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, 2000
[ ] 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
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
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(Address of principal executive offices, including zip code)
(212) 267-2503
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(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, 2000 were
$5,358,946.
As of March 16, 2001 there were 6,458,424 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 16, 2001 based on the closing price of the
common stock as quoted by the Nasdaq SmallCap Market on such date was
$4,642,315.
Transitional Small Business Disclosure Format: Yes __ No X
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TABLE OF CONTENTS
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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 Technology..................................1
CT-3 Technology...................................................3
Gemini and the 2-5A Antisense Technology..........................6
Our Diversification Strategy......................................6
Employees............................................................7
Forward-Looking Statements...........................................7
Recent Developments.................................................7
Sale of Optex Assets..............................................7
Repurchase of Series B Preferred Stock............................7
Common Stock Purchase Agreement with Fusion Capital Fund II, LLC..8
Risk of Delisting.................................................8
Risk Factors.........................................................8
Our Financial Condition and Need for Substantial Additional
Funding...........................................................8
Our Operations....................................................9
Our Securities...................................................12
ITEM 2. DESCRIPTION OF PROPERTY.............................................14
ITEM 3. LEGAL PROCEEDINGS...................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................................15
PART II.....................................................................16
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................16
Recent Sales of Unregistered Securities.............................16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................18
Overview............................................................18
Results of Operations...............................................18
Liquidity And Capital Resources.....................................20
Recently Issued Accounting Standards................................22
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS...................................22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................22
PART III....................................................................23
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT.................................................23
Information Concerning Directors and Executive Officers.............23
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TABLE OF CONTENTS
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Section 16(a) Beneficial Ownership Reporting Compliance.............24
ITEM 10. EXECUTIVE COMPENSATION .............................................24
Compensation of Executive Officers..................................24
Options and Stock Appreciation Rights...............................25
Option Exercise and Holdings........................................27
Long Term Incentive Plan Awards.....................................27
Compensation of Directors...........................................27
Employment Contracts and Termination of Employment and
Change of Control Agreements........................................28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .....28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................30
ITEM 13. EXHIBITS LIST, AND REPORTS ON FORM 8-K .............................31
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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 early biomedical, pharmaceutical, electronic infrastructure,
software, communications 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 two such technologies that we believe may be useful
in treating a variety of diseases, including cancer, infectious disease, pain,
and inflammation. We are also entitled to royalties and other revenues in
connection with commercialization of technology relating to cataract surgery.
We have, however, expanded our focus, and now seek to develop and
commercialize a diverse portfolio of patented technologies. (Consistent with
this, last year we changed our name from "Atlantic Pharmaceuticals, Inc." to our
current name, "Atlantic Technology Ventures, Inc." Our acquisition of an
ownership interest in a company that is currently developing high-speed
fiber-optic communication technologies represents our first investment in an
electronic infrastructure technology.
CORPORATE STRUCTURE
We were incorporated in Delaware on May 18, 1993. Each of our
technologies, or royalty rights, is held either by Atlantic or by our
subsidiaries Optex Ophthalmologics, Inc., or "Optex," and Gemini Technologies,
Inc., or "Gemini."
We seek to minimize 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, thereby
providing flexibility to allocate resources among technologies based on the
progress of individual technologies.
ATLANTIC AND ITS SUBSIDIARIES
Optex and the Catarex Technology
Our majority-owned (81.2%) subsidiary, Optex, is entitled to royalties and
other revenues in connection with commercialization of Catarex technology.
Bausch & Lomb, a multinational ophthalmics company, is developing this
technology 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,
including those related to the Catarex technology.
Relationship with Bausch & Lomb
In May 1998, Optex entered into a development and licensing agreement
pursuant to which it granted to Bausch & Lomb Surgical Incorporated, an
affiliate of Bausch & Lomb, a worldwide license to its rights to the Catarex
device. (For a description of the Catarex device, see "The Catarex Device and
its Applications" below). Under this agreement, Bausch & Lomb was responsible
for clinical testing, obtaining regulatory approval worldwide, and manufacturing
and commercializing the Catarex device. In addition, Bausch & Lomb undertook to
make milestone payments to Optex, as well as royalty payments on sales of the
Catarex device, and was required to reimburse Optex for all of its costs, up to
$2.5 million, related to the initial phase of development of the Catarex device.
Prior to amendment of this agreement in September 1999, reimbursements from
Bausch & Lomb were treated as a reduction of expenses and totaled $2,276,579
since the inception of the agreement.
In September 1999, Optex and Bausch & Lomb Surgical amended this agreement
to expand Optex's role in development of the Catarex surgical device. In
addition to the basic design work provided for in the original agreement, Optex
was required to deliver to Bausch & Lomb within a stated period of time a number
of Catarex devices for use in clinical trials, and was required to assist Bausch
& Lomb in developing manufacturing processes for scale-up of manufacture of the
Catarex device. Bausch & Lomb reimbursed Optex for all costs, including labor,
professional services and materials, incurred by Optex in delivering these
Catarex devices and performing manufacturing services, and paid Optex a profit
component based upon certain of those costs. As of December 31, 2000,
development revenue under the September 1999 amendment totaled $6,251,798, with
a net profit component of $1,250,360.
Pursuant to an asset purchase agreement dated January 31, 2001, between
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all its assets, including all those
related to the Catarex technology. The purchase price was $3 million paid at
closing. 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 if it ceases
developing the Catarex technology. Upon the sale, Bausch & Lomb's development
agreement with Optex was terminated. As of December 31, 2000, and including the
$3 million purchase price of Optex assets received on March 2, 2001, Bausch &
Lomb payments to Optex have totaled $14,028,377, of which $6,750,360 was
realized as net profit to Optex. Management believes that Bausch & Lomb will
aggressively pursue commercialization of the assets purchased.
Cataracts and Current Cataract-Removal Technology
One of the most common vision disorders is cataracts, or the clouding of
the normally clear lens inside the eye. This results in increased glare,
decreased vision, or both. Cataracts progressively degrade visual acuity, and
restoring vision eventually requires that the affected lens be surgically
extracted. Cataracts may exist at birth, may result from aging or may be caused
by injury or disease. Cataract surgery is currently the most frequently
performed therapeutic surgical procedure in the U.S. among persons over 65 years
of age. Medicare pays $3.4 billion a year for 1 million of the 1.3 million
cataract procedures performed annually in the U.S. Each year approximately 3.6
million cataract surgeries are performed worldwide. According to the American
Academy of Ophthalmology, the chances are 50% that a person between the ages of
52 and 64 will develop a cataract, and by age 75 almost everyone will develop a
cataract. We anticipate that given the aging of the world population, the number
of cataract removal procedures performed each year will increase in the near
future.
Currently, there are two principal technologies that are widely used for
cataract removal: extracapsular cataract extraction, or "ECCE," and
phacoemulsification, or "phaco." Until relatively recently, most cataract
procedures were done by means of ECCE, which is generally a simple and reliable
procedure that can be used with cataracts of any density. The ECCE procedure
requires direct surgical extraction of the entire lens nucleus in one step
through an approximately 11 millimeter, or "mm," incision in the eye and an
approximately 6mm opening in the lens capsule inside the eye. The residual
cortical material (the softer material that surrounds the lens nucleus) is
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then removed using a mechanical irrigation/aspiration device. Once the lens is
completely removed, an intraocular synthetic polymer lens is inserted into the
eye and placed in the remaining portion of the lens capsule.
Although it is an effective procedure, ECCE has a number of disadvantages,
including the time required for surgery, post-operative recovery and visual
rehabilitation.
In a phaco procedure, the surgeon uses an ultrasound-emitting handpiece to
sculpt or carve the lens nucleus. An incision of approximately 3mm to 5mm is
made in the eye and an opening of approximately 5mm is made in the lens capsule.
As these incisions are smaller than those required in ECCE procedures, patients
generally recover faster, and also experience better post-operative results, due
to a reduction in astigmatism induced by wound healing. Phaco, however, also has
disadvantages. For one, performing a phaco procedure successfully requires
considerable skill and much training. Also, the ultrasound energy used in, and
stray fragments of the lens nucleus resulting from, a phaco procedure can damage
the cells that line the inner layer of the cornea, which in turn can cause them
to degenerate.
The Catarex Device and its Applications
The Catarex device removes the lens nucleus and cortex in a single step
through a small incision in the eye while leaving the lens capsule functionally
intact. The Catarex device is inserted into the eye through an incision of less
than 3mm and advanced into the lens capsule through a less than 1.5mm incision.
Once positioned within the lens capsule, the device is activated and the lens
nucleus and cortex are removed in a matter of minutes through the action of
fluid vortex forces drawing the lens material to the device, where it is
mechanically emulsified and aspirated. A synthetic lens would then be placed in
the capsule; given the limitations of currently available intraocular lenses,
the incision in the lens capsule would need to be slightly enlarged.
We believe that the Catarex device has several advantages over existing
technologies that should facilitate it being accepted by the ophthalmic
community:
o If successfully developed, Catarex would allow the entire cataract,
including the lens nucleus and cortex, to be removed through incisions
in the eye and lens capsule that would be smaller than the incisions
required in either ECCE or phaco procedures. We anticipate that this
would reduce operating time and the trauma associated with operating,
which in turn would speed recovery.
o Speedier patient recovery would reduce the costs involved in cataract
surgery, an important consideration in this era of managed care and
cost containment.
o We expect that cataract extraction using the Catarex device will leave
the anterior lens capsule of the lens functionally intact, which would
shield from damage the cells that line the inner surface of the
cornea.
o We expect that surgeons will find the Catarex device easier to master
than phaco extraction, as the operating principles of the device
eliminate the need for the skill-intensive sculpting required in the
phaco procedure.
o Studies have indicated that the Catarex device can be used on
cataracts of all degrees of hardness.
o Leaving the lens capsule functionally intact would permit the
insertion of liquid polymer lenses, once they are developed. Liquid
polymer lenses are lenses made of injectable substances that can be
used to refill the original lens capsule. The use of injectable lenses
in conjunction with lens extraction using the Catarex device could
result in the Catarex device being used not only in cataract surgery,
but also to treat all refractive errors, including myopia
(nearsightedness), hyperopia (farsightedness) and presbyopia (the loss
of near vision that occurs with age).
CT-3 Technology
Atlantic is developing CT-3, a synthetic derivative of the major active
ingredient in marijuana, for use in the treatment of inflammation and pain and
other indications.
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Background
There has been much publicity regarding whether patients are adequately
treated for acute and chronic pain. This is due, in part, to the significant
side effects of the more common drugs used to treat pain.
Acute pain encompasses such medical conditions as post-operative pain, as
well as pain from acute injuries. Chronic pain covers a broad range of
conditions, including headaches, cancer pain, arthritis pain, low back pain,
neuropathic pain, and psychogenic pain. Although difficult to quantify, it is
estimated that roughly 130 million people suffer from chronic pain in the U.S.
alone, with about 3 million new diagnoses of chronic pain per year.
The single biggest cause of chronic pain is arthritis. An estimated 40
million people in the U.S. suffer from arthritis, as do an equal number in
Europe. Osteoarthritis is the more common form, and 60% of its victims are
women. Half of those suffering from osteoarthritis are under the age of 65. The
number of people with osteoarthritis is expected to double by 2020 as the number
of elderly people continues to grow.
A more debilitating form of arthritis is rheumatoid arthritis, affecting
about 2.5 million people. Chronic pain and inflammation management are critical
in this patient segment. Cancer pain is another market, with about 1 million new
diagnoses of cancer per year, a majority of them requiring pain management.
Other causes of chronic pain are fibromyalgia (a connective tissue
disorder causing pain affecting approximately 5 million people), and peripheral
neuropathy.
Currently available analgesic (anti-pain) and anti-inflammatory drugs
include narcotics, non-narcotic analgesics, corticosteroids and nonsteroidal
anti-inflammatory drugs, or "NSAIDs." Although highly effective as analgesics,
the usefulness of narcotics is limited by significant adverse effects, including
their potential to cause addiction. In contrast, non-narcotic analgesics are
safer but, due to their low potency, have limited usefulness in cases of severe
chronic pain. Use of corticosteroids, which are highly effective as
anti-inflammatory agents, is limited by their potentially significant side
effects. Traditional NSAIDs, such as aspirin, ibuprofen and indomethacin, are
generally safer than corticosteroids for long-term use, but they too can cause
significant side effects when used chronically. While the newer NSAIDs
categorized as COX-2 inhibitors, for example Celebrex (developed by G.D. Searle
& Co.) and Vioxx (developed by Merck & Co.), are potentially less prone to cause
ulcers than are traditional NSAIDs, they do not appear to be more effective for
the relief of pain or inflammation.
