EXHIBIT 4.1
kpmg
Consolidated Financial Statements of
NEUROCHEM INC.
(A DEVELOPMENT STAGE COMPANY)
Years ended June 30, 2003, 2002 and 2001
and for the period from inception (June 17, 1993) to June 30,
2003
(KPMG LOGO)
KPMG LLP Telephone (514) 840-2100
Chartered Accountants Telefax (514) 840-2187
2000 McGill College Avenue http://www.kpmg.ca
Suite 1900
Montreal (Quebec) H3A 3H8
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Neurochem Inc. as at June 30,
2003 and 2002 and the consolidated statements of operations, deficit and cash
flows for each of the years in the three-year period ended June 30, 2003 and for
the period from inception (June 17, 1993) to June 30, 2003. 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 2003 and
2002 and the results of its operations and its cash flows for each of the years
in the three-year period ended June 30, 2003 and for the period from inception
(June 17, 1993) to June 30, 2003 in accordance with Canadian generally accepted
accounting principles.
(Signed) KPMG LLP
Chartered Accountants
Montreal, Canada
August 8, 2003 (except note 18 (b), which
is as of August 12, 2003)
KPMG LLP, a Canadian owned limited liability partnership established under the
laws of Ontario, is a member firm of KPMG International, a Swiss association.
NEUROCHEM INC.
Consolidated Financial Statements
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
FINANCIAL STATEMENTS
Consolidated Balance Sheets........................... 1
Consolidated Statements of Operations................. 2
Consolidated Statements of Deficit.................... 3
Consolidated Statements of Cash Flows................. 4
Notes to Consolidated Financial Statements............ 5
NEUROCHEM INC.
Consolidated Balance Sheets
June 30, 2003 and 2002
(in thousands of Canadian dollars)
(in accordance with Canadian GAAP)
================================================================================
<Table>
<Caption>
2003 2003 2002
----------- -------- --------
(US$ - (Cdn$) (Cdn$)
note 2 (l))
Assets
Current assets:
Cash and cash equivalents $ 4,759 $ 6,450 $ 1,149
Marketable securities 7,292 9,884 23,013
Grants receivable (note 3) 390 529 1,017
Sales taxes and other receivables 651 882 405
Research tax credits receivable 866 1,174 718
Prepaid expenses and deposits 685 928 249
-------- -------- --------
14,643 19,847 26,551
Long-term security deposits (note 9 (e)) 174 236 226
Long-term investment (note 4) 3,262 4,421 --
Property and equipment (note 5) 3,003 4,070 3,750
Patent costs (note 6) 1,908 2,586 2,206
-------- -------- --------
$ 22,990 $ 31,160 $ 32,733
======== ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,253 $ 3,054 $ 2,216
Accrued liabilities 1,741 2,359 2,044
Current portion of obligations under capital leases
(note 7) 303 411 552
-------- -------- --------
4,297 5,824 4,812
Obligations under capital leases (note 7) 467 633 1,044
-------- -------- --------
4,764 6,457 5,856
Shareholders' equity:
Share capital (note 8) 64,544 87,482 69,501
Deficit (46,318) (62,779) (42,624)
-------- -------- --------
18,226 24,703 26,877
Commitments and contingencies (notes 3 (a) and 9))
Subsequent events (note 18)
-------- -------- --------
$ 22,990 $ 31,160 $ 32,733
======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors by:
(Signed) John Molloy (Signed) Colin Bier, Ph.D.
Director Director
-1-
NEUROCHEM INC.
Consolidated Statements of Operations
Years ended June 30, 2003, 2002 and 2001 and for the period from inception
(June 17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
(in accordance with Canadian GAAP)
================================================================================
<Table>
<Caption>
Cumulative
since
inception of
2003 2003 2002 2001 operations
----------- -------- -------- -------- ------------
(US$ - (Cdn$) (Cdn$) (Cdn$) (Cdn$)
note 2 (l))
Revenues:
Research contracts $ -- $ -- $ 2,271 $ 6,370 $ 9,216
License fees -- -- -- -- 1,106
-------- -------- -------- -------- --------
-- -- 2,271 6,370 10,322
Expenses:
Research and development 13,857 18,782 15,304 9,926 68,108
Research tax credits (1,040) (1,410) (1,048) (752) (9,376)
Research grants and other (1,398) (1,895) (2,071) (1,837) (7,608)
-------- -------- -------- -------- --------
11,419 15,477 12,185 7,337 51,124
General and administrative 5,300 7,184 3,698 3,189 22,221
Depreciation of property and
equipment 752 1,019 758 348 3,035
Amortization of patent costs 131 178 130 74 541
Interest and bank charges 106 144 232 127 862
-------- -------- -------- -------- --------
17,708 24,002 17,003 11,075 77,783
-------- -------- -------- -------- --------
Net loss before undernoted items (17,708) (24,002) (14,732) (4,705) (67,461)
Investment and other income:
Interest income 590 800 1,144 1,979 4,964
Foreign exchange 74 100 113 39 248
Gain on disposal of intellectual
property (note 4) 2,570 3,484 -- -- 3,484
-------- -------- -------- -------- --------
3,234 4,384 1,257 2,018 8,696
-------- -------- -------- -------- --------
Net loss before income taxes (14,474) (19,618) (13,475) (2,687) (58,765)
Income taxes:
Quebec credit for losses -- -- -- -- 700
-------- -------- -------- -------- --------
Net loss $(14,474) $(19,618) $(13,475) $ (2,687) $(58,065)
======== ======== ======== ======== ========
Net loss per share (note 12):
Basic and diluted $ (0.66) $ (0.90) $ (0.75) $ (0.15)
======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
-2-
NEUROCHEM INC.
Consolidated Statements of Deficit
Years ended June 30, 2003, 2002 and 2001 and for the period from inception
(June 17, 1993) to June 30, 2003
(in thousands of Canadian dollars)
(in accordance with Canadian GAAP)
================================================================================
<Table>
<Caption>
Cumulative
since
inception of
2003 2003 2002 2001 operations
----------- -------- -------- -------- ------------
(US$ - (Cdn$) (Cdn$) (Cdn$) (Cdn$)
note 2 (l))
Deficit, beginning of year $(31,448) $(42,624) $(29,149) $(25,897) $ --
Net loss (14,474) (19,618) (13,475) (2,687) (58,065)
Share issue costs (396) (537) -- (565) (4,714)
-------- -------- -------- -------- --------
Deficit, end of year $(46,318) $(62,779) $(42,624) $(29,149) $(62,779)
======== ======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
-3-
NEUROCHEM INC.
Consolidated Statements of Cash Flows
Years ended June 30, 2003, 2002 and 2001 and for the period from inception
(June 17, 1993) to June 30, 2003
(in thousands of Canadian dollars)
(in accordance with Canadian GAAP)
================================================================================
<Table>
<Caption>
Cumulative
since
inception of
2003 2003 2002 2001 operations
----------- -------- -------- -------- ------------
(US$ - (Cdn$) (Cdn$) (Cdn$) (Cdn$)
note 2 (l))
Cash flows from operating activities:
Net loss $(14,474) $(19,618) $(13,475) $ (2,687) $(58,065)
Adjustments for:
Gain on disposal of intellectual
property (2,570) (3,484) -- -- (3,484)
Depreciation and amortization 883 1,197 888 422 3,576
Write-off of patents -- -- 119 -- 119
Share issued for services -- -- -- -- 41
Changes in operating assets and liabilities:
Grants receivable 360 488 (37) (370) (529)
Sales taxes and other
receivables (352) (477) 12 (64) (882)
Research tax credits receivable (336) (456) 34 536 (1,174)
Prepaid expenses and deposits (508) (689) (31) (72) (1,163)
Accounts payable and accrued
liabilities 801 1,086 1,565 116 5,448
-------- -------- -------- -------- --------
(16,196) (21,953) (10,925) (2,119) (56,113)
Cash flows from financing activities:
Proceeds from issue of share capital 13,266 17,981 11 8,891 87,440
Share issue costs (396) (537) -- (565) (4,714)
Proceeds from sale-leaseback -- -- 1,649 -- 2,168
Repayment of obligations under
capital lease (407) (552) (618) (443) (2,118)
-------- -------- -------- -------- --------
12,463 16,892 1,042 7,883 82,776
Cash flows from investing activities:
Additions to property and equipment (1,209) (1,638) (946) (2,122) (6,280)
Additions to patent costs (397) (538) (1,156) (424) (3,458)
Long-term investment (436) (591) -- -- (591)
Investment in marketable securities -- -- -- -- (31,000)
Proceeds from maturity of
marketable securities 9,686 13,129 7,045 942 21,116
-------- -------- -------- -------- --------
7,644 10,362 4,943 (1,604) (20,213)
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents 3,911 5,301 (4,940) 4,160 6,450
Cash and cash equivalents,
beginning of year 848 1,149 6,089 1,929 --
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of year $ 4,759 $ 6,450 $ 1,149 $ 6,089 $ 6,450
======== ======== ======== ======== ========
</Table>
Supplemental disclosures to cash flow statements (note 13)
See accompanying notes to consolidated financial statements.
