As filed with the Securities and Exchange Commission on June 29, 2001
Registration No. ___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ATLANTIC TECHNOLOGY VENTURES, INC.
(Exact name of registrant as specified in its charter)
New York 8731 36-3898269
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Identification
organization) Number) No.)
350 Fifth Avenue, Suite 5507
New York, New York 10118
(212) 267-2503
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
----------------
Frederic P. Zotos, Esq.
350 Fifth Avenue, Suite 5507
New York, New York 10118
(212) 267-2503
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------
COPIES TO:
EZRA G. LEVIN, ESQ.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
(212) 715-9100
Approximate date of commencement of proposed sale to the public: At
such time or times as may be determined by the selling shareholders after this
registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] _______
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
-------------------- ------------------ ----------------- -------------------- ---------------- --------------- -----------------
Number of Shares Proposed Proposed Maximum
Title of Shares to be Maximum Aggregate Amount of Amount
to be Registered Registered Offering Price Offering Price(1) Registration Previously Amount Due
Per Share(1) Fee Paid(2)
-------------------- ------------------ ----------------- -------------------- ---------------- --------------- -----------------
Common stock, par 3,000,000 $0.79 $2,370,000 $592.50 $951.32 $0.00
value $.001 per
share
-------------------- ------------------ ----------------- -------------------- ---------------- --------------- -----------------
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act, based on the average
of the high and low sales prices for our common stock reported on the
Nasdaq SmallCap Market on May 23, 2001.
(2) This amount was paid to the Commission by Atlantic in connection with
its filing on March 23, 2001, of a registration statement on Form S-3,
registration number 333-57550. On April 23, 2001, Atlantic withdrew
that registration statement and its amendment.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
2
SUBJECT TO COMPLETION, DATED JUNE 29, 2001
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
3,000,000 SHARES
ATLANTIC TECHNOLOGY VENTURES, INC.
COMMON STOCK
The 3,000,000 shares of common stock of Atlantic Technology Ventures,
Inc. covered by this prospectus are being offered and sold from time to time by
Fusion Capital Fund II, LLC.
Atlantic's common stock is traded on the Nasdaq SmallCap Market under
the symbol "ATLC".
INVESTING IN ATLANTIC'S COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 3.
The selling stockholder, Fusion Capital is an "underwriter" within the
meaning of the Securities Act of 1933, as amended. Atlantic will be issuing to
Fusion Capital pursuant to an equity line agreement the shares offered in this
prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is ______, 2001.
TABLE OF CONTENTS
Prospectus Summary............................................................2
Risk Factors..................................................................3
Description of Business.......................................................8
Management's Discussion and Analysis.........................................14
The Financing Transaction....................................................20
Use of Proceeds..............................................................22
Selling Stockholder..........................................................22
Plan of Distribution.........................................................23
Legal Proceedings............................................................25
Directors, Executive Officers, Promoters and Control Persons.................25
Security Ownership of Certain Beneficial Owners and Management...............26
Description of Securities....................................................28
Experts......................................................................29
Disclosure of Commission Position on Indemnification For Securities
Act Liabilities............................................................30
Description of Property......................................................30
Certain Relationships and Related Transactions...............................30
Market for Common Equity and Related Stockholder Matters.....................31
Executive Compensation.......................................................32
Additional Information.......................................................36
Index to Consolidated Financial Statements...................................37
1
PROSPECTUS SUMMARY
This summary highlights the information we present more fully in the
rest of this prospectus. We encourage you to read the entire prospectus
carefully.
Atlantic Technology Ventures, Inc.
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 upon commercialization of a 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.
Our offices are located at 350 Fifth Avenue, Suite 5507, New York, New
York 10118 and our telephone number is (212) 267-2503.
The Offering
This prospectus covers up to 3,000,000 shares of our common stock that
we expect we will issue to the selling stockholder identified in this
prospectus. The number of shares subject to this prospectus, if issued and
outstanding on May 7, 2001, would represent approximately 31.3% out of our
issued and outstanding common stock on that date.
Common Stock Purchase Agreement
As of May 7, 2001, we entered into a common stock purchase agreement
and related agreements with Fusion Capital Fund II, LLC, an Illinois limited
liability company, pursuant to which Fusion Capital agreed to purchase from us
from time to time over a 30-month period, subject to a 6-month extension or
earlier termination at our discretion, upon our request, up to $6.0 million
worth of shares of our common stock. (This agreement replaces an earlier
agreement we entered into with Fusion Capital on March 16, 2001.)
We also agreed with Fusion Capital that we would file with the
Securities and Exchange Commission a registration statement registering for
resale under the Securities Act shares issued to Fusion Capital pursuant to this
transaction. We have performed this obligation by filing the registration
statement of which this prospectus is a part, and the shares being offered in
this prospectus represent shares that we expect to issue to Fusion Capital in
connection with this transaction.
2
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, and
will require substantial funding. 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. We do
not expect to generate any additional revenues in the near future.
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 March 31, 2001, we had a cash and cash equivalents balance of
$2,581,497. 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;
3
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;
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.
4
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 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. We
failed to do so, and on June 21, 2001, Nasdaq notified us that we would be
delisted on June 29, 2001 unless by June 28, 2001, we request a hearing before
Nasdaq's Listing Qualifications Panel. On June 28th we requested a hearing, and
a hearing has been scheduled for August 9, 2001. Our hearing request will stay
the delisting of our common stock pending the Panel's decision. The hearing will
be scheduled within 456 days of the date we file our request. During the
hearing, we intend to request, based on our particular circumstances, an
extension of the time allotted to raise our share price. There can be no
assurance the Panel will grant our request.
5
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.
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.
6
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.
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.
If Fusion Capital were to purchase the full amount of shares
purchasable under the common stock purchase agreement on the date of this
prospectus, and assuming a purchase price per share of $0.68 (the closing sale
price of the common stock on May 3, 2001), Fusion Capital would be able to
purchase 2,400,000 shares of our common stock under the common stock purchase
agreement, in addition to the 600,000 shares of common stock issued to it as a
commitment fee. Assuming Fusion Capital's purchase under the common stock
purchase agreement of a total of 2,400,000 shares of common stock on the date of
this prospectus, those shares, along with the 600,000 shares issued to it as a
commitment fee, would represent 31.3% of our then outstanding common stock. This
would result in significant dilution to the ownership interests of other holders
of our common stock. Such dilution could be more significant if the trading
price of our common stock is lower than the current trading price of our stock
at the time Fusion Capital purchases shares of our common stock under the common
stock purchase agreement, as a lower trading price would increase the number of
shares of our common stock to be issuable to Fusion Capital for any given dollar
amount.
We can require Fusion Capital to purchase additional shares if our
closing sale price on each of the five trading days immediately prior to the
first trading day of any 30-day period is at least $5.00, provided the closing
sale price of our common stock during such 30-day period or periods remains at
least $5.00. The purchase under the common stock purchase agreement of a
significant percentage of our outstanding stock would result in substantial
dilution to the ownership interests of other holders of our common stock. See
page 21 for a table that shows the number of shares issuable and potential
dilution based on varying market prices. If we issue all 2,400,000 shares that
we have registered in this offering for Fusion Capital to purchase under the
common stock purchase agreement, our stock price will need to equal or exceed
$2.50 per share for us to receive the maximum proceeds of $6.0 million under the
common stock purchase agreement. Assuming a purchase price of $0.68 per share
(the closing sale price of the common stock on May 3, 2001) and the purchase by
Fusion Capital of the full amount of shares offered by this prospectus, proceeds
to us would only be $1,632,120 unless we choose to issue more than 2,400,000
shares, which we have the right, but not the obligation, to do.
7
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.
Any time the price of our common stock is less than $0.68, we may not sell to
Fusion Capital any of our shares, and if we are delisted, Fusion Capital would
thereafter not be obligated to purchase any of our shares. Either circumstance
could adversely affect our ability to raise funds under our common stock
purchase agreement with Fusion Capital.
Our common stock purchase agreement with Fusion Capital provides that
we may not sell any of our shares to Fusion Capital if the purchase price per
share is less than $0.68, which was the market price of our common stock on May
3, 2001, the date of our common stock purchase agreement with Fusion Capital. In
addition, the common stock purchase agreement provides that if we are delisted
from the Nasdaq SmallCap Market, Fusion Capital will thereafter not be required
to purchase any shares of common stock under the agreement. Either circumstance
could adversely affect our ability to raise funds under our common stock
purchase agreement with Fusion Capital. (In this context, note that Nasdaq is
currently considering whether to delist us from the Nasdaq SmallCap Market.)
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 one such technology that we believe
may be useful in treating pain and inflammation. We are also entitled to
royalties and other revenues in connection with commercialization of
technologies relating to cataract surgery and to treating cancer and infectious
diseases.
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."
8
We seek to minimize administrative costs, thereby maximizing the
capital available for research and development. We do so by providing a
centralized management team that oversees the transition of products and
technologies from the early development stage to commercialization. In addition,
we budget and monitor funds and other resources among Atlantic and our
subsidiaries, thereby providing flexibility to allocate resources among
technologies based on the progress of individual technologies.
ATLANTIC AND ITS SUBSIDIARIES
Optex and the Catarex Technology
Our majority-owned (81.2%) subsidiary, Optex, is entitled to royalties
and other revenues in connection with commercialization of Catarex technology.
Bausch & Lomb, a multinational ophthalmics company, is developing this
technology to overcome the limitations and deficiencies of traditional cataract
extraction techniques. Optex had been the owner of this technology, and was
developing it pursuant to a development agreement with Bausch & Lomb, but on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its assets,
including those related to the Catarex technology.
Relationship with Bausch & Lomb
In May 1998, Optex entered into a development and licensing agreement
pursuant to which it granted to Bausch & Lomb Surgical Incorporated, an
affiliate of Bausch & Lomb, a worldwide license to its rights to the Catarex
device. (For a description of the Catarex device, see "The Catarex Device and
its Applications," below). Under this agreement, Bausch & Lomb was responsible
for clinical testing, obtaining regulatory approval worldwide, and manufacturing
and commercializing the Catarex device. In addition, Bausch & Lomb undertook to
make milestone payments to Optex, as well as royalty payments on sales of the
Catarex device, and was required to reimburse Optex for all of its costs, up to
$2.5 million, related to the initial phase of development of the Catarex device.
Prior to amendment of this agreement in September 1999, reimbursements from
Bausch & Lomb were treated as a reduction of expenses and totaled $2,276,579
since the inception of the agreement.
In September 1999, Optex and Bausch & Lomb Surgical amended this
agreement to expand Optex's role in development of the Catarex surgical device.
In addition to the basic design work provided for in the original agreement,
Optex was required to deliver to Bausch & Lomb within a stated period of time a
number of Catarex devices for use in clinical trials, and was required to assist
Bausch & Lomb in developing manufacturing processes for scale-up of manufacture
of the Catarex device. Bausch & Lomb reimbursed Optex for all costs, including
labor, professional services and materials, 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 asset (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. Upon the closing of the asset purchase agreement option 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. Management
believes that Bausch & Lomb will aggressively pursue commercialization of the
assets purchased. On May 9, 2001, the Company's Board of Directors, after
consideration of all the relevant facts and circumstances including
recommendations of counsel, agreed to authorize a payment of $240,000 in
aggregate to three former employees of Optex (who are now employed by Bausch &
Lomb). The payments were made on May 11, 2001 and represented the settlement of
claims made by the employees subsequent to the asset purchase agreement referred
to above for severance monies allegedly due under their employment agreement.
We did not believe these monies were due pursuant to the terms of the
transaction itself and the respective employment agreements. The Board of
Directors elected to acquiesce to the demands of the former employees and
resolve the matter in light of the potential future royalties from Bausch & Lomb
and the importance of these individuals to the ongoing development activities.
The payment will be recorded as an expense in the June 30, 2001 statement of
operations.
9
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 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.
10
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.
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
11
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.
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
12
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.
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
Pursuant to an asset purchase agreement dated April 23, 2001, among
Atlantic, Atlantic's majority-owned subsidiary Gemini Technologies, Inc., the
Cleveland Clinic Foundation, or "CCF," and CCF's affiliate IFN, Inc., on May 4,
2001, Gemini sold to IFN substantially all its assets (mostly intangible assets
with no book value), including all those related to the 2-5A antisense enhancing
technology for future contingent royalty payments and withdrawal of arbitration
described below. We received no proceeds from the sale of Genemini's assets.
As the purchase price for Gemini's assets, IFN agreed to pay Gemini,
upon receipt, an amount equal to 20 percent of all amounts that CCF is entitled
to pursuant to the Cleveland sublicense, subject to adjustments. The purchase
price will be reduced by 1 percent of the sublicense fees for each $150,000
expended by IFN to develop the technology, subject to a floor of 5 percent. In
addition, upon closing CCF withdrew its outstanding arbitration demand
against Gemini and Atlantic, with prejudice, and each party is obligated to
pay its own costs and attorneys' fees related thereto.
We feel that this solution represents a satisfactory alternative to two
undesirable alternatives, namely (1) termination of the Cleveland sublicense
with no compensation to Gemini and substantial shutdown costs and (2) continued
development of 2-5A at levels that Gemini would not be able to justify or
sustain.
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.
13
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 TeraCom.
TeraComm is developing a fiberoptic transmitter that uses a
high-temperature superconductor (HTS) material to switch a laser beam on and off
with a high-speed electronic digital signal. HTS materials have zero electrical
resistance at low temperatures (< 70 K), and also can have very high optical
reflectance in their superconducting state while they can transmit light in
their normal (non-superconducting) state. TeraComm discovered that a small
electric current in an HTS material could switch the material between states,
and do so very quickly--in less than a millionth millionth of a second. Because
the HTS optical switch works best at far infrared wavelengths and these optical
waves are too large to send through an optical fiber, the TeraComm invention
employs an optical wavelength converter to change the waves to the band that is
just right for the fiber.
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 five employees.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 prospectus, and should
not unduly rely on these forward looking statements.
14
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,
pharmaceutical electronic infrastructure, software and communications 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 SB-2.
Results of Operations
From the commencement of operations through March 31, 2001, we have
generated $11,830,379 of revenue.
Three Months Ended March 31, 2001 Versus Three Months Ended March 31, 2000
In accordance with a license and development agreement, as amended,
Bausch & Lomb Surgical has paid our subsidiary, Optex Ophthalmologics. Inc.
("Optex"), for developing its Catarex technology. For the three months ended
March 31, 2001, this agreement provided $2,461,922 of development revenue, and
related cost of development revenue of $2,082,568. For the three months ended
March 31, 2000, this agreement provided $912,481 of development revenue, and
related cost of development revenue of $729,985. The primary reason for the
substantial increase in revenues over last year was the recognition of a project
completion bonus of $1,067,345 paid out and recognized at the completion of the
project in March 2001. With the termination of the above agreement at the
conclusion of the sale of substantially all of Optex's assets in March 2001, as
described further below, we will no longer have the revenues or profits
associated with that agreement available to us.
For the quarter ended March 31, 2001, research and development expense
was $306,767 as compared to $127,439 in the first quarter of 2000. This increase
is due to increased expenditures on certain development projects including CT-3
as we have been assessing potential markets and developing test plans for a
Phase II study.
