EXHIBIT 99.2
EUGENE SCIENCE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 and 2003
CONTENTS
Independent Auditors' Report 1 - 2
Consolidated Balance Sheets 3
Consolidated Statements of Stockholders' Deficit 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7 - 20
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
EUGENE SCIENCE, INC.
We have audited the consolidated balance sheets of EUGENE SCIENCE, INC.
and subsidiary (the "Company") as at December 31, 2004 and 2003 and the related
consolidated statements of stockholders' deficit, operations and cash flows for
the years then ended. The 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.
Except as stated in the following paragraph, we conducted our audits in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since we were appointed auditors of the subsidiary during 2005, we did
not observe the taking of the physical inventory of the subsidiary at the year
ended 2002 and 2003, and we were unable to satisfy ourselves concerning those
inventory quantities by alternative means. Since opening inventories enter into
the determination of the results of operations and cash flows for 2003 and 2004,
we were unable to determine whether adjustments to the inventory balances, cost
of sales, net income for the year, opening retained earnings, and cash provided
from operations might be necessary for 2003 and 2004. The subsidiary had no
inventory as at December 31, 2004 and $212,140 as at December 31, 2003. Cost of
sales of the subsidiary was $390,194 and $174,584 for 2003 and 2004
respectively.
-1-
INDEPENDENT AUDITORS' REPORT (cont'd)
In our opinion, except for the effect on the financial statements for
2003 and 2004 of adjustments, if any, which we might have determined to be
necessary had we been able to examine opening inventory quantities of the
subsidiary as at December 31, 2003 and 2004, as described in the preceding
paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and 2003, and the results of its operation, changes in its accumulated deficit
and its cash flows for the years ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and negative
working capital from operations and operates in a country whose economy is
currently unstable, which raises substantial doubt about its ability to continue
as a going concern. Management's plan in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/S/ SF PARTNERSHIP, LLP
-------------------------
SF PARTNERSHIP, LLP
TORONTO, CANADA CHARTERED ACCOUNTANTS
May 27, 2005
-2-
EUGENE SCIENCE, INC.
Consolidated Balance Sheets
December 31, 2004 and 2003
2004 2003
------------ ------------
ASSETS
CURRENT
Cash and cash equivalents (note 3) ..................... $ 36,681 $ 697,950
Accounts receivable (net of allowance for
doubtful accounts $308,250; 2003 - $233,309) (note 17) 2,721,287 2,127,605
Inventory (note 4) ..................................... 15,094 329,122
Advances to a related company (note 5) ................ 925,251 --
Prepaid and sundry assets .............................. 170,682 98,075
------------ ------------
3,868,995 3,252,752
PROPERTIES AND EQUIPMENT (note 6) .......................... 9,780,104 8,729,738
INVESTMENTS (note 7) ....................................... 588,584 594,146
INTANGIBLE ASSETS .......................................... 186,398 157,317
------------ ------------
$ 14,424,081 $ 12,733,953
============ ============
LIABILITIES
CURRENT
Accounts payable ....................................... $ 5,696,758 $ 3,684,133
Rental deposits (note 8) ............................... 156,016 133,952
Loans payable - current portion (note 9) ............... 10,512,246 4,449,922
Advances from a related company (note 10) .............. -- 12,812
Advances from shareholder and officer (note 11) ........ 6,169 82,046
------------ ------------
16,371,189 8,362,865
ACCRUED SEVERANCE .......................................... 426,367 300,806
DEPOSIT (note 18) .......................................... 1,768,344 --
LOANS PAYABLE (note 9) .................................... 336,774 2,636,947
CONVERTIBLE DEBENTURES (note 12) ........................... -- 1,666,791
------------ ------------
18,902,674 12,967,409
------------ ------------
STOCKHOLDERS' DEFICIENCY
CAPITAL STOCK (note 13) .................................... 2,538,572 2,538,572
PAID IN CAPITAL ............................................ 12,688,523 12,688,523
ACCUMULATED OTHER COMPREHENSIVE LOSS ....................... (1,676,719) (1,167,171)
ACCUMULATED DEFICIT ........................................ (18,028,969) (14,293,380)
------------ ------------
(4,478,593) (233,456)
------------ ------------
$ 14,424,081 $ 12,733,953
============ ============
APPROVED ON BEHALF OF THE BOARD
- ------------------------------- -------------------------------
Director Director
-3-
EUGENE SCIENCE, INC.