-4-
NEUROCHEM INC.
Notes to Consolidated Financial Statements
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
1. ORGANIZATION AND BUSINESS ACTIVITIES:
Neurochem Inc. (the "Company" or "Neurochem"), incorporated under the
Canada Business Corporations Act in 1993, is a Canadian biopharmaceutical
company focused on the development and commercialization of innovative
therapeutics for neurological disorders.
Since inception, the business activities of the Company have been devoted
principally to research and development of the Company's core technology
platform, amyloid inhibitors, which focuses on the design and synthesis of
chemical compounds that inhibit the formation, deposition and toxicity of
amyloid fibrils implicated as the underlying causes of certain diseases.
The Company's therapeutic focus is on developing treatments for a number of
important disease indications characterized by the presence of toxic
deposits of amyloid protein. The diseases currently targeted by the Company
include Alzheimer's Disease, Hemorrhagic Stroke due to Cerebril Amyloid
Angiopathy ("CAA"), and certain Systemic Amyloidosis disorders. In
addition, the Company is also conducting research and development work for
other neurological disorders principally Epileptic Seizures induced by
Traumatic Brain Injury. In 2003, the Company disposed of its intellectual
property and lead compounds for Diabetes Type II (see note 4). The status
of the Company's principal product candidates are as follows:
<Table>
<Caption>
Disease indication Product candidates Stage of development
------------------ ------------------ --------------------
Amyloid A (AA) Amyloidosis Fibrillex(TM) Phase II/III clinical trial
Alzheimer's Disease Alzhemed(TM) Phase III clinical trials in design
Hemorrhagic Stroke due to CAA Cerebril(TM) Phase II clinical trial
Epileptic Seizures induced by
Traumatic Brain Injury Lead compound NC-1461 Pre-clinical testing
</Table>
Neurochem is considered to be in the development stage, with a significant
emphasis in clinical trials for three of its product candidates.
Substantially all of the Company's research and development expenditures,
and all revenues from milestone payments and research contracts, since
inception, relate to the Company's core technology platform. The Company's
capital expenditures since inception, including costs incurred to secure
patents, relate principally to the Company's core technology platform.
-5-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements, which have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
would differ in some respects from those prepared in the United States. A
reconciliation of the net loss and shareholders' equity reported in
accordance with Canadian GAAP with US GAAP is presented in note 16.
(a) Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
(b) Cash and cash equivalents:
The Company considers all investments with maturities of three months
or less that are highly liquid and readily convertible into cash to be
cash equivalents.
(c) Marketable securities:
Marketable securities are investments with maturities greater than
three months and less than a year, and consist principally of corporate
bonds and commercial paper. Interest bearing financial assets are
intended to be held to maturity and are carried at amortized cost.
Interest is recognized on an effective yield basis. These investments
are written down to their estimated fair market value when this amount
is less than amortized cost, unless the Company has reason to believe
it will be able to recover the carrying amount. Estimated fair market
value is based on quoted or market prices.
(d) Long-term investment:
The long-term investment is recorded at cost. When, in the opinion of
management, a permanent decline in value has occurred, the investment
is written down to its estimated realizable value. In determining the
estimated realizable value, management relies on its judgment and
knowledge of the investment as well as assumptions of general business
and economic conditions that prevail and are expected to prevail. These
assumptions are limited due to the uncertainty of predictions
concerning future events.
-6-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(e) Property and equipment:
Property and equipment are stated at cost. Equipment under capital
leases are stated at the present value of minimum lease payments.
Depreciation and amortization are provided at the following annual
rates:
<Table>
<Caption>
Asset Basis Rate/period
----- ----- -----------
Research equipment Declining balance 20%
Office equipment Declining balance 20%
Computer hardware Declining balance 30%
Computer software Straight-line 100%
Equipment under capital leases Declining balance 20-30%
Leasehold improvements Straight-line Over the term
of the lease
</Table>
The Company performs a review for the impairment of its property and
equipment whenever events or changes in circumstances indicate that the
carrying amount of property and equipment may not be recoverable. An
impairment loss would be recognized when estimates of non-discounted
future cash flows expected to result from the use of such property and
equipment and its eventual disposition are less than its carrying
amount. No impairment losses have been identified by the Company for
the years ended June 30, 2003, 2002 and 2001.
(f) Patent costs:
Patents are stated at cost and are amortized using the straight-line
method over the life of the patent ranging from 17 to 20 years. The
capitalized amount with respect to patents relates to direct costs
incurred in connection with securing the patents. The cost of the
patents does not necessarily reflect their present or future value and
the amount ultimately recoverable is dependent upon the continued
development and successful commercialization of the related products.
Management reviews the unamortized balance of patent costs on an annual
basis, or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable, and recognizes any impairment
in carrying values in the year of impairment. An impairment would be
recognized when estimates of non-discounted future cash flows expected
to result from the use of the asset and its eventual disposition are
less then the carrying amount. In 2003, the Company recorded nil in
write-downs in patent costs for which no future benefits were expected
(2002 - $119; 2001 - nil).
-7-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(g) Goodwill and other intangible assets:
Effective July 1, 2002, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants (CICA), Handbook
Section 3062, with respect to the accounting for goodwill and other
intangible assets. The standard changes the accounting for goodwill
from an amortization method to an impairment-only approach. In
addition, the standard requires acquired intangible assets to be
separately recognized if the benefit of the intangible assets is
obtained through contractual or other legal right, or if the intangible
assets can be sold, transferred, licensed, rented or exchanged.
There was no impact on the Company's financial position, results of
operations and cash flows as a result of adopting these
recommendations. In addition, there has been no change in the estimated
useful life of the patent costs which continue to be amortized.
(h) Revenue recognition:
Revenue from research contracts is recognized when services to be
provided are rendered and all conditions under the terms of the
underlying agreement are met. Revenue subject to the achievement of
milestones is recorded only when the specified events have occurred and
collectibility is assured.
Up-front payments and initial technology access fees are deferred and
recognized as revenue on a systematic basis over the period that the
related products or services are delivered and all obligations are
performed.
License fees are recorded when conditions and events under the license
agreement have occurred and collectibility is reasonably assured.
(i) Research and development:
Research expenditures are expensed as incurred. Development
expenditures, if any, are capitalized when they meet the criteria for
capitalization in accordance with Canadian generally accepted
accounting principles and the future benefits could be regarded as
being reasonably certain. At June 30, 2003 and 2002, no development
costs were deferred.
(j) Government assistance:
Government assistance, consisting of grants and research tax credits,
is recorded as a reduction of the related expense or the cost of the
asset acquired. Government assistance is recorded in the accounts when
reasonable assurance exists that the Company has complied with the
terms and conditions of the approved grant program or, for tax credits,
when there is reasonable assurance that they will be realized.
-8-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(k) Foreign exchange:
Monetary assets and liabilities denominated in foreign currencies are
translated at year-end exchange rates. Other balance sheet items
denominated in foreign currencies are translated at rates of exchange
in effect at the transaction date. Income and expenses denominated in
foreign currencies are translated at average rates prevailing during
the year. Translation gains and losses are included in income.
The Company's foreign subsidiaries are considered to be integrated
foreign operations and their accounts have been translated using the
temporal method with translation gains and losses included in the
consolidated statements of operations.