For the quarter ended March 31, 2001, general and administrative
expense was $681,948 as compared to $495,678 in the first quarter of 2000. This
increase is largely due to an increase in payroll costs over last year of
approximately $72,000 and a finders fee of $120,000 incurred in conjunction with
a common stock purchase agreement entered into during the first quarter 2001
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 receipt of
funds under this agreement will commence upon effective registration and certain
other conditions which are targeted for June 2001. A material contingency that
may affect our operating plans and ability to raise funds is our stock price. If
our stock price remains at current levels, we will be limited in the amount of
funds we will be able to draw as defined by the Fusion Capital agreement. As the
Fusion Capital agreement is currently structured, we do not have a guarantee
that we will be able to draw any funds. See Liquidity and Capital Resources for
further details on this agreement.
For the quarter ended March 31, 2001, we had compensation expense
relating to stock warrants of $11,971 associated with warrants issued to Dian
Griesel during March 2001 as partial compensation for investor relations
services. Additional expense associated with these warrants will continue to be
incurred over the 2 year term of the agreement. For the quarter ended March 31,
2000, we had $990,820 of expense associated with warrants issued to Joseph
Stevens & Company as partial compensation for investment banking services which
was recorded in full as of December 31, 2000. Compensation expense relating to
these investor relations and investment banking services represent a general and
administrative expenses.
15
For the first quarter of 2001, interest and other income was $20,018,
compared to $40,190 in the first quarter of 2000. The decrease in interest
income is primarily due to the decline in our cash reserves.
Net income applicable to common shares for the quarter ended March 31,
2001, was $855,631 as compared to a net loss applicable to common shares of
$2,037,561 for the quarter ended March 31, 2000. This increase in net income
applicable to common shares is primarily attributable to a gain on the sale of
the assets of our subsidiary, Optex recognized during the first quarter of 2001
in the amount of $2,809,451, partially offset by a distribution to the minority
shareholders of Optex of $767,514. (see further discussion of this sale below).
In the quarter ended March 31, 2000, we recorded compensation expense of
$990,820 relating to stock warrants issued to Joseph Stevens & Co. which did not
exist during the current year. Net income (loss) applicable to common shares
also included a beneficial conversion on our Series B preferred stock in the
amount of $600,000 and a dividend of $167,127 paid upon the repurchase of the
outstanding Series B preferred stock recorded during the first quarter of 2001.
We also issued preferred stock dividends on our Series A preferred stock for
which the estimated fair value of $64,144 and $659,319 was included in the net
income (loss) applicable to common shares for the first quarter of 2001 and
2000, respectively. The decrease in the estimated fair value of these dividends
as compared to the prior year is primarily a reflection of a decline in our
stock price and a reduction of the number of preferred shares issued. Going
forward, with the termination of our agreement with Bausch & Lomb, 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.
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 above, 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 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
16
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 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.
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,
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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 March 31, 2001, we incurred an accumulated deficit of
$23,306,559, and we expect to continue to incur additional losses through the
year ending December 31, 2001 and for the foreseeable future. The loss has been
incurred through primarily research and development activities related to our
various technologies under our control.
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 Optex assets, Bausch & Lomb's
development agreement with Optex was terminated. Upon the closing of the asset
purchase agreement Optex agreed to forego future contingent payments in exchange
for the receipt of a one time $3 million payment and the same potential for
future royalties. As a result of this transaction, we recorded a gain on the
sale of Optex assets of $2,809,451. Pursuant to our agreement with the minority
shareholders of Optex, we made a profit distribution of $767,514 representing
the minority shareholders' percentage of the cumulative profit from the Bausch &
Lomb cost plus 25 percent agreement up to and including proceeds from the sale
of Optex' assets. On May 9, 2001, the Company's Board of Directors, after
consideration of all the relevant facts and circumstances including
recommendations of counsel, agreed to authorize a payment of $240,000 in
aggregate to three former employees of Optex (who are now employed by Bausch &
Lomb). The payments were made on May 11, 2001 and represented the settlement of
claims made by the employees subsequent to the asset purchase agreement referred
to above for severance monies allegedly due under their employment agreement. We
did not believe these monies were due pursuant to the terms of the transaction
itself and the respective employment agreements. The Board of Directors elected
to acquiesce to the demands of the former employees and resolve the matter in
light of the potential future royalties from Bausch & Lomb and the importance of
these individuals to the ongoing development activities. The payment will be
recorded as an expense in the June 30, 2001 statement of operations.
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 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.
As of May 7, 2001, we entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC pursuant to which Fusion Capital agreed to
purchase up to $6.0 million of our common stock over a 30-month period, subject
to a 6-month extension or earlier termination at our discretion. (This agreement
replaces an earlier agreement we entered into with Fusion Capital on March 16,
2001.) The receipt of funds under this agreement will commence upon effective
registration and certain other conditions which are targeted for June 2001. The
purchase 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
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common stock, without any fixed discount to the market price. A material
contingency that may affect our operating plans and ability to raise funds is
our stock price. If our stock price remains at current levels, we will be
limited in the amount of funds we will be able to draw as defined by the Fusion
Capital agreement. As the Fusion Capital agreement is currently structured, we
do not have a guarantee that we will be able to draw any funds. A $120,000
finders fee relating to this transaction was paid to Gardner Resources, Ltd.
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 March 31, 2001, we had $2,581,497 in cash and cash equivalents and
working capital of $1,831,571. 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. 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.
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 $2,581,497 at March 31, 2001, 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. To meet these needs in the short
term, we expect to begin drawing funds in the amount of $200,000 per month from
Fusion Capital starting in June 2001, once we have an effective registration. If
our agreement with Fusion Capital is not finalized, or if we are unable to draw
funds from Fusion Capital, we will seek alternative funding sources. These
funding sources include seeking other equity financing and working toward
licensing CT-3 later in 2001.
A material contingency that may affect our operating plans and ability
to raise funds is our stock price. If our stock price remains at current levels,
we will be limited in the amount of funds we will be able to draw on under the
Fusion Capital agreement. As the Fusion Capital agreement is currently
structured, it is not guaranteed that we will be able to draw any funds.
In addition, the common stock purchase agreement with Fusion Capital
provides that until it terminates, we may not issue any variable-priced equity
or variable-priced equity-like securities without Fusion Capital's prior written
consent. This may impede our ability to raise additional funding.
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 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. We
failed to do so, and on June 21, 2001, Nasdaq notified us that we would be
delisted on June 29, 2001 unless by June 28, 2001, we request a hearing before
Nasdaq's Listing Qualifications Panel. On June 28th, we requested a hearing, and
a hearing has been scheduled for August 9, 2001. Our hearing request will stay
the delisting of our common stock pending the Panel's decision. The hearing will
be scheduled within 456 days of the date we file our request. During the
hearing, we intend to request, based on our particular circumstances, an
extension of the time allotted to raise our share price. There can be no
assurance the Panel will grant our request. Regarding the consequences of our
common stock being delisted, see "Risk Factors -- Our Securities."
19
On April 18, 2001, Nasdaq advised us that we were not in compliance
with the requirement that we have at least $2,000,000 of net tangible assets or
$500,000 net income. On May 21, 2001, Nasdaq informed us that based on its
review of our quarterly report on Form 10-QSB for the quarter ended March 31,
2001, we are now in compliance with that requirement.
THE FINANCING TRANSACTION
General
As of May 7, 2001, we entered into a common stock purchase agreement
with Fusion Capital pursuant to which Fusion Capital agreed to purchase up to
$6.0 million of our common stock over a 30-month period, subject to a 6-month
extension or earlier termination at our discretion. (This agreement replaced a
common stock purchase agreement we entered into with Fusion Capital on March 16,
2001, which has been terminated.) The purchase price of the shares will be based
upon the future market price of the common stock, without any fixed discount to
the market price.
Purchase of Shares Under the Common Stock Purchase Agreement
Under the common stock purchase agreement, Fusion Capital will purchase
a specified dollar amount of our common stock. Subject to the termination rights
described below, each trading day during the term of the agreement, Fusion
Capital will purchase $10,000 of our common stock. We may decrease this amount
at any time. If our stock price equals or exceeds $5.00 per share for five
consecutive trading days, we have the right to increase this daily amount. Upon
prior written notice, we have the right to suspend any purchases of common stock
by Fusion Capital. The purchase price per share is equal to the lesser of:
o the lowest sale price of our common stock on the day Fusion Capital
purchases shares of our common stock; or
o the average of the 3 lowest closing bid prices of our common stock
during the 12 consecutive trading days prior to the date Fusion
Capital purchases shares of our common stock.
In order to ensure that we remain in compliance with the Nasdaq
Marketplace rules, the common stock purchase agreement provides that the
purchase price per share may not be less than $0.68, which was the closing sale
price of our common stock on the trading day immediately preceding the date of
the common stock purchase agreement
The purchase price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the ten trading days in which the closing bid price is used to
compute the purchase price. Fusion Capital may not, however, purchase shares of
common stock under the common stock purchase agreement if Fusion Capital or its
affiliates would beneficially own more than 4.9% of our then aggregate
outstanding common stock immediately after the proposed purchase. If the 4.9%
limitation is ever reached, we have the option to increase this limitation to
9.9%. If the 9.9% limitation is ever reached, this will not limit Fusion
Capital's obligation to fund the monthly purchase amount of $200,000 or Fusion
Capital's obligation to purchase up to the full remaining portion of the $6.0
million if our stock price equals or exceeds $5.00 per share.
20
The following table sets forth the number of shares of our common stock
that we would sell to Fusion Capital under the common stock purchase agreement
at varying purchase prices:
Percentage of
Assumed No. of shares shares
Purchase issuable (max. outstanding
Price 2,400,000) (1) after issuance (2)
-------- --------------- ------------------
$1.00 2,400,000 31.3%
$2.00 2,400,000 31.3%
$3.00 2,000,000 28.3%
$5.00 1,200,000 21.5%
$10.00 600,000 15.4%
$15.00 400,000 13.2%
$20.00 300,000 12.0%
(1) Calculated based on Fusion Capital's agreement to purchase up to $6.0
million of our common stock. The limit of 2,400,000 represents the shares
offered in this prospectus, excluding the 600,000 shares we have issued to
Fusion Capital as a commitment fee. If our stock price level would require
more than 2,400,000 shares to be issuable to Fusion Capital under the
common stock purchase agreement, we have the right, and currently intend,
to terminate the agreement without any payment or liability to Fusion
Capital.
(2) Based on 6,571,447 shares outstanding on May 7, 2001, plus 600,000 shares
of common stock issued to Fusion Capital as a commitment fee and the
number of shares issuable at the corresponding assumed purchase price set
forth in the adjacent column.
Our Right to Prevent Purchases
We have the unconditional right to suspend purchases at any time on one
trading day's notice. Any such suspension could be effective until we revoke it.
If we need cash proceeds of sales under the common stock purchase agreement for
working capital or other business purposes, we do not intend to suspend
purchases in this manner.
Our Right to Increase or Decrease the Amount to Be Purchased by Fusion Capital
We have the unconditional right to decrease the daily amount to be
purchased by Fusion Capital at any time for any reason effective upon one
trading day's notice. We also have the right to increase the daily purchase
amount at any time for any reason, except that we may not increase the daily
purchase amount above $10,000 unless our stock price has been above $5.00 per
share for five consecutive trading days. For any trading day that the sale price
of our common stock is below $5.00, the daily purchase amount will not be
greater than $10,000.
Events of Default
Generally, Fusion Capital may terminate the common stock purchase
agreement without any liability or payment to us upon the occurrence of any of
the following events of default:
o if for any reason the shares offered by this prospectus cannot be
sold pursuant to this prospectus for a period of ten consecutive
trading days or for more than an aggregate of 30 trading days in any
365-day period;
o suspension by the Nasdaq SmallCap Market of our common stock from
trading for a period of ten consecutive trading days or for more
than an aggregate of 30 trading days in any 365-day period;
o our failure to satisfy any listing criteria of the Nasdaq SmallCap
Market for a period of 30 consecutive trading days;
21
o notice from us or our transfer agent to the effect that either of us
intends not to comply with a proper request for purchase under the
common stock purchase agreement of shares of common stock;
o our failure to confirm to the transfer agent any purchase by Fusion
Capital of shares of our common stock under the common stock
purchase agreement;
o failure of the transfer agent to issue any shares of our common
stock purchased by Fusion Capital under the common stock purchase
agreement;
o any material breach by us of the representations or warranties or
covenants contained in the common stock purchase agreement or any
related agreements which has or which could have a material adverse
affect on us, subject to a cure period of ten trading days;
o a default by us of any payment obligation in excess of $1.0 million;
or
o our voluntary or involuntary participation in insolvency or
bankruptcy proceedings.
Our Termination Rights
We have the right to terminate the common stock purchase agreement at
any time for any reason at no cost by delivering written notice to Fusion
Capital. A termination notice will be effective one trading day after Fusion
Capital receives it.
No Short-Selling or Hedging by Fusion Capital
Fusion Capital has agreed that neither it nor any of its affiliates
will engage in any direct or indirect short-selling or hedging of our common
stock during any time prior to the termination of the common stock purchase
agreement.
Additional Shares Issued to Fusion Capital
Under the terms of the May 7, 2001 common stock purchase agreement with
Fusion Capital, in connection with its initial purchase of shares under the
agreement, we issued to Fusion Capital 600,000 shares of our common stock as a
commitment fee. Unless an event of default occurs, Fusion Capital must hold
these shares until the common stock purchase agreement has been terminated.
No Variable Priced Financings
Until the termination of the common stock purchase agreement, we have
agreed not to issue, or enter into any agreement with respect to the issuance
of, any variable-priced equity or variable-priced equity-like securities unless
we have obtained Fusion Capital's prior written consent.
USE OF PROCEEDS
We will not receive any proceeds from any sales of the shares by the
selling stockholders. We will, however, receive up to $6.0 million of proceeds
from the sale of shares of our common stock to Fusion Capital under our common
stock purchase agreement with them. We plan on using those proceeds for working
capital and general corporate purposes.
SELLING STOCKHOLDER
The selling stockholder is Fusion Capital Fund II, LLC ("Fusion
Capital"), an Illinois limited liability company located in Chicago, Illinois.
Fusion Capital is an investor in publicly traded companies. The selling
stockholder has not had any position, office or other material relationship with
us within the past three years. Steven Martin and Joshua Scheinfeld will hold
investment and voting control over any shares of our common stock owned by
Fusion Capital.
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We estimate the maximum number of shares we will sell to Fusion Capital
under the common stock purchase agreement will be 2,400,000 shares, assuming
Fusion Capital purchases all $6.0 million worth of common stock. We have the
right under certain conditions to suspend or terminate the common stock purchase
agreement without any payment or liability to Fusion Capital. We have also
issued Fusion Capital 600,000 shares as a commitment fee pursuant to the terms
of the common stock purchase agreement. Unless an event of default occurs, these
shares must be held by Fusion Capital until the earlier of the termination of
the common stock purchase agreement or 30 months from the date of the common
stock purchase agreement. This prospectus relates to the offer and sale from
time to time by Fusion Capital of these shares. None of the shares offered in
this prospectus were issued or outstanding on the date of this prospectus, and
the selling stockholder does not otherwise own any shares of our common stock.
The common stock purchase agreement is described in detail under the heading
"The Financing Transaction."
