<PAGE>
Exhibit 2.3
Report of Independent Auditors
The Board of Directors
Cytovia, Inc.
We have audited the accompanying balance sheets of Cytovia, Inc. (a development
stage company) as of December 31, 1999 and 1998 and the related statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1999 and the periods from January 9, 1998 (inception) through December 31, 1998
and 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. 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 Cytovia, Inc. (a development
stage company) at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the year ended December 31, 1999 and the periods from
January 9, 1998 (inception) through December 31, 1998 and 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
March 24, 2000
1
<PAGE>
Cytovia, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,599,574 $ 722,142
Short-term investments, available-for-sale 495,940 6,641,330
Prepaid expenses and other current assets 52,652 84,927
------------------------------------
Total current assets 4,148,166 7,448,399
Property and equipment, net 1,759,026 1,234,905
Deposits and other assets 56,324 56,218
------------------------------------
Total assets $ 5,963,516 $ 8,739,522
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 158,907 $ 46,284
Accrued liabilities 201,085 498,533
Accrued license fees 950,000 -
Current portion of capital lease obligations 280,614 137,581
------------------------------------
Total current liabilities 1,590,606 682,398
Capital lease obligations - less current portion 820,332 581,961
Deferred rent 139,899 41,293
Other long-term liabilities 16,557 -
Stockholders' equity:
Series A convertible preferred stock - $.001 par value; 1,084,860 shares
authorized, issued and outstanding at December 31, 1999 and 1998;
liquidation preference - $10,100,047 at December 31,
1999 1,085 1,085
Series A1 convertible preferred stock - $.001 par value; 450,000
shares authorized, 450,000 and none issued and outstanding at
December 31, 1999 and 1998, respectively 450 -
Series A2 convertible preferred stock - $.001 par value; 558,660
shares authorized, 558,660 and none issued and outstanding at
December 31, 1999 and 1998, respectively; liquidation
preference - $3,000,004 at December 31, 1999 559 -
Series B convertible preferred stock - $.001 par value; 150,000
shares authorized, 124,301 issued and outstanding at December 31, 1999 and
1998; liquidation preference - $2,000,003 at December
31, 1999 124 124
Common stock - $.001 par value; 10,000,000 shares authorized,
393,079 and 829,000 issued and outstanding at December 31, 1999
and 1998, respectively 393 829
Additional paid-in capital 15,101,807 12,098,012
Accumulated other comprehensive income (loss) (5,388) 79,218
Deficit accumulated during the development stage (11,702,908) (4,745,398)
------------------------------------
Total stockholders' equity 3,396,122 7,433,870
------------------------------------
Total liabilities and stockholders' equity $ 5,963,516 $ 8,739,522
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Cytovia, Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
PERIODS FROM JANUARY 9, 1998
YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
-------------------------------------------------------
<S> <C> <C> <C>
Operating expenses:
Research and development $ 5,249,503 $ 3,939,979 $ 9,189,482
General and administrative 1,859,205 1,037,199 2,896,404
-------------------------------------------------------
Total operating expenses 7,108,708 4,977,178 12,085,886
-------------------------------------------------------
Loss from operations (7,108,708) (4,977,178) (12,085,886)
Other income (expense):
Interest income 283,695 252,421 536,116
Interest expense (132,497) (20,641) (153,138)
-------------------------------------------------------
Net loss $ (6,957,510) $ (4,745,398) $ (11,702,908)
=======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Cytovia, Inc.
