UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[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
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ATLANTIC TECHNOLOGY VENTURES, INC.
(Exact name of issuer as specified in its charter)
Delaware 36-3898269
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
350 Fifth Avenue, Suite 5507, New York, New York
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10118 (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
TABLE OF CONTENTS
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PAGE
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PART I............................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS................................................................................1
General................................................................................................1
Corporate Structure....................................................................................1
Atlantic and Its Subsidiaries..........................................................................1
Optex and the Catarex 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...................................................................................11
ITEM 2. Description of Property...............................................................................13
ITEM 3. LEGAL PROCEEDINGS.....................................................................................13
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................14
PART II..........................................................................................................15
ITEM 5. Market for Common Equity and Related Stockholder Matters..............................................15
Recent Sales of Unregistered Securities...............................................................15
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
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................................................................................................39
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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. Any technologies or
rights to royalties or other revenues are held either by Atlantic or by our
subsidiaries Optex Ophthalmologics, Inc., or "Optex," and Gemini Technologies,
Inc., or "Gemini."
We seek to minimize 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.
1
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, that Optex incurred 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, among
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all its assets (mostly intangible
assets with no book value), including all those related to the Catarex
technology. Upon the sale, Atlantic and Optex have no further obligations to
Bausch & Lomb. The purchase price was $3 million paid at closing. Optex is also
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 at fair value. 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 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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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 FDA 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. There occurred no clinically-relevant
adverse events and no evidence of marijuana-like psychoactivity was found.
After completing 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 that by the fourth quarter of 2001 we will have found a corporate
partner to continue the clinical development of CT-3. 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, the U.S. Patent and
Trademark Office issued us 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
6,162,829 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 and other involvement with management
of TeraComm.
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
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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.
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/A 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 (mostly intangible assets with
no book value), 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
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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, 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
Because we have not completed developing any of our products or generated any
product sales, we expect to incur significant operating losses over the next
several years and our ability to generate profits in the future is uncertain.
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-
If we do not obtain additional funding, our ability to develop our technologies
will be impeded.
We will need substantial additional funds to develop our technologies.
We will seek those funds through public or private equity or debt financings,
through collaborative arrangements or from other sources (including exercise of
the warrants we have issued giving the holder the right to purchase shares of
our capital stock for a stated exercise price). Funding may not, however, be
available on acceptable terms, if at all. Additionally, if our common stock is
delisted from Nasdaq, we may find it still more difficult to obtain additional
funding. Furthermore, pursuant to the common stock purchase agreement with
Fusion Capital, and until its termination, we have agreed not to issue any
variable-priced equity or variable-priced equity-like securities unless we have
obtained Fusion Capital's prior written consent. This may further impede our
ability to raise additional funding.
As of December 31, 2000, we had a cash and cash equivalents balance of
$2,663,583. We anticipate that our current resources will be sufficient to
finance our currently anticipated needs for operating and capital expenditures
for at least the next twelve months (See also Management's Discussion and
Analysis).
Our Operations
To develop our technologies, we may need to enter into collaborative agreements
with others. Such agreements could limit our control.
We do not have the resources to directly conduct full clinical
development, obtain regulatory approvals, or manufacture or commercialize any of
our proposed products, and we have no current plans to acquire such resources.
Therefore, we depend upon others to carry out such activities. As a result, we
anticipate that we may enter into collaborative agreements with third parties
able to contribute to developing our technologies. Such agreements may limit our
control over any or all aspects of development of our technologies.
We are in the early stages of developing our technologies and may not succeed in
developing commercially viable products.
