EXHIBIT 99.1
Pages F-34 through F-52 of the Company’s Definitive Proxy Statement on Schedule 14A relating to the Company’s 2006 annual meeting of stockholders filed with the Securities and Exchange Commission on September 15, 2006.
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of Remedium Oy
We have audited the accompanying consolidated balance sheets of Remedium Oy (“the Company”) and subsidiaries (collectively “the Group”) as of December 31, 2005 and 2004, and the consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years ended December 31, 2005, 2004 and 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2005 and 2004, and the results of the Group’s operations and cash flows for the years ended December 31, 2005, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America.
Helsinki, Finland
May 12, 2006
KPMG Oy Ab
Virpi Halonen
Authorized Public Accountant
F-34
Remedium Oy and Subsidiaries
Consolidated Statements of Operations
| Year Ended December 31, | |||||||||||
| Note | 2005 | 2004 | 2003 | ||||||||
| € | € | € | |||||||||
Net revenue | 7,668,649 | 11,570,657 | 9,932,008 | ||||||||
Reimbursement revenue | 863,351 | 858,572 | 853,515 | ||||||||
Total Revenue | 8,532,000 | 12,429,229 | 10,785,523 | ||||||||
Operating Costs and Expenses | |||||||||||
Direct | 4,428,864 | 5,024,511 | 5,453,056 | ||||||||
Reimbursable out-of-pocket expenses | 863,351 | 858,572 | 853,515 | ||||||||
Selling, general and administrative expenses | 3,584,342 | 2,828,430 | 2,187,253 | ||||||||
Depreciation and amortization | 79,073 | 178,119 | 135,202 | ||||||||
Total Operating Expenses | 8,955,630 | 8,889,632 | 8,629,026 | ||||||||
(Loss) Income from Operations | (423,630 | ) | 3,539,597 | 2,156,497 | |||||||
Financial Income | 3 | 25,440 | 18,545 | 85,077 | |||||||
Financial Expense | 3 | (16,147 | ) | (8,254 | ) | (3,774 | ) | ||||
Net Financial Income | 9,293 | 10,291 | 81,303 | ||||||||
(Loss) Income before Income Taxes and Minority Interest | (414,337 | ) | 3,549,888 | 2,237,800 | |||||||
Income Tax Provision | 4 | 29,189 | 1,070,615 | 659,959 | |||||||
Minority Interest, net | — | — | 36,178 | ||||||||
Net (Loss) Income | (443,526 | ) | 2,479,273 | 1,614,019 | |||||||
See accompanying notes to the consolidated financial statements.
F-35
Remedium Oy and Subsidiaries
Consolidated Balance Sheets
| As of December 31, | ||||||||
| Note | 2005 | 2004 | ||||||
| € | € | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and Cash equivalents | 186,820 | 632,300 | ||||||
Available for sale investments | 5 | — | 1,561,711 | |||||
Accounts receivable, less allowance of € 0 and € 0 for 2005 and 2004 | 1,975,411 | 975,618 | ||||||
Costs and estimated earnings in excess of related billings on uncompleted contracts | 6 | 261,059 | 16,629 | |||||
Prepaid expenses and other | 7 | 428,739 | 171,087 | |||||
Total Current Assets | 2,852,029 | 3,357,345 | ||||||
Long Term Assets | ||||||||
Property and Equipment, Net | 8 | 218,652 | 249,776 | |||||
Goodwill | 10 | 278,384 | 279,031 | |||||
Other Intangible Assets | 10 | 69,354 | 85,229 | |||||
Deferred Tax | 4 | 54,475 | 62,534 | |||||
Restricted Cash | 186,534 | 179,369 | ||||||
Total Long Term Assets | 807,399 | 855,939 | ||||||
Total Assets | 3,659,428 | 4,213,284 | ||||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | 299,542 | 220,287 | ||||||
Bank overdrafts | 14 | 675,344 | 45,297 | |||||
Accrued expenses and other | 11 | 1,399,293 | 1,088,193 | |||||
Billings in excess of related costs and estimated earnings on uncompleted contracts | 6 | 149,669 | 113,230 | |||||
Total Current Liabilities | 2,523,848 | 1,467,007 | ||||||
Long Term Liabilities | ||||||||
Pension | 13 | 153,000 | 119,000 | |||||
Long Term Loans | — | 22,469 | ||||||
Total Long Term Liabilities | 153,000 | 141,469 | ||||||
Total Liabilities | 2,676,848 | 1,608,476 | ||||||
Stockholders’ Equity | ||||||||
Common stock, € 1.70 par Value 13,400 share authorized and issued | 22,780 | 22,780 | ||||||
Additional paid-in capital | 127,316 | 127,316 | ||||||
Deferred Compensation | (10,312 | ) | (41,362 | ) | ||||
Retained earnings | 847,921 | 2,497,447 | ||||||
Other comprehensive income | (5,125 | ) | (1,373 | ) | ||||
Total Stockholders’ Equity | 982,580 | 2,604,808 | ||||||
Total Liabilities and Stockholders’ Equity | 3,659,428 | 4,213,284 | ||||||
See accompanying notes to the consolidated financial statements