(l) Translation of convenience:
The Company's functional currency is the Canadian dollar. As a
convenience to certain users, the Company has also presented the 2003
consolidated financial statements in US dollars using the convenience
translation method whereby all Canadian dollar amounts were converted
into US dollars at the noon exchange rate quoted by the Bank of Canada
at June 30, 2003, which was $0.7378 US dollar per Canadian dollar. The
information in US dollars is presented only for the convenience of some
readers and thus has limited usefulness. This translation should not be
viewed as a representation that such Canadian dollar amounts actually
represent such US dollar amounts or could be or would have been
converted into US dollars at the rate indicated.
(m) Stock-based compensation plan:
Effective July 1, 2002, the Company adopted prospectively the new
recommendations of the CICA, Handbook Section 3870, with respect to the
accounting for stock-based compensation and other stock-based payments.
The new recommendations require that all stock-based payments to
non-employees, and employee awards that are direct awards of stock,
call for settlement in cash or other assets, or are stock appreciation
rights that call for settlement by the issuance of equity instruments,
granted on or after July 1, 2002, be accounted for using the fair value
method. For all other stock-based employee compensation awards, the new
standards permit the Company to continue to follow its existing policy
of using the settlement date method of accounting. Under this method,
no compensation expense is recognized when stock options are issued to
employees. Any consideration received from the plan participants upon
exercise of stock options is credited to share capital.
-9-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Stock-based compensation plan (continued):
The new standard requires that the Company disclose the pro forma
effect of accounting for all stock-based awards granted during the year
ended June 30, 2003 under the fair value-based method (refer to note
12). In the first year of application, comparative disclosures need not
be provided for prior periods.
(n) Income taxes:
The Company utilizes the asset and liability method for accounting for
income taxes. Under this method, future income tax assets and
liabilities are determined based on "temporary differences"
(differences between the accounting basis and the tax basis of the
assets and liabilities), and are measured using the currently enacted,
or substantively enacted, tax rates and laws expected to apply when
these differences reverse. A valuation allowance is recorded against
any future tax asset if it is more likely than not that the asset will
not be realized.
(o) Earnings per share:
Basic earnings per share are determined using the weighted average
number of common shares outstanding during the period. Diluted earnings
per share are computed in a manner consistent with basic earnings per
share except that the weighted average shares outstanding are increased
to include additional shares from the assumed exercise of options and
warrants, if dilutive. The number of additional shares is calculated by
assuming that outstanding options and warrants were exercised and that
the proceeds from such exercises were used to acquire shares of common
stock at the average market price during the reporting period.
(p) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant areas requiring
the use of management estimates include estimating the useful lives of
long-lived assets, including property and equipment and patent costs,
as well as assessing the recoverability of the long-term investment,
research tax credits and future tax assets. The reported amounts and
note disclosures are determined to reflect the most probable set of
economic conditions and planned course of actions. Actual results could
differ from these estimates.
-10-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
3. GRANTS RECEIVABLE:
(a) Technology Partnerships Canada Program:
During the year ended June 30, 2000, the Company signed an agreement
with the federal Ministry of Industry under its Technology Partnerships
Canada Program (the "Agreement"). Under the Agreement, the Company is
entitled to a financial contribution based on eligible expenditures
incurred by the Company with respect to a project for the development
of effective oral therapeutics for Alzheimer's Disease. The
contributions were earned over a period of four years ended March 31,
2003.
The Company submitted total claims under the Agreement in the amount of
$1,498 in 2003, $2,019 in 2002, $1,777 in 2001 and $1,443 in 2000 for a
cumulative amount of $6,737. The Company recorded $1,405 in 2003,
$1,657 in 2002, $1,413 in 2001 in "research grants and other" in the
consolidated statements of operations and $93 in 2003, $362 in 2002 and
$364 in 2001 against property and equipment.
Under the Agreement, the Company is committed to pay the federal
government royalties equal to 7.24% of gross revenues realized from the
commercialization of effective orally-administered therapeutics for the
treatment of Alzheimer's Disease until June 30, 2010. After June 30,
2010, the Company may have to continue to pay royalties until such time
as the aggregate amount of royalties paid pursuant to the Agreement
reaches $20,540.
(b) Food and Drug Administration:
During the year ended June 30, 2002, the Company was awarded a $1,400
grant from the US Food and Drug Administration for certain direct costs
to be incurred by the Company for a Phase II/III trial of
Fibrillex(TM). Funds under the grant are expected to be received by the
Company in equal quarterly instalments over a period of three years.
Included in "research grants and other" on the statement of operations
for the twelve-month period ended June 30, 2003 is an amount of $460
(2002 - $356) received under this agreement.
-11-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
4. LONG-TERM INVESTMENT:
In May 2003, the Company entered into the following transactions with
respect to its Diabetes Type II pre-clinical program:
(i) the Company disposed of its intellectual property rights relating to
the pre-clinical diabetes program, including an exclusive perpetual,
royalty-free, worldwide license to Innodia Inc. ("Innodia"), a
privately held Canadian biopharmaceutical company. The carrying value
of these rights, which amount to $346, were exchanged for 1,904,464
Innodia common shares having a fair market value of $5,400. The fair
market value of the Innodia common shares was determined based on the
pricing of a $7,000 private placement financing completed by Innodia
concurrent with this transaction. Since the Company transferred its
ownership of a controlled productive asset to Innodia in exchange for
a non-controlling equity interest of 31% in Innodia, the Company
accounted for this transaction as a partial sale and recognized a gain
on the transaction only to the extent of the interest of the other
shareholders in Innodia. Accordingly, the gain on sale of intellectual
property rights of $3,484 included in the 2003 statement of operations
represents approximately 69% of the total gain of $5,054 on the
transaction;
(ii) the Company subscribed for 176,339 Class A1 preferred shares of
Innodia as part of a private placement for a cash consideration of
$500, plus related costs of $91.
In June 2003, the Company transferred its 31% interest in Innodia to a
holding company which is controlled indirectly by a shareholder. As
consideration for this transfer, Neurochem received 176,339 non-voting
Class A1 preferred shares, 1,904,464 non-voting, participating Class A
common shares and 352,537 voting, non-participating Class V preferred
shares. The Class A1 preferred shares are convertible into common shares on
a one-for-one basis at any time at the option of the holder and
automatically convertible under specified circumstances. At June 30, 2003,
the Company's long-term investment represents voting rights of
approximately 12% and equity ownership of approximately 70% in the holding
company, which represents the same economic interest as that held directly
in Innodia prior to the transfer.
-12-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
5. PROPERTY AND EQUIPMENT:
<Table>
<Caption>
2003
-----------------------------------------------------------
Accumulated
depreciation Net book
Cost and amortization value
------------- ---------------- -------------
Research equipment $ 2,484 $ 1,253 $ 1,231
Computer hardware and software 1,331 750 581
Office equipment 560 187 373
Equipment under capital leases 1,198 429 769
Leasehold improvements 1,532 416 1,116
------------- ------------- -------------
$ 7,105 $ 3,035 $ 4,070
============= ============= =============
</Table>
<Table>
<Caption>
2002
-----------------------------------------------------------
Accumulated
depreciation Net book
Cost and amortization value
------------- ---------------- -------------
Research equipment $ 1,694 $ 822 $ 872
Computer hardware and software 587 376 211
Office equipment 357 126 231
Equipment under capital leases 1,782 429 1,353
Leasehold improvements 1,346 263 1,083
------------- ------------- -------------
$ 5,766 $ 2,016 $ 3,750
============= ============= =============
</Table>
Included in "depreciation of property and equipment" in the consolidated
statements of operations is depreciation of equipment under capital lease
of $251 (2002 - $245).
-13-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
6. PATENT COSTS:
<Table>
<Caption>
2003 2002
------ ------
Cost $2,946 $2,562
Accumulated amortization 360 356
------ ------
$2,586 $2,206
====== ======
</Table>
The remaining weighted average amortization period of patents at June 30,
2003 is 15.4 years (2002 - 16.2 years). The estimated amortization expense
for each of the next five years is approximately $196 per annum or $980 in
the aggregate.