Although a major focus of pharmaceutical research for many years has been
the development of safe, powerful anti-inflammatory and analgesic drugs with
minimal adverse side effects, no such universally safe and efficacious drug has
been developed. A variety of compounds are in preclinical and early clinical
development, but it is not evident that an acceptable combination of efficacy
and safety has yet been achieved.
In addition to the many pharmacological products, various alternative
treatments have been utilized due to the continued need for additional types of
pain management. The FDA estimated that there are approximately 9-12 million
visits per year for acupuncture treatment of chronic pain. In addition, various
herbs and nutritional supplements claim to relieve pain. Modified diets and
various relaxation techniques have been utilized by some patients, seeking
relief from their pain. Other devices, such as TENS and implanted opioid pumps
are marketed for chronic pain. This indicates that there is a continued need for
alternative treatments to relieve pain.
The CT-3 Technology and Its Applications
We have proprietary rights to a group of compounds, one of which is
currently designated "CT-3." CT-3 is a synthetic derivative of (DELTA)9
tetrahydrocannabinol (THC), the major active ingredient of marijuana. It was
designed to maximize the potent efficacious medicinal properties of marijuana
without producing its undesirable psychotropic side effects. Based upon the
broad anti-inflammatory and analgesic properties exhibited in preclinical
studies, we believe that this group of compounds may be useful in the treatment
of inflammation and pain, as well as several other indications, including
musculoskeletal disorders, neurological disorders, cancer, glaucoma, and
gastrointestinal disorders. We also believe, based on preclinical studies and an
initial phase I human clinical trial, that this group of compounds has a reduced
potential for side effects.
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CT-3 is a chirally pure carboxylic derivative of the major active
ingredient of marijuana, (DELTA)9 tetrahydrocannabinol (THC). CT-3 is a new
chemical entity and was designed to have increased anti-inflammatory and
analgesic properties and reduced psychotropic activity compared to the THC
parent. Animal studies have shown that CT-3 lacks the ulcer causing side effects
of NSAIDs. Animal studies using dosages significantly higher than the
anticipated therapeutic dose of CT-3 have indicated a lack of central nervous
system side effects (psychoactivity), and we believe that CT-3 provides
anti-inflammatory and analgesic effects without the psychoactive effects of THC.
Also, a clinical trial designed to measure the safety and pharmacokinetics of
CT-3 resulted in no clinically relevant-adverse events and no evidence of
marijuana-like psychoactivity. Several in vitro studies have indicated that CT-3
acts by inhibiting and reducing the release or synthesis of several different
mediators of inflammation including cytokines, metalloproteinases, leukotrines,
and cylcooxygenases. In addition, tests in an in vivo model of rheumatoid
arthritis have shown CT-3 to have significant anti-inflammatory effects,
including the potential to reduce the amount of joint destruction caused by
rheumatism. Subsequent studies have substantiated these findings and have
demonstrated that CT-3 can minimize the effects of adjuvant-induced arthritis in
rats. We also believe that it is not yet known whether this compound is more
clinically effective than traditional NSAIDs, corticosteroids, COX-2 inhibitors
and the variety of potential competitor compounds in late preclinical and early
clinical development. The preliminary data therefore suggest that CT-3 appears
to have significant potential for therapeutic benefit in the treatment of
chronic pain and inflammation that potentially lacks the major side effects of
traditional anti-inflammatory drugs and analgesics.
Research and Development Activities
Atlantic is developing CT-3 as the lead compound in the series of patented
compounds. CT-3 has been tested in a Phase I clinical trial and in many
pre-clinical in vitro and in vivo studies to profile its potential activity and
to evaluate its usefulness in treating medical conditions. This evaluation
process started with a focus on analgesic and anti-inflammatory processes and
has been broadened to include musculoskeletal disorders, neurological disorders,
gastrointestinal disorders, psychiatric disorders, glaucoma, and cancer.
In 2000 we successfully filed an investigational new drug (IND)
application with the United States Food and Drug Administration for CT-3 and
signed a contract with Aster Clinical Research Center in Paris, France, to
conduct the Phase I clinical trial. The clinical trial was designed to measure
the safety and pharmacokinetics of CT-3 in human subjects. As expected, the
Phase I clinical trial was successfully completed and showed that CT-3 was safe
and resulted in no clinically-relevant adverse events and no evidence of
marijuana-like psychoactivity.
After completion of the Phase I clinical trial we increased our efforts to
sublicense CT-3 to suitable strategic partners to assist in clinical
development, regulatory approval filing, manufacturing and marketing of CT-3. We
anticipate finding a corporate partner to continue the clinical development of
CT-3 by the fourth quarter of 2001. In addition, we are considering conducting a
Phase II clinical trial ourselves. 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.
In addition, in the fourth quarter of 2000, we were issued a new US patent
6,162,829 that covers the use of analogs of CT-3 as analgesic or
anti-inflammatory agents.
Competition
The market for the treatment of chronic pain and inflammation is large and
highly competitive. Several multinational pharmaceutical companies currently
have many popular products in this market and many companies have active
research programs to identify and develop more potent and safer
anti-inflammatory and analgesic agents. One notable area of research is in the
development of "COX-2 inhibitors," which are claimed to be safer to the stomach
than available NSAIDs. (COX-2 inhibition is not considered a significant
contributor to the mechanism of action of CT-3; in vitro studies have shown very
weak COX-2 inhibition.) Two COX-2 inhibitor compounds have recently received FDA
approval and several others are in various stages of clinical development. We
believe that the potential advantages of CT-3 make it worth developing, and that
if we succeed, CT-3 could become a significant new agent in the treatment of
pain and inflammation.
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Proprietary Rights
We have 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
6,162829 expires in 2017. We have the right under this license to sublicense our
rights under the license. The license requires that we pay royalties to Dr.
Burstein based on sales of products and processes incorporating technology
licensed under the license, as well as a percentage of any income derived from
any sublicense of the licensed technology. Furthermore, pursuant to the terms of
the license, we must satisfy certain other terms and conditions in order to
retain the license rights. If we fail to comply with certain terms of the
license, our license rights under the license could be terminated.
Gemini and the 2-5A Antisense Technology
On August 14, 2000, Gemini Technologies, Inc., our subsidiary, was awarded
a Small Business Innovation Research (SBIR) Phase II grant to continue its
research on antisense enhancing technology by the National Institute for Allergy
and Infectious Diseases (NIAID), a unit of the National Institutes of Health
(NIH). The grant, which totals approximately $750,000, will be used to fund a
pre-clinical efficacy study using aerosolized 2-5A antisense compound for the
inhibition of respiratory syncytial virus (RSV) in monkeys. It also will provide
funds for the toxicological and pharmacological studies needed to file an
investigational new drug (IND) application with the FDA to begin clinical
studies in humans.
This research is intended to build upon research previously published in
the Proceedings of the National Academy of Sciences (PNAS) Vol. 95, July 1998,
that documented the compound's effectiveness against a broad spectrum of RSV
strains. Data collected to date indicate that the molecule to be tested has 130
times greater in vitro potency than Ribavarin (Virazole), one of two
FDA-approved treatments for RSV infections (the other treatment is a monoclonal
antibody recommended for use in high-risk infants only). This molecule has also
been shown to be stable against degradative enzymes, and is capable of being
absorbed into lung tissue when administered in a droplet formulation.
Our Diversification Strategy
Early in 2000 we adopted a broader approach in selecting technologies to
develop. Consistent with this approach, effective March 21, 2000, Atlantic's
name was changed from "Atlantic Pharmaceuticals, Inc." to its current name.
This broader approach is reflected in our acquisition on May 12, 2000, of
an ownership interest in TeraComm Research, Inc., a privately-held company that
is currently developing next-generation fiber optic communications technologies,
namely a high-speed fiber-optic transceiver.
The purchase price for our ownership interest was $5 million in cash,
200,000 shares of our common stock and a warrant to purchase 200,000 shares of
our common stock. TeraComm issued us 1,400 shares of its Series A preferred
stock representing a 35% ownership interest. Taking into account the cash
purchase price and the value of the common stock at the signing of the letter of
intent, we valued this deal at $6,795,000. We are accounting for the investment
in TeraComm in accordance with the equity method of accounting for investments
since we have the ability to exert significant influence over TeraComm including
through our Board representation.
TeraComm is developing a fiberoptic transmitter that uses a
high-temperature superconductor (HTS) material to switch a laser beam on and off
with a high-speed electronic digital signal. HTS materials have zero electrical
resistance at low temperatures (< 70 K), and also can have very high optical
reflectance in their superconducting state while they can transmit light in
their normal (non-superconducting) state. TeraComm discovered that a small
electric current in an HTS material could switch the material between states,
and do so very quickly--in less than a millionth millionth of a second. Because
the HTS optical switch works best at far infrared wavelengths and these optical
waves are too large to send through an optical fiber, the TeraComm invention
employs an optical wavelength converter to change the waves to the band that is
just right for the fiber.
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Thus far, TeraComm has successfully developed methods of producing
effective HTS thin-films with metal electrodes, has successfully demonstrated
control of optical transmission in HTS films using electric current, and has
been awarded patents covering implementation of this technology for fiberoptic
telecommunications. TeraComm has not yet achieved the technical milestone that
it needs to achieve for further progress in developing their technology.
TeraComm has informed us that it is seeking to raise additional funding to
continue its development program and achieve this technical milestone.
Due to our need to preserve our cash resources and due to our uncertainty
regarding TeraComm's plans for developing its technology, we ultimately paid
only $1 million of the $5 million cash portion of the purchase price. As a
consequence, we were required to surrender to TeraComm a number of our shares of
TeraComm's preferred stock, which had the effect of reducing to 14.4% our actual
ownership interest. However, Atlantic continues to hold one seat on the Board of
Directors, and therefore continues to have the ability to exert significant
influence.
On May 23, 2000, we announced our appointment of Walter L. Glomb, Jr., as
Vice President. Mr. Glomb is responsible for supporting our investment in
TeraComm and identifying complimentary electronic infrastructure and
communication technologies for us to develop. Mr. Glomb is based in our new
office in Vernon, Connecticut, in the center of the major cluster of photonics
companies that stretches from Boston to New Jersey. Atlantic's new strategy
focuses on our developing strategic partnerships with early-stage companies, and
we feel that this region promises to be a rich source of such partnerships.
EMPLOYEES
We currently have six employees.
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, 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. These forward-looking
statements reflect our views as of the date they are made with respect to future
events and financial performance, but are subject to many risks and
uncertainties, which could cause actual results to differ materially from any
future results expressed or implied by such forward-looking statements. Examples
of such risks and uncertainties include the risks detailed below. We do not
undertake to update any forward-looking statements.
RECENT DEVELOPMENTS
Sale of Optex Assets
On March 2, 2001, Optex Ophthalmologics, Inc., our 81.2%-owned subsidiary,
sold substantially all of its assets, including those related to the Catarex
technology, to Bausch & Lomb Incorporated for an initial payment of $3 million
and ongoing royalty payment obligations upon product commercialization. For
further details, see "Description of Business--Atlantic and Its
Subsidiaries--Optex and the Catarex Technology."
Repurchase of Series B Preferred Stock
On March 9, 2001, we repurchased from BH Capital Investments, L.P. and
Excalibur Limited Partnership, for an aggregate purchase price of $617,067, all
165,518 shares of our Series B convertible preferred stock held by the
investors. On December 4, 2000, we repurchased 482,758 shares of Series B
preferred stock. Our repurchase of the remaining shares of Series B preferred
stock and termination of our obligations under the purchase agreement with the
investors represent the last in a series of transactions relating to that
purchase agreement. For further details, see "Market for Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered Securities," as well
as our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2000,
-7-
and our Current Reports on Form 8-K filed with the SEC on December 11, 2000,
December 29, 2000, January 24, 2001, January 30, 2001, and March 14, 2001.
Common Stock Purchase Agreement with Fusion Capital Fund II, LLC
On March 16, 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. 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. For further details, see our registration statement on Form S-3
filed with the SEC on March 25, 2001. However, Nasdaq delisting would constitute
an event of default under the purchase agreement with Fusion Capital, and Fusion
Capital would no longer be obligated to purchase our common stock.
Risk of Delisting
We risk being delisted from the Nasdaq SmallCap Market. March 20, 2001,
marked the thirtieth consecutive business day that the minimum bid price of our
common stock was less than $1.00. This constitutes a failure on our part to meet
Nasdaq's continued inclusion requirement for minimum bid price. On March 22,
2001, Nasdaq notified us of this failure, and we have a period of 90 calendar
days from that notice to comply with the continued inclusion standard for
minimum bid price. We can do so by meeting the standard for a minimum of 10
consecutive business days during the 90 day compliance period.
