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APPENDIX H
HIPPOCAMPE SA
(A Development Stage Company)
FINANCIAL REPORT
DECEMBER 31, 2000
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C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations and retained deficit 3
Statements of cash flows 4
Notes to financial statements 5 - 10
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INDEPENDENT AUDITORS' REPORT
----------------------------
To the Shareholders
Hippocampe SA
We have audited the accompanying balance sheets of Hippocampe SA (a
development stage company) as of December 31, 2000 and 1999, and the
related statements of operations and retained deficit, and cash flows for
the years ended December 31, 2000, 1999 and 1998, and for the period from
May 2, 1990 (inception) to December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hippocampe SA (a
development stage company) as of December 31, 2000 and 1999, and the
results of its operations and its cash flows for the years ended December
31, 2000, 1999 and 1998, and for the period from May 2, 1990 (inception) to
December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Peterson Sullivan P.L.L.C.
Seattle, Washington
March 15, 2001
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HIPPOCAMPE SA
(A Development Stage Company)
BALANCE SHEETS
December 31, 2000 and 1999
(In Euros)
U.S. Dollars
(Information Only)
2000 2000 1999
------------------ ---------- ----------
ASSETS
Current Assets
Cash $ 174,180 E 185,428 E 36,409
Short-term investments 140,337 149,400 27,440
Receivables 59,717 63,573 70,274
Loan fees 81,374 86,629 -
Prepaid expenses 10,598 11,282 2,806
---------- ---------- ----------
Total current assets 466,206 496,312 136,929
Patents and Other 121,010 128,825 9,238
---------- ---------- ----------
$ 587,216 E 625,137 E 146,167
========== ========== ==========
LIABILITIES
Current Liabilities
Accounts payable $ 606,833 E 646,021 E 100,144
Taxes and social
costs payable 102,621 109,248 54,143
Note payable 360,914 384,221 -
Other 7,900 8,410 6,176
---------- ---------- ----------
Total current
liabilities 1,078,268 1,147,900 160,463
Payable to Shareholders 227,517 242,209 242,209
Shareholders' Equity
Common stock, E15.24 par
value; 7,820 shares
authorized, issued
and outstanding 111,983 119,215 119,215
Additional paid-in
capital 756,695 805,559 -
Deficit accumulated
during the develop-
ment stage (1,587,247) (1,689,746) (375,720)
---------- ---------- ----------
(718,569) (764,972) (256,505)
---------- ---------- ----------
$ 587,216 E 625,137 E 146,167
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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HIPPOCAMPE SA
(A Development Stage Company)
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
For the Years Ended December 31, 2000, 1999, 1998,
and the Period from May 2, 1990 (Inception) to December 31, 2000
(In Euros)
Total
accumulated
during
development
stage (May 2,
U.S. Dollars 1990 to
(Information Only) December 31,
2000 2000 1999 1998 2000)
----------- ----------- ---------- ---------- ------------
Revenues $ 12,273 E 13,066 E 46,631 E 41,597 E 224,181
Expenses
Research and
development 94,891 101,019 93,902 70,239 362,466
General and
administrative 378,765 403,225 48,896 38,212 723,685
Bank fee 756,694 805,559 - - 805,559
Interest 15,525 16,527 - - 16,527
----------- ----------- ---------- ---------- -----------
1,245,875 1,326,330 142,798 108,451 1,908,237
----------- ----------- ---------- ---------- -----------
Loss before
income tax
provision (1,233,602) (1,313,264) (96,167) (66,854) (1,684,056)
Income tax
provision 715 762 2,641 762 5,690
----------- ----------- ---------- ---------- -----------
Net loss (1,234,317) (1,314,026) (98,808) (67,616) (1,689,746)
Retained
deficit,
beginning (352,930) (375,720) (276,912) (209,296) -
----------- ----------- ---------- ---------- -----------
Retained
deficit,
ending $(1,587,247) E(1,689,746) E (375,720) E (276,912) E(1,689,746)
=========== =========== ========== ========== ===========
Basic and
diluted loss
per share $ (157.84) E (168.03) E (12.64) E (8.65) E (216.08)
=========== =========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
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HIPPOCAMPE SA
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999, 1998,
and the Period from May 2, 1990 (Inception) to December 31, 2000
(In Euros)
Total
accumulated
during
development
stage (May 2,
1990 to
December 31,
2000 1999 1998 2000)
----------- ---------- ---------- --------------
Cash Flows From
Operating Activities
Net loss E(1,314,026) E (98,808) E (67,616) E (1,689,746)
Adjustments to
reconcile net loss
to net cash provided
by (used in)
operating activities
Amortization 52,070 11,612 9,391 104,583
Fee payable in
common stock 805,559 - - 805,559
Decrease (increase)
in receivables 6,701 (47,204) (7,021) (63,574)
Increase in
accounts payable 545,877 38,003 13,279 646,021
Increase in taxes
and social costs
payable 55,105 26,168 23,774 109,248
Other (6,242) 137 (5,228) (2,870)
----------- ---------- ---------- ------------
Net cash provided
by (used in)
operating
activities 145,044 (70,092) (33,421) (90,779)
Cash Flows From
Investing Activities
Patents and other (128,286) - (5,176) (190,037)
Short-term investments (121,960) (27,440) - (149,400)
----------- ---------- ---------- ------------
Net cash used in
investing
activities (250,246) (27,440) (5,176) (339,437)
Cash Flows From
Financing Activities
Proceeds from the
issuance of common
stock - - - 119,215
Borrowings from
shareholders - 103,815 68,723 242,208
Increase in note
payable and other
short-term advances 384,221 - - 384,221
Loan fees (130,000) - - (130,000)
----------- ---------- ---------- ------------
Net cash provided
by financing
activities 254,221 103,815 68,723 615,644
----------- ---------- ---------- ------------
Net increase in
cash 149,019 6,283 30,126 185,428
Cash, beginning of
period 36,409 30,126 - -
----------- ---------- ---------- ------------
Cash, end of period E 185,428 E 36,409 E 30,126 E 185,428
=========== ========== ========== ============
The accompanying notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS
Note 1. The Company and Summary of Significant Accounting Policies
Organization/Development Stage Company
- --------------------------------------
Hippocampe SA ("the Company") was created in 1990 as a French company for
the purpose of engaging in research and development of human health
products. All of the Company's activities have been conducted in France.
