shares, of which 25% or 62,500 were
exercisable on issuance, then an additional 25% thereafter; and
additional 50,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001 for 100,000 shares, of which
25% or 25,000 shares were exercisable on issuance, then an additional 25%
annually thereafter; an additional 75,000 shares of common stock were
exercisable pursuant to stock options granted on February 20, 2001 for
150,000 shares, of which 25% or 37,500 shares were exercisable on
issuance, then an additional 25% annually thereafter; an additional
75,000 shares of common stock are exercisable pursuant to stock options
granted on April 12, 2000 for 100,000 shares, of which 25% or 25,000
shares were exercisable on issuance, then an additional 25% annually
thereafter; an additional 112,500 shares are exercisable pursuant to
stock options granted on April 12, 2000 for 150,000, of which 25% or
37,500 were exercisable on issuance, then an additional 25% annually
thereafter; an additional 25,000 shares are exercisable pursuant to stock
options granted October 21, 1999, all of which were immediately
exercisable; an additional 2,000 shares are exercisable pursuant to stock
options granted September 23, 1999 for 2,000 shares, all of which were
exercisable after one year; and an additional 6,666 shares are
exercisable pursuant to stock options granted May 28, 1999 for 10,000
shares, exercisable in three equal annual amounts exercisable starting
one year from grant date.
(5) Represents options exercisable within 60 days of March 20, 2002. 31,250
shares of common stock were exercisable pursuant to stock options granted
on February 19, 2002 for 125,000 shares, of which 25% or 31,250 shares
were exercisable on issuance, then an additional 25% annually thereafter;
an additional 50,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001
25
for 100,000 shares, of which 25% or 25,000 shares were exercisable on
issuance, then an additional 25% annually thereafter; an additional
12,500 shares of common stock were exercisable pursuant to stock options
granted on February 20, 2001 for 25,000 shares, of which 25% or 6,250
shares were exercisable on issuance, then an additional 25% annually
thereafter; an additional 75,000 shares of common stock are exercisable
pursuant to stock options granted under the plan on April 12, 2000 for
100,000 shares, of which 50% or 50,000 shares were exercisable as of
April 3, 2001, then an additional 25% annually thereafter; an additional
18,750 shares are exercisable pursuant to stock options granted on April
12, 2000 for 25,000 shares, of which 25% or 6,250 were exercisable
immediately, then an additional 25% annually thereafter; an additional
25,000 shares are exercisable pursuant to stock options granted October
21, 1999, all of which were immediately exercisable; an additional 2,000
shares are exercisable pursuant to stock options granted on September 23,
1999, all of which were exercisable on September 23, 2000; an additional
32,500 shares are exercisable pursuant to stock options granted on August
9, 1999 for 50,000 shares, of which 25% or 12,500 were exercisable on
issuance, then an additional 25% annually thereafter; an additional 6,666
shares are exercisable pursuant to stock options granted on May 28, 1999
for 10,000 shares, exercisable in three equal amounts starting one year
from grant date; and an additional 10,000 shares are exercisable pursuant
to stock options granted on August 7, 1998 for 10,000 shares, of which
one third were exercisable after one year, with the remainder exercisable
monthly (or 277.79 per month) over two years.
(6) Represents options exercisable within 60 days of March 20, 2002. 2,000
shares of common stock were exercisable pursuant to stock options granted
on August 8, 2001, all of which were immediately exercisable; an
additional 50,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001, all of which were immediately
exercisable; an additional 25,000 shares are exercisable pursuant to
stock options granted on February 29, 2000, all of which were immediately
exercisable; an additional 2,000 shares are exercisable pursuant to stock
options granted on September 29, 2000, all of which were immediately
exercisable; an additional 25,000 shares are exercisable pursuant to
stock options granted on October 21, 1999, all of which were immediately
exercisable; an additional 2,000 shares are exercisable pursuant to stock
options granted September 23, 1999, all of which were exercisable on
September 23, 2000; an additional 2,000 shares are exercisable pursuant
to stock options granted August 28, 1998; an additional 2,000 shares are
exercisable pursuant to stock options granted on June 17, 1997; and an
additional 2,000 shares are exercisable pursuant to stock options granted
on July 24, 1996.
(7) Represents options exercisable within 60 days of March 20, 2002. 2,000
shares of common stock were exercisable pursuant to stock options granted
on August 8, 2001, all of which were immediately exercisable; an
additional 50,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001, all of which were immediately
exercisable; an additional 25,000 shares of common stock are exercisable
pursuant to stock options granted September 29, 2000, all of which were
immediately exercisable; an additional 2,000 shares are exercisable
pursuant to stock options granted September 29, 2000, all of which were
immediately exercisable; an additional 17,250 shares are exercisable
pursuant to stock options for 23,000 shares granted on April 6, 2000, of
which 25% or 5,570 were exercisable on issuance, and then an additional
25% annually thereafter; and an additional 6,666 shares of common stock
were exercisable pursuant to stock options granted on March, 21 2000 for
10,000 shares, which are exercisable in three equal annual amounts
starting from one year of the grant date.
(8) Represents options exercisable within 60 days of March 20, 2002. These
10,000 shares of common stock were exercisable pursuant to stock options
granted on January 28, 2002, all of which were immediately exercisable.
(9) Represents options exercisable within 60 days of March 20, 2002. 12,500
shares of common stock were exercisable pursuant to stock options granted
on February 19, 2002 for 100,000 shares, of which 25% or 12,500 shares
were exercisable on issuance, then an additional 25% annually thereafter;
an additional 25,000 shares of common stock were exercisable pursuant to
stock options granted on February 20, 2001 for 50,000 shares, of which
25% or 12,500 shares were exercisable on issuance, then an additional 25%
annually thereafter; and an additional 37,500 shares of common stock are
exercisable pursuant to stock options for 50,000 shares granted April 4,
2000, of which 25% or 12,500 were exercisable on issuance, and then an
additional 25% annually thereafter.
26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 4, 2000, we entered into a financial advisory and consulting
agreement with Joseph Stevens & Company, Inc. In this agreement, we engaged
Joseph Stevens to provide us with financial advisory services from January 4,
2000 until January 4, 2001. As partial compensation for the services to be
rendered by Joseph Stevens, we issued them three warrants to purchase an
aggregate of 450,000 shares of our common stock. The exercise price and exercise
period of each warrant is as follows:
================================================================================================================
Warrant Number Exercise
No. of Shares Price Exercise Period
================================================================================================================
No.1 150,000 $2.50 1/4/00 through 1/4/05
----------------------------------------------------------------------------------------------------------------
1/4/01 through 1/4/06 (which vested in equal monthly
No.2 150,000 $3.50 increments during 1/4/00-1/4/01)
----------------------------------------------------------------------------------------------------------------
1/4/02 through 1/4/07 (which vested in equal monthly
No.3 150,000 $4.50 increments during 1/4/00-1/4/01)
================================================================================================================
In addition, each warrant may only be exercised when the market price
of a share of common stock is at least $1.00 greater than the exercise price of
that warrant. In connection with issuance of the warrants, Atlantic and Joseph
Stevens entered into a letter agreement granting Joseph Stevens registration
rights in respect of the shares of common stock issuable upon exercise of the
warrants.
Pursuant to our restated certificate of incorporation and bylaws, we
have entered into indemnification agreements with each of our directors and
executive officers.
All transactions between us and our officers, directors, principal
stockholders and their affiliates are approved by a majority of the board of
directors, including a majority of the independent and disinterested outside
directors on the board of directors. We believe that the transaction set forth
above was made on terms no less favorable to us than could have been obtained
from unaffiliated third parties.
ITEM 13. EXHIBITS LIST, AND REPORTS ON FORM 8-K
EXHIBITS
The following documents are referenced or included in this report.
Exhibit No. Description
----------- -----------
3.1(1) Certificate of incorporation of Atlantic, as amended to date.
3.2(1) Bylaws of Atlantic, as amended to date.
3.3(5) Certificate of designations of Series A convertible preferred stock.
3.4(6) Certificate of increase of Series A convertible preferred stock.
3.5(9) Certificate of designations, preferences and rights of Series B convertible preferred stock of
Atlantic, filed on September 28, 2000.
3.6(9) Certificate of amendment of the certificate of designations, preferences and rights of Series B
convertible preferred stock of Atlantic, filed on November 17, 2000.
27
3.7(10) Certificate of amendment of the certificate of designations, preferences and rights of Series B
convertible preferred stock of Atlantic, filed on January 9, 2001.
3.8(10) Certificate of amendment of the certificate of designations, preferences and rights of Series B
convertible preferred stock of Atlantic, filed on January 19, 2001.
4.2(1) Form of unit certificate.
4.3(1) Specimen common stock certificate.
4.4(1) Form of redeemable warrant certificate.
4.5(1) Form of redeemable warrant agreement between Atlantic and Continental Stock Transfer & Trust
Company.
4.6(1) Form of underwriter's warrant certificate.
4.7(1) Form of underwriter's warrant agreement between Atlantic and Joseph Stevens & Company, L.P.
4.8(1) Form of subscription agreement between Atlantic and the selling stockholders.
4.9(1) Form of bridge note.
4.10(1) Form of bridge warrant.
4.11(2) Investors' rights agreement between Atlantic, Dreyfus Growth and Value Funds, Inc. and Premier
Strategic Growth Fund.
4.12(2) Common stock purchase agreement by and among Atlantic, Dreyfus Growth and Value Funds, Inc. and
Premier Strategic Growth Fund.
10.2(1) Employment agreement dated July 7, 1995, between Atlantic and Jon D. Lindjord.
10.3(1) Employment agreement dated September 21, 1995, between Atlantic and Dr. Stephen R. Miller.
10.4(1) Employment agreement dated September 21, 1995, between Atlantic and Margaret A. Schalk.
10.5(1) Letter agreement dated August 31, 1995, between Atlantic and Dr. H. Lawrence Shaw.
10.6(1) Consulting agreement dated January 1, 1994, between Atlantic and John K. A. Prendergast.
10.8(1) Investors' rights agreement dated July 1995, between Atlantic, Dr. Lindsay A. Rosenwald and
VentureTek, L.P.
10.9(1) License and assignment agreement dated March 25, 1994, between Optex Ophthalmologics, Inc.,
certain inventors and NeoMedix Corporation, as amended.
10.10(1) License agreement dated May 5, 1994, between Gemini Gene Therapies, Inc. and the Cleveland
Clinic Foundation.
10.11(1)+ License Agreement dated June 16, 1994, between Channel Therapeutics, Inc., the University of
Pennsylvania and certain inventors, as amended.
28
10.12(1)+ License agreement dated March 28, 1994, between Channel Therapeutics, Inc. and Dr. Sumner
Burstein.
10.13(1) Form of financial advisory and consulting agreement by and between Atlantic and Joseph Stevens
& Company, L.P.
10.14(1) Employment agreement dated November 3, 1995, between Atlantic and Shimshon Mizrachi.
10.15(3) Financial advisory agreement between Atlantic and Paramount dated September 4, 1996 (effective
date of April 15, 1996).
10.16(3) Financial agreement between Atlantic, Paramount and UI USA dated June 23, 1996.
10.17(3) Consultancy agreement between Atlantic and Dr. Yuichi Iwaki dated July 31, 1996.
10.18(3) 1995 stock option plan, as amended.
10.19(3) Warrant issued to an employee of Paramount Capital, LLC to purchase 25,000 shares of Common
Stock of Atlantic.
10.20(3) Warrant issued to an employee of Paramount Capital, LLC to purchase 25,000 shares of Common
Stock of Atlantic.
10.21(3) Warrant issued to an employee of Paramount Capital, LLC to purchase 12,500 shares of Common
Stock of Atlantic.
10.22(4) Letter agreement between Atlantic and Paramount Capital, Inc. dated February 26, 1997.
