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0 '1- 6 Ou / "', 1,250,000 Units Advanced Tobacco Products Consisting of 1,250,000 Shares of Common Sto and Warrants to Purchase 625,000 , Shares of Common Stock ,iC'v'6711=~ l,;:D [Jtcit'.R: E C n •; C C Inch;,~~~ 29 i964 OFFICE UF dFi LIC_1 i I Oi. - A~ REPORT SEP.~,' A11 of the Units offered hereby are being sold by the Company. Each Unit consists of one share of Common Stock and one 'Warrant to purchase one-half share of Common Stock. The shares of Common Stock and Warrants constituting the Units will not be separately transferable until August 21, 1984 (90 days after this offering), or such earlier date as may be determined by the Company with the consent of the Representative of the Underwriters. See "Description of Units." Even multiples of Warrants may be exercised to purchase shares of Common Stock at an initial exercise price of $7.00 per whole share, subject to adjustment in certain events. Each registered holder of Warrants may exercise his Warrants in whole or in part, at any time after the date the Warrants become separately transferable until May 31, 1986, except that under certain circumstances the expiration date may be accelerated by the Company. See "Description of Warrants." Prior to this offering, there has been .no market for any of the Company's securities. See "Underwriting" for information relating to the factors that were considered in determining the initial public offering price. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND PURCHASERS MAY SUSTAIN A LOSS OF THEIR TOTAL INVESTMENT. SEE "RISK FACTORS." ~ . THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Per Unit ...................................................................... Total(3) ........................................................................ Price to Public $6.50 $8,125,000 Underwriting Discount(I ) $.5525 $690,625 J Proceeds to Company(2) $5.9475 $7,434,375 (1) See "Underwriting" for information concerning indemnification of the Underwriters and Unit purchase warrants to be sold to the Representative of the Underwriters. (2) Before deducting estimated expenses of $300,000 payable by the Company. (3) The Company has granted to the Underwriters an option to purchase up to an additional 187,500 Units to cover over-allotments. If all such Units are purchased, the Total Price to Public, Underwriting Discount and Proceeds to Company will be $9,343,750, $794,219 and $8,549,531, respectively. See "•Underwriting." This prospectus also covers 4,692,122 shares of Common Stock to be issued in connection with an acquisition. See "The Company." The Units are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions, including their right to reject orders in whole or in part. It is expected that delivery of the Units will be made against payment therefor in Dallas, Texas on or about May 31, 1984. Schneider, Bernet & Hickman, Inc. May 23, 1984 0 0 r I

r 'I'he Smokeless Cigarette and the packages in Nhich it %%ill be sold. free-flow mouthpiece Cross-section %ieN of the Smokeless Cigarette. The Company intends to furnish its shareholders and holders of Warrants. after the close ofcach fiscal \,ear. an annual report containing audited financial statements. In addition. the Company intends to furnish its shareholders and holders of Warrants quarterly reports containing unaudited financial information. 1\ CO\\ECFIO\ W1Ttl 'fHIS OFFERI\G,'I'HE: l:\DE:RWR1'I'ERS N1A1' OVk:R-A1.1.0T OR E:FFECf TRA\SACI'1O\S WHICH STABILIZE OR \lal\'1'AI\ THE MARKET PRICE OF THE l:\fTS,COMMO\ STOCK AND NVARRA\TS.aT a LEVELABOVETHA'I'WHICH MIGHT OTHERWISE PREVAIL I\ THE OPEN MARKET. SUCH STABIL17_IN'G, IF COMME\CE:D, MA1 BE DISCO\TI\LED AT A\1' TIME. i

PROSPECTUS SUMMARY The following summary is qualifred in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY ' Advanced Tobacco Products, Inc. has developed a patented smokeless tobacco product (the "Smokeless Cigarette") which has the appearance and feel and provides a sensation similar to a conventional cigarette, but which delivers nicotine satisfaction to the user by inhalation of nicotine vapor in a manner not requiring the combustion of tobacco. The Company believes that the Smokeless Cigarette delivers an amount of nicotine per inhalation within a range of amounts received per inhalation from conventional cigarettes and contains flavorings similar to those commonly used in conventional cigarettes. Because the use of the Smokeless Cigarette does not involve the combustion of tobacco, the user inhales none of the carbon monoxide or tars produced by tobacco combustion which the United States Surgeon General has determined may cause cancer and increase the risk of heart disease. In addition, the Smokeless Cigarette does not expose the user or others to smoke and the