F-36
Remedium Oy and Subsidiaries
Consolidated Statements of Stockholders’ Equity
| Number of Common Shares | Par Value | Additional Paid-In Capital | Retained Earnings | Deferred Compensation | Other Income | Total | ||||||||||||
| € | € | € | € | € | ||||||||||||||
Balance at December 31, 2002 | 13,400 | 22,780 | 61,316 | 2,324,995 | 21,448 | 2,430,539 | ||||||||||||
Net income | 1,614,019 | 1,614,019 | ||||||||||||||||
Dividends | (2,383,860 | ) | (2,383,860 | ) | ||||||||||||||
Realised gain on disposal of available for sale investments, net of €8,044 tax | (19,694 | ) | (19,694 | ) | ||||||||||||||
Translation adjustment, net of €0 tax | (610 | ) | (610 | ) | ||||||||||||||
Balance at December 31, 2003 | 13,400 | 22,780 | 61,316 | 1,555,154 | 1,144 | 1,640,394 | ||||||||||||
Net income | 2,479,273 | 2,479,273 | ||||||||||||||||
Dividends | (1,536,980 | ) | (1,536,980 | ) | ||||||||||||||
Unrealised gain on available-for-sale investments, net of €1,718 tax | 4,603 | 4,603 | ||||||||||||||||
Realised gain on disposal of available for sale investments, net of €717 tax | (1,754 | ) | (1,754 | ) | ||||||||||||||
Translation adjustment, net of €0 tax | (5,366 | ) | (5,366 | ) | ||||||||||||||
Issuance of stock options | 66,000 | (66,000 | ) | — | ||||||||||||||
Deferred compensation amortization | 24,638 | 24,638 | ||||||||||||||||
Balance at December 31, 2004 | 13,400 | 22,780 | 127,316 | 2,497,447 | (41,362 | ) | (1,373 | ) | 2,604,808 | |||||||||
Net income | (443,526 | ) | (443,526 | ) | ||||||||||||||
Dividends | (1,206,000 | ) | (1,206,000 | ) | ||||||||||||||
Realised gain on disposal of available for sale investments, net of €1,718 tax | (4,603 | ) | (4,603 | ) | ||||||||||||||
Translation adjustment, net of €0 tax | 851 | 851 | ||||||||||||||||
Deferred compensation amortization | 31,050 | 31,050 | ||||||||||||||||
Balance at December 31, 2005 | 13,400 | 22,780 | 127,316 | 847,921 | (10,312 | ) | (5,125 | ) | 982,580 | |||||||||
See accompanying notes to the consolidated financial statements.
F-37
Remedium Oy and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Operating Activities: | |||||||||
Net income (loss) | (443,526 | ) | 2,479,273 | 1,614,019 | |||||
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: | |||||||||
Depreciation and amortization | 79,073 | 178,119 | 135,202 | ||||||
Noncash stock based compensation | 31,050 | 24,638 | — | ||||||
Profit on sale of investments | (16,913 | ) | (14,257 | ) | (57,232 | ) | |||
Changes in assets and liabilities; | |||||||||
Restricted cash | (7,165 | ) | (1,375 | ) | (82 | ) | |||
Accounts receivable | (999,793 | ) | 197,089 | (241,873 | ) | ||||
Prepaid expenses and other | (184,246 | ) | (34,178 | ) | 14,853 | ||||
Prepaid taxes | (72,556 | ) | (14,669 | ) | (50,205 | ) | |||
Costs and estimated earnings in excess of related billings on uncompleted contracts | (244,430 | ) | (16,629 | ) | — | ||||
Accounts payable | 79,259 | 46,607 | 130,453 | ||||||
Accrued expenses and provisions | 338,793 | (328,242 | ) | 94,729 | |||||
Billings in excess of related costs and estimated earnings on uncompleted contracts | 53,068 | (65,664 | ) | 178,894 | |||||
Net Cash (Used In)/Provided by Operating Activities | (1,387,386 | ) | 2,450,712 | 1.818,758 | |||||
Investing Activities: | |||||||||
Purchases of property and equipment | (32,075 | ) | (93,202 | ) | (258,911 | ) | |||
Purchase of available for sale investments | — | (2,800,000 | ) | (2,131,000 | ) | ||||
Proceeds from sale of available for sale investments | 1,572,303 | 2,358,887 | 3,112,054 | ||||||
Acquisition of Group companies | — | (63,723 | ) | (183,952 | ) | ||||
Net Cash Generated (Used) in Investing Activities | 1,540,228 | (598,038 | ) | 538,191 | |||||
Financing Activities: | |||||||||
Proceeds from borrowings | 652,975 | 29,979 | 15,318 | ||||||
Repayment of borrowings | (45,297 | ) | (11,269 | ) | |||||
Dividends paid | (1,206,000 | ) | (1,536,980 | ) | (2,383,860 | ) | |||
Net Cash Provided by Financing Activities | (598,322 | ) | (1,518,270 | ) | (2,368,542 | ) | |||
Net Increase (Decrease) In Cash and Cash Equivalents | (445,480 | ) | 334,404 | (11,593 | ) | ||||
Cash and Cash Equivalents, Beginning of Period | 632,300 | 297,896 | 309,489 | ||||||
Cash and Cash Equivalents, End of Period | 186,820 | 632,300 | 297,896 | ||||||
See accompanying notes to the consolidated financial statements.