In addition, the consolidated financial statements included with this
Annual Report show that on December 31, 2000, our net tangible assets were less
than $2 million. Consequently, we expect to receive a deficiency notice from
Nasdaq notifying us that we have ten days to submit a plan to achieve and
sustain long-term compliance with all applicable listing criteria. If Nasdaq is
not satisfied with the plan that we submit or if we do not submit a plan, we
will then receive a staff determination from Nasdaq. Upon receipt of the staff
determination, we will have seven days to appeal the staff determination and
request a hearing before Nasdaq's Listing Qualifications Panel (the "panel"),
and such request will generally stay the delisting pending a determination by
the panel (called a "panel decision"). Failure to request a hearing within seven
calendar days will result in automatic delisting.
For more details regarding delisting and its significance, see "Risk
Factors--Our Securities."
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.
Our Financial Condition and Need for Substantial Additional Funding
Our future profitability is uncertain.
We were incorporated in 1993, and we have incurred significant operating
losses in each of our fiscal years since then. As of December 31, 2000, our
accumulated deficit was approximately $24.8 million. We have not completed
developing any of our products or generated any product sales. All of our
technologies are in the research and development stage, which requires
substantial expenditures. Our operating loss from inception consists of
milestone payments and development revenue, including a profit component, 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. We do not 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.
-8-
We will need additional funding, and it may not be available.
As of December 31, 2000, we had a cash and cash equivalents balance of
approximately $2.7 million. We will require substantial additional resources to
continue to develop and test our potential products, to obtain regulatory
approvals, to manufacture and commercialize any products that we may develop,
and to license new technologies.
We will need to obtain additional funding 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). Additional
financing sources may not be available on acceptable terms, if at all. If
adequate funds are not available, we may need to reduce significantly our
spending and delay, scale back or eliminate one or more of our research,
discovery or development programs.
Our Operations
We depend on others to conduct clinical development, obtain regulatory
approvals, and manufacture and commercialize our technologies.
We do not have the resources to directly conduct full clinical
development, obtain regulatory approvals, manufacture or commercialize any of
our proposed products and we have no current plans to acquire such resources. We
anticipate that we may enter into collaborative agreements for the research and
development, clinical testing, seeking of regulatory approval, manufacturing or
commercialization of our proposed products. In addition, collaborative
agreements we do enter into could limit our control over the resources devoted
to these activities as well as our flexibility in considering alternatives for
the commercialization of the products involved.
We may not succeed in developing commercially viable products.
To be profitable, we must, alone or with others, successfully
commercialize our technologies. They 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 the development of products
based on innovative or novel technologies. 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 encounter problems in clinical
trials that will cause us to delay or suspend development of one of
the technologies;
o that it will be found to be ineffective or unsafe;
o that it will fail to meet applicable regulatory standards; or
o that it will fail to obtain required regulatory approvals.
Similarly, it is possible that, for the following reasons, we may be
unable to commercialize any given technology, even if it is shown to be
effective:
o it is uneconomical;
o in the case of one of our pharmaceutical technologies or the Catarex
device, it is not eligible for third-party reimbursement from
government or private insurers;
o others hold proprietary rights that preclude us from commercializing
it;
o others have brought to market equivalent or superior products;
o others have superior resources to market similar products or
technologies; or
-9-
o it has undesirable or unintended side effects that prevent or limit
their commercial use.
Our ability to compete will suffer if we are unable to protect our patent rights
and trade secrets or if we infringe the proprietary rights of third parties.
Our success will depend to a large extent on our ability to obtain U.S.
and foreign patent protection for drug candidates and processes, preserve trade
secrets and operate without infringing the proprietary rights of third parties.
To obtain a patent on an invention, one must be the first to invent it or
the first to file a patent application for it. We cannot be sure that the
inventors of subject matter covered by patents and patent applications that we
own or license were the first to invent, or the first to file patent
applications for, those inventions. Furthermore, patents we own or license may
be challenged, infringed upon, invalidated, found to be unenforceable, or
circumvented by others, and our rights under any issued patents may not provide
sufficient protection against competing drugs or otherwise cover commercially
valuable drugs or processes.
We seek to protect trade secrets and other unpatented proprietary
information, in part by means of confidentiality agreements with our
collaborators, employees, and consultants. If any of these agreements is
breached, we may be without adequate remedies. Also, our trade secrets may
become known or be independently developed by competitors.
Government regulations may prevent us from commercializing one or more of our
technologies, or may delay commercialization or make it more expensive.
The federal government, principally the FDA, and comparable agencies in
state and local jurisdictions and in foreign countries extensively and
rigorously regulates all new drugs and medical devices, including our products
and technologies under development. These authorities, particularly the FDA,
impose substantial requirements upon preclinical and clinical testing,
manufacturing and commercialization of pharmaceutical and medical device
products.
There are many costly and time-consuming procedures required for approval
of a new drug, including lengthy and detailed preclinical and clinical testing
and validation of manufacturing and quality control processes. Several years may
be needed to satisfy these requirements, and this time period may vary
substantially depending on the type, complexity and novelty of the product
candidate. Government regulation can delay or prevent marketing of potential
products for a considerable period of time and impose costly procedures upon our
activities. Moreover, the FDA or other regulatory agency may not grant approval
for any products developed or not grant approval on a timely basis, and success
in preclinical or early stage clinical trials does not assure success in later
stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations. This could delay, limit or prevent regulatory approval.
Even if regulatory approval of a product is granted, limitations may be imposed
on the indicated uses of a product. Further, later discovery of previously
unknown problems with a product may result in added restrictions on the product,
including withdrawal of the product from the market. Any delay or failure in
obtaining regulatory approvals would materially and adversely affect our
business, financial condition and results of operations.
A drug and medical device manufacturer (either us or one of our
third-party manufacturers) must conform to Good Manufacturing Practices, or
"GMP," regulations, which the FDA enforces strictly through their facilities
inspection programs. Contract manufacturing facilities must pass a pre-approval
inspection of their manufacturing facilities before the FDA will approve a New
Drug Application, or "NDA." Certain material manufacturing changes that occur
after approval are also subject to FDA review and clearance or approval. FDA or
other regulatory agencies may not approve the process or the facilities by which
any of our products may be manufactured. Our dependence on others to manufacture
our products may adversely affect our ability to develop and deliver products on
a timely and competitive basis. If we are required to manufacture our own
products we will be required to build or purchase a manufacturing facility, will
be subject to the regulatory requirements described above, to similar risks
-10-
regarding delays or difficulties encountered in manufacturing any such products
and will require substantial additional capital. We may be unable to manufacture
any such products successfully or in a cost-effective manner.
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. Moreover, increased attention to the
containment of health care costs in the U.S. could result in new government
regulations that could materially and adversely affect our business. We are
unable to predict the likelihood of adverse governmental regulations that could
arise from future legislative or administrative action, either in the U.S. or
abroad.
We will also be subject to a variety of foreign regulations governing
clinical trials, registration and sales of our products. Regardless of whether
FDA approval is obtained, approval of a product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. 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. Delays in the approval process or failure to obtain such foreign
approvals would materially and adversely affect our business, financial
condition and results of operations.
We depend upon our key license agreements.
We have licensed our proprietary technology from others. If we do not meet
our financial, development or other obligations under our license agreements in
a timely manner, we could lose the rights to some or all of our proprietary
technologies, which could materially and adversely affect our business and
financial condition and results of operations.
Our rights to our 2-5A antisense technology are contingent on the
Cleveland Clinic Foundation upholding its obligations to the National Institutes
of Health with respect to 2-5A. We could lose our rights to 2-5A if the
Cleveland Clinic fails to properly discharge its obligations to the National
Institutes of Health. In addition, on May 8, 2000, the Cleveland Clinic
Foundation filed a claim for arbitration before the American Arbitration
Association to terminate its sublicense with Atlantic, claiming that we have
breached the sublicense by failing to fulfill our obligations under the
sublicense. We may lose this arbitration, and as a result lose our rights under
the sublicense, or we may be forced to settle this arbitration on terms that are
not entirely favorable to us.
We carry only a limited amount of product liability insurance.
If we develop and commercialize any products, through third-party
arrangements or otherwise, we may be exposed to product liability claims. We
intend to carry product liability insurance when we initiate the Phase I study
of CT-3. 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. We may not be able to
obtain such insurance at all, in sufficient amounts to protect us against such
liability or at a reasonable cost. None of our licensors has made, nor is
expected to make, any representations to us as to the safety or efficacy of the
inventions covered by the license agreements or as to any products which may be
made or used under rights granted therein. Product liability claims brought
against us or a party that we are obligated to indemnify could materially and
adversely affect our business, financial condition and results of operations.
Any breach by us of environmental regulations could result in our incurring
significant costs.
Federal, state and local laws, rules, regulations and policies 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 and regulations 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.
-11-
Conflicts of interest could arise as a result of our directors serving on the
boards of other companies.
Steve H. Kanzer and Peter O. Kliem serve as directors of other companies,
and in the future other of our directors may from time to time serve as
directors of other companies. If any of those companies compete with us,
conflicts of interest could arise.
Our Securities
We risk being delisted from NASDAQ, and the resulting market illiquidity could
adversely affect our ability to raise funds.
Although our common stock, redeemable warrants and the units offered in
our initial public offering are quoted on the NASDAQ SmallCap Market, continued
inclusion of those securities on NASDAQ will require the following:
o that we maintain at least $2,000,000 in net tangible assets;
o that the minimum bid price for the common stock be at least $1.00 per
share;
o that the public float consist of at least 500,000 shares of common
stock, valued in the aggregate at more than $1,000,000;
o that the common stock have at least two active market makers;
o that the common stock be held by at least 300 holders; and
o that we adhere to certain corporate governance requirements.
If we are unable to satisfy any of these maintenance requirements, our
securities may be delisted from NASDAQ.
With regard to our minimum bid price, March 20, 2001, marked the thirtieth
consecutive business day that the minimum bid price of our common stock was less
than $1.00. This constitutes a failure on our part to meet Nasdaq's continued
inclusion requirement for minimum bid price. On March 22, 2001, Nasdaq notified
us of this failure, and we have a period of 90 calendar days from that notice to
comply with the continued inclusion standard for minimum bid price. We can do so
by meeting the standard for a minimum of 10 consecutive business days during the
90 day compliance period.
In addition, the financial statements included with this Annual Report
show that on December 31, 2000, our net tangible assets were less than $2
million. Consequently, we expect to receive a deficiency notice from Nasdaq
notifying us that we have ten days to submit a plan to achieve and sustain
long-term compliance with all applicable listing criteria. If Nasdaq is not
satisfied with the plan that we submit or if we do not submit a plan, we will
then receive a staff determination from Nasdaq. Upon receipt of the staff
determination, we will have seven days to appeal the staff determination and
request a hearing before Nasdaq's Listing Qualifications Panel (the "panel"),
and such request will generally stay the delisting pending a determination by
the panel (called a "panel decision"). Failure to request a hearing within seven
calendar days will result in automatic delisting.
If we were to be delisted, trading, if any, in the securities would
thereafter be conducted in the over-the-counter market in the "pink sheets" or
the National Association of Securities Dealers' "Electronic Bulletin Board."
Consequently, the liquidity of our securities could be materially impaired, not
only in the number of securities that could 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, which could result in lower prices for
our securities than might otherwise be attained and could also result in a
larger spread between the bid and asked prices for our securities. In addition,
if our securities were delisted it could materially and adversely affect our
ability to raise funding.
In addition, if our securities are delisted from trading on NASDAQ and the
trading price of our common stock is less than $5.00 per share, our common stock
will become a "penny stock." Broker-dealers who sell penny
-12-
stocks must provide purchasers of these stocks with a standardized
risk-disclosure document prepared by the SEC. It 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 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. In the event our securities are delisted, 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 being delisted would also constitute an event of default under our
common stock purchase agreement with Fusion Capital Fund II, LLC.
Holders of our Series A preferred stock have rights superior to those of the
holders of our common stock.
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 could adversely affect the prevailing market price of our other
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 other securities.
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 other securities.
The holders of shares of Series A preferred stock have rights in addition
to those summarily described. A complete description of the rights of the Series
A preferred stock is contained in the certificate of designations of the Series
A preferred stock filed with the Secretary of State of Delaware.
Our securities are relatively illiquid compared to securities traded on the
principal trading markets.
Our securities are traded on the NASDAQ SmallCap Market and lack the
liquidity of securities traded on the principal trading markets. Accordingly, an
investor may be unable to promptly liquidate an investment in our securities.
Similarly, the sale of a larger block of our securities could depress the price
of our securities to a greater degree than a company that typically has a higher
volume of trading in its securities.
The market price of our common stock may be highly volatile.