related odor associated with the use of conventional cigarettes and, as a result, may be enjoyed where conventional cigarette smoking is prohibited or is socially unacceptable. The Company intends to market the Smokeless Cigarette as a pleasurable nicotine product and not as a product intended to discourage or reduce smoking or to have therapeutic benefits. The Company believes most users of the Smokeless Cigarette will be smokers of conventional cigarettes who wish to reduce their health concerns or who wish to enjoy the inhalation ofni_cotine in stt;oking restricted environments. During the past five years the Company's activities have included product development, clinical and consumer testing, and the development of promotional and advertising plans. The Company intends to finance its initial product marketing, including television advertising, and commercial scale production with the proceeds of this offering. THE OFFERING Securities Oftered ..................... 1,250,000 Units (the "Units"), each consisting of one share of Common Stock and one Warrant to purchase one-half share of Common Stock. Even multiples of Warrants may be exercised to purchase shares of Common Stock at a price of $7.00 per whole share, commencing on August 21, 1984, and expiring on May 31, 1986, unless such date is ~ accelerated by the Company under certain terms and oonditions.(1) Common Stock Outstanding After Offering ........................ 6,987,600 shares.(1) Use of Proceeds ....................... Approximately 53,100,000 to finance advertising and promotional costs; $1,500,000 to finance the purchase of manufacturing equipment; 5700,000 to finance the production of inventory necessary to commence commercial scale operations; 5350,000 to finance leasehold improvements; $250,000 to finance market research; $700,000 to finance other anticipated operating expenses prior to commencement of commercial scale operations; and the balance for additions to working capital. See "Use of Proceeds." Risk Factors ............................ The Units offered hereby involve a high degree of risk and substantial dilution. See "Risk Factors" and "Dilution." NASDAQ Symbols .................. Units: ATPIU; Warrants: ATPIW; Common Stock: ATPI (1) Excludes 625,000 shares of Common Stock issuable upon exercise of the Warrants, 187,500 shares of Common Stock which may be sold pursuant to the Underwriters' over-allotment option to purchase 187,500 Units and up to 93,750 shares issuable upon the exercise of Warrants included in such Units, and 150,000 shares of Common Stock issuable upon exercise of Unit purchase warrants to be purchased by the Representative of the Underwriters and upon the exercise of Warrants included in the Units covered by such warrants. 3

SELECTED FINANCIAL INFORMATION THE COMPANY AND PRO FORMA - THE COMPANY AND NCC GROUP, LTD. COMBINED Drcember 31 March 31, 1984 , 1983 Historictl Historical Pro Forvu Combined(1) As Adjusted(Ix2) Balance Sheet Data: Working capital .......................................... S 2,125 S 127,461 S 195,598 57,329,973 Total assets ................................................. 29,668 279,734 703,691 7,838,066 Total liabilities ............ ..................... .•...••••• 16,284 57,496 32,978 32,978 Total shareholders' equity .......................... 13,384 222,238 670,713 7,805,088 August, 1982 (Date of Lcepdon of NCC) to December 31, Yeu Ended December 31, 'Ibree Months Ended Mvch 31, 1982 1983(3) 1983 1984 Operating Data(3): Advanced Tobacco Products, Inc.: Revenues - interest ................................ $ S 2,762 Total expenses ......................................... 16,000 13,908 Net loss .................................................... S(16,000) S 1( 1,146) Net Ioss*per share ..................................... ' R.04) 01 ) Pro Forma Combined - Advanced Tobacco Products, Inc. and NCC Group, Ltd. Revenues - interest ............. ................... 17;117 28,459 7,177 3,946 Total expenses ......................................... 178,598 263,173 37,842 70,473 Net loss .................................................... S 161 481) S 2( 34,714) S 3( 0,665) S 6( 6,527) Net loss per share ..................................... S(.OS) K. 01 ) (1) Assumes the purchase by the Company of the assets, subject to the liabilities of NCC Group, Ltd. and the issuance by the Company of 4,669,692 net shares of Common Stock in connection therewith. See "The Company" and "Management - Certain Transactions." (2) Gives effect to the sale of the Units offered hereby (exclusive of the 187,500 Units subject to the Underwriters' over-allotment option). Gives effect to the immediate application of the net proceeds of the offering to working capital, but does not give effect to the application of such proceeds over the twelve-month period commencing with the closing of the offering as described under "Use of Prooeeds." (3) Includes only the operations of the Company from April, 1983 (date of inception) through December 31, 1983. This Prospectus assumes the purchase by the Company of the assets, subject to the liabilities, ojNCC Group, Ltd., and the issuance by the Company oj4',669.692 net shares oJCommon Stock in connection thereK,ith. i - .n ~ 4 ° 0