To be profitable, we must, alone or with others, successfully
commercialize our technologies. 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. They are also rigorously regulated by
the federal government, particularly the U.S. Food and Drug Administration, or
"FDA," and by comparable agencies in state and local jurisdictions and in
foreign countries. Each of the following is possible with respect to any one of
our products:
o that we will not be able to maintain our current research and development
schedules;
o that, in the case of one of our pharmaceutical technologies, we will not be
able to enter into human clinical trials because of scientific,
governmental or financial reasons, or that we will encounter problems in
clinical trials that will cause us to delay or suspend development of one
of the technologies;
o that the product will be found to be ineffective or unsafe;
o that government regulation will delay or prevent the product's marketing
for a considerable period of time and impose costly procedures upon our
activities;
o that the FDA or other regulatory agencies will not approve a given product
or will not do so on a timely basis;
o that the FDA or other regulatory agencies may not approve the process or
facilities by which a given product is manufactured;
o that our dependence on others to manufacture our products may adversely
affect our ability to develop and deliver the products on a timely and
competitive basis;
o that, if we are required to manufacture our own products, we will be
subject to similar risks regarding delays or difficulties encountered in
manufacturing the products, will require substantial additional capital,
and may be unable to manufacture the products successfully or in a
cost-effective manner;
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o that the FDA's policies may change and additional government regulations
and policies may be instituted, both of which could prevent or delay
regulatory approval of our potential products; or
o that we will be unable to obtain, or will be delayed in obtaining, approval
of a product in other countries, because the approval process varies from
country to country and the time needed to secure approval may be longer or
shorter than that required for FDA approval.
Similarly, it is possible that, for the following reasons, we may be
unable to commercialize, or receive royalties from the sale of, any given
technology, even if it is shown to be effective:
o if it is uneconomical;
o if, 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 if others hold proprietary rights that preclude us from commercializing it;
o if others have brought to market equivalent or superior products;
o if others have superior resources to market similar products or
technologies;
o if government regulation imposes limitations on the indicated uses of a
product, or later discovery of previously unknown problems with a product
results in added restrictions on the product or results in the product
being withdrawn from the market; or
o if it has undesirable or unintended side effects that prevent or limit its
commercial use.
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.
Because we carry only a limited amount of product liability insurance, product
liability claims brought against us could adversely affect our business.
If we develop and commercialize any products, through third-party
arrangements or otherwise, we may be exposed to product liability claims. 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 or in sufficient amounts to protect us against such liability
or at a reasonable cost.
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
-10-
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.
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 constituted 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 had a period of 90 calendar
days from that notice to comply with the continued inclusion standard for
minimum bid price. To do so, we would have had to meet that 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 our securities are 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 are delisted it could materially and
adversely affect our ability to raise funding.
-11-
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 stocks must
provide purchasers of these stocks with a standardized risk-disclosure document
prepared by the SEC. This document provides information about penny stocks and
the nature and level of risks involved in investing in the penny-stock market. A
broker must also give a purchaser, orally or in writing, bid and offer
quotations and information 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.
Because holders of our Series A preferred stock have rights superior to those of
the holders of our common stock, in certain circumstances holders of our common
stock may be adversely affected.
Holders of shares of our outstanding Series A preferred stock can
convert each share into 3.27 shares of our common stock without paying us any
cash. The conversion price of shares of Series A preferred stock is $3.06 per
share of common stock. Both the conversion rate and the conversion price may be
adjusted in favor of holders of shares of Series A preferred stock upon certain
triggering events. Accordingly, the number of shares of common stock that
holders of shares of Series A preferred stock receive upon conversion may
increase, which could adversely affect the prevailing market price of our
securities.
In addition, each February 7 and August 7 we are obligated to pay
dividends, in arrears, to the holders of shares of Series A preferred stock, and
the dividends consist of 0.065 additional shares of Series A preferred stock for
each outstanding share of Series A preferred stock. Our issuing additional
shares of Series A preferred stock without payment of any cash to us could
adversely affect the prevailing market price of our securities.
If we are liquidated, sold to or merged with another entity (and we are
not the surviving entity after the merger), we will be obligated to pay holders
of shares of Series A preferred stock a liquidation preference of $13.00 per
share before any payment is made to holders of shares of common stock. After
payment of the liquidation preference, we might not have any assets remaining to
pay the holders of shares of common stock. The liquidation preference could
adversely affect the market price of our securities.
The holders of shares of Series A preferred stock have rights in
addition to those 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.
Given the limited trading volume of our shares, investors may experience delay
in liquidating an investment in our securities.
