<PAGE>
EXHIBIT 99.2
Independent Auditor's Report
August 1, 2000
Board of Directors
Talaria Therapeutics, Inc.
(A Development Stage Enterprise)
Conshohocken, Pennsylvania
We have audited the accompanying balance sheets of TALARIA THERAPEUTICS,
INC. (A Development Stage Enterprise) as of December 31, 1999 and 1998 and the
related statements of operations, of stockholders' equity and of cash flows for
the year ended December 31, 1999, for the period from October 2, 1998
(inception) to December 31, 1998, and for the period from October 2, 1998
(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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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 TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise) as of December 31, 1999 and 1998 and the
results of its operations and its cash flows for the year ended December 31,
1999, for the period from October 2, 1998 (inception) to December 31, 1998, and
for the period from October 2, 1998 (inception) to December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not generated any revenues and has not
yet achieved profitable operations, nor has it ever generated positive cash
flows from operations. These factors raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Goldenberg Rosenthal, LLP
Jenkintown, Pennsylvania
1
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1998 1999 2000
---------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............... $1,040,531 $ 1,816,322 $ 1,195,541
Other current assets.................... -- 7,101 7,410
---------- ----------- -----------
Total Assets........................... $1,040,531 $ 1,823,423 $ 1,202,951
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses... $ 13,277 $ 312,644 $ 440,344
Other current liabilities............... 3,505 -- --
---------- ----------- -----------
Total current liabilities.............. 16,782 312,644 440,344
---------- ----------- -----------
Commitments and Contingency
Stockholders' equity
Preferred stock, $.0001 par value;
Authorized, 2,666,666 shares, no
shares issued......................... -- -- --
Series A convertible preferred stock,
$.0001 par value; Authorized, issued
and outstanding 1,500,000 shares...... 150 150 150
Series B convertible preferred stock,
$.0001 par value; Authorized 833,334
shares; Issued and outstanding 833,334
shares in 1999 and 2000, no shares in
1998.................................. -- 83 83
Common stock, $.0001 par value;
Authorized 9,000,000 shares Issued and
outstanding 2,333,000 shares.......... 233 233 233
Additional paid-in capital.............. 2,733,026 5,237,322 5,237,322
Deficit accumulated during the
development stage..................... (1,709,660) (3,727,009) (4,475,181)
---------- ----------- -----------
Net stockholders' equity................ 1,023,749 1,510,779 762,607
---------- ----------- -----------
Total Liabilities and Stockholders'
Equity............................... $1,040,531 $ 1,823,423 $ 1,202,951
========== =========== ===========
</TABLE>
See notes to financial statements
2
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
October 2,
1998
Three Months Ended (inception)
October 2, 1998 Year Ended March 31, to
(Inception) to December -------------------- March 31,
December 31, 1998 31, 1999 1999 2000 2000
----------------- ----------- --------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating expenses
incurred in the
development stage:
Research and
development......... $ 1,666,464 $ 1,946,436 $ 329,328 $ 615,045 $ 4,227,945
General and
administrative...... 43,823 135,513 40,492 154,901 334,237
----------- ----------- --------- --------- -----------
Total operating
expenses............ 1,710,287 2,081,949 369,820 769,946 4,562,182
Interest income......... 627 64,600 11,348 21,774 87,001
----------- ----------- --------- --------- -----------
Net loss................ $(1,709,660) $(2,017,349) $(358,472) $(748,172) $(4,475,181)
=========== =========== ========= ========= ===========
Basic and diluted net
loss per share........ $ (0.73) $ (0.86) $ (0.15) $ (0.32)
=========== =========== ========= =========
Shares used in computing
basic and diluted net
loss per share........ 2,333,000 2,333,000 2,333,000 2,333,000
=========== =========== ========= =========
Pro forma basic and
diluted net loss per
share (unaudited)..... $ (0.47) $ (0.16)
=========== =========
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)..... 4,249,667 4,666,334
=========== =========
</TABLE>
See notes to financial statements
3
<PAGE>
TALARIA THERAPEUTICS, INC
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
OCTOBER 2, 1998 (INCEPTION) TO MARCH 31, 2000
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible Deficit
Preferred Stock Preferred Stock Common Stock Accumulated
---------------- ---------------- ---------------- Additional During the Net