The market price of our common stock has been and is expected to continue
to be highly volatile. Factors, including announcements of technological
innovations by us or other companies, regulatory matters, new or existing
products or procedures, concerns about our financial position, operating
results, government regulation, developments or disputes relating to agreements,
patents or proprietary rights, may have a significant impact on the market price
of our stock. In addition, potential dilutive effects of future sales of shares
of common stock by stockholders and by Atlantic, including Fusion Capital
pursuant to this prospectus and subsequent sale of common stock by the holders
of warrants and options could have an adverse effect on the prices of our
securities.
-13-
The sale of our common stock to Fusion may cause dilution and the sale of the
shares acquired by Fusion could cause the price of our common stock to decline.
The purchase price for the common stock to be issued to Fusion Capital
Fund II, LLC, under our common stock purchase agreement with them will fluctuate
based on the closing price of our common stock. See "Recent Developments"
regarding our agreement with Fusion.
All shares that we issue to Fusion Capital will be registered and freely
tradeable. However, Fusion has agreed that it will not sell or otherwise
transfer the commitment shares until the earliest of termination of the common
stock purchase agreement, our default under the agreement, or approximately 30
months from the date hereof. Fusion may sell none, some or all of the shares of
common stock purchased from Atlantic at any time. We expect that shares that we
issue to Fusion Capital will be sold over a period of up to 30 months from the
date of the related prospectus. Depending upon market liquidity at the time, a
sale of any of those shares at any given time could cause the trading price of
our common stock to decline. The sale of a substantial number of those shares,
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 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
sales of our common stock to Fusion 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 the Atlantic common stock due to the shares available
for sale by Fusion could refrain from purchases or effect sales in anticipation
of a decline of the market price.
ITEM 2. Description of Property
Through January 31, 2002, we have leased space for our executive office at
150 Broadway, Suite 1009, New York, New York 10038, for a monthly lease payment
of $967. On March 19, 2001, we moved into new offices at 350 Fifth Avenue, Suite
5507, New York, New York 10118. The lease for this space is for a term of two
years and two and a half months with a monthly lease payment of $6,645.
Optex's lease of spaces at 27452 Calle Arroyo, San Juan Capistrano,
California 92675, was transferred to B&L as of April 1, 2001, as part of the
sale to Bausch & Lomb of substantially all of Optex's assets.
Gemini's lease of space at 11000 Cedar Avenue, Cleveland, Ohio 44106 ended
on October 30, 2000. The space is now under a month-to-month rental agreement
with monthly payments of $1,933. The new rental agreement will continue until
Atlantic management makes a determination with regard to the 2-5A Antisense
Technology.
To facilitate Atlantic's exploration of investment opportunities in
fiber-optics, we are leasing 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 commencing May 17, 2000, with monthly lease payments of
$1,000 through May 14, 2001 and thereafter $1,251 per month until May 14, 2003.
We believe that our existing facilities are adequate to meet our current
requirements and that our insurance coverage adequately covers our interest in
our leased spaces. We do not own any real property.
ITEM 3. LEGAL PROCEEDINGS
There are no current or pending legal proceedings to which Atlantic or any
of its subsidiaries is a party or to which any of their properties is subject
other than the following.
Claim for Arbitration Brought by Cleveland Clinic Foundation
-14-
Atlantic's subsidiary, Gemini, has an exclusive worldwide sublicense from
the Cleveland Clinic Foundation to a U.S. patent and related patent
applications, as well as corresponding foreign applications, relating to 2-5A
chimeric antisense technology and its use for selective degradation of targeted
RNA. On May 8, 2000, the Cleveland Clinic Foundation filed a claim for
arbitration before the American Arbitration Association to terminate this
sublicense, claiming that Gemini has breached the sublicense by failing to
fulfill its obligations under the sublicense. Atlantic and the Cleveland Clinic
Foundation are currently engaged in discussions aimed at settling this dispute.
To that end, on April 5, 2001, the parties agreed to extend several arbitration
deadlines pursuant to Rule 40 of the AAA Commercial Arbitration Rules.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
-15-
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Our common stock is listed on the Nasdaq SmallCap Market. The following
table sets forth the high and low closing price for our common stock as quoted,
in U.S. dollars, by Nasdaq during each quarter within the last two fiscal years:
======================================
Quarter Ended High Low
======================================
March 31, 1999 $3.125 $1.313
--------------------------------------
June 30, 1999 $2.469 $1.063
--------------------------------------
September 30, 1999 $2.375 $1.125
--------------------------------------
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, 2000 $3.313 $0.406
======================================
The number of holders of record of our common stock as of March 28, 2001
was 120. The number of beneficial stockholders of our common stock as of March
28, 2001 was 1,880.
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 BH Capital Investments, L.P. and Excalibur Limited Partnership
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 (the "Series B 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 (the "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.
The issuance of the shares of Series B preferred stock and warrants did
not involve any public offering and therefore was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
The warrants are exercisable at the fixed exercise price or 110% of the
market price 180 days after the date of issuance, whichever is lower. Pursuant
to a second amendment to the purchase agreement, executed on January
-16-
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 our
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 our issuing a number of shares of
common stock in excess of the limit imposed by the rules of the Nasdaq SmallCap
Market.
Holders of shares of our outstanding Series B preferred stock can convert
each share into shares of common stock without paying Atlantic 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, but the conversion price will be reduced by an additional 5% if the
common stock is not listed on either the Nasdaq SmallCap Market or Nasdaq
National Market as of that date, and in no event will the conversion price be
lower than the floor price ($0.50 for the conversion of a share of Series B
preferred stock effected on or before March 28, 2002). The conversion price may
be adjusted in favor of holders of shares of Series B preferred stock upon
certain triggering events. The conversion rate is determined by dividing the
original price of the Series B preferred stock by the conversion price in effect
at the time of conversion; but before any adjustment is required upon the
occurrence of any such triggering events, the conversion price will be equal to
the original price of the Series B preferred stock.
On March 9, 2001, Atlantic and the Investors entered into stock repurchase
agreement no. 2. Pursuant to stock repurchase agreement no. 2, 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.
Issuance to Joseph Stephens & Company, Inc.
On January 4, 2000, we entered into a Financial Advisory and Consulting
Agreement with Joseph Stevens & Company, Inc. ("Joseph Stevens"). In this
agreement, we engaged Joseph Stevens to provide us with investment banking
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 issuance of the warrants did not involve any public offering and
therefore was exempt from the registration requirements of Section 5 of the
Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the Act.
The exercise price of each warrant is as follows:
======================================
Warrant No. of Exercise
Number Shares Price
======================================
No.1 150,000 $2.50
--------------------------------------
No.2 150,000 $3.50
--------------------------------------
No.3 150,000 $4.50
======================================
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.
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Issuance to TeraComm Research, Inc.
On May 12, 2000, we 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 our common stock, and a warrant to purchase a further
200,000 shares of our common stock. The warrants have a term of three years and
are exercisable at $8.975 per share of common stock, but only if the market
price of our common stock is $30 or more. We are accounting for the investment
in TeraComm in accordance with the equity method of accounting for investments
since we have the ability to exert significant influence over TeraComm including
through our Board representation.
The issuance of the common stock and warrants did not involve any public
offering and therefore was exempt from the registration requirements of Section
5 of the Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the Act.
On July 18, 2000, Atlantic 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, we
were required to pay TeraComm $1,000,000 and thereafter make to TeraComm three
payments of $1,000,000 at three-month intervals. If we failed to make any of
these payments, TeraComm's only recourse would be reducing proportionately our
ownership interest. Our failure to make the first $1,000,000 payment by midnight
at the end of December 30, 2000 (whether or not TeraComm has reached the
milestone) would at the option of TeraComm be deemed to constitute failure by us
to timely make that payment.
When we failed to make the first $1,000,000 payment by midnight at the end
of December 30, 2000, we were deemed to have surrendered to TeraComm a
proportion of our TeraComm shares equal to the proportion of the dollar value of
the purchase price for our 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% our actual ownership interest in TeraComm. However,
Atlantic continues to hold one seat on the Board of Directors, and therefore
continues to have the ability to exert significant influence.
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 the development of biomedical and
pharmaceutical products and technologies. We have rights to two technologies
which we believe may be useful in the treatment of a variety of diseases,
including cancer, infectious disease, and pain and inflammation, and we are
entitled to royalties and other revenues in connection with a third technology,
relating to the treatment of ophthalmic disorders. Our existing products and
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
2000 Versus 1999
From the commencement of operations through December 31, 2000, we have
generated $9,118,457 of revenue.
In accordance with a development agreement as amended in September 1999,
Bausch & Lomb Surgical reimbursed our subsidiary, Optex, for costs Optex
incurred in developing its Catarex technology, plus a profit component. For the
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
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$866,008. On March 2, 2001, Optex sold substantially all of its assets,
including those related to the Catarex technology, to Bausch & Lomb. The
development agreement was terminated and we will no longer receive development
revenue under that agreement.
Research and development expenditures consist primarily of costs
associated with research and development personnel; the cost of operating our
research and development laboratories; payments made under our license
agreements, sponsored research agreements, research agreements with institutes,
and consultants' agreements with its licensors, scientific collaborators, and
research institutes; and costs related to patent filings and maintenance. 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. 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 TeraComm's product development activity is in the
very early stages. The TeraComm investment is accounted for in accordance with
the equity method of accounting for investments as we continue to have the
ability to exert significant influence over TeraComm.
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,
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. 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 as partial compensation for investment banking services
provided by Joseph Stevens & Company during 2000.
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 $79,274 loss in equity in our affiliate, TeraComm, and 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.
1999 Versus 1998
During 1999, Optex's development agreement with Bausch & Lomb was amended
to include a profit component. Fees earned from the date of the amendment are
presented in our financial statements as development revenue. Prior to amendment
of this agreement in September 1999, reimbursements from Bausch & Lomb were
treated as a reduction of expenses and totaled $2,276,579 since the inception of
the agreement. Reimbursements made under the agreement in 1999 reduced our
research and development expenses by $1,044,708 and general and administrative
expenses by $184,360. Net general and administrative expenses for the year ended
December 31, 1999, were $1,941,425 as compared to $2,668,508 for the
corresponding period in 1998. This decrease was primarily attributable to a
general reduction in corporate overhead associated with reduced corporate
staffing, patent prosecution fees, advertising, and travel expenses.
Research and development expenses, including license fees, were $1,091,291
for the year ended December 31, 1999, as compared to $3,036,355 for the
corresponding period in 1998. These amounts are net of reimbursements from
Bausch & Lomb of $1,044,708 in 1999 and $899,936 in 1998. The decrease in
research and development expenses in 1999 was attributable to reduced research
and development activities for all of our technologies, except for the Catarex
technology being developed by Optex, with respect to which increased development
work was offset by higher reimbursement from Bausch & Lomb. Termination of the
license agreement between Channel and the Trustees of the University of
Pennsylvania contributed to reduced research and development activities.
-19-
Interest income in 1999 was $292,630 compared to $451,335 in 1998. The
decrease was attributable to reduced investment amounts.
LIQUIDITY AND CAPITAL RESOURCES
From inception to December 31, 2000, we incurred an accumulated deficit of
$24,826,334, and we expect to continue to incur additional losses for the
foreseeable future.
At December 31, 2000, we had $2,663,583 in cash and cash equivalents and
working capital of $798,726. We are also obligated, and contingently obligated,
under consulting and lease agreements to pay certain amounts in the future. See
Note 13 of Notes to Consolidated Financial Statements.
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs;
progress and cost of ongoing and planned pre-clinical and clinical testing;
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; levels of resources that we
devote to developing our manufacturing and commercializing capabilities;
technological advances; the status of competitors; our ability to establish
collaborative arrangements with other organizations; and our need to purchase
additional capital equipment.
In May 1998, Optex entered into a development and licensing agreement
pursuant to which it granted to Bausch & Lomb Surgical Incorporated, an
affiliate of Bausch & Lomb, a worldwide license to its rights to the Catarex
device. In September 1999, Optex and Bausch & Lomb Surgical amended this
agreement to expand Optex's role in development of the Catarex surgical device.
During 2000, we recorded development revenue from the amended agreement in the
amount of $5,169,288.
Pursuant to an asset purchase agreement dated January 31, 2001, between
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all its assets, including all those
related to the Catarex technology. The purchase price was $3 million paid at
closing ($600,000 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 if it ceases
developing the Catarex technology. Upon the acquisition, Bausch & Lomb's
development agreement with Optex was terminated.
We anticipate that our current resources, together with $2.4 million in
net proceeds from the Bausch & Lomb asset purchase agreement, less $617,067 used
to repurchase the remaining shares of our Series B preferred stock (see below),
will be sufficient to finance our currently anticipated needs for operating and
capital expenditures for at least the next twelve months. In addition, we will
attempt to generate additional capital through a combination of collaborative
agreements, strategic alliances, and equity and debt financing. However, we can
give no assurance that we will be able to obtain additional capital through
these sources or upon terms acceptable to us.