Effect of Performance of the Common Stock Purchase Agreement on Us and Our
Stockholders
All shares registered pursuant to the common stock purchase agreement
will be freely tradable. We expect that they will be sold over a period of up to
30 months from the date of this prospectus. Depending upon market liquidity at
the time, sale of shares under this offering could cause the trading price of
our common stock to decline and to be highly volatile. Fusion Capital may
ultimately purchase all of the shares of common stock issuable under the common
stock purchase agreement, and it may sell all of the shares of common stock it
acquires upon purchase. Therefore, the purchase of shares under the common stock
purchase agreement may result in substantial dilution to the interests of other
holders of our common stock. However, we have the right to block purchases under
the common stock purchase agreement and to require termination of the common
stock purchase agreement in some cases.
Our Ability to Suspend Purchases
The common stock purchase agreement provides that we may at any time
suspend purchases under the common stock purchase agreement. To the extent we
need to use the cash proceeds of sales of common stock issuable under the common
stock purchase agreement for working capital or other business purposes, we do
not intend to suspend purchases under the common stock purchase agreement.
Holdings of Fusion Capital Upon Termination of the Offering
Notwithstanding certain limitations on the ability of Fusion Capital to
purchase shares as set forth in the common stock purchase agreement, assuming
the purchase of 2,400,000 shares by Fusion Capital, together with the 600,000
shares delivered as a commitment fee, Fusion Capital would beneficially own
31.3% of our outstanding stock as of May 7, 2001. To the extent we need to use
the cash proceeds of sales of common stock issuable under the common stock
purchase agreement for working capital or other business purposes, we do not
intend to restrict purchases under the common stock purchase agreement. Because
the Fusion Capital may sell all, some, or none of the common stock offered by
this prospectus, we cannot estimate the amount of common stock that will be held
by Fusion Capital upon termination of the offering.
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by the
selling stockholder, Fusion Capital Fund II, LLC. The common stock may be sold
or distributed from time to time by the selling stockholder directly to one or
more purchasers or through brokers, dealers, or underwriters who may act solely
as agents or may acquire the common stock as principals, at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The sale
of the common stock offered by this prospectus may be effected in one or more of
the following methods:
o ordinary brokers' transactions;
o transactions involving cross or block trades or otherwise on the
Nasdaq SmallCap Market;
23
o purchases by brokers, dealers, or underwriters as principal and
resale by these purchasers for their own accounts pursuant to this
prospectus;
o "at the market" to or through market makers or into an existing
market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
o in privately negotiated transactions; or
o any combination of the foregoing.
See the table under the heading "The Financing Transaction" for the
number of shares of our common stock that would be sold to Fusion Capital upon
our sale of common stock under the common stock purchase agreement at varying
purchase prices.
We will use our best efforts to file, during any period during which we
are required to do so under our registration rights agreement with Fusion
Capital, one or more post-effective amendments to the registration statement of
which this prospectus is a part to describe any material information with
respect to the plan of distribution not previously disclosed in this prospectus
or any material change to such information in this prospectus.
In order to comply with the securities laws of certain states, if
applicable, in those states the shares may be sold only through registered or
licensed brokers or dealers. In addition, in certain states, the shares may not
be sold unless they have been registered or qualified for sale in the state or
an exemption from the registration or qualification requirement is available and
complied with.
Brokers, dealers, underwriters, or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling stockholder and/or
purchasers of the common stock for whom the broker-dealers may act as agent, or
to whom they may sell as principal, or both. The compensation paid to a
particular broker-dealer may be less than or in excess of customary commissions.
The selling stockholder is an "underwriter" within the meaning of the
Securities Act. Any broker-dealers who act in connection with the sale of the
shares hereunder may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions they receive and proceeds of any sale of the
shares may be deemed to be underwriting discounts and commissions under the
Securities Act.
Neither we nor the selling stockholder is currently able to estimate
the amount of compensation that any agent will receive. We know of no existing
arrangements between any selling stockholder and any other stockholder, broker,
dealer, underwriter, or agent relating to the sale or distribution of the
shares. At the time a particular offer of shares is made, a prospectus
supplement, if required, will be distributed that will set forth the names of
any agents, underwriters, or dealers and any compensation from the selling
stockholder and any other required information.
We will pay all of the expenses incident to the registration, offering,
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents. We have also agreed to indemnify the
selling stockholder and related persons against specified liabilities, including
liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
Atlantic, we have been advised that in the opinion of the SEC this
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Fusion Capital has agreed not to engage in any direct or indirect short
selling or hedging of our common stock during the term of the common stock
purchase agreement.
We have advised the selling stockholder that while it is engaged in a
distribution of the shares included in this prospectus it is required to comply
with Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes the selling
stockholder, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security that is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered hereby this
prospectus.
24
This offering will terminate on the date on which all shares offered by
this prospectus have been sold by the selling stockholder.
LEGAL PROCEEDINGS
There are no current or pending legal proceedings to which Atlantic or
any of its subsidiaries is a party or to which any of their properties is
subject other than the following:
Claim for Arbitration Brought by Cleveland Clinic Foundation
Atlantic's subsidiary, Gemini, was party to an exclusive worldwide
sublicense from the Cleveland Clinic Foundation 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 had breached the sublicense by failing to fulfill its
obligations under the sublicense. Pursuant to an asset purchase agreement dated
April 23, 2001, among the Cleveland Clinic Foundation and its new affiliate IFN,
Inc., Atlantic and Gemini, on May 4, 2001, Gemini sold to IFN substantially all
its assets (mostly intangible assets with no book value), including all those
related to the 2-5A antisense enhancing technology in the second quarter of
2001. Upon the closing of this transaction, the Cleveland Clinic withdrew its
outstanding arbitration demand against Gemini and Atlantic, with prejudice. Each
party is obligated to pay its own costs and attorney's fees related thereto. For
additional information, please see "Description of Business--Atlantic and Its
Subsidiaries--Gemini and the 2-5A Antisense Technology."
Directors, executive officers, promoters and control persons
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
A. Joseph Rudick, M.D., 44, has been a director of Atlantic since May
1999. He was also the Chief Executive Officer of Atlantic from April 10, 2000
until February 15, 2001, 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.
25
Frederic P. Zotos, Esq., 35, has been a director of Atlantic since May
1999, President of Atlantic since April 3, 2000, and Chief Executive Officer
since February 15, 2001. 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.
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.
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 May 7, 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 May 3, 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
26
owned by that person or entity. The common stock represented here includes the
common stock that the beneficial holders would directly possess if they
converted all shares of Series A Preferred Stock held by them.
NUMBER OF % OF TOTAL SHARES
NAME AND ADDRESS SHARES OUTSTANDING (1)
---------------- ------ ---------------
CERTAIN BENEFICIAL HOLDERS:
Lindsay A. Rosenwald, M.D.(2) 499,298 7.6%
787 Seventh Avenue
New York, NY 10019
VentureTek, L.P.(3) 438,492 6.7%
40 Exchange Place 20th Floor
New York, NY 10005
MANAGEMENT:
A. Joseph Rudick, M.D.(4) 130,610 1.9%
Frederic P. Zotos, Esq.(5) 158,666 2.4%
Steve H. Kanzer, C.P.A., Esq.(6) 60,000 *
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 6.3%
------------------------
* Less than 1.0%
(1) Percentage of beneficial ownership is calculated assuming 6,571,447 shares
of common stock were outstanding on May 7, 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 May 3, 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 May 3, 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
27
additional 12,500 shares are exercisable pursuant to stock options granted
on April 12, 2000 for 25,000 shares, of which 25% or 6,250 were
exercisable immediately, then an additional 25% annually thereafter; an
additional 25,000 shares are exercisable pursuant to stock options granted
October 21, 1999, all of which were immediately exercisable; an additional
2,000 shares are exercisable pursuant to stock options granted on
September 23, 1999, all of which were exercisable on September 23, 2000;
an additional 25,000 shares are exercisable pursuant to stock options
granted on August 9, 1999 for 50,000 shares, of which 25% or 12,500 were
exercisable on issuance, then an additional 25% annually thereafter; an
additional 6,666 shares are exercisable pursuant to stock options granted
on May 28, 1999 for 10,000 shares, exercisable in three equal amounts
starting one year from grant date; and an additional 9,444 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 May 3, 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 starting
one year from grant date.
(6) Represents options exercisable within 60 days of May 3, 2001. 25,000
shares are exercisable pursuant to stock options granted on September 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 May 3, 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 May 3, 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.
Description of securities
General
Our certificate of incorporation authorizes us to issue 50,000,000
shares of common stock and 10,000,000 shares of preferred stock. Of the
authorized preferred stock, 1,375,000 shares have been designated Series A
convertible preferred stock and 1,647,312 shares have been designated Series B
convertible preferred stock. As of
28
May 7, 2001, 6,571,447 shares of our common stock were issued and outstanding,
329,256 shares of our Series A preferred stock were issued and outstanding, and
no shares of our Series B preferred stock were issued and outstanding.
Common Stock
Holders of our common stock are entitled to one vote for each share on
all matters to be voted on by our stockholders. Holders of our common stock have
no cumulative voting rights. They are entitled to share ratably any dividends
that may be declared from time to time by the board of directors in its
discretion from funds legally available for dividends. Holders of our common
stock have no preemptive rights to purchase our common stock. There are no
conversion rights or sinking fund provisions for the common stock.
Our common stock is listed on the Nasdaq SmallCap Market.
Series A Preferred Stock
Holders of shares of our 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.
On matters to be voted on by our stockholders, holders of shares of
Series A preferred stock are entitled to the number of votes equal to the number
of votes that could be cast in such vote by a holder of the common stock into
which those shares of Series A preferred stock are convertible on the record
date for that vote, or if no record date has been established, on the date that
vote is taken. So long as at least 50% of the shares of Series A preferred stock
are outstanding, the affirmative vote or consent of the holders of at least
66.67% of all outstanding Series A preferred stock voting separately as a class
is necessary to effect certain actions, including, but not limited to,
declaration of dividends or distribution on any of our securities other than the
Series A preferred stock pursuant to the provisions of the certificate of
designations of the Series A preferred stock and approval of any liquidation,
dissolution or sale of substantially all of our assets. Currently there are
outstanding fewer than 50% of the shares of Series A preferred stock
outstanding.
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.
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 our common stock.
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 Delaware Secretary of State.
Series B Preferred Stock
We are currently authorized to issue 1,647,312 shares of Series B
preferred stock, with such voting rights, designations, preferences, limitations
and relative rights as are contained in the certificate of designations of the
Series B preferred stock, as amended, filed with the Secretary of State of the
State of Delaware. Currently there are no shares of Series B preferred stock
outstanding.
EXPERTS
The consolidated financial statements of Atlantic (a development stage
company) and its subsidiaries as of December 31, 2000 and 1999 and for each of
the years in the three-year period ended December 31, 2000, and for
29
the period from June 13, 1993 (inception) to December 31, 2000, have been
included herein and in this registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
Certain legal matters in connection with the shares of our common stock
offered for resale in this prospectus have been passed upon for us by Kramer
Levin Naftalis & Frankel LLP, New York, New York.
Disclosure of Commission Position on
Indemnification For Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, officers or controlling
persons in the successful defense of any action, suit or proceeding) is asserted
by that director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether that indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of that issue.
DESCRIPTION OF PROPERTY
We 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.
To facilitate our 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.
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."), we
agreed to pay to Dr. Rudick, who was then our President, an amount equal to
$141,012. This amount has been 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 has been 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.
On January 4, 2000, we entered into a financial advisory and consulting
agreement with Joseph Stevens & Company, Inc. In this agreement, we engaged
Joseph Stevens to provide us with investment banking services from January 4,
2000 until January 4, 2001. As partial compensation for the services to be
rendered by Joseph Stevens, we issued them three warrants to purchase an
aggregate of 450,000 shares of our common stock. The exercise price and exercise
period of each warrant is as follows:
30
================================================================================================================
Warrant Number Exercise
No. of Shares Price Exercise Period
================================================================================================================
No.1 150,000 $2.50 1/4/00 through 1/4/05
----------------------------------------------------------------------------------------------------------------
No.2 150,000 $3.50 1/4/01 through 1/4/06 (subject to vesting in equal
monthly increments from 1/4/00-1/4/01)
----------------------------------------------------------------------------------------------------------------
No.3 150,000 $4.50 1/4/02 through 1/4/07 (subject to vesting in equal
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.
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
------------------------------------------------------
March 31, 2001 $1.438 $0.625
======================================================
The number of holders of record of our common stock as of May 7, 2001
was 120. The number of beneficial stockholders of our common stock as of May 7,
2001 was 89.
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.
31
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
Pursuant to our 1995 stock option plan, on April 12, 2000, we granted
Dr. Rudick options for 100,000 shares of common stock at an exercise price of
$4.1875. Additionally, on April 12, 2000, we granted Dr. Rudick 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, we
rescinded options for 50,000 shares of common stock that we had granted to Dr.
Rudick on August 9, 1999, in order to correct our having granted 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, we granted Frederic Zotos options
for 100,000 shares of common stock at an exercise price of $4.1875.
Additionally, on April 12, 2000, we granted Frederic Zotos 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, we granted Nicholas Rossettos 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. Elsewhere in the "Executive Compensation" section we refer to the
individuals named in the table as the "Named Officers." No other executive
officer of Atlantic received compensation in excess of $100,000 during fiscal
year 2000. No executive officer who would otherwise have been included in this
table on the basis of 2000 salary and bonus resigned or terminated employment
during that year.
SUMMARY COMPENSATION TABLE
---------------------------------- -------- ------------------------------------------- -------------------- -------------------
Annual Compensation Long-Term All Other
Compensation Compensation ($)
Awards
Name and Principal Position Year Salary($) Bonus($) Other Annual Securities
Compensation ($) Underlying
Options/SARs(#)
---------------------------------- -------- ------------ ------------ ----------------- -------------------- -------------------
A. Joseph Rudick, M.D.(1) 2000 123,750 25,000 0 25,000 84,674(2)
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 and CEO 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; he resigned this position effective February 15, 2001.
(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.
32
(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 and Chief
Executive Officer effective February 15, 2001.
(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
$6,750 in director's fees.
(8) Represents fees paid for consulting services rendered.
(9) Mr. Rossettos became Chief Financial Officer of Atlantic on April 10,
2000.
(10) Represents matching contributions by Atlantic pursuant to Atlantic's
SAR-SEP retirement plan.
OPTIONS AND STOCK APPRECIATION RIGHTS
The following table contains information concerning the grant of stock
options under the 1995 stock option plan and otherwise to the Named Officers
during the 2000 fiscal year. Except as described in footnote (1) below, no stock
appreciation rights were granted during the 2000 fiscal year.
33
OPTION/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------------------------------------
Individual Grants
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Name Number of Securities % of Underlying Exercise Price Expiration
Underlying Options/ Options/SARs Granted to ($/Share)(3) Date
SARs Granted(#)(1) Employees in Fiscal
Year(2)
----------------------------------- ---------------------- ------------------------- ---------------- --------------
A. Joseph Rudick M.D.(4) 125,000 25% $4.1875 4/12/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Frederic P. Zotos, Esq. 250,000 51% $4.1875 4/12/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Nicholas J. Rossettos, CPA 50,000 10% $4.1875 4/12/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
Other Employees 20,000 4% $4.1875 4/12/10
50,000 10% $3.4375 5/15/10
----------------------------------- ---------------------- ------------------------- ---------------- --------------
------------------------
(1) Each option has a maximum term of ten years, subject to earlier
termination in the event of the optionee's cessation of service with
Atlantic. Dr. Rudick's options became exercisable as follows: (1) the
first option for 100,000 shares of common stock, 25% upon granting and
25% each of the first three anniversaries of the date of granting; (2)
the second option for 25,000 shares of common stock, 25% upon granting
and 25% each of the first three anniversaries of the date of granting.