Consolidated Statements of Stockholders' Deficit
Years Ended December 31, 2004 and 2003
PAID IN ACCUMULATED
CAPITAL IN OTHER TOTAL
NUMBER OF CAPITAL EXCESS OF COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES STOCK PAR VALUE LOSS DEFICIT DEFICIT
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 1,
2003 29,197,300 $ 2,538,572 $ 12,688,523 $ (181,344) $(10,584,222) $ 4,461,529
Unrealized loss
on investments -- -- -- (1,006,341) -- (1,006,341)
Foreign exchange
on translation -- -- -- 20,514 -- 20,514
Net loss ......... -- -- -- -- (3,709,158) (3,709,158)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
2003 29,197,300 $ 2,538,572 $ 12,688,523 $ (1,167,171) $(14,293,380) $ (233,456)
============ ============ ============ ============ ============ ============
Balance, January 1,
2004 29,197,300 $ 2,538,572 $ 12,688,523 $ (1,167,171) $(14,293,380) $ (233,456)
Unrealized loss
on investments -- -- -- (78,490) -- (78,490)
Foreign exchange
on translation -- -- -- (431,058) -- (431,058)
Net loss ......... -- -- -- -- (3,735,589) (3,735,589)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
2004 29,197,300 $ 2,538,572 $ 12,688,523 $ (1,676,719) $(18,028,969) $ (4,478,593)
============ ============ ============ ============ ============ ============
-4-
EUGENE SCIENCE, INC.
Consolidated Statements of Operations
Years Ended December 31, 2004 and 2003
2004 2003
------------ ------------
REVENUE
Manufacturing .......................... $ 2,328,320 $ 3,746,415
Merchandise ............................ 528,604 1,085,474
------------ ------------
2,856,924 4,831,889
------------ ------------
COST OF SALES
Manufacturing .......................... 2,225,390 3,515,733
Merchandise ............................ 806,040 945,658
------------ ------------
3,031,430 4,461,391
------------ ------------
GROSS (LOSS) PROFIT ........................ (174,506) 370,498
------------ ------------
EXPENSES
Salaries, employee benefits, and
retirement allowance ................ 859,044 1,032,563
Research and development ............... 401,599 1,059,064
Professional fees ...................... 159,664 166,522
Advertising, promotion, and
entertainment ....................... 151,024 144,641
Office and general ..................... 81,007 212,571
Travel ................................. 65,690 76,143
Bad debts .............................. 62,476 231,704
Repairs and maintenance ................ 60,037 87,284
Utilities .............................. 56,656 88,627
Insurance .............................. 16,588 19,192
Rent ................................... 5,280 70,235
Foreign exchange ....................... 61 46,020
Commission ............................. -- 12,437
Depreciation ........................... 342,912 260,941
------------ ------------
2,262,038 3,507,944
------------ ------------
OPERATING LOSS ............................. (2,436,544) (3,137,446)
------------ ------------
OTHER INCOME (EXPENSES)
Net rental income ...................... 142,178 107,519
Miscellaneous income ................... 7,488 73,744
Interest expense - net ................. (1,229,901) (651,605)
Interest - other (note 18) ............. (151,141) --
Financing fees ......................... (57,731) --
Loss on disposition of equipment ....... -- (101,370)
Loss on write down of equipment ........ (9,938) --
------------ ------------
(1,299,045) (571,712)
------------ ------------
NET LOSS ................................... $ (3,735,589) $ (3,709,158)
============ ============
BASIC LOSS PER SHARE ....................... $ (0.13) $ (0.13)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES .......... 29,197,300 29,197,300
============ ============
-5-
EUGENE SCIENCE, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2004 and 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................... $(3,735,589) $(3,709,158)
Adjustments for:
Depreciation ............................... 613,987 636,577
Amortization of intangible assets .......... 37,324 34,191
Loss on disposition of equipment ........... -- 101,370
Loss on write down of equipment ............ 9,938 --
Change in non-cash working capital
Accounts receivable ........................ (219,510) 658,322