Number Number Number Paid-in Development Stockholders'
of Shares Amount of Shares Amount of Shares Amount Capital Stage Equity
--------- ------ --------- ------ --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A
convertible preferred
stock.................. 1,500,000 $150 -- $-- -- $-- $1,499,850 $ -- $1,500,000
Issuance of common stock
to founders............ -- -- -- -- 1,090,000 109 109,000 -- 109,109
Issuance of common stock
in exchange for a
license for a patent
and for technology..... -- -- -- -- 1,243,000 124 1,124,176 -- 1,124,300
Net loss for the period
ended December 31,
1998................... -- -- -- -- -- -- -- (1,709,660) (1,709,660)
--------- ---- ------- ---- --------- ---- ---------- ----------- ----------
Balance, December 31,
1998................... 1,500,000 150 -- -- 2,333,000 233 2,733,026 (1,709,660) 1,023,749
Issuance of Series B
convertible preferred
stock.................. -- -- 833,334 83 -- -- 2,499,919 -- 2,500,002
Issuance of stock
options in exchange for
research and
development services... -- -- -- -- -- -- 4,377 -- 4,377
Net loss for the year
ended December 31,
1999................... -- -- -- -- -- -- -- (2,017,349) (2,017,349)
--------- ---- ------- ---- --------- ---- ---------- ----------- ----------
Balance, December 31,
1999................... 1,500,000 150 833,334 83 2,333,000 233 5,237,322 (3,727,009) 1,510,779
Net loss for the three
months ended March 31,
2000 (unaudited)....... -- -- -- -- -- -- -- (748,172) (748,172)
--------- ---- ------- ---- --------- ---- ---------- ----------- ----------
Balance, March 31, 2000
(unaudited)............ 1,500,000 $150 833,334 $ 83 2,333,000 $233 $5,237,322 $(4,475,181) $ 762,607
========= ==== ======= ==== ========= ==== ========== =========== ==========
</TABLE>
See notes to financial statements.
4
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 2,
1998 Year Ended Three Months Ended October 2,
(Inception) to December March 31, 1998
December 31, 31, ---------------------- (Inception) to
1998 1999 1999 2000 March 31, 2000
-------------- ----------- ---------- ---------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss............... $(1,709,660) $(2,017,349) $ (358,472) $ (748,172) $(4,475,181)
Adjustments to
reconcile net loss to
net cash used in
operating activities
Noncash research and
development and
compensation
expense.............. 1,233,300 4,377 -- -- 1,237,677
Increase in other
current assets...... -- (7,101) (300) (309) (7,410)
Increase in accounts
payable and accrued
expenses............ 13,277 299,367 21,822 127,700 440,344
Increase (decrease)
in other current
liabilities......... 3,505 (3,505) (3,505) -- --
----------- ----------- ---------- ---------- -----------
Net cash used in
operating
activities......... (459,578) (1,724,211) (340,455) (620,781) (2,804,570)
----------- ----------- ---------- ---------- -----------
Cash flows from
financing activities
Proceeds from the
issuance of preferred
stock................. 1,500,000 2,500,002 -- -- 4,000,002
Proceeds from the
issuance of common
stock................. 109 -- -- -- 109
----------- ----------- ---------- ---------- -----------
Net cash provided by
financing
activities......... 1,500,109 2,500,002 -- -- 4,000,111
----------- ----------- ---------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 1,040,531 775,791 (340,455) (620,781) 1,195,541
Cash and cash
equivalents, beginning
of period.............. -- 1,040,531 1,040,531 1,816,322 --
----------- ----------- ---------- ---------- -----------
Cash and cash
equivalents, end of
period................. $ 1,040,531 $ 1,816,322 $ 700,076 $1,195,541 $ 1,195,541
=========== =========== ========== ========== ===========
<CAPTION>
SUPPLEMENTAL INFORMATION
REGARDING NONCASH
ACTIVITIES
<S> <C> <C> <C> <C> <C>
Exchange of common
stock for a patent
license and for
technology............ $ 1,124,300 -- -- -- $ 1,124,300
Exchange of stock
options for research
and development
services.............. -- $ 4,377 -- -- $ 4,377
Compensation in
conjunction with stock
issuance.............. $ 109,000 -- -- -- $ 109,000
</TABLE>
See notes to financial statements.
5
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Information for the three months ended March 31, 1999 and 2000 is unaudited)
NOTE 1 Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Talaria Therapeutics, Inc. (the "Company") was incorporated in Delaware
on September 24, 1998. The Company is a development stage enterprise engaged in
the development of treatments for cardiovascular diseases using therapeutic
liposomes.
Since inception, the Company has been engaged in organizational
activities, including raising capital and research and development activities.
The Company has not generated any revenues and has not yet achieved profitable
operations, nor has it ever generated positive cash flows from operations.