Mr. Zotos' options are exercisable as follows: (1) the first option for
100,000 shares of common stock, 25% upon granting and 25% each of the
first three anniversaries of the date of granting; (2) the second
option for 150,000 shares of common stock, 25% upon granting and 25%
each of the first three anniversaries of the date of granting. Mr.
Rossettos' options for 50,000 shares of common stock are exercisable as
follows: 25% upon granting and 25% each of the first three
anniversaries of the date of granting. Options for the remainder of the
employees are exercisable as follows: (1) the option for 20,000 shares
of common stock, 25% upon granting and 25% each of the first three
anniversaries of the date of granting; (2) the option for 50,000 shares
of common stock, 25% upon granting and 25% each of the first three
anniversaries of the date of granting. Each option will become
immediately exercisable in full upon an acquisition of Atlantic by
merger or asset sale, unless the option is assumed by the successor
entity. Each option includes a limited stock appreciation right
pursuant to which the optionee may surrender the option, to the extent
exercisable for vested shares, upon the successful completion of a
hostile tender for securities possessing more than 50% of the combined
voting power of Atlantic's outstanding voting securities. In return for
the surrendered option, the optionee will receive a cash distribution
per surrendered option share equal to the excess of (1) the highest
price paid per share of common stock in that hostile tender offer over
(2) the exercise price payable per share under the cancelled option.
(2) Calculated based on total option grants to employees of 495,000 shares
of common stock during the 2000 fiscal year.
(3) The exercise price may be paid in cash or in shares of common stock
(valued at fair market value on the exercise date) or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. Atlantic may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares and the federal and state income tax liability incurred by the
optionee in connection with such exercise. The optionee may be
permitted, subject to the approval of the Plan Administrator, to apply
a portion of the shares purchased under the option (or to deliver
existing shares of common stock) in satisfaction of such tax liability.
(4) Stock options for 50,000 shares granted to Dr. Rudick on August 9,
1999, would have vested upon the sale of Optex on January 31, 2001.
These options were, however, rescinded during the 2000 fiscal year, in
order to correct for the grant to Dr. Rudick in the 1999 fiscal year of
options for 37,000 shares above the amount permitted by the 1995 stock
option plan for that fiscal year.
34
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. We grant
non-employee directors 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, we granted each of
Steve H. 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, we granted Peter
Kliem options for 25,000 shares of common stock at an exercise price of $3.1875.
On September 29, 2000, we granted Steve H. Kanzer options for 25,000 shares of
common stock at an exercise price of $3.1875. We also granted Peter Kliem
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.
Our 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.
We reimburse board members for reasonable expenses incurred in
connection with attending meetings of the board and of committees of the board.
35
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, we terminated the employment of Mr. Mizrachi and
became 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. Effective
February 15, 2001, Dr. Rudick resigned as Chief Executive Officer of Atlantic,
and his employment agreement terminated.
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 February 15, 2001, Mr. Zotos was also appointed Chief
Executive Officer of Atlantic.
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.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission relating to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or other document referred to are not necessarily complete and in
each instance we refer you to the copy of the contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference.
For further information with respect to us and the common stock we are
offering, please refer to the registration statement. A copy of the registration
statement can be inspected by anyone without charge at the public reference room
of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at 7 World Trade Center, Suite
1300, New York, New York 10048, and 500 West Madison Street, Chicago, Illinois
60601. Please call the Commission at 1-800-SEC-0330 for further information on
the operation of the public reference room. Copies of these materials can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains information regarding
registrants that file electronically with the Commission.
Our common stock is quoted for trading on the Nasdaq SmallCap Market,
and you may inspect at the offices of the Nasdaq SmallCap Market, located at
1735 K Street, N.W., Washington, D.C. 20006, the registration statement relating
to the common stock offered by this prospectus, reports filed by us under the
Exchange Act, and other information concerning us.
36
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Index to Financial Statements
financial statements for fiscal year 2000
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-8
Notes to Consolidated Financial Statements F-9
FINANCIAL STATEMENTS FOR QUARTER ENDED MARCH 31, 2001
Consolidated Balance Sheets
as of March 31, 2001 (unaudited) F-29
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2001 and 2000,
and the period from July 13, 1993 (inception) to March 31, 2001 F-30
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 2001 and 2000, and the
period from July 13, 1993 (inception) to March 31, 2001 F-31
Notes to Consolidated Financial Statements (unaudited) F-32
37
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Technology Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of Atlantic
Technology Ventures, Inc. and subsidiaries (a development stage company) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000 and for the period from July 13, 1993
(inception) to December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Technology
Ventures, Inc. and subsidiaries (a development stage company) as of December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2000, and for the
period from July 13, 1993 (inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Short Hills, New Jersey
March 30, 2001
F-1
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
As of December 31,
Assets 2000 1999
------------------ -------------------
Current assets:
Cash and cash equivalents $ 2,663,583 3,473,321
Accounts receivable 192,997 337,323
Prepaid expenses 22,599 17,414
------------------ -------------------
Total current assets 2,879,179 3,828,058
Property and equipment, net 227,088 131,832
Investment in affiliate 67,344 --
Other assets 2,901 --
------------------ -------------------
Total assets $ 3,176,512 3,959,890
================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 785,838 542,759
Deferred revenue 1,294,615 --
------------------ -------------------
Total current liabilities $ 2,080,453 542,759
Redeemable Series B convertible preferred stock.
Authorized 1,647,312 shares; 206,896 shares issued and
outstanding at December 31, 2000 600,000 --
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock: None issued and outstanding -- --
Series A convertible preferred stock, $.001 par value.
Authorized 1,375,000 shares; 359,711 and 610,088 shares issued and
outstanding at December 31, 2000 and 1999, respectively (liquidation
preference aggregating $4,676,243 and $7,931,144 at December 31, 2000
and 1999, respectively) 360 610
Convertible preferred stock warrants, 112,896 and 117,195
issued and outstanding at December 31, 2000 and
1999, respectively 520,263 540,074
Common stock, $.001 par value. Authorized 50,000,000
shares; 6,122,135 and 4,815,990 shares issued and outstanding
at December 31, 2000 and 1999, respectively 6,122 4,816
Common stock subscribed. 182 shares at December 31, 2000
and 1999 -- --
Additional paid-in capital 24,796,190 21,662,272
Deficit accumulated during development stage (24,826,334) (18,790,099)
------------------ -------------------
496,601 3,417,673
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------------ -------------------
Total stockholders' equity 496,059 3,417,131
------------------ -------------------
Total liabilities and stockholders' equity $ 3,176,512 3,959,890
================== ===================
See accompanying notes to consolidated financial statements.
F-2
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
period from
July 13, 1993
(inception) to
Year ended December 31, December 31,
-----------------------------------------------------
2000 1999 1998 2000
--------------- --------------- -------------- ----------------
Revenues:
Development revenue $ 5,169,288 1,082,510 -- $6,251,798
License revenue -- -- 2,500,000 2,500,000
Grant revenue 189,658 77,069 -- 366,659
--------------- --------------- -------------- ----------------
Total revenues 5,358,946 1,159,579 2,500,000 9,118,457
--------------- --------------- -------------- ----------------
Costs and expenses:
Cost of development revenue 4,135,430 866,008 -- 5,001,438
Research and development 1,130,345 1,091,291 3,036,355 9,504,910
Acquired in-process research and
development 2,653,382 -- -- 2,653,382
General and administrative 2,235,535 1,941,425 2,668,508 15,903,226
Compensation expense relating to
stock 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 -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 1,214,723 1,215 -- --
Conversion of preferred to common stock (584,265) (585) -- --
Cashless exercise of preferred warrants 2,010 2 -- --
Exercise of options -- -- -- --
Exercise of warrants -- -- -- --
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 632,468 632 -- --
Conversion of preferred to common stock (95,599) (95) -- --
Preferred stock dividend 73,219 73 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1999 610,088 610 -- --
Conversion of preferred to common stock (309,959) (310) -- --
Preferred stock dividend 59,582 60 -- --
Cashless exercise of preferred warrants (4,299) (19,811) 9,453 9
Exercise of options -- -- -- --
Issuance of common stock to TeraComm shareholders -- -- -- --
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- 344,828 345
Costs related to issuance of Series B preferred stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- (137,931) (138)
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible
preferred stock -- -- (206,897) (207)
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 359,711 $ 360 -- $ --
=========== =========== =========== ===========
F-4
Convertible
Preferred
Stock Warrants Common Stock
-------------------------- -------------------------
Number Amount Shares Amount
----------- ----------- ----------- -----------
Common stock subscribed at $.001 per share
July-November 1993 -- $ -- -- $ --
Issued common stock at $.001 per share,
June 1994 -- -- 84 --
Issued and subscribed common stock at $.05
per share, August 1994 -- -- 860 1
Payments of common stock subscriptions -- -- 5,061 5
Issuance of warrants, September 1995 -- -- -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 1,872,750 1,873
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 785,234 785
Repurchase of common stock -- -- (269) --
Compensation related to grant of stock
options -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1995 -- -- 2,663,720 2,664
Issuance of warrants, April 1996 -- -- -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 250,000 250
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1996 -- -- 2,913,720 2,914
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- -- --
Channel merger -- -- 103,200 103
Conversion of preferred to common stock -- -- 47,651 48
Issuance of convertible preferred stock
warrants 123,720 570,143 -- --
Issuance of warrants -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 123,720 570,143 3,064,571 3,065
Conversion of preferred to common stock -- -- 1,367,817 1,367
Cashless exercise of preferred warrants (6,525) (30,069) -- --
Exercise of options -- -- 70,000 70
Exercise of warrants -- -- 1,000 1
Expense related to grant of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Imputed convertible preferred stock dividend -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1998 117,195 540,074 4,503,388 4,503
Conversion of preferred to common stock -- -- 312,602 313
Preferred stock dividend -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1999 117,195 540,074 4,815,990 4,816
Conversion of preferred to common stock -- -- 1,011,038 1,011
Preferred stock dividend -- -- -- --
Cashless exercise of preferred warrants -- -- 19,802 --
Exercise of options -- -- 85,654 86
Issuance of common stock to TeraComm shareholders -- -- 200,000 200
Expense related to grant of stock warrants -- -- -- --
Issuance of Series B convertible preferred stock -- -- -- --
Costs related to issuance of Series B preferred stock -- -- -- --
Repurchase of Series B convertible preferred stock -- -- -- --
Dividend upon repurchase of Series B convertible
preferred stock -- -- -- --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible
preferred stock -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 112,896 $ 520,263 6,122,135 $ 6,122
=========== =========== =========== ===========
F-5
Deficit
accumulated
Common Stock Additional during Deferred
Subscribed paid-in development compen-
Number Amount capital stage sation
-------- ----------- ---------- ------------ ---------
Common stock subscribed at $.001 per share
July-November 1993 5,231 $ 5 6,272 -- --
Issued common stock at $.001 per share,
June 1994 -- -- 101 -- --
Issued and subscribed common stock at $.05
per share, August 1994 12 -- 52,374 -- --
Payments of common stock subscriptions (5,061) (5) -- -- --
Issuance of warrants, September 1995 -- -- 300,000 -- --
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 6,034,827 -- --
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 2,441,519 -- --
Repurchase of common stock -- -- -- -- --
Compensation related to grant of stock
options -- -- 208,782 -- (144,000)
Amortization of deferred compensation -- -- -- -- 12,000
Net loss -- -- -- (4,880,968) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 182 -- 9,043,875 (4,880,968) (132,000)
Issuance of warrants, April 1996 -- -- 139,000 -- --
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 1,452,063 -- --
Amortization of deferred compensation -- -- -- -- 28,800
Net loss -- -- -- (3,557,692) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 182 -- 10,634,938 (8,438,660) (103,200)
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- 10,611,947 -- --
Channel merger -- -- 657,797 -- --
Conversion of preferred to common stock -- -- (26) -- --
Issuance of convertible preferred stock
warrants -- -- (570,143) -- --
Issuance of warrants -- -- 159,202 -- --
Amortization of deferred compensation -- -- -- -- 28,800
Imputed convertible preferred stock dividend -- -- (3,703,304) -- --
Imputed convertible preferred stock dividend -- -- 3,703,304 -- --
Net loss -- -- -- (5,151,396) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 182 -- 21,493,715 (13,590,056) (74,400)
Conversion of preferred to common stock -- -- (782) -- --
Cashless exercise of preferred warrants -- -- 30,067 -- --
Exercise of options -- -- 52,430 -- --
Exercise of warrants -- -- 5,499 -- --
Expense related to grant of stock options -- -- 81,952 -- --
Amortization of deferred compensation -- -- -- -- 74,400
Imputed convertible preferred stock dividend -- -- (1,628,251) -- --
Imputed convertible preferred stock dividend -- -- 1,628,251 -- --
Net loss -- -- -- (2,753,528) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 182 -- 21,662,881 (16,343,584) --
Conversion of preferred to common stock -- -- (218) -- --
Preferred stock dividend -- -- (391) -- --
Net loss -- -- -- (2,446,515) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 182 -- 21,662,272 (18,790,099) --
Conversion of preferred to common stock -- -- (701) -- --
Preferred stock dividend -- -- (60) -- --
Cashless exercise of preferred warrants -- -- -- --
Exercise of options -- -- 344,512 -- --
Issuance of common stock to TeraComm shareholders -- -- 1,799,800 -- --
Expense related to grant of stock warrants -- -- 1,020,128 -- --
Issuance of Series B convertible preferred stock -- -- 975,943 -- --
Costs related to issuance of Series B preferred stock -- -- (147,800) -- --
Repurchase of Series B convertible preferred stock -- -- (399,862) -- --
Dividend upon repurchase of Series B convertible
preferred stock -- -- 121,949 (233,757) --
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible
preferred stock -- -- (599,793) -- --
Net loss -- -- -- (5,802,478) --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 182 -- 24,796,190 (24,826,334) --
=========== =========== =========== =========== ===========
F-6
Common Total
stock stock-
subscrip- holders'
tions Treasury equity
receivable stock (deficit)
-------------- ------------ --------------
Common stock subscribed at $.001 per share
July-November 1993 (6,277) -- --
Issued common stock at $.001 per share,
June 1994 -- -- 101
Issued and subscribed common stock at $.05
per share, August 1994 (750) -- 51,625
Payments of common stock subscriptions 6,809 -- 6,809
Issuance of warrants, September 1995 -- -- 300,000
Issued common stock and warrants at $4 per unit,
December 1995 (net of costs of issuance
of $1,454,300) -- -- 6,036,700
Conversion of demand notes payable and
the related accrued interest to common stock,
December 1995 -- -- 2,442,304
Repurchase of common stock -- (324) (324)
Compensation related to grant of stock
options -- -- 64,782
Amortization of deferred compensation -- -- 12,000
Net loss -- -- (4,880,968)
----------- ----------- -----------
Balance at December 31, 1995 (218) (324) 4,033,029
Issuance of warrants, April 1996 -- -- 139,000
Issued common stock and warrants at $6.73
per share, August 1996 (net of costs of
issuance of $76,438) -- -- 1,452,313
Amortization of deferred compensation -- -- 28,800
Net loss -- -- (3,557,692)
----------- ----------- -----------
Balance at December 31, 1996 (218) (324) 2,095,450
Issued convertible preferred stock at $10 per unit,
May and August 1997 (net of costs of issuance
of $1,758,816) -- -- 10,613,184
Channel merger -- -- 657,900
Conversion of preferred to common stock -- -- --
Issuance of convertible preferred stock
warrants -- -- --