Inventory .................................. 332,326 586,457
Accounts payable ........................... 1,286,353 1,222,709
Accrued severance .......................... 68,600 (30,815)
Prepaid and sundry assets .................. (50,947) 368,887
Rental deposits ............................ -- (159,600)
Deposit .................................... 1,595,880 --
----------- -----------
(61,638) (291,060)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ...... (274,164) (65,598)
Investments ................................ 14,850 184,045
Intangible assets .......................... (40,184) (49,834)
----------- -----------
(299,498) 68,613
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from a related company ............ -- 12,855
Loans payable .............................. 2,341,762 (669,256)
Advances from shareholder and officer ...... (80,673) 82,320
Convertible debentures ..................... (1,752,002) (111,443)
Advances to a related company .............. (848,479) 410,915
----------- -----------
(339,392) (274,609)
----------- -----------
FOREIGN EXCHANGE ON CASH AND CASH EQUIVALENTS .... 39,259 2,942
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........ (661,269) (494,114)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR ... 697,950 1,192,064
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR .......... $ 36,681 $ 697,950
=========== ===========
-6-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
1. DESCRIPTION OF BUSINESS AND GOING CONCERN
a) Description of Business
Eugene Science, Inc. ("the Company"), a company operating in
Bucheon, Kyunggi-Do, Korea, was founded on July 1, 1997 under
the laws of the Republic of Korea to manufacture and sell
bio-technology products.
From its inception, the Company has been actively investing in
research to develop new technologies that can be used in the
functional food and drug industry.
The Company manufactures CZTM series cholesterol-lowering
functional food ingredients, beverages and capsules fortified
with CZTM series ingredients, and ordinary corn oil. The
merchandise sales include the purchase and resale of vegetable
oil products which include the ingredients of CZTM series.
b) Going Concern
The Company's financial statements are presented on a going
concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of
business. The Company has experienced recurring losses since
2000 and has negative cash flows from operations that raise
substantial doubt as to its ability to continue as a going
concern. For the years ended December 31, 2004 and 2003, the
Company experienced net losses of $3,735,589 and $3,709,158
respectively.
For 2004, the Company had no sales from its main product CZTM,
which accounted for 16% of its total sales and an estimated
gross margin of 28% in 2003.
The Company's ability to continue as a going concern is also
contingent upon its ability to secure additional financing,
initiating sale of its product and attaining profitable
operations.
In May 2005, plant sterols, the main ingredient of CZTM
series, was formally approved as a health function food
ingredient by the Korean Food & Drug Administration, making it
possible for the Company to advertise the cholesterol-lowering
function of CZTM and food enriched with CZTM. The Company
expects that the favorable change in the regulation will
strongly help in selling CZTM to major food companies. The
Company has also developed new capsule products that are
efficient and convenient in delivering the health function of
CZTM. The Company is actively developing sales channels for
CZTM and the capsule products and expects the sales to start
in the second half of 2005.
-7-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
1. DESCRIPTION OF BUSINESS AND GOING CONCERN (cont'd)
The Company also plans to strengthen the cooperation with its
international partners to restart shipping to overseas
markets. The Company expects to sell CZTM to major food
companies through its international strategic partners such as
Archer Daniels Midland Company. In regards to CZTM capsules,
the Company also plans to provide a large volume to the United
States market starting the second half of 2005 through
marketing companies in the United States.