(a development stage company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock issued upon incorporation - $ - 829,000 $ 829
Issuance of Series A preferred stock at
$9.31 per share for cash in March 1998 1,084,860 1,085 - -
Issuance of Series B preferred stock at
$16.09 per share for cash in May 1998 124,301 124 - -
Net loss - - - -
Unrealized gain on short-term investments - - - -
Comprehensive loss - - - -
=================================================================
Balance at December 31, 1998 1,209,161 1,209 829,000 829
Issuance of common stock for services - - 2,000 2
Conversion of common stock to Series A1
preferred stock 450,000 450 (440,000) (440)
Exercise of stock options - - 2,079 2
Issuance of Series A2 preferred stock at
$5.37 per share for cash in December 1999
558,660 559 - -
Issuance of stock options to consultants - - - -
Net loss - - - -
Unrealized loss on short-term investments - - - -
Comprehensive loss
=================================================================
Balance at December 31, 1999 2,217,821 $ 2,218 393,079 $ 393
=================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
CAPITAL INCOME (LOSS) DEFICIT EQUITY
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock issued upon incorporation $ (829) $ - $ - $ -
Issuance of Series A preferred stock at
$9.31 per share for cash in March 1998 10,098,962 - - 10,100,047
Issuance of Series B preferred stock at
$16.09 per share for cash in May 1998 1,999,879 - - 2,000,003
Net loss - - (4,745,398) (4,745,398)
Unrealized gain on short-term investments - 79,218 - 79,218
-----------------
Comprehensive loss - - - (4,666,180)
===============================================================
Balance at December 31, 1998 12,098,012 79,218 (4,745,398) 7,433,870
Issuance of common stock for services 1,598 - - 1,600
Conversion of common stock to Series A1
preferred stock (10) - - -
Exercise of stock options 518 - - 520
Issuance of Series A2 preferred stock at
$5.37 per share for cash in December 1999 3,001,056 - - 3,001,615
Issuance of stock options to consultants 633 - - 633
Net loss - - (6,957,510) (6,957,510)
Unrealized loss on short-term investments - (84,606) (84,606)
-----------------
Comprehensive loss (7,042,116)
===============================================================
Balance at December 31, 1999 $ 15,101,807 $ (5,388) $(11,702,908) $ 3,396,122
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Cytovia, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIODS FROM JANUARY 9, 1998
YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,957,510) $ (4,745,398) $ (11,702,908)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 416,444 42,051 458,495
Deferred rent 98,606 41,293 139,899
Amortization of deferred compensation 2,233 - 2,233
Accrued license fee 950,000 - 950,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 32,275 (84,927) (52,652)
Deposits and other assets (106) (56,218) (56,324)
Accounts payable 112,623 46,284 158,907
Accrued liabilities (297,448) 498,533 201,085
Other long-term liabilities 16,557 - 16,557
------------------------------------------------------
Net cash used in operating activities (5,626,326) (4,258,382) (9,884,708)
------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (940,565) (1,276,956) (2,217,521)
Purchase of short-term investments (2,325,000) (15,825,860) (18,150,860)
Proceeds from sale and maturities of short-term
investments 8,385,784 9,263,748 17,649,532
------------------------------------------------------
Net cash provided by (used in) investing activities 5,120,219 (7,839,068) (2,718,849)
------------------------------------------------------
FINANCING ACTIVITIES
Repayment of capital lease obligations (208,479) (11,109) (219,588)
Proceeds from capital lease obligations 589,883 730,651 1,320,534
Proceeds from sale of Series A preferred stock - 10,100,047 10,100,047
Proceeds from sale of Series A2 preferred stock 3,001,615 - 3,001,615
Proceeds from sale of Series B preferred stock - 2,000,003 2,000,003
Proceeds from sale of common stock 520 - 520
------------------------------------------------------
Net cash provided by financing activities 3,383,539 12,819,592 16,203,131
------------------------------------------------------
Net increase in cash and cash equivalents 2,877,432 722,142 3,599,574
Cash and cash equivalents at beginning of period 722,142 - -
------------------------------------------------------
Cash and cash equivalents at end of period $ 3,599,574 $ 722,142 $ 3,599,574
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------------
Interest paid $ 132,079 $ 20,641 $ 152,720
------------------------------------------------------
Conversion of common stock to Series A1
preferred stock $ 450 $ - $ 450
======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Cytovia, Inc. (the "Company") was formed out of a general partnership in
December 1997 between CoCensys, Inc. and a founding partner. On January 9, 1998
the general partnership was dissolved and the Company was incorporated.
Cytovia, Inc. is focused on discovering and developing small-molecule
therapeutics that modulate key cellular signal pathways involved in programmed
cell death, also known as apoptosis. Cytovia has developed a proprietary whole
cell screening technology to screen compound libraries and already has uncovered
several classes of novel small molecule drug compounds for the treatment of a
wide range of diseases including drug resistant cancers, myocardial infarction,
stroke, liver failure and other degenerative diseases.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers instruments purchased with an original maturity of three
months or less to be cash equivalents. Short-term investments consist of highly
liquid debt instruments. Management has classified the Company's short-term
investments as available-for-sale securities in the accompanying financial
statements. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives, generally three to ten
years. Maintenance and repair costs are charged to expense as incurred.