There is no assurance that profitable operations, if achieved, could be
sustained on a continuing basis. Further, the Company's future operations are
dependent on the success of the Company's efforts to raise additional capital,
its research and commercialization efforts, and ultimately, the market
acceptance of the Company's products.
The accompanying financial statements have been prepared on a going-
concern basis which contemplates the continuation of operations, realization of
assets and liquidation of liabilities in the ordinary course of business. The
Company incurred a net loss of $2,017,349 for the year ended December 31, 1999
and a net loss of $748,172 (unaudited) for the three months ended March 31,
2000. The Company has a deficit accumulated during the development stage of
$4,475,181 (unaudited) as of March 31, 2000. The net losses incurred by the
Company have consumed working capital. The Company plans to obtain additional
financing through joint ventures or the sale of preferred stock. There can be
no assurance that these efforts will be successful. The financial statements do
not include any adjustments relating to the recoverability and classifications
of reported asset amounts or the amounts of liabilities that might result from
the outcome of that uncertainty.
Use of Estimates
The presentation 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Research and Development Expense
Costs incurred for research and product development, including acquired
technology and costs incurred for technology in the development stage, are
expensed as incurred.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit
risk consist principally of cash and cash equivalents. All cash and cash
equivalents are held in United States financial institutions and money market
funds. Cash balances as of December 31, 1999 and 1998 and March 31, 2000
(unaudited) were in excess of federally-insured amounts.
6
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the three months ended March 31, 1999 and 2000 is unaudited)
Tax Status
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for differences between the
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 recorded using enacted tax rates
expected to apply to taxable income in the year 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 rate is recognized in income in the
period that includes the enactment date.
Stock-Based Compensation
The Company accounts for its stock-based compensation to non-employees at
fair value in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
Equity Securities Transactions
Since inception, the Board of Directors has established the fair value of
equity securities based upon facts and circumstances existing at the date such
equity transactions occurred, including the price at which equity instruments
were sold to independent third parties.
Interim Financial Information
The financial statements as of March 31, 2000, for the three months ended
March 31, 1999 and 2000 and for the period from October 2, 1998 (inception) to
March 31, 2000 are unaudited and have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position at such date, and the operating
results and cash flows for such periods, in accordance with generally accepted
accounting principles. Results for the interim period are not necessarily
indicative of the results to be expected for any subsequent period.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1998 1999 2000
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued professional fees.......................... $ 91 $ 15,050 $143,548
Accrued compensation............................... 3,505 -- --
Accrued manufacturing costs........................ 13,186 282,427 292,054
Accrued other...................................... -- 15,167 4,742
------- -------- --------
$16,782 $312,644 $440,344
======= ======== ========
</TABLE>
Basic Diluted and Pro Forma Loss per Share
Basic and diluted loss per share amounts have been calculated using the
weighted average number of shares of common stock outstanding during the
respective period.
In 1999 and 2000 (unaudited), options for the purchase of common stock
were not included in the calculation of diluted loss per share as doing so
would have been anti-dilutive.
7
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the three months ended March 31, 1999 and 2000 is unaudited)
Convertible preferred stock was not included in the calculation of
diluted loss per share because doing so would have been antidilutive. However,
the convertible preferred stock could potentially be dilutive in the future.
The following table presents the calculation of pro forma basic and
diluted net loss per share:
<TABLE>
<CAPTION>
Year ended Three Months
December ended March
31, 1999 31, 2000
----------- ------------
<S> <C> <C>
Net loss to common stockholders...................... $(2,017,349) $ (748,172)
=========== ==========
Shares used in computing basic and diluted net loss
per share.......................................... 2,333,000 2,333,000
Pro forma adjustment to show assumed conversion of
Series A and Series B convertible preferred stock
(unaudited)........................................ 1,916,667 2,333,334
----------- ----------
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)..................... 4,249,667 4,666,334
=========== ==========
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (0.47) $ (0.16)
=========== ==========
</TABLE>
NOTE 2 Stockholders' Equity
On October 2, 1998, the Company issued 1,090,000 shares of common stock
for $109 to three founders. Imputed compensation of $109,000 was recorded in
connection with this transaction.
On October 2, 1998, the Company completed a private placement of
1,275,000 shares of Series A convertible preferred stock ("Series A") at $1 per
share.
On October 2, 1998, the Company issued 1,243,000 shares of common stock
in exchange for a license for a patent and for certain technology to be
utilized in the Company's research and development activities. Accordingly, the
estimated fair value of the license and technology of $1,124,300 has been
recorded as research and development expense in the accompanying statement of
operations during the period ended December 31, 1998.
On October 30, 1998, the Company completed a second private placement of
225,000 shares of Series A at $1 per share.