7. OBLIGATIONS UNDER CAPITAL LEASES:
Minimum lease payments under capital leases expiring in 2006 are as
follows:
<Table>
<Caption>
2003 2002
--------- ---------
2003 $ -- $ 645
2004 470 470
2005 470 470
2006 196 196
--------- ---------
1,136 1,781
Less amount representing interest at rates ranging
from 6.88% to 9.75% 92 185
--------- ---------
1,044 1,596
Less current portion 411 552
--------- ---------
$ 633 $ 1,044
========= =========
</Table>
Interest expense related to obligations under capital leases was $92 in
2003 (2002 - $80; 2001 - $50) and is included in "interest and bank
charges" in the consolidated statements of operations.
In December 2001, the Company entered into a sale-leaseback agreement with
a Canadian chartered bank to sell previously acquired research equipment
and concurrently leased the same property back over a four-year period. The
Company received proceeds from the sale in the amount of $1,649.
-14-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
8. SHARE CAPITAL:
(a) The authorized share capital of the Company consists of:
o an unlimited number of voting common shares
o an unlimited number of non-voting preferred shares, issuable in
one or more series
(b) Issued and outstanding:
The issued and outstanding share capital consists of:
<Table>
<Caption>
2003 2002
-------------- --------------
23,483,024 common shares (2002 - 18,028,344 common shares) $ 87,482 $ 69,501
============== ==============
</Table>
Changes in the issued and outstanding common shares for the past three
fiscal periods were as follows:
<Table>
<Caption>
Number Dollars
---------- -------
Balance, June 30, 2000 16,623,481 $60,599
Exercise of over allotment option (i) 581,818 4,800
Issued for cash from private placement (ii) 321,035 3,807
Exercise of options 435,438 205
Exercise of warrants 34,447 79
---------- -------
Balance, June 30, 2001 17,996,219 69,490
Exercise of options 32,125 11
---------- -------
Balance, June 30, 2002 18,028,344 69,501
Issued for cash from private placement (iii) 4,000,000 15,148
Exercise of warrants 836,644 1,904
Exercise of options 618,036 929
---------- -------
Balance, June 30, 2003 23,483,024 $87,482
========== =======
</Table>
-15-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
8. SHARE CAPITAL (CONTINUED):
(b) Issued and outstanding (continued):
Fiscal 2001:
(i) In August 2000, the underwriters fully exercised their
over-allotment option issued in connection with the Company's
2000 initial public offering to purchase an additional 581,818
common shares for a cash consideration of $4,800.
(ii) In January 2001, the Company issued 321,035 common shares to a
shareholder for a cash consideration of $3,807.
Fiscal 2003:
(iii) On July 25, 2002 and February 18, 2003, the Company completed
equity financing agreements with Picchio Pharma Inc. In July
2002, the Company issued 2.8 million units at a cost of $2.50 per
unit, and received aggregate proceeds of $7,000. The units were
comprised of one common share and one warrant exercisable any
time within a three-year period at the exercise price of $3.13,
which represents a premium of 25% over the issue price of the
unit. The warrants expire on July 25, 2005.
In February 2003, the Company issued 1.2 million units at a cost
of $6.79 per unit and received aggregate proceeds of $8,148. The
units were comprised of one common share and one warrant
exercisable any time within a three-year period at an exercise
price of $7.81, which represents a premium of 15% over the issue
price of the unit. The warrants expire on February 18, 2006.
Share issue costs related to these transactions were charged to the
deficit.
(c) Stock option plan:
Under its stock option plan, the Company may grant options to purchase
common shares to key employees, directors, officers, consultants and
members of the Scientific Advisory Board of the Company. The terms,
number of common shares covered by each option as well as the permitted
frequency of the exercise of such options is determined by the Board of
Directors. In general, options vest over periods ranging from one to
five years. The total number of common shares which may be issued
pursuant to the plan is 3,196,973 shares. The maximum number of common
shares which may be optioned in favor of any single individual shall
not exceed 5% of the issued and outstanding common shares of the
Company. The option price per share will, in no circumstances, be lower
than the fair market value of the common shares at the date of the
grant of the option, less any discount permitted by any regulatory
authority. In no event may the term of any option exceed ten years from
the date of the grant of the option.
-16-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
8. SHARE CAPITAL (CONTINUED):
(c) Stock option plan (continued):
Changes in outstanding options issued under the stock option plan for
the past three fiscal periods were as follows:
<Table>
<Caption>
Weighted
average
Number exercise price
--------- --------------
Options outstanding, June 30, 2000 1,489,725 $ 1.73
Exercised (186,438) 0.37
Cancelled or expired (2,562) 0.41
--------- --------
Options outstanding, June 30, 2001 1,300,725 1.93
Granted 704,400 3.00
Exercised (22,125) 0.36
Cancelled or expired (19,500) 3.13
--------- --------
Options outstanding, June 30, 2002 1,963,500 2.32
Granted 909,000 7.22
Exercised (577,036) 1.59
Cancelled or expired (3,620) 3.25
--------- --------
Options outstanding, June 30, 2003 2,291,844 $ 4.48
========= ========
</Table>
-17-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
8. SHARE CAPITAL (CONTINUED):
(c) Stock option plan (continued):
The following table summarizes information about options outstanding
and exercisable at June 30, 2003:
<Table>
<Caption>
Weighted average
remaining
Options Options contractual life
Exercise price/share outstanding exercisable (years)
-------------------- ----------- ----------- ----------------
$ 0.36 - $ 0.65 272,500 272,500 3.8
$ 2.99 - $ 3.75 1,116,011 684,595 7.5
$ 5.30 - $ 6.79 377,333 98,708 9.3
$ 8.11 - $ 9.85 526,000 41,000 9.6
--------- --------- ---
2,291,844 1,096,803 7.8
========= ========= ===
</Table>
(d) Other outstanding options at June 30, 2003:
The Company had previously issued 400,000 options to purchase common
shares at prices ranging from US$0.20 to US$2.50 per share which are
not covered by the stock option plan. In the fiscal period ended June
30, 2003, 41,000 (10,000 in 2002; 249,000 in 2001) of these options
were exercised for gross proceeds of $12 ($3 in 2002; $135 in 2001).
The remaining 100,000 outstanding options are detailed as follows:
<Table>
<Caption>
Options Options
Exercise price/share outstanding exercisable Expiry
-------------------- ----------- ----------- ------
US$ 2.50 100,000 100,000 2004
======= ======= ====
</Table>
-18-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
8. SHARE CAPITAL (CONTINUED):
(e) Outstanding warrants at June 30, 2003:
Each warrant entitles the holder to purchase one common share. Changes
in outstanding warrants issued in connection with various private
placements for the past three fiscal periods were as follows:
<Table>
<Caption>
Weighted
average
Number exercise price
--------- --------------
Warrants outstanding, June 30, 2000 977,876 $ 2.22
Exercised (34,447) 2.31
--------- --------
Warrants outstanding, June 30, 2001 and 2002 943,429 2.22
Issued in connection with private placement (note 8 (b) (iii)) 4,000,000 4.53
Exercised (836,644) 2.28
--------- --------
Warrants outstanding, June 30, 2003 4,106,785 $ 4.46
========= ========
</Table>
The following table summarizes information about outstanding warrants
at June 30, 2003:
<Table>
<Caption>
Warrants Exercise price Expiry
-------- -------------- ------
106,785 $ 1.80 April 2005
2,800,000 $ 3.13 July 2005
1,200,000 $ 7.81 February 2006
--------- --------
4,106,785 $ 4.46
========= ========
</Table>
-19-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
9. COMMITMENTS:
(a) Operating leases:
Minimum annual lease payments for the next five years and thereafter
under operating leases relating to premises are as follows:
<Table>
2004 $ 574
2005 479
2006 400
2007 323
2008 196
Thereafter 717
--------
$ 2,689
========
</Table>
In addition, the Company is also responsible for operating costs and
taxes under the operating leases.
(b) License agreements and research collaborations:
Effective January 1, 1994, the Company entered into a number of license
agreements (the "License Agreements") with Parteq Research and
Development Innovations ("Parteq"), the commercialization arm and
exclusive worldwide licensee of Queen's University. Pursuant to these
agreements, the Company was granted the worldwide exclusive license to
use, market and sublicense certain technologies, patents and patent
applications developed and belonging to Queen's University. While the
title and interest in the intellectual property rights remain the
property of Queen's University, the Company will be the owner of all
intellectual property rights in and to all improvements to the
intellectual property rights developed, invented or acquired by the
Company. Pursuant to the terms of the License Agreements, the Company
has agreed to pay certain fees (including milestone payments) and
royalties, and to assume all expenses related to the protection of the
intellectual property rights. Each of the License Agreements will
terminate upon the later of (i) the expiry date of the last-to-expire
of the licensed patents or (ii) ten years after its first sales of
products that use the license, should no patent be issued.