10.23(4) Agreement and plan of reorganization between Atlantic, Channel Therapeutics, Inc. and New
Channel, Inc. dated February 20, 1997.
10.24(4) Warrant issued to John Prendergast to purchase 37,500 shares of Atlantic's common stock.
10.25(4) Warrant issued to Dian Griesel to purchase 24,000 shares of Atlantic's common stock.
10.26(7) Amendment No. 1 to development & license Agreement between Optex and Bausch & Lomb Surgical,
Inc. dated September 16, 1999.
10.27(8) Financial advisory and consulting agreement between Atlantic and Joseph Stevens & Company, Inc.
dated January 4, 2000.
10.28(8) Warrant No. 1 issued to Joseph Stevens & Company, Inc. to purchase 150,000 shares of Atlantic's
Common Stock exercisable January 4, 2000.
10.29(8) Warrant No. 2 issued to Joseph Stevens & Company, Inc. to purchase 150,000 shares of Atlantic's
Common Stock exercisable January 4, 2001.
10.30(8) Warrant No. 3 issued to Joseph Stevens & Company, Inc. to purchase 150,000 shares of Atlantic's
Common Stock exercisable January 4, 2002.
10.31(9) Preferred stock purchase agreement dated May 12, 2000, between Atlantic and TeraComm Research,
Inc.
10.32(9) Warrant certificate issued May 12, 2000, by Atlantic to TeraComm Research, Inc.
29
10.33(9) Stockholders agreement dated May 12, 2000, among TeraComm Research, Inc., the common
stockholders of TeraComm, and Atlantic.
10.34(9) Registration rights agreement dated May 12, 2000, between Atlantic and TeraComm Research, Inc.
with respect to shares of TeraComm preferred stock issued to Atlantic.
10.35(9) Registration rights agreement dated May 12, 2000, between Atlantic and TeraComm Research, Inc.
with respect to shares of Atlantic common stock issued to TeraComm.
10.36(9) Employment agreement dated as of April 10, 2000, between Atlantic and A. Joseph Rudick.
10.37(9) Employment agreement dated as of April 3, 2000, between Atlantic and Frederic P. Zotos.
10.38(9) Employment agreement dated as of April 10, 2000, between Atlantic and Nicholas J. Rossettos, as
amended.
10.39(9) Employment agreement dated as of May 15, 2000, between Atlantic and Walter Glomb.
10.40(9) Employment agreement dated as of April 18, 2000, between Atlantic and Kelly Harris.
10.41(10) Amendment dated as of July 18, 2000, to the Preferred Stock
Purchase Agreement dated May 12, 2000, between Atlantic and
TeraComm Research, Inc.
10.42(10) Convertible preferred stock and warrants purchase agreement dated September 28, 2000, among
Atlantic, BH Capital Investments, L.P. and Excalibur Limited Partnership.
10.43(10) Registration rights agreement dated September 28, 2000 among Atlantic, BH Capital Investments,
L.P., and Excalibur Limited Partnership.
10.44(10) Escrow agreement dated September 28, 2000 among Atlantic, BH Capital Investments, L.P., and
Excalibur Limited Partnership.
10.45(10) Form of stock purchase warrants issued on September 28, 2000 to BH Capital Investments, L.P.,
exercisable for shares of common stock of Atlantic.
10.46(10) Form of stock purchase warrants issued on September 28, 2000 to Excalibur Limited Partnership,
exercisable for shares of common stock of Atlantic.
10.47(10) Amendment No. 1 dated October 31, 2000, to convertible preferred stock and warrants purchase
agreement dated September 28, 2000, among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.48(12) Stock repurchase agreement dated December 4, 2000, among Atlantic, BH Capital Investments,
L.P., and Excalibur Limited Partnership.
10.49(14) Letter agreement dated December 28, 2000, among Atlantic and BH Capital Investments, L.P., and
Excalibur Limited Partnership.
10.50(11) Amendment No. 2 dated January 9, 2001, to convertible preferred stock and warrants purchase
agreement dated September 28, 2000, among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.51(14) Amendment No. 1 dated January 9, 2001, to registration rights agreement dated September 28,
2000, among Atlantic and BH Capital Investments, L.P. and Excalibur Limited Partnership.
30
10.52(11) Amendment No. 3 dated January 19, 2001, to convertible preferred stock and warrants purchase
agreement dated September 28, 2000, among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.53(14) Letter agreement dated January 25, 2001, among Atlantic and BH Capital Investments, L.P., and
Excalibur Limited Partnership.
10.54(13) Stock repurchase agreement No. 2 dated March 9, 2001, among Atlantic, BH Capital Investments,
L.P., and Excalibur Limited Partnership.
10.55(15) Common stock purchase agreement dated March 16, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.56(15) Warrant certificate issued March 8, 2001, by Atlantic to Dian Griesel.
10.57(16) Common stock purchase agreement dated as of May 7, 2001,
between Atlantic and Fusion Capital Fund II, LLC.
10.58(16) Form of registration rights agreement between Atlantic and Fusion Capital Fund II, LLC.
10.59(17) Asset purchase agreement dated as of January 31, 2001, between Bausch & Lomb Incorporated,
Bausch & Lomb Surgical, Inc., Optex Ophthalmologics, Inc. and Atlantic (the "January 31 Asset
Purchase Agreement).
10.60(17) Amendment No. 1 dated March 2, 2001, to the January 31 asset purchase agreement.
10.61(17) Asset purchase agreement dated as of April 23, 2001, between Atlantic, Gemini Technologies,
Inc., and IFN, Inc.
10.62(18) Securities purchase agreement dated November 2, 2001, between Atlantic and certain investors.
10.63(18) Placement agreement dated November 6, 2001, between Joseph Stevens & Company, Inc. and Atlantic.
10.64* Asset purchase agreement dated as of April 23, 2001, among Atlantic, Gemini Technologies, Inc.
and IFN, Inc.
21.1(1) Subsidiaries of Atlantic.
23.1* Consent of KPMG LLP.
------
+ Confidential treatment has been granted as to certain portions of these
exhibits.
* Filed herewith.
(1) Incorporated by reference to exhibits of Atlantic's registration statement on Form SB-2 (No. 33-98478),
as filed with the Securities and Exchange Commission (the "SEC") on October 24, 1995 and as amended by
Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and Amendment No. 5, as filed with
the Commission on November 9, 1995, December 5, 1995, December 12, 1995, December 13, 1995 and December
14, 1995, respectively.
31
(2) Incorporated by reference to exhibits of Atlantic's Current Report on Form 8-KSB, as filed with the SEC
on August 30, 1996.
(3) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the period ended September 30, 1996.
(4) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the period ended March 31, 1996.
(5) Incorporated by reference to exhibits of Atlantic's Current Report on Form 8-KSB, as filed with the SEC
on June 9, 1997.
(6) Incorporated by reference to exhibits of Atlantic's registration statement on Form S-3 (No. 333-34379),
as filed with the Commission on August 26, 1997, and as amended by Amendment No. 1 as filed with the SEC
on August 28, 1997.
(7) Incorporated by reference to exhibits of Atlantic Form 10-QSB for the period ended September 30, 1999.
(8) Incorporated by reference to exhibits of Atlantic's Form 10-KSB for the year ended December 31, 1999.
(9) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the period ended June 30, 2000.
(10) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the period ended September 30,
2000.
(11) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on January 24, 2001.
(12) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on December 11, 2000.
(13) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on March 14, 2001.
(14) Incorporated by reference to exhibits of Atlantic's Form 10-KSB for the year ended December 31, 2000 for
the year ended December 31, 2000 filed on April 17, 2001.
(15) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the period ended March 31, 2001.
(16) Incorporated by reference to exhibits of Atlantic's registration
statement on Form SB-2 (Registration No. 333-61974), as filed with the
Commission on May 31, 2001, and as amended by Amendment No. 1 as filed
with the SEC on June 29, 2001.
(17) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the period ended September 30, 2001.
(18) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on December 6, 2001.
REPORTS ON FORM 8-K
On December 6, 2001, we filed with the SEC a report on Form 8-K stating
that, on that day, we had raised approximately $2 million through a private
placement of its common stock. A copy of the stock purchase agreement and the
placement agreement were attached thereto.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act,
Atlantic has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 1, 2002.
Atlantic Ventures Technology, Inc.
/s/ Frederic P. Zotos
-----------------------------------------------
Frederic P. Zotos
President, Chief Executive Officer and director
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of Atlantic and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frederic P. Zotos President, Chief Executive Officer and April 1, 2002
------------------------------------ director
Frederic P. Zotos
/s/ Nicholas J. Rossettos Treasurer, Secretary and Chief Financial April 1, 2002
------------------------------------
Nicholas J. Rossettos
/s/ Steve H. Kanzer Officer Director April 1, 2002
------------------------------------
Steve H. Kanzer
/s/ Peter O. Kliem Director April 1, 2002
------------------------------------
Peter O. Kliem
/s/ A. Joseph Rudick Director April 1, 2002
------------------------------------
A. Joseph Rudick
/s/ David Tanen Director April 1, 2002
------------------------------------
David Tanen
33
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2
Consolidated Statements of Operations for the Years ended
December 31, 2001, 2000 and 1999 and for the Period
from July 13, 1993 (inception) to December 31, 2001 F-3
Consolidated Statements of Stockholders' Equity for the
Period from July 13, 1993 (inception) to December 31, 2001 F-4
Consolidated Statements of Cash Flows for the Years ended December 31, 2001,
2000 and 1999 and for the Period from
July 13, 1993 (inception) to December 31, 2001 F-5
Notes to Consolidated Financial Statements F-6
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Technology Ventures, Inc.:
We have audited the consolidated financial statements of Atlantic Technology
Ventures, Inc. and subsidiaries (a development stage company) as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Technology
Ventures, Inc and subsidiaries (a development stage company) as of December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2001, and for the
period from July 13, 1993 (inception) to December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has limited liquid resources that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
Short Hills, New Jersey
March 22, 2002
F-1
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
As of December 31,
-----------------------------
Assets 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 1,591,761 2,663,583
Accounts receivable -- 192,997
Prepaid expenses 38,593 22,599
------------ ------------
Total current assets 1,630,354 2,879,179
Property and equipment, net 105,153 227,088
Investment in affiliate -- 67,344
Other assets 22,838 2,901
------------ ------------
Total assets $ 1,758,345 3,176,512
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 508,613 785,838
Deferred revenue -- 1,294,615
------------ ------------
Total current liabilities $ 508,613 2,080,453
Redeemable Series B convertible preferred stock Authorized 1,647,312 shares; 0
and 206,898 shares issued and
outstanding at December 31, 2001 and 2000 respectively -- 600,000
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value
Authorized 1,375,000 shares; 346,357 and 359,711 shares issued and
outstanding at December 31, 2001 and 2000 respectively (liquidation
preference aggregating $4,502,641 and $4,676,243 at December 31, 2001 and
2000 respectively) 346 360
Convertible preferred stock warrants, 112,896
issued and outstanding at December 31, 2001 and 2000 520,263 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 15,965,359 and 6,122,135 shares issued and
outstanding at December 31, 2001 and 2000 respectively 15,965 6,122
Common stock subscribed. 182 shares at December 31, 2001
and 2000 -- --
Additional paid-in capital 27,442,106 24,796,190
Deficit accumulated during development stage (26,728,406) (24,826,334)
------------ ------------
1,250,274 496,601
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------ ------------
Total stockholders' equity 1,249,732 496,059
------------ ------------
Total liabilities and stockholders' equity $ 1,758,345 3,176,512
============ ============
See accompanying notes to consolidated financial statements.