THE COMPANY Advanced Tobacco Products, Inc. has developed and obtained United States and foreign patents relating to a smokeless tobacco product (the "Smokeless Cigarette") which has the appearance and feel and provides a sensation similar to a conventional cigarette, but which delivers nicotine satisfaction to the user through inhalation of nicotine vapor derived from a small amount of a nicotine mixture contained within the product. Because the nicotine inhaled from the Smokeless Cigarette is not derived from the combustion of tobacco as is the case with a conventional cigarette, the user inhales none of the carbon monoxide or tars produced by tobacco combustion which the United States Surgeon General has determined may cause cancer and increase the risk of heart disease. In addition, use of the Smokeless Cigarette does not expose the user or others to the smoke and the related odor associated with the use of conventional cigarettes and, as a result, may be enjoyed where conventional cigarette smoking is prohibited or is socially unacceptable. The Company intends to market the Smokeless Cigarette as a pleasutable nicotine product and not as a product intended to discourage or reduce smoking or to have therapeutic benefits. The Company believes that the Smokeless Cigarette delivers an amount of nicotine per inhalation within a range of amounts delivered per inhalation from many conventional combustible cigarettes. The Company's belief is based upon clinical testing of subjects after use of Smokeless Cigarettes and conventional cigarettes and the Company's analysis of Federal Trade Commission reports regarding approximately 200 varieties of conventional cigarettes. The clinical studies upon which the Company's belief is based were performed by individual physicians and clinical researchers who at the time of their studies were independent of the Company. The Company believes, however, that the nicotine delivery of the Smokeless Cigarette and of conventional cigarettes varies substantially among individual users due to differing smoking or nicotine inhalation habits. The Company believes that most users of the Smokeless Cigarette will be smokers of conventional cigarettes who wish to reduce their health concerns or who wish to enjoy nicotine in restricted smoking environments or when others may be offended by conventional cigarette smoke and odor. According to an independent study, in 1982 approximately 56 million Americans smoked 633 billion conventional cigarettes purchased at retail for $23.4 billion. Many of these smokers' use of combustible cigarettes has been restricted in certain public areas and business and commercial environments by local ordinances adopted under smoking restriction laws currently in effect in a majority of states, many of which laws have been recently enacted. EGC Associates, Inc., an independent market research firm retained by the Company, has completed a study of consumer acceptance of the Smokeless Cigarette involving shopping mall intercept interviews in Los Angeles, Chicago, San Antonio, Oklahoma City and Columbus, Ohio. Of the 550 cigarette smokers interviewed after sampling the Smokeless Cigarette, 44% indicated they would be "very likely" to purchase the Smokeless Cigarette on a trial basis if it were available, 30% indicated they would be "somewhat likely" to do so, and 26% indicated that it was "not too likely" that they would purchase the Smokeless Cigarette on a trial basis. Of those interviewed, 12% indicated they would be willing to pay more for "a day's worth" of the Smokeless Cigarette than for a pack of conventional cigarettes, 46% indicated they would pay the same amount, 41 % indicated they would pay slightly less than such amount, and 5% did not know what they would pay. The study attempted to measure only the initial interest of consumers in the Smokeless Cigarette and may not be indicative of a level of sustained acceptance of the Smokeless Cigarette in the markets tested or in other markets. The Company has commenced the development of its advertising and promotion plan with the assistance of an advertising and promotion firm. During 1984 the Company intends to continue consumer testing in order further to develop its advertising and promotion program. The Company intends to commence the introduction of its Smokeless Cigarettes to the retail market in selected major Texas cities approximately twelve months after this offering and to expand its market throughout the United States and selected foreign countries on a region by region basis consistent with its production and marketing capacity and the results of its initial marketing. The Company has obtained a commitment for the completion of its initial manufacturing facility prior to the final quarter of 1984. The Company has also obtained commitments from suppliers to provide conventional cigarette manufacturing equipment modified to manufacture Smokeless Cigarettes. 5

