SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
September 3, 1998
-----------------
Date of Report
(Date of earliest event reported)
Electropharmacology, Inc.
-------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Delaware 0-25828 95-4315412
-------- ------- ----------
(State or other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation) Identification No.)
1109 N.W. 13th Street
Gainesville, Florida 32601
-------------------- -----
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(352) 367-9088
--------------
(Registrant's telephone number, including area code)
1
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT TO APPLICATION OR REPORT
FILED PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
ELECTROPHARMACOLOGY, INC.
FORM 8-K/A
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits and other portions of the Item 7 of its Form 8-K dated
September 3, 1998, and previously filed with the Commission on September 3,
1998, as set forth in the pages attached hereto:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
I. Balance sheets of HealthTech Development, Inc. (a
development stage company) as of June 30, 1998
(unaudited), December 31, 1997 and 1996 (audited) and the
related statements of operations, shareholders' equity
(deficit) and cash flows for the six months ended June 30,
1998 (unaudited) and for the period from December 14, 1993
(inception) to June 30, 1998 (unaudited) and years ended
December 31, 1997, 1996 and 1995 (audited) and for the
period from December 14, 1993 (inception) to December 31,
1997 (audited).
II. Audited balance sheet of Delargen Corporation d/b/a Gemini
Biotech, Inc. (a development stage company) as of December
31, 1996 and the related statements of operations,
stockholder's equity (deficit) and cash flows for the year
ended December 31, 1996 and for the period from January 1,
1997 to June 30, 1997 and from January 1, 1996 (inception)
to June 30, 1997.
III. Balance sheets of Gemini Biotech, Ltd. (a development
stage partnership) as of June 30, 1998 (unaudited) and
December 31, 1997 (audited) and the related statements of
operations, partners' capital (deficit) and cash flows for
the six months ended June 30, 1998 (unaudited) and the
period July 1, 1997 (date of commencement of operations)
to June 30, 1998 (unaudited) and for the period July 1,
1997 (date of commencement of operations) to December 31,
1997 (audited).
(b) Pro Forma Financial Information
I. Pro Forma Condensed Combined Balance Sheet as of June 30,
1998 and the related Pro Forma Condensed Combined
Statement of Operations for the six months ended June 30,
1998 and for the year ended December 31, 1997 giving
effect to (i) the merger of HealthTech Development, Inc.
(a development stage company) with and into
Electropharmacology, Inc.; (ii) the merger of Gemini
Biotech, Ltd. with and into Electropharmacology, Inc.; and
(iii) the sale of the medical device business to AA
Northvale Medical Associates, Inc.
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
HealthTech Development, Inc. (a development stage company)
We have audited the accompanying balance sheets of HealthTech Development, Inc.
(a development stage company) as of December 31, 1997 and 1996, and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
years ended December 31, 1997, 1996 and 1995 and for the period from December
14, 1993 (inception) to December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 HealthTech Development, Inc. (a
development stage company) as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years ended December 31, 1997, 1996
and 1995, and for the period December 14, 1993(inception) to December 31, 1997,
in conformity with generally accepted accounting principles.
The Company is in the development stage and to date has had limited operations.
The continuation of the Company's business is dependent upon its ability to
obtain adequate financing arrangements and, ultimately, future profitable
operations.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses and will need to achieve
profitable operations and obtain adequate financing in order to continue
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 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Ft. Lauderdale, FL
July 17, 1998
3
<PAGE>
<TABLE>
<CAPTION>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
BALANCE SHEETS
June 30, December 31,
-------- -----------
1998 1997 1996
---- ---- ----
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 48 $ 809 $ 3,619
Accounts receivable -- -- 56,000
--------- --------- ---------
Total current assets 48 809 59,619
--------- --------- ---------
Property and equipment 1,931 1,931 1,931
Less accumulated depreciation (965) (772) (386)
--------- --------- ---------
966 1,159 1,545
--------- --------- ---------
$ 1,014 $ 1,968 $ 61,164
========= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 44,500 $ 44,500 $ 114,454
--------- --------- ---------
Total current liabilities $ 44,500 44,500 114,454
--------- --------- ---------
Stockholders' deficit:
Common stock, $.01 par value,1,000,000 shares authorized, 3,247 shares
issued and outstanding on June 30, 1998, 3,247 shares issued and
outstanding on December 31, 1997, 800 shares issued and outstanding on
December 31, 1996
32 32 8
Additional paid in capital 194,522 192,522 55,172
Accumulated deficit during development stage (238,040) (235,086) (108,470)
--------- -------- --------
(43,486) (42,532) (53,290)
--------- -------- --------
$ 1,014 $ 1,968 $ 61,164
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 14, December 14,
1993 1993
(inception) to Six Months (inception) to
June 30, Ended June 30, Year ended December 31, December 31,
-------- -------------- ----------------------- ------------
1998 1998 1997 1997 1996 1995 1997
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 157,662 $ -- $ -- $ -- $ 121,662 $ 36,000 $ 157,662
Cost of sales 133,750 -- -- -- 97,750 36,000 133,750
--------- --------- --------- --------- --------- --------- ---------
Gross profit 23,912 -- -- -- 23,912 -- 23,912
Operating expenses:
General and 156,384 2,664 49,986 89,972 17,838 28,169 153,720
administrative
expenses
Research and
development costs 104,620 300 17,285 34,570 62,750 5,000 104,320
-------- --------- --------- --------- --------- --------- ---------
Total operating
expenses 261,004 2,964 62,271 124,542 80,588 33,169 258,040
-------- --------- --------- --------- --------- --------- ---------
Operating loss (237,092) (2,964) (62,271) (124,542) (56,676) (33,169) (234,128)
--------- --------- --------- --------- --------- --------- ---------
Other income
(expense):
Interest expense (2,198) -- (1,099) (2,198) -- -- (2,198)
Interest income 1,250 10 62 124 448 359 1,240
--------- --------- --------- --------- --------- --------- ---------
(948) 10 (1,037) (2,074) 448 359 (958)
--------- --------- --------- --------- --------- --------- ---------
Net loss $(238,040) $ (2,954) $ (63,308) $(126,616) $ (56,228) $ (32,810) $(235,086)
========= ========= ========= ========= ========= ========= =========
5
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD DECEMBER 14, 1993 (INCEPTION) TO JUNE 30, 1998
<TABLE>
<CAPTION>
Accumulated
Deficit
Common stock Additional During
Number Par paid in Development
Of shares Value capital Stage Total
--------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Common stock issued
December 14, 1993 through
December 31, 1994 666 $ 7 $ 31,022 $ -- $ 31,029
Net loss December 14, 1993
through December 31, 1993 -- -- -- (19,432) (19,432)
--------- --------- --------- --------- ---------
Balance, December 31, 1994 666 7 31,022 (19,432) 11,597
Common stock issued 134 1 7,499 7,500
Capital contributions -- -- 16,151 -- 16,151
Net loss for the year ended
December 31, 1995 -- -- -- (32,810) (32,810)
--------- --------- --------- --------- ---------
Balance, December 31, 1995 800 8 54,672 (52,242) 2,438
Contribution of capital -- -- 500 -- 500
Net loss for the year ended
December 31, 1996 -- -- -- (56,228) (56,228)
--------- --------- --------- --------- ---------
Balance, December 31, 1996 800 8 55,172 (108,470) (53,290)
Issuance of stock for
expenses 822 8 46,139 -- 46,147
Issuance of stock for rights 500 5 28,065 -- 28,070
Issuance of stock for services 800 8 44,904 -- 44,912
Issuance of stock for legal
services 325 3 18,242 -- 18,245
Net loss for the year ended
December 31, 1997 -- -- -- (126,616) (126,616)
--------- --------- --------- --------- ---------
Balance, December 31, 1997 3,247 32 192,522 (235,086) (42,532)
========= ========= ========= ========= =========
Capital Contribution (unaudited) 2,000 2,000
Net loss for the six months ended
June 30, 1998 (unaudited) (2,954) (2,954)
--------- --------- --------- --------- ---------
Balance, June 30, 1998 (unaudited) 3,247 $ 32 $ 194,522 $ 238,040 $ (43,486)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 14,
1993
(inception) to Six Months Year ended December 31,
June 30, Ended June 30, ----------------------
-------- --------------
1998 1998 1997 1997 1996 1995
---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $(238,040) $ (2,954) $ (63,308) $(126,616) $ (56,228) $ (32,810)
provided by operating
activities:
Non-cash professional fees paid in common stock 18,245 -- 9,122 18,245 -- --
Issuance of common stock for expenses
paid by stockholder 46,147 -- 23,074 46,147 -- --
Non-cash compensation charge for issuance of
common stock 44,912 -- 22,456 44,912 -- --
Issuance of common stock for intellectual rights 28,070 -- 14,035 28,070 -- --