F-2
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
period from
July 13, 1993
Years ended December 31, (inception) to
-------------------------------------------------- December 31,
2001 2000 1999 2001
------------- -------------- ------------- ----------------
Revenues:
Development revenue $ 2,461,922 $ 5,169,288 $ 1,082,510 $ 8,713,720
License revenue -- -- -- 2,500,000
Grant revenue 250,000 189,658 77,069 616,659
------------- -------------- ------------- ----------------
Total revenues 2,711,922 5,358,946 1,159,579 11,830,379
------------- -------------- ------------- ----------------
Costs and expenses:
Cost of development revenue 2,082,568 4,135,430 866,008 7,084,006
Research and development 886,716 1,130,345 1,091,291 10,391,626
Acquired in-process research and
development -- 2,653,382 -- 2,653,382
General and administrative 2,771,407 2,235,535 1,941,425 18,674,633
Compensation expense relating to stock
warrants (general and administrative), net 78,611 1,020,128 -- 1,099,476
License fees -- -- -- 173,500
------------- -------------- ------------- ----------------
Total operating expenses 5,819,302 11,174,820 3,898,724 40,076,623
------------- -------------- ------------- ----------------
Operating loss (3,107,380) (5,815,874) (2,739,145) (28,246,244)
Other (income) expense:
Interest and other income (42,010) (92,670) (292,630) (1,293,146)
Gain on sale of Optex assets (2,569,451) -- -- (2,569,451)
Loss on sale of Gemini assets 334,408 -- -- 334,408
Interest expense -- -- -- 625,575
Equity in loss of affiliate 67,344 79,274 -- 146,618
Distribution to minority shareholders 837,274 -- -- 837,274
------------- -------------- ------------- ----------------
Total other income (1,372,435) (13,396) (292,630) (1,918,722)
------------- -------------- ------------- ----------------
Net loss $ (1,734,945) $ (5,802,478) $ (2,446,515) $ (26,327,522)
Imputed convertible preferred stock
dividend 600,000 -- -- 5,931,555
Dividend paid upon repurchase of Series B 167,127 233,757 -- 400,884
Preferred stock dividend issued in
preferred shares 107,449 811,514 314,366 1,390,512
------------- -------------- ------------- ----------------
Net loss applicable to common shares $ (2,609,521) $ (6,847,749) $ (2,760,881) $ (34,050,473)
============= ============== ============= ================
Net loss per common share:
Basic and diluted $ (0.36) $ (1.21) $ (0.59)
============= ============== =============
Weighted average shares of common
stock outstanding, basic and diluted: 7,209,916 5,656,741 4,692,912
============= ============== =============
See accompanying notes to consolidated financial statements.
F-3
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Series A Series B
convertible convertible
preferred stock preferred stock
------------------------ -----------------------
Shares Amount Shares Amount
--------- ----------- ----------- -----------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 -- -- -- --
Issued and subscribed common stock at $.05
per share, August 1994 -- -- -- --
Payments of common stock subscriptions -- -- -- --
Issuance of warrants, September 1995 -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- -- --
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- -- --
Repurchase of common stock -- -- -- --
Compensation related to grant of stock
options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1995 -- -- -- --
Issuance of warrants, April 1996 -- -- -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1996 -- -- -- --
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) 1,237,200 1,237 -- --
Channel merger -- -- -- --
Conversion of preferred to common stock (22,477) (22) -- --
Issuance of convertible preferred stock
warrants -- -- -- --
Issuance of warrants -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1997 1,214,723 1,215 -- --
Conversion of preferred to common stock (584,265) (585) -- --
Cashless exercise of preferred warrants 2,010 2 -- --
Exercise of options -- -- -- --
Exercise of warrants -- -- -- --
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1998 632,468 632 -- --
Conversion of preferred to common stock (95,599) (95) -- --
Preferred stock dividend 73,219 73 -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 1999 610,088 $ 610 -- $ --
Conversion of preferred to common stock (309,959) (310) -- --
Preferred stock dividend 59,582 60 -- --
Cashless exercise of preferred warrants
Exercise of options -- -- -- --
Issuance of common stock to TeraComm shareholders -- -- -- --
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- 344,828 345
Costs related to issuance of Series B preferred stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- (137,931) (138)
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- (206,897) (207)
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 2000 359,711 $ 360 -- $ --
Conversion of preferred to common stock (57,132) (58) -- --
Preferred stock dividend 43,778 44 -- --
Issuance of common stock as commitment shares -- -- -- --
Issuance of common stock for services -- -- -- --
Issuance of common stock pursuant to Fusion agreement -- -- -- --
Issuance of common stock in private placement -- -- -- --
Conversion of Series B convertible preferred stock
to common stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- -- --
Compensation expense relating to stock warrants -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
Balance at December 31, 2001 346,357 $ 346 -- $ --
========= =========== =========== ===========
Convertible
preferred
stock warrants Common stock
------------------------ ------------------------
Number Amount Shares Amount
---------- ------------ ------------ -----------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 -- -- 84 --
Issued and subscribed common stock at $.05
per share, August 1994 -- -- 860 1
Payments of common stock subscriptions -- -- 5,061 5
Issuance of warrants, September 1995 -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 1,872,750 1,873
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 785,234 785
Repurchase of common stock -- -- (269) --
Compensation related to grant of stock
options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1995 -- -- 2,663,720 2,664
Issuance of warrants, April 1996 -- -- -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 250,000 250
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1996 -- -- 2,913,720 2,914
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- --
Channel merger -- -- 103,200 103
Conversion of preferred to common stock -- -- 47,651 48
Issuance of convertible preferred stock
warrants 123,720 570,143 -- --
Issuance of warrants -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1997 123,720 570,143 3,064,571 3,065
Conversion of preferred to common stock -- -- 1,367,817 1,367
Cashless exercise of preferred warrants (6,525) (30,069) -- --
Exercise of options -- -- 70,000 70
Exercise of warrants -- -- 1,000 1
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1998 117,195 540,074 4,503,388 4,503
Conversion of preferred to common stock -- -- 312,602 313
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 1999 117,195 $ 540,074 4,815,990 $ 4,816
Conversion of preferred to common stock -- -- 1,011,038 1,011
Preferred stock dividend -- -- -- --
Cashless exercise of preferred warrants (4,299) (19,811) 9,453 9
Exercise of options -- -- 85,654 86
Issuance of common stock to TeraComm shareholders -- -- 200,000 200
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- -- --
Costs related to issuance of Series B preferred stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- -- --
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 2000 112,896 $ 520,263 6,122,135 $ 6,122
Conversion of preferred to common stock -- -- 186,817 187
Preferred stock dividend -- -- -- --
Issuance of common stock as commitment shares -- -- 600,000 600
Issuance of common stock for services -- -- 70,000 70
Issuance of common stock pursuant to Fusion agreement -- -- 416,667 417
Issuance of common stock in private placement -- -- 8,333,318 8,333
Conversion of Series B convertible preferred stock
to common stock -- -- 236,422 236
Repurchase of Series B convertible preferred stock -- -- -- --
Compensation expense relating to stock warrants -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
Balance at December 31, 2001 112,896 $ 520,263 15,965,359 $ 15,965
========== ============ ============ ===========
Deficit
Common stock accumulated
subscribed Additional during
------------------- paid-in development
Number Amount capital stage
------- ---------- ----------- -------------
Common stock subscribed at $.001 per share
July-November 1993 5,231 $ 5 6,272 --
Issued common stock at $.001 per share,
June 1994 -- -- 101 --
Issued and subscribed common stock at $.05
per share, August 1994 12 -- 52,374 --
Payments of common stock subscriptions (5,061) (5) -- --
Issuance of warrants, September 1995 -- -- 300,000 --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 6,034,827 --
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 2,441,519 --
Repurchase of common stock -- -- -- --
Compensation related to grant of stock
options -- -- 208,782 --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- (4,880,968)
------- ---------- ----------- -------------
Balance at December 31, 1995 182 -- 9,043,875 (4,880,968)
Issuance of warrants, April 1996 -- -- 139,000 --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 1,452,063 --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- (3,557,692)
------- ---------- ----------- -------------
Balance at December 31, 1996 182 -- 10,634,938 (8,438,660)
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- 10,611,947 --
Channel merger -- -- 657,797 --
Conversion of preferred to common stock -- -- (26) --
Issuance of convertible preferred stock
warrants -- -- (570,143) --
Issuance of warrants -- -- 159,202 --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- (3,703,304) --
Imputed convertible preferred stock dividend -- -- 3,703,304 --
Net loss -- -- -- (5,151,396)
------- ---------- ----------- -------------
Balance at December 31, 1997 182 -- 21,493,715 (13,590,056)
Conversion of preferred to common stock -- -- (782) --
Cashless exercise of preferred warrants -- -- 30,067 --
Exercise of options -- -- 52,430 --
Exercise of warrants -- -- 5,499 --
Expense related to grant of stock options -- -- 81,952 --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- (1,628,251) --
Imputed convertible preferred stock dividend -- -- 1,628,251 --
Net loss -- -- -- (2,753,528)
------- ---------- ----------- -------------
Balance at December 31, 1998 182 -- 21,662,881 (16,343,584)
Conversion of preferred to common stock -- -- (218) --
Preferred stock dividend -- -- (391) --
Net loss -- -- -- (2,446,515)
------- ---------- ----------- -------------
Balance at December 31, 1999 182 $ -- 21,662,272 (18,790,099)
Conversion of preferred to common stock -- -- (701) --
Preferred stock dividend -- -- (60) --
Cashless exercise of preferred warrants -- -- 19,802 --
Exercise of options -- -- 344,512 --
Issuance of common stock to TeraComm shareholders -- -- 1,799,800 --
Expense related to grant of stock warrants -- -- 1,020,128 --
Issuance of Series B convertible preferred stock -- -- 975,943 --
Costs related to issuance of Series B preferred stock -- -- (147,800) --
Repurchase of Series B convertible preferred stock -- -- (399,862) --
Dividend upon repurchase of Series B convertible
preferred stock -- -- 121,949 (233,757)
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- (599,793) --
Net loss -- -- -- (5,802,478)
------- ---------- ----------- -------------
Balance at December 31, 2000 182 $ -- 24,796,190 (24,826,334)
Conversion of preferred to common stock -- -- (129) --
Preferred stock dividend -- -- (1,031) --
Issuance of common stock as commitment shares -- -- 443,400 --
Issuance of common stock for services -- -- 44,030 --
Issuance of common stock pursuant to Fusion agreement -- -- 99,583 --
Issuance of common stock in private placement -- -- 1,831,628 --
Conversion of Series B convertible preferred stock
to common stock -- -- 119,764 --
Repurchase of Series B convertible preferred stock -- -- 30,060 (167,127)
Compensaton expense relating to stock warrants -- -- 78,611 --
Net loss -- -- -- (1,734,945)
------- ---------- ----------- -------------
Balance at December 31, 2001 182 $ -- 27,442,106 (26,728,406)
======= ========== =========== =============
Common Total
stock stock-
Deferred subscrip- holders'
compen- tions Treasury equity
sation receivable stock (deficit)
-------- -------- -------- ------------
Common stock subscribed at $.001 per share
July-November 1993 -- (6,277) -- --
Issued common stock at $.001 per share,
June 1994 -- -- -- 101
Issued and subscribed common stock at $.05
per share, August 1994 -- (750) -- 51,625
Payments of common stock subscriptions -- 6,809 -- 6,809
Issuance of warrants, September 1995 -- -- -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- -- 6,036,700
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- -- 2,442,304
Repurchase of common stock -- -- (324) (324)
Compensation related to grant of stock
options (144,000) -- -- 64,782
Amortization of deferred compensation 12,000 -- -- 12,000
Net loss -- -- -- (4,880,968)
-------- -------- -------- ------------
Balance at December 31, 1995 (132,000) (218) (324) 4,033,029
Issuance of warrants, April 1996 -- -- -- 139,000
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- -- 1,452,313
Amortization of deferred compensation 28,800 -- -- 28,800
Net loss -- -- -- (3,557,692)
-------- -------- -------- ------------
Balance at December 31, 1996 (103,200) (218) (324) 2,095,450
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- 10,613,184
Channel merger -- -- -- 657,900
Conversion of preferred to common stock -- -- -- --
Issuance of convertible preferred stock
warrants -- -- -- --
Issuance of warrants -- -- -- 159,202
Amortization of deferred compensation 28,800 -- -- 28,800
Imputed convertible preferred stock dividend -- -- -- (3,703,304)
Imputed convertible preferred stock dividend -- -- -- 3,703,304
Net loss -- -- -- (5,151,396)
-------- -------- -------- ------------
Balance at December 31, 1997 (74,400) (218) (324) 8,403,140
Conversion of preferred to common stock -- -- -- --
Cashless exercise of preferred warrants -- -- -- --
Exercise of options -- -- -- 52,500
Exercise of warrants -- -- -- 5,500
Expense related to grant of stock options -- -- -- 81,952
Amortization of deferred compensation 74,400 -- -- 74,400
Imputed convertible preferred stock dividend -- -- -- (1,628,251)
Imputed convertible preferred stock dividend -- -- -- 1,628,251
Net loss -- -- -- (2,753,528)
-------- -------- -------- ------------
Balance at December 31, 1998 -- (218) (324) 5,863,964
Conversion of preferred to common stock -- -- -- --
Preferred stock dividend -- -- -- (318)
Net loss -- -- -- (2,446,515)
-------- -------- -------- ------------
Balance at December 31, 1999 -- (218) (324) 3,417,131
Conversion of preferred to common stock -- -- -- --
Preferred stock dividend -- -- -- --
Cashless exercise of preferred warrants -- -- -- --
Exercise of options -- -- -- 344,598
Issuance of common stock to TeraComm shareholders -- -- -- 1,800,000
Expense related to grant of stock warrants -- -- -- 1,020,128
Issuance of Series B convertible preferred stock -- -- -- 976,288
Costs related to issuance of Series B preferred stock -- -- -- (147,800)
Repurchase of Series B convertible preferred stock -- -- -- (400,000)
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- (111,808)
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible preferred stock -- -- -- (600,000)
Net loss -- -- -- (5,802,478)
-------- -------- -------- ------------
Balance at December 31, 2000 -- (218) (324) 496,059
Conversion of preferred to common stock -- -- -- --
Preferred stock dividend -- -- -- (987)
Issuance of common stock as commitment shares -- -- -- 444,000
Issuance of common stock for services -- -- -- 44,100
Issuance of common stock pursuant to Fusion agreement -- -- -- 100,000
Issuance of common stock in private placement -- -- -- 1,839,961
Conversion of Series B convertible preferred stock
to common stock -- -- -- 120,000
Repurchase of Series B convertible preferred stock -- -- -- (137,067)
Compensation expense relating to stock warrants -- -- -- 78,611
Net loss -- -- -- (1,734,945)
-------- -------- -------- ------------
Balance at December 31, 2001 -- (218) (324) 1,249,732
======== ======== ======== ============
See accompanying notes to consolidated financial statements.