Development of the Smokeless Cigarette was commenced in 1977 by Mr. J. P. Ray, President of the Company. During 1978 and 1979 medical tests were performed regarding the nicotine delivered by the Smokeless Cigarette. In 1978 Mr. Ray applied for a United States patent and a number of foreign patents intended to cover the technology underlying the Smokeless Cigarette. A United States patent relating to the Smokeless Cigarette was issued on August 18, 1981 and seven foreign patents were subsequently issued (eight additional foreign patents are pending). I The Company was formed in April, 1983, under the name S. A. Vend, Inc., which was changed to Advanced_Tobacco Products, Inc. in January, 1984. On September 19, 1983, the Company entered into an agreement with NCC Group, Ltd., a partnership formed by Mr. Ray in August, 1982 to finance the development and testing of the Smokeless Cigarette, under which the Company will acquire the technology relating to the Smokeless Cigarette and other nicotine products and the United States and foreign patents and patent applications relating to such technology. Unless the context requires otherwise, all references in this Prospectus to the "Company" include NCC Group, Ltd., Mr. Ray and other owners of the patents and technology to be acquired by the Company through NCC Group, Ltd. The Company's principal offices and facilities are located at 2929 Mossrock, Suite 130, San Antonio, Texas 78230, and its telephone number is (512) 340-5892. RISK FACTORS The Units offered hereby are speculative and involve a high degree of risk. In analyzing this offering, prospective investors should carefully consider, among others, the mattors set forth below. The order in which such risks are discussed is not necessarily indicative of their relative significance. l.- Potential FDA Regnlitiod; Otber Governniental'Regulation and Taxationp' General. The Company believes that its Smokeless Cigarette currently is not subject to significant state or federal governmental regulation or taxation. The Company's belief, however, is based upon the opinion ;c ,~of its counsel Matthews & Braiiscomb, San Antonio, Texas, and itsspecial Food and Drug Administ.ration~ ~• ("FDA")oounsel 8urdiri &Galkins,ngton; D.C•.-(tb the extent such opinions relate to matters within the jurisdiction of or relating to the FDA), generally to the effect summarized below and in "Business - Governmental Regulation and Taxation." Such opinions are not binding on a court of law or the FDA, however, and are based upon such counsels' interpretation of several significant statutes and regulations, discussed briefly below, which do not specifically include or exclude the Smokeless Cigarette as a regulated or specially taxed product. The Company has not sought any ruling or determination under any such statutes or regulations, however, and, to the Company's knowledge, no court or governmental agency has ruled on the applicability of any such statutes or regulations to the Smokeless Cigarette. Specifically, the Company has not sought an advisory opinion from the FDA as to the "drug" or "new drug" status of the Smokeless Cigarette, even though such an opinion might be obtained if the Company were to submit to the FDA certain information relating to the Smokeless Cigarette and the Company's marketing plans. The Company has not sought such an opinion because the Company does not believe such an opinion is necessary for the reasons set forth below under "FDA Regulation", because such an opinion, even if granted, may be amended or revoked by the FDA at any time after it has been issued, and because the Company believes that obtaining such an opinion would involve unnecessary time and expense (even though the time and expense associated with a later assertion of jurisdiction by the FDA would likely be significantly greater than that associated with seeking such an opinion). Therefore, there can be no assurance that the Company's manufacturing and marke.ting of its product will not be materially delayed or otherwise materially burdened by governmental regulation or taxation. Such delays or other burdens could result from the amendment of current laws and regulations or the enactment of new regulatory or taxation schemes as well as interpretations of current statutes and regulations in the specific context of the Smokeless Cigarette. FDA Regulation. The FDA has refused to assert jurisdiction over conventional cigarettes as customarily marketed by maintaining the position that the Federal Food, Drug and Cosmetic Act (the "FDC Act") generally does not apply to cigarettes containing nicotine or nicotine separately. The FDA's position was affirmed in 1980 by the United States Court of Appeals for the District of Columbia Circuit 6