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 find it impossible to promptly liquidate an investment in our
securities. Also, the sale of a large block of our securities could depress the
price of our securities to a greater degree than a company that typically has a
higher volume of trading in its securities.
Because many factors may have a significant impact upon the market price of our
common stock, the market price of our common stock may continue to be highly
volatile.
The market price of our common stock has been highly volatile, and we
expect that this will continue to be the case. Many 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, the potential dilutive
effects of future sales of shares of common stock by us and by stockholders,
including Fusion Capital pursuant to this prospectus, and the subsequent sale of
common stock by the holders of warrants and options could depress the market
price of our securities.
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Sale of shares of our common stock to Fusion Capital may cause dilution, and
sale of those shares by Fusion Capital could cause the price of our common stock
to decline.
The purchase price for the common stock to be issued to Fusion Capital
under the common stock purchase agreement will fluctuate based on the closing
price of our common stock.
All shares registered in this offering will be freely tradeable.
However, Fusion Capital 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 of the common stock purchase agreement. Fusion Capital may at any
time sell none, some or all of the shares of common stock purchased from us. We
expect that shares registered in this offering will be sold over a period of up
to 30 months from the date of this prospectus. Depending upon market liquidity
at the time, a sale of shares under this offering at any given time could cause
the trading price of our common stock to decline. The sale of a substantial
number of shares of our common stock under this offering, or anticipation of
such sales, could make it more difficult for us to sell equity or equity related
securities in the future at a time and at a price that it might otherwise wish
to effect sales.
The existence of the agreement with Fusion Capital to purchase shares of our
common stock could cause downward pressure on the market price of our common
stock.
Both the actual dilution and the potential for dilution resulting from
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 Capital 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.
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Claim for Arbitration Brought by Cleveland Clinic Foundation
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.
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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 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,
each warrant entitling Joseph Stevens to purchase 150,000 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 Number Exercise
No. of Shares Price
=======================================================
No.1 150,000 $2.50
-------------------------------------------------------
No.2 150,000 $3.50
-------------------------------------------------------
No.3 150,000 $4.50
=======================================================
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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.
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.
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
-16-
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 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 Dian Griesel
On March 8, 2001, Atlantic entered into an agreement with The Investor
Relations Group, Inc., or "IRG," under which IRG will provide Atlantic investor
relations services. Pursuant to this agreement Atlantic issued to Dian Griesel
warrants to purchase 120,000 shares of its common stock. The term of the
warrants is five years and the exercise price of the warrants is $0.875, and
they will vest in 5,000 share monthly increments over a 24 month period. In
addition, should Atlantic's stock price reach $2.50, Atlantic will grant Ms.
Griesel an additional 50,000 warrants. Should Atlantic's stock price reach
$5.00, Atlantic will grant Ms. Griesel a further 50,000 warrants. As a result,
Atlantic recorded compensation expense relating to these stock warrants of
$11,971 for the three month period ended March 31, 2001 and will remeasure the
compensation expense at the end of each reporting period until the final
measurement date is reached in 24 months.
The issuance of the warrants did not involve any public offering and
therefore was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion includes "forward-looking" statements that reflect our
current views with respect to future events and financial performance. We use
words such as we "expect," "anticipate," "believe," and "intend" and similar
expressions to identify forward-looking statements. Investors should be aware
that actual results may differ materially from our expressed expectations
because of risks and uncertainties inherent in future events, particularly those
risks identified in the "Risk Factors" section of this Annual Report, and should
not unduly rely on these forward looking statements.
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/A.
Results of Operations
From the commencement of operations through December 31, 2000, we have
generated $9,118,457 of revenue.
2000 Versus 1999
In accordance with a development agreement as amended in September
1999, Bausch & Lomb Surgical paid our subsidiary, Optex, for 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 $866,008 which solely represented the activity
for the fourth quarter of 1999. On March 2, 2001, Optex sold substantially all
of its assets, including those related to the Catarex technology, to Bausch &
Lomb. As described below, the development agreement was terminated and we will
no longer receive development revenue under that agreement.