F-38
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS:
In this discussion, the terms, “Company”, “we”, “us”, and “our”, refer to Remedium Oy and subsidiaries, except where it is made clear otherwise.
Founded in 1996, Remedium Oy (“Remedium”), is a privately-held, full-service clinical research organization (“CRO”) for Phase I-IV clinical development of drugs and biologics to the pharmaceutical and biotechnology industries based in Finland with offices in 8 countries throughout Scandinavia, Central Europe, and Eastern Europe. Its in-house staff consists of 11 physicians, clinical and data management teams, and an early development team that specializes in fast-tracking Phase I and Phase II studies. Remedium’s comprehensive services include the filing of Investigational New Drug (IND) and similar regulatory applications, preparation and submission of New Drug Applications (NDAs), and post-marketing surveillance on an international basis. Remedium has completed more than 160 clinical research projects involving over 45,000 subjects. Remedium applies the highest standards within the industry and has validated systems. It has strong relationships with government-owned clinics and specialty societies focused on cardiovascular and oncologic diseases. In addition, it has a well-developed network of consulting specialists and Principal Investigators throughout Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements for 2005, 2004 and 2003 include our accounts and the accounts of companies in our control. At 31 December 2005 and 2004 all subsidiaries were wholly owned. Intercompany transactions and balances have been eliminated on consolidation.
Basis of Presentation
In 2005 we established two new companies in Poland and Romania to add to our operations in Sweden, which was established in 2004, and Estonia and Lithuania, which were established in 2003.
In 2003 we acquired a controlling interest of 51 % in the Danish CRO company Meddoc Aps and in 2004 acquired the remaining minority interest of 49 %. This acquisition was accounted for using the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on estimated fair values of assets and liabilities. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in the Company’s consolidated balance sheet as of the effective date of the acquisition. The total purchase consideration in 2003 and 2004 amounted to € 260,756 of which € 48,900 related to direct acquisition costs for legal, appraisal and accounting fees.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) require 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 period. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2005 and 2004 cash and cash equivalents consisted of amounts held at bank.
F-39
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Restricted Cash
In connection with some of our real estate rental agreements we are required to maintain cash deposits with financial institutions. These restricted cash balances are classified in accordance with the remaining rental period of the property in question. As of December 31, 2005 and 2004, this restricted cash amount was €186,534 and €179,369, respectively and included in long-term assets.
Revenue Recognition
A significant portion of our revenue is recognized from the outsourcing of personnel to our clients. This revenue is recognized based on actual hours incurred at the agreed upon contract rate.
We also have revenue, which is recognized from fixed-price contracts on a proportional performance basis. To measure the performance, we compare actual direct costs incurred to estimated total contract direct costs, which is the best indicator of the performance of the contract obligations as the costs relate to the labour hours incurred to perform the service. Total direct costs are incurred for each contract and compared to estimated total direct costs for each contract to determine the percentage of the contract that is completed. This percentage is multiplied by the estimated total contract value to determine the amount of net revenue recognized. A formal project review process takes place at period end although most projects are evaluated on an ongoing basis. Management reviews the estimated total direct costs on each contract to determine if estimated amounts are correct, and estimates are adjusted as needed. If we determine that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made. Because of the inherent uncertainties in estimating direct costs required to complete a project, particularly complex, multi-year studies, it is possible that the estimates used will change and could result in a material change to our estimates. Original estimates might also be changed due to changes in the scope of work. We attempt to negotiate contract amendments with the client to cover these services provided outside the terms of the original contract. There can be no assurance that the client will agree to the proposed amendments, and we ultimately bear the risk of cost overruns. Accordingly no change in estimate is made to the total contract value until our clients have formally approved the contract amendments. Changes to the estimated total contract direct costs result in a cumulative adjustment to the amount of revenue recognized.
Costs and estimated earnings in excess of related billings on uncompleted contracts represents net revenue recognized to date that is currently unbillable to the client pursuant to contractual terms. In general, amounts become billable upon the achievement of milestones or in accordance with predetermined payment schedules set forth in the contracts with our clients. Billings in excess of related costs and estimated earnings on uncompleted contracts represent amounts billed in excess of net revenue recognized at the balance sheet date.
Net Revenue
The Company’s consolidated net revenues represent the Company’s total revenues less allowances for customer credits, including estimated discounts and rebates.
Reimbursable Out-of-Pocket Expenses
On behalf of our clients, we incur out-of-pocket costs for which we are reimbursed at cost, without mark-up or profit. Effective January 1, 2002, in connection with the required implementation of Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force Rule No. 01-04 (“EITF 01-14”), “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”, out-of-pocket costs are included in Operating Expenses, while the reimbursements received are reported separately as Reimbursement Revenue in the Consolidated Statements of Operations.