in Action on Smoking and Health v. Harris. Because of the foregoing, the Company does not believe the Smokeless Cigarette will be subject to FDA regulation. However, the FDA can assert jurisdiction over cigarettes containing nicotine, or nicotine separately, as a drug when a jurisdictional basis, such as health claims by the vendor, exists. It is therefore possible that the FDA would determine that the Smokeless Cigarette is a "drug" or "new drug" and that the Company would be unsuccessful in opposing such a determination. Should PDA regulation be imposed, introduction of the Smokeless Cigarette into the United States market could be prohibited or delayed for an indefinite period pending FDA approval, and FDA approval of the Smokeless Cigarette could be conditioned upon restrictions materially adverse to the Company's marketing efforts. If the Smokeless Cigarette is marketed in interstate commerce under such circumstances without an approved application, the Company could be in violation of the FDC Act and such violation could result in seizure of its products, irrjunctions and criminal penalties. Prohibition of Television Advertising; Federal Excise Tax. The Federal Cigarette Labeling and Advertising Act which, among other things, prohibits television advertising of and imposes labeling requirements upon conventional cigarettes, and the federal cigarette excise tax statutes, apply only to "cigarettes," which are defined as a "roll of tobacco" wrapped in certain substances. Because the Smokeless Cigarette does not contain a "roll of tobacco", but rather nicotine and other purified substances derived from tobacco, and because neither the Federal Cigarette Labeling and Advertising Act nor the federal cigarette excise tax statutes have been applied to smokeless tobacco products such as chewing tobacco or snuff, the Company believes the Smokeless Cigarette is not subject to such act or tax. Nevertheless, the Company has not requestcd a ruling or other determination regarding the applicability of such act or tax and is not aware of any controlling precedent, and it is possible that it could be successfully argued that the Smokeless Cigarette is sufficiently similar to conventional cigarettes to justify the application of such act or tax to the product. The Company believes that the use of television advertising would provide the Company with the most effective means of introducing the Smokeless Cigarette to the retail market and a substantial competitive advantage over its conventional cigarette competitors. The application of the federal ban on television advertising to the Smokeless Cigarette would increase the risk that the Smokeless Cigarette will not be successfully introduced, and, if successfully introduced, will not sucoessfully compete with conventional cigarettes and other competing products on a sustained basis. Since the federal ban on cigarette advertising commenced in 1971, the Company believes that very few new brands of conventional cigarettes have been successfully introduced, and only at a cost significantly in excess of the Company's expected financial resources. Although the application of the federal cigarette excise tax to the Smokeless Cigarette may result in less net revenue to the Company per sales unit, the Company does not believe the amount of net revenue reduction would by itself cause its operations to be unprofitable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors Bearing on Results of Future Operations." State Regulation. State statutes taxing cigarettes and cigars and restricting their use are also believed by the Company generally to be inapplicable because definitions of the taxed and restricted product generally refer to "a roll of tobacco for smoking" without specifying nicotine alone as the relevant substance. The Company believes that the Smokeless Cigarette will be taxed and otherwise regulated under state laws as a smokeless tobacco product, such as snuff and chewing tobacco. However, a determination that federal laws and regulations concerning conventional cigarettes are applicable to the Smokeless Cigarette would likely result in interpretations of many state conventional cigarette laws such that they would be applicable to Smokeless Cigarettes. See "Business - Governmental Regulation and Taxation." 2. Uncertain Market and Competition The Company is not aware of any previous attempt to market a product intended to provide nicotine pleasure other than conventional combustible or smokeless tobacco products such as conventional cigarettes, cigars, chewing tobacco and snuff. The Company believes that there is no market history for nicotine products which would provide a reliable basis for estimating the potential market for the Smokeless 7