Issuance of warrants -- -- 159,202
Amortization of deferred compensation -- -- 28,800
Imputed convertible preferred stock dividend -- -- (3,703,304)
Imputed convertible preferred stock dividend -- -- 3,703,304
Net loss -- -- (5,151,396)
----------- ----------- -----------
Balance at December 31, 1997 (218) (324) 8,403,140
Conversion of preferred to common stock -- -- --
Cashless exercise of preferred warrants -- -- --
Exercise of options -- -- 52,500
Exercise of warrants -- -- 5,500
Expense related to grant of stock options -- -- 81,952
Amortization of deferred compensation -- -- 74,400
Imputed convertible preferred stock dividend -- -- (1,628,251)
Imputed convertible preferred stock dividend -- -- 1,628,251
Net loss -- -- (2,753,528)
----------- ----------- -----------
Balance at December 31, 1998 (218) (324) 5,863,964
Conversion of preferred to common stock -- -- --
Preferred stock dividend -- -- (318)
Net loss -- -- (2,446,515)
----------- ----------- -----------
Balance at December 31, 1999 (218) (324) 3,417,131
Conversion of preferred to common stock -- -- --
Preferred stock dividend -- -- --
Exercise of options -- -- 344,598
Issuance of common stock to TeraComm shareholders -- -- 1,800,000
Expense related to grant of stock warrants -- -- 1,020,128
Issuance of Series B convertible preferred stock -- -- 976,288
Costs related to issuance of Series B preferred stock -- -- (147,800)
Repurchase of Series B convertible preferred stock -- -- (400,000)
Dividend upon repurchase of Series B convertible
preferred stock -- -- (111,808)
Reclassification of Series B convertible preferred
stock to redeemable Series B convertible
preferred stock -- -- (600,000)
Net loss -- -- (5,802,478)
----------- ----------- -----------
Balance at December 31, 2000 (218) (324) 496,059
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
period from
July 13, 1993
(inception) to
Year ended December 31, December 31,
------------------------------------------
2000 1999 1998 2000
------------ ------------ ------------ -------------
Cash flows from operating activities:
Net loss $(5,802,478) (2,446,515) (2,753,528) (24,592,577)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and development 1,800,000 -- -- 1,800,000
Expense relating to issuance of warrants -- -- -- 298,202
Expense relating to the issuance of options -- -- 81,952 81,952
Expense related to Channel merger -- -- -- 657,900
Change in equity of affiliate 79,274 -- -- 79,274
Compensation expense relating to
stock options and warrants 1,020,128 -- 74,400 1,228,910
Discount on notes payable - bridge financing -- -- -- 300,000
Depreciation 76,095 113,771 166,553 506,505
Loss on disposal of furniture and equipment -- 73,387 -- 73,387
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 144,326 43,692 (381,015) (192,997)
(Increase) decrease in prepaid expenses (5,185) 24,694 (40,858) (22,599)
Increase in deferred revenue 1,294,615 -- -- 1,294,615
Increase (decrease) in accrued expenses 243,079 (114,242) 264,435 785,838
Increase (decrease) in accrued interest -- -- -- 172,305
(Increase) decrease in other assets (2,901) -- -- (2,901)
----------- ----------- ----------- -----------
Net cash used in operating activities (1,153,047) (2,305,213) (2,588,061) (17,532,186)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (171,351) (62,917) (177,765) (813,081)
Investment in affiliate (146,618) -- -- (146,618)
Proceeds from sale of furniture and equipment -- 6,100 -- 6,100
----------- ----------- ----------- -----------
Net cash used in investing activities (317,969) (56,817) (177,765) (953,599)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500 5,500
Proceeds from exercise of stock options 344,598 -- 52,500 397,098
Proceeds from issuance of demand notes payable -- -- -- 2,395,000
Repayment of demand notes payable -- -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing -- -- -- 1,200,000
Proceeds from issuance of warrants -- -- -- 300,000
Repayment of notes payable - bridge financing -- -- -- (1,500,000)
Repurchase of common stock -- -- -- (324)
Preferred stock dividend paid -- (318) -- (318)
Proceeds from the issuance of common stock -- -- -- 7,547,548
Proceeds from issuance of convertible preferred stock 828,488 -- -- 11,441,672
Repurchase of convertible preferred stock (511,808) -- -- (511,808)
----------- ----------- ----------- -----------
Net cash provided by financing activities 661,278 (318) 58,000 21,149,368
----------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (809,738) (2,362,348) (2,707,826) 2,663,583
Cash and cash equivalents at beginning of period 3,473,321 5,835,669 8,543,495 --
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,663,583 3,473,321 5,835,669 2,663,583
=========== =========== =========== ===========
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- -- 2,442,304
Cashless exercise of preferred warrants 19,811 -- 30,069 49,880
Conversion of preferred to common stock 1,011 313 1,367 2,426
Preferred stock dividend issued in shares 811,514 314,366 -- 1,125,880
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-8
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Organization, Liquidity and Basis of Presentation
Organization
Atlantic Technology Ventures, Inc. (the Company) was incorporated on May
18, 1993, began operations on July 13, 1993, and is the majority owner of
two operating companies - Gemini Technologies, Inc. (Gemini), and Optex
Ophthalmologics, Inc. (Optex), and has one wholly-owned subsidiary -
Channel Therapeutics, Inc. (Channel) (collectively, the Operating
Companies).
Gemini (an 84.7%-owned subsidiary) was incorporated on May 18, 1993 to
exploit a new proprietary technology which combines 2'-5' oligoadenylate
(2-5A), with standard antisense compounds to alter the production of
disease-causing proteins. Optex (an 81.2%-owned subsidiary) was
incorporated on October 19, 1993 to develop its principal product, a novel
cataract removal device. On March 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.
F-9
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
principally using straight-line methods over their useful lives, generally
five years, except for leasehold improvements which are depreciated over
the lesser of five years or the term of the lease.
Minority Interest
The Company has recorded 100% of the losses of the Operating Companies in
its consolidated statements of operations as the minority shareholders are
not required to and have not funded their pro rata share of losses.
Minority interest losses recorded by the Company since inception total
$454,075 as of December 31, 2000 and will only be recovered if and when the
Operating Companies generate income to the extent of those losses recorded
by the Company.
Research and Development
All research and development costs are expensed as incurred and include
costs of consultants who conduct research and development on behalf of the
Company and the Operating Companies. Costs related to the acquisition of
technology rights and patents for which development work is still in
process, are expensed as incurred and considered a component of research
and development costs.
F-10
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Revenue Recognition
Revenue under research contracts is recorded as earned under the contracts,
generally as services are provided. 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.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income," the
Company applies the rules for the reporting and display of comprehensive
income and its components. The net loss is equal to the comprehensive loss
for all periods presented.
Computation of Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss
applicable to common shares by the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share is the same
as basic net loss per common share, as common equivalent shares from stock
options, stock warrants, stock subscriptions, and convertible preferred
stock would have an antidilutive effect because the Company incurred a net
loss during each period presented.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-11
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25," issued in March
2000, to account for its fixed plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, "Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method
of accounting described above, and has adopted the disclosure requirements
of SFAS No. 123.
Options of stock awards issued to non-employees and consultants are
recorded at their fair value as determined in accordance with SFAS No. 123
and EITF No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services" and recognized as expense over the related vesting period.
Financial Instruments and Derivatives
At December 31, 2000 and 1999, the fair values of cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and
accrued expenses, and deferred revenue approximate carrying values due to
the short-term nature of these instruments.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued and, as amended, is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133 standardizes the
accounting for derivative instruments including certain derivative
instruments embedded in other contracts and requires derivative instruments
to be recognized as assets and liabilities and recorded at fair value. The
Company currently is not party to any derivative instruments. Any future
transactions involving derivative instruments will be evaluated based on
SFAS No. 133.
(3) Property and Equipment
Property and equipment consists of the following at December 31,:
2000 1999
--------- ---------
Furniture and equipment $ 440,493 269,142
Leasehold improvements 83,861 83,861
--------- ---------
524,354 353,003
Less accumulated depreciation (297,266) (221,171)
--------- ---------
Net property and equipment $ 227,088 131,832
========= =========
(4) Investment in Affiliate
On May 12, 2000, the Company acquired shares of preferred stock
representing a 35% ownership interest in TeraComm Research, Inc.
(TeraComm), a privately-held company that is developing next-generation
high-speed fiberoptic communications technologies. The purchase price for
this ownership interest was $5,000,000 in cash, 200,000 shares of the
Company's common stock, and a warrant to purchase a further 200,000 shares
of the Company's common stock. The warrants have a term of 3 years and are
exercisable at $8.975 per share of common stock, but only if the market
price of the Company's common stock is $30 or more. Of the $5,000,000 cash
portion of the purchase price, the Company paid $1,000,000 in 2000. The
Company is accounting for its investments in TeraComm in accordance with
the equity method of 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.
F-12
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
On July 18, 2000, the Company and TeraComm amended the purchase agreement.
In the amendment, the parties agreed that the $4,000,000 balance of the
$5,000,000 cash component of the purchase price would not be due until
TeraComm achieved a specified milestone. Within ten days after TeraComm
achieved that milestone or December 30, 2000, whichever occurred earlier,
the Company was required to pay TeraComm $1,000,000 and thereafter make to
TeraComm three payments of $1,000,000 at the three-month intervals. If the
Company failed to make any of these payments, TeraComm's only recourse
would be reducing proportionately the Company's ownership interest. When
the Company failed to make the first $1,000,000 payment by midnight at the
end of December 30, 2000, the Company was deemed to have surrendered to
TeraComm a proportion of the Company's TeraComm shares equal to the
proportion of the dollar value of the purchase price for the Company's
TeraComm shares ($6,795,000) that was represented by the unpaid $4,000,000
of the cash portion of the purchase price. This had the effect of reducing
to 14.4% the Company's 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 TeraCom 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 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 only 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.
F-13
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(6) Notes Payable - Bridge Financing
On September 12, 1995, the Company closed the sale of thirty units with
each unit consisting of an unsecured 10% promissory note of the Company in
the principal amount of $50,000 and 50,000 warrants, each exercisable to
purchase one share of common stock of the Company at an initial exercise
price of $1.50 per share. The total proceeds received of $1,500,000 were
allocated to the notes payable and warrants based on the estimated fair
value as determined by the Board of Directors of the Company of $1,200,000
and $300,000, respectively. The warrants were reflected as additional
paid-in capital.
Proceeds from the IPO were used to pay these notes payable, with $75,000
remaining unpaid at December 31, 1995. This remaining obligation was paid
in January 1996.
(7) Stockholders' Equity
Common Stock
In 1993, the Company received common stock subscriptions for 5,231 shares
of common stock from various individuals, including the Controlling
Shareholder and the Partnership, in exchange for common stock subscriptions
receivable of $6,277. In December 1994, the Company issued 2,606 shares of
common stock upon receipt of payment of $3,127 representing a portion of
these common stock subscriptions receivable.
In June 1994, the Company received common stock subscriptions for 84 shares
of common stock from various individuals including directors and employees.
Payment of the related common stock subscriptions receivable in the amount
of $101 was received in December 1994 which resulted in the issuance of 84
shares of common stock.
In August 1994, the Company received common stock subscriptions for 872
shares of common stock from certain investors. Payment of the related
common stock subscriptions receivable in the amount of $33,000 and $18,625
was received in August 1994 and December 1994, respectively, which resulted
in the issuance of 860 shares of common stock.
In March 1995, June 1995, and August 1995, the Company repurchased 62, 20,
and 187 shares of common stock, respectively, for an aggregate total of
$324.
In March 1995, May 1995, and June 1995, the Company issued 2,170, 125, and
160 shares of common stock, respectively, upon receipt of payment of $3,682
representing subscriptions receivable.
In December 1995, the Company issued 1,872,750 shares of common stock
through a public offering, resulting in net proceeds, after deducting
applicable expenses, of $6,036,700. Concurrent with this
F-14
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
offering, 785,234 shares of common stock were issued upon the conversion of
certain demand notes payable and accrued interest totaling $2,442,304 (see
note 5).
In August 1996, the Company sold in a private placement 250,000 shares of
common stock to certain investors resulting in net proceeds of $1,452,313.
In connection with this private placement, the Company paid Paramount
Capital, Inc. (Paramount) a finders fee of $76,438 and issued an employee
of Paramount a warrant to purchase 12,500 shares of the Company's common
stock at $6.73 per share, which expires August 16, 2001. Paramount is owned
by the Controlling Shareholder.
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Channel, and New Channel, Inc., a Delaware corporation, dated
February 20, 1997, all of the stockholders of Channel (except for the
Company) agreed to receive an aggregate of 103,200 shares of common stock
of the Company in exchange for their shares of common stock, par values
$0.001 per share, of Channel. On February 20, 1997, Channel became a
wholly-owned subsidiary of the Company. Subsequent to this transaction,
Channel issued a dividend to the Company consisting of all of Channel's
rights to the CT-3 technology, which is in the field of pain and
inflammation. On May 16, 1997, the Company issued 103,200 shares of common
stock of the Company to stockholders of Channel. In connection with the
issuance of these shares, the Company recognized an expense in the amount
of $657,900. This expense was recorded as research and development expense
in the consolidated statement of operations for the year ended December 31,
1997.
In May 2000, the Company issued 200,000 shares of common stock to
shareholders of TeraComm (see note 4).
Convertible Preferred Stock
Series A Preferred
In May and August, 1997, the Company sold in a private placement 1,237,200
shares of Series A convertible preferred stock (Series A Preferred) to
certain investors resulting in net proceeds of $10,613,184.
Prior to August 7, 1998 (the Reset Date), each share of Series A Preferred
was convertible into 2.12 shares of common stock initially at a conversion
price of $4.72 per share of common stock. Pursuant to the Certificate of
Designations for the Series A Preferred, the conversion price was adjusted
on the Reset Date such that now each share is convertible into 3.27 shares
of common stock at a conversion price of $3.06. This conversion price is
subject to adjustment upon the occurrence of certain events, including the
issuance of common stock at a per share price less than the conversion
price, or the occurrence of a merger, reorganization, consolidation,
reclassification, stock dividend or stock split which will result in an
increase or decrease in the number of common stock shares outstanding.
F-15
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Holders of Series A Preferred will be entitled to receive dividends, as,
when, and if declared by the Board of Directors. Commencing on the Reset
Date, the holders of the Series A Preferred are entitled to payment-in-kind
dividends, payable semi-annually in arrears, on their respective shares of
Series A Preferred at the annual rate of 0.13 shares of Series A Preferred
for each outstanding share of Series A Preferred. The Company did not make
the February 7, 1999 dividend payment. On August 9, 1999, the Company
issued a payment-in-kind dividend of 0.13325 of a share of Series A
Preferred for each share of Series A Preferred held as of the record date
of August 2, 1999, amounting to an aggregate of 73,219 shares. This
dividend included the dividend payment of 0.065 of a share of Series A
Preferred for each share of Series A Preferred held which had not been made
on February 7, 1999, and the portion of the dividend payment due August 9,
1999, was increased from 0.065 of a share to 0.06825 of a share to reflect
non-payment of the February 7, 1999 dividend. On February 15, 2000, and
August 7, 2000, the Company issued the respective payment-in-kind
dividends, totaling 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.