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 described in the
preceding paragraph. This increase was due to increased expenditures for the
year on certain development projects, including the costs associated with the
completion of a successful Phase I study for our CT-3 compound during 2000.
During 2000, we made an investment in TeraComm Research, Inc.,
accounted for under the equity method of accounting, of $1,000,000 cash as well
as common stock and a warrant to purchase common stock, together valued at
$1,800,000. Of the $2,800,000 purchase price, we expensed $2,653,382 as acquired
in-process research and development, as no capitalizable intangible assets are
present at TeraComm, as its product development activity is in the very early
stages and has no alternative future use at this time. The TeraComm investment
is accounted for
-18-
in accordance with the equity method of accounting for investments as we
continue to have the ability to exert significant influence over TeraComm
through our Board seat and other involvement with management.
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 received prior to the September 1999 amendment.
This increase was due to costs incurred in hiring and relocating executives, an
increase in payroll costs over last year, and an increase in fees for
professional services attributable to legal filings and due diligence relating
to fundraising efforts and certain investments.
In 2000, we had $1,020,128 of expense associated with warrants issued
to Joseph Stevens & Company as partial compensation for investment banking
services provided by Joseph Stevens & Company during 2000. Compensation expense
relating to these investment banking services represents a general and
administrative expense.
For the year ended December 31, 2000, our interest and other income was
$92,670 compared to $292,630 for the year ended December 31, 1999. This decrease
was primarily due to a decline in our cash reserves, which resulted in decreased
interest income. For the year ended December 31, 2000, our share of losses of
TeraComm amounted to $79,274.
Net loss applicable to common shares for the year ended December 31,
2000, was $6,847,749 as compared to a net loss applicable to common shares of
$2,760,881 for the year ended December 31, 1999. This increase in net loss
applicable to common shares is primarily attributable to acquired in-process
research and development expense relating to our investment in TeraComm of
$2,653,382. In the year ended December 31, 2000, we recorded compensation
expense of $1,020,865 relating to stock warrants issued to Joseph Stevens & Co.
which did not exist during 1999. Net loss applicable to common shares in 2000
also included a dividend paid upon the repurchase of the outstanding Series B
preferred stock of $233,757 which was not paid in 1999. We also issued preferred
stock dividends on our Series A preferred stock for which the estimated fair
value of $811,514 and $314,366 was included in the net loss applicable to common
shares for the years ended December 2000 and 1999, respectively. The increase in
the estimated fair value of these dividends as compared to the prior year is
partially a reflection of an increase in our stock price. Going forward, with
the termination of our agreement with Bausch & Lomb, described below, we will no
longer have the revenue or profits associated with that agreement available to
us. For the year ended December 31, 2000, we received $5,169,288 in development
revenue from Bausch & Lomb as compared with $1,082,510 in 1999.
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, which represented pass-through expenses, 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.
Net loss applicable to common shares for the year ended December 31,
1999, was $2,760,881 as compared to a net loss applicable to common shares of
$4,381,779 for the year ended December 31, 1998. This decrease in net loss is
primarily attributable to an imputed preferred stock dividend on our Series A
preferred stock of 1,628,251 in 1998 compared to a preferred stock dividend on
our Series A preferred stock of $314,366 in 1999. In addition, research and
development expenses decreased by $1,945,064 from 1998 to 1999 and general and
administrative expenses decreased by $727,083 from 1998 to 1999 as a result of
our efforts to scale back on these expenses in 1999. This decrease in expenses
is partially offset by $2,500,000 of license revenue which was recognized in
1998 from our agreement with Bausch and Lomb. This is compared with total
revenue net of cost of development for 1999 of $293,571 in 1999 subsequent to
the September 1999 amendment with Bausch & Lomb.
LIQUIDITY AND CAPITAL RESOURCES
From inception to December 31, 2001, we incurred an accumulated deficit
of $24,826,334, and we expect to continue to incur additional losses through the
year ending December 21, 2000 and for the foreseeable future. The loss has been
incurred through primarily research and development activities related to our
various technologies under our control.