Cigarette or the advertising and promotional costs required to develop such a market. Furthermore, because the Smokeless Cigarette delivers nicotine vapor to its user, the Company does not consider the Smokeless Cigarette to be similar to recently introduced cigarette substitute products such as non-tobacco combustible cigarettes or special filters designed to eliminate or reduce the use of nicotine. However, there is a risk that the Smokeless Cigarette may encounter market resistance due to a perception that it is another cigarette substitute which eliminates or reduces the user's inhalation of nicotine. The Smokeless Cigarette may also encounter resistance to the extent conventional cigarette smokers regard the inhalation of the smoke produced by tobacco combustion to be an essential part of their cigarette smoking enjoyment. In addition to the risks associated with consumer acceptance of the Smokeless Cigarette, there is a substantial competitive risk associated with the fact that the Company's resources available for promotional activities and advertising will be small when compared to the resources of most manufacturers of conventional cigarettes and other potential competitors. Consequently, there can be no assurance that the Company will be able to compete effectively with manufacturers of conventional tobacco products or with any competitive nicotine delivery products not yet developed, will be able to defend successfully its patent rights, or that the market for the Smokeless Cigarette will be substantial and within the Company's financial ability to develop. Furthermore, the Company's marketing strategy relies to a significant extent on the anticipated use of television advertising, which is prohibited under federal law as to conventional cigarettes. This law has not been interpreted in the context of the Smokeless Cigarette. See "Risk Factors - Untested Patents" and "- Governmental Regulation" and "Business - Competition." 3. Lack of Ssles and Earnings During the past five years the Company's activities have consisted of product development, clinical and consumer testing and the development of promotional and advertising plans. The Company has not yet commenced commercial scale manufacturing or retail sales of its Smokeless Cigarette. Since commencement of operations by NCC Group, Ltd. in August, 1982, through March 31, 1984, NCC Group, Ltd. had an accumulated net loss of $435,576. During the period from inception in April, 1983, through March 31, 1984, the Company had an accumulated net loss of 527,146. The Company does not anticipate that it will have significant sales or operate at a profit for at least twelve months after the date of this Prospectus. Furthermore, the Company anticipates that its operations will result in decreases in its working capital for at least 24 months after the date of this Prospectus because initial retail sales are not expected until approximately twelve months after this offering and because a significant amount of working capital is expected to be used as inventory and accounts receivable increase prior to and after the commencement of initial retail sales. The Company believes, however, that the proceeds of this offering, together with its cash on hand, will be sufficient to meet its cash needs for at least twelve months following this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 4. Untested Patents The Company currently holds one United States patent, and holds seven foreign patents and currently pending patent applications in eight other foreign countries paralleling its United States patent relating to the basic technology underlying the Smokeless Cigarette. In addition, the Company has applied for patents covering certain improvements to the Smokeless Cigarette and inventions concerning certain other nicotine related products. The Company has received an opinion from its patent counsel, Arnold, White & Durkee, Houston, Texas, to the effect that the product which it intends to market, as well as the process which it intends to use in manufacturing its product, do not infringe any known U.S. patent rights of other parties. Nevertheless, the foregoing opinion is not binding upon any court or governmental agency and none of the Company's patent rights have been litigated or subjected to judicial scrutiny. Moreover, the Company believes that many courts have been unsympathetic to the holders of patents relating to relatively simple inventions such as the Smokeless Cigarette. It is possible that if a manufacturer of a similar product could demonstrate a significant difference between its product and the Smokeless Cigarette, the Company would be unable to prevent the sale of such product. Therefore, if the Company's patent rights are tested in litigation, there can be no assurance that patent rights affording substantial competitive protection to the Company will be upheld or that such rights would prevent the marketing of competing products similar in concept and design to the Smokeless Cigarette. Furthermore, there is no assurance that the Company 8