Depreciation and amortization 965 193 193 386 386 --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivables -- -- 28,000 56,000 (40,000) (16,000)
Other assets
-- -- -- -- -- 932
Increase (decrease) in:
Accounts payable and accrued expenses 44,500 -- (31,321) (69,954) 97,650 16,800
--------- --------- --------- --------- --------- ---------
Total adjustments 182,839 193 65,559 123,806 58,036 1,732
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by operating activities (55,201) (2,761) (2,251) 2,810 1,808 (31,078)
--------- --------- --------- --------- --------- ---------
Cash flows used for investing activities:
Purchase of property and equipment (1,931) -- -- -- (1,931) --
--------- --------- --------- --------- --------- ---------
Net cash used for investing activities (1,931) -- -- -- (1,931) --
Cash flows from financing activities:
Proceeds from sale of securities 38,529 -- -- -- -- 7,500
Proceeds from capital contribution 18,651 2,000 -- -- 500 16,151
--------- --------- --------- --------- --------- ---------
Net cash from financing activities 57,180 2,000 -- -- 500 23,651
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash 48 (761) (2,251) (2,810) 377 (7,427)
Cash and cash equivalents, beginning -- 809 809 3,619 3,242 10,669
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents, ending $ 48 48 3,060 809 3,619 3,242
========= ========= ========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ - $ - $ - $ - $ - $ -
========= ========= ========= ========= ========= =========
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
December 14,
1993
(inception) to
December 31,
------------
1997
----
<C>
Cash flows from operating activities:
Net income $(235,086)
provided by operating
activities:
Non-cash professional fees paid in common stock 18,245
Issuance of common stock for expenses
paid by stockholder 46,147
Non-cash compensation charge for issuance of
common stock 44,912
Issuance of common stock for intellectual rights 28,070
Depreciation and amortization 772
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivables --
Other assets --
Increase (decrease) in:
Accounts payable and accrued expenses 44,500
---------
Total adjustments 182,646
---------
Net cash provided (used) by operating activities (52,440)
---------
Cash flows used for investing activities:
Purchase of property and equipment (1,931)
---------
Net cash used for investing activities (1,931)
---------
Cash flows from financing activities:
Proceeds from sale of securities 38,529
Proceeds from capital contribution 16,651
---------
Net cash from financing activities 55,180
---------
Net increase (decrease) in cash 809
Cash and cash equivalents, beginning --
---------
Cash and cash equivalents, ending $ 809
=========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ -
=========
</TABLE>
Non cash transactions were as follows:
Legal fees amounting to $18, 245 were paid in 1997 by issuing 325 share of
common stock valued at $56.14 per share.
Operating expenses amounting to $46,147 paid by the officers of the Company
were paid in 1997 by issuing 822 shares of common stock valued at $56.14
per share including interest of $2,198.
Officers were issued 800 shares of common stock for services rendered in
1997, valued at $56.14 per share. An officer was issued 500 shares of common
stock in payment for intellectual rights valued at $56.14 per share.
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization - HealthTech Development, Inc., (the "Company"), was incorporated
in the State of Texas on December 14, 1993. The Company was formed to acquire,
develop and commercialize emerging biomedical technologies. The Company is in
the development stage and its efforts through December 31, 1997, have primarily
involved providing consulting services to other biotech-related companies and
universities.
Cash and cash equivalents - Cash and cash equivalents are defined as cash and
investments that have a maturity of less than three months.
Research and development - Research and development costs are expensed as
incurred. Payments related to the acquisition of technology rights, for which
development work is in process, are expensed and considered a component of
research and development costs.
Income taxes - The Company with the consent of its shareholders, has elected
under the Internal Revenue Code to be an S corporation. In lieu of corporation
income taxes the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
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.
Stock-Based Compensation - The Company accounts for stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no
compensation cost has been recognized for its stock options. The Company
provides additional pro forma disclosures as required under Statement of
Financial Accounting Standard, No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123").
2. GOING CONCERN CONTINGENCY
The Company has minimal capital available to meet future obligations and to
carry out its planned operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern.
In order to continue any significant operations, the Company will have to pursue
other sources of capital, such as raising equity, and the acquisition of other
profitable operations. The Company is also negotiating a sale of the Company to
another biotech-related company. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
8
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS
The Company was paid for consulting services it performed for a related biotech
company. The services were provided pursuant to an oral agreement. The biotech
company was related by having common shareholders. The Company paid its former
President for performing the consulting services. Consulting income from the
related company was $80,000 and $36,000, respectively for 1996 and 1995.
Consulting service expense was charged for the same amount in each year. The
Company paid its former President $57,500, $40,250, and $32,000 respectively for
1997, 1996, and 1995 for these as well as other consulting services.
4. STOCKHOLDERS' EQUITY
From inception through December 31, 1994, the founding shareholders were issued
666.7 shares for total consideration of $31,029. On December 31, 1995, the
Company sold 133.3 shares to an unrelated third party for $7,500 or $56.14 per
share. In 1995, the shareholders contributed $16,151 to capital. In 1996, one
shareholder contributed $500 to capital.
On January 31, 1997, the Company issued 822 shares of common stock valued at
$56.14 per share for expenses totaling $46,147, paid by the present Chairman of
the Board when he was the President and Chief Executive Officer of the Company.
The expenses principally related to 1996 and were charged in that period.
Interest expense of $2,198 was included in the agreement. At the same time, the
Company issued 500 shares in exchange for the assignment and transfer of all his
rights with respect to possible business opportunities involving the following:
Physical Optics Corporation, GeneQuest Incorporated and Baxter Healthcare. These
rights were valued at $56.14 per share or a total of $28,070. In addition, the
Company issued 200 shares to the Chairman in exchange for an agreement to commit
to devote a portion of his time during 1997 to attempt to maximize the value of
the Company. The Company valued this commitment at $11,228 or $56.14 per share.
On the same date, the Company issued 600 shares to the present President in
exchange for an agreement to commit to devote a portion of his time during 1997
to attempt to maximize the value of the Company. The Company valued this
commitment at $33,684 or $56.14 per share.
On July 15, 1997, the Company issued to its attorney 325 shares of common stock
for legal services totaling $18,245. The shares were issued based on $56.14 per
share.
On January 31, 1997, the Company granted stock options for 154 shares of common
stock to the President and three shareholders at an exercise price of $1,000 per
share, exercisable at any time prior to January 1, 1998. The options were not
exercised and have expired.
On December 29, 1995, the Company granted stock options for 45 shares of common
stock to two individuals at an exercisable price of $1,000 per share,
exercisable at any time prior to January 1, 1998. The options were granted as an
inducement for grantees to invest $700,000 each to purchase shares of common
stock. The options were not exercised and have expired.
9
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
4. STOCKHOLDERS' EQUITY (continued)
The options outstanding at the end of each of the last three years and changes
in options in each of those years are summarized as follows:
Weighted
Number of Exercise price Average Price
Shares Per share Per share
------ --------- ---------
Outstanding, January 1, 1995 - - -
Granted 45 1,000 1,000
Exercised - - -
------- ---------- ---------
Outstanding, December 31, 1995 45 1,000 1,000
Granted - - -
Exercised - - -
Outstanding, December 31, 1996 45 1,000 1,000
------- ---------- ---------
Granted 154 1,000 1,000
Exercised - - -
------- ---------- ---------
Outstanding, December 31, 1997 $ 199 $ 1,000 1,000
======= ========== =========
Options exercisable at the end of each fiscal year are as follows:
Weighted
Number of Exercise price Average Price
Shares Per share Per share
------ --------- ---------
December 31,1995 45 $ 1,000 $ 1,000
December 31, 1996 45 1,000 1,000
December 31, 1997 199 1,000 1,000
The options outstanding at December 31, 1997 expired on January 1, 1998.