F-4
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
period from
July 13, 1993
Years ended December 31, (inception) to
----------------------------------------- December 31,
2001 2000 1999 2001
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (1,734,945) (5,802,478) (2,446,515) (26,327,522)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and development -- 1,800,000 -- 1,800,000
Expense relating to issuance of common stock and warrants 488,100 -- -- 786,302
Expense relating to the issuance of options -- -- -- 81,952
Expense related to Channel merger -- -- -- 657,900
Change in equity of affiliate 67,344 79,274 -- 146,618
Compensation expense relating to
stock options and warrants 78,611 1,020,128 -- 1,307,521
Discount on notes payable - bridge financing -- -- -- 300,000
Depreciation 66,226 76,095 113,771 572,731
Gain on sale of Optex assets (2,569,451) -- -- (2,569,451)
Distribution to Optex minority shareholders 837,274 -- -- 837,274
Loss on sale of Gemini assets 334,408 -- -- 334,408
Loss on disposal of furniture and equipment -- -- 73,387 73,387
Changes in assets and liabilities:
Decrease in accounts receivable 192,997 144,326 43,692 --
(Increase) decrease in prepaid expenses (15,994) (5,185) 24,694 (38,593)
Increase (decrease) in deferred revenue (1,294,615) 1,294,615 -- --
Increase (decrease) in accrued expenses (904,383) 243,079 (114,242) (118,545)
Increase (decrease) in accrued interest -- -- -- 172,305
Increase in other assets (19,937) (2,901) -- (22,838)
------------ ------------ ------------ ------------
Net cash used in operating activities (4,474,365) (1,153,047) (2,305,213) (22,006,551)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and equipment (108,250) (171,351) (62,917) (921,331)
Investment in affiliate -- (146,618) -- (146,618)
Proceeds from sale of Optex assets 3,000,000 -- -- 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100 6,100
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 2,891,750 (317,969) (56,817) 1,938,151
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- -- 5,500
Proceeds from exercise of stock options -- 344,598 -- 397,098
Proceeds from issuance of demand notes payable -- -- -- 2,395,000
Repayment of demand notes payable -- -- -- (125,000)
Proceeds from the issuance of notes payable - bridge financing -- -- -- 1,200,000
Proceeds from issuance of warrants -- -- -- 300,000
Repayment of notes payable - bridge financing -- -- -- (1,500,000)
Repurchase of common stock -- -- -- (324)
Preferred stock dividend paid (987) -- (318) (1,305)
Net proceeds from the issuance of common stock 1,939,961 -- -- 9,487,509
Proceeds from issuance of convertible preferred stock -- 828,488 -- 11,441,672
Repurchase of convertible preferred stock (617,067) (511,808) -- (1,128,875)
Distribution to Optex minority shareholders (811,114) -- -- (811,114)
------------ ------------ ------------ ------------
Net cash provided (used in) by financing activities 510,793 661,278 (318) 21,660,161
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents (1,071,822) (809,738) (2,362,348) 1,591,761
Cash and cash equivalents at beginning of period 2,663,583 3,473,321 5,835,669 --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,591,761 2,663,583 3,473,321 1,591,761
============ ============ ============ ============
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- -- 2,442,304
Cashless exercise of preferred warrants -- 19,811 -- 49,880
Conversion of preferred to common stock 423 1,011 313 2,849
Preferred stock dividend issued in shares 107,449 811,514 314,366 1,233,329
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Organization, Liquidity and Basis of Presentation
Organization
Atlantic Technology Ventures, Inc. (the Company) was incorporated on May
18, 1993, began operations on July 13, 1993, and is the majority owner of
two subsidiaries--Gemini Technologies, Inc. (Gemini), and Optex
Ophthalmologics, Inc. (Optex) and one wholly-owned subsidiary--Channel
Therapeutics, Inc. (Channel) (collectively, the Operating Companies).
Gemini (an 84.7%-owned subsidiary) was incorporated on May 18, 1993, to
exploit a new proprietary technology which combines 2'-5' oligoadenylate
(2-5A) with standard antisense compounds to alter the production of
disease-causing proteins. Pursuant to an asset purchase agreement dated
April 23, 2001, between Atlantic, Gemini Technologies, Inc., the
Cleveland Clinic Foundation, or "CCF," and CCF's affiliate IFN, Inc., on
May 4, 2001, Gemini sold to IFN substantially all its assets (mostly
intangible assets with no book value), including all those related to the
2-5A antisense enhancing technology for future contingent royalty
payments and withdrawal of arbitration.
Optex (an 81.2%-owned subsidiary) was incorporated on October 19, 1993,
to develop its principal product, a novel cataract-removal device. On
March 2, 2001, the Company concluded the sale of substantially all of
Optex's assets to Bausch & Lomb, Inc. (see note 13).
Channel was incorporated on May 18, 1993, to develop pharmaceutical
products in the fields of cardiovascular disease, pain and inflammatory
disorders. Prior to 1997, Channel was an 88%-owned subsidiary. The
Company purchased the remaining 12% of Channel in 1997 for $657,900
through the issuance of common stock (see note 8). Channel ceased
operations during 1999. The Company also holds a 14.4% ownership in a
fiber optic switching company, TeraComm Research, Inc. (see note 5).
The Company and each of its operating companies are in the development
stage, devoting substantially all efforts to obtaining financing and
performing research and development activities.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Liquidity
The Company has reported net losses of $1,734,945, $5,802,478, and
$2,446,515 for the years ended December 31, 2001, 2000 and 1999,
respectively. The loss from date of inception, July 13, 1993, to December
31, 2001 amounts to $26,327,522. Also, the Company has $1,591,761 in cash
and cash equivalents as of December 31, 2001 which is primarily a result
of a private placement of its common stock in December 2001 and currently
has no revenue generating activities. The Company anticipates that its
current resources (including the $2 million proceeds of the first closing
of the Company's recent private placement in December 2001) will be
sufficient to finance for the next several months its currently
anticipated needs for operating and capital expenditures. The Company
plans to achieve this by continuing to reduce expenses, including by
means of voluntary salary reductions and postponement of certain
development expenses. As a result of these changes the Company expects
that its average monthly cash outlay will be approximately $129,000. The
Company does not currently have any committed sources of financing, and
due to the trading price of its common stock it is not currently able to
access funding under its agreement with Fusion Capital. These factors
F-6
raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the
amounts or classification of liabilities which might result from the
outcome of this uncertainty.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and
debt financing, collaborative agreements, strategic alliances and its
ability to realize the full potential of its technology in development.
During December 2001, the Company received net proceeds of approximately
$1,848,000 from the private placement of various individual investors and
$100,000 from Fusion Capital. Additional funds are currently not
available on acceptable terms and may not become available, and there can
be no assurance that any additional funding that the Company does obtain
will be sufficient to meet the Company's needs in the short and long
term. To date, a significant portion of the Company's financing has been
through private placements of common stock and warrants, the issuance of
common stock for stock options and warrants exercised and debt financing.
Until the Company's operations generate significant revenues, the Company
will continue to fund operations from cash on hand and through the
sources of capital previously described.
The Company's common stock was delisted from the Nasdaq SmallCap Market
effective at the close of business August 23, 2001 for failing to meet
the minimum bid price requirements set forth in the NASD Marketplace
Rules. As of August 23, 2001, the Company's common stock trades on the
Over-The-Counter Bulletin Board under the symbol "ATLC.OB". Delisting of
the Company's common stock from Nasdaq could have a material adverse
effect on its ability to raise additional capital, its stockholders'
liquidity and the price of its common stock.
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS)
No. 7, "Accounting and Reporting by Development Stage Enterprises," which
requires development stage enterprises to employ the same accounting
principles as operating companies.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
F-7
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
principally using straight-line methods over their useful lives,
generally five years, except for leasehold improvements which are
depreciated over the lesser of five years or the term of the lease.
Research and Development
All research and development costs are expensed as incurred and include
costs of consultants who conduct research and development on behalf of
the Company and the Operating Companies. Costs related to the acquisition
of technology rights and patents for which development work is still in
process, are expensed as incurred and considered a component of research
and development costs.
Revenue Recognition
Revenue under research contracts is recorded as earned under the
contracts as services are provided. In accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," revenues from the achievement of research and development
milestones, which represent the achievement of a significant step in the
research and development process, will be recognized when and if the
milestones are achieved. Continuation of certain contracts and grants are
dependent upon the Company achieving specific contractual milestones;
however, none of the payments received to date are refundable regardless
of the outcome of the project. Grant revenue is recognized in accordance
with the terms of the grant and as services are performed, and generally
equals the related research and development expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities, and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income," the
Company applies the rules for the reporting and display of comprehensive
income and its components. The net loss is equal to the comprehensive
loss for all periods presented.