would be able to absorb the expenses of patent litigation against any infringers if necessary to enforce the Company's rights. Nevertheless, the Company intends, to the extent of its financial resources, vigorously to defend its patent rights with respect to competing products it believes infringe upon such righu. See "Business - Patents and Trademarks." 5. Control by Officers, Directors and Current Shareboiders After completion of this offering and assuming the exercise of the Wari-ants, the officers, directors and existing shareholders of the Company, and the owners of the Smokeless Cigarette patent and related rights, will own approximately 75% of the shares of Common Stock of the Company then outstanding. Accordingly, since the Common Stock of the Company has no cumulative voting rights, such officers, directors, shareholders and owners will be in a position to elect all of the directors of the Company and to control its business policies. See "Principal Shareholders." 6. Dilution This offering involves immediate substantial dilution of the book value of the Common Stock of the Company from the offering price per Unit. See "Dilution." 7. Possible Release from Escrow and Rule 144 Sales All holders of the Common Stock other than purchasers of Units have agreed with the State Securities Commissioner of Texas to deposit into escrow an aggregate of approximately 3,000,000 of the 5,737,600 shares of the Company's Common Stock they will own after the transactions described in this Prospectus. The escrow agreement generally provides that such shares may not be released from escrow prior to the fifth anniversary of this offering, and thereafter only in aggregate annual increments of approximately 600,000 shares, unless (i) the Company's net earnings in each of any two consecutive fiscal years are at least equal to the product of 10% of the public offering price per Unit times 6,987,600 (the number of shares of Common Stock outstanding immediately after the closing of this offering), (ii) the Company's accumulated net earnings after this offering are equal to or greater than the product of 30% (increasing by 6 percentage points per year in each year after the fifth anniversary of the effective date of the Registration Statement of which this Prospectus is a part) of the public offering price per Unit times 6,987,600, (iii) the closing price per Unit or the combined closing price, as the case may be, per share of Common Stock and per Warrant if the Common Stock and Warrants are separately tradeable, for at least 90 consecutive trading days shall have been at least (a) S 13.00 (adjusted for stock splits and stock dividends) at any time on or before the fifth anniversary of the effective date of the Registration Statement of which this Prospectus is a part, or (b) 59.75 (adjusted for stock splits and stock dividends) at any time after the fifth anniversary of such effective date, or (iv) a tender offer or an offer to merge or otherwise acquire the Company's Common Stock or substantially all of its assets pursuant to which the public shareholders of the Company are entitled to receive not less than the same value per share (which must be cash if the offer is made by certain affiliates) as the existing shareholders is made by a third party and accepted by the Company or the holders of a majority of its Common Stock. In addition to the foregoing escrow agreement, all holders of the Company's securities have agreed with the Representative of the Underwriters to refrain from selling any shares of Common Stock in the public trading market except pursuant to the provisions of Rule 144 under the Securities Act applicable to "restricted securities," even though 4,692,122 of such shares issuable in connection with the acquisition of the Smokeless Cigarette patent rights are covered by the Registration Statement of which this Prospectus is a part and, absent such an agreement, the holders of such shares would generally be able to resell their shares free of such restrictions. Unless previously waived by the Representative of the Underwriters, this agreement will