FASB Statement 123, "Accounting for Stock based Compensation"("FASB 123"),
requires the Company to provide pro forma information regarding net income and
earning per share as if compensation cost for the Company's options or warrants
has been determined in accordance with the fair value based method prescribed in
FASB 123. The Company estimates the fair value of each stock option or warrant
at the grant date by using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in the current period: a
dividend yield of 0%, estimated volatility of 0%, a risk-free interest rate of
5.50%, and an expected life of nine month to two years. Under the accounting
provisions of FASB 123, the Company's net loss and net loss per common share
would have been unchanged.
10
<PAGE>
HEALTHTECH DEVELOPMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
5. RESEARCH AND DEVELOPMENT ACTIVITIES
The Company was formed in 1993 to acquire develop and commercialize emerging
biomedical technologies. The Company has entered into options to license and/or
license agreements with certain national laboratories and universities. The
Company initially focused on technologies related to the development of
vaccines, diagnostics for cancer and certain biodegradable materials and
achieved controlled release of biological substances to improve the function of
orthopedic devices. The Company abandoned two development projects related to
cancer vaccine development and biomaterials for bone healing with orthopedic
devices. In 1997, certain numbers of the Company's exclusive licenses were
terminated by the licensors as a result of discontinuation of related
development activities by the Company. The Company is the assignee of
intellectual property rights, including pending patent applications, with
respect to certain technologies related to biodegradable materials for the
controlled release of pharmaceutically active materials, the design of small
molecule drugs for the treatment of cancer spread and the creation of genetic
databases and genetic tests for certain diet-regulated diseases. The Company
maintains an exclusive license to a United States patent related to a method of
detection of certain malignant cancers, although there can be no assurance that
the Company will be able fund further development (see note 2 Going Concern
Contingency). The Company's management does not believe that the termination of
this license will have a material adverse effect on the Company's contemplated
product development programs.
The Company entered into two Sponsored Research Agreements with an educational
institution on January 1, 1996, which expired on December 31, 1997. The Company
was to sponsor the research and obtain the rights to intellectual property
developed during the course of such research with a view to profitable
commercialization of such intellectual property. The Company made the initial
payments of $6,250 on February 8, 1996. Additional payments of $152,061 were due
on September 1, 1996 and $93,447 on September 1, 1997 and were not paid. The
Company was in default of the agreements and the agreements were terminated. The
Company had total liability under the terms of the agreements, to pay all
reasonable expenses incurred or committed to be expensed as of the effective
termination date, including salaries for appointees for the remainder of their
appointment. Although the Company will not get the intellectual rights, if any,
to the research, it has provided an estimate of $25,000 to meet future
contingencies related to this agreement.
6. SUBSEQUENT EVENT
On August 24, 1998, the Company split its shares 1,950.53 for one. The Company
was merged into Electropharmacology, Inc. ("EPi"), with the shareholders of HTD
receiving an aggregate of 6,172,095 shares of the Company's common stock (such
number of shares being substantially equivalent to the number of shares of the
EPi's common stock outstanding at such time, or 6,333,385 shares).
11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Delargen Corporation
d/b/a Gemini Biotech, Inc.
We have audited the accompanying balance sheet of Delargen Corporation d/b/a
Gemini Biotech, Inc. (a development stage company) as of December 31, 1996 and
the related statements of operations, stockholder's equity (deficit) and cash
flows for the year ended December 31, 1996 and for the period from January 1,
1997 to June 30, 1997 and from January 1, 1996 (inception) to June 30, 1997.
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 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 Delargen Corporation d/b/a
Gemini Biotech, Inc. (a development stage company) as of December 31, 1996 and
the results of its operations and its cash flows for the periods from January 1,
1997 to June 30, 1997 and from January 1, 1996 (inception) to June 30, 1997 in
conformity with generally accepted accounting principles.
The Company is in the development stage and to date has had limited operations.
The continuation of the Company's business is dependent upon its ability to
maintain future profitable operations.
September 28, 1998
12
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,519
Accounts receivable 4,000
Accounts receivable-related parties 31,426
----------
Total current assets 68,945
Property and equipment, net 92,044
Other assets:
Investment in partnership 18,000
Organizational and loan costs, net 575
----------
Total other assets 18,575
----------
Total assets $ 179,564
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt $ 36,324
Accounts payable 4,949
Note payable-related party 5,000
----------
Total current liabilities 46,273
Long-term debt 120,569
Stockholder's equity:
Common stock--$.01 par value; 1,000,000 authorized; 1,000
100,000 shares outstanding
Additional paid-in capital 40,000
Deficit accumulated during the development stage (28,278)
----------
Total stockholder's equity 12,722
----------
Total liabilities and stockholder's deficit $ 179,564
==========
</TABLE>
The Accompanying notes are an integral part of these financial statements
13
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
January 1, January 1, 1996 January 1, 1996
1997 (Inception) (Inception)
to to to
June 30, 1997 December 31, 1996 June 30, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Sales $ 16,244 $ 10,107 $ 26,351
Cost and expenses:
Cost of sales 2,544 6,060 8,604
General and administrative 36,149 16,743 52,892
----------------- ----------------- -----------------
Total cost and expenses 38,693 22,803 61,496
----------------- ----------------- -----------------
Loss from operations (22,449) (12,696) (35,145)
Other expenses:
Interest expense 5,759 15,582 21,341
----------------- ----------------- -----------------
Net loss $ (28,208) $ (28,278) $ (56,486)
================= ================= =================
</TABLE>
The Accompanying notes are an integral part of these financial statements
14
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
$.01 Par Value Additional During the
------------------------------ Paid-in Development
Shares Amount Capital Stage
--------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Common stock issued at inception
of Company 100,000 $ 1,000 $ 40,000
Net loss--January 1, 1996 (inception)
through December 31, 1996 $ (28,278)
--------------- ------------ ------------- ----------------
Balance--December 31, 1996 100,000 1,000 40,000 (28,278)
Net loss--January 1, 1997
through June 30, 1997 (28,208)
--------------- ------------ ------------- ----------------
Balance--June 30, 1997 100,000 $ 1,000 $ 40,000 $ (56,486)
=============== ============ ============= ================
</TABLE>
The Accompanying notes are an integral part of these financial statements
15
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception Inception
January 1, January 1, January 1,
1997 1996 1996
to to to
June 30, December 31, June 30,
1997 1996 1997
---------------- ----------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (28,208) $ (28,278) $ (56,486)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,436 1,123 11,559
Changes in operating assets and liabilities: -
(Increase) in accounts receivable 4,000 (4,000) 0
(Increase) in accounts receivable - related parties 31,426 (31,426) 0
(Increase) in other assets - (575) (575)
Increase in accounts payable (5,556) 4,949 (607)
---------------- ----------------- ---------------
Total adjustments 40,306 (29,929) 10,377
---------------- ----------------- ---------------
Net cash used for operating activities 12,098 (58,207) (46,109)
Cash flows from investing activities:
Purchase of equipment and other fixed assets (26,788) (93,167) (119,955)
Investment in partnership (6,000) (18,000) (24,000)
---------------- ----------------- ---------------
Net cash used for investing activities (32,788) (111,167) (143,955)
Cash flows from financing activities:
Increase in shareholder debt 1,476 1,476
Increase in note payable-related parties - 5,000 5,000
Proceeds from advances on SBA loan - 75,000 75,000
Payments to reduce SBA loan (5,357) (3,571) (8,928)
Proceeds from capital lease financing 87,560 87,560
Payments to reduce capital lease financing (8,454) (2,096) (10,550)
Proceeds from stock issuance 41,000 41,000
---------------- ----------------- ---------------
Net cash provided by financing activities (12,335) 202,893 190,558
---------------- ----------------- ---------------
Net increase (decrease) in cash (33,025) 33,519 494
Cash at beginning of period 33,519 - -
---------------- ----------------- ---------------
Cash at end of period $ 494 $ 33,519 $ 494
================ ================= ===============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 5,759 $ 15,582 $ 21,341
================ ================= ===============
Cash paid for income tax during the period $ - $ - $ -
================ ================= ===============
</TABLE>
The Accompanying notes are an integral part of these financial statements
16
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization - Delargen Corporation d/b/a Gemini Biotech, Inc. (the
"Company") is a biotechnology company incorporated in Texas on December 7, 1995.
It commenced operations on January 1, 1996 as a provider of synthesis of
nucleobases, their analogs and polymers for research purposes. On May 31, 1996,
the Company filed an assumed name certificate and began doing business as Gemini
Biotech, Inc. The Company is in the development stage and its efforts from
January 1, 1996 (inception) through June 30, 1997 primarily involved laboratory
services to other biotech companies or universities.