The Company's main research efforts have been concentrated in the
prevention and treatment of the AIDS virus. The Company has established a
network over the past ten years enabling it to work with education centers,
research centers, pharmaceutical laboratories and biotechnology companies.
These financial statements have been prepared treating the Company as a
development stage company. As of December 31, 2000, the Company had not
performed any clinical testing and a commercially viable product is not
expected for several more years. As such, the Company has not generated
significant revenues. Revenues reported by the Company consist of
incidental serum by-products of the Company's research and development
activities. For the purpose of these financial statements, the development
stage started May 2, 1990, which is the date when the Company was
originally organized in France.
Effective December 13, 2000, Ichor Corporation ("Ichor") entered into an
agreement to acquire 99.9% of the outstanding shares of the Company. Ichor
is a United States company that has no significant operations. Ichor will
exchange approximately 33 million of its common shares for the outstanding
shares of the Company. The exchange is expected to be completed in early
2001 and will be accounted for as a reverse purchase, with the Company as
the continuing entity.
Foreign Currency
- ----------------
Consistent with the location of its activities, beginning January 1, 1999,
the Company adopted the euro as its corporate currency. Accordingly, the
Company prepared its 2000 and 1999 financial statements in euros. The
financial statements for prior years were prepared using French francs as
the reporting currency and were restated in euros for each period presented
using the Official Fixed Conversion Rate of E1 = FRF 6.55957. Therefore,
the financial statements for prior years depict the same trends that would
have been presented had they been presented in French francs. However,
because they were originally prepared using French francs, they are not
necessarily comparable to financial statements of a company which
originally prepared its financial statements in a European currency other
than the French francs and restated them in euros. All assets,
liabilities, revenues and expenses have been reported using the above
exchange rate, and no foreign exchange gains or losses have been recorded.
There are no other potential elements for other comprehensive income so no
statements of comprehensive income have been provided.
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Note 1. (Continued)
Short-Term Investments
- ----------------------
Short-term investments consist of certificates of deposit stated at cost.
The fair value approximates cost based on the length to maturity and
interest rate.
No interest was paid and income tax paid was not material during 2000, 1999
and 1998.
Revenue Recognition
- -------------------
The Company records the sale of products when the products are delivered
and the Company has only a security interest in the products should a
customer default on payment.
Patents
- -------
Patents represent fees paid to the French patent office. These fees are
stated at historical cost and are amortized over five years.
Research and Development
- ------------------------
Research and development costs are expensed as incurred.
Taxes on Income
- ---------------
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events
other than enactments of changes in the tax laws or rates.
Earnings per Share
- ------------------
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in
the period which was 7,820 shares for each period. Diluted earnings per
share takes into consideration common shares outstanding (computed under
basic earnings per share) and potentially dilutive securities. The common
shares and warrants due to MFC Bank, discussed in Note 4, have not been
reflected as issued for the purposes of computing earnings or loss per
share since issuance would be antidilutive.
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Note 1. (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.
New Accounting Standards
- ------------------------
Statement of Financial Accounting Standard No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" defers the effective date of FASB No. 133
(as amended by Financial Accounting Standard No. 138). Because the Company
does not engage in any derivative or hedging activities, there should be no
impact on its consolidated financial statements.
Statement of Financial Accounting Standard No. 140 is generally effective
on a prospective basis for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Management
has not determined the effect this standard may have on future financial
statements.
Note 2. Receivables
2000 1999
---------- ----------
Trade receivables E 36,886 E 36,886
Refunds due from suppliers 5,514 18,742
Value added tax 55,714 13,663
Other - 6,235
---------- ----------
98,114 75,526
Allowance for doubtful accounts (34,541) (5,252)
---------- ----------
E 63,573 E 70,274
========== ==========
No collateral was required for the above receivables and they are expected
to be collected in the normal course.