Redeemable Series B Preferred
On September 28, 2000, pursuant to a Convertible Preferred Stock and
Warrants Purchase Agreement (the Purchase Agreement) the Company issued to
BH Capital Investments, L.P. and Excalibur Limited Partnership (together,
the Investors) for a purchase price of $2,000,000, 689,656 shares of the
F-16
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Company's Series B convertible preferred stock (Series B Preferred) and
warrants to purchase 134,000 shares of the Company's common stock. Half of
the shares of the Series B Preferred (344,828 shares) and warrants to
purchase half of the shares of common stock (67,000 shares) were held in
escrow, along with half of the purchase price.
On December 4, 2000, the Company and the Investors entered into a stock
repurchase agreement (the Stock Repurchase Agreement) pursuant to which the
Company repurchased from the Investors for $500,000, 137,930 shares of
Series B Preferred, which represents 125% of the purchase price paid by the
Investors for those shares and for warrants to purchase 26,800 shares of
the Company's common stock with an estimated value of $28,719, and agreed
to the release from escrow to the Investors of the $1,000,000 purchase
price of the 344,828 shares of Series B Preferred held in escrow. The
Company also allowed the Investors to keep all of the warrants issued under
the Purchase Agreement and released from escrow to the Investors warrants
to purchase 67,000 shares of the Company's common stock with an estimated
value of $71,799, and issued to the Investors warrants to purchase a
further 20,000 shares of the Company's common stock at the same exercise
price with an estimated value of $21,432. In addition, the Company was
required to pay the legal expenses of the Investors, totaling $11,807. The
carrying amount of the 137,930 shares repurchased is equal to $400,000;
therefore, the amount paid in excess of the carrying amount plus the value
of the warrants given to the Investors, totaling $233,757, was recorded as
a dividend upon repurchase of Series B Preferred shares and deducted from
net loss to arrive at net loss applicable to common shares.
The warrants are exercisable at the fixed exercise price or 110% of the
market price 180 days after the date of issuance, whichever is lower.
Pursuant to a second amendment to the Purchase Agreement, executed on
January 9, 2001, the fixed exercise price of the warrants was lowered from
$3.19, the fixed exercise price upon their issuance, to $1.00, the market
price of the Company's common stock at the time of the renegotiations. Each
warrant may be exercised any time during the 5 years from the date of
granting. The warrants may not be exercised if doing so would result in the
Company's issuing a number of shares of common stock in excess of the limit
imposed by the rules of the Nasdaq SmallCap Market.
Pursuant to the Company's renegotiations with the Investors, the Company is
required, among other things, to redeem on March 28, 2002, all outstanding
shares of Series B Preferred for (A) 125% of the original issue price per
share or (B) the market price of the shares of common stock into which they
are convertible, whichever is greater (the Redemption Price). The Company
may at any time redeem all outstanding shares of Series B Preferred at the
Redemption Price. As a result of the renegotiations discussed in this
paragraph, the Series B Preferred is considered redeemable and the
remaining outstanding shares at December 31, 2000 are classified outside of
permanent equity in the accompanying consolidated balance sheet. At
December 31, 2000, the Company had 206,898 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
F-17
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Series B Preferred was also amended by the second amendment to the Purchase
Agreement. The conversion price per share of Series B Preferred on any
given day is the lower of (1) $1.00 or (2) 90% of the average of the two
lowest closing bid prices on the principal market of the common stock out
of the fifteen trading days immediately prior to conversion, but the
conversion price will be reduced by an additional 5% if the common stock is
not listed on either the Nasdaq SmallCap Market or Nasdaq National Market
as of that date, and in no event will the conversion price be lower than
the floor price ($0.50 for the conversion of a share of Series B Preferred
effected on or before March 28, 2002). The conversion price may be adjusted
in favor of holders of shares of Series B Preferred upon certain triggering
events. The conversion rate is determined by dividing the original price of
the Series B Preferred by the conversion price in effect at the time of
conversion; but before any adjustment is required upon the occurrence of
any such triggering events, the conversion price will be equal to the
original price of the Series B Preferred. The change in conversion price
upon the renegotiations on January 9, 2001 resulted in a difference between
the conversion price of the Series B Preferred and the market price of the
common stock on the effective date of the renegotiation. This amount,
estimated at approximately $620,000, will be recorded as an imputed
preferred stock dividend within equity and will be included in the
calculation of net earnings/(loss) per common share in the first quarter of
2001.
On January 19, 2001, 41,380 shares of Series B Preferred were converted by
the Investors into 236,422 shares of the Company's common stock. On March
9, 2001, the Company and the Investors entered into Stock Repurchase
Agreement No. 2, pursuant to which the Company repurchased from the
Investors, for an aggregate purchase price of $617,067, all 165,518 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
F-18
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
shares were authorized for issuance. The options have a maximum term of 10
years and vest over a period determined by the Company's Board of Directors
(generally 4 years).
The Company applies APB Opinion No. 25 in accounting for its Plan.
Accordingly, compensation cost has been recognized for stock options
granted to employees and directors only to the extent that the quoted
market price of the Company's stock at the date of grant exceeded the
exercise price of the option.
During 1995, the Company granted options to purchase 246,598 shares of the
Company's common stock at exercise prices below the quoted market prices of
its common stock. Deferred compensation expense in the amount of $144,000
was recorded at the date of grant with the offset recorded as an increase
to additional paid-in capital. Compensation expense in the amount of
$74,400, $28,800, $28,800 and 12,000 was recognized in 1998, 1997, 1996,
and 1995, respectively.
In November 1997, the Company granted options to purchase 24,000 shares of
the Company's common stock at $9.50 per share to Investor Relations Group
(Investor). These options expire November 10, 2002. The Company recognized
expense of $81,952, which is included in general and administrative expense
in the consolidated statement of operations for the year ended December 31,
1998. The expense represents the estimated fair market value of the
options, in accordance with SFAS No. 123.
During 2000, the Company granted employees and directors an aggregate of
407,000 plan options and 175,000 options outside of the Plan. All stock
options granted during 2000, 1999 and 1998 were granted at the quoted
market price on the date of grant. On February 20, 2001, the Company
agreed to issue an aggregate of 550,000 stock options to certain executive
officers and employees at the quoted market price on the date of grant.
Had compensation costs been determined in accordance with the fair value
method prescribed by SFAS No. 123, the Company's net loss applicable to
common shares and net loss per common share (basic and diluted) for Plan
options would have been increased to the pro forma amounts indicated below:
2000 1999 1998
----------- ---------- ----------
Net loss applicable to common shares:
As reported $ 6,847,749 2,760,881 4,381,779
Pro forma 8,190,926 3,623,177 5,038,676
Net loss per common share - basic
and diluted:
As reported 1.21 0.59 1.13
Pro forma 1.45 0.77 1.30
F-19
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions
used for the grants in 2000, 1999, and 1998: dividend yield of 0%; expected
volatility of 170% for 2000, 94% for 1999 and 95% for 1998; risk-free
interest rate of 6.5% for 2000 and 1999 and 5.0% for 1998; and expected
lives of eight years for each year presented.
A summary of the status of the Company's stock options as of December 31,
2000, 1999 and 1998 and changes during the years then ended is presented
below:
Weighted Weighted Weighted
average average average
2000 exercise 1999 exercise 1998 exercise
shares price shares price shares price
--------- -------- -------- ------- -------- --------
At the beginning
of the year 396,200 $ 3.25 837,798 $ 5.06 715,598 $ 5.16
Granted 582,000 4.10 221,000 1.39 192,200 3.19
Exercised (14,000) 2.56 -- -- (70,000) 0.75
Cancelled (160,000) 3.97 (662,598) 4.93 -- --
--------- -------- -------- ------- -------- --------
At the end of
the year 804,200 $ 3.73 396,200 $ 3.25 837,798 $ 5.06
======== ======= ========
Options exercisable
at year-end 354,478 211,869 574,660
========= ======== ========
Weighted-average
fair value of
options granted
during the year $ 4.05 $ 1.20 $ 2.84
======== ======== ========
F-20
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following table summarizes the information about Plan stock options
outstanding at December 31, 2000:
Remaining Number of
Exercise Number contractual options
price outstanding life exercisable
--------- ---------- ----------- ----------
$1.313 50,000 8.61 years 25,000
$1.375 20,000 8.41 years 6,666
$1.500 75,000 8.81 years 75,000
$1.750 6,000 8.73 years 6,000
$2.313 2,000 7.66 years 2,000
$3.188 54,000 9.75 years 50,000
$3.250 40,000 7.61 years 31,112
$3.438 50,000 9.38 years 12,500
$4.188 445,000 9.28 years 111,250
$5.125 23,000 9.27 years 5,750
$6.125 10,000 9.22 years --
$6.813 1,200 2.19 years 1,200
$7.000 2,000 6.46 years 2,000
$7.500 2,000 5.56 years 2,000
$9.500 24,000 1.86 years 24,000
---------- ----------
804,200 354,478
========== ==========
(9) Stock Warrants
In connection with notes payable - bridge financing, the Company issued
warrants to purchase 1,500,000 shares of common stock at an initial
exercise price of $1.50 per share; subject to an upward adjustment upon
consummation of the IPO. Simultaneously with the consummation of the IPO,
these warrants were converted into redeemable warrants at an exercise price
of $5.50 per share on a one-for-one basis (see note 6). These redeemable
warrants expired unexercised on December 13, 2000.
As of December 14, 1996, the redeemable warrants are subject to redemption
by the Company at a redemption price of $0.05 per redeemable warrant on 30
days prior written notice, provided that the average closing bid price of
the common stock as reported on Nasdaq equals or exceeds $8.25 per share,
subject to adjustment, for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date
of notice of the redemption.
F-21
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
In December 1995, in connection with the IPO, the Company issued redeemable
warrants to purchase 1,872,750 shares of common stock at an exercise price
of $5.50 per share. The remainder of these redeemable warrants expired
unexercised on December 13, 2000. Commencing December 14, 1996, these
redeemable warrants are subject to redemption by the Company at its option,
at a redemption price of $.05 per warrant provided that the average closing
bid price of the common stock equals or exceeds $8.25 per share for a
specified period of time, and the Company has obtained the required
approvals from the Underwriters of the Company's IPO. In January 1998,
1,000 warrants were exercised.
In connection with the IPO, the Company granted to Joseph Stevens & Co.,
L.P. (the Underwriter) warrants to purchase from the Company 165,000 units,
each unit consisting of one share of common stock and one redeemable
warrant at an initial exercise price of $6.60 per unit. Such warrants are
exercisable during the four-year period commencing December 13, 1996. The
redeemable warrants issuable upon exercise of these warrants have an
exercise price of $6.05 per share. As long as the warrants remain
unexercised, the terms under which the Company could obtain additional
capital may be adversely affected. Thse redeemable warrants expired
unexercised on December 13, 2000.
The Company entered into an agreement with Paramount effective April 15,
1996 pursuant to which Paramount will, on a non-exclusive basis, render
financial advisory services to the Company. Two warrants exercisable for
shares of the Company's common stock were issued to Paramount in connection
with this agreement. These included a warrant to purchase 25,000 shares of
the Company's common stock at $10 per share, which warrant expires on April
16, 2001 and a warrant to purchase 25,000 shares of the Company's common
stock at $8.05 per share, which warrant expires on June 16, 2001. In
connection with the issuance of these warrants, the Company recognized an
expense in the amount of $139,000 for the fair value of the warrants. This
expense was recorded as general and administrative in the consolidated
statement of operations for the year ended December 31, 1996.
In connection with the Channel merger discussed in note 7, the Company
issued a warrant to a director of the Company to purchase 37,500 shares of
the Company's common stock at $5.33 per share, which warrant expires on
July 14, 2006. The Company recognized expense of $48,562 for the fair value
of the warrants which was recorded as a research and development expense in
the consolidated statement of operations for the year ended December 31,
1997.
The Company entered into an agreement with an investor pursuant to which
the investor will render investor relations and corporate communication
services to the Company. A warrant to purchase 24,000 shares of the
Company's common stock at $7.00 per share, which warrant expires on
November 22, 2001, was issued in 1996. The Company recognized expense of
$110,640 for the fair value of the warrants, which was recorded as a
general and administrative expense in the consolidated statements of
operations for the year ended December 31, 1997.
Concurrent with the private placement offering of Series A Preferred in
1997, the Company issued 123,720 warrants to designees of Paramount, the
placement agent. These warrants are initially
F-22
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
exercisable at a price equal to $11.00 per share and may be exercised at
any time during the 10-year period commenced February 17, 1998. The rights,
preferences and privileges of the shares of Series A Preferred issuable
upon exercise of these warrants are identical to those offered to the
participants in the private placement. The warrants contain anti-dilution
provisions providing for adjustment of the number of securities underlying
the Series A Preferred issuable upon exercise of the warrants and the
exercise price of the warrants under certain circumstances. The warrants
are not redeemable and will remain outstanding, to the extent not
exercised, notwithstanding any mandatory redemption or conversion of the
Series A Preferred underlying the warrants. In accordance with SFAS No.
123, the Company determined the fair value of the warrants using the
Black-Scholes Model and allocated this value of $570,143, to convertible
preferred stock warrants with a corresponding reduction in additional
paid-in capital. In April 2000 and June 1998, 4,799 and 6,525 warrants,
respectively, were exercised via a cashless method for 6,955 and 2,010
shares of Series A Preferred, respectively.
On January 4, 2000, the Company entered into a Financial Advisory and
Consulting Agreement with the Underwriters. In this agreement, the Company
engaged the Underwriters to provide investment-banking services for one
year commencing January 4, 2000. As partial compensation for the services
to be rendered by the Underwriters, the Company issued the Underwriters
three warrants to purchase an aggregate of 450,000 shares of its common
stock. The exercise price ranges between $2.50 and $4.50 and the exercise
period of each warrant is at various times through 2007. In addition, each
warrant may only be exercised when the market price per share of common
stock is at least $1.00 greater than the exercise price of that warrant. In
connection with the issuance of the warrants, the Company and the
Underwriters entered into a letter agreement granting registration rights
in respect of the shares of common stock issuable upon exercise of the
warrants. In accordance with EITF Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and other relative accounting
literature, the Company recorded the estimated fair value of the warrants
of $1,020,128, which represents a general and administrative expense, as
compensation expense relating to stock options and warrants over the
vesting period through January 4, 2001.
(10) Related-Party Transactions
During 1999, the Company entered into consulting agreements with certain
members of its Board of Directors. Prior to 1999, the Company had several
consulting agreements with directors of the Company. These agreements, all
of which have been terminated, required either monthly consulting fees or
project-based fees. No additional agreements were entered into during 2000.
Consulting expense under these agreements was $8,000, $99,000 and $96,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
(11) Income Taxes
There was no current or deferred tax expense for the years ended December
31, 2000, 1999 and 1998 because of the Company's operating losses.
F-23
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The components of deferred tax assets and deferred tax liabilities as of
December 31, 2000 and 1999 are as follows:
2000 1999
------------ ------------
Deferred tax assets:
Tax loss carryforwards $ 9,139,517 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 (liabality) $ -- --
============ ============
F-24
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 benefet $ -- --% $ -- --% $ -- --%
=========== ==== =========== ==== =========== ====
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The net
change in the total valuation allowance for the years ended December 31,
2000, 1999 and 1998 was an increase of $2,476,000, $527,000 and $1,255,000,
respectively. The tax benefit assumed using the federal statutory tax rate
of 34% has been reduced to an actual benefit of zero due principally to the
aforementioned valuation allowance.