Until required for operations, our policy is to keep our cash reserves in
bank deposits, certificates of deposit, commercial paper, corporate notes, U.S.
government instruments and other investment-grade quality instruments.
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 (the "Series B preferred stock") and warrants to purchase
134,000 shares of our common stock. Half of the shares of
-20-
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 (the "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.
The conversion price per share of the Series B preferred stock was 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, but the conversion price will be reduced by an additional 5% if the
common stock is not listed on either the Nasdaq SmallCap Market or Nasdaq
National Market as of that date, and in no event will the conversion price be
lower than the floor price ($0.50 for the conversion of a share of Series B
preferred stock effected on or before March 28, 2002). The conversion price may
be adjusted in favor of holders of shares of Series B preferred stockupon
certain triggering events. The conversion rate is determined by dividing the
original price of the Series B preferred stock by the conversion price in effect
at the time of conversion; but before any adjustment is required upon the
occurrence of any such triggering events, the conversion price will be equal to
the original price of the Series B preferred stock.
On March 9, 2001, Atlantic and the Investors entered into a second stock
repurchase agreement ("stock repurchase agreement no. 2"). Pursuant to stock
repurchase agreement no. 2, 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 12, 2000, we 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 fiber optic communications
technologies. The purchase price for this ownership interest was $5,000,000 in
cash, 200,000 shares of our common stock, and a warrant to purchase a further
200,000 shares of our common stock. Of the $5,000,000 cash portion of the
purchase price, we paid $1,000,000. We are accounting for the investment
in TeraComm in accordance with the equity method of accounting for investments
since we have the ability to exert significant influence over TeraComm including
through our Board representation.
On July 18, 2000, Atlantic 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, we
were required to pay TeraComm $1,000,000 and thereafter make to TeraComm three
payments of $1,000,000 at three-month intervals. If we failed to make any of
these payments, TeraComm's only recourse would be reducing proportionately our
ownership interest. Our failure to make the first $1,000,000 payment by midnight
at the end of December 30, 2000 (whether or not TeraComm has reached the
milestone) would at the option of TeraComm be deemed to constitute failure by us
to timely make that payment.
When we failed to make this first $1,000,000 payment, we were deemed to
have surrendered to TeraComm a proportion of our TeraComm shares equal to the
proportion of the dollar value of the purchase price for our 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% our ownership
interest in TeraComm. However, Atlantic continues to hold one seat on the Board
of Directors, and therefore continues to have the ability to exert significant
influence.
On March 16, 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. 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. For further details, see our registration statement on Form S-3
filed with the SEC
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on March 25, 2001. However, Nasdaq delisting would constitute an event of
default under the purchase agreement with Fusion Capital, and Fusion Capital
would no longer be obligated to purchase our common stock.
We risk being delisted from the Nasdaq SmallCap Market. March 20, 2001,
marked the thirtieth consecutive business day that the minimum bid price of our
common stock was less than $1.00. This constitutes a failure on our part to meet
Nasdaq's continued inclusion requirement for minimum bid price. On March 22,
2001, Nasdaq notified us of this failure, and we have a period of 90 calendar
days from that notice to comply with the continued inclusion standard for
minimum bid price. We can do so by meeting the standard for a minimum of 10
consecutive business days during the 90 day compliance period.
In addition, the consolidated financial statements included with this
Annual Report show that on December 31, 2000, our net tangible assets were less
than $2 million. Consequently, we expect to receive a deficiency notice from
Nasdaq notifying us that we have ten days to submit a plan to achieve and
sustain long-term compliance with all applicable listing criteria. If Nasdaq is
not satisfied with the plan that we submit or if we do not submit a plan, we
will then receive a staff determination from Nasdaq. Upon receipt of the staff
determination, we will have seven days to appeal the staff determination and
request a hearing before Nasdaq's Listing Qualifications Panel (the "panel"),
and such a request will generally stay the delisting pending a determination by
the panel (called a "panel decision"). Failure to request a hearing within seven
calendar days will result in automatic delisting. In addition, if our securities
were delisted it could materially and adversely affect our ability to raise
additional funding.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, we adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" and
SFAS No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". SFAS No. 138 amends the accounting and reporting standards of SFAS
No. 133 for certain derivative instruments and certain hedging activities. SFAS
No. 133 requires a company to recognize all derivative instruments as assets and
liabilities in its balance sheet and measure them at fair value. The adoption of
these statements did not have a material impact on our consolidated financial
position, results of operations or cash flows, as we are currently not party to
any derivative instruments.
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 at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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
A. Joseph Rudick, M.D., 44, has been a director of Atlantic since May 1999
and Chief Executive Officer since April 10, 2000. He was also the President of
Atlantic from May 1999 until 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. ("Paramount"), 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.
Steve H. Kanzer, C.P.A., Esq., 37, has been a director of Atlantic since
its inception in 1993. Mr. Kanzer currently is a member of the Audit Committee
and the Compensation Committee. Since December 1997, Mr. Kanzer has been Chief
Executive Officer of a biotechnology holding company, Corporate Technology
Development, Inc., 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. Mr. Kanzer is a founder and Chairman of the Board of
Discovery Laboratories, Inc., and a member of the board of directors of Endorex
Corp., two publicly-traded pharmaceutical research and development companies.
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.
Frederic P. Zotos, Esq., 35, has been a director of Atlantic since May
1999 and President of Atlantic since April 3, 2000. From June 1999 until 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. He is Co-Chair of the Fairfield-Westchester and Chair of the New
York City Chapters of the Licensing Executive Society, and a member of its
Financial Markets Committee. 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.
Nicholas J. Rossettos, C.P.A., 35, has been Chief Financial Officer since
April 2000. Mr. Rossettos' most recent position was as Manager of Finance for
Centerwatch, a pharmaceutical trade publisher headquartered in Boston, MA that
is a wholly owned subsidiary of Thomson CP headquartered in Toronto, Canada.
Prior to that, he was Director of Finance and Administration for EnviroBusiness,
Inc., an environmental and technical management-consulting firm headquartered in
Cambridge, MA. He holds an A.B. in Economics from Princeton University and a
M.S. in Accounting and M.B.A. from Northeastern University.
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Peter O. Kliem, 62, has been a Director of Atlantic since March 21, 2000
and is a member of the Compensation Committee. Mr. Kliem is a co-founder,
President and COO 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. He serves as trustee and vice president of the
Boston Biomedical Research Institute and served as Chairman of PB Diagnostics.
He is a member of the board of directors of the privately held company,
Corporate Technology Development, Inc. In addition, he served as Industry
Advisor to TVM-Techno Venture Management. Mr. Kliem earned his M.S. in chemistry
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
Atlantic's officers, directors and persons who are the beneficial owners of more
than 10% of the common stock to file initial reports of ownership and reports of
changes in ownership of the common stock with the SEC. Officers, directors and
beneficial owners of more than 10% of the common stock are required by SEC
regulations to furnish Atlantic with copies of all Section 16(a) forms they
file.
Each of Atlantic's directors and executive officers was late in filing the
forms required by Section 16(a) of the Exchange Act during fiscal year 2000.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to our 1995 stock option plan, on April 12, 2000, Dr. Rudick was
granted options for 100,000 shares of common stock at an exercise price of
$4.1875. Additionally, on April 12, 2000, Dr. Rudick was granted options for
25,000 shares of common stock at an exercise price of $4.1875 in connection with
his promotion to Chief Executive Officer. During the 2000 fiscal year, options
for 50,000 shares of common stock that had been granted to Dr. Rudick on August
9, 1999, were rescinded in order to correct for the grant to Dr. Rudick during
the 1999 fiscal year of options for 37,000 shares of common stock above the
amount permitted by our stock option plan for that fiscal year. Pursuant to the
1995 stock option plan, on April 12, 2000, Frederic Zotos was granted options
for 100,000 shares of common stock at an exercise price of $4.1875.
Additionally, on April 12, 2000, Frederic Zotos was granted options for 150,000
shares of common stock at an exercise price of $4.1875 in connection with his
promotion to President. On April 12, 2000, Nicholas Rossettos was granted
options for 50,000 shares of common stock at an exercise price of $4.1875 in
connection with his promotion to Chief Financial Officer.
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 2000 whose compensation for that fiscal year was in excess of
$100,000. The individuals named in the table will be hereinafter referred to as
the "Named Officers." No other executive officer of Atlantic received
compensation in excess of $100,000 during fiscal year 2000. No executive officer
who would otherwise have been included in this table on the basis of 2000 salary
and bonus resigned or terminated employment during that year.
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SUMMARY COMPENSATION TABLE
---------------------------------- -------- ------------------------------------------- -------------------- -------------------
Annual Compensation Long-Term All Other
Compensation Compensation ($)
------------------------------------------- -------------------- -------------------
Awards
---------------------------------- -------- ------------ ------------ ----------------- -------------------- -------------------
Name and Principal Position Year Salary($) Bonus($) Other Annual Securities
Compensation ($) Underlying
Options/SARs(#)
---------------------------------- -------- ------------ ------------ ----------------- -------------------- -------------------
A. Joseph Rudick, M.D.(1) 2000 123,750 111,174 0 25,000 84,674(2)
Chief Executive Officer 1999 0 23,502 0 87,000(3) 81,523(4)
1998 0 0 10,000 0
---------------------------------- -------- ------------ ------------ ----------------- -------------------- -------------------
Frederic P. Zotos, Esq. (5) 2000 131,250 50,000 10,000(6) 250,000 14,750(7)
President 1999 0 0 0 37,000 2,600(8)
1998 0 0 0 0 0
---------------------------------- -------- ------------ ------------ ----------------- -------------------- -------------------
Nicholas J. Rossettos, C.P.A.(9) 2000 91,146 25,000 10,000(10) 50,000 0
Chief Financial Officer, 1999 0 0 0 0 0
Treasurer and Secretary 1998 0 0 0 0 0
---------------------------------- -------- ------------ ------------ ----------------- -------------------- -------------------
-------------------------
(1) Dr. Rudick became Chief Executive Officer of Atlantic on April 10, 2000.
(2) Represents $86,174 paid to Dr. Rudick 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), less $1,500 returned to
Atlantic by him due to mistaken overpayment of director's fees for the
1999 fiscal year.
(3) 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.
(4) 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).
(5) Mr. Zotos became President of Atlantic on April 3, 2000.
(6) Represents matching contributions by Atlantic pursuant to Atlantic's
SAR-SEP retirement plan.
(7) Represents $8,000 in fees paid for consulting services rendered and $6,750
in director's fees.
(8) Represents fees paid for consulting services rendered.
(9) Mr. Rossettos became Chief Financial Officer of Atlantic on April 10, 2000.
(10) Represents matching contributions by Atlantic pursuant to Atlantic's
SAR-SEP retirement plan.
OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock
options under the 1995 stock option plan and otherwise to the Named Officers
during the 2000 fiscal year. Except as described in footnote (1) below, no stock
appreciation rights were granted during the 2000 fiscal year.
-25-
OPTION/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------------------------------------
Individual Grants
--------------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Underlying Exercise Price Expiration
Underlying Options/ Options/SARs Granted to ($/Share)(3) Date
SARs Granted(#)(1) Employees in Fiscal
Year(2)
----------------------------------- ---------------------- ------------------------- ---------------- --------------
A. Joseph Rudick M.D.(4) 125,000 25% $4.1875 4/12/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Frederic P. Zotos, Esq. 250,000 51% $4.1875 4/12/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Nicholas J. Rossettos, CPA 50,000 10% $4.1875 4/12/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Other Employees 20,000 4% $4.1875 4/12/10
50,000 10% $3.4375 5/15/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
------------------------
(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. Dr. Rudick's options became exercisable as follows: (1) the
first option for 100,000 shares of common stock, 25% upon granting and 25%
each of the first three anniversaries of the date of granting; (2) the
second option for 25,000 shares of common stock, 25% upon granting and 25%
each of the first three anniversaries of the date of granting. Mr. Zotos'
options are exercisable as follows: (1) the first option for 100,000
shares of common stock, 25% upon granting and 25% each of the first three
anniversaries of the date of granting; (2) the second option for 150,000
shares of common stock, 25% upon granting and 25% each of the first three
anniversaries of the date of granting. Mr. Rossettos' options for 50,000
shares of common stock are exercisable as follows: 25% upon granting and
25% each of the first three anniversaries of the date of granting. Options
for the remainder of the employees are exercisable as follows: (1) the
option for 20,000 shares of common stock, 25% upon granting and 25% each
of the first three anniversaries of the date of granting; (2) the option
for 50,000 shares of common stock, 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 495,000 shares of
common stock during the 2000 fiscal year.
(3) The exercise price may be paid in cash or in shares of common stock
(valued at fair market value on the exercise date) or through a cashless
exercise procedure involving a same-day sale of the purchased shares.
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 such 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 such tax liability.