F-8
Computation of Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common
shares outstanding for the period. Diluted net loss per common share is
the same as basic net loss per common share, as common equivalent shares
from stock options, stock warrants, stock subscriptions, and convertible
preferred stock would have an antidilutive effect because the Company
incurred a net loss during each period presented. The amount of common
stock equivalents excluded from the calculation were 12,973,106,
3,277,625 and 6,600,165 in 2001, 2000 and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25," issued in March 2000, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS No.
123.
Options or stock awards issued to non-employees and consultants are
recorded at their fair value as determined in accordance with SFAS No.
123 and EITF No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" and recognized as expense over the related
vesting period.
Financial Instruments and Derivatives
At December 31, 2001 and 2000, the fair values of cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and
accrued expenses, and deferred revenue approximate carrying values due to
the short-term nature of these instruments.
On January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging
F-9
Activities--an amendment of SFAS No. 133" and SFAS No. 133, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." SFAS
No. 138 amends the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and certain hedging activities. SFAS No.
133 requires a company to recognize all derivative instruments as assets
and liabilities in its balance sheet and measure them at fair value. The
adoption of these statements had no impact on the Company's consolidated
financial position, results of operations or cash flows, as the Company
is currently not party to any derivative instruments. Any future
transactions involving derivative instruments will be accounted for based
on SFAS No. 133 and 138.
(3) Recently Issued Accounting Standards
In July 2001, the FASB issued SFAS No. 141 "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations be accounted for under a single
method--the purchase method. SFAS No. 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment.
The amortization of goodwill ceases upon adoption of the Statement, which
for calendar year-end companies, will be January 1, 2002. SFAS No. 142
has no financial impact on the Company since the Company does not have
any goodwill or intangible assets which resulted from any previous
business combinations.
(4) Property and Equipment
Property and equipment consists of the following at December 31,:
2001 2000
-------------- --------------
Furniture and equipment $ 125,366 440,493
Leasehold improvements 28,635 83,861
-------------- --------------
154,001 524,354
Less accumulated depreciation (48,848) (297,266)
-------------- --------------
Net property and equipment $ 105,153 227,088
============== ==============
(5) Investment in Affiliate
On May 12, 2000, the Company acquired shares of preferred stock
representing a 35% ownership interest in TeraComm Research, Inc.
(TeraComm), a privately-held company that is developing next-generation
high-speed fiberoptic communications technologies. The purchase price for
this ownership interest was $5,000,000 in cash, 200,000 shares of the
Company's common stock, and a warrant to purchase a further 200,000
shares of the Company's common stock. The warrants have a term of 3 years
and are exercisable at $8.975 per share of common stock, but only if the
market price of the Company's common stock is $30 or more. Of the
$5,000,000 cash portion of the purchase price, the Company paid
$1,000,000 in 2000. The Company was accounting for its investment in
TeraComm in accordance with the equity method of accounting for
investments since the Company has the ability to
F-10
exert significant influence over TeraComm, primarily through its
representation on TeraComm's board of directors.
On July 18, 2000, the Company and TeraComm amended the purchase
agreement. In the amendment, the parties agreed that the $4,000,000
balance of the $5,000,000 cash component of the purchase price would not
be due until TeraComm achieved a specified milestone. Within ten days
after TeraComm achieved that milestone or December 30, 2000, whichever
occurred earlier, the Company was required to pay TeraComm $1,000,000 and
thereafter make to TeraComm three payments of $1,000,000 at the
three-month intervals. If the Company failed to make any of these
payments, TeraComm's only recourse would be reducing proportionately the
Company's ownership interest. When the Company failed to make the first
$1,000,000 payment by midnight at the end of December 30, 2000, the
Company was deemed to have surrendered to TeraComm a proportion of the
Company's TeraComm shares equal to the proportion of the dollar value of
the purchase price for the Company's TeraComm shares ($6,795,000) that
was represented by the unpaid $4,000,000 of the cash portion of the
purchase price. This had the effect of reducing to 14.4% the Company's
ownership interest in TeraComm. The Company is accounting for its
investment in TeraComm in accordance with the equity method of accounting
for investments. However, the Company continues to hold a seat on
TeraComm's board of directors, and continues to have the ability to exert
significant influence through its involvement with TeraComm management.
Upon acquiring an interest in TeraComm, the Company allocated a portion
of the purchase price based on the fair value of the identifiable
tangible assets acquired and liabilities assumed. At the time of
acquisition, such assets and liabilities were minimal. TeraComm had no
other intangible assets beyond the technology then under development -- a
high-speed fiber-optic switch. This technology at the date of
acquisition, was not commercially viable, did not then have any
identifiable revenue stream and did not have any alternate future use.
This high-speed fiber-optic switch is TeraComm's only subscribable
technology. TeraComm is a very early-stage development company with no
identifiable revenue sources, therefore the excess of the purchase price
over the sum of the amounts assigned to identifiable assets acquired less
liabilities assumed is not considered to represent "goodwill". The
Company's acquisition of the interest in TeraComm was based solely on the
value of the future commercialized products and therefore the excess of
the purchase price as described above was attributed to the research and
development activities of TeraComm.
As such, of the $1,000,000 cash and common stock and common stock
warrants valued at $1,800,000 currently invested in TeraComm, the Company
has expensed approximately $2,650,000 as acquired in-process research and
development, as TeraComm's product development activity is in the very
early stages. The Company's share of TeraComm's net equity at December
31, 2000 was $67,344. During 2001, the entire value of the investment was
written down to zero due to TeraComm's additional losses. The Company is
under no obligation to provide further funding to TeraComm.
At December 31, 2001, all 200,000 of the warrants described above are
outstanding.
F-11
(6) Demand Notes Payable to Related Parties
Demand notes payable at December 31, 1994 consisted of advances from one
of the founders of the Company, who served as a director and was, at that
time, the controlling shareholder of the Company (Controlling
Shareholder), totaling $485,000, advances from a partnership including
certain family members of the Controlling Shareholder (the Partnership)
totaling $400,000, and advances under a line of credit agreement with the
Controlling Shareholder totaling $500,000. All unpaid principal and
accrued interest through June 30, 1995, including a note payable of
$1,010,000 issued in 1995, was converted into 785,234 shares of common
stock of the Company upon the consummation of the initial public offering
(IPO).
Demand notes payable at December 31, 1995 totaling $125,000 consisted of
a loan provided to the Company by the Partnership in July 1995. This loan
had an interest rate of 10% annually. Terms of the loan required the
Company to repay the principal amount of such loan, together with the
interest accrued thereon, with a portion of the proceeds received by the
Company in the IPO. This loan and the related accrued interest was fully
repaid in January 1996.
(7) Notes Payable - Bridge Financing
On September 12, 1995, the Company closed the sale of thirty units with
each unit consisting of an unsecured 10% promissory note of the Company
in the principal amount of $50,000 and 50,000 warrants, each exercisable
to purchase one share of common stock of the Company at an initial
exercise price of $1.50 per share. The total proceeds received of
$1,500,000 were allocated to the notes payable and warrants based on the
estimated fair value as determined by the Board of Directors of the
Company of $1,200,000 and $300,000, respectively. The warrants were
reflected as additional paid-in capital.
Proceeds from the IPO were used to pay these notes payable, with $75,000
remaining unpaid at December 31, 1995. This remaining obligation was paid
in January 1996.
(8) Stockholders' Equity
Common Stock
In 1993, the Company received common stock subscriptions for 5,231 shares
of common stock from various individuals, including the Controlling
Shareholder and the Partnership, in exchange for common stock
subscriptions receivable of $6,277. In December 1994, the Company issued
2,606 shares of common stock upon receipt of payment of $3,127
representing a portion of these common stock subscriptions receivable.
In June 1994, the Company received common stock subscriptions for 84
shares of common stock from various individuals including directors and
employees. Payment of the related common stock subscriptions receivable
in the amount of $101 was received in December 1994 which resulted in the
issuance of 84 shares of common stock.
F-12
In August 1994, the Company received common stock subscriptions for 872
shares of common stock from certain investors. Payment of the related
common stock subscriptions receivable in the amount of $33,000 and
$18,625 was received in August 1994 and December 1994, respectively,
which resulted in the issuance of 860 shares of common stock.
In March 1995, June 1995, and August 1995, the Company repurchased 62,
20, and 187 shares of common stock, respectively, for an aggregate total
of $324.
In March 1995, May 1995, and June 1995, the Company issued 2,170, 125,
and 160 shares of common stock, respectively, upon receipt of payment of
$3,682 representing subscriptions receivable.
In December 1995, the Company issued 1,872,750 shares of common stock
through a public offering, resulting in net proceeds, after deducting
applicable expenses, of $6,036,700. Concurrent with this offering,
785,234 shares of common stock were issued upon the conversion of certain
demand notes payable and accrued interest totaling $2,442,304 (see note
6).
In August 1996, the Company sold in a private placement 250,000 shares of
common stock to certain investors resulting in net proceeds of
$1,452,313. In connection with this private placement, the Company paid
Paramount Capital, Inc. (Paramount) a finders fee of $76,438 and issued
an employee of Paramount a warrant to purchase 12,500 shares of the
Company's common stock at $6.73 per share, which expires August 16, 2001.
Paramount is owned by the Controlling Shareholder.
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Channel, and New Channel, Inc., a Delaware corporation, dated
February 20, 1997, all of the stockholders of Channel (except for the
Company) agreed to receive an aggregate of 103,200 shares of common stock
of the Company in exchange for their shares of common stock, par values
$0.001 per share, of Channel. On February 20, 1997, Channel became a
wholly-owned subsidiary of the Company. Subsequent to this transaction,
Channel issued a dividend to the Company consisting of all of Channel's
rights to the CT-3 technology, which is in the field of pain and
inflammation. On May 16, 1997, the Company issued 103,200 shares of
common stock of the Company to stockholders of Channel. In connection
with the issuance of these shares, the Company recognized an expense in
the amount of $657,900. This expense was recorded as research and
development expense in the consolidated statement of operations for the
year ended December 31, 1997.
In May 2000, the Company issued 200,000 shares of common stock to
shareholders of TeraComm (see note 5).
On May 7, 2001, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion
Capital agreed to purchase up to $6.0 million of the Company's common
stock over a 30-month period, subject to a 6-month extension or earlier
termination at the Company's discretion. This agreement replaced an
earlier common stock purchase agreement between the Company and Fusion
Capital dated March 16, 2001. Fusion's obligation to purchase shares of
the Company's common stock is subject to certain conditions, including
the effectiveness of a registration statement covering the shares to be
purchased. That registration statement was declared effective
F-13
on July 6, 2001. The selling price of the shares will be equal to the
lesser of (1) $20.00 or (2) a price based upon the future market price of
the common stock, without any fixed discount to the market price. A
material contingency that may affect the Company's operating plans and
ability to raise funds under this agreement is the Company's stock price.
Currently, the Company's stock price is below the floor price of $0.68
specified in the Fusion Capital agreement and as a result the Company is
currently unable to draw funds pursuant to the Fusion Capital agreement.
As the Fusion Capital agreement is currently structured, the Company
cannot guarantee that it will be able to draw any funds. The Company paid
a $120,000 finder's fee relating to this transaction to Gardner
Resources, Ltd. and issued to Fusion Capital Fund II, LLC 600,000 common
shares as a commitment fee. Those shares had an estimated fair value of
$444,000 which was recorded as a general and administrative expense as
there is no assurance that Fusion will ever provide financing to the
Company. The Company has amended its agreement with Fusion Capital to
allow Atlantic to draw funds pursuant to the agreement regardless of its
listing status on the Nasdaq SmallCap Market, but the $0.68 floor price
remains in place. On November 30, 2001, Fusion Capital waived the $0.68
floor price specified in the purchase agreement and purchased from the
Company under the agreement 416,667 shares of the Company's common stock
at a price of $0.24, representing an aggregate purchase price of
$100,000. Fusion Capital's waiver applied only to the November 30, 2001
purchase, so the $0.68 floor price remains an obstacle to the Company's
obtaining additional financing from Fusion Capital unless the Company's
stock price increases or Fusion Capital elects in the future to again
waive the floor price.