On July 1, 1999, the Company completed a private placement of 833,334
shares of Series B convertible preferred stock ("Series B") at $3 per share.
In the event of liquidation, dissolution or winding-up of the Company,
holders of Series A and Series B shall be entitled to either convert their
preferred stock into common stock (see below) or retain their liquidation
preference to the common stockholders. In the latter case, the holders of the
Series A and Series B shall be entitled to receive the original issuance price
($1 and $3, respectively) plus declared and unpaid dividends from the assets of
the Company in preference to the common stockholders. After the Series A and
Series B stockholders have been paid in full the original issuance price, the
remaining assets of the Company shall be distributed ratably to the Series A,
Series B and common stockholders in accordance with their respective
shareholdings at the time of distribution. The Series A and Series B
stockholders are entitled to receive, in addition to the original issuance
price plus declared and unpaid dividends, a maximum return of 40% per year on
the original issuance price, prorated for any portion of a year. After the
maximum distribution to the Series A and Series B stockholders has been paid,
the Series A and Series B stockholders have no further
8
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Information for the three months ended March 31, 1999 and 2000 is unaudited)
participation in the distribution of the assets of the Company. If the assets
available for distribution are insufficient to permit the payment of their full
preferential amounts, the Series A and Series B stockholders shall share
ratably in the distribution of assets. The stockholders have the right to
purchase shares in future equity offerings, except in a specified public
offering (see below), in proportion to their current ownership, at the offering
price. The holders of common and preferred stock are entitled to dividends only
if and when declared by the Board of Directors. Holders of the common stock
shall not receive dividends in preference to the preferred stockholders.
Each share of Series A and Series B preferred stock is convertible into
one share of common stock (i) at the option of the holder thereof at any time
or, (ii) automatically at the closing of a registration statement under the
Securities Act of 1933 covering the offer and sale of the Company's common
stock with a gross offering price of at least $10 million and a per share price
of at least $6.50, subject to adjustment. In the event of a stock split or
stock dividend or other dividend or other adjustment to the capital structure
of the Company, including any adjustments to the common stock, the preferred
stock will be adjusted proportionately.
The Series A and Series B stockholders are entitled to vote based on the
number of shares of common stock to which their holdings could be converted.
Common stockholders are entitled to one vote for each share of common stock.
NOTE 3 Equity Incentive Plan
In October, 1998, the Company adopted an Equity Incentive Plan (the
"Plan") which provides for the granting of incentive and nonstatutory options
to consultants and key employees to purchase up to 100,000 shares of the
Company's common stock. Such options are exercisable for a period of 10 years
and generally vest over a four-year period. As of December 31, 1999, there were
30,000 shares available for grant under the Plan.
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Number average
of Exercise
Shares Price
------ --------
<S> <C> <C>
Outstanding at inception (October 2, 1998)................... -- --
Outstanding at December 31, 1998............................. -- --
Options Granted............................................ 70,000 $0.10
------ -----
Outstanding at December 31, 1999............................. 70,000 $0.10
------ -----
Outstanding at March 31, 2000 (unaudited).................... 70,000 $0.10
====== =====
Options exercisable as of December 31, 1999.................. -- --
====== =====
</TABLE>
In 1999, the Company granted options to two non-employees to purchase
35,000 shares each of common stock at an exercise price of $0.10 per share. The
Company recorded compensation expense of $4,377 in 1999, based on the fair
market value at the grant date as determined using a Black-Scholes option
pricing model.
As of December 31, 1999 and March 31, 2000 (unaudited) the exercise price
per share, weighted-average exercise price per share and weighted-average
remaining contractual life of outstanding options were $0.10, $0.10 and 9
years, respectively.
9
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the three months ended March 31, 1999 and 2000 is unaudited)
The options granted become exercisable over four years beginning in 2000.
As of December 31, 1999, no options were exercisable and as of March 31, 2000,
17,500 options (unaudited) were exercisable. The stock option agreement
provides that all options granted shall vest in full and become immediately
exercisable upon a change in control of the Company. See footnote No. 7.
The per share weighted-average fair value of stock options granted during
1999 was $0.06, on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: expected dividend yield
of 0%, risk-free interest rate of 6%, volatility of 80% and an expected life of
4 years.
NOTE 4 Income Taxes
As of December 31, 1999, the Company had available net operating loss
carryforwards ("NOL") of approximately $3,711,000 for federal and state income
tax reporting purposes which are available to offset future federal and state
taxable income, if any, through 2019 and 2009, respectively. The Company also
has research and development tax credit carryforwards of approximately $107,000
for federal income tax reporting purposes which are available to reduce federal
income taxes, if any, through 2019.