(4) Stock options for 50,000 shares granted to Dr. Rudick on August 9, 1999,
would have vested upon the sale of Optex on January 31, 2001. These
options were, however, rescinded during the 2000 fiscal year, in order to
correct for the grant to Dr. Rudick in the 1999 fiscal year of options for
37,000 shares above the amount permitted by the 1995 stock option plan for
that fiscal year.
-26-
OPTION EXERCISE AND HOLDINGS
The following table provides information with respect to the Named
Officers concerning the exercisability of options during the 2000 fiscal year
and unexercisable options held as of the end of the 2000 fiscal year. No stock
appreciation rights were exercised during the 2000 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.
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
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
A. Joseph Rudick, M.D. 0 -- 94,361 127,639 0 0
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
Frederic P. Zotos 0 -- 92,833 194,167 0 0
----------------------------- -------------- ---------------- -------------- ----------------- ----------------- ------------------
Nicholas J. Rossettos 0 -- 12,500 37,500 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 Atlantic's common stock on December 31,
2000 of $0.66 per share, the closing sales price per share on that date on
the Nasdaq SmallCap Market.
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 September 29,
2000, 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 $3.1875 per share, the fair market value of our common
stock on the date of grant. Additionally, on September 29, 2000, Peter Kliem was
granted options for 25,000 shares of common stock at an exercise price of
$3.1875. On September 29, 2000, Steve Kanzer was granted options for 25,000
shares of common stock at an exercise price of $3.1875. Peter Kliem was also
granted options for 23,000 shares of common stock on April 6, 2000, at an
exercise price of $5.125 and options for 10,000 shares of common stock on March
21, 2000, at an exercise price of $6.125.
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.
-27-
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
AGREEMENTS
Effective November 15, 1995, Shimshon Mizrachi became Controller of
Atlantic and of each of Atlantic's subsidiaries pursuant to a letter agreement
dated November 6, 1995. Mr. Mizrachi and his dependents were also eligible to
receive paid medical and long-term disability insurance and such other health
benefits as Atlantic made available to its other senior officers and directors.
Effective January 7, 2000, Atlantic terminated the employment of Mr. Mizrachi
and was obligated, pursuant to the letter agreement, to pay his salary for six
months thereafter, subject to Mr. Mizrachi's duty to mitigate damages by seeking
alternative employment.
Effective April 10, 2000, Dr. Rudick became Chief Executive Officer of
Atlantic pursuant to an employment agreement dated as of the effective date.
This agreement has a three-year term ending on April 10, 2003. Dr. Rudick
reports to our board of directors. Dr. Rudick and his dependents are eligible
to receive paid medical and long term disability insurance and such other health
benefits as Atlantic makes available to other senior officers and directors.
Effective April 3, 2000, Mr. Zotos became President of Atlantic 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.
Effective April 10, 2000, Mr. Rossettos became Chief Financial Officer of
Atlantic 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 President or Chief Executive Officer. 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 common stock as of March 30, 2001, 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 30, 2001, 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.
-28-
NUMBER OF % OF TOTAL SHARES
NAME AND ADDRESS SHARES OUTSTANDING(1)
---------------- ------ -----------
CERTAIN BENEFICIAL HOLDERS:
Lindsay A. Rosenwald, M.D.(2) 499,298 7.7%
787 Seventh Avenue
New York, NY 10019
VentureTek, L.P.(3) 438,492 6.8%
40 Exchange Place 20th Floor
New York, NY 10005
MANAGEMENT:
A. Joseph Rudick, M.D.(4) 130,333 2.0%
Frederic P. Zotos, Esq.(5) 158,666 2.5%
Steve H. Kanzer, C.P.A., Esq.(6) 60,000 1%
Peter O. Kliem(7) 38,500 *
Nicholas J. Rossettos, C.P.A.(8) 25,000 *
All current executive
officers and directors as
a group (5 persons) 412,499 6.4%
------------------------
* Less than 1.0%
(1) Percentage of beneficial ownership is calculated assuming 6,458,424 shares
of common stock were outstanding on March 30, 2001.
(2) Includes 344,508 shares of common stock and 154,410 shares of common stock
issuable upon conversion of 47,202 shares of Series A preferred stock
within 60 days of March 30, 2001. 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) The general partner of VentureTek, L.P. is Mr. C. David Selengut. Mr.
Selengut may be considered a beneficial owner of shares owned by
VentureTek, L.P. by virtue of his authority as general partner to vote and
dispose of those shares. VentureTek, L.P. is a limited partnership, the
limited partners of which include Dr. Rosenwald's wife and children, and
sisters of Dr. Rosenwald's wife and children. Dr. Rosenwald disclaims
beneficial ownership of those shares.
(4) Represents options exercisable within 60 days of March 30, 2001. 50,000
shares of common stock are exercisable pursuant to stock options granted
under the plan on April 12, 2000 for 100,000 shares, of which 25% or
25,000 shares were exercisable on April 3, 2000, then an additional 25%
annually thereafter;
-29-
an additional 12,500 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 25,000 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 9,167 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. Does
not include 50,000 shares exercisable pursuant to stock options granted on
August 9, 1999, all of which would have been exercisable upon the sale of
Optex on January 31, 2001, because we rescinded this grant in the 2000
fiscal year in order to correct the grant of stock options to Dr. Rudick
in the 1999 fiscal year above the amount permitted by the stock option
plan for that year.
(5) Represents options exercisable within 60 days of March 30, 2001. 50,000
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 75,000 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, the first of three equal annual amounts
exercisable starting one year from grant date.
(6) Represents options exercisable within 60 days of March 30, 2001. 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 December 31, 2000. 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; and an
additional 11,500 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.
(8) Represents options exercisable within 60 days of March 30, 2001. 25,000
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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In recognition of his role in negotiating an amendment to Optex's contract
with Bausch & Lomb (see "Business--Optex Ophthalmologics, Inc."), Atlantic
agreed to pay to Dr. Rudick, Atlantic's President, an amount equal to $141,012.
This amount will be paid in 18 monthly installments ($7,834 per month), which
commenced October 1999, out of the profit component of Bausch & Lomb's payments
to Optex. Under this arrangement, Dr. Rudick received in 1999 a total of $23,507
covering 3 monthly installments and in 2000 a total of $86,174 covering 11
monthly installments. The remaining four installments will be paid in 2001. We
felt it was appropriate to enter into this arrangement, given that the deal
struck with Bausch & Lomb was considerably more advantageous
-30-
to us than the deal tentatively agreed to by us prior to Dr. Rudick's joining
the board and becoming President, and given also that in 2000 Dr. Rudick spent
more time on Atlantic matters than Atlantic had any right to expect, given that
Dr. Rudick's compensation was initially limited to consulting fees of $6,000 a
month.
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 investment banking services from January 4,
2000 until January 4, 2001. As partial compensation for the services to be
rendered by Joseph Stevens, we issued them three warrants to purchase an
aggregate of 450,000 shares of our common stock. The exercise price and exercise
period of each warrant is as follows:
=============================================================================
Warrant No. of Exercise
Number Shares Price Exercise Period
=============================================================================
No.1 150,000 $2.50 1/4/00 through 1/4/05
-----------------------------------------------------------------------------
1/4/01 through 1/4/06 (subject to
vesting in equal monthly increments
No.2 150,000 $3.50 from 1/4/00-1/4/01)
-----------------------------------------------------------------------------
1/4/02 through 1/4/07 (subject to
vesting in equal monthly increments
No.3 150,000 $4.50 from 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 Atlantic's restated certificate of incorporation and bylaws,
Atlantic enters into indemnification agreements with each of its directors and
executive officers.
All transactions between Atlantic and its 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 all of the transactions set
forth above were 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.
-31-
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.
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 by and 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 by and between Atlantic and
Joseph Stevens & Company, L.P.
4.8(1) Form of Subscription Agreement by and 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 by and among 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.
-32-
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.
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 by and among 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 by and between
Optex and Bausch & Lomb Surgical, Inc. dated September 16, 1999.
10.27(8) Financial Advisory and Consulting Agreement by and 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.
-33-
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.
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 Letter Agreement, dated December 28, 2000, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership. (filed
herewith).
-34-
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 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. (filed
herewith).
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 Letter Agreement, dated January 25, 2001, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership. (filed
herewith).
10.54(13) Stock Repurchase Agreement No. 2, dated March 9, 2001, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
21.1(1) Subsidiaries of Atlantic.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (included in Part III of this Report under the
caption "Signatures").
------
+ Confidential treatment has been granted as to certain portions of these
exhibits.
(1) Incorporated by reference to exhibits of Atlantic's Registration Statement
on Form SB-2, Registration #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.
(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 (Registration 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
period 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.
-35-
(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.
REPORTS ON FORM 8-K
On December 11, 2000, we filed with the SEC a report on Form 8-K stating
that on December 4, 2000, Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership entered into a stock repurchase agreement, a copy of which
was attached thereto.
On December 29, 2000 we filed with the SEC a report on Form 8-K stating
that on December 28, 2000, Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership amended the stock repurchase agreement entered into on
December 4, 2000, by extending from January 2, 2001 to January 9, 2001 the
expiration date of our option to repurchase on terms specified in the stock
repurchase agreement the remaining 206,898 shares of our Series B convertible
preferred stock held by BH Capital Investments, L.P. and Excalibur Limited
Partnership.
-36-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Atlantic has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on April 16,
2001.
Atlantic Ventures Technology, Inc.
/s/ Frederic P. Zotos
------------------------------
Frederic P. Zotos
President and Director
Power of Attorney and Signatures
We, the undersigned officers and directors of Atlantic Ventures
Technology, Inc., hereby severally constitute and appoint A. Joseph Rudick our
true and lawful attorney, with full power to him, to sign for us in our names in
the capacities indicated below, all amendments to this Annual Report on Form
10-KSB, and generally to do all things in our names and on our behalf in such
capacities to enable Atlantic Ventures Technology, Inc. to comply with the
provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
Atlantic and in the capacities and on the dates indicated.
Signatures Titles Date
---------- ------ ----
/s/ A. Joseph Rudick CEO and Director April 16, 2001
--------------------
A. Joseph Rudick
/s/ Steve H. Kanzer Director April 16, 2001
-------------------
Steve H. Kanzer
/s/ Frederic P. Zotos President and Director April 16, 2001
---------------------
Frederic P. Zotos
/s/ Nicholas J. Rossettos Chief Financial Officer April 16, 2001
------------------------- and Secretary
Nicholas J. Rossettos
/s/ Peter O. Kliem Director April 16, 2001
---------------------
Peter O. Kliem
-37-
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years ended
December 31, 2000, 1999 and 1998 and for the Period
from July 13, 1993 (inception) to December 31, 2000 F-3
Consolidated Statements of Stockholders' Equity for the
Period from July 13, 1993 (inception) to December 31, 2000 F-4
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998 and for the Period from
July 13, 1993 (inception) to December 31, 2000 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 accompanying consolidated balance sheets of Atlantic
Technology Ventures, Inc. and subsidiaries (a development stage company) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000 and for the period from July 13, 1993
(inception) to December 31, 2000. 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,
2000 and 1999, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2000, and for the
period from July 13, 1993 (inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Short Hills, New Jersey
March 30, 2001
F-1
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
As of December 31,
Assets 2000 1999
------------------ -------------------
Current assets:
Cash and cash equivalents $ 2,663,583 3,473,321
Accounts receivable 192,997 337,323
Prepaid expenses 22,599 17,414
------------------ -------------------
Total current assets 2,879,179 3,828,058
Property and equipment, net 227,088 131,832
Investment in affiliate 67,344 --
Other assets 2,901 --
------------------ -------------------
Total assets $ 3,176,512 3,959,890
================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 785,838 542,759
Deferred revenue 1,294,615 --
------------------ -------------------
Total current liabilities $ 2,080,453 542,759
Redeemable Series B convertible preferred stock.
Authorized 1,647,312 shares; 206,896 shares issued and
outstanding at December 31, 2000 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: None issued and outstanding -- --
Series A convertible preferred stock, $.001 par value.