On August 1, 2001, the Company agreed to issue 35,000 shares of its
common stock to each of BH Capital Investments, L.P. and Excalibur
Limited Partnership in return for their commitment to provide the Company
with $3.5 million of financing in connection with an asset purchase for
which the Company had submitted a bid. The Company subsequently issued
those shares, but the Company did not ultimately purchase those assets.
Those shares had an estimated fair value of $44,100, which is included as
a general and administrative expense for the year ended December 31,
2001.
On November 6, 2001, the Company entered into an agreement with Joseph
Stevens & Company, Inc. in which Joseph Stevens agreed to act as
placement agent for a private placement of shares of the Company's common
stock. In that private placement, the price of each share of the
Company's common stock was $0.24 and the minimum and maximum subscription
amounts were $2,000,000 and $3,000,000, respectively. In addition, each
investor received a warrant to purchase one share of the Company's common
stock for every share of the Company's common stock purchased by that
investor. The warrants have an exercise price of $0.29 and are
exercisable for five years from the closing date. On December 3, 2001,
the Company issued to certain investors an aggregate of 8,333,318 shares
of common stock for the minimum subscription of $2,000,000. In connection
with the private placement, the Company paid Joseph Stevens a placement
fee of $140,000 equal to 7% of the aggregate subscription amount plus a
warrant to purchase 833,331 shares of the Company's common stock, which
represented 10% of the number of shares issued to the investors. The term
of this warrant is five years and the per share exercise price is $0.29.
In conjunction with this private placement, the Company received net
proceeds of approximately $1,848,000 in December 2001.
F-14
Convertible Preferred Stock
Series A Preferred Stock
In May and August, 1997, the Company sold in a private placement
1,237,200 shares of Series A convertible preferred stock to certain
investors resulting in net proceeds of $10,613,184.
Prior to August 7, 1998 (the Reset Date), each share of Series A
preferred stock was convertible into 2.12 shares of common stock
initially at a conversion price of $4.72 per share of common stock.
Pursuant to the Certificate of Designations for the Series A preferred
stock, the conversion price was adjusted on the Reset Date such that now
each share is convertible into 3.27 shares of common stock at a
conversion price of $3.06. This conversion price is subject to adjustment
upon the occurrence of certain events, including the issuance of common
stock at a per share price less than the conversion price, or the
occurrence of a merger, reorganization, consolidation, reclassification,
stock dividend or stock split which will result in an increase or
decrease in the number of common stock shares outstanding. The Company is
in the process of determining changes to the conversion rate of the
Series A preferred stock required by recent issuances of stock and
warrants, including in connection with the Company's recent private
placement. Certain of these changes will be retroactive and therefore the
Company expects that it will be issuing approximately 1,262 make-up
shares of common stock to certain former Series A preferred stock holders
as of December 31, 2001.
Holders of Series A preferred stock will be entitled to receive
dividends, as, when, and if declared by the Board of Directors.
Commencing on the Reset Date, the holders of the Series A preferred stock
are entitled to payment-in-kind dividends, payable semi-annually in
arrears, on their respective shares of Series A preferred stock at the
annual rate of 0.13 shares of Series A preferred stock for each
outstanding share of Series A preferred stock. The Company did not make
the February 7, 1999 dividend payment. On August 9, 1999, the Company
issued a payment-in-kind dividend of 0.13325 of a share of Series A
preferred stock for each share of Series A preferred stock held as of the
record date of August 2, 1999, amounting to an aggregate of 73,219
shares. This dividend included the dividend payment of 0.065 of a share
of Series A preferred stock for each share of Series A preferred stock
held which had not been made on February 7, 1999, and the portion of the
dividend payment due August 9, 1999, was increased from 0.065 of a share
to 0.06825 of a share to reflect non-payment of the February 7, 1999
dividend. In February and August 2001 and 2000, the Company issued the
respective payment-in-kind dividends based on the holders as of the
record date. The estimated fair value of these dividends in the aggregate
of $107,449, $811,514 and $314,366 were included in the Company's
calculation of net loss per common share for 2001, 2000 and 1999.
The holders of shares of Series A preferred stock have the right at all
meetings of stockholders of the Company to that number of votes equal to
the number of shares of common stock issuable upon conversion of the
Series A preferred stock at the record or vote date for determination of
the stockholders entitled to vote on such matters.
In connection with the issuance of the Series A preferred stock, the
Company recognized $1,628,251 and $3,703,304 in 1998 and 1997,
respectively, as an imputed preferred stock dividend in the
F-15
calculation of net loss per common share to record the difference between
the conversion price of the preferred stock and the market price of the
common stock on the effective date of the private placement.
Upon liquidation, the holders of shares of Series A preferred stock then
outstanding will first be entitled to receive, pro rata, and in
preference to the holders of common stock, Series B preferred stock and
any capital stock of the Company, an amount per share equal to $13.00
plus any accrued but unpaid dividends, if any.
The Certificate of Designations of Series A preferred stock provides that
the Company may not issue securities that have superior rights to Series
A preferred stock without the consent of the holders of Series A
preferred stock. Accordingly, so long as these convertible securities
remain unexercised and shares of Series A preferred stock remain
uncovered, the terms under which the Company could obtain additional
funding, if at all, may be adversely affected.
Redeemable Series B Preferred Stock
On September 28, 2000, pursuant to a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement") the Company issued
to BH Capital Investments, L.P. and Excalibur Limited Partnership
(together, the "Investors") for a purchase price of $2,000,000, 689,656
shares of the Company's Series B convertible preferred stock and warrants
to purchase 134,000 shares of the Company's common stock. Half of the
shares of the Series B preferred stock (344,828 shares) and warrants to
purchase half of the shares of common stock (67,000 shares) were held in
escrow, along with half of the purchase price.
On December 4, 2000, the Company and the Investors entered into a stock
repurchase agreement (the "Repurchase Agreement") pursuant to which the
Company repurchased from the investors 137,930 of the outstanding shares
and agreed to the release from escrow to the Investors of the $1,000,000
purchase price of the 344,828 shares of Series B preferred stock held in
escrow. The Company also allowed the Investors to keep all of the
warrants issued under the purchase agreement including those released
from escrow and warrants for an additional 20,000 shares of the Company's
common stock at the same exercise price. In addition, the Company was
required to pay the legal expenses of the Investors, totaling $11,807.
The carrying amount of the 137,930 shares repurchased is equal to
$400,000; therefore, the amount paid in excess of the carrying amount
plus the value of the warrants given to the Investors, totaling $233,757,
was recorded as a dividend upon repurchase of Series B preferred stock
shares and deducted from net loss to arrive at net loss applicable to
common shares for the year ended December 31, 2000.
Pursuant to a second amendment to the purchase agreement, executed on
January 9, 2001, the fixed exercise price of the warrants was lowered
from $3.19, the fixed exercise price upon their issuance, to $1.00, the
market price of the Company's common stock at the time of the
renegotiations. Each warrant may be exercised any time during the five
years from the date of granting. The warrants may not be exercised if
doing so would result in the Company's issuing a number of shares of
common stock in excess of the limit imposed by the rules of the Nasdaq
SmallCap Market.
F-16
Pursuant to the Company's subsequent renegotiations with the Investors,
the Company was required, among other things, to redeem on March 28,
2002, all outstanding shares of Series B preferred stock for (A) 125% of
the original issue price per share or (B) the market price of the shares
of common stock into which they are convertible, whichever is greater
(the "Redemption Price"). The Company would have been able to at any time
redeem all outstanding shares of Series B preferred stock at the
Redemption Price. As a result of the renegotiations discussed in this
paragraph, the Series B preferred stock was considered redeemable and the
remaining outstanding shares at December 31, 2000 were classified outside
of permanent equity in the accompanying consolidated balance sheet. At
December 31, 2000, of the shares of Series B preferred stock issued to
the Investors, there were 206,898 shares outstanding at a carrying amount
of $2.90 per share.
Holders of shares of the Company's outstanding Series B preferred stock
could convert each share into shares of common stock without paying the
Company any cash. The conversion price per share of the Series B
preferred stock was also amended by the second amendment to the Purchase
Agreement. The conversion price per share of Series B preferred stock on
any given day is the lower of (1) $1.00 or (2) 90% of the average of the
two lowest closing bid prices on the principal market of the common stock
out of the fifteen trading days immediately prior to conversion. The
change in conversion price upon the renegotiations on January 9, 2001
resulted in a difference between the conversion price of the Series B
preferred stock and the market price of the common stock on the effective
date of the renegotiation. This amount, estimated at $600,000, was
recorded as an imputed preferred stock dividend within equity and is
deducted from net loss to arrive at net loss applicable to common shares
during the year ended December 31, 2001.
On January 19, 2001, 41,380 shares of Series B preferred stock were
converted by the Investors into 236,422 shares of the Company's common
stock. On March 9, 2001, the Company and the Investors entered into a
second stock repurchase agreement pursuant to which the Company
repurchased from the Investors, for an aggregate purchase price of
$617,067, all 165,518 shares of the Company's Series B preferred stock
held by the Investors on March 9, 2001. The carrying amount of the
165,518 shares is equal to $480,000; therefore the amount in excess of
the carrying amount, plus the estimated fair value of the warrants
retained by the Investors, which equals $167,127, was recorded as a
dividend upon repurchase of shares of Series B preferred stock and is
deducted from net loss to arrive at net loss applicable to common shares.
At December 31, 2001, all 154,000 of the warrants described above are
outstanding.
(9) Stock Options
In August 1995, in connection with a severance agreement entered into
between the Company and a former CEO, the Company granted options (not
pursuant to the 1995 Stock Option Plan) to purchase 23,557 shares of
common stock at an exercise price of $1.00 per share with immediate
vesting. Total compensation expense recorded at the date of grant with
regards to those options was $64,782 with the offset recorded as
additional paid-in capital.
F-17
Stock Option Plan
In July 1995, the Company established the 1995 Stock Option Plan (the
Plan), which provided for the granting of up to 650,000 options to
officers, directors, employees and consultants for the purchase of stock.
In July 1996, the Plan was amended to increase the total number of shares
authorized for issuance by 300,000 shares to a total of 950,000 shares
and beginning with the 1997 calendar year, by an amount equal to one
percent (1%) of the shares of common stock outstanding on December 31 of
the immediately preceding calendar year. At December 31, 2001 and 2000,
1,164,198 and 1,102,977 shares were authorized for issuance. The options
have a maximum term of 10 years and vest over a period determined by the
Company's Board of Directors (generally 4 years).
The Company applies APB Opinion No. 25 in accounting for its Plan.
Accordingly, compensation cost has been recognized for stock options
granted to employees and directors only to the extent that the quoted
market price of the Company's stock at the date of grant exceeded the
exercise price of the option.
During 1995, the Company granted options to purchase 246,598 shares of
the Company's common stock at exercise prices below the quoted market
prices of its common stock. Deferred compensation expense in the amount
of $144,000 was recorded at the date of grant with the offset recorded as
an increase to additional paid-in capital. Compensation expense in the
amount of $74,400, $28,800, $28,800 and $12,000 was recognized in 1998,
1997, 1996, and 1995, respectively.
In November 1997, the Company granted options to purchase 24,000 shares
of the Company's common stock at $9.50 per share to Investor Relations
Group (Investor). These options expire November 10, 2002. The Company
recognized expense of $81,952, which is included in general and
administrative expense in the consolidated statement of operations for
the year ended December 31, 1998. The expense represents the estimated
fair market value of the options, in accordance with SFAS No. 123.
During 2001, the Company granted employees and directors an aggregate of
404,000 Plan options and 275,000 options outside of the Plan, of which
70,000 options have been cancelled as a result of termination of the
employment of certain employees. All stock options granted during 2001,
2000 and 1999 were granted at the quoted market price on the date of
grant.