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, among
Bausch & Lomb, a Bausch & Lomb affiliate, Atlantic, and Optex, on March 2, 2001,
Optex sold to Bausch & Lomb substantially all its assets (mostly intangible
assets with no book value), including all those related to the Catarex
technology. Upon the sale, Atlantic and Optex have no further obligations to
Bausch & Lomb. The purchase price was $3 million paid at closing (approximately
$564,000 of which was distributed to the minority shareholders). In addition,
Optex is entitled to receive additional consideration, namely $1 million once
Bausch & Lomb receives regulatory approval to market the Catarex device in
Japan, royalties on net sales on the terms stated in the original development
agreement dated May 14, 1998, between Bausch & Lomb and Optex, as amended, and
minimum royalties of $90,000, $350,000, and $750,000 for the first, second, and
third years, respectively, starting on first commercial use of the Catarex
device or January 1, 2004, whichever is earlier. Optex also has the option to
repurchase the acquired assets from Bausch & Lomb if it ceases developing the
Catarex technology at fair value. Upon the sale of Opetx assets, Bausch & Lomb's
development agreement with Optex was terminated. Upon the closing of the asset
purchase agreement, Optex agreed to forgo future contingent payments in exchange
for the receipt of a one-time $3 million payment and the same potential for
future royalties.
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. On January 19,
2001, 41,380 shares of Series B preferred stock were converted by the Investors
into 236,422 shares of our common stock. On March 9, 2001, Atlantic and the
Investors
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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 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.
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.
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs;
our progress in and the cost of ongoing and planned preclinical and clinical
testing; the timing and cost of obtaining regulatory approvals; the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights; competing technological and market developments;
changes in our existing collaborative and licensing relationships; the resources
that we devote to developing manufacturing and commercializing capabilities;
technological advances; status of competitors; our ability to establish
collaborative arrangements with other organizations; and our need to purchase
additional capital equipment.
At December 31, 2000, we had $2,663,583 in cash and cash equivalents
and working capital of $798,726. 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 above), 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.
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We have the following short term and long term liquidity needs. Our
cash utilized for operations for the next year is expected to be approximately
$200,000 per month. Currently, these expected operating expenses include
approximately $70,000 per month for research and pre-clinical development
expenses and approximately $130,000 for general and administrative expenses.
Based on our cash position of $2,663,583 at December 31,2000, we will either
have to raise additional funds within the next twelve months to fund our current
spending requirements or we will have to reduce or eliminate the planned levels
of development activities. Since we do not have significant fixed cash
commitments, we have the option of significantly cutting or delaying our
development activities as may be necessary.
We are at risk of being delisted from the Nasdaq SmallCap Market. As of
March 20, 2001, we had the thirtieth consecutive business day that the minimum
bid price of our common stock was less than $1.00. This constituted 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 within 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 39.
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 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% on April 3, 2000 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% upon 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% upon 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% upon 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; 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;
-29-
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, exercisable in 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 March 30, 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 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.
-30-
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, each warrant
entitling Joseph Stevens to purchase 150,000 shares of our common stock. The
exercise price and exercise period of each warrant is as follows:
================================================================================================================
Warrant Number Exercise
No. of Shares Price Exercise Period
================================================================================================================
No.1 150,000 $2.50 1/4/00 through 1/4/05
----------------------------------------------------------------------------------------------------------------
1/4/01 through 1/4/06 (subject to vesting in equal
No.2 150,000 $3.50 monthly increments from 1/4/00-1/4/01)
----------------------------------------------------------------------------------------------------------------
1/4/02 through 1/4/07 (subject to vesting in equal
No.3 150,000 $4.50 monthly increments 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 July 16,
2001.
Atlantic Ventures Technology, Inc.
/s/ Frederic P. Zotos
-----------------------------------
Frederic P. Zotos
President, Chief Executive Officer, and Director
-37-
Exhibit 23.1
Accountants' Consent
The Board of Directors
Atlantic Technology Ventures, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-34379, 333-35079, 333-65393, 333-40916, 333-49036 and 333-57550) on Form S-3
and (Nos. 333-15807 and 333-48531) on Form S-8 of Atlantic Technology Ventures,
Inc. (a development stage company) of our report dated March 30, 2001, relating
to the consolidated balance sheets of Atlantic Technology Ventures, Inc. and
subsidiaries 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, which report appears in the
December 31, 2000 Annual Report on Form 10-KSB/A of Atlantic Technology
Ventures, Inc.