Authorized 1,375,000 shares; 359,711 and 610,088 shares issued and
outstanding at December 31, 2000 and 1999, respectively (liquidation
preference aggregating $4,676,243 and $7,931,144 at December 31, 2000
and 1999, respectively) 360 610
Convertible preferred stock warrants, 112,896 and 117,195
issued and outstanding at December 31, 2000 and
1999, respectively 520,263 540,074
Common stock, $.001 par value. Authorized 50,000,000
shares; 6,122,135 and 4,815,990 shares issued and outstanding
at December 31, 2000 and 1999, respectively 6,122 4,816
Common stock subscribed. 182 shares at December 31, 2000
and 1999 -- --
Additional paid-in capital 24,796,190 21,662,272
Deficit accumulated during development stage (24,826,334) (18,790,099)
------------------ -------------------
496,601 3,417,673
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------------ -------------------
Total stockholders' equity 496,059 3,417,131
------------------ -------------------
Total liabilities and stockholders' equity $ 3,176,512 3,959,890
================== ===================
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
(inception) to
Year ended December 31, December 31,
-----------------------------------------------------
2000 1999 1998 2000
--------------- --------------- -------------- ----------------
Revenues:
Development revenue $ 5,169,288 $ 1,082,510 $ -- $ 6,251,798
License revenue -- -- 2,500,000 2,500,000
Grant revenue 189,658 77,069 -- 366,659
--------------- --------------- -------------- ----------------
Total revenues 5,358,946 1,159,579 2,500,000 9,118,457
--------------- --------------- -------------- ----------------
Costs and expenses:
Cost of development revenue 4,135,430 866,008 -- 5,001,438
Research and development 1,130,345 1,091,291 3,036,355 9,504,910
Acquired in-process research and
development 2,653,382 -- -- 2,653,382
General and administrative 2,235,535 1,941,425 2,668,508 15,903,226
Compensation expense relating to
stock options and warrants 1,020,128 -- -- 1,020,865
License fees -- -- -- 173,500
--------------- --------------- -------------- ----------------
Total operating expenses 11,174,820 3,898,724 5,704,863 34,257,321
--------------- --------------- -------------- ----------------
Operating loss (5,815,874) (2,739,145) (3,204,863) (25,138,864)
Other (income) expense:
Interest and other income (92,670) (292,630) (451,335) (1,251,136)
Interest expense -- -- -- 625,575
Equity in loss of affiliate 79,274 -- -- 79,274
--------------- --------------- -------------- ----------------
Total other (income) expense (13,396) (292,630) (451,335) (546,287)
--------------- --------------- -------------- ----------------
Net loss $ (5,802,478) $ (2,446,515) $ (2,753,528) $ (24,592,577)
=============== =============== ============== ================
Imputed convertible preferred stock
dividend -- -- 1,628,251 5,331,555
Dividend paid upon repurchase of Series B 233,757 -- -- 233,757
Preferred stock dividend issued in
preferred shares 811,514 314,366 -- 1,283,063
--------------- --------------- -------------- ----------------
Net loss applicable to common shares $ (6,847,749) (2,760,881) (4,381,779) (31,440,952)
=============== =============== ============== ================
Per share - basic and diluted
Net loss applicable to common shares $ (1.21) (0.59) (1.13)
=============== =============== ==============
Weighted average shares of common
stock outstanding 5,656,741 4,692,912 3,883,412
=============== =============== ==============
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 (4,299) (19,811) 9,453 9
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 -- $ --
=========== =========== =========== ===========
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 -- -- 19,802 --
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
=========== =========== =========== ===========
Deficit
accumulated
Common Stock Additional during Deferred
Subscribed paid-in development compen-
Number Amount capital stage sation
-------- ----------- ---------- ------------ ---------
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 -- (144,000)
Amortization of deferred compensation -- -- -- -- 12,000
Net loss -- -- -- (4,880,968) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 182 -- 9,043,875 (4,880,968) (132,000)
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 -- -- -- -- 28,800
Net loss -- -- -- (3,557,692) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 182 -- 10,634,938 (8,438,660) (103,200)
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 -- -- -- -- 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 182 -- 21,493,715 (13,590,056) (74,400)
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 -- -- -- -- 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 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 -- -- -- --
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) --
=========== =========== =========== =========== ===========
Common Total
stock stock-
subscrip- holders'
tions Treasury equity
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 -- -- 64,782
Amortization of deferred compensation -- -- 12,000
Net loss -- -- (4,880,968)
----------- ----------- -----------
Balance at December 31, 1995 (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
Net loss -- -- (3,557,692)
----------- ----------- -----------
Balance at December 31, 1996 (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
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 (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
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 -- -- --
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
=========== =========== ===========
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
(inception) to
Year ended December 31, December 31,
------------------------------------------
2000 1999 1998 2000
------------ ------------ ------------ -------------
Cash flows from operating activities:
Net loss $(5,802,478) (2,446,515) (2,753,528) (24,592,577)
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 warrants -- -- -- 298,202
Expense relating to the issuance of options -- -- 81,952 81,952
Expense related to Channel merger -- -- -- 657,900
Change in equity of affiliate 79,274 -- -- 79,274
Compensation expense relating to
stock options and warrants 1,020,128 -- 74,400 1,228,910
Discount on notes payable - bridge financing -- -- -- 300,000
Depreciation 76,095 113,771 166,553 506,505
Loss on disposal of furniture and equipment -- 73,387 -- 73,387
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 144,326 43,692 (381,015) (192,997)
(Increase) decrease in prepaid expenses (5,185) 24,694 (40,858) (22,599)
Increase in deferred revenue 1,294,615 -- -- 1,294,615
Increase (decrease) in accrued expenses 243,079 (114,242) 264,435 785,838
Increase (decrease) in accrued interest -- -- -- 172,305
(Increase) decrease in other assets (2,901) -- -- (2,901)
----------- ----------- ----------- -----------
Net cash used in operating activities (1,153,047) (2,305,213) (2,588,061) (17,532,186)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (171,351) (62,917) (177,765) (813,081)
Investment in affiliate (146,618) -- -- (146,618)
Proceeds from sale of furniture and equipment -- 6,100 -- 6,100
----------- ----------- ----------- -----------
Net cash used in investing activities (317,969) (56,817) (177,765) (953,599)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500 5,500
Proceeds from exercise of stock options 344,598 -- 52,500 397,098
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 -- (318) -- (318)
Proceeds from the issuance of common stock -- -- -- 7,547,548
Proceeds from issuance of convertible preferred stock 828,488 -- -- 11,441,672
Repurchase of convertible preferred stock (511,808) -- -- (511,808)
----------- ----------- ----------- -----------
Net cash provided by financing activities 661,278 (318) 58,000 21,149,368
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (809,738) (2,362,348) (2,707,826) 2,663,583
Cash and cash equivalents at beginning of period 3,473,321 5,835,669 8,543,495 --
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,663,583 3,473,321 5,835,669 2,663,583
=========== =========== =========== ===========
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 -- 30,069 49,880
Conversion of preferred to common stock 1,011 313 1,367 2,426
Preferred stock dividend issued in shares 811,514 314,366 -- 1,125,880
=========== =========== =========== ===========
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, 2000, 1999 and 1998
(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 operating companies - Gemini Technologies, Inc. (Gemini), and Optex
Ophthalmologics, Inc. (Optex), and has 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. Optex (an 81.2%-owned subsidiary) was
incorporated on October 19, 1993 to develop its principal product, a novel
cataract removal device. On March 7, 2001, the Company concluded the sale
of substantially all of its Optex assets to Bausch & Lomb, Inc. (see note
12.) 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 7). Channel ceased operations during
1999. The Company also holds a 14.4% ownership in a fiber optic switching
company, TeraComm Research, Inc. (see note 4).
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 accompanying consolidated financial statements have been prepared
assuming that the Company will operate as a going concern. The Company
anticipates that their current liquid resources, together with the $2.4
million in net proceeds received in March 2001 from an agreement between
the Company and Bausch & Lomb (see note 12) less $617,067 paid to certain
investors in conjunction with the repurchase of Series B convertible
preferred stock (see note 7) will be sufficient to finance their currently
anticipated needs for operating and capital expenditures for at least the
next 12 months. In addition, the Company will attempt to generate
additional capital through a combination of collaborative agreements,
strategic alliances and equity and debt financing. However, the Company can
give no assurance that they will be able to obtain additional capital
through these sources or upon terms acceptable to them.
F-6
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
principally using straight-line methods over their useful lives, generally
five years, except for leasehold improvements which are depreciated over
the lesser of five years or the term of the lease.
Minority Interest
The Company has recorded 100% of the losses of the Operating Companies in
its consolidated statements of operations as the minority shareholders are
not required to and have not funded their pro rata share of losses.
Minority interest losses recorded by the Company since inception total
$454,075 as of December 31, 2000 and will only be recovered if and when the
Operating Companies generate income to the extent of those losses recorded
by the Company.
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.
F-7
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Revenue Recognition
Revenue under research contracts is recorded as earned under the contracts,
generally 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 will be
recognized when and if the milestones are achieved. Continuation of certain
contracts and grants are dependent upon the Company achieving specific
contractual milestones; however, none of the payments received to date are
refundable regardless of the outcome of the project. Grant revenue is
recognized in accordance with the terms of the grant and as services are
performed, and generally equals the related research and development
expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities, and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income," the
Company applies the rules for the reporting and display of comprehensive
income and its components. The net loss is equal to the comprehensive loss
for all periods presented.
Computation of Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share is the same
as basic net loss per common share, as common equivalent shares from stock
options, stock warrants, stock subscriptions, and convertible preferred
stock would have an antidilutive effect because the Company incurred a net
loss during each period presented.
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.
F-8
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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 of 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, 2000 and 1999, 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.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and, as amended, is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133 standardizes the
accounting for derivative instruments including certain derivative
instruments embedded in other contracts and requires derivative instruments
to be recognized as assets and liabilities and recorded at fair value. The
Company currently is not party to any derivative instruments. Any future
transactions involving derivative instruments will be evaluated based on
SFAS No. 133.
(3) Property and Equipment
Property and equipment consists of the following at December 31,:
2000 1999
--------- ---------
Furniture and equipment $ 440,493 269,142
Leasehold improvements 83,861 83,861
--------- ---------
524,354 353,003
Less accumulated depreciation (297,266) (221,171)
--------- ---------
Net property and equipment $ 227,088 131,832
========= =========
(4) 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 is accounting for its investments in TeraComm in accordance with
the equity method of accounts for investment since the Company has the
ability to exert significant influence over TeraComm, primarily through its
representation on the TeraComm Board of Directors.
F-9
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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, Atlantic continues to hold a
seat on the Board of Directors of TeraComm and continues to have the
ability to exert significant influence.
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 losses of TeraComm amounted to $79,274
in 2000.
(5) 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.
F-10
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(6) 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.
(7) Stockholders' Equity
Common Stock
In 1993, the Company received common stock subscriptions for 5,231 shares
of common stock from various individuals, including the Controlling
Shareholder and the Partnership, in exchange for common stock subscriptions
receivable of $6,277. In December 1994, the Company issued 2,606 shares of
common stock upon receipt of payment of $3,127 representing a portion of
these common stock subscriptions receivable.
In June 1994, the Company received common stock subscriptions for 84 shares
of common stock from various individuals including directors and employees.
Payment of the related common stock subscriptions receivable in the amount
of $101 was received in December 1994 which resulted in the issuance of 84
shares of common stock.
In August 1994, the Company received common stock subscriptions for 872
shares of common stock from certain investors. Payment of the related
common stock subscriptions receivable in the amount of $33,000 and $18,625
was received in August 1994 and December 1994, respectively, which resulted
in the issuance of 860 shares of common stock.
In March 1995, June 1995, and August 1995, the Company repurchased 62, 20,
and 187 shares of common stock, respectively, for an aggregate total of
$324.
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
F-11
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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 5).
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 4).
Convertible Preferred Stock
Series A Preferred
In May and August, 1997, the Company sold in a private placement 1,237,200
shares of Series A convertible preferred stock (Series A Preferred) 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
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, 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.
F-12
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Holders of Series A Preferred 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 are entitled to payment-in-kind
dividends, payable semi-annually in arrears, on their respective shares of
Series A Preferred at the annual rate of 0.13 shares of Series A Preferred
for each outstanding share of Series A Preferred. 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 for each share of Series A Preferred 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 for each share of Series A Preferred 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. On February 15, 2000, and
August 7, 2000, the Company issued the respective payment-in-kind dividends
based on the holders as of the record dates of February 2, 2000, and August
7, 2000, respectively. The estimated fair value of the respective dividends
are included in the Company's calculation of the 2000 and 1999 net loss per
common share.
The holders of shares of Series A Preferred 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 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, the Company
recognized $1,628,251 and $3,703,304 in 1998 and 1997, respectively, as an
imputed preferred stock dividend in the calculation of net loss per common
share to record the difference between the conversion price of the
preferred stock and the market price of the common stock on the effective
date of the private placement.
Upon liquidation, the holders of shares of Series A Preferred then
outstanding will first be entitled to receive, pro rata, and in preference
to the holders of common stock, Series B Preferred 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 provides that the
Company may not issue securities that have superior rights to Series A
Preferred without the consent of the holders of Series A Preferred.
Accordingly, so long as these convertible securities remain unexercised and
shares of Series A Preferred remain uncovered, the terms under which the
Company could obtain additional funding, if at all, may be adversely
affected.