6
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING STANDARD ON IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, the Company regularly evaluates its long-lived assets for
indicators of possible impairment and records impairment losses when indicators
of impairment are present and the estimated undiscounted cash flows to be
generated by those assets are less than the assets' carrying amounts. While the
Company's current and historical operating and cash flow losses are indicators
of impairment, the Company believes the future cash flows to be received from
the long-lived assets will exceed the assets' carrying value, and accordingly
the Company has not recognized any impairment losses through December 31, 1999.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, ("APB 25") and related Interpretations
in accounting for its employee stock options. Under APB 25, if the exercise
price of the Company's employee stock options equals or exceeds the fair value
of the underlying stock on the date of grant, no compensation expense is
recognized. Options issued to non-employees are recorded at their fair value in
accordance with SFAS No. 123 and EITF 96-18 and recognized over the related
service period.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
USE OF 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.
7
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, REPORTING COMPREHENSIVE INCOME, all components
of comprehensive income (loss), including net income (loss), are reported in the
financial statements in the period in which they are recognized.
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner sources. Net
income (loss) and other comprehensive income (loss), including unrealized gains
and losses on investments, are reported, net of their related tax effect, to
arrive at comprehensive income (loss).
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities as of December 31,
1999:
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
ESTIMATED SHORT-TERM
COST FAIR VALUE INVESTMENTS
-----------------------------------------------------
<S> <C> <C> <C>
U.S. treasury notes $501,328 $495,940 $5,388
-----------------------------------------------------
$501,328 $495,940 $5,388
=====================================================
</TABLE>
The following is a summary of available-for-sale securities as of December 31,
1998:
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
ESTIMATED SHORT-TERM
COST FAIR VALUE INVESTMENTS
-----------------------------------------------------
<S> <C> <C> <C>
Mortgage backed securities $2,625,000 $2,625,000 $ -
U.S. treasury notes 2,989,336 3,030,780 41,444
U.S. government obligations 947,776 985,550 37,774
-----------------------------------------------------
$6,562,112 $6,641,330 $ 79,218
=====================================================
</TABLE>
As of December 31, 1999, all of the available-for-sale securities have a
maturity of less than one year.
8
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------------
<S> <C> <C>
Scientific equipment $ 950,795 $ 652,642
Computer and office equipment 779,598 184,237
Leasehold improvements 487,128 440,077
------------------------------------
2,217,521 1,276,956
Less accumulated depreciation and amortization (458,495) (42,051)
------------------------------------
$ 1,759,026 $ 1,234,905
====================================
</TABLE>
Depreciation and amortization amounted to $416,444 and $42,051 for the year
ended December 31, 1999 and the period from January 9, 1998 (inception) through
December 31, 1998, respectively. Depreciation and amortization expense amounted
to $458,495 for the period from January 9, 1998 (inception) through December 31,
1999.
4. STOCKHOLDERS' EQUITY
At December 31, 1999, convertible preferred stock authorized and outstanding is
as follows:
<TABLE>
<CAPTION>
SHARES SHARES LIQUIDATION
AUTHORIZED OUTSTANDING VALUE
---------------------------------------------------------
<S> <C> <C> <C>
Series A 1,084,860 1,084,860 $10,100,047
Series A2 558,660 558,660 3,000,004
Series B 150,000 124,301 2,000,003
---------------------------------------------------------
1,793,520 1,767,821 $15,100,054
=========================================================
</TABLE>
9
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
In the event of a liquidation of the Company, preferred stockholders are
entitled to a liquidation preference of $9.31 per share for Series A, $5.37 per
share for Series A2 and $16.09 per share for Series B, plus any declared and
unpaid dividends as such shares. After distribution to the Series A, A2 and B
preferred stockholders, the remaining assets of the Company shall be distributed
to the holders of Series A1 preferred and holders of common stock in proportion
to the number of shares of Series A1 preferred and common stock then held.
In April 1999, the Board of Directors of the Company approved a 2-for-1 stock
split of the common stock of the Company. All amounts have been restated to
reflect this split as if it had occurred at the inception of the Company.
In March 1998, the Company issued 1,084,860 shares of Series A convertible
preferred stock for $9.31 per share with gross proceeds to the Company of
$10,100,047.
In July 1998, the Company issued 124,301 shares of Series B convertible
preferred stock for $16.09 per share with gross proceeds to the Company of
$2,000,003.