Had compensation costs been determined in accordance with the fair value
method prescribed by SFAS No. 123, the Company's net loss applicable to
common shares and net loss per common share (basic and diluted) for plan
options would have been increased to the pro forma amounts indicated
below:
F-18
2001 2000 1999
--------------- --------------- ---------------
Net loss applicable to common shares:
As reported $ 2,609,521 6,847,749 2,760,881
Pro forma 3,332,557 8,190,926 3,623,177
Net loss per common share - basic and diluted:
As reported 0.36 1.21 0.59
Pro forma 0.46 1.45 0.77
The fair value of each option granted is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions used for the grants in 2001, 2000 and 1999: dividend yield of
0%; expected volatility of 110% for 2001 and 94% for 2000 and 1999;
risk-free interest rate of 4.5% for 2001 and 6.5% for 2000 and 1999; and
expected lives of eight years for each year presented.
A summary of the status of the Company's stock options as of December 31,
2001, 2000 and 1999 and changes during the years then ended is presented
below:
F-19
Weighted Weighted Weighted
average average average
2001 exercise 2000 exercise 1999 exercise
shares price shares price shares price
------------- ------------ ------------ ----------- ------------ -----------
At the beginning
of the year 804,200 $ 3.73 396,200 $ 3.25 837,798 $ 5.06
Granted 679,000 0.88 582,000 4.10 221,000 1.39
Exercised -- -- (14,000) 2.56 -- --
Cancelled (170,000) 2.44 (160,000) 3.97 (662,598) 4.93
------------- ------------ ------------ ----------- ------------ -----------
At the end of
the year 1,313,200 $ 2.40 804,200 $ 3.73 396,200 $ 3.25
============ =========== ===========
Options exercisable
at year-end 680,617 354,478 211,869
============= ============ ============
Weighted-average
fair value of
options granted
during the year $ 0.71 $ 4.05 $ 1.20
============= ============ ============
F-20
The following table summarizes the information about Plan stock options
outstanding at December 31, 2001:
Remaining Number of
Exercise Number contractual options
price outstanding life exercisable
------------ ---------------- ---------------- ---------------
0.610 4,000 9.61 years --
0.875 575,000 9.15 years 218,750
1.033 30,000 9.03 years 7,500
1.313 50,000 7.61 years 37,500
1.375 20,000 7.41 years 13,334
1.500 75,000 7.81 years 75,000
1.750 6,000 7.73 years 6,000
2.313 2,000 6.66 years 2,000
3.188 54,000 8.75 years 54,000
3.250 10,000 6.61 years 10,000
4.188 448,000 8.28 years 224,000
6.094 10,000 8.22 years 3,333
6.813 1,200 1.19 years 1,200
7.000 2,000 5.46 years 2,000
7.500 2,000 4.56 years 2,000
9.500 24,000 0.86 years 24,000
---------------- ---------------
1,313,200 680,617
================ ===============
(10) Stock Warrants
In connection with notes payable - bridge financing, the Company issued
warrants to purchase 1,500,000 shares of common stock at an initial
exercise price of $1.50 per share; subject to an upward adjustment upon
consummation of the IPO. Simultaneously with the consummation of the IPO,
these warrants were converted into redeemable warrants at an exercise
price of $5.50 per share on a one-for-one basis (see note 7). These
redeemable warrants expired unexercised on December 13, 2000.
As of December 14, 1996, the redeemable warrants are subject to
redemption by the Company at a redemption price of $0.05 per redeemable
warrant on 30 days prior written notice, provided that the average
closing bid price of the common stock as reported on Nasdaq equals or
exceeds $8.25 per share, subject to adjustment, for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of notice of the redemption.
F-21
In December 1995, in connection with the IPO, the Company issued
redeemable warrants to purchase 1,872,750 shares of common stock at an
exercise price of $5.50 per share. The remainder of these redeemable
warrants expired unexercised on December 13, 2000. Commencing December
14, 1996, these redeemable warrants are subject to redemption by the
Company at its option, at a redemption price of $.05 per warrant provided
that the average closing bid price of the common stock equals or exceeds
$8.25 per share for a specified period of time, and the Company has
obtained the required approvals from the Underwriters of the Company's
IPO. In January 1998, 1,000 warrants were exercised.
In connection with the IPO, the Company granted to Joseph Stevens & Co.,
L.P. (the Underwriter) warrants to purchase from the Company 165,000
units, each unit consisting of one share of common stock and one
redeemable warrant at an initial exercise price of $6.60 per unit. Such
warrants are exercisable during the four-year period commencing December
13, 1996. The redeemable warrants issuable upon exercise of these
warrants have an exercise price of $6.05 per share. As long as the
warrants remain unexercised, the terms under which the Company could
obtain additional capital may be adversely affected. These redeemable
warrants expired unexercised on December 13, 2000.
The Company entered into an agreement with Paramount effective April 15,
1996 pursuant to which Paramount will, on a non-exclusive basis, render
financial advisory services to the Company. Two warrants exercisable for
shares of the Company's common stock were issued to Paramount in
connection with this agreement. These included a warrant to purchase
25,000 shares of the Company's common stock at $10 per share, which
warrant expired unexercised on April 16, 2001 and a warrant to purchase
25,000 shares of the Company's common stock at $8.05 per share, which
warrant expired unexercised on June 16, 2001. In connection with the
issuance of these warrants, the Company recognized an expense in the
amount of $139,000 for the fair value of the warrants. This expense was
recorded as general and administrative in the consolidated statement of
operations for the year ended December 31, 1996.
In connection with the Channel merger discussed in note 8, the Company
issued a warrant to a director of the Company to purchase 37,500 shares
of the Company's common stock at $5.33 per share, which warrant expires
on July 14, 2006. The Company recognized expense of $48,562 for the fair
value of the warrants which was recorded as a research and development
expense in the consolidated statement of operations for the year ended
December 31, 1997.
The Company entered into an agreement with an investor pursuant to which
the investor will render investor relations and corporate communication
services to the Company. A warrant to purchase 24,000 shares of the
Company's common stock at $7.00 per share, which warrant expired
unexercised on November 22, 2001, was issued in 1996. The Company
recognized expense of $110,640 for the fair value of the warrants, which
was recorded as a general and administrative expense in the consolidated
statements of operations for the year ended December 31, 1997.
Concurrent with the private placement offering of Series A preferred
stock in 1997, the Company issued 123,720 warrants to designees of
Paramount, the placement agent. These warrants are initially exercisable
at a price equal to $11.00 per share and may be exercised at any time
during the 10-year
F-22
period commenced February 17, 1998. The rights, preferences and
privileges of the shares of Series A preferred stock issuable upon
exercise of these warrants are identical to those offered to the
participants in the private placement. The warrants contain anti-dilution
provisions providing for adjustment of the number of securities
underlying the Series A preferred stock issuable upon exercise of the
warrants and the exercise price of the warrants under certain
circumstances. The warrants are not redeemable and will remain
outstanding, to the extent not exercised, notwithstanding any mandatory
redemption or conversion of the Series A preferred stock underlying the
warrants. In accordance with SFAS No. 123, the Company determined the
fair value of the warrants using the Black-Scholes Model and allocated
this value of $570,143, to convertible preferred stock warrants with a
corresponding reduction in additional paid-in capital. In April 2000 and
June 1998, 4,799 and 6,525 warrants, respectively, were exercised via a
cashless method for 6,955 and 2,010 shares of Series A preferred stock,
respectively.
On January 4, 2000, the Company entered into a Financial Advisory and
Consulting Agreement with the Underwriters. In this agreement, the
Company engaged the Underwriters to provide investment-banking services
for one year commencing January 4, 2000. As partial compensation for the
services to be rendered by the Underwriters, the Company issued the
Underwriters three warrants to purchase an aggregate of 450,000 shares of
its common stock. The exercise price ranges between $2.50 and $4.50 and
the exercise period of each warrant is at various times through 2007. In
addition, each warrant may only be exercised when the market price per
share of common stock is at least $1.00 greater than the exercise price
of that warrant. In connection with the issuance of the warrants, the
Company and the Underwriters entered into a letter agreement granting
registration rights in respect of the shares of common stock issuable
upon exercise of the warrants. In accordance with EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" and other relative accounting literature, the Company recorded
the estimated fair value of the warrants of $1,020,128, which represents
a general and administrative expense, as compensation expense relating to
stock options and warrants over the vesting period through January 4,
2001.
On March 8, 2001, the Company entered into an agreement with The Investor
Relations Group, Inc., or "IRG," under which IRG will provide the Company
investor relations services. Pursuant to this agreement, the Company
issued to Dian Griesel of IRG warrants to purchase 120,000 shares of its
common stock. The term of the warrants is five years and the exercise
price of the warrants is $0.875, and they will vest in 5,000 share
monthly increments over a 24 month period. In addition, should the
Company's stock price reach $2.50, the Company will grant Ms. Griesel an
additional 50,000 warrants. Should the Company's stock price reach $5.00,
the Company will grant Ms. Griesel a further 50,000 warrants. As a
result, the Company recorded compensation expense relating to these stock
warrants of $33,256 for the year ended December 31, 2001 and will
remeasure the compensation expense at the end of each reporting period
until the final measurement date is reached in 14 months.
On August 9, 2001, the Company entered into an agreement with Proteus
Capital Corp in which Proteus agreed to assist the Company with raising
additional funds. Pursuant to this agreement, the Company granted Proteus
warrants to purchase 100,000 shares of the Company's common stock at
$0.59 per share, which was the average closing stock price for the two
weeks ended August 17, 2001. The warrants were fully vested on the date
of the agreement and were outstanding at December 31, 2001. The term of
the warrants is five years. As a result, the Company recorded
compensation expense relating to these stock warrants of $45,355 for the
year ending December 31, 2001.
F-23
(11) Related-Party Transactions
During 1999, the Company entered into consulting agreements with certain
members of its Board of Directors. Prior to 1999, the Company had several
consulting agreements with directors of the Company. These agreements,
all of which have been terminated, required either monthly consulting
fees or project-based fees. No additional agreements were entered into as
of December 31, 2001. Consulting expense under these agreements was $0,
$8,000 and $99,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(12) Income Taxes
There was no current or deferred tax expense for the years ended December
31, 2001, 2000 and 1999 because of the Company's operating losses.
The components of deferred tax assets and deferred tax liabilities as of
December 31, 2001 and 2000 are as follows:
2001 2000
--------------- --------------
Deferred tax assets:
Tax loss carryforwards $ 8,613,260 9,239,517
Research and development credit 805,633 743,286
Fixed assets -- 2,563
Deferred compensation 340,764 --
Unrealized loss on investment 1,083,774 --
Other 32,046 --
-------------- -------------
Gross deferred tax assets 10,875,477 9,985,366
Less valuation allowance (10,870,822) (9,985,366)
--------------- --------------
Net deferred tax assets 4,655 --
Deferred tax liabilities (4,655) --
--------------- --------------
Net deferred tax asset (liability) $ -- --
=============== ==============
F-24
The reasons for the difference between actual income tax expense
(benefit) for the years ended December 31, 2001, 2000 and 1999 and the
amount computed by applying the statutory federal income tax rate to
losses before income tax (benefit) are as follows:
2001 2000 1999
------------------------------- ------------------------------ ----------------------------
% of % of % of
pretax pretax pretax
Amount earnings Amount earnings Amount earnings
-------------- -------------- -------------- ------------- ------------- -----------
Income tax expense
at statutory rate $ (590,000) (34.0%) $ (1,973,000) (34.0%) $ (832,000) (34.0%)
State income taxes,
net of Federal
tax benefit (186,000) (10.7%) (640,000) (10.9%) (147,000) (6.0%)
Change in valuation
reserve 885,000 51.0% 2,476,000 42.1% 527,000 21.5%
Credits generated
in current year (62,000) (3.6%) (248,000) (4.2%) (74,000) (3.0%)
Adjustment to prior
estimated income
tax expense -- -- -- -- % 529,000 21.6%
Other, net (47,000) (2.7%) 385,000 7.0% (3,000) (0.1%)
-------------- -------------- -------------- ------------- ------------- -----------
Income tax benefit $ -- -- % $ -- -- $ -- -- %
============== ============== ============== ============= ============= ===========
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
net change in the total valuation allowance for the years ended December
31, 2001, 2000 and 1999 was an increase of $885,000, $2,476,000 and
$527,000, respectively. The tax benefit assumed using the federal
statutory tax rate of 34% has been reduced to an actual benefit of zero
due principally to the aforementioned valuation allowance.