-20-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
9. COMMITMENTS (CONTINUED):
(b) License agreements and research collaborations (continued):
The Company is a party to research and license agreements under which
it has obtained rights to use certain technologies to develop certain
of its product candidates. These agreements impose various milestones,
commercialization, sublicensing, royalty and other payment, insurance,
indemnification and other obligations and are subject to certain
reservations of rights.
(c) Agreement with H. Lundbeck A/S:
In 1999, the Company entered into a Collaborative Research and License
Agreement and a Master Private Placement and Stock Option Agreement
(the "Agreements") with H. Lundbeck A/S ("Lundbeck"), a European
pharmaceutical company specializing in the research, development,
production and marketing of drugs for treating diseases of the central
nervous system.
Pursuant to the Agreements, the parties agreed to collaborate on the
development of compounds (GAG and GAG mimetic) useful in treating
Alzheimer's Disease.
In October 2000, the Company achieved a research and development
objective under its Agreements. In 2001, as a result of the
determination of "proof of concept" in connection with the research
program, the Company received a milestone payment in the amount of
$3,807 (US$2,500). In addition, the Company received research funding
of $1,933 (US$1,250) ($1,912 (US$1,250) in 2001) under a research
program that commenced January 2001 under the Agreements and $338 ($651
in 2001) under other research agreements with Lundbeck.
In October 2001, the Company and Lundbeck mutually agreed to terminate
the Agreements and, as a result, the Company regained ownership and
control of its anti-amyloid drug molecules program for Alzheimer's
Disease at no cost to the Company. Consequently, the Company received
the last payments from Lundbeck under the Agreements in October 2001.
-21-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
9. COMMITMENTS (CONTINUED):
(d) Management services agreement:
Payments under a management services agreement with a
shareholder-affiliated entity (see note 10 (d)) are as follows: 2004 -
$960; 2005 - $640.
(e) Guarantees:
On January 1, 2003, the Company adopted the new recommendations of the
CICA, accounting Guideline 14, Disclosure of Guarantees, which
clarifies disclosure requirements for certain guarantees. The
guideline does not provide guidance on nor require the measurement and
recognition of a guarantor's liability for obligations under
guarantees. The guideline defines a guarantee to be a contract
(including an indemnity) that contingently requires the Company to
make payments to a third party based on (i) changes in an underlying
interest rate, foreign exchange rate, equity or commodity instrument,
index or other variable, that is related to an asset, a liability or
an equity security of the counterparty, (ii) failure of another party
to perform under an obligating agreement or (iii) failure of another
party to pay its indebtedness when due.
At June 30, 2003, the Company is contingently liable for a letter of
guarantee granted in favor of a landlord in the amount of $200. A
long-term security deposit of $200 is pledged under the letter of
guarantee. In addition, the Company has granted a movable hypothec in
the amount of $100 under a lease agreement covering the universality
of movable property at a leased location.
-22-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
10. RELATED PARTY TRANSACTIONS:
(a) Included in revenues are amounts received under various agreements
with Lundbeck, a shareholder, of nil in 2003, $2,271 in 2002 and
$6,370 in 2001.
(b) Included in research and development are the following amounts paid to
Queen's University at Kingston, a shareholder, under various research
agreements:
<Table>
2003 $ 5
2002 295
2001 137
</Table>
(c) The Company paid Parteq Research and Development Innovations, a
shareholder, the following amounts for patent fees in the normal
course of operations:
<Table>
2003 $ 10
2002 16
2001 --
</Table>
(d) Under the terms of a management services agreement entered into in
March 2003 with Picchio International Inc., a company controlled by a
shareholder, the Company recorded a management fee of $320 for the
year ended June 30, 2003. In addition, the Company reimbursed this
company for $209 of expenses incurred prior to the date of the
management services agreement.
(e) Accounts payable and accrued liabilities include balances due to
shareholders of $13 (2002 and 2001 - $47).
These transactions are in the normal course of operations and are measured
at the exchange amount, which is the amount of consideration established
and agreed to by the related parties.
-23-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
11. INCOME TAXES:
(a) Details of the components of income taxes are as follows:
<Table>
<Caption>
2003 2002 2001
---------- ---------- ----------
Loss before income taxes:
Canadian operations $ (18,559) $ (13,475) $ (2,687)
Foreign operations (1,059) -- --
---------- ---------- ----------
(19,618) (13,475) (2,687)
Basic income tax rate 34% 36% 38%
---------- ---------- ----------
Computed income tax recovery (6,670) (4,851) (1,021)
Adjustment in income taxes resulting from:
Non-recognition of losses and other
unclaimed deductions 2,403 4,851 1,021
Reduction of future tax assets due to
differences in tax rates with foreign
subsidiaries 4,592 -- --
Permanent differences (325) -- --
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
</Table>
(b) Future income taxes:
The temporary differences that give rise to future tax assets and
liabilities at June 30, 2003 and 2002 are as follows:
<Table>
<Caption>
2003 2002
---------- ----------
Future tax assets:
Patent costs $ 10,053 $ --
Unclaimed scientific research and experimental
development expenditures for tax purposes 5,750 9,546
Share issue costs 376 522
Non-capital losses carried forward -- 2,669
Long-term investment 271 --
Cumulative eligible capital 6 33
---------- ----------
16,456 12,770
Less: valuation allowance (15,621) (12,178)
---------- ----------
835 592
Future tax liabilities:
Property and equipment, and patent costs (835) (592)
---------- ----------
Net future tax assets $ -- $ --
========== ==========
</Table>
-24-
Intentionally Left Blank
-25-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
11. INCOME TAXES (CONTINUED):
(b) Future income taxes (continued):
In assessing the realizability of future tax assets, management
considers whether it is more likely than not that some portion or all
of the future income tax assets will be realized. The ultimate
realization of future tax assets is dependent upon the generation of
future taxable income and/or tax planning strategies. Since the
Company is a development stage enterprise, the generation of future
taxable income is dependent on the successful commercialization of its
products and technologies.
(c) The Company has the following unclaimed deductions available to reduce
future taxable income in Canada:
<Table>
<Caption>
Federal Quebec
------------ -----------
Research expenditure pool (no expiry) $ 26,093 $ 149
============ ===========
</Table>
The Company also has approximately $3,685 in federal research
investment tax credits that can be used to reduce future federal taxes
payable and which expire as follows:
<Table>
2012 $1,434
2013 2,251
------
$3,685
======
</Table>
-26-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
12. EARNINGS PER SHARE:
(a) Basic and diluted earnings per share:
The reconciliation between basic and diluted earnings per share is as
follows:
<Table>
<Caption>
2003 2002 2001
------------ ------------ ------------
Basic:
Basic weighted average number of
common shares outstanding 21,770,541 18,007,392 17,436,716
============ ============ ============
Basic net loss per share $ (0.90) $ (0.75) $ (0.15)
============ ============ ============
Diluted:
Basic weighted average number of
common shares outstanding 21,770,541 18,007,392 17,436,716
Plus impact of stock options and
warrants (1) 2,858,010 1,239,910 1,976,280
------------ ------------ ------------
Diluted common shares 24,628,551 19,247,302 19,412,996
============ ============ ============
Diluted net loss per share (1) $ (0.90) $ (0.75) $ (0.15)
============ ============ ============
</Table>
(1) The impact of stock options and warrants is anti-dilutive because the
Company incurred losses in 2003, 2002 and 2001. All outstanding options and
warrants included in this computation could potentially be dilutive in the
future.