Redeemable Series B Preferred
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
F-13
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Company's Series B convertible preferred stock (Series B Preferred) and
warrants to purchase 134,000 shares of the Company's common stock. Half of
the shares of the Series B Preferred (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 Stock Repurchase Agreement) pursuant to which the
Company repurchased from the Investors for $500,000, 137,930 shares of
Series B Preferred, which represents 125% of the purchase price paid by the
Investors for those shares and for warrants to purchase 26,800 shares of
the Company's common stock with an estimated value of $28,719, 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 held in escrow. The
Company also allowed the Investors to keep all of the warrants issued under
the Purchase Agreement and released from escrow to the Investors warrants
to purchase 67,000 shares of the Company's common stock with an estimated
value of $71,799, and issued to the Investors warrants to purchase a
further 20,000 shares of the Company's common stock at the same exercise
price with an estimated value of $21,432. 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 shares and deducted from
net loss to arrive at net loss applicable to common shares.
The warrants are exercisable at the fixed exercise price or 110% of the
market price 180 days after the date of issuance, whichever is lower.
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 5 years from the date of
granting. The warrants may not be exercised if doing so would result in the
Company's issuing a number of shares of common stock in excess of the limit
imposed by the rules of the Nasdaq SmallCap Market.
Pursuant to the Company's renegotiations with the Investors, the Company is
required, among other things, to redeem on March 28, 2002, all outstanding
shares of Series B Preferred 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
may at any time redeem all outstanding shares of Series B Preferred at the
Redemption Price. As a result of the renegotiations discussed in this
paragraph, the Series B Preferred is considered redeemable and the
remaining outstanding shares at December 31, 2000 are classified outside of
permanent equity in the accompanying consolidated balance sheet. At
December 31, 2000, the Company had 206,896 shares outstanding at a carrying
amount of $2.90 per share.
Holders of shares of the Company's outstanding Series B Preferred could
convert each share into shares of common stock without paying the Company
any cash. The conversion price per share of the
F-14
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Series B Preferred was also amended by the second amendment to the Purchase
Agreement. The conversion price per share of Series B Preferred 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, but the
conversion price will be reduced by an additional 5% if the common stock is
not listed on either the Nasdaq SmallCap Market or Nasdaq National Market
as of that date, and in no event will the conversion price be lower than
the floor price ($0.50 for the conversion of a share of Series B Preferred
effected on or before March 28, 2002). The conversion price may be adjusted
in favor of holders of shares of Series B Preferred upon certain triggering
events. The conversion rate is determined by dividing the original price of
the Series B Preferred by the conversion price in effect at the time of
conversion; but before any adjustment is required upon the occurrence of
any such triggering events, the conversion price will be equal to the
original price of the Series B Preferred. 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 and the market price of the
common stock on the effective date of the renegotiation. This amount,
estimated at approximately $620,000, will be recorded as an imputed
preferred stock dividend within equity and will be included in the
calculation of net earnings/(loss) per common share in the first quarter of
2001.
On January 19, 2001, 41,380 shares of Series B Preferred 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 Stock Repurchase
Agreement No. 2, pursuant to which the Company repurchased from the
Investors, for an aggregate purchase price of $617,067, all 165,516 shares
of the Company's Series B Preferred held by the Investors on March 9, 2001.
The carrying amount of the 165,516 shares is equal to $480,000; therefore
the amount in excess of the carrying amount, which equals $137,067, will be
recorded as a dividend upon repurchase of Series B Preferred shares and
deducted from net loss to arrive at net loss applicable to common shares.
(8) Stock Options
In August 1995, in connection with a severance agreement entered into
between the Company and a former CEO, the Company granted options (not
pursuant to the 1995 Stock Option Plan) to purchase 23,557 shares of common
stock at an exercise price of $1.00 per share with immediate vesting. Total
compensation expense recorded at the date of grant with regards to those
options was $64,782 with the offset recorded as additional paid-in capital.
Stock Option Plan
In July 1995, the Company established the 1995 Stock Option Plan (the
Plan), which provided for the granting of up to 650,000 options to
officers, directors, employees and consultants for the purchase of stock.
In July 1996, the Plan was amended to increase the total number of shares
authorized for issuance by 300,000 shares to a total of 950,000 shares and
beginning with the 1997 calendar year, by an amount equal to one percent
(1%) of the shares of common stock outstanding on December 31 of the
immediately preceding calendar year. At December 31, 2000 and 1999,
1,102,977 and 1,054,817
F-15
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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 2000, the Company granted employees and directors an aggregate of
407,000 plan options and 175,000 options outside of the Plan. All stock
options granted during 2000, 1999 and 1998 were granted at the quoted
market price on the date of grant. On February 20, 2001, the Company
agreed to issue an aggregate of 550,000 stock options to certain executive
officers and employees 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:
2000 1999 1998
----------- ---------- ----------
Net loss applicable to common shares:
As reported $ 6,847,749 2,760,881 4,381,779
Pro forma 8,190,926 3,623,177 5,038,676
Net loss per common share - basic
and diluted:
As reported 1.21 0.59 1.13
Pro forma 1.45 0.77 1.30
F-16
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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 2000, 1999, and 1998: dividend yield of 0%; expected
volatility of 170% for 2000, 94% for 1999 and 95% for 1998; risk-free
interest rate of 6.5% for 2000 and 1999 and 5.0% for 1998; 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,
2000, 1999 and 1998 and changes during the years then ended is presented
below:
Weighted Weighted Weighted
average average average
2000 exercise 1999 exercise 1998 exercise
shares price shares price shares price
--------- -------- -------- ------- -------- --------
At the beginning
of the year 396,200 $ 3.25 837,798 $ 5.06 715,598 $ 5.16
Granted 582,000 4.10 221,000 1.39 192,200 3.19
Exercised (14,000) 2.56 -- -- (70,000) 0.75
Cancelled (160,000) 3.97 (662,598) 4.93 -- --
--------- -------- -------- ------- -------- --------
At the end of
the year 804,200 $ 3.73 396,200 $ 3.25 837,798 $ 5.06
======== ======= ========
Options exercisable
at year-end 354,478 211,869 574,660
========= ======== ========
Weighted-average
fair value of
options granted
during the year $ 4.06 $ 1.20 $ 2.84
======== ======== ========
F-17
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following table summarizes the information about Plan stock options
outstanding at December 31, 2000:
Remaining Number of
Exercise Number contractual options
price outstanding life exercisable
--------- ---------- ----------- ----------
1.313 50,000 8.61 years 25,000
1.375 20,000 8.41 years 6,666
1.500 75,000 8.81 years 75,000
1.750 6,000 8.73 years 6,000
2.313 2,000 7.66 years 2,000
3.188 54,000 9.75 years 50,000
3.250 40,000 7.61 years 31,112
3.438 50,000 9.38 years 12,500
4.188 445,000 9.28 years 111,250
5.125 23,000 9.27 years 5,750
6.125 10,000 9.22 years --
6.813 1,200 2.19 years 1,200
7.000 2,000 6.46 years 2,000
7.500 2,000 5.56 years 2,000
9.500 24,000 1.86 years 24,000
---------- ----------
804,200 354,478
========== ==========
(9) 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 6). 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-18
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
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. Thse 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 expires 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 expires 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 7, 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 expires 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 in
1997, the Company issued 123,720 warrants to designees of Paramount, the
placement agent. These warrants are initially
F-19
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
exercisable at a price equal to $11.00 per share and may be exercised at
any time during the 10-year period commenced February 17, 1998. The rights,
preferences and privileges of the shares of Series A Preferred 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 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 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, 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 as compensation expense relating to stock options and
warrants over the vesting period through January 4, 2001.
(10) 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 during 2000.
Consulting expense under these agreements was $8,000, $99,000 and $96,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
(11) Income Taxes
There was no current or deferred tax expense for the years ended December
31, 2000, 1999 and 1998 because of the Company's operating losses.
F-20
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The components of deferred tax assets and deferred tax liabilities as of
December 31, 2000 and 1999 are as follows:
2000 1999
------------ ------------
Deferred tax assets:
Tax loss carryforwards $ 9,239,517 7,003,948
Research and development credit 743,286 495,555
Fixed assets 2,563 9,651
------------ ------------
Gross deferred tax assets 9,985,366 7,509,154
Less valuation allowance 9,985,366 7,509,154
------------ ------------
Net deferred tax assets -- --
Deferred tax liabilities -- --
------------ ------------
Net deferred tax asset (liabality) $ -- --
============ ============
F-21
The reasons for the difference between actual income tax expense (benefit)
for the years ended December 31, 2000, 1999 and 1998 and the amount
computed by applying the statutory federal income tax rate to losses before
income tax (benefit) are as follows:
2000 1999 1998
-------------------- ---------------------- -------------------
% of % of % of
pretax pretax pretax
Amount earnings Amount earnings Amount earnings
-------- --------- --------- --------- --------- -------
Income tax expense
at statutory rate $(1,972,000) (34.0%) $ (832,000) (34.0%) $ (936,000) (34.0%)
State income taxes,
net of Federal
tax benefit (640,000) (10.9%) (147,000) (6.0%) (165,000) (6.0%)
Change in valuation
reserve 2,476,000 42.1% 527,000 21.5% 1,255,000 45.6%
Credits generated
in current year (248,000) (4.2%) (74,000) (3.0%) (183,000) (6.6%)
Adjustment to prior
estimated income
tax expense -- -- 529,000 21.6% -- --%
Other, net 385,000 7.0% (3,000) (0.1%) 29,000 1.0%
----------- ---- ----------- ---- ----------- ----
Income tax benefet $ -- --% $ -- --% $ -- --%
=========== ==== =========== ==== =========== ====
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,
2000, 1999 and 1998 was an increase of $2,476,000, $527,000 and $1,255,000,
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, 2000, the Company had federal and state net operating loss
tax carryforwards of approximately $23,500,000. The net operating loss
carryforwards expire in various amounts starting in 2008 and 2001 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-22
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(12) 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 cancellable by Bausch & Lomb at any time upon
six months written notice.
The Agreement provides that Bausch & Lomb will 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 shall reimburse Optex
for its research and development expenses not to exceed $2,500,000. Bausch
& Lomb shall 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, is required to
deliver to Bausch & Lomb within a stated period Catarex devices for use in
clinical trials, and is required to assist Bausch & Lomb in connection with
development of manufacturing processes for scale-up of manufacture of the
Catarex device. Additionally, Bausch & Lomb will reimburse Optex for all
costs, including labor, professional services and materials, incurred by
Optex in delivering those Catarex devices and performing manufacturing
services, and will pay Optex a fixed profit component of 25% based upon
certain of those costs.
During 2000 and 1999, Optex recorded revenue pursuant to the amended
Agreement of $5,169,288 and $1,082,510, respectively. The revenue recorded
in 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
expenses presented separately as cost of development revenue on the
consolidated statement of operations. Of this amount, $192,992 and $304,752
are recorded as an account receivable at December 31, 2000 and 1999,
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. The 1999 reimbursement received by
the Company prior to the amendment to the Agreement was
F-23
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
$1,229,068. As of December 31, 2000, the Company recorded $1,294,615 of
deferred revenue related to the amended Agreement, which represents
expenses paid in advance by Bausch & Lomb at a rate of 125% during 2000.
Revenue and related expense will be recorded as operations are incurred
during 2001. No such amounts existed at December 31, 1999.
In connection with the revised agreement, the Company agreed to pay a bonus
to its President totaling $141,000, payable monthly through September 2001.
At December 31, 2000 and 1999, $23,502 and $117,500, respectively, were due
and were included in accounts payable and accrued expenses in the
accompanying consolidated balance sheets.
On January 31, 2001, the Company entered into an agreement to sell
substantially all of the assets of Optex to Bausch & Lomb for $3,000,000
and certain future royalties. The sale closed on March 2, 2001, on which
date Optex received $3,000,000, approximately $600,000 of which was
distributed to the minority shareholders of Optex.
(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
cancellable 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. 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.
The Company have 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 6,162829 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 to Dr. Burstein based on sales of products
and processes incorporating technology licensed under the license, as well
as a percentage of any income derived from any sublicense of the licensed
technology. Furthermore, pursuant to the terms of the license, the Company
must satisfy certain other terms and conditions in order to retain the
license rights. If the Company fails to comply with certain terms of the
license, our license rights under the license could be terminated.
Operating Leases
The Company rents certain office space under operating leases which expire
in various years through 2003.
Aggregate annual lease payments for noncancellable operating leases are as
follows:
F-24
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Year ending
December 31,
---------------
2001 $ 138,000
2002 81,000
2003 26,000
---------
$ 245,000
=========
Rent expense related to operating leases for the years ended December 31,
2000, 1999 and 1998 was $161,810, $118,264 and $97,756, 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. Of this
amount, $140,833 was recorded in accrued expenses at December 31, 1998.
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.
F-25