At December 31, 2001, the Company had federal and state net operating
loss tax carryforwards of approximately $21,000,000. The net operating
loss carryforwards expire in various amounts starting in 2008 and 2002
for federal and state tax purposes, respectively. The Tax Reform Act of
1986 contains provisions which limit the ability to utilize net operating
loss carryforwards in the case of certain events including significant
changes in ownership interests. If the Company's net operating loss
carryforwards are limited, and the Company has taxable income which
exceeds the permissible yearly net operating loss carryforward, the
Company would incur a federal income tax liability even though net
operating loss carryforwards would be available in future years.
F-25
(13) License Agreement
On May 14, 1998, Optex entered into a Development and License Agreement
(the Agreement) with Bausch & Lomb to complete the development of
Catarex, a cataract-removal technology owned by Optex. Under the terms of
the Agreement, Optex and Bausch & Lomb intend jointly to complete the
final design and development of the Catarex System. Bausch & Lomb was
granted an exclusive worldwide license to the Catarex technology for
human ophthalmic surgery and will assume responsibility for
commercializing Catarex globally. The Agreement is cancelable by Bausch &
Lomb at any time upon six months written notice.
The Agreement provided that Bausch & Lomb would pay Optex milestone
payments of (a) $2,500,000 upon the signing of the Agreement, (b)
$4,000,000 upon the successful completion of certain clinical trials, (c)
$2,000,000 upon receipt of regulatory approval to market the Catarex
device in the United States (this payment is creditable in full against
royalties), and (d) $1,000,000 upon receipt of regulatory approval to
market the Catarex device in Japan. Pursuant to the Agreement, Bausch &
Lomb would reimburse Optex for its research and development expenses not
to exceed $2,500,000. Bausch & Lomb would pay Optex a royalty of 7% of
net sales and an additional 3% royalty when certain conditions involving
liquid polymer lenses are met.
During 1998, the Company received the first nonrefundable milestone
payment of $2,500,000 and recorded this amount as license revenue. In
addition, the Company recorded $1,047,511 in 1998 as a reduction of
expenses related to the reimbursement of research and development costs
associated with the Catarex device.
On September 16, 1999, the Company and Bausch & Lomb amended the
Agreement to provide for an expanded role for Optex in development of the
Catarex surgical device. Under the amended Agreement, Optex, in addition
to the basic design work provided for in the original agreement, was
required to deliver to Bausch & Lomb within a stated period Catarex
devices for use in clinical trials, and was required to assist Bausch &
Lomb in connection with development of manufacturing processes for
scale-up of manufacture of the Catarex device. Additionally, Bausch &
Lomb would reimburse Optex for all costs, including labor, professional
services and materials, incurred by Optex in delivering those Catarex
devices and performing manufacturing services, and would pay Optex a
fixed profit component of 25% based upon certain of those costs.
During 2001, 2000 and 1999, Optex recorded revenue pursuant to the
amended Agreement of $2,461,922, $5,169,288 and $1,082,510, respectively.
The revenue recorded in 2001, 2000 and 1999 pursuant to the amended
Agreement is inclusive of the fixed profit component of 25% presented on
a gross basis with the related costs incurred presented separately as
cost of development revenue on the consolidated statements of operations.
Of these amounts, $0 and $192,992 are recorded as an account receivable
at December 31, 2001 and 2000, respectively. Prior to the amended
Agreement, the research and development expenses of the Catarex device
incurred and the related reimbursement were presented by the Company on a
net basis as the reimbursement reflects a dollar for dollar reimbursement
arrangement, effectively being a pass-through of expenses. The 1999
reimbursement received by the Company prior to the amendment to the
Agreement was $1,229,068. As of December 31, 2000, the
F-26
Company recorded $1,294,615 of deferred revenue related to the amended
Agreement, which amount represents expenses paid in advance by Bausch &
Lomb during 2000 at a rate of 125%. This deferred revenue was recognized
when the related expense was recorded in operations during 2001.
As of December 31, 2000, Optex received reimbursement for costs,
including labor, professional services and materials, incurred by Optex
in delivering Catarex devices and performance manufacturing services
totaling $5 million. The amended agreement provided that Bausch & Lomb
would reimburse Optex for such costs up to $8 million. In connection with
the revised agreement, the Company agreed to pay a bonus to its President
totaling $141,000, payable monthly through March 2001. At December 31,
2001 and 2000, $0 and $23,502, respectively, were due and were included
in accounts payable and accrued expenses in the accompanying consolidated
balance sheets.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb, a Bausch & Lomb affiliate, the Company, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its
assets (mostly intangible assets with no book value), including all those
related to the Catarex technology. The purchase price was $3 million paid
at closing (of which approximately $564,000 has been distributed to
Optex's minority shareholders). In addition, Optex is entitled to receive
additional consideration, namely $1 million once Bausch & Lomb receives
regulatory approval to market the Catarex device in Japan, royalties on
net sales on the terms stated in the original development agreement dated
May 14, 1998, between Bausch & Lomb and Optex, as amended, and minimum
royalties of $90,000, $350,000, and $750,000 for the first, second, and
third years, respectively, starting on first commercial use of the
Catarex device or January 1, 2004, whichever is earlier. Optex also has
the option to repurchase the acquired assets from Bausch & Lomb at fair
value if it ceases developing the Catarex technology.
Upon the sale of Optex assets, Bausch & Lomb's development agreement with
Optex was terminated and Optex has no further involvement with Bausch &
Lomb. As a result of this transaction, the Company recorded a net gain on
the sale of Optex assets of $2,569,451 for the year ended December 31,
2001, net of severance payments to former Optex employees in the amount
of $240,000 as described below. The purchase price of $3,000,000 is
nonrefundable and upon the closing of the asset purchase agreement in
March 2001, Optex had no further obligation to Bausch & Lomb or with
regard to the assets sold. In the asset purchase agreement, Optex agreed
to forgo future contingent payments provided for in the earlier
development agreement. Pursuant to the Company's agreement with the
minority shareholders of Optex, Optex has recorded a profit distribution
for the year ended December 31, 2001 of $837,274 representing the
minority shareholders' percentage of the cumulative profit from the
Bausch & Lomb development and asset purchase agreements up to and
including proceeds from the sale of Optex' assets.
On May 9, 2001, the Company's board of directors, after consideration of
all the relevant facts and circumstances, including recommendation of
counsel, agreed to authorize an aggregate payment of $240,000 to three
former employees of Optex (who are now employed by Bausch & Lomb). The
payments were made on May 11, 2001, and represented the settlement of
claims made by the employees subsequent to the asset purchase agreement
referred to above for severance monies allegedly due under their
employment agreement. The Company did not believe these monies were due
pursuant
F-27
to the terms of the transaction itself and the respective employment
agreements. The board of directors elected to acquiesce to the demands of
the former employees and resolve the matter in light of the potential
future royalties from Bausch & Lomb and the importance of these
individuals to the ongoing development activities. The payment was
recorded as an expense netted against the gain on sale of Optex assets in
the December 31, 2001 consolidated statement of operations.
(13) Commitments and Contingencies
Consulting and Research Agreements
The Company has entered into consulting agreements, under which stock
options may be issued in the foreseeable future. The agreements are
cancelable with no firm financial commitments.
Employment Agreements
The Company entered into employment agreements with four executives
during April and May, 2000. These agreements provide for the payment of
signing and year-end bonuses in 2000 totaling $225,000, and annual base
salaries aggregating $550,000. Certain agreements were amended in
February 2001 and one executive was terminated in October 2001. As of
December 31, 2001, the annual base salaries of four executives aggregate
to $485,000 and year-end bonuses aggregated to $105,000. The 2001 and
2000 bonuses are included in accrued liabilities in the accompanying
consolidated balance sheets at December 31, 2001 and 2000, respectively.
Each agreement has an initial term of three years and can be terminated
by the Company, subject to certain provisions, with the payment of
severance amounts that range from three to six months.
Proprietary Rights
The Company has an exclusive worldwide license to four U.S. patents and
corresponding foreign applications covering a group of compounds,
including CT-3. The licensor is Dr. Sumner Burstein, a professor at the
University of Massachusetts. This license extends until the expiration of
the underlying patent rights. The primary U.S. patent expires in 2012 and
the new analog patent 6,162,829 expires in 2017. The Company has the
right under this license to sublicense our rights under the license. The
license requires that the Company pay royalties of 3% to Dr. Burstein
based on sales of products and processes incorporating technology
licensed under the license, as well as 8% of any income derived from any
sublicense of the licensed technology. Furthermore, pursuant to the terms
of the license, the Company must satisfy certain other terms and
conditions in order to retain the license rights. If the Company fails to
comply with certain terms of the license, our license rights under the
license could be terminated.
Operating Leases
The Company rents certain office space under operating leases which
expire in various years through 2003.
F-28
Aggregate annual minimum lease payments for noncancelable operating
leases are as follows:
Year ending
December 31,
-------------------
2002 $ 94,528
2003 31,167
-------------
$ 125,695
=============
Beginning in March 2002, the Company entered into a sublease agreement to
cover a portion of its lease obligation. The minimum lease payments above
include noncancellable sublease income of $7,500 and $3,750 expected to
be received in 2002 and 2003, respectively. The Company has sublet 60% of
a facility in Connecticut which is no longer utilized by the Company. As
a result, the Company recorded an estimated loss on the remaining
operating lease obligation in the amount of $11,026 at December 31, 2001.
Rent expense related to operating leases for the years ended December 31,
2001, 2000 and 1999 was $135,662, $161,810 and $118,264, respectively.
Resignation of CEO
In July 1998, the CEO of the Company resigned. The Company recorded
$211,250 of expense for salary continuation through April 1999. Pursuant
to the resignation, all unvested stock options held by the CEO vested
immediately and the unexercised options expired in July 1999.
Termination of Agreement with the Trustees of the University of
Pennsylvania
On October 12, 1999, the Company and Channel announced the termination of
the license agreement dated as of June 16, 1994, between the Trustees of
the University of Pennsylvania (Penn) and Channel pursuant to which
Channel received the rights to use cyclodextrin technology. The Company
and Channel, on the one hand, and Penn, on the other hand, released each
other from any further obligations under the license agreement. The
Company paid Penn a portion of the patent costs for which Penn was
seeking reimbursement under the agreement.
CryoComm Technology
In October 2001, the Company stopped work on CryoComm, a wholly-owned
subsidiary of the Company that had been developing superconducting
electronics for Internet packet switching and transport products.
Discontinuing work on CryoComm will allow the Company to focus on its
core life-sciences technologies, although the Company will continue to
prosecute the patents on the
F-29
CryoComm technology. As part of this restructuring, Walter Glomb's
position was eliminated effective October 16, 2001, although Mr. Glomb
will receive a 7% success fee if he is able to secure funding to further
develop this technology. As stated in his employment agreement, Mr. Glomb
was also entitled to receive a total of $62,500 in severance payments due
under his employment agreement over the six months following his
termination. These amounts were recorded during the fourth quarter of
2001 and $36,458 of these severance payments is included in accrued
liabilities in the accompanying consolidated balance sheet as of December
31, 2001.
F-30