-27-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
12. EARNINGS PER SHARE (CONTINUED):
(b) Stock-based compensation:
Effective July 1, 2002, the Company adopted prospectively the new
recommendations with respect to the accounting for stock-based
compensation and other stock-based payments (see note 2 (m)). If the
fair value-based accounting method had been used to account for and
measure stock-based compensation costs relating to exempt options
granted to employees after July 1, 2002, the net earnings and related
earnings per share figures would have been as follows:
<Table>
Reported net loss $ (19,618)
Pro forma adjustments to compensation expense (718)
------------
Pro forma net loss $ (20,336)
============
Pro forma loss per share:
Basic $ (0.93)
Diluted (0.93)
============
</Table>
The weighted average fair value of each option granted is estimated on
the date of grant using the Black-Scholes pricing model with the
following assumptions:
<Table>
Risk free interest rate 4.68%
Expected volatility 61%
Expected life in years 7
Expected dividend yield nil
</Table>
-28-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
12. EARNINGS PER SHARE (CONTINUED):
(b) Stock-based compensation (continued):
The following table summarizes the weighted average grant-date fair
value per share for options granted during the year ended June 30,
2003:
<Table>
<Caption>
Weighted
average
grant-date
Number of fair value
options per share
------------ ------------
Exercise price per share equal to market 909,000 $ 4.66
============ ============
</Table>
Dividend yield was excluded from the calculation since it is the
present policy of the Company to retain all earnings to finance
operations.
13. STATEMENT OF CASH FLOWS - SUPPLEMENTARY DISCLOSURE:
(a) Cash and cash equivalents:
Cash and cash equivalents consist of cash balances with banks and
short-term investments:
<Table>
<Caption>
2003 2002
------------ ------------
Cash balances with banks $ 2,462 $ 115
Short-term investments (yielding interest between
3.24% to 3.29% (2002: 1.3% to 2.7%) 3,988 1,034
------------ ------------
$ 6,450 $ 1,149
============ ============
</Table>
(b) Interest and income taxes:
<Table>
<Caption>
2003 2002
------------ ------------
Cash paid in the year for:
Interest $ 92 $ 143
Income taxes -- --
</Table>
-29-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
13. STATEMENT OF CASH FLOWS - SUPPLEMENTARY DISCLOSURE (CONTINUED):
(c) Non-cash transactions:
<Table>
<Caption>
2003 2002 2001
------------ ------------ ------------
Disposal of intellectual property to
Innodia in exchange
for an equity interest (note 4) $ 3,830 $ -- $ --
Additions to property and equipment
and patent costs included in accounts
payable and accrued liabilities at
year-end 590 523 625
</Table>
14. SEGMENT DISCLOSURES:
(a) Business segment:
The Company operates in one business segment, namely the development
and commercialization of innovative therapeutics for neurological
disorders. The Company's operations are conducted principally in
Canada.
(b) Information about major customers:
All of the Company's revenues in 2002 and 2001 were derived from one
customer (see note 9 (c) and 10 (a)).
(c) Property and equipment and intangible assets (patent costs) by
geographic area are as follows:
<Table>
<Caption>
2003 2002
------------ ------------
Canada $ 4,070 $ 5,956
Europe 2,586 --
------------ ------------
$ 6,656 $ 5,956
============ ============
</Table>
-30-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
15. FINANCIAL INSTRUMENTS:
(a) Fair value disclosure:
Fair value estimates are made as of a specific point in time, using
available information about the financial instrument. These estimates
are subjective in nature and often cannot be determined with
precision.
The Company has determined that the carrying value of its short-term
financial assets and liabilities, including cash and cash equivalents,
grants receivable, sales taxes receivable, interest and other
receivables, research tax credits receivable as well as accounts
payable and accrued liabilities, approximates their fair value because
of the relatively short periods to maturity of these instruments.
Marketable securities are comprised of fixed income instruments with a
high credit rating (not less than R1 (mid) rating). The weighted
average effective interest rate of the marketable securities is
approximately 3.25%. The fair market value of the marketable
securities amounts to $9,947 as at June 30, 2003 ($22,976 in 2002).
The fair value of obligations under capital leases, calculated at the
present value of future contractual payments of principal and
interest, discounted at the current market rates of interest available
to the Company for debt instruments with similar terms and maturity,
approximates their carrying value.
(b) Credit risk:
Credit risk results from the possibility that a loss may occur from
the failure of another party to perform according to the terms of the
contract. The Company regularly monitors the credit risk exposure and
takes steps to mitigate the likelihood of these exposures from
resulting in actual loss.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
marketable securities. The Company has investment policies that ensure
the safety and preservation of principal, that ensure that the
Company's liquidity needs are met and that optimize yields. Authorized
investments include bankers' acceptances, bearer deposit notes,
corporate and government bonds, certificates of deposit, commercial
paper and treasury bills, and are limited to 10% per issuer.
-31-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
15. FINANCIAL INSTRUMENTS (CONTINUED):
(c) Foreign currency risk management:
A substantial portion of the Company's revenues from research
contracts and milestone payments in prior years, as well as expenses,
are denominated in US dollars. This results in financial risk due to
fluctuations in the value of the Canadian dollar relative to the US
dollar. The Company does not use derivative financial instruments to
reduce its foreign exchange exposure. Fluctuations in payments made
for the Company's services could cause unanticipated fluctuations in
the Company's operating results.
(d) Interest rate risk:
The Company's exposure to interest rate risk is as follows:
Cash and cash equivalents Fixed interest rate
Marketable securities Fixed interest rate
Obligations under capital leases Fixed interest rate
16. CANADIAN/US REPORTING DIFFERENCES:
(a) Consolidated statements of operations:
The reconciliation of earnings reported in accordance with Canadian
GAAP with US GAAP is as follows:
<Table>
<Caption>
Cumulative
since
inception of
2003 2002 operations
------------ ------------ ------------
Net loss in accordance with
Canadian GAAP $ (19,618) $ (13,475) $ (58,065)
Adjustment for:
Stock-based compensation costs (1) (83) (111) (1,967)
------------ ------------ ------------
Net loss in accordance with US GAAP $ (19,701) $ (13,586) $ (60,032)
============ ============ ============
Loss per share under US GAAP:
Basic and diluted $ (0.90) $ (0.75)
============ ============
</Table>
-32-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(a) Consolidated statements of operations (continued):
The weighted average number of common shares outstanding for purposes
of determining basic and diluted loss per share is the same amount as
the one used for Canadian GAAP purposes.
(b) Consolidated balance sheets:
A reconciliation of balance sheet items in accordance with Canadian
GAAP with US GAAP is as follows:
(i) Share capital:
<Table>
<Caption>
2003 2002
------------ ------------
Share capital, Canadian GAAP $ 87,482 $ 69,501
Adjustment for:
Share issue costs (2) (4,714) (4,177)
------------ ------------
Share capital, US GAAP $ 82,768 $ 65,324
============ ============
</Table>
(ii) Additional paid-in capital:
<Table>
<Caption>
2003 2002
------------ ------------
Additional paid-in capital, Canadian GAAP $ -- $ --
Adjustment for:
Stock-based compensation (1):
Current year 83 111
Cumulative effect of prior years 1,610 1,499
------------ ------------
1,693 1,610
------------ ------------
Additional paid-in capital, US GAAP $ 1,693 $ 1,610
============ ============
</Table>
-33-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(b) Consolidated balance sheets (continued):
(iii) Deficit:
<Table>
<Caption>
2003 2002
------------ ------------
Deficit, Canadian GAAP $ (62,779) $ (42,624)
Adjustment for:
Stock-based compensation (1):
Current year (83) (111)
Cumulative effect of prior years (1,610) (1,499)
------------ ------------
(1,693) (1,610)
Share issue expenses (2) 4,714 4,177
------------ ------------
Deficit, US GAAP $ (59,758) $ (40,057)
============ ============
</Table>
(1) Stock-based compensation:
Employees
For US GAAP purposes, the Company has elected to follow the
intrinsic value method of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for stock options granted to employees and directors.
Under the intrinsic value method, compensation cost is recognized
for the difference, if any, between the quoted market price of
the stock as at the grant date and the amount the individual must
pay to acquire the stock. The Company recorded compensation
expense of $83 (2002 - $111) in respect of options granted to
employees prior to the Company's initial public offering at
prices other than the quoted market price at date of grant.
Non-employees
In accordance with FAS 123, Accounting for Stock-Based
Compensation, compensation related to stock options granted to
non-employees prior to July 1, 2002 is recorded in the accounts
based on the fair value of the stock options at the grant date.
For purposes of reconciliation to US GAAP, the Company recorded
compensation expense of nil in respect of options granted to
non-employees (2002 - nil).