KPMG LLP
Short Hills, New Jersey
July 16, 2001
-38-
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Index to CONSOLIDATED Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 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-12
Notes to Consolidated Financial Statements F-14
-39-
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. 600,000 --
Authorized 1,647,312 shares; 206,896 shares issued
and outstanding at December 31, 2000
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. 360 610
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)
Convertible preferred stock warrants, 112,896 and 117,195 520,263 540,074
issued and outstanding at December 31, 2000 and 1999,
respectively
Common stock, $.001 par value. Authorized 50,000,000 shares; 6,122 4,816
6,122,135 and 4,815,990 shares issued and outstanding at
December 31, 2000 and 1999, respectively
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
Year Ended December 31,
Cumulative
period from
July 13, 1993
Inception to
------------------------------------------------ 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 warrants
(general and administrative) 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 -- -- -- --
------------- ------------- ------------- --------------
F-4
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock
----------------------------- -----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- --------------
Balance at December 31, 1997 1,214,723 1,215 -- --
Conversion of preferred to common stock (584,265) (585) -- --
Cashless exercise of preferred warrants 2,010 2 -- --
Exercise of options -- -- -- --
Exercise of warrants -- -- -- --
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- --------------
Balance at December 31, 1998 632,468 632 -- --
Conversion of preferred to common stock (95,599) (95) -- --
Preferred stock dividend 73,219 73 -- --
Net loss -- -- -- --
------------- ------------- ------------- --------------
Balance at December 31, 1999 610,088 610 -- --
Conversion of preferred to common stock (309,959) (310) -- --
Preferred stock dividend 59,582 60 -- --
Cashless exercise of preferred warrants -- -- -- --
Exercise of options -- -- -- --
Issuance of common stock to TeraComm
shareholders -- -- -- --
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- 344,828 345
Costs related to issuance of Series B preferred
stock -- -- -- --
Repurchase of Series B convertible preferred
stock -- -- (137,931) (138)
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible
preferred
stock to redeemable Series B convertible
preferred stock -- -- (206,897) (207)
Net loss -- -- -- --
------------- ------------- ------------- --------------
Balance at December 31, 2000 359,711 $ 360 -- $ --
============= ============= ============= ==============
F-5
Convertible Common Stock
Preferred
Stock Warrants
----------------------------- -----------------------------
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 -- -- -- --
------------- ------------- ------------- --------------
F-6
Convertible
Preferred
Stock Warrants Common Stock
----------------------------- -----------------------------
Number Amount Shares Amount
------------- ------------- ------------- --------------
Balance at December 31, 1997 123,720 570,143 3,064,571 3,065
Conversion of preferred to common stock -- -- 1,367,817 1,367
Cashless exercise of preferred warrants (6,525) (30,069) -- --
Exercise of options -- -- 70,000 70
Exercise of warrants -- -- 1,000 1
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- --------------
Balance at December 31, 1998 117,195 540,074 4,503,388 4,503
Conversion of preferred to common stock -- -- 312,602 313
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- --------------
Balance at December 31, 1999 117,195 540,074 4,815,990 4,816
Conversion of preferred to common stock -- -- 1,011,038 1,011
Preferred stock dividend -- -- -- --
Cashless exercise of preferred warrants (4,299) (19,811) 9,453 9
Exercise of options -- -- 85,654 86
Issuance of common stock to TeraComm
shareholders -- -- 200,000 200
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- -- --
Costs related to issuance of Series B preferred
stock -- -- -- --
Repurchase of Series B convertible preferred
stock -- -- -- --
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible
preferred
stock to redeemable Series B convertible
preferred stock -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- --------------
Balance at December 31, 2000 112,896 $520,263 6,122,135 $6,122
============= ============= ============= ==============
F-7
Deficit
Common Stock Accumulated
Subscribed Additional during Deferred
----------------------- 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) --
---------- ---------- ------------- -------------- -----------
F-8
Common Stock Additional Deficit Deferred
Accumulated
during
Subscribed Paid-in Development Compen-
-----------------------
Number Amount Capital Stage sation
---------- ---------- ------------- -------------- -----------