F-40
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Concentration of Credit Risk
Our accounts receivable and costs and estimated earnings in excess of related billings on uncompleted contracts are concentrated with a small number of companies within the pharmaceutical industry. The significant majority of this exposure is to large, well-established firms. We have not experienced any credit losses in the past. As of December 31, 2005, the total of accounts receivable and costs and estimated earnings in excess of related billings on uncompleted contracts was € 2,236,470. Of this amount, the exposure to our three largest clients was 39 % of the total, with the three largest clients representing 18 %, 12 %, and 9 % of total exposure, respectively. As of December 31, 2004, the total of accounts receivable and costs and estimated earnings in excess of related billings on uncompleted contracts was € 992,247. Of this amount, the exposure to our three largest clients was 31 % of the total, with the three largest clients representing 13 %, 11 %, and 7 % of total exposure, respectively.
Financial Instruments
The fair value of cash and cash equivalents, restricted cash, accounts receivable, costs and estimated earnings in excess of related billings on uncompleted contracts, accounts payable, loans, accrued expenses and billings in excess of related costs and estimated earnings on uncompleted contracts were not materially different than their carrying amounts as reported at December 31, 2005 and December 31, 2004.
As of December 31, 2005 and 2004, the Company was not counterparty to any forward foreign exchange contracts or any other transaction involving a derivative financial instrument.
Property and Equipment
Property and Equipment is recorded at cost. Depreciation is provided using the declining balance method over the estimated useful lives of the assets, which range from 3 to 10 years for equipment and furniture and fixtures. Depreciation and amortization for the years ended December 31, 2005 and 2004 was € 79,073 and € 178,119, respectively. Expenditures for maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or fully depreciated the cost and accumulated depreciation are removed from the accounts, and any gain or loss on the sale of property and equipment is included in operations.
Goodwill and other intangible assets
The excess of the purchase price of a business acquired over the fair value of net tangible assets and identifiable intangible assets at the date of the acquisition has been assigned to goodwill. In accordance with SFAS 142, “Goodwill and Other Intangible Assets”, goodwill is evaluated for impairment on an annual basis or more frequently if events or changes in circumstances indicate that goodwill might be impaired.
Customer relationships recognised in the course of business acquisitions are fair valued and amortised over their expected lives of 7 to 10 years. Order backlog fair valued during acquisitions is amortised over the related contract period. License agreements acquired for software are amortised over the estimated useful lives which range from 3 to 5 years.
Operating Expenses
Direct expenses include amounts incurred during the period that are directly related to the management or completion of a clinical trial or related project and generally include direct labour and related benefit charges, other direct costs and certain allocated expenses. Direct costs as a percentage of net revenues tend to fluctuate from one period to another, as a result of changes in the mix of services provided and the various studies conducted during any time period. Selling, general and administrative expenses include the salaries, wages and benefits of all administrative, finance and business development personnel, and all other support expenses not directly related to specific contracts.
F-41
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), which states that, for fixed plans, no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company’s common stock on the grant date. If stock options are granted with an exercise price below the estimated fair value of the Company’s common stock at the grant date, the difference between the fair value of the Company’s common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred compensation is amortized to compensation expense over the vesting period of the stock option. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123”, which requires compensation expense to be disclosed in the notes based on the fair value of the options granted at the date of the grant. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method required by SFAS No. 123, the Company’s net income and diluted net income per common share would have been the pro forma amounts indicated below.
| Year Ended December 31, | ||||||||
| 2005 | 2004 | 2003 | ||||||
| € | € | € | ||||||
Net (loss)/income —as reported | (443,526 | ) | 2,479,273 | 1,614,019 | ||||
Add: Total Stock-based employee compensation expense determined under intrinsic method, net of tax effects | 31,050 | 24,638 | — | |||||
Less: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects | (123,269 | ) | (97,811 | ) | ||||
Pro forma net income | (535,745 | ) | 2,406,100 | 1,614,019 | ||||
The Company has just one incentive plan being the 2004 plan. The fair value of this option grant was estimated to be €397 on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Year Ended December 31, 2004 | |||
Expected dividend yield | 0 | % | |
Expected lives (years) | 4.8 years | ||
Risk-free interest rate (%) | 3.11 | % | |
Expected volatility (%) | 45 | % |
The company will adopt FAS 123R from January 1, 2006.
Foreign Currency Translations
Assets and liabilities of the Company’s subsidiaries whose functional currencies are not Euros are translated into Euros at exchange rates in effect on the balance sheet date and equity accounts are translated at historical exchange rates. Revenue and expense items are translated at average exchange rates in effect during the year. Gains or losses from translating foreign currency financial statements are recorded in other comprehensive income. The cumulative translation adjustment included in other comprehensive income for the years ended December 31, 2005, December 31, 2004 and December 31, 2003 was € 5,125, € 5,976, and € 610, respectively.