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Note 3. Taxes and Social Costs Payable
2000 1999
---------- ----------
Social security and other social benefits E 97,094 E 41,856
Income tax 1,882 1,117
Value added tax 7,672 5,447
Other 2,600 5,723
---------- ----------
E 109,248 E 54,143
========== ==========
Note 4. Shareholders' Equity
The Company issued 7,820 shares of common stock in June 1990 for E119,215
in cash. There were no other transactions affecting shareholders' equity
since inception except for results of operations and the transaction
discussed in the following two paragraphs.
As part of the reverse purchase discussed in the Organization section of
Note 1, the Company agreed to pay a fee to MFC Merchant Bank SA ("MFC
Bank") for locating Ichor and assisting with the reverse purchase. The
parent of MFC Bank is an Ichor shareholder.
MFC Bank's fee is payable in common stock which had not been issued by
December 31, 2000. The number of shares of common stock was calculated in
compliance with the agreement where MFC Bank assisted the Company in the
Ichor transaction. This agreement requires that MFC Bank receive 4% of
Ichor's issued and outstanding common shares on a fully diluted basis which
was calculated to be 50,446,353 shares. The fair value of the shares
payable to MFC Bank at the measurement date, amounting to E805,559, has
been considered additional paid-in capital in the balance sheet. Part of
the fair value of these shares will be reclassified to common stock when
the shares are issued.
In July 2000, the Company entered into a revolving term credit facility
with MFC Bank. The facility allows the Company to borrow up to E1,300,000
at LIBOR plus 4% (approximately 8.9% at December 31, 2000) repayable on
August 31, 2001, and is collateralized by all of the Company's assets plus
any future patents. The Company borrowed E384,221 under this facility as
of December 31, 2000. The fair value of this note approximates carrying
value because the note is short-term and has a market rate of interest.
MFC Bank had also advanced E400,000 to the Company under an open account to
pay current expenses.
The Company is to pay MFC Bank a E130,000 arrangement fee under the term
credit facility and E10,000 per month for nine months as a retainer fee in
addition to the common stock to be paid for assisting in the Ichor
transaction. The arrangement fee is being amortized over the term of the
loan and the retainer fee is expensed monthly beginning August 2000.
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Note 4. (Continued)
Under these agreements, the Company will issue warrants which entitle MFC
Bank to purchase approximately 6,730,599 of the Company's common shares on
a fully diluted basis. The warrants will entitle MFC Bank to convert an
amount equal to the maximum of the credit facility including unpaid
interest plus the arrangement and retainer fees. The warrants are
exercisable within a three-year period beginning August 2000 at
approximately E.2319 per common share. The warrants are to be granted when
the reverse purchase is completed. The intrinsic value of any beneficial
conversion feature will be calculated at the grant date using the Black-
Scholes model. This amount, if any, will be recorded as paid-in capital
and any amount allocated to the retainer fee will be expensed immediately
with any remaining amount amortized over the remainder of the loan term on
the interest method.
Note 5. Transactions with Shareholders
Sales to a shareholder were E9,376 in 2000, E28,679 in 1999 and E0 in 1998.
Trade receivables include E22,677 and E20,467 from this shareholder at
December 31, 2000 and 1999, respectively.
The amounts payable to shareholders bear no interest, have no collateral,
and are repayable upon the Company becoming profitable. Since the timing
of the Company becoming profitable cannot be determined, the fair value of
the amounts payable to shareholders cannot be determined. The Company is
not expected to become profitable in the near-term, therefore, the amounts
payable to shareholders have been classified as long-term.
Note 6. Income Taxes
The reconciliation of income tax on income computed at the federal
statutory rates to income tax expense is as follows:
2000 1999 1998
---------- ---------- ----------
U.S. Federal statutory rates
on loss from operations E (446,769) E (20,867) E (11,924)
Tax differential on foreign loss - (12,376) (12,702)
Nondeductible fee to be paid
in common stock 275,414 - -
Change in valuation allowance 172,117 35,884 25,388
---------- ---------- ----------
Income tax expense E 762 E 2,641 E 762
========== ========== ==========
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Note 6. (Continued)
Deferred tax asset is composed of the following:
December 31, December 31,
2000 1999
------------ ------------
Difference in book and tax basis
of amounts payable to shareholder
and payable to MFC Bank E 218,351 E 89,616
Legal and similar fees to be deducted
for French tax purposes in 2001 43,382 -
------------ -------------
261,733 89,616
Less valuation allowance for deferred
tax asset (261,733) (89,616)
------------ -------------
Net deferred tax asset E - E -
============ =============
All of the Company's provision for income taxes was from French income.
The Company had no net operating loss carryforwards as of December 31,
2000.
Note 7. Commitments and Contingencies
The Company leases property under noncancelable operating leases through
January 2006. Future minimum lease payments under noncancelable operating
leases are as follows:
2001 E 7,317
2002 7,317
2003 7,317
2004 7,317
2005 7,317
Total rent expense was E7,317, each for 2000, 1999 and 1998, respectively.
The Company is involved in various matters of litigation arising in the
ordinary course of business. In the opinion of management, the estimated
outcome of such issues will not have a material effect on the Company's
financial statements.
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