At December 31, 2000, the Company had federal and state net operating loss
tax carryforwards of approximately $23,500,000. The net operating loss
carryforwards expire in various amounts starting in 2008 and 2001 for
federal and state tax purposes, respectively. The Tax Reform Act of 1986
contains provisions which limit the ability to utilize net operating loss
carryforwards in the case of certain events including significant changes
in ownership interests. If the Company's net operating loss carryforwards
are limited, and the Company has taxable income which exceeds the
permissible yearly net operating loss carryforward, the Company would incur
a federal income tax liability even though net operating loss carryforwards
would be available in future years.
F-25
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(12) License Agreement
On May 14, 1998, Optex entered into a Development and License Agreement
(the Agreement) with Bausch & Lomb to complete the development of Catarex,
a cataract-removal technology owned by Optex. Under the terms of the
Agreement, Optex and Bausch & Lomb intend jointly to complete the final
design and development of the Catarex System. Bausch & Lomb was granted an
exclusive worldwide license to the Catarex technology for human ophthalmic
surgery and will assume responsibility for commercializing Catarex
globally. The Agreement is cancellable by Bausch & Lomb at any time upon
six months written notice.
The Agreement provides that Bausch & Lomb will pay Optex milestone payments
of (a) $2,500,000 upon the signing of the Agreement, (b) $4,000,000 upon
the successful completion of certain clinical trials, (c) $2,000,000 upon
receipt of regulatory approval to market the Catarex device in the United
States (this payment is creditable in full against royalties), and (d)
$1,000,000 upon receipt of regulatory approval to market the Catarex device
in Japan. Pursuant to the Agreement, Bausch & Lomb shall reimburse Optex
for its research and development expenses not to exceed $2,500,000. Bausch
& Lomb shall pay Optex a royalty of 7% of net sales and an additional 3%
royalty when certain conditions involving liquid polymer lenses are met.
During 1998, the Company received the first nonrefundable milestone payment
of $2,500,000 and recorded this amount as license revenue. In addition, the
Company recorded $1,047,511 in 1998 as a reduction of expenses related to
the reimbursement of research and development costs associated with the
Catarex device.
On September 16, 1999, the Company and Bausch & Lomb amended the Agreement
to provide for an expanded role for Optex in development of the Catarex
surgical device. Under the amended Agreement, Optex, in addition to the
basic design work provided for in the original agreement, is required to
deliver to Bausch & Lomb within a stated period Catarex devices for use in
clinical trials, and is required to assist Bausch & Lomb in connection with
development of manufacturing processes for scale-up of manufacture of the
Catarex device. Additionally, Bausch & Lomb will reimburse Optex for all
costs, including labor, professional services and materials, incurred by
Optex in delivering those Catarex devices and performing manufacturing
services, and will pay Optex a fixed profit component of 25% based upon
certain of those costs.
During 2000 and 1999, Optex recorded revenue pursuant to the amended
Agreement of $5,169,288 and $1,082,510, respectively. The revenue recorded
in 2000 and 1999 pursuant to the amended Agreement is inclusive of the
fixed profit component of 25% presented on a gross basis with the related
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
F-26
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
$1,229,068. As of December 31, 2000, the Company recorded $1,294,615 of
deferred revenue related to the amended Agreement, which represents
expenses paid in advance by Bausch & Lomb at a rate of 125% during 2000.
Revenue and related expense will be recorded as operations are incurred
during 2001. No such amounts existed at December 31, 1999.
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.
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 6,162829 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:
F-27
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Year ending
December 31,
---------------
2001 $ 138,000
2002 81,000
2003 26,000
---------
$ 245,000
=========
Rent expense related to operating leases for the years ended December 31,
2000, 1999 and 1998 was $161,810, $118,264 and $97,756, respectively.
Resignation of CEO
In July 1998, the CEO of the Company resigned. The Company recorded
$211,250 of expense for salary continuation through April 1999. Of this
amount, $140,833 was recorded in accrued expenses at December 31, 1998.
Pursuant to the resignation, all unvested stock options held by the CEO
vested immediately and the unexercised options expired in July 1999.
Termination of Agreement with the Trustees of the University of
Pennsylvania
On October 12, 1999, the Company and Channel announced the termination of
the license agreement dated as of June 16, 1994, between the Trustees of
the University of Pennsylvania (Penn) and Channel pursuant to which Channel
received the rights to use cyclodextrin technology. The Company and
Channel, on the one hand, and Penn, on the other hand, released each other
from any further obligations under the license agreement. The Company paid
Penn a portion of the patent costs for which Penn was seeking reimbursement
under the agreement.
F-28
PART I -- OTHER INFORMATION
Item 1. Financial Statements
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
March 31,
Assets 2001
---------------
Current assets:
Cash and cash equivalents $ 2,581,497
Accounts receivable --
Prepaid expenses 29,320
--------------
Total current assets 2,610,817
Property and equipment, net 259,256
Investment in affiliate 63,623
Other assets 22,838
--------------
Total assets $ 2,956,534
==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 779,246
Deferred revenue --
--------------
Total current liabilities $ 779,246
--------------
Redeemable Series B preferred stock.
Authorized 1,647,312 shares; none issued or
outstanding at March 31, 2001 and --
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock --
Series A convertible preferred stock, $.001 par value.
Authorized 1,375,000 shares; 351,588 issued and
outstanding at March 31, 2001
(liquidation preference aggregating $4,570,644 at March
31, 2001) 351
Convertible preferred stock warrants, 112,896
issued and outstanding at March 31, 2001 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 6,458,424 issued and outstanding at March 31, 2001 6,458
Common stock subscribed. 182 shares at March 31, 2001 --
Additional paid-in capital 24,957,317
Deficit accumulated during development stage (23,306,559)
--------------
2,177,830
Less common stock subscriptions receivable (218)
Less treasury stock, at cost (324)
--------------
Total stockholders' equity 2,177,288
--------------
Total liabilities and stockholders' equity $ 2,956,534
==============
See accompanying notes to consolidated financial statements.
F-29
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Cumulative
period from
July 13, 1993
(inception) to
Three months ended March 31, March 31,
2001 2000 2001
---- ---- ----
Revenues:
Development revenue $ 2,461,922 912,481 8,713,720
License revenue -- -- 2,500,000
Grant revenue 250,000 13,009 616,659
-------------- ------------ -------------
Total revenues 2,711,922 925,490 11,830,379
-------------- ------------ -------------
Costs and expenses:
Cost of development revenue 2,082,568 729,985 7,084,006
Research and development 306,767 127,439 9,811,677
Acquired in-process research and
development -- -- 2,653,382
General and administrative 681,948 495,678 16,585,174
Compensation expense relating to
stock warrants (general and administrative) 11,971 990,820 1,032,836
License fees -- -- 173,500
-------------- ------------ -------------
Total operating expenses 3,083,254 2,343,922 37,340,575
-------------- ------------ -------------
Operating loss (371,332) (1,418,432) (25,510,196)
Other (income) expense:
Interest and other income (20,018) (40,190) (1,271,154)
Interest expense -- -- 625,575
Equity in (earnings) loss of affiliate 3,721 -- 82,995
Gain on sale of Optex assets (2,809,451) -- (2,809,451)
Distribution to Optex minority shareholders 767,514 -- 767,514
-------------- ------------ -------------
Total other (income) expense (3,083,254) (40,190) (2,604,521)
-------------- ------------ -------------
Net income (loss) $ 1,686,902 (1,378,242) (22,905,675)
============== ============ =============
Imputed convertible preferred stock
dividend 600,000 -- 5,931,555
Dividend paid upon repurchase of Series B 167,127 -- 400,884
Preferred stock dividend issued in
preferred shares 64,144 659,319 1,347,207
-------------- ------------ -------------
Net income (loss) applicable to common shares $ 855,631 (2,037,561) (30,585,321)
============== ============ =============
Net income (loss) applicable to common shares per share:
Basic $ 0.13 (0.41)
============== ============
Diluted $ 0.10 (0.41)
============== ============
Weighted average shares of common
stock outstanding:
Basic 6,384,613 4,968,921
============== ============
Diluted 8,237,212 4,968,921
============== ============
See accompanying notes to consolidated financial statements.
F-30
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
Cumulative
period from
July 13, 1993
(inception) to
Three months ended March 31, March 31,
------------------------------
2001 2000 2001
-------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,686,902 (1,378,242) (22,905,675)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Acquired in-process research and development -- -- 1,800,000
Expense relating to issuance of warrants -- -- 298,202
Expense relating to the issuance of options -- -- 81,952
Expense related to Channel merger -- -- 657,900
Change in equity of affiliate 3,721 -- 82,995
Compensation expense relating to
stock options and warrants 11,971 990,820 1,240,881
Discount on notes payable - bridge financing -- -- 300,000
Depreciation 26,943 15,757 533,448
Gain on sale of Optex assets (2,809,451) -- (2,809,451)
Distribution to Optex shareholders 767,514 -- 767,514
Loss on disposal of furniture and equipment -- -- 73,387
Changes in assets and liabilities:
Decrease in accounts receivable 192,997 17,927 --
Increase in prepaid expenses (6,721) (20,185) (29,320)
Decrease in deferred revenue (1,294,615) -- --
Increase (decrease) in accrued expenses (169,592) (46,815) 616,246
Increase in accrued interest -- -- 172,305
Increase in other assets (19,937) (2,901) (22,838)
-------------- ------------- -------------
Net cash (used in)
operating activities (1,610,268) (423,639) (19,142,454)
-------------- ------------- -------------
Cash flows from investing activities:
Purchase of furniture and equipment (86,660) (6,116) (899,741)
Investment in affiliate -- (250,000) (146,618)
Proceeds from sale of Optex assets 3,000,000 -- 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100
-------------- ------------- -------------
Net cash provided by (used in)
investing activities 2,913,340 (256,116) 1,959,741
-------------- ------------- -------------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500
Proceeds from exercise of stock options -- 321,039 397,098
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 (577) -- (895)
Proceeds from the issuance of common stock -- -- 7,547,548
Proceeds from issuance of convertible preferred stock -- -- 11,441,672
Repurchase of convertible preferred stock (617,067) -- (1,128,875)
Distribution to Optex minority shareholders (767,514) -- (767,514)
-------------- ------------- -------------
Net cash provided by (used in)
financing activities (1,385,158) 321,039 19,764,210
-------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents (82,086) (358,716) 2,581,497
Cash and cash equivalents at beginning of period 2,663,583 3,473,321 --
-------------- ------------- -------------
Cash and cash equivalents at end of period $ 2,581,497 3,114,605 2,581,497
============== ============= =============
Supplemental disclosure of non-cash 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 -- -- 49,880
Conversion of preferred to common stock 336 289 2,762
Preferred stock dividend issued in shares 64,144 659,324 1,190,024
============== ============= =============
---------------
* See accompanying notes to consolidated financial statements.
F-31
ATLANTIC TECHNOLOGY VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2001
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. Accordingly, the financial
statements do not include all information and footnotes required by Generally
Accepted Accounting Principles for complete financial statements. In the opinion
of management, the accompanying financial statements reflect all adjustments,
consisting of only normal recurring adjustments, considered necessary for fair
presentation. Interim operating results are not necessarily indicative of
results that may be expected for the year ending December 31, 2001 or for any
subsequent period. These consolidated financial statements should be read in
conjunction with Atlantic Technology Ventures, Inc., and Subsidiaries'
("Atlantic") Annual Report on Form 10-KSB as of and for the year ended December
31, 2000.
(2) LIQUIDITY
Atlantic anticipates that their current liquid resources will be
sufficient to finance their currently anticipated needs for operating and
capital expenditures for at least the next twelve months. In addition, Atlantic
will attempt to generate additional capital through a combination of
collaborative agreements, strategic alliances and equity and debt financing.
However, Atlantic can give no assurance that they will be able to obtain
additional capital through these sources or upon terms acceptable to them.
On March 16, 2001, Atlantic 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 which will commence
upon effective registration and certain other conditions. A material contingency
that may affect Atlantic's operating plans and ability to raise funds is its
stock price. If its stock price remains at current levels, Atlantic will be
limited in the amount of funds it will be able to draw as defined by the Fusion
Capital agreement. As the Fusion Capital agreement is currently structured,
Atlantic does not have a guarantee that it will be able to draw any funds. See
note 11 below and see liquidity discussion within Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(3) COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated by dividing net
income (loss) applicable to common shares by the weighted average number of
common shares outstanding for the period. Diluted net income (loss) per common
share is calculated by dividing net income (loss) applicable to common shares
plus the impact of the assumed preferred stock conversions totaling $231,271, by
the weighted average common shares outstanding for the period plus 1,888,599
common stock equivalents from assumed conversions of the Series A and Series B
preferred stock if dilutive. The common stock equivalents from stock options,
stock warrants, and stock subscriptions have not been included in the diluted
calculations as their effect is anti-dilutive.
(4) RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, Atlantic 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
Atlantic's consolidated financial position, results of operations or cash flows,
as Atlantic is currently not party to any derivative instruments.
F-32
(5) INCOME TAXES
Atlantic generated book income solely in the quarter ended March 31,
2001 as a result of the sale of Optex assets to Bausch & Lomb as described
further in note 10. However, Atlantic does not expect to generated book income
for the year ended December 31, 2001; therefore, no income taxes have been
reflected for the three months ended March 31, 2001.
(6) PREFERRED STOCK DIVIDEND
On January 16, 2001, Atlantic's board of directors declared a
payment-in-kind dividend of 0.065 of a share of Series A convertible preferred
stock ("Series A Preferred") for each share of Series A Preferred held as of the
record date of February 7, 2001. The estimated fair value of this dividend of
$64,144 was included in Atlantic's calculation of net income (loss) per common
share for the three months ended March 31, 2001. The equivalent dividend for the
three months ended March 31, 2000 had an estimated fair value of $659,319 and is
recorded in the same manner.
(7) ISSUANCE OF STOCK WARRANTS
As more fully described in Note 9 to Atlantic's Annual Report on Form
10-KSB as of and for the year ended December 31, 2000, on January 4, 2000,
Atlantic entered into a Financial Advisory and Consulting Agreement with Joseph
Stevens & Company, Inc. pursuant to which Atlantic issued to Joseph Stevens &
Company, Inc. three warrants to purchase an aggregate of 450,000 shares of its
common stock. Atlantic recorded compensation expense relating to these stock
warrants in the amount of $990,820 for the three month period ended March 31,
2000. No such compensation is required subsequent to December 31, 2000.
On March 8, 2001, Atlantic entered into an agreement with The Investor
Relations Group, Inc. (IRG) under which IRG will provide Atlantic investor
relations services pursuant to which Atlantic issued to Dian Griesel warrants to
purchase 120,000 shares of its common stock at an exercise price of $0.875 per
share. These warrants 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 Dian Griesel an additional 50,000 warrants. Should Atlantic's stock
price reach $5.00, Atlantic will grant Dian Griesel a further 50,000 warrants.
As a result, Atlantic recorded compensation expense relating to these stock
warrants of $11,971 pursuant to EITF Issue No. 96-18 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.
