EX-1.9 10 0010.txt FINANCIAL STATEMENT 1 HIPPOCAMPE SA (A Development Stage Company) FINANCIAL REPORT SEPTEMBER 30, 2000 2 CONTENTS Page FINANCIAL STATEMENTS Balance sheet 1 Statements of operations 2 Statements of cash flows 3 3 HIPPOCAMPE SA (A Development Stage Company) BALANCE SHEET September 30, 2000 (Unaudited) (In Euros)
U.S. Dollars (Information Only) 2000 2000 ------------ ------------ ASSETS Current Assets Cash $ 166,747 E 190,241 Accounts receivable, net 66,588 75,970 Other 104,450 119,167 ------------ ------------ Total current assets 337,785 385,378 Patents and Other 61,899 70,621 ------------ ------------ $ 399,684 E 455,999 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable and other liabilities $ 217,521 E 248,169 Note payable 378,987 432,386 ------------ ------------ Total current liabilities 596,508 680,555 Payable to Shareholders 212,297 242,209 Shareholders' Equity (Deficit) Common stock 104,492 119,215 Deficit accumulated during the development stage (513,613) (585,980) ------------ ------------ (409,121) (466,765) ------------ ------------ $ 399,684 E 455,999 ============ ============
1 4 HIPPOCAMPE SA (A Development Stage Company) STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In Euros)
U.S. Dollars (Information Only) September 30, September 30, September 30, 2000 2000 1999 ------------- ------------- ------------- Revenues $ 8,386 E 9,567 E 17,944 Expenses Research and development 129,388 147,618 72,984 General and administrative 63,291 72,209 30,373 ----------- ----------- ----------- 192,679 219,827 103,357 ----------- ----------- ----------- Net loss $ (184,293) E (210,260) E (85,413) =========== =========== =========== Basic and diluted loss per common share $ (23.57) E (26.89) E (10.92) =========== =========== =========== Weighted average number of shares outstanding 7,820 7,820 ============ ===========
2 5 HIPPOCAMPE SA (A Development Stage Company) STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In Euros)
September 30, September 30, 2000 1999 ------------- ------------- Cash Flows From Operating Activities Net loss E (210,260) E (85,413) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Amortization 11,510 10,800 Increase in receivables (5,696) (19,143) Increase in accounts payable and other liabilities 87,708 109,557 ----------- ----------- Net cash (used in) provided by operating activities (116,738) 15,801 Cash Flows From Investing Activities Patents and other (189,256) - Certificate of deposit 27,440 - ----------- ----------- Net cash used in investing activities (161,816) - Cash Flows Provided by Financing Activities Borrowings under note payable 432,386 - ----------- ----------- Net increase in cash 153,832 15,801 Cash, Beginning of period 36,409 30,126 ----------- ----------- Cash, End of period E 190,241 E 45,927 =========== ===========
3 6 HIPPOCAMPE SA (A Development Stage Company) FINANCIAL REPORT DECEMBER 31, 1999 7 CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance sheets 2 Statements of operations 3 Statements of cash flows 4 Notes to financial statements 5 - 10 8 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Shareholders Hippocampe SA We have audited the accompanying balance sheets of Hippocampe SA (a development stage company) as of December 31, 1999 and 1998, and the related statements of operations and retained deficit, and cash flows for the years ended December 31, 1999, 1998 and 1997, and for the period from May 2, 1990 (inception) to December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Hippocampe SA (a development stage company) as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999, 1998 and 1997, and for the period from May 2, 1990 (inception) to December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ Peterson Sullivan P.L.L.C. Peterson Sullivan P.L.L.C. Seattle, Washington November 28, 2000 1 9 HIPPOCAMPE SA (A Development Stage Company) BALANCE SHEETS December 31, 1999 and 1998 (In Euros)
U.S. Dollars (Information Only) ASSETS 1999 1999 1998 ---------- ---------- ---------- Current Assets Cash $ 36,576 E 36,409 E 30,126 Certificate of deposit 27,566 27,440 - Receivables 70,597 70,274 23,070 Other 2,819 2,806 2,806 ---------- ---------- ---------- Total current assets 137,558 136,929 56,002 Patents and Other 9,280 9,238 20,850 ---------- ---------- ---------- $ 146,838 E 146,167 E 76,852 ========== ========== ========== LIABILITIES Current Liabilities Accounts payable $ 100,605 E 100,144 E 62,141 Taxes and social costs payable 54,392 54,143 27,975 Other 6,204 6,176 6,039 ---------- ---------- ---------- Total current liabilities 161,201 160,463 96,155 Payable to shareholders 243,323 242,209 138,394 Shareholders' Equity Common stock, E15.24 par value; 7,820 shares authorized, issued and outstanding 119,763 119,215 119,215 Deficit accumulated during the development stage (377,449) (375,720) (276,912) ---------- ---------- ---------- (257,686) (256,505) (157,697) ---------- ---------- ---------- $ 146,838 E 146,167 E 76,852 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 2 10 HIPPOCAMPE SA (A Development Stage Company) STATEMENTS OF OPERATIONS AND RETAINED DEFICIT For the Years Ended December 31, 1999, 1998, 1997, and the Period from May 2, 1990 (Inception) to December 31, 1999 (In Euros)