result in the eligibility for sales in the public market, subject in some cases to the foregoing escrow agreement, of 990,478 of the currently outstanding shares of Common Stock beginning in September, 1985, 55,000 shares beginning in January, 1986, and the balance (4,692,122 shares) two years following the completion of this offering. The availability of such shares for resale may have an adverse effect on the market price for the Company's Common Stock. The release of any of the foregoing shares from escrow and the availability of any of the foregoing shares for resale pursuant to the agreement with the Representative ofthe Underwriters may have an adverse effect on the market price for the Company's securities. 9

8. Dependence on Key Personnel The Company will be heavily dependent on the efforts of certain of its executive officers. The loss of the services of one or more of these individuals could materially adversely affect the Company. While certain of such executive officers have had experience with other consumer products and have been involved in the development of the Smokeless Cigarette, none has had experience in the packaging or manufacturing of the Smokeless Cigarette. See "Management." Futhermore, the Company's adticipated operations will require it to employ and train a significant number of additional employees. There can be no assurance that the Company will be successful in recruiting or retaining personnel of the requisite caliber or in the requisite number to enable the Company to conduct its business as proposed. See "Business - Employees." 9. Possible Products II.iability Claims Because the Smokeless Cigarette is a novel nicotine delivery product and because manufacturers of conventional cigarettes have been subjected to products liability lawsuits based on the content of conventional cigarettes, the Company may be subjected to products liability claims from persons who use the Smokeless Cigarette in the manner intended by the Company. However, the Company believes that normal use of the Smokeless Cigarette is no more harmful, if at all, than the inhalation of nicotine through the smoking of conventional cigarettes. The Smokeless Cigarette contains an amount of nicotine comparable to that contained in some brands of conventional cigarettes and less than is contained in most cigars. As is the case with conventional cigarettes and cigars, the amount of nicotine contained in a Smokeless Cigarette may be harmful if swallowed. Consequently, the Company may be subjected to products liability claims from persons who may use the Smokeless Cigarettes in ways not anticipated or intended by the Company. The packages in which the Smokeless Cigarettes will be sold will bear a warning that the Smokeless Cigarette may be harmful if swallowed. See "Business - The Smokeless Cigarettes." The Company maintains an umbrella insurance policy providing up to S 11,000,000 in coverage and intends to obtain additional excess products liability coverage of approximately S20,000,000 prior to commencing commercial operations. USE OF PROCEEDS The net proceeds from the sale of the 1,250,000 Units offered hereby are estimated to be approximately $7,100,000, excluding any proceeds from any exercise of the Underwriter's over-allotment option or from any exercise of Warrants. The following table sets forth each intended use of proceeds and the percentage of the aggregate net proceeds represented by each. Pending such uses, the net proceeds will be invested in short-term, interest-bearing obligations, such as certificates of deposit issued by banks, government obligations and money market securities. Inteoded Use of Proceeds Amount % of Aggrce.te Net Proceeds Advertising and promotional costs ................................... 53,100,000 43.7% Purchasing, modification and refurbishment of manufacturing equipment necessary to commence commercial scale operations ........................................... 1,500,000 21.1% Construction of leasehold improvements to initial manufacturing facility ..................................................... 350,000 4.9% Market research ................................................................. 250,000 3.5% Production of inventory necessary to commence commercial scale operations ........................................... 700,000 9.9% Financing of other anticipated operating expenses prior to commencement of commercial scale operations (including S335,000 for management salaries) .............. 700,000 9.9% Working capital ................................................................ 500,000 7.0% The Company anticipates that the net proceeds from this offering, together with cash on hand, will be sufficient to finance its operations for at least twelve months following the completion of this offering. 10