In May 1999, CoCensys, Inc., converted its 440,000 shares of common stock in the
Company to 450,000 shares of Series A1 convertible preferred stock. As
consideration for the conversion, the companies renegotiated a license agreement
in effect between them. Originally, the license agreement called for CoCensys to
receive 50% of amounts received by the Company for licensing rights under the
agreement to products which treat central nervous systems (CNS) disorders, and
12% of amounts received for licensing rights under the agreement to products
which treat other indications. In exchange for the conversion, this agreement
was amended so that CoCensys would receive 15% of amounts received by the
Company for licensing rights to any products under the agreement regardless of
indication.
In December 1999, the Company issued 558,660 shares of Series A2 convertible
preferred stock for $5.37 per share with gross proceeds to the Company of
$3,001,615.
10
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Each share of convertible preferred stock is convertible at any time, at the
option of the holder, into common stock, on a one-to-one basis, adjusted for
stock splits and subject to certain antidilution adjustments. In addition, there
is mandatory conversion of each series of convertible preferred stock upon
consummation of an initial public offering of common stock with aggregate gross
proceeds to the Company in excess of $15 million and a share price which equals
two and one-half times the purchase price per share. Each series of convertible
preferred stock is also convertible upon a vote of majority of the holders of
the outstanding shares of that series of convertible preferred stock.
WARRANTS
As of December 31, 1999 and 1998, the Company had outstanding warrants to
purchase 4,972 and 3,418 shares of Series B preferred stock at a price of $16.09
per share.
The warrants are exercisable until August 6, 2005 or 3 years after closing of an
initial public offering, whichever is longer.
STOCK OPTION PLAN
In March 1998, the Company adopted the 1998 Equity Incentive Plan (the "Plan")
which provides for the grant of incentive and nonstatutory stock options and
other cash and stock based awards to employees, directors or consultants of the
Company. The Plan authorizes the Company to issue up to 457,688 shares of common
stock as amended. The Plan provides that incentive stock options will be granted
at no less than the fair value of the Company's common stock as determined by
the board of directors at the date of the grant. The options generally vest and
become exercisable over a period of four years.
Options expire no more than ten years after the date of grant, or earlier if the
employment terminates.
11
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------------------------------------------
<S> <C> <C>
Granted 292,556 $.25
Cancelled (3,222) $.25
-------------------
Balance at December 31, 1998 289,334 $.25
Granted 131,300 $.80
Cancelled (11,817) $.43
-------------------
Balance at December 31, 1999 408,817 $.50
===================
</TABLE>
As of December 31, 1999, options to purchase 123,641 shares are exercisable and
48,871 shares are available for future grant under the Plan. As of December 31,
1999, the weighted-average remaining contractual life was approximately 9.07
years.
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS No. 123. The fair value of these
options was estimated at the date of grant using the minimum value method with
the following weighted average assumptions for 1999 and 1998: risk-free interest
rate of 5.5%; no annual dividends; and an expected option life of four years.
The weighted-average fair value of the options granted during 1999 and 1998 was
$.80 and $.11, respectively. The effect of applying the minimum value method of
SFAS No. 123 to options granted in 1999 and 1998 did not result in a pro forma
net loss that is materially different from the amount reported. Accordingly,
such pro forma information is not presented herein.
12
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------------------------------
<S> <C> <C>
Conversion of Series A Preferred stock 2,169,720 2,169,720
Conversion of Series A1 Preferred Stock 450,000 -
Conversion of Series A2 Preferred Stock 558,660 -
Conversion of Series B Preferred stock 300,000 300,000
Stock options 457,688 356,888
Warrants 9,944 6,836
------------------------------------
3,946,012 2,833,444
====================================
</TABLE>
5. RESEARCH AND DEVELOPMENT COLLABORATIONS
AURORA BIOSCIENCES, INC.
In July 1998, the Company entered into a Collaboration Agreement (the
"Agreement") with Aurora Biosciences, Inc. ("Aurora"). During the two-year term
of the Agreement, the companies agreed to enter into a screening collaboration
in which Aurora will screen compounds for the Company utilizing its
high-throughput screening technology with assays developed by the Company.
Cytovia can access compounds currently in Aurora's compound libraries or can
elect to use compounds purchased from other sources in completing the screens.
During the term of the Agreement, Cytovia is to pay Aurora a total of $2,000,000
for screening services. As of December 31, 1999 and 1998, a total of $1,500,000
and $500,000, respectively, has been paid to Aurora and expensed under the terms
of the Agreement. Aurora purchased 124,301 shares of Series B convertible
preferred stock in connection with the Agreement.