-34-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(b) Consolidated balance sheets (continued):
(1) Stock-based compensation (continued):
Fair value method
Both Canadian and US GAAP require disclosure of the pro forma net
loss using the fair value method of accounting for stock options
granted to employees. The calculation under Canadian GAAP is
presented in note 12 (b); the US GAAP calculation presented
hereafter considers options granted prior to the effective date
of the Canadian GAAP requirements.
If the fair value based accounting method under FAS 123 had been
used to account for stock-based compensation costs relating to
options issued to employees, the net loss and related loss per
share figures under US GAAP would have been as follows:
<Table>
<Caption>
Cumulative
since
inception of
2003 2002 operations
------------ ------------ ------------
Reported net loss, US GAAP $ (19,701) $ (13,586) $ (60,032)
Add: Stock-based employee
compensation expense
determined under the
intrinsic value method
included in reported net
earnings, net of related
taxes of $nil 83 111 1,967
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
taxes of $nil (1,115) (431) (3,820)
------------ ------------ ------------
Pro forma net loss, US GAAP $ (20,733) $ (13,906) $ (61,885)
============ ============ ============
</Table>
-35-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(b) Consolidated balance sheets (continued):
(1) Stock-based compensation (continued):
<Table>
<Caption>
2003 2002
------------ ------------
Loss per share (US GAAP)
Basic:
As reported $ (0.90) $ (0.75)
Pro forma (0.95) (0.77)
Diluted:
As reported (0.90) (0.75)
Pro forma (0.95) (0.77)
</Table>
The weighted average fair value of each option granted is
estimated on the date of grant using the Black-Scholes pricing
model with the following weighted average assumptions:
<Table>
<Caption>
2003 2002
------------ ------------
Risk-free interest rate 4.68% 5.19%
Expected volatility 61% 54%
Expected life in years 7 7
Expected dividend yield -- --
</Table>
The following table summarizes the weighted average grant date
fair value per shares for options granted:
<Table>
<Caption>
Weighted
average
grant-date
Number of fair value
options per share
------------ ------------
2003 909,000 $ 4.66
2002 704,400 1.54
</Table>
-36-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(b) Consolidated balance sheets (continued):
(2) Share issue costs:
For US GAAP purposes, share issue costs are recorded as a
reduction of the proceeds raised from the issuance of share
capital. For Canadian GAAP purposes, share issue costs were
charged to the deficit.
(c) Consolidated comprehensive income:
FAS 130, Reporting Comprehensive Income, requires the Company to
report and display information related to comprehensive income for the
Company. Comprehensive income consists of net income and all other
changes in shareholders' equity that do not result from changes from
transactions with shareholders, such as cumulative foreign currency
translation adjustments and unrealized gains or losses on securities.
There were no adjustments to the net loss, US GAAP, required to
reconcile to the comprehensive loss.
(d) Other disclosures required by US GAAP:
(i) Debt and equity investments:
In accordance with FAS 115, Accounting for Certain Investments in
Debt and Equity Securities, the Company's marketable securities
are classified as held-to-maturity and the amortized cost, gross
unrealized holding gains, unrealized holding losses and fair
value by security-type were as follows:
At June 30, 2003
<Table>
<Caption>
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
------------ ------------ ------------ ------------
Commercial paper $ 9,884 $ 63 $ -- $ 9,947
============ ============ ============ ============
</Table>
-37-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(i) Debt and equity investments (continued):
At June 30, 2002
<Table>
<Caption>
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
------------ ------------ ------------ ------------
Canadian money
market securities $ 13,987 $ -- $ -- $ 13,987
Canadian corporate
debt securities 9,026 -- (37) 8,989
------------ ------------ ------------ ------------
$ 23,013 $ -- $ (37) $ 22,976
============ ============ ============ ============
</Table>
(ii) Supplementary information:
Under US GAAP and SEC rules, separate disclosure is required for
the following statement of operations item. There is not similar
requirement under Canadian GAAP.
<Table>
<Caption>
2003 2002
-------------- --------------
Rental expense $ 485 $ 407
============== ==============
</Table>
-38-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(iii) Development stage company (continued):
The Company is a development stage enterprise as defined in
FAS 7 and the following additional disclosures are provided.
The statement of shareholders' equity since date of inception
under US GAAP is presented below:
<Table>
<Caption>
Common shares Class A shares 1st Preference
----------------------- ----------------------- -----------------------
Number Dollars Number Dollars Number Dollars
---------- ---------- ---------- ---------- ---------- ----------
Period ended October 14, 1994:
Shares issued
for cash 850,000 -- -- -- 400,000 546
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, October 14,
1994 850,000 -- -- -- 400,000 546
Period ended September 30, 1995:
Shares issued
for cash -- -- -- -- 600,000 811
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1995 850,000 -- -- -- 1,000,000 1,357
Year ended September 30, 1996:
Shares issued
for cash -- -- -- -- -- --
Shares issued
for services 275,076 41 -- -- -- --
Share issue costs -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1996 1,125,076 41 -- -- 1,000,000 1,357
Year ended September 30, 1997:
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1997 1,125,076 41 -- -- 1,000,000 1,357
<Caption>
Special shares Additional Total
----------------------- paid-in shareholders'
Number Dollars capital Deficit equity
---------- ---------- ---------- ---------- -------------
Period ended October 14, 1994:
Shares issued
for cash -- -- $ -- $ -- $ 546
Net loss -- -- -- (551) (551)
---------- ---------- ---------- ---------- ----------
Balance, October 14,
1994 -- -- -- (551) (5)
Period ended September 30, 1995:
Shares issued
for cash -- -- -- -- 811
Net loss -- -- -- (1,787) (1,787)
---------- ---------- ---------- ---------- ----------
Balance, September 30,
1995 -- -- -- (2,338) (981)
Year ended September 30, 1996:
Shares issued
for cash 5,595,001 10,071 -- -- 10,071
Shares issued
for services -- -- -- -- 41
Share issue costs -- (217) -- -- (217)
Net loss -- -- -- (2,169) (2,169)
---------- ---------- ---------- ---------- ----------
Balance, September 30,
1996 5,595,001 9,854 -- (4,507) 6,745
Year ended September 30, 1997:
Net loss -- -- -- (2,391) (2,391)
---------- ---------- ---------- ---------- ----------
Balance, September 30,
1997 5,595,001 9,854 -- (6,898) 4,354
</Table>
-39-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(iii) Development stage company (continued):
The Company is a development stage enterprise as defined in
FAS 7 and the following additional disclosures are provided
(continued):
The statement of shareholders' equity since date of inception
under US GAAP is presented below (continued):
<Table>
<Caption>
Common shares Class A shares 1st Preference
----------------------- ----------------------- ------------------------
Number Dollars Number Dollars Number Dollars
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1997
brought forward 1,125,076 41 -- -- 1,000,000 1,357
---------- ---------- ---------- ---------- ---------- ----------
Year ended September 30, 1998:
Conversion into
Class A shares -- -- 6,595,001 11,211 (1,000,000) (1,357)
Shares issued
for cash -- -- 3,138,770 10,201 -- --
Exercise of options 5,500 2 -- -- -- --
Share issue costs -- -- -- (550) -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1998 1,130,576 43 9,733,771 20,862 -- --
Period ended June 30, 1999:
Shares issued
for cash -- -- 1,483,224 5,562 -- --
Exercise of options 29,314 11 -- -- -- --
Share issue costs -- -- -- (106) -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30,
1999 1,159,890 54 11,216,995 26,318 -- --
<Caption>
Special shares Additional Total
------------------------ paid-in shareholders'
Number Dollars capital Deficit equity
---------- ---------- ---------- ---------- -------------
Balance, September 30, 1997
brought forward 5,595,001 9,854 $ -- $ (6,898) $ 4,354
---------- ---------- ---------- ---------- ----------
Year ended September 30, 1998:
Conversion into
Class A shares (5,595,001) (9,854) -- -- --
Shares issued
for cash -- -- -- -- 10,201
Exercise of options 5,500 -- -- -- 2
Share issue costs -- -- -- -- (550)
Net loss -- -- 602 (6,824) (6,222)
---------- ---------- ---------- ---------- ----------
Balance, September 30,
1998 -- -- 602 (13,722) 7,785
Period ended June 30, 1999:
Shares issued
for cash -- -- -- -- 5,562
Exercise of options 29,314 -- -- -- 11
Share issue costs -- -- -- -- (106)
Net loss -- -- 303 (3,887) (3,584)
---------- ---------- ---------- ---------- ----------