F-42
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Pensions
The Company accounts for pensions in accordance with the provisions of Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions. The pension expense is recorded on a full accrual basis and reflected in the income statement over the working lives of the employees provided with such benefits. The economic and demographic assumptions used in calculating pension expense are reviewed and updated periodically. The company has estimated the effect on the net income and shareholder’ equity assuming the adoption of SFAS No. 87 as of January 1, 2003 as the adoption on the actual effective date of January 1, 1989 was not feasible. The transitional obligation has been recognized in equity immediately upon adoption of FAS 87. Elements of the Finnish statutory employment pension scheme (“TEL”) must be accounted for as defined benefit plans under FAS 87. All other employment pension schemes within the group are accounted for as defined contribution plans.
Comprehensive Income
The Company has elected to present comprehensive income and its components in the Statements of Stockholders’ Equity. The components of comprehensive income are net income and all other non-owner changes in equity. At the year ended December 31, 2005 the balance consisted of translation adjustment of € 5,125. At the year ended December 31, 2004 the balance consisted of translation adjustment of € 5,976 and fair value adjustment of € 4,603 relating to available for sale investments.
Financial Assets
The Company classifies its investments into three categories of trading, held to maturity and available for sale investments however at the year ended December 31, 2005 held no investments. At the year ended December 31, 2004 the company held available for sale investments comprising of marketable debt (Sampo Bank Interest Rate Fund), which was fair valued using the current market value. The fair value changes of available for sale investments are recognized in shareholder’s equity. When the investment is disposed of, the related accumulated fair value changes are released from shareholder’s equity and recognized in the income statement as part of interest income.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs were approximately €134,617, €191,295 and €107,507 for the years ended December 31, 2003, 2004 and 2005, respectively.
Supplemental Cash Flow Information
Cash paid for income taxes net of refunds for the years ended December 31, 2005, 2004 and 2003 was €101,746, €972,285 and €662,032, respectively. Cash paid for interest for the years ended December 31, 2005, 2004 and 2003 was €16,147, €8,254 and €3,774.
F-43
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Recently Issued Accounting Standards
In November 2005, The FASB issued Staff Position No. (FSP) 115-1 The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. FSP 115-1 provides accounting guidance for identifying and recognizing other-than-temporary impairments of debt and equity securities, as well as cost method investments in addition to disclosure requirements. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. As the company has no investments in debt or equity securities the adoption of FSP 115-1 will not have a material impact on the Group’s financial condition or results or operations.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 123 (revised 2004),Share-Based Payment(SFAS 123R), which (SFAS 123R), which will be effective for us on January 1, 2006. The adoption of SFAS 123R will increase operating expenses and therefore negatively affect income from operations. The increase in costs is expected to be approximately €31,000 in 2006. All outstanding options will be fully vested by 31 December 2006. The Company does not plan to issue any new options in 2006.
3. FINANCIAL INCOME AND EXPENSE
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Interest income | 8,527 | 4,288 | 27,845 | ||||||
Gain on sale of available for sale investment | 16,913 | 14,257 | 57,232 | ||||||
Interest (expense) | (12,938 | ) | (6,665 | ) | (6,628 | ) | |||
Foreign exchange gain/(loss) | (3,209 | ) | (1,589 | ) | 2,854 | ||||
Net financial income | 9,293 | 10,291 | 81,303 | ||||||
4. INCOME TAXES:
The components of income before provision for income taxes were as follows:
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Domestic | 51,369 | 3,770,327 | 2,431,129 | ||||||
Foreign | (465,706 | ) | (220,439 | ) | (193,329 | ) | |||
(Loss)/Income from continuing operations | (414,337 | ) | 3,549,888 | 2,237,800 | |||||
The components of the provision for income taxes were as follows:
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Domestic | |||||||||
Current | (17,563 | ) | 1,085,284 | 710,164 | |||||
Deferred | 55,737 | 16,854 | (22,542 | ) | |||||
Foreign | |||||||||
Current | (5,630 | ) | 1,321 | — | |||||
Deferred | (3,355 | ) | (32,844 | ) | (27,663 | ) | |||
Provision for income taxes | 29,189 | 1,070,615 | 659,959 | ||||||
F-44
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Taxes computed at the statutory income tax rates are reconciled to the provision for income taxes as follows:
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Statutory income tax rate | 26 | % | 29 | % | 29 | % | |||
Effective tax rate | (7 | )% | 30 | % | 29 | % | |||
| € | € | € | |||||||
Statutory rate | (107,728 | ) | 1,029,468 | 648,462 | |||||
Non-deductible expenses net of non-taxable income | 20,295 | (7,489 | ) | 1,677 | |||||
Valuation allowance | 97,572 | 49,393 | |||||||
Foreign tax rate differential | 19,050 | 3,624 | 9,820 | ||||||
Change in tax rates | — | (4,381 | ) | — | |||||
| 29,189 | 1,070,615 | 659,959 | |||||||
The statutory tax rate in Finland decreased from 29% to 26% for fiscal years commencing January 1, 2005 however the change was enacted in 2004 and the deferred tax balances at December 31, 2004 reflect the change in rate.