As of March 31, 2000, the Company had available net operating loss
carryforwards of approximately $4,459,000 (unaudited) for federal and state
income tax reporting purposes which are available to offset future federal and
state taxable income, if any, through 2020 and 2010, respectively. The Company
also has research and development tax credit carryforwards of approximately
$130,000 (unaudited) for federal income tax reporting purposes which are
available to reduce federal income taxes, if any, through 2020.
The Tax Reform Act of 1986 (the "Act") provides for a limitation on the
annual use of NOL and research and development tax credit carryforwards
(following certain ownership changes, as defined by the Act) that could
significantly limit the Company's ability to utilize these carryforwards. The
Company has experienced and expects in the foreseeable future to experience
additional ownership changes, as defined by the Act, as a result of past and
anticipated future financings. Accordingly, the Company's ability to utilize
the aforementioned carryforwards may be limited. Additionally, because tax laws
limit the time during which these carryforwards may be applied against future
taxes, the Company may not be able to take full advantage of these attributes
for federal and state income tax purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
December 31 March 31, 2000
------------------- --------------
1998 1999
-------- ---------- (unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards..... $676,000 $1,485,000 $1,784,000
Stock-based compensation............. -- 2,000 2,000
Research credit carryforward......... 14,000 107,000 130,000
Organizational costs................. 8,000 8,000 8,000
-------- ---------- ----------
Total gross deferred tax assets..... 698,000 1,602,000 1,924,000
Less valuation allowance.............. 698,000 1,602,000 1,924,000
-------- ---------- ----------
Net deferred taxes.................. $ -- $ -- $ --
======== ========== ==========
</TABLE>
10
<PAGE>
TALARIA THERAPEUTICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information for the three months ended March 31, 1999 and 2000 is unaudited)
The gross deferred tax assets and the valuation allowance shown above
represent the items which reduce the income tax benefit which would result from
applying the federal statutory tax rate to the pre-tax loss and cause no income
tax expense or benefit to be recorded for the periods ended December 31, 1998
and 1999 and March 31, 2000 (unaudited).
The net change in the valuation allowance for the periods ended December
31, 1998 and 1999 and March 31, 2000 was an increase of $698,000, $904,000 and
$322,000 (unaudited), respectively, related primarily to net operating losses
incurred by the Company which are not currently deductible.
The effective tax rate of zero differs from the statutory rate primarily
due to the provision of an allowance against deferred tax assets.
NOTE 5 Management Agreement
On October 2, 1998, the Company entered into a management agreement with
a company (the "Management Company") to provide strategic guidance to the
Company, as well as day-to-day management of the business, administrative and
financial aspects of the Company, including payroll, personnel, insurance,
employee benefits, accounting and tax matters. An officer of the Company serves
as an executive of the Management Company and the Management Company is
affiliated with certain Series A and Series B investors. The management
agreement has an initial one-year term and is automatically renewed for
successive one-year terms unless either party gives written notice 60 days
prior to the expiration of a term. Under terms of the agreement, the Management
Company is paid a management fee of $6,250 per month and an administrative
support fee of $1,000 per month.
Costs incurred for the periods ended December 31, 1998 and 1999 and March
31, 2000 totalled $21,750, $87,000 and $21,750 (unaudited), respectively, and
are included in general and administrative expenses in the accompanying
statement of operations.
In August 1999, the Company entered into another management agreement
related to certain technical aspects of the Company's operations. The agreement
was for a one year term with annual renewals. Initial fees were $30,000 per
month through August 2000, with escalation terms for subsequent renewals. The
agreement will terminate immediately upon a change of control of the Company.
See footnote No. 7.
Costs incurred under this agreement for the periods ended December 31,
1999 and March 31, 2000 were $124,378 and $90,000 (unaudited), respectively.
Note 6 Contingency
The Company has entered into an indemnification agreement with two other
plaintiffs in the patent infringement lawsuit filed by the Company. The Company
has agreed to indemnify those two other parties against any loss they incur
from actions against them arising from the patent infringement litigation.
Note 7 Subsequent Event
On July 31, 2000, the Company agreed to negotiate a non-binding letter of
intent providing for the purchase of the Company by Esperion Therapeutics, Inc.
("Esperion"). Pursuant to the proposed letter of intent, all of the outstanding
shares of stock of the Company would be exchanged for Esperion common stock.
Upon the achievement of certain future milestones, Esperion would make
additional payments in cash or Esperion stock to the Company's stockholders.
The Company's stockholders would also receive deferred contingent payments in
cash or common stock based on future net sales of the product in North America.
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