Compensation for these warrants relates to investment banking and
investor relations services and represents a general and administrative expense.
(8) REDEEMABLE SERIES B PREFERRED SHARES
On September 28, 2000, pursuant to a Convertible Preferred Stock and
Warrants Purchase Agreement (the Purchase Agreement) Atlantic 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 Atlantic's
Series B convertible preferred stock (Series B Preferred) and warrants to
purchase 134,000 shares of Atlantic'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, Atlantic and the Investors entered into a stock
repurchase agreement (the Stock Repurchase Agreement) pursuant to which Atlantic
repurchased from the investors a portion of the outstanding shares.
Pursuant to Atlantic's renegotiations with the Investors, Atlantic was
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). Atlantic would have
been able to 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 was considered redeemable and the remaining
outstanding shares at December 31, 2000 were classified
F-33
outside of permanent equity in the accompanying consolidated balance sheet. At
December 31, 2000, Atlantic had 206,898 shares outstanding at a carrying amount
of $2.90 per share.
Holders of shares of Atlantic's outstanding Series B Preferred could
convert each share into shares of common stock without paying Atlantic 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.
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 $600,000, was recorded as an imputed
preferred stock dividend within equity and is deducted from net income (loss) to
arrive at net income (loss) applicable to common shares during 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 Atlantic's common stock. On March 9,
2001, Atlantic and the Investors entered into Stock Repurchase Agreement No. 2,
pursuant to which Atlantic repurchased from the Investors, for an aggregate
purchase price of $617,067, all 165,518 shares of Atlantic'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 $167,127, was recorded as a dividend upon repurchase of
Series B Preferred shares and is deducted from net income (loss) to arrive at
net income (loss) applicable to common shares.
(9) DEVELOPMENT REVENUE
In accordance with an amended license and development agreement, which
was subsequently terminated as described below in note 10, Bausch & Lomb
Surgical reimbursed Atlantic's subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for costs Optex incurred in developing its Catarex(TM) technology,
plus a profit component. For the three months ended March 31, 2001, this
agreement provided $2,461,922 of development revenue, and related cost of
development revenue of $2,082,568. For the three months ended March 31, 2000,
this agreement provided $912,481 of development revenue, and related cost of
development revenue of $729,985. The agreement was terminated in March 2001 (see
note 10 below).
(10) SALE OF OPTEX ASSETS
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 of its assets (mostly intangible
assets with no book value), including all those related to the Catarex
technology. The purchase price was $3 million paid at closing (approximately
$564,000 of which was distributed to Optex's minority shareholders). In
addition, Optex is entitled to receive additional consideration, namely $1
million, once Bausch & Lomb receives regulatory approval to market the Catarex
device in Japan, royalties on net sales on the terms stated in the original
development agreement dated May 14, 1998, between Bausch & Lomb and Optex, as
amended, and minimum royalties of $90,000, $350,000, and $750,000 for the first,
second, and third years, respectively, starting on first commercial use of the
Catarex device or January 1, 2004, whichever is earlier. Optex also has the
option to repurchase the acquired assets from Bausch & Lomb if it ceases
developing the Catarex technology.
Upon the sale of Optex assets, Bausch & Lomb's development agreement
with Optex was terminated and Optex has no further involvement with Bausch &
Lomb. As a result of this transaction, Atlantic recorded a gain on the sale of
Optex assets of $2,809,451. The purchase price of $3,000,000 is nonrefundable
and upon the closing of the asset purchase agreement in March 2001, Optex has no
further obligation to Bausch & Lomb or with regard to the assets sold. Upon the
closing of the asset purchase agreement, Optex agreed to forgo future contingent
payments in exchange for the receipt of a none time $3 million payment and the
same potential for future royalties. Pursuant to Atlantic's agreement with the
minority shareholders of Optex, Optex made a profit distribution in March 2001
of $767,514 representing the minority shareholders' percentage of the cumulative
profit from the Bausch & Lomb development and asset purchase agreements up to
and including proceeds from the sale of Optex' assets. (This figure includes the
$564,000 referred to above.) Three former employees of Optex have made claims of
$240,000 in aggregate pursuant to their employment agreements for severance in
connection with the sale of Optex. The Company does not believe the terms or
intention of the parties pursuant to the transaction constituted an event of
termination of employment as defined in the employment agreements requiring the
payment of severance and has therefore, not accrued any estimated liability as
of March 31, 2001.
F-34
(11) PRIVATE PLACEMENT OF COMMON SHARES
As of May 7, 2001, Atlantic 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 receipt of funds under this agreement will commence upon effective
registration, which Atlantic expects in June 2001, and certain other conditions
being satisfied. The purchase price of the shares will equal 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, except that the purchase
price may not be less than $0.68 per share. A material contingency that may
affect Atlantic's operating plans and ability to raise funds is its stock price.
If its stock price remains at current levels, Atlantic will be limited in the
amount of funds it will be able to draw as defined by the Fusion Capital
agreement. As the Fusion Capital agreement is currently structured, Atlantic
does not have a guarantee that it will be able to draw any funds. Atlantic paid
a finder's fee of $120,000 in relation to this agreement in April 2001 which is
included in general and administrative expense for the three month period ended
March 31, 2001.
(12) SUBSEQUENT EVENTS
An asset purchase agreement dated April 23, 2001, among Atlantic,
Atlantic's majority-owned subsidiary Gemini Technologies, Inc., the Cleveland
Clinic Foundation (CCF) and CCF's affiliate IFN, Inc. was signed in which Gemini
will sell, upon meeting certain closing conditions, to IFN substantially all its
assets, including all those related to the 2-5A antisense enhancing technology
for future contingent royalty payments and agreed upon withdrawal of CCF's
arbitration demand against Atlantic and Gemini. The transaction is expected to
close during the second quarter of 2001 and will be beneficial to Atlantic as
they will avoid the possibility of terminating the Cleveland sublicense with no
compensation to Genimi and substantial shutdown costs that Gemni would likely
have incurred without this asset purchase agreement.
F-35
3,000,000 SHARES
ATLANTIC TECHNOLOGY VENTURES, INC.
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
_________, 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL")
permits a corporation, under specified circumstances, to indemnify its
directors, officers, employees or agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, that is one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they will have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification will be made if such person will
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought will determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
The Registrant's Restated Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by the DGCL. The Registrant has obtained liability insurance
for each director and officer for certain losses arising from claims or charges
made against them while acting in their capacities as directors or officers of
the Registrant.
Item 25. Other Expenses of Issuance and Distribution.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this Registration Statement will be as
follows:
Total
SEC registration fee (actual) .......................................$592.50
Accounting fees and expenses ........................................$15,000
Legal fees and expenses..............................................$20,000
Printing and engraving expenses......................................$ 1,000
Miscellaneous expenses...............................................$ 1,000
Item 26. 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 to
purchase an aggregate of 450,000 shares of our common stock.
The issuance of the warrants did not involve any public offering and
therefore was exempt from the registration requirements of Section 5 of the
Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the Act.
The exercise price of each warrant is as follows:
II-1
=======================================================
Warrant Number No. of Shares Exercise Price
=======================================================
No.1 150,000 $2.50
-------------------------------------------------------
No.2 150,000 $3.50
-------------------------------------------------------
No.3 150,000 $4.50
=======================================================
Each warrant may only be exercised when the market price of a share of
common stock is at least $1.00 greater than the exercise price of that warrant.
In connection with issuance of the warrants, Atlantic and Joseph Stevens entered
into a letter agreement granting Joseph Stevens registration rights in respect
of the shares of common stock issuable upon exercise of the warrants.
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.
II-2
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 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
II 3
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.
Issuance to I.W. Miller Group
On June 20, 2001, Atlantic entered into an agreement with I.W. Miller
Group, Inc., or "IWMG," under which IWMG will provide Atlantic investor
relations services. Pursuant to this agreement Atlantic issued to IWMG warrants
to purchase 120,000 shares of its common stock. The term of the warrants is two
years and the exercise price of the warrants is $1.00, and they will vest in
10,000 share monthly increments commencing the month after the date of this
agreement. In addition, should Atlantic's stock price reach $2.50, Atlantic will
grant IWMG an additional 75,000 warrants. Atlantic will record compensation
expense relating to these stock warrants at June 30, 2001 and will remeasure the
compensation expense at the end of each reporting period until the final
measurement date is reached in 24 months.
II-4
Item 27. Exhibits.
The following documents are referenced or included in this report.
Exhibit No. Description
----------- -----------
3.1(1) Certificate of Incorporation of Atlantic, as amended to date.
3.2(1) Bylaws of Atlantic, as amended to date.
3.3(5) Certificate of Designations of Series A Convertible Preferred
Stock.
3.4(6) Certificate of Increase of Series A Convertible Preferred Stock.
3.5(9) Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Atlantic, filed on September 28,
2000.
3.6(9) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series B Convertible Preferred Stock of
Atlantic, filed on November 17, 2000.
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.
II-5
10.4(1) Employment Agreement dated September 21, 1995, between Atlantic
and Margaret A. Schalk.
10.5(1) Letter Agreement dated August 31, 1995, between Atlantic and Dr.
H. Lawrence Shaw.
10.6(1) Consulting Agreement dated January 1, 1994, between Atlantic and
John K. A. Prendergast.
10.8(1) Investors' Rights Agreement dated July 1995, between Atlantic, Dr.
Lindsay A. Rosenwald and VentureTek, L.P.
10.9(1) License and Assignment Agreement dated March 25, 1994, between
Optex Ophthalmologics, Inc., certain inventors and NeoMedix
Corporation, as amended.
10.10(1) License Agreement dated May 5, 1994, between Gemini Gene
Therapies, Inc. and the Cleveland Clinic Foundation.
10.11(1)+ License Agreement dated June 16, 1994, between Channel
Therapeutics, Inc., the University of Pennsylvania and certain
inventors, as amended.
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.
II-6
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.
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.
II-7
10.47(10) Amendment No. 1 dated October 31, 2000, to Convertible Preferred
Stock and Warrants Purchase Agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.48(12) Stock Repurchase Agreement dated December 4, 2000, among Atlantic,
BH Capital Investments, L.P., and Excalibur Limited Partnership.
10.49(14) Letter Agreement dated December 28, 2000, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.50(11) Amendment No. 2 dated January 9, 2001, to Convertible Preferred
Stock and Warrants Purchase Agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.51(14) Amendment No. 1 dated January 9, 2001, to Registration Rights
Agreement dated September 28, 2000, among Atlantic and BH Capital
Investments, L.P. and Excalibur Limited Partnership.
10.52(11) Amendment No. 3 dated January 19, 2001, to Convertible Preferred
Stock and Warrants Purchase Agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.53(14) Letter Agreement dated January 25, 2001, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.54(13) Stock Repurchase Agreement No. 2 dated March 9, 2001, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.55(15) Common Stock Purchase Agreement dated March 16, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.56(15) Warrant Certificate issued March 8, 2001, by Atlantic to Dian
Griesel.
10.57* Common Stock Purchase Agreement dated as of May 7, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.58* Form of Registration Rights Agreement between Atlantic and Fusion
Capital Fund II, LLC.
21.1(1) Subsidiaries of Atlantic.
23.1* Consent of KPMG LLP.
23.2* Consent of Kramer Levin Naftalis & Frankel LLP (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1* Power of Attorney (included on the signature page of this
Registration Statement).
--------------------
+ 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.
II-8
(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
year ended December 31, 1999.
(9) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the
period ended June 30, 2000.
(10) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the
period ended September 30, 2000.
(11) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
January 24, 2001.
(12) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
December 11, 2000.
(13) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
March 14, 2001.
(14) Incorporated by reference to exhibits of Atlantic's Form 10-KSB for the
year ended December 31, 2000 for the year ended December 31, 2000 filed
on April 17, 2001.
(15) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the
period ended March 31, 2001.
----------------------
* Filed herewith.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
II-9
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement(or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that clauses (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
such clauses is contained in periodic reports file with or furnished to
the Commission by the Registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on June 29, 2001.
By: /s/ Frederick P. Zotos
------------------------------------
Frederic P. Zotos
President and Chief Executive Officer
II-11
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1(1) Certificate of Incorporation of Atlantic, as amended to date.
3.2(1) Bylaws of Atlantic, as amended to date.
3.3(5) Certificate of Designations of Series A Convertible Preferred
Stock.
3.4(6) Certificate of Increase of Series A Convertible Preferred Stock.
3.5(9) Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Atlantic, filed on September 28,
2000.
3.6(9) Certificate of Amendment of the Certificate of Designations,
Preferences and Rights of Series B Convertible Preferred Stock of
Atlantic, filed on November 17, 2000.
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.
II-12
10.5(1) Letter Agreement dated August 31, 1995, between Atlantic and Dr.
H. Lawrence Shaw.
10.6(1) Consulting Agreement dated January 1, 1994, between Atlantic and
John K. A. Prendergast.
10.8(1) Investors' Rights Agreement dated July 1995, between Atlantic,
Dr. Lindsay A. Rosenwald and VentureTek, L.P.
10.9(1) License and Assignment Agreement dated March 25, 1994, between
Optex Ophthalmologics, Inc., certain inventors and NeoMedix
Corporation, as amended.
10.10(1) License Agreement dated May 5, 1994, between Gemini Gene
Therapies, Inc. and the Cleveland Clinic Foundation.
10.11(1) License Agreement dated June 16, 1994, between Channel
Therapeutics, Inc., the University of Pennsylvania and certain
inventors, as amended.
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.
II-13
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.
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.
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10.47(10) Amendment No. 1 dated October 31, 2000, to Convertible Preferred
Stock and Warrants Purchase Agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.48(12) Stock Repurchase Agreement dated December 4, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.49(14) Letter Agreement dated December 28, 2000, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.50(11) Amendment No. 2 dated January 9, 2001, to Convertible Preferred
Stock and Warrants Purchase Agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.51(14) Amendment No. 1 dated January 9, 2001, to Registration Rights
Agreement dated September 28, 2000, among Atlantic and BH Capital
Investments, L.P. and Excalibur Limited Partnership.
10.52(11) Amendment No. 3 dated January 19, 2001, to Convertible Preferred
Stock and Warrants Purchase Agreement dated September 28, 2000,
among Atlantic, BH Capital Investments, L.P., and Excalibur
Limited Partnership.
10.53(14) Letter Agreement dated January 25, 2001, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.54(13) Stock Repurchase Agreement No. 2 dated March 9, 2001, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.55(15) Common Stock Purchase Agreement dated March 16, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.56(15) Warrant Certificate issued March 8, 2001, by Atlantic to Dian
Griesel.
10.57* Common Stock Purchase Agreement dated as of May 7, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.58* Form of Registration Rights Agreement between Atlantic and Fusion
Capital Fund II, LLC. 21.1(1) Subsidiaries of Atlantic.
23.1* Consent of KPMG LLP.
23.2* Consent of Kramer Levin Naftalis & Frankel LLP (contained in the
opinion filed as Exhibit 5.1 hereto).
24.1* Power of Attorney (included on the signature page of this
Registration Statement).
-----------------
+ 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.
II-15
(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
year 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.
(11) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
January 24, 2001.
(12) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
December 11, 2000.
(13) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
March 14, 2001.
(14) Incorporated by reference to exhibits of Atlantic's Form 10-KSB for the
year ended December 31, 2000 filed on April 17, 2001.
(15) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for the
period ended March 31, 2001.
-------------------
* Filed herewith.
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