Cash and cash equivalents - Cash and cash equivalents are defined as cash and
investments that have a maturity of less than three months.
Inventories - Inventory is stated at cost, which is the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. The lives range from three to five years.
Revenue recognition - The Company recognizes revenue when the products are
shipped to the customer.
Organizational costs - Significant costs related to the organization of the
company were deferred and amortized over a period of five years.
Income taxes - The Company accounts for income taxes on an asset and liability
approach to financial accounting. Deferred income tax assets and liabilities are
computed annually for the difference between the financial statement and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period, plus or minus the change during the period
in deferred tax assets and liabilities. The Company made no provision for taxes
because there has not been any taxable profit since its inception.
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.
17
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
2. GOING CONCERN CONTINGENCY
The Company incurred losses for the year ended December 31, 1996 and for periods
from January 1, 1997 to June 30, 1997 and from January 1, 1996 to June 30, 1997.
Management's plans in regard to these matters are to increase the revenue for
the laboratory service business and to commence research activities with its
scientific staff, and to obtain grant funding.
The Company is also negotiating a sale of the Company to another biotech-related
company. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 5,617
Laboratory equipment 87,550
---------------
93,167
Less: accumulated depreciation (1,123)
---------------
Property and equipment, net $ 92,044
===============
</TABLE>
Depreciation expense charged to income was $1,123 in 1996.
4. LOAN AND NOTE AGREEMENTS
On April 30, 1996, the Company entered into loan and note agreement with a bank
and the U. S. Small Business Administration (SBA) for $75,000. The SBA
guarantees eighty percent of the loan. The loan is to be repaid in eighty-four
principal installments of $892.86 plus interest. The interest rate is two and
three quarters of a percent over the minimum prime rate as published in the
Money Rate Section of the Wall Street Journal The final payment is due March 30,
2003. Collateral for the loan is all of the Company's equipment, inventory and
accounts receivable. In addition, the loan is guaranteed by the Company's
stockholder. As of December 31, 1996 the outstanding loan balance was $71,428.
Maturities of the note payable for the next five years are as follows:
December 31, Amount
------------ ------
1997 $ 10,714
1998 10,714
1999 10,714
2000 10,714
2001 10,714
Thereafter 17,858
18
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
5. CAPITAL LEASE AGREEMENTS
On January 1, 1998 the Company entered into a capital lease agreement for the
acquisition of laboratory equipment at a cost of $72,000. The lease agreement
required thirty-six payments of $2,241 and one balloon payment of $7,212.
Payment amounts included principal, interest at a rate of 13.319% and taxes. In
addition to the collaterized equipment covered by the lease, payments required
under the lease agreement were guaranteed by the Company's stockholder. For
financial reporting purposes, minimum lease payments relating to the equipment
have been capitalized. The lease expires December 2000. The leased property
under capital lease as of December 31, 1996 had a cost of $72,000, accumulated
amortization of $0 and a net book value of $72,000. Amortization of the leased
property is included in depreciation expense.
The future minimum lease payments under capital lease and the net present value
of the future minimum lease payments at December 31, 1996 were as follows:
Total minimum lease payments $ 87,702
Amount representing interest 15,702
Present value of net minimum lease payments 72,000
Current portion 19,087
Long-Term capital lease obligation $ 52,913
6. RESEARCH AND DEVLOPMENT ACTIVITES
The Company was formed December 1995 and as of January 1996 started to acquire,
develop and commercialize biomedical technologies and products. The Company is
engaged in the custom synthesis of oligonucleotides, peptides, genes and novel
nucleosides. The research activities focus on the design and synthesis of
therapeutic drugs and diagnostic agents using nucleic acid based compounds. The
Company has built a library of proprietary and exclusively licensed compounds
for the treatment of cancer and rheumatoid arthritis.
7. INCOME TAXES
The tax effect of the net operating losses were recorded in 1997 and 1996 as a
deferred tax asset since the realization was uncertain. The Company did not
record a federal or state income tax expense for 1997. At December 31, 1997, the
Company has approximately $56,485 in federal tax loss carryforwards that expires
in 2011.
19
<PAGE>
DELARGEN CORPORATION
D/B/A GEMINI BIOTECH, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (Continued)
8. SUBSEQUENT EVENTS
On July 1, 1997, the Company transferred all its assets and business to Gemini
Biotech, Ltd., ("Gemini") for a one percent general partnership interest in the
partnership. On August 18, 1998, the partners transferred all the limited
partnership interests in Gemini, a privately held Texas limited partnership and
all the stock of the Company, the general partner, to Gemini Health Technologies
L.P., a newly-formed Delaware limited partnership (the Partnership). The
Partnership is owned by a publicly held company, Electropharmacology, Inc.
("EPi"). The assets are being exchanged for 6,000,000 partnership units in the
Partnership, which partnership units are exchangeable, subject to certain
restrictions, for shares of the EPi's common stock, on the basis of one share of
EPi's common stock for each partnership unit (subject to adjustment in the case
of certain events concerning EPi and/or the Partnership).
The effect of the transaction is that the business previously conducted by EPi
and Gemini is now being conducted by the Partnership and Gemini, with EPi Sub
being the general partner of the Partnership and the Jayaramans being the
limited partner of the partnership, and the Partnership being the limited
partner of Gemini and GBI remaining as the limited partner of the Partnership.
At such time as the Jayaramans exchange all of their partnership units in the
Partnership for shares of EPi's common stock, it is expected that the
Partnership and Gemini will be dissolved, EPi Sub will be dissolved and all of
such businesses will be conducted by EPi.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Partners and
Limited Partners of
Gemini Biotech, Ltd.
We have audited the accompanying balance sheet of Gemini Biotech, Ltd. (a
development stage partnership) as of December 31, 1997 and the related
statements of operations, partners' capital (deficit) and cash flows for the
period July 1, 1997 (date of commencement of operations) to December 31, 1997.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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 Gemini Biotech, Ltd. as of
December 31, 1997 and the results of its operations and its cash flows for the
period July 1, 1997 to December 31, 1997 in conformity with generally accepted
accounting principles.