Balance, June 30,
1999 -- -- 905 (17,609) 9,668
</Table>
-40-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(iv) Development stage company (continued):
The Company is a development stage enterprise as defined in FAS 7
and the following additional disclosures are provided
(continued):
The statement of shareholders' equity since date of inception
under US GAAP is presented below (continued):
<Table>
<Caption>
Common shares Class A shares 1st Preference
-------------------------- -------------------------- -------------------------
Number Dollars Number Dollars Number Dollars
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1999
brought forward 1,159,890 54 11,216,995 26,318 -- --
Year ended June 30, 2000:
Shares issued
for cash 180,723 750 63,442 238 -- --
Exercise of options 12,177 4 -- -- -- --
Exercise of warrants - -- -- 111,467 362 -- --
Conversion of
Class A shares 11,391,904 26,918 (11,391,904) (26,918) -- --
Initial public offering 3,878,787 32,000 -- -- -- --
Share issue costs -- (2,739) -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance June 30,
2000 16,623,481 56,987 -- -- -- --
Year ended June 30, 2001:
Exercise of over-
allotment option 581,818 4,800 -- -- -- --
Shares issued
for cash 321,035 3,807 -- -- -- --
Exercise of options 435,438 205 -- -- -- --
Exercise of warrants 34,447 79 -- -- -- --
Share issue expenses -- (565) -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30,
2001 17,996,219 65,313 -- -- -- --
<Caption>
Special shares Additional Total
------------------------- paid-in shareholders'
Number Dollars capital Deficit equity
----------- ----------- ----------- ----------- -------------
Balance, June 30, 1999
brought forward -- -- $ 905 $ (17,609) $ 9,668
Year ended June 30, 2000:
Shares issued
for cash -- -- -- -- 988
Exercise of options -- -- -- -- 4
Exercise of warrants - -- -- -- -- 362
Conversion of
Class A shares -- -- -- -- --
Initial public offering -- -- -- -- 32,000
Share issue costs -- -- -- -- (2,739)
Net loss -- -- 334 (5,915) (5,581)
----------- ----------- ----------- ----------- -----------
Balance June 30,
2000 -- -- 1,239 (23,524) 34,702
Year ended June 30, 2001:
Exercise of over-
allotment option -- -- -- -- 4,800
Shares issued
for cash -- -- -- -- 3,807
Exercise of options -- -- -- -- 205
Exercise of warrants -- -- -- -- 79
Share issue expenses -- -- -- -- (565)
Net loss -- -- 260 (2,947) (2,687)
----------- ----------- ----------- ----------- -----------
Balance, June 30,
2001 -- -- 1,499 (26,471) 40,341
</Table>
-41-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(iii) Development stage company (continued):
The Company is a development stage enterprise as defined in FAS 7
and the following additional disclosures are provided (continued):
The statement of shareholders' equity since date of inception
under US GAAP is presented below (continued):
<Table>
<Caption>
Common shares Class A shares 1st Preference Special shares
----------------------- ----------------------- ----------------------- -----------------------
Number Dollars Number Dollars Number Dollars Number Dollars
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2001
brought forward 17,996,219 65,313 -- -- -- -- -- --
Year ended June 30, 2002:
Exercise of options 32,125 11 -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30,
2002 18,028,344 65,324 -- -- -- -- -- --
Year ended June 30, 2003:
Shares issued for
cash 4,000,000 15,148 -- -- -- -- -- --
Exercise of warrants 836,644 1,904 -- -- -- -- -- --
Exercise of options 618,036 929 -- -- -- -- -- --
Share issue costs -- (537) -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30,
2003 23,483,024 82,768 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<Caption>
Additional Total
paid-in shareholders'
capital Deficit equity
---------- ---------- -------------
Balance, June 30, 2001
brought forward $ 1,499 $ (26,471) $ 40,341
Year ended June 30, 2002:
Exercise of options -- -- 11
Net loss 111 (13,586) (13,475)
---------- ---------- ----------
Balance, June 30,
2002 1,610 (40,057) 26,877
Year ended June 30, 2003:
Shares issued for
cash -- -- 15,148
Exercise of warrants -- -- 1,904
Exercise of options -- -- 929
Share issue costs -- -- (537)
Net loss 83 (19,701) (19,618)
---------- ---------- ----------
Balance, June 30,
2003 $ 1,693 $ (59,758) $ 24,703
---------- ---------- ----------
</Table>
-42-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(iv) Recent accounting pronouncements:
In April 2003, the Financial Accounting Standards Board ("FASB")
issued FAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, which is effective for
contracts entered into or modified after June 30, 2003 and
hedging relationships designated after June 30, 2003. In May
2003, FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.
The provisions of this statement are effective for financial
instruments entered into or modified after May 31, 2003. The
Company does not expect FAS 149 and 150 to have a material impact
on its financial statements.
The Emerging Issues Task Force ("EITF") reached a consensus on
issue 00-21, Revenue Arrangements with Multiple Deliverables.
This consensus addresses issues related to separating and
allocating value to the individual elements of a single customer
arrangement involving obligations regarding multiple products,
services, or rights which may be fulfilled at different points in
time or over different periods of time. The EITF guidance is
applicable for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not expect this
guidance to have a material impact on its financial statements.
In December 2002, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3063, Impairment or Disposal of
Long-lived Assets and revised Section 3475, Disposal of
Long-Lived Assets and Discontinued Operations. Together, these
two Sections supersede the write-down and disposal provisions of
Section 3061, Property, Plant and Equipment as well as Section
3475, Discontinued Operations. Section 3063 amends existing
guidance on long-lived asset impairment measurement and
establishes standards for the recognition, measurement and
disclosure of the impairment of long-lived assets held for use by
the Company. It requires that an impairment loss be recognized
when the carrying amount of an asset to be held and used exceeds
the sum of the undiscounted cash flows expected from its use and
disposal; the impairment recognized is measured as the amount by
which the carrying amount of the asset exceeds its fair value.
Section 3475 provides a single accounting model for long-lived
assets to be disposed of by sale. Section 3475 provides specified
criteria for classifying an asset as held-for-sale to be measured
at the lower of their carrying amounts or fair value, less costs
to sell.
-43-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED):
(d) Other disclosures required by US GAAP (continued):
(iv) Recent accounting pronouncements (continued):
Section 3475 also broadens the scope of businesses that qualify
for reporting as discontinued operations to include any disposals
of a component of an entity, which comprises operations and cash
flows that can be clearly distinguished from the rest of the
Company, and changes the timing of recognizing losses on such
operations. The new standards contained in Section 3063 on the
impairment of long-lived assets held for use are applicable for
years beginning on or after April 1, 2003. The revised standards
contained in Section 3475 on disposal of long-lived assets and
discontinued operations are applicable to disposal activities
initiated by the Company's commitment to a plan on or after May
1, 2003. The Company does not expect that the adoption of these
standards will have a material effect on its financial
statements.
17. COMPARATIVE FIGURES:
Certain of the comparative figures have been reclassified to conform to the
presentation adopted in the current year.
18. SUBSEQUENT EVENTS:
(a) Exercise of warrants and options:
In July and August 2003, the Company issued 178,907 common shares
pursuant to the exercise of 106,785 warrants and 72,122 options for an
aggregate cash consideration of $400.
-44-
NEUROCHEM INC.
Notes to Consolidated Financial Statements, Continued
Years ended June 30, 2003, 2002 and 2001 and for the period from inception (June
17, 1993) to June 30, 2003
(in thousands of Canadian dollars, except per share data)
================================================================================
18. SUBSEQUENT EVENTS (CONTINUED):
(b) Litigation:
The Company executed an agreement with Immtech International, Inc.
("Immtech") of Vernon Hills, Illinois in 2002 pursuant to which
Immtech provided the Company with certain compounds for testing and
granted the Company an option to license such compounds. On August 12,
2003, Immtech filed certain legal proceedings with the United States
District Court with respect to a dispute regarding the agreement. The
Company is vigorously defending these proceedings. In the opinion of
management, none of the compounds involved in the dispute are relevant
to the Company's product candidates and the Company does not believe
these proceedings will have any material impact on its business.
-45-