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) --
---------- ---------- ------------- -------------- -----------
21,662,881 (16,343,584)
Balance at December 31, 1998 182 -- --
Conversion of preferred to common stock -- -- (218) -- --
Preferred stock dividend -- -- (391) -- --
Net loss -- -- -- (2,446,515) --
---------- ---------- ------------- -------------- -----------
21,662,272 (18,790,099)
Balance at December 31, 1999 182 -- --
Conversion of preferred to common stock -- -- (701) -- --
Preferred stock dividend -- -- (60) -- --
Cashless exercise of preferred warrants -- -- 19,802 --
Exercise of options -- -- 344,512 -- --
Issuance of common stock to TeraComm
shareholders -- -- 1,799,800 -- --
Expense related to grant of stock warrants -- -- 1,020,128 -- --
Issuance of Series B convertible preferred
stock -- -- 975,943 -- --
Costs related to issuance of Series B
preferred stock -- -- (147,800) -- --
Repurchase of Series B convertible preferred
stock -- -- (399,862) -- --
Dividend upon repurchase of Series B
convertible Preferred stock -- -- 121,949 (233,757) --
Reclassification of Series B convertible
preferred stock to redeemable Series B
convertible preferred stock -- -- (599,793) -- --
Net loss -- -- -- (5,802,478) --
---------- ---------- ------------- -------------- -----------
Balance at December 31, 2000 182 -- $24,796,190 $(24,826,334) --
========== ========== ============= ============== ===========
F-9
Total
Common Stock Stockholders'
Subscriptions Treasury Equity
Receivable Stock (Deficit)
------------------ ------------------ ------------------
Common stock subscribed at $.001 per share (6,277) -- --
July-November 1993
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)
------------------ ------------------ ------------------
F-10
Common Stock Treasury Total
Stockholders'
Subscriptions Equity
Receivable Stock (Deficit)
------------------ ------------------ ------------------
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-11
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
period from
July 13, 1993
Year ended December 31, (inception) to
---------------------------------------------- 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)
-------------- ------------- -------------- ------------------
F-12
Cumulaive
period from
July 13, 1993
Year ended December 31, (inception) to
---------------------------------------------- December 31,
2000 1999 1998 2000
-------------- ------------- -------------- ------------------
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-13
PART I
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Delaware 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 2, 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.
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.
F-14
(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.
Revenue Recognition
Revenue under research contracts is recorded as earned under the
contracts, generally as services are provided. Revenues from the
achievement of research and development milestones will be recognized
when and if the milestones are achieved and are presented as license
revenue. 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.
F-15
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.
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
F-16
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.
F-17
(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 accounting for
investments since the Company has the ability to exert significant
influence over TeraComm, primarily through its representation on the
TeraComm Board of Directors.
On July 18, 2000, the Company and TeraComm amended the purchase
agreement. In the amendment, the parties agreed that the $4,000,000
balance of the $5,000,000 cash component of the purchase price would
not be due until TeraComm achieved a specified milestone. Within ten
days after TeraComm achieved that milestone or December 30, 2000,
whichever occurred earlier, the Company was required to pay TeraComm
$1,000,000 and thereafter make to TeraComm three payments of $1,000,000
at the three-month intervals. If the Company failed to make any of
these payments, TeraComm's only recourse would be reducing
proportionately the Company's ownership interest. When the Company
failed to make the first $1,000,000 payment by midnight at the end of
December 30, 2000, the Company was deemed to have surrendered to
TeraComm a proportion of the Company's TeraComm shares equal to the
proportion of the dollar value of the purchase price for the Company's
TeraComm shares ($6,795,000) that was represented by the unpaid
$4,000,000 of the cash portion of the purchase price. This had the
effect of reducing to 14.4% the Company's actual ownership interest in
TeraComm. However, the Company continues to hold a seat on the Board of
Directors of TeraComm and continues to have the ability to exert
significant influence through its involvement with TeraComm management.