| Year Ended December 31, | ||||||
| 2005 | 2004 | |||||
Components of the deferred tax asset were as follows: | ||||||
Future Benefit of net operating losses | 209,830 | 123,599 | ||||
Accruals | — | 5,822 | ||||
Billings in excess of related costs and estimated earnings on uncompleted contracts | 38,914 | 29,440 | ||||
Pension provision | 39,780 | 30,967 | ||||
Gross deferred tax asset | 288,524 | 189,828 | ||||
Valuation allowance | (146,965 | ) | (49,393 | ) | ||
Net deferred tax asset | 141,559 | 140,435 | ||||
Components of the deferred tax liability were as follows: | ||||||
Unrealized gain on investments | — | (1,718 | ) | |||
Costs and estimated earnings in excess of related billings on uncompleted contracts | (67,875 | ) | (4,324 | ) | ||
Property and equipment | (14,650 | ) | (10,988 | ) | ||
Other intangible assets | (13,951 | ) | (12,962 | ) | ||
Total deferred tax liabilities | (96,476 | ) | (29,992 | ) | ||
Net deferred tax | 45,083 | 110,443 | ||||
Current deferred tax asset | 19,569 | 47,909 | ||||
Non-current deferred tax asset | 54,475 | 62,534 | ||||
Current deferred tax liability | (28,961 | ) | — | |||
| 45,083 | 110,443 | |||||
F-45
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
As of December 31,2005, the Company had tax benefits of €209,830 arising from operating losses of €695,331 which can be carried forward indefinitely. Due to certain foreign operations recent loss history and the uncertainty regarding the realization of the related deferred tax asset a valuation allowance of €146,965 has been established.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Tax loss carryforwards can be carried forward indefinitely. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2005. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.”
The income tax costs (benefits) related to unrealised gains and losses in comprehensive income components of stockholders’ equity were €467 in 2003, (€561) in 2004 and (€1,801) in 2005.
5. AVAILABLE FOR SALE INVESTMENTS
The available for sale investment consisted solely of an investment in a Sampo Bank interest rate fund.
| Year Ended December 31, | ||||||
| 2005 | 2004 | |||||
| € | € | |||||
Acquisition cost at January 1, | 1,555,390 | 1,100,020 | ||||
Fair value in other comprehensive income | 6,321 | 2,471 | ||||
Fair value at January 1, | 1,561,711 | 1,102,491 | ||||
Additions | — | 2,800,000 | ||||
Disposal proceeds | (1,572,303 | ) | (2,358,887 | ) | ||
Other comprehensive income, gross | (6,321 | ) | 3,850 | |||
Income statement gains | 16,913 | 14,257 | ||||
Fair value at December 31, | — | 1,561,711 | ||||
F-46
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
6. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS/BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS
| Costs and earnings of uncompleted contracts | Billings of contracts | Net | ||||
2005 | ||||||
Costs and estimated earnings in excess of related billings on uncompleted contracts | 1,078,492 | 817,433 | 261,059 | |||
Billings in excess of related costs and estimated earnings on uncompleted contracts | 966,689 | 1,116,358 | 149,669 | |||
2004 | ||||||
Costs and estimated earnings in excess of related billings on uncompleted contracts | 280,741 | 264,112 | 16,629 | |||
Billings in excess of related costs and estimated earnings on uncompleted contracts | 344,498 | 457,728 | 113,230 | |||
7. PREPAID EXPENSES AND OTHER:
| Year Ended December 31, | ||||
| 2005 | 2004 | |||
| € | € | |||
Prepaid Expenses | 409,170 | 123,178 | ||
Current deferred tax (Note 4) | 19,569 | 47,909 | ||
Total | 428,739 | 171,087 | ||
8. PROPERTY AND EQUIPMENT:
| Year Ended December 31, | ||||||
| 2005 | 2004 | |||||
| € | € | |||||
Equipment consists of the following: | ||||||
Computers and Networks | 302,875 | 274,795 | ||||
Office Furniture & equipment | 125,562 | 115,517 | ||||
| 428,437 | 390,312 | |||||
Accumulated depreciation | (209,785 | ) | (140,536 | ) | ||
Equipment, net | 218,652 | 249,776 | ||||
The company has pledged assets as part of its financing arrangements. Note 15
F-47
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
9. ACQUISITIONS:
In 2003 the Company acquired a controlling interest of 51 % in the Danish CRO company Meddoc Aps and in 2004 acquired the remaining minority interest of 49 %. This acquisition was accounted for using the purchase method of accounting, utilizing appropriate fair value techniques to allocate the purchase price based on estimated fair values of assets and liabilities. Accordingly, the estimated fair value of assets acquired and liabilities assumed were included in the Company’s consolidated balance sheet as of the effective date of the acquisition. The total purchase consideration in 2003 and 2004 amounted to € 260,756 of which € 48,900 related to direct acquisition costs for legal, appraisal and accounting fees. The total purchase price for the 2004 acquisition of the remaining 49% of Meddoc Aps was allocated to the estimated fair value of assets and liabilities assumed as set forth in the following table:
| 2004 | 2003 | |||||
| € | € | |||||
Condensed balance sheet: | ||||||
Non-current assets | 5,967 | 21,556 | ||||
Current assets | 46,515 | 67,089 | ||||
Deferred tax | 20,250 | 7,018 | ||||
Non-current liabilities | (41,502 | ) | (20,192 | ) | ||
Current liabilities | (31,230 | ) | (37,801 | ) | ||
Goodwill | 63,776 | 159,310 | ||||
Total purchase price | 63,776 | 196,980 | ||||
10. GOODWILL AND INTANGIBLE ASSETS:
Changes in the carrying amount of goodwill for the twelve months ended December 31, 2004 and 2005 were as follows:
| € | |||
Balance as of January 1, 2004 | 215,123 | ||
Goodwill recorded during the period | |||
For current acquisitions | 63,776 | ||
Translation adjustments | 132 | ||
Balance as of December 1, 2004 | 279,031 | ||
Translation adjustments | (647 | ) | |
Balance as of December 31, 2005 | 278,384 | ||
Information regarding the Company’s other intangible assets follows:
| Year Ended December 31, | ||||||
| 2005 | 2004 | |||||
| € | € | |||||
License agreements | 38,823 | 38,823 | ||||
Backlog and customer relationship | 136,585 | 136,585 | ||||
| 175,408 | 175,408 | |||||
Less accumulated amortization | (106,054 | ) | (90,179 | ) | ||
Other intangible assets, net | 69,354 | 85,229 | ||||
F-48
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
11. ACCRUED EXPENSES AND OTHER:
| Year Ended December 31, | ||||
| 2005 | 2004 | |||
| € | € | |||
Employee related accruals | 487,922 | 590,382 | ||
Customer advances | 534,613 | 82,992 | ||
Withholding tax | 91,802 | 154,914 | ||
Vat | 13,249 | 54,462 | ||
Accrued expenses | 242,746 | 205,443 | ||
Current deferred tax (Note 4) | 28,961 | — | ||
Total | 1,399,293 | 1,088,193 | ||
12. STOCK-BASED COMPENSATION:
In 2004 we have adopted an equity incentive plans that provides for the granting of stock options to employees and directors. We account for grants of options to employees and directors under these plans applying the intrinsic value method provided for in Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations. In addition to APB Opinion No. 25, we provide the disclosures required by SFAS No. 123 “Accounting for Stock-Based Compensation” and by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.”
The Company has just one incentive plan being the 2004 plan which authorized the company to issue 720 stock options of which 360 were allocated to stock options A and 300 to stock options B. Both stock options have an exercise price of €750 with stock options A having a vesting period ending December 1, 2005 and stock options B having a vesting period ending December 1, 2006. The subscription period of both stock options will expire on January 31, 2009. According to the combination agreement referred to in note 17 the options to purchase Remedium shares will be changed to acquire Covalent shares. The total cost charged to income statement for this plan amounted to €31,050 in 2005 and €24,638 in 2004.
| Year Ended December 31, | ||||||||
| 2005 | 2004 | |||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||
Outstanding at beginning of year | 660 | 750 | — | — | ||||
Granted | — | — | 660 | 750 | ||||
Exercised | — | — | — | — | ||||
Outstanding at end of year | 660 | 750 | 660 | 750 | ||||
13. EMPLOYEE BENEFIT PLAN:
Pension costs are determined under the provisions of Statement of Financial Accounting No.87, “Employers’ Accounting for Pensions” (“FAS 87”) and related disclosures are determined under the provisions of Statement of Financial Accounting Standards No.132 (Revised 2003), “Employers’ Disclosures about Pensions and other Postretirement Benefits”.
F-49
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Elements of the Finnish statutory employment pension scheme (“TEL”) must be accounted for as defined benefit plans under FAS 87. All other employment pension schemes within the group are accounted for as defined contribution plans.
The following table sets forth the changes in the benefit obligation and fair value of plan assets during the year and the funded status of the above mentioned defined pension plan.