Total US accumulated during Dollars development stage (Information (May 2, 1990 to Only) December 31, 1999 1999 1998 1997 1999) --------- --------- --------- --------- ---------- Revenues $ 46,846 E 46,631 E 41,597 E 13,721 E 211,115 Expenses Research and development 94,334 93,902 70,239 19,958 261,447 General and administrative 49,121 48,896 38,212 33,533 320,460 --------- --------- --------- --------- ---------- 143,455 142,798 108,451 53,491 581,907 --------- --------- --------- --------- ---------- Loss before income tax provision (96,609) (96,167) (66,854) (39,770) (370,792) Income tax provision 2,653 2,641 762 - 4,928 --------- --------- --------- --------- ---------- Net loss (99,262) (98,808) (67,616) (39,770) (375,720) Retained deficit, beginning (278,187) (276,912) (209,296) (169,526) - --------- --------- --------- --------- ---------- Retained deficit, ending $(377,449) E(375,720) E(276,912) E(209,296) E(375,720) ========= ========= ========= ========= ========== Basic and diluted loss per share $ (12.69) E (12.64) E (8.65) E (5.09) E (48.04) ========= ========= ========= ========= ==========
The accompanying notes are an integral part of these financial statements. 3 11 HIPPOCAMPE SA (A Development Stage Company) STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998, 1997, and the Period from May 2, 1990 (Inception) to December 31, 1999 (In Euros)
Total accumulated during development stage (May 2,1990 to December 31, 1999 1998 1997 1999) ---------- ---------- ---------- ---------- Cash Flows From Operating Activities Net loss E (98,808) E (67,616) E (39,770) E(375,720) Adjustments to reconcile net loss to net cash used in operating activities Amortization 11,612 9,391 1,645 52,513 Increase in receivables (47,204) (7,021) (3,480) (70,275) Increase in accounts payable 38,003 13,279 22,514 100,144 Increase (decrease) in taxes and social costs payable 26,168 23,774 (22) 54,143 Other 137 (5,228) 3,385 3,372 ---------- ---------- ---------- ---------- Net cash used in operating activities (70,092) (33,421) (15,728) (235,823) Cash Flows From Investing Activities Patents and other - (5,176) (26,713) (61,751) Certificates of deposit (27,440) - - (27,440) ---------- ---------- ---------- ---------- Net cash used in investing activities (27,440) (5,176) (26,713) (89,191) Cash Flows From Financing Activities Proceeds from the issuance of common stock - - - 119,215 Borrowings from shareholders 103,815 68,723 30,033 242,208 ---------- ---------- ---------- ---------- Net cash provided by financing activities 103,815 68,723 30,033 361,423 ---------- ---------- ---------- ---------- Net increase (decrease) in cash 6,283 30,126 (12,408) 36,409 Cash, Beginning of Period 30,126 - 12,408 - ---------- ---------- ---------- ---------- Cash, End of period E 36,409 E 30,126 E - E 36,409 ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 4 12 NOTES TO FINANCIAL STATEMENTS Note 1. The Company and Summary of Significant Accounting Policies Organization/Development Stage Company -------------------------------------- Hippocampe SA ("the Company") was created in 1990 as a French company for the purpose of engaging in research and development of human health products. All of the Company's activities have been conducted in France. The Company's main research efforts have been concentrated in the prevention and treatment of the AIDS virus. The Company has established a network over the past ten years enabling it to work with education centers, research centers, pharmaceutical laboratories and biotechnology companies. These financial statements have been prepared treating the Company as a development stage company. As of December 31, 1999, the Company had not performed any clinical testing and a commercially viable product is not expected for several more years. As such, the Company has not generated significant revenues. Revenues reported by the Company consist of incidental serum by-products of the Company's research and development activities. For the purpose of these financial statements, the development stage started May 2, 1990, which is the date when the Company was originally organized in France. The Company issued 7,820 shares of common stock in June, 1990 for E119,215 in cash. There were no other transactions affecting shareholders' equity since inception except for results of operations. Foreign Currency ---------------- Consistent with the location of its activities, beginning January 1, 1999, the Company adopted the euro as its corporate currency. Accordingly, the Company prepared its 1999 financial statements in euros. The financial statements for prior years have been prepared using French francs as the reporting currency and have been restated in euros for each period presented using the Official Fixed Conversion Rate of E1 = FRF 6.55957. Therefore, the financial statements for prior years depict the same trends that would have been presented had they been presented in French francs. However, because they were originally prepared using French francs, they are not necessarily comparable to financial statements of a company which originally prepared its financial statements in a European currency other than the French francs and restated them in euros. All assets, liabilities, revenues and expenses have been reported using the above exchange rate, and no foreign exchange gains or losses have been recorded. There are no other potential elements for other comprehensive income so no statement of comprehensive income has been provided. 