Upon acquiring an interest in TeraComm, the Company allocated a portion
of the purchase price based on the fair value of the indentifiable
tangible assets acquired and liabilities assumed. At the time of
acquisition, such assets and liabilities were minimal. TeraComm had no
other intangible assets beyond the technology then under development --
a high-speed fiber-optic switch. This technology at the date of
acquisition, was not commercially viable, did not then have any
identifiable revenue stream and did not
F-18
have any alternate future use. This high-speed fiber-optic switch is
TeraComm's only subscribable technology. TeraComm is a very early-stage
development company with no identifiable revenue sources, therefore
the excess of the purchase price over the sum of the amounts assigned
to identifiable assets acquired less liabilities assumed is not
considered to respresent "goodwill". The Company's acquisition of the
interest in TeraComm was based solely on the value of the future
commercialized products and therefore the excess of the purchase price
as described above was attributed to the research and development
activities of TeraComm.
As such, of the $1,000,000 cash and common stock and common stock
warrants valued at $1,800,000 currently invested in TeraComm, the
Company has expensed approximately $2,650,000 as acquired in-process
research and development, as TeraComm's product development activity is
in the very early stages. The Company's share of 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.
(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
F-19
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 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
F-20
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.
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, amounting to an aggregate of 59,582 shares of Series A
Preferred, 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.
F-21
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 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 206,898 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 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
F-22
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
165,518 shares of the Company's Series B Preferred held by the
Investors on March 9, 2001. The carrying amount of the 165,518 shares
is equal to $480,000; therefore the amount in excess of the carrying
amount, 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 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.
F-23
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:
F-24
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
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 396,200 $3.25 837,798 $5.06 715,598 $5.16
year
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 $4.05 $1.20 $2.84
============ ============ =============
The following table summarizes the information about Plan stock options
outstanding at December 31, 2000:
Exercise Number of Remaining Number of
options 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
================ ===============
F-25
(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.
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
F-26
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 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, 4,299 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, which represents a general and administrative expense, as
compensation expense relating to stock warrants over the
vesting period through January 4, 2001.
F-27
(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.
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 $9,139,517 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 (liability) $ -- --
=============== ==============
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 $(1,973,000) (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 benefit $ -- --% $ -- --% $ -- --%
============== =========== ============== ========== ============== ===========
F-28
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.
(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
F-29
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 costs incurred 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 as the reimbursement reflects a dollar for
dollar reimbursement arrangement, effectively being a pass-through of
expenses. The 1999 reimbursement received by the Company prior to the
amendment to the Agreement was $1,229,068. As of December 31, 2000, the
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.
As of December 31, 2000, Optex received reimbursement for costs,
including labor, professional services and materials, incurred by Optex
in delivering Catarex devices and performance manufacturing services
totalling $5 million. The amended agreement provides that Bausch & Lomb
will reimburse Optex for such costs up to $8 million.
In connection with the revised agreement, the Company agreed to pay a
bonus to its President totaling $141,000, payable monthly through March
2001. At December 31, 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 (mostly intangible assets with
no book value) 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.
F-30
Proprietory Rights
The Company has an exclusive worldwide license to four U.S. patents and
corresponding foreign applications covering a group of compounds,
including CT-3. The licensor is Dr. Sumner Burstein, a professor at the
University of Massachusetts. This license extends until the expiration
of the underlying patent rights. The primary U.S. patent expires in
2012 and the new analog patent 6,162,829 expires in 2017. The Company
has the right under this license to sublicense its rights under the
license. The license requires that the Company pay royalties of 3% to
Dr. Burstein based on sales of products and processes incorporating
technology licensed under the license, as well as 8% of any income
derived from any sublicense of the licensed technology. Furthermore,
pursuant to the terms of the license, the Company must satisfy certain
other terms and conditions in order to retain the license rights. If
the Company fails to comply with certain terms of the license, its
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:
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-31