The Agreement also provides for the future payment of certain milestones and
royalties to Aurora should any of the compounds discovered through the screening
collaboration continue through the development process.
13
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
5. RESEARCH AND DEVELOPMENT COLLABORATIONS (CONTINUED)
OTHER COLLABORATIVE RELATIONSHIPS
In January 1998, the Company signed a License and Development Agreement
(the "Agreement") with a collaborative partner. The Company licensed technology
developed by the partner to measure the activity of caspases and other enzymes
involved in apoptosis or programmed cell death. The Agreement gives the Company
exclusive rights to commercially develop the technology for the commercial
sector and allows for sublicensing of the technology by the Company. Any
revenues derived from sublicensing or sales of products developed using the
technology would result in royalty and milestone payments to the partner. In
exchange for this license, the Company agreed to pay $2,000,000 over the life of
the contract of which $1,000,000 related to 1999.
Prior to the end of the Agreement, the Company determined that the collaborative
partner was in breach of their responsibilities as outlined in the contract
resulting in a notice of constructive breach being sent by the Company. Prior to
that time, a total of $750,000 had been paid for the technology covered under
the Agreement. An additional amount of $250,000 due under the Agreement in 1998
and $1,000,000 due in 1999 has not been paid. During 1999, the parties to the
agreement entered into litigation to determine the responsibilities and
obligations of each party. In January 2000, an out of court settlement was
reached. The settlement calls for Cytovia to pay a total of $950,000 to the
party in settlement of all claims. The amount is payable throughout the course
of 2000 and has been accrued for as of December 31, 1999.
6. RELATED PARTY TRANSACTIONS
From the Company's inception through October 31, 1998, Cytovia occupied a
portion of CoCensys' facilities and utilized a portion of CoCensys' staff and
infrastructure. During that period, a total of $1,125,316 was paid to CoCensys
for reimbursement of costs incurred on Cytovia's behalf as well as payments for
use of CoCensys' facilities, staff, and equipment. As of December 31, 1999 and
1998, no amounts were payable to CoCensys.
14
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating lease
agreements that expire at various dates through 2004. The minimum annual rents
are subject to specified annual rental increases. Rent expense was $521,641 and
$188,658 for the years ended December 31, 1999 and 1998, respectively. Rent
expense for the period from January 9, 1998 (inception) through December 31,
1999 was $710,299.
The Company leases certain equipment under capital lease obligations. Included
in property and equipment are capital leases with an original purchase price of
$1,320,534 and $781,830 as of December 31, 1999 and 1998, respectively.
Annual future minimum obligations for operating and capital leases are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL LEASE
YEAR ENDING DECEMBER 31: LEASES OBLIGATIONS
-------------------------------------
<S> <C> <C>
2000 $ 559,216 $ 406,477
2001 572,414 399,458
2002 579,146 371,565
2003 596,524 190,482
2004 614,420 -
Thereafter 2,109,682 -
-------------------------------------
Total minimum lease payments $ 5,031,402 1,367,982
===================
Less amount representing interest (267,036)
-------------------
Present value of future minimum capital lease
obligations 1,100,946
Less amounts due in one year (280,614)
-------------------
Long-term portion of capital lease obligations $ 820,332
===================
</TABLE>
As of December 31, 1999, the Company has approximately $264,495 of available
funding under equipment lease lines.
15
<PAGE>
Cytovia, Inc.
(a development stage company)
Notes to Financial Statements (continued)
8. INCOME TAXES
At December 31, 1999, the Company has federal and state tax net operating loss
carryforwards of approximately $9,855,000 and $2,470,000, respectively. The
federal and state tax loss carryforwards will begin to expire in 2006, unless
previously utilized. The Company also has federal and state research and
development tax credit carryforwards of approximately $499,000 and $274,000,
respectively, which will begin to expire in 2018, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net
operating loss and credit carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three-year period. However, the
Company does not believe such limitations will have a material impact upon the
utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of December 31,
1999 are shown below. A valuation allowance of $5,149,000 has been recognized as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,493,000 $ 1,568,000
Research and development credits 677,000 -
Capitalized research and development 438,000 -
Other, net 541,000 382,000
--------------------------------------
Total deferred tax assets 5,149,000 1,950,000
Valuation allowance (5,149,000) (1,950,000)
Net deferred tax assets $ - $ -
======================================
</TABLE>
16