The Partnership is in the development stage and to date has had limited
operations. The continuation of the Partnership's business is dependent upon its
ability to maintain future profitable operations.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
financial statements, the Partnership has incurred a significant loss in the
period from July 1, 1997 to December 31, 1997 and has a net capital deficiency
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
Partnership was not in compliance with certain of the ratios relating to net
work contained in a loan obtained from an insurance company. The insurance
company currently has the right to accelerate payment of the note. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
June 30, 1998
21
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,407 $ 454,992
Cash-restricted 235,657 235,657
Accounts receivable 57,697 43,090
Inventory 7,528 5,000
Prepaid expense -- 3,125
----------- -----------
Total current assets 380,488 741,864
----------- -----------
Property and equipment, net 252,976 185,864
----------- -----------
Other assets:
Organizational and loan costs, net 67,034 71,737
Deposits 3,350 3,350
----------- -----------
Total other assets 70,384 75,087
----------- -----------
$ 703,848 $ 1,002,815
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 97,185 $ 97,185
Accounts payable -- 26,818
Accrued expenses 90,840 15,408
Sales tax payable -- 3,748
----------- -----------
Total current liabilities 188,025 143,159
----------- -----------
Long-term debt 932,791 1,180,325
----------- -----------
Partnership capital (deficit):
General partner (85,656) (101,573)
Limited partners (331,312) (219,096)
----------- ------------
Total partnership capital (deficit) (416,967) (320,669)
----------- ------------
$ 703,848 $ 1,002,815
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
22
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the Period
Six Months July 1, 1997 July 1, 1997
ended (commencement) to (commencement) to
June 30, June 30 December 31,
-------- ------- ------------
1998 1998 1997
---- ---- ----
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Sales, net of sales returns and $ 416,962 $ 534,980 $ 118,018
allowances
Cost of sales (205,817) (298,436) (92,619)
--------------- ---------------- ----------------
Gross profit 211,145 236,544 25,399
--------------- ---------------- ----------------
Selling, general and administrative (327,681) (520,850) (193,169)
--------------- ---------------- ----------------
expenses
Loss from operations (116,536) (284,306) (167,770)
Other income (expense):
Interest expense - (71,622) (71,622)
Interest income 6,584 19,617 13,033
--------------- ---------------- ----------------
Total other income (expense) 6,584 (52,005) (58,589)
--------------- ---------------- ----------------
Net loss $ (109,952) $ (336,311) $ (226,359)
=============== ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
STATEMENT OF PARTNERSHIP CAPITAL (DEFICIT)
FOR THE PERIOD JULY 1, 1997 (date of commencement of operations)
TO JUNE 30, 1998
<TABLE>
<CAPTION>
General Limited Limited
Partner Partner Partner Total
------- ------- ------- -----
<S> <C> <C> <C> <C>
Profit percentage 1% 49.5% 49.5% 100.%
=============== ============ =========== ===========
Contribution of assets $ - $ 2,500 $ 2,500 $ 5,000
Distributions (99,310) - - (99,310)
Net loss during development
Stage (2,263) (112,048) (112,048) (226,359)
-------------- ------------ ------------- -----------
Balance, December 31, 1997 $ (101,573) $ (109,548) $(109,548) $(320,669)
-------------- ------------ ------------- -----------
Net loss for six months ended
June 30, 1998 (unaudited) $ (1,100) $ (54,426) $ (54,426) $(109,952)
Distributions 17,018 (1,682) (1,682) 13,654
--------------- ------------ ------------- -----------
Balance, June 30, 1998 (unaudited) $ (85,655) $ (165,656) $(165,656) $ 416,967
=============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Period
Six Months July 1, 1997 July 1, 1997
Ended (commencement) to (commencement) to)
June 30, 1998 June 30, 1998 December 31, 1997
------------- ------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (109,952) $ (336,311) $ (226,359)
------------ ------------ ------------
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 40,005 68,410 28,405
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (14,607) (57,697) (43,090)
Inventory (2,528) (7,528) (5,000)
Prepaid expense 3,125 -- (3,125)
Deposits -- (3,350) (3,350)
Increase (decrease) in:
Accounts payable (26,818) -- 26,818
Accrued expenses 72,540 87,948 15,408
Sales tax payable (3,748) -- 3,748
------------ ------------ ------------
Total adjustments 67,469 87,783 19,814
------------ ------------ ------------
Net cash used in operating activities (41,983) (248,528) (206,545)
------------ ------------ ------------
Cash flows used for investing activities:
Purchase of property and equipment (98,714) (306,608) (207,894)
Organizational and loan costs incurred (3,700) (81,812) (78,112)
------------ ------------ ------------
Net cash used in investing activities (102,414) (388,420) (286,006)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from note payable -- 1,315,000 1,315,000
Principal payments on note payable 247,534) (285,024) (37,490)
Distributions to general partner (17,018) (116,328) (99,310)
Contributions by limited partners 3,364 8,364 5,000
------------ ------------ ------------
Net cash provided by financing activities (261,188) 922,012 1,183,200
------------ ------------ ------------
Net increase (decrease) in cash (405,585) 285,064 690,649
Cash and cash equivalents, beginning 690,649 -- --
Cash and cash equivalents, ending $ 285,064 $ 285,064 $ 690,649
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 56,312 $ 127,934 $ 71,622
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization - Gemini Biotech, Ltd. (the "Partnership") is a
biotechnology partnership formed in Texas on January 15, 1997. It commenced
operations on July 1, 1997 as a provider of synthesis of nucleobases, their
analogs and polymers for research purposes. The partnership was formed by the
contribution of assets from its general partner Delargen Corporation and its
limited partners Krishna Jayaraman and Sharma Jayaraman. The general partner
contributed a service business and laboratory equipment at book value. Since the
assets were less than the liabilities assumed, the partnership recorded a
distribution of $99,310. The limited partners contributed their interest in
certain inventory of nucleobases and polymers. The inventory was contributed at
the partners' cost of $5,000. The Partnership is in the development stage and
its efforts through December 31, 1997 primarily involved laboratory services to
other biotech companies or universities.
Cash and cash equivalents - Cash and cash equivalents are defined as cash and
investments that have a maturity of less than three months.
Inventories - Inventory is stated at cost, which is the lower of cost or market.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. The lives range from three to seven years. Leasehold
improvements are being amortized over the remaining term of the lease of 18
months.
Revenue recognition - The Partnership recognizes revenue when the products are
shipped to the customer.
Deferred Loan costs - The Partnership incurred costs in obtaining financing
which have been deferred and are being amortized over 101 months.
Organizational costs - Significant costs related to the organization of the
partnership are deferred and amortized over a period of five years.
Research and development - Research and development costs are expensed as
incurred.
Income Taxes - The Company is formed as a partnership. All taxable income or
loss flows through to the partners. Accordingly, no income tax expense or
liability is recorded in the accompanying financial statements.
Fair Value of Financial Instruments - The fair value of the Partnership's
financial instruments such as account receivables, accounts payable, and notes
payable approximate their carrying value.
26
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
2. GOING CONCERN CONTINGENCY
The Partnership incurred a significant loss for the period from July 1, 1997 to
December 31, 1997 and had a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. The Partnership was not in
compliance with certain of the ratios relating to net work contained in a loan
obtained from an insurance company. The insurance company currently has the
right to accelerate payment of the note. Management's plans in regard to these
matters are to increase the revenue for the laboratory service business and to
commence research activities with its scientific staff, and to obtain grant
funding.
The Partnership is also negotiating a sale of the Partnership to another
biotech-related company. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Laboratory equipment $ 179,775
Furniture and fixtures 9,291
Computers 12,874
Leasehold improvements 5,954
---------------
207,894
Less: accumulated depreciation and
Amortization 22,030
---------------
Property and equipment, net $ 185,864
===============
</TABLE>
Depreciation and amortization expense charged to income was $22,030 in 1997.
27
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
NOTES TO FINANCIAL STATEMENTS
4. LOAN AND NOTE AGREEMENTS
On June 27, 1997, the Partnership entered into loan and note agreements (the
"Agreement") with an insurance company in the amount of $1,315,000. The loan
amortizes over 101 payments ending July 1, 2006. Interest is at two points over
prime. At December 31, 1997, the rate was 10.50%. The collateral for the note is
all the Partnership's assets including accounts receivable, inventory, property
and equipment owned by the Partnership and to be acquired in the future. In
addition, the loan is guaranteed by the Rural Biological Science Department of
the Federal Drug Administration. The limited partners have personally guaranteed
the repayment of this indebtedness.
As of December 31, 1997, the Partnership had been advanced $1,079,343 of the
total loan. The insurance company had recorded the transaction as though the
partnership borrowed the entire $1,315,000 at the inception of the loan. The
insurance company had retained the balance as of December 31, 1997 of $235,657
in a bank. The amount is restricted awaiting documentation for the Partnership
to draw down the balance.
The Agreement states the Partnership must maintain certain financial covenants
principally relating to working capital, fixed charge ratios and net worth. The
covenants also include a limitation on compensation and distributions. All of
the amounts outstanding under the Agreement will become due and payable if an
event of default occurs. The Partnership was not in compliance with certain of
the ratios relating to net worth. The insurance company currently has the right
to accelerate payment of the note.
Maturities of the note payable for the next five years are as follows:
<TABLE>
<CAPTION>
December 31, Amount
<S> <C>
1998 $ 97,185
1999 90,909
2000 121,273
2001 134,688
2002 149,531
Thereafter 683,924
------------
$ 1,277,510
============
</TABLE>
5. RESEARCH AND DEVLOPMENT ACTIVITES
The Partnership was formed in 1997 to acquire, develop and commercialize
biomedical technologies and products. The Partnership is engaged in the custom
synthesis of oligonucleotides, peptides, genes and novel nucleosides. The
research activities focus on the design and synthesis of therapeutic drugs and
diagnostic agents using nucleic acid based compounds. The Partnership has built
a library of proprietary and exclusively licensed compounds for the treatment of
cancer and rheumatoid arthritis.
28
<PAGE>
GEMINI BIOTECH, LTD.
(A Development Stage Partnership)
NOTES TO FINANCIAL STATEMENTS
6. CONCENTRATION OF CREDIT RISK AND SALES
During the year the Partnership maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Partnership does not believe that there is a significant risk
in having these balances in one financial institution. The cash balance at
December 31, 1997 was $454,992.
One customer accounted for approximately 41% of the Partnership's sales for the
period July 1, 1997 (date of commencement of operations) to December 31, 1997.
7. COMMITMENTS AND CONTINGENCIES
The Partnership leases its office and laboratory facility under a 20-month lease
expiring February 28, 1999. The monthly rental is $3,350 and pass through of
expenses. Rent expense was $20,100 for the period ended December 31, 1997.
Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1997, for each of the
next 5 years and in the aggregate are:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ------
<S> <C>
1998 $ 40,100
1999 6,700
-----------
$ 46,800
===========
</TABLE>
8. SUBSEQUENT EVENTS
On August 18, 1998, the partners transferred all the limited partnership
interests in Gemini, a privately held Texas limited partnership and all the
stock of Delargen Corp., the general partner, to Gemini Health Technologies
L.P., a newly-formed Delaware limited partnership (the Partnership). The
Partnership is owned by a publicly held company, Electropharmacology, Inc.
("EPi"). The assets are being exchanged for 6,000,000 partnership units in the
Partnership, which partnership units are exchangeable, subject to certain
restrictions, for shares of the EPi's common stock, on the basis of one share of
EPi's common stock for each partnership unit (subject to adjustment in the case
of certain events concerning EPi and/or the Partnership).
The effect of the transaction is that the business previously conducted by EPi
and Gemini is now being conducted by the Partnership and Gemini, with EPi Sub
being the general partner of the Partnership and the Jayaramans being the
limited partner of the partnership, and the Partnership being the limited
partner of Gemini and GBI remaining as the limited partner of the Partnership.
At such time as the Jayaramans exchange all of their partnership units in the
Partnership for shares of EPi's common stock, it is expected that the
Partnership and Gemini will be dissolved, EPi Sub will be dissolved and all of
such businesses will be conducted by EPi.
29
<PAGE>
Electropharmacology, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 1998
<TABLE>
<CAPTION>
Merger
------------------------------
Historical Historical
--------------------- -------------
ASSETS Pro Forma Pro Forma
- ------ EPi HTD Adjustments Combined GBLP
--------- --------- ----------------------------- --------------- -------------
<S> <C> <C> <C> <C>
Current assets :
Cash 62,465 48 62,513 285,064
Trade accounts receivable, net 126,723 126,723 57,697
Inventory 159,043 159,043 7,528
Trade notes and other receivables 2,181 2,181 30,200
Prepaid expenses 161,962 161,962 -
----------- --------- ------------ ------------ ----------
Total current assets 512,374 48 - 512,422 380,488
----------- --------- ------------ ------------ ----------
Rental and other equipment, net 568,497 966 569,463 252,976
Patents & Organization Cost, net 86,088 86,088 67,034
Deposits 5,075 5,075 3,350
Acquired Developed Technology -
Investment in ADM Tronics -
----------- --------- ------------ ------------ ----------
Total Assets 1,172,034 1,014 - 1,173,048 703,848
=========== ========= ============ ============ =========
LIABILITIES AND NET CAPITAL DEFICIENCY
- --------------------------------------
Current liabilities:
Note Payable 719,276 719,276 97,185
Accounts payable 509,330 44,500 553,830 (480)
Accrued expenses 308,224 308,224 68,958
Accrued commissions 14,262 14,262 -
Accrued payroll 1,767 1,767 22,361
Customer deposits - -
Deferred Revenue 75,000 75,000
Notes payable to related parties 65,926 63,654 (4) 129,580
-
----------- --------- ------------ ------------ ----------
Total current liabilities 1,693,785 44,500 63,654 1,801,939 188,025
----------- --------- ------------ ------------ ----------
Long term Note Payable 90,260 90,260 932,791
Minority Interest in Limited
Partnership
----------- --------- ------------ ------------ ----------
Total Liabilities 1,784,045 44,500 63,654 1,892,199 1,120,816
=========== ========= ============ ============ =========
Commitments and contingencies
Net capital deficiency/Equity:
Convertible Preferred Stock 2,430 (2,430) (6) -
Common Stock 41,325 32 80,409 (1), (6) 121,766
Additional paid-in capital 15,277,249 194,522 1,703,225 (1) 17,174,996
Deferred Compensation (67,678) (67,678)
General Partner (1%) (85,656)
Limited Partners (99%) 5,000
Deficit/Retained Earnings (15,865,337) (238,040) (1,844,858)(1), (4),(6) (17,948,235) (336,312)
--------- --------- ------------ ------------ ---------
Net capital deficiency/Total
Equity (612,011) (43,486) (63,654) (719,151) (416,967)
----------- --------- ------------ ------------ ----------
Total liabilities and net
capital deficiency 1,172,034 1,014 - 1,173,048 703,848
=========== ========= ============ ============ =========
<PAGE>
Electropharmacology, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 1998
(RESTUBBED TABLE)
Medical Device
Merger Divestiture
-------------------------- ------------------
Pro Forma
Pro Forma Pro Froma Pro Forma Combined
Adjustments Combined Adjustments (as adjusted)
-------------- ----------- ------------------ --------------
ASSETS
- ------
Current assets :
Cash 347,577 135,000 (3) 482,577
Trade accounts receivable, net 184,420 184,420
Inventory 730,000 (2) 896,571 (152,233) (3) 744,338
Trade notes and other receivables 32,381 32,381
Prepaid expenses 161,962 161,962
----------- ---------- ---------------- ------------
Total current assets 730,000 1,622,910 (17,233) 1,605,677
----------- ---------- ---------------- ------------
Rental and other equipment, net 822,439 (613,466) (3) 208,973
Patents & Organization Cost, net 153,122 153,122
Deposits 8,425 8,425
Acquired Developed Technology - -
Investment in ADM Tronics - 606,667 (3) 606,667
----------- ---------- ---------------- -----------
Total Assets 730,000 2,606,896 (24,032) 2,582,864
=========== ========== ================ ===========
LIABILITIES AND NET CAPITAL DEFICIENCY
- --------------------------------------
Current liabilities:
Note Payable 816,461 (672,750) (3), (5) 143,711
Accounts payable 553,350 (48,169) (3), (5) 505,181
Accrued expenses 377,182 (29,081) (3), (5) 348,101
Accrued commissions 14,262 14,262
Accrued payroll 24,128 24,128
Customer deposits - -
Deferred Revenue 75,000 75,000
Notes payable to related parties 129,580 129,580
- -
----------- ---------- ---------------- ------------
Total current liabilities - 1,989,964 (750,000) 1,239,964
----------- ---------- ---------------- ------------
Long term Note Payable 1,023,051 1,023,051
Minority Interest in Limited
Partnership 2,422,985 (2) 2,422,985 2,422,985
----------- ---------- ---------------- ------------
Total Liabilities 2,422,985 5,436,000 (750,000) 4,686,000
=========== ========== ================ ============
Commitments and contingencies
Net capital deficiency/Equity:
Convertible Preferred Stock - -
Common Stock 121,766 3,226 (3), (6) 124,992
Additional paid-in capital 17,174,996 96,774 (3), (6) 17,271,770
Deferred Compensation (67,678) (67,678)
General Partner (1%) 87,919 (2) 2,263 2,263
Limited Partners (99%) 219,096 (2) 224,096 224,096
Deficit/Retained Earnings (2,000,000) (2) (20,284,547) 625,968 (3), (6) (19,658,579)
----------- ---------- ---------------- ------------
Net capital deficiency/Total
Equity (1,692,985) (2,829,104) 725,968 (2,103,136)
----------- ---------- ---------------- ------------
Total liabilities and net
capital deficeincy 730,000 2,606,896 (24,032) 2,582,864
=========== ========== ================ ============
</TABLE>
<PAGE>
(1) To reflect the elimination of HTD equity accounts, issuance of EPI shares
and allocation of the purchase price in excess of net tangible assets
acquired, see Note 2.
(2) To reflect the elimination of the GBLP equity accounts, issuance
of EPI shares and allocation of the purchase price in excess of net
tangilble assets acquired, see Note 2.
(3) To reflect the sale of the Medical Device Business for $150,000 cash
(net of $15,000 registration fee) and ADM stock (2,925,000 shares) pursuant
to the Asset Purchase Agreement.
(4) To record a related party payable of $63,654 related to the exercise of
244,823 options issued to the President as if the change in control occurred
on June 30, 1998.
(5) To record the settlement of certain legal expenses ($100,000) through the
issuance of common shares. See Note 5.
(6) To record the issuance of 1,872,000 common shares for the conversion of the
outstanding preferred stock and in exchange for certain outstanding
warrants. See Note 6.