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Change in benefit obligations: | |||||||||
Benefit obligation at beginning of year | 113,000 | 114,000 | 53,000 | ||||||
Service cost | 30,000 | 36,000 | 16,000 | ||||||
Interest cost | 7,000 | 8,000 | 4,000 | ||||||
Net actuarial (gain) / loss | (50,000 | ) | (45,000 | ) | 41,000 | ||||
Benefits paid | |||||||||
Benefit obligation at end of year | 100,000 | 113,000 | 114,000 | ||||||
Funded status: | |||||||||
Funded status | (100,000 | ) | (113,000 | ) | (114,000 | ) | |||
Unrecognized transition asset | — | — | — | ||||||
Unrecognized net actuarial loss/(gain) | (53,000 | ) | (6,000 | ) | 41,000 | ||||
Accrued pension liability | (153,000 | ) | (119,000 | ) | (73,000 | ) | |||
Pension costs for the plan include the following components: | |||||||||
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Service cost benefits earned during the year | 30,000 | 36,000 | 16,000 | ||||||
Interest cost on projected benefit obligation | 7,000 | 8,000 | 4,000 | ||||||
Expected return on plan assets | — | — | — | ||||||
Recognized net actuarial gain (-) or loss (+) | 2,000 | — | |||||||
Net periodic pension cost | 37,000 | 46,000 | 20,000 | ||||||
The assumptions used were as follows: | |||||||||
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Discount rate at the year-end | 4.75 | % | 5.00 | % | 5.25 | % | |||
Rate of salary increase | 4.00 | % | 4.00 | % | 4.00 | % | |||
Rate of inflation | 2.00 | % | 2.00 | % | 2.00 | % | |||
Employee turnover | 2.00 | % | 2.00 | % | 2.00 | % | |||
F-50
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Amounts recognized in statement of financial position were as follows:
| Year Ended December 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
| € | € | € | |||||||
Accrued benefit costs | (153,000 | ) | (119,000 | ) | (73,000 | ) | |||
Net amount recognized | (153,000 | ) | (119,000 | ) | (73,000 | ) | |||
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were as follows:
| Year Ended December 31, | ||||||
| 2005 | 2004 | 2003 | ||||
| € | € | € | ||||
Projected benefit obligation | 100,000 | 113,000 | 114,000 | |||
Accumulated benefit obligation | 13,000 | 10,000 | 22,000 | |||
Fair value of plan assets | — | — | — | |||
14. LINE OF CREDIT
The company has two significant lines of credit. The first credit facility amounting to €500,000 is with Svenska Handelsbanken AB with interest charged at Handelsbanken Avista +0.9%, which at year-end was approximately 3%. The second significant line of credit amounting to €300,000 is with Okopankki Oyj with interest charged at 1 month euribor + 0.5% which at year end was approximately 3%. Of the combined facility of €800,000 some €180,000 remained unused at year-end. Commitments by the banks generally expire one year from the date of the agreement and are generally renewed.
15. COMMITMENTS AND CONTINGENCIES:
The Company is obligated under noncancellable operating leases expiring at various dates through 2009 relating to its operating facilities and certain equipment. The following table sets our the operating lease commitments:
| 2006 | 2007 | 2008 | 2009 | Total | ||||||
| € | € | € | € | € | ||||||
Operating Lease - equipment | 396,871 | 396,871 | 396,871 | 167,139 | 1,357,752 | |||||
Operating Lease - facilities | 553,493 | 399,735 | 318,477 | 13,441 | 1,285,146 | |||||
Total | 950,364 | 796,606 | 715,348 | 180,580 | 2,642,898 | |||||
The Company has pledged assets to a value of € 916,819 to financial institutions in accordance with the terms of their financing arrangements.
16. RELATED PARTIES
In the ordinary course of business, we have engaged in transactions with related parties on commercial terms that are no less favourable than would be available to other third parties.
Kai Lindevall, (CEO and President) is an owner in Ipsat Therapies Oy, a customer of Remedium, total sales for the years 2005, 2004 and 2003 amounted to € 9,326.25, € 104,403.67 and € 112,917.72 respectively.
F-51
Remedium Oy and Subsidiaries
Notes to the Consolidated Financial Statements—(Continued)
Jan Quistgaard (Director) is president, CEO and a board member and Sven-Erik Nilsson is a major shareholder and a board member of Egalet A/S a customer of Remedium, total sales for the years 2005, 2004 and 2003 amounted to € 0, € 0 and € 17,527.98 respectively.
Riitta Korpela (Director) is a director of Valio Oy a customer of Remedium; total sales for the years 2005, 2004 and 2003 amounted to € 64,387.28, € 0 and € 0 respectively.
Petri Manninen (Director) is a shareholder in Lakiasiaintoimisto Lakituki Oy, a supplier of Remedium, total services purchased for the years 2005, 2004 and 2003 amounted to € 25,255.17, € 20,923 and € 13,174.78 respectively.
Seppo Oksanen (Director) is a director of Fibrogen Europe Oy, a customer of Remedium, total sales for the years 2005, 2004 and 2003 amounted to € 37,620.88, € 14,116.00 € and € 113,301.18 respectively.
Heikki Vapaatalo (Director) is a board member in Orion Oyj, a customer of Remedium, total sales for the years 2005, 2004 and 2003 amounted to € 28,000, € 0 and € 0 respectively. He is also a board member and consultant of Yhtyneet Laboratoriot, a supplier of Remedium, total services purchased for the years 2005, 2004 and 2003 amounted to € 0, € 8,501.51 and € 5,269.06 respectively. He is also a member for Scientific Advisory Committee in Valio Oyj, a customer of Remedium.
17. SUBSEQUENT EVENTS
On March 3, 2006 the Company announced that it had entered into a definitive combination agreement with Covalent Group Inc., which is a Nasdaq listed (Nasdaq:CVGR) company (Covalent) with its headquarters in Wayne, Pennsylvania, USA. Under the terms of the agreement, which has been approved by the Boards of Directors of both companies and the stockholders of Remedium, Covalent expects to pay $ 20 million for all of the outstanding shares and common stock equivalents of Remedium. The consideration for the transaction is expected to be in the form of Covalent shares in the amount of $ 16 million and $ 4 million in cash, subject to certain purchase price adjustments. The closing is expected to occur at the end of the second quarter of 2006 subject to certain contingencies including, but not limited to, the approval of Covalent’s stockholders and a scheduled new fundraising to help finance the transaction. Upon closing, the combined company will be named Encorium BioSolutions Inc. (“Encorium”).
F-52