5 13 Note 1. (Continued) Cash and Cash Equivalents ------------------------- Cash and cash equivalents include highly liquid investments with original maturities of three months or less and are generally interest bearing. These assets are recorded at cost which approximates market. Interest and income tax paid on a cash basis were not material during 1999, 1998 and 1997. Certificate of Deposit ---------------------- The certificate of deposit is stated at cost. The fair value approximates cost based on the length to maturity and interest rate. Revenue Recognition ------------------- The Company records the sale of products when the products are shipped. Patents ------- Patents are stated at historical cost and are amortized over five years. Financing --------- In July 2000, the Company entered into a revolving term credit facility with a bank. This facility allows the Company to borrow up to E1,300,000 at LIBOR plus 4% repayable on August 31, 2001. As a part of this transaction, the Company issued warrants to the bank allowing the bank to convert amounts due under the credit facility into a maximum of 10% of the Company's common shares. Management believes that its existing cash, certificate of deposit, revolving credit facility and additional loans from shareholders will be sufficient to fund its cash requirements through 2000. However, the Company's existing capital resources may not be sufficient to fund the Company's operations through commercialization of its first product. Accordingly, the Company will need to raise substantial additional funds. The Company is currently evaluating several financing alternatives, some of which may involve the sale of additional equity, commencement of corporate partnerships and other methods of raising capital from public, private, and corporate sources. Management anticipates completion of one or more of these financing events prior to the end of 2001. As a part of planning for future financing, the Company's majority shareholders agreed to exchange their shares of the Company's common stock for shares in another entity in a transaction to be accounted for as a reverse purchase. 6 14 Note 1. (Continued) Taxes on Income --------------- The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates. Earnings per Share ------------------ Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive securities. There were no dilutive securities outstanding during the period May 2, 1990 to December 31, 1999. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles 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. New Accounting Standards ------------------------ Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") will be effective for periods beginning after June 15, 2000. FAS 133 requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value provided certain conditions are met. The Company does not currently have derivative instruments or engage in hedging activities so there would be no affect on its consolidated financial statements. The United States Securities and Exchange Commission recently issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which the Company adopted in 2000. Currently, the impact of this bulletin on the Company's financial statements is unknown. 7 15 Note 1. (Continued) Research and Development ------------------------ Research and development costs are expensed as incurred. When products being developed reach technological feasibility, costs associated with these products will be capitalized and amortized over their estimated useful lives. Note 2. Receivables
1999 1998 ---------- ---------- Trade receivables E 36,886 E 15,192 Refunds due from suppliers 18,742 16,652 Value added tax 13,663 - Other 6,235 - ---------- ---------- 75,526 31,844 Allowance for doubtful accounts (5,252) (8,774) ---------- ---------- E 70,274 E 23,070 ========== ==========
No collateral was required for the above receivables. Note 3. Taxes and Social Costs Payable
1999 1998 ---------- ---------- Salaries payable E 2,876 E 4,138 Social security and other social benefits 41,856 15,329 Income tax 1,117 - Value added tax 5,447 7,747 Other 2,847 761 ---------- ---------- E 54,143 E 27,975 ========== ==========
8 16 Note 4. Transactions with Shareholders Sales to a shareholder were E22,677 in 1999 and E0 in 1998 and 1997. Trade receivables include E20,467 at December 31, 1999, and E0 in 1998 from this shareholder. The amounts payable to shareholders bear no interest, have no collateral, and are repayable upon the Company becoming profitable. Since the timing of the Company becoming profitable cannot be determined, the fair value of the amounts payable to shareholders cannot be determined. The Company is not expected to become profitable in the near-term, therefore, the amounts payable to shareholder have been classified as long-term. Note 5. Income Taxes The reconciliation of income tax on income computed at the federal statutory rates to income tax expense is as follows:
1999 1998 1997 --------- --------- --------- U.S. Federal statutory rates on loss from operations E (20,867) E (11,924) E (5,962) Tax differential on foreign loss (12,376) (12,702) (4,978) Change in valuation allowance 35,884 25,388 10,940 --------- --------- --------- Income tax expense E 2,641 E 762 E - ========= ========= =========
Deferred tax asset is composed of the following:
December 31, 1999 December 31, 1998 ----------------- ----------------- Difference in book and tax basis of amounts payable to shareholder E 89,616 E 51,204 Net operating loss carryforwards - 2,528 Less valuation allowance for deferred tax asset (89,616) (53,732) ----------------- ----------------- Net deferred tax asset E - E - ================= =================
9 17 Note 5. (Continued) All of the Company's provision for income taxes was from French income. The Company had no net operating loss carryforwards as of December 31, 1999. Note 6. Commitments and Contingencies The Company leases property under noncancelable operating leases through January 2006. Future minimum lease payments under noncancelable operating leases are as follows: 2000 E 7,317 2001 7,317 2002 7,317 2003 7,317 2004 7,317 Thereafter 7,928 -------- E 44,513 ======== Total rent expense was E7,317, each for 1999, 1998 and 1997, respectively. The Company is involved in various matters of litigation arising in the ordinary course of business. In the opinion of management, the estimated outcome of such issues will not have a material effect on the Company's financial statements. 10