30
<PAGE>
Electropharmacology, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Merger
-----------------
Historical Historical
---------------------- ------------
Pro Forma Pro Forma
EPi HTD Adjustments Combined GBLP
--------- --------- ----------------- ----------- ------------
<S> <C> <C>
Revenue:
Rentals 143,445 - 143,445 -
Sales 42,000 - 42,000 416,962
--------- --------- ------------ --------- ----------
Total revenue 185,445 - - 185,445 416,962
Operating expenses:
Cost of revenue 67,064 - 67,064 205,817
Selling, general and administrative 419,874 2,664 79,944 (3), (4) 502,482 327,681
Research and development 13,863 300 2,000,000 (1) 2,014,163 -
--------- --------- ------------ --------- ----------
Total operating expenses 500,801 2,964 2,079,944 2,583,709 533,498
--------- --------- ------------ --------- ----------
Loss from operations (315,356) (2,964) (2,079,944) (2,398,264) (116,536)
Other income (expense)
Interest expense (20,939) - (20,939) -
Interest and other income 2,561 10 2,571 6,584
Loss on disposal of equipment - -
--------- --------- ------------ --------- ----------
Total other income (expense) (18,378) 10 - (18,368) 6,584
--------- --------- ------------ --------- ----------
Net loss (333,734) (2,954) (2,079,944) (2,416,632) (109,952)
========= ========= ============ ========= ==========
Net loss per share - basic and diluted (0.08) (1) (0.20) -
========= ========= ========= ==========
Weighted average number of common shares
outstanding - basic and diluted 4,130,727 3,247 12,174,822 12,174,822 -
========= ========= ========= ==========
<PAGE>
Electropharmacology, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Six Months Ended June 30, 1998
(RESTUBBED TABLE)
Medical Device
Merger Divestiture
---------------- ------------------
Pro Forma
Pro Forma Pro Froma Pro Forma Combined
Adjustments Combined Adjustments (as adjusted)
--------------- ------------ ------------------ ----------------
Revenue:
Rentals 143,445 (143,445) (2) -
Sales 458,962 (42,000) (2) 416,962
------------ ---------- ----------------- ---------------
Total revenue - 602,407 (185,445) 416,962
Operating expenses:
Cost of revenue 272,881 (67,064) (2) 205,817
Selling, general and administrative 830,162 (200,000) (2) 630,162
Research and development 2,000,000 (1) 4,014,163 4,014,163
------------ ---------- ----------------- ---------------
Total operating expenses 2,000,000 5,117,206 (267,064) 4,850,142
------------ ---------- ----------------- ---------------
Loss from operations (2,000,000) (4,514,799) 81,619 (4,433,180)
Other income (expense)
Interest expense (20,939) 20,939 (2) -
Interest and other income 9,155 9,155
Loss on disposal of equipment - -
------------ ---------- ----------------- ---------------
Total other income (expense) - (11,784) 20,939 9,155
------------ ---------- ----------------- ---------------
Net loss (2,000,000) (4,526,584) 102,558 (4,424,026)
============ ========== ================= ===============
Net loss per share - basic and diluted (0.37) (0.35)
========== ===============
Weighted average number of common shares
outstanding - basic and diluted 12,174,822 322,581 12,497,403
========== ===============
</TABLE>
(1) To record the purchase of in-process research and development. See Note 2.
(2) To reflect the sale of the Medical Device Division, including related
depreciation expense and savings of $200,000 in SG&A costs, as if it had
occurred on January 1, 1998. See "Business-Recent Corporate Reorganization".
(3) To record a related party payable of $63,654 related to the exercise of
244,823 options issued to the President as if the change in control occurred
on June 30, 1998. See "Certain Transactions"
(4) To record the issuance of 1,872,000 common shares for the conversion of
the outstanding preferred stock and in exchange for certain outstanding
warrants. See Note 6.
31
<PAGE>
Electropharmacology, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Merger
----------------
Historical Historical
---------------------- -------------
Pro Forma Pro Forma
EPi HTD Adjustments Combined GBLP
--------- --------- ---------------- ---------- -------------
<S> <C> <C>
Revenue:
Rentals 1,700,486 - 1,700,486 -
Sales 700,763 - 700,763 118,018
--------- --------- ------------ ---------- ---------
Total revenue 2,401,249 - - 2,401,249 118,018
Operating expenses:
Cost of revenue 611,702 - 611,702 92,619
Selling, general and administrative 3,177,031 89,972 79,944 (3), (4) (3,346,947 193,169
Research and development 214,686 28,070 2,000,000 (1) 2,242,756 -
--------- --------- ------------ ---------- ---------
Total operating expenses 4,003,419 118,042 2,079,944 6,201,405 285,788
--------- --------- ------------ ---------- ---------
Loss from operations (1,602,170) (118,042) (2,079,944) (3,800,156) (167,770)
Other income (expense)
Interest expense (25,135) (2,198) (27,333) (71,622)
Interest and other income 9,894 124 10,018 13,033
Loss on disposal of equipment (30,506) (30,506)
--------- --------- ------------ ---------- ---------
Total other income (expense) (45,747) (2,074) - (47,821) (58,589)
--------- --------- ------------ ---------- ---------
Net loss (1,647,917) (120,116) (2,079,944) (3,847,977) (226,359)
========= ========= ============ ========== =========
Net loss per share - basic and diluted (0.45) (37) (0.33) -
========= ========= ========== =========
Weighted average number of common
shares outstanding - basic and
diluted 3,697,611 3,247 11,741,706 11,741,706 -
========= ========= ========== =========
<PAGE>
Electropharmacology, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1997
(RESTUBBED TABLE)
Medical Device
Merger Divestiture
-------------- --------------------
Pro Forma
Pro Forma Pro Froma Pro Forma Combined
Adjustments Combined Adjustments (as adjusted)
------------ ---------- --------------------- ----------------
Revenue:
Rentals 1,700,486 (1,700,486) (2) -
Sales 818,781 (700,763) (2) 118,018
----------- ----------- ---------------- ------------
Total revenue - 2,519,267 (2,401,249) 118,018
Operating expenses:
Cost of revenue 704,321 (611,702) (2) 92,619
Selling, general and administrative 3,540,116 (2,000,000) (2) 1,540,116
Research and development 2,000,000(1) 4,242,756 4,242,756
----------- ----------- ---------------- ------------
Total operating expenses 2,000,000 8,487,193 (2,611,702) 5,875,491
----------- ----------- ---------------- ------------
Loss from operations (2,000,000) (5,967,926) 210,453 (5,757,473)
Other income (expense)
Interest expense (98,955) 25,135 (2) (73,820)
Interest and other income 23,051 23,051
Loss on disposal of equipment (30,506) (30,506)
----------- ----------- ---------------- ------------
Total other income (expense) - (106,410) 25,135 (81,275)
----------- ----------- ---------------- ------------
Net loss (2,000,000) (6,074,336) 235,588 (5,838,748)
=========== =========== ================ ============
Net loss per share - basic and diluted (0.52) (0.48)
=========== ============
Weighted average number of common
shares outstanding - basic and
diluted 11,741,706 322,581 12,064,287
=========== ============
</TABLE>
(1) To record the purchase of in-process research and development. See Note 2.
(2) To reflect the sale of the Medical Device Division, including related
depreciation expense and savings of $200,000 in SG&A costs, as if it had
occurred on January 1, 1997. See "Business-Recent Corporate Reorganization".
(3) To record a related party payable of $63,654 related to the exercise of
244,823 options issued to the President as if the change in control occurred
on June 30, 1998. See "Certain Transactions"
(4) To record the issuance of 1,872,000 common shares for the conversion of the
outstanding preferred stock and in exchange for certain outstanding
warrants. See Note 6.
32
<PAGE>
Electropharmacology, Inc.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
1. Determination of Purchase Price for HTD and GBLP
The purchase price for both HealthTech Development, Inc., a development
stage company ("HTD") and Gemini Biotech L.P. (GBLP) was determined by the
Company's management (see Notes to the Financial Statements -"Use of Estimates")
in accordance with APB 16 and was based upon a number of objective and
subjective factors including but not limited to (a) reference to the market
price of Common Stock during the negotiation period and leading up to the
execution of the acquisition agreements; (b) the Company's management's
estimation that the outstanding liabilities, transaction costs and ongoing
operation costs of HTD through the closing of its merger into the Company would
generally offset the realizable value of tangible assets, such that the only
material assets of HTD remaining as of the effective time of the merger would be
intangible assets consisting of technology rights and license agreements; (c)
the Company's management's assessment of the synergistic value of (i) HTD's
various technologies (ii) GBLP's various technologies and (iii) the technologies
licensed through the licensing agreement with Elan Pharma International Limited,
as well as the investment by Elan International Services, Ltd. in Common Stock
of the Company in combination with the Company's own drug delivery technologies
in attracting corporate sponsors, facilitating technology licenses and other
fund raising activities, and providing a greater balance to the Company's stock
holders.
APB 16 states that the cost of an acquired company is measured by the
fair value of the consideration received. Since at the time of the foregoing
transactions there was no active trading market for the Company's Common Stock,
an objective measurement of its fair value is difficult. The Company utilized
various valuation methodologies including the income approach, stock price
approach and company comparable approach. Based on these methodologies, the
Company determined that the 20 day average stock price preceding each
transaction represented the most logical valuation methodology and has accounted
for the valuation of the respective technologies accordingly. This methodology
indicated a value of approximately $2,000,000 for HTD and $2,730,000 for GBLP
and their related developed technology (as defined below), which were the
primary assets being acquired by the Company given its current business
strategy. Since the technologies, chemical compounds, gene databases,
intellectual property rights and other intangible assets so acquired are not at
this time susceptible to precise valuation, the Company has used valuations that
it believes are reasonable based on its significant knowledge of such assets but
there can be no assurance that such valuations are accurate or reliable.
33
<PAGE>
2. Accounting for Mergers and Allocation of Purchase Price
The HTD and GBLP mergers will be accounted for as a purchase
transaction with the Company as the acquiring company. The total estimated
purchase price of $2,000,000 for HTD and $2,730,000 for GBLP has been allocated
to the fair market values of the assets acquired and the liabilities assumed.
The pro forma allocation of the purchase price is based upon information that
was available at the date of preparation of the pro forma financial statements
and is subject to change, although this preliminary allocation is not expected
to materially differ from the final allocation.
In accordance with the provisions of APB Nos. 16 and 17, all
identifiable assets acquired, including identifiable intangible assets, were
assigned a portion of the purchase price on the basis of their fair values. To
this end, the Company performed and detailed analysis to determine the fair
value of the identifiable assets in allocating the purchase price among the
Acquired Assets.
The income, stock valuation, and comparable market approaches were used
to value the Acquired Assets. Standard valuation procedures indicate that these
are appropriate methodologies for valuing intangible assets such as patents and
patent applications, licenses, employment agreements, noncompete agreements,
chemical compounds, genetic databases, and various other intellectual property.
In the case of HTD, the base technologies (the "Developed Technology")
have various ascertainable development timelines with additional human or
financial resources still required for further development in order to realize
economic benefits. These base technologies include intellectual property in the
application of cancer drugs, new drug targets, and immune system booster
technologies. Since the technology is not well defined and understood by the
biotechnology community, management of the Company has determined that a
combination of the various valuation methodologies would provide the most
reliable valuation. Other intangibles considered included license agreements,
patents issued and patent applications pending, reputation and associated
goodwill, as well as the potential for incomplete research and development
projects. A review of the assets and liabilities carried on HTD's balance sheet
as of December 31, 1997 indicated that the carrying value of such assets and
liabilities did not approximate their fair values at that date and, accordingly,
various intangible assets of $2,000,000 have been recorded. As a result of the
acquired technologies development timeline, substantial development costs,
technological feasibility, and various other uncertainties involved related to
the commercialization of these technologies, the Company has classified the
acquired intangible assets as in-process research and development in the
allocation of the purchase price. Although we have used our experience and
observation in the industry, the results are estimates only. We are not sure if
the valuation and the respective allocation of the purchase price and the
corresponding accounting treatment as in-process research and development in the
financial statements is correct since we can not predict the outcome of any
technology at this early stage of development.
34
<PAGE>
<TABLE>
<CAPTION>
The calculation of the estimated purchase price is as follows:
<S> <C>
NET LIABILITIES:
Net liabilities (less fair value of assets).................$ 43,486
EQUITY:
Common Stock issued (6,172,000 shares valued
At $0.317 per share).................................1,956,514
-----------
Estimated Total Purchase Price.......................................$ 2,000,000
As a condition to the HTD merger agreement, up to an additional
1,650,000 shares of Common Stock of the Company may be issued to the former
shareholders of HTD based on certain minimum net revenues amounts, certain net
pretax profit percentages, and the certain development milestones.
The estimated allocation of the purchase price is as follows:
In-Process Research and Development...................................$2,000,000
-----------
Estimated net assets acquired................................$2,000,000
</TABLE>
In the case of GBLP, the base technologies (the "Developed Technology")
have various ascertainable development timelines with additional human or
financial resources still required to be expended for further development in
order to realize economic benefits. These base technologies include intellectual
property in the application of cancer and inflammation drugs. Management of the
Company has determined that a combination of the various valuation methodologies
would provide the most reliable valuation. Other intangibles considered include
license agreements, patents issued and patent applications pending, reputation
and associated goodwill, as well as the potential for incomplete research and
development projects. A review of the assets and liabilities carried on GBLP's
balance sheet as of December 31, 1997 indicated that the carrying value of such
assets and liabilities did not approximate their fair values at that date and
accordingly, various intangible assets of $2,730,000 have been recorded and
classified as inventory and in-process research and development in the
allocation of the purchase price. As a result of the acquired technologies
development timeline, substantial development costs, technological feasibility,
and various other uncertainties involved related to the commercialization of
these technologies, the Company has classified the majority of the acquired
intangible assets as in-process research and development in the allocation of
the purchase price. Although we have used our experience and observation in the
industry, the results are estimates only. We are not sure if the valuation and
the respective allocation of the purchase price and the corresponding accounting
treatment as in-process research and development in the financial statements is
correct since we can not predict the outcome of any technology at this early
stage of development.
35
<PAGE>
<TABLE>
<CAPTION>
The calculation of the estimated purchase price is as follows:
<S> <C>
NET LIABILITIES:
Net liabilities (less fair value of assets).................$ 416,968
EQUITY:
Partnership Units issued (6,000,000 units convertible Into
6,000,000 shares of Common Stock of the Company after 12
months, valued at
$0.3855 per unit)...............................................2,313,032
------------
Estimated Total Purchase Price............................................2,730,000
As a condition to the GBLP merger agreement, additional partnership
units of up to 1,050,000 (convertible into 1,050,000 shares of Common Stock of
the Company) may be issued to the former partners of GBLP based on certain
development milestones.
The estimated allocation of the purchase price is as follows:
Inventory................................................................$ 730,000
In-Process Research and Development.......................................2,000,000
------------
Estimated net assets acquired....................................2,730,000
</TABLE>
3. Divestiture of Company's SofPulse Business
On August 18, 1998, the Company sold substantially all of the assets of
its SofPulse medical device business to a wholly-owned subsidiary of ADM Tronics
Unlimited, Inc. ("ADM"), a publicly traded company, in exchange for a
combination of $150,000 in cash, 1,400,000 shares of ADM common stock issued to
the Company, and additional 1,540,000 shares of ADM common stock issued to pay
approximately $650,000 of the Company's payable (see "Certain Transactions") and
a warrant to purchase additional shares of ADM common stock if ADM achieves
certain sales objectives with respect to its conduct of the SofPulse business.
The Company recorded an extraordinary gain on the disposition of assets of
approximately $640,000 as a result of this divestiture.
4. Additional Stock Options Issued to the Company's President
Effective as of August 24, 1998 as a result of merger with HTD and the
acquisition of GBLP in conjunction with certain change of control provisions in
the President's employment contract, the Company recorded a related party
payable to the President for $63,654 related to the exercise of 244,823 options
to purchase common stock at $.26 per share. This has been shown as additional
compensation expense for pro-forma presentation.
36
<PAGE>
5. Settlement of certain legal expenses
On August 24, 1998 in conjunction with the merger of HTD the Company
issued 322,581 common shares at a price of $0.31 per share in settlement of
certain legal expenses totaling $100,000 with the Company's previous corporate
counsel.
6. Conversion of Preferred Stock and exchange of warrants
On August 24, 1998 in conjunction with the merger of HTD the Company
issued 1,872,000 common shares for the conversion of the outstanding preferred
stock and in exchange for certain outstanding warrants. As a result of these
issuances, the Company recorded additional consulting expense of $16,290.
37
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Electropharmacology, Inc.
By: /s/ Arup Sen
--------------------------------------
Arup Sen
President and Chief Executive Officer
November 2, 1998
38