In addition, management is pursuing various sources of equity
financing. Although the Company plans to pursue additional
financing, there can be no assurance that the Company will be
able to secure financing when needed or obtain such on terms
satisfactory to the Company, if at all.
As mentioned in note 19, subsequent to the year-end, the
Company obtained equity financing of $1 million and the
Company is in the process of trying to obtain additional
funding in the United States.
The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the
Company to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company are in accordance with generally
accepted accounting principles of the United States of America, and
their basis of application is consistent. Outlined below are those
policies considered particularly significant:
a) Basis of Presentation
The consolidated financial statements include the accounts of
the Company, and its 74% owned subsidiary UcoleBio Corp.
Intercompany accounts and transactions have been eliminated on
consolidation. These consolidated financial statements reflect
all adjustments, which are, in the opinion of management,
necessary for a fair presentation of the results for the year.
b) Unit of Measurement
The US Dollar has been used as the unit of measurement in
these financial statements.
-8-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
c) Use of Estimates
Preparation of financial statements in accordance with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and related notes to financial statements. These
estimates are based on management's best knowledge of current
events and actions the Company may undertake in the future.
Actual results may ultimately differ from estimates, although
management does not believe such changes will materially
affect the financial statements in any individual year.
d) Revenue Recognition
The Company generates revenues from sales of manufactured
goods and merchandise, as well as rental of the company's
buildings.
Revenues from products sales are recognized in accordance with
Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" ("SAB No. 101") when delivery has
occurred provided there is persuasive evidence of an
agreement, the fee is fixed or determinable and collection of
the related receivable is probable.
The Company retains substantially all of the benefits and
risks of ownership of its income properties and therefore
accounts for leases with its tenants as operating leases.
e) Government Grants
Government grants are recognized as income over the periods
necessary to match them with the related costs that they are
intended to compensate.
f) Currency Translation
The Company's functional currency is Korean won. Adjustments
to translate those statements into U.S. dollars at the balance
sheet date are recorded in other comprehensive income.
Foreign currency transactions of the Korean operation have
been translated to Korean Won at the rate prevailing at the
time of the transaction. Realized foreign exchange gains and
losses have been charged to income in the year.
g) Cash and Equivalents
Highly liquid investments with maturities of three months or
less when purchased are considered cash equivalents and
recorded at cost, which approximates fair value.
-9-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h) Properties and Equipment
Properties and equipment are stated at cost. Major renewals
and betterments are capitalized and expenditures for repairs
and maintenance are charges to expense as incurred.
Depreciation is computed using the straight-line method over
the following periods:
Building 20-40 years
Machinery 10 years
Vehicles 5 years
Furniture and equipment 3-5 years
i) Intangible Assets
Intangible assets such as cost of obtaining industrial rights
and patents are stated at cost, net of depreciation computed
using the straight-line method over 5 to 10 years.
j) Inventories
Inventories are stated at the lower of cost or net realizable
value. Net realizable value is determined by deducting selling
expenses from selling price.
The cost of inventories is determined on the first-in
first-out method, except for materials-in-transit for which
the specific identification method is used.
k) Investments
Investments in available-for-sale securities are being
recorded in accordance with FAS-115 "Accounting for Certain
Investments in Debt and Equity Securities". Equity securities
that are not held principally for the purpose of selling in
the near term are reported at fair market value with
unrealized holding gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.
l) Financial Instruments
Fair values of cash equivalents, short-term and long-term
investments and short-term debt approximate cost. The
estimated fair values of other financial instruments,
including debt, equity and risk management instruments, have
been determined using market information and valuation
methodologies, primarily discounted cash flow analysis. These
estimates require considerable judgment in interpreting market
data, and changes in assumptions or estimation methods could
significantly affect the fair value estimates.
-10-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m) Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory
Costs - an amendment of ARB No. 43, Chapter 4" (Statement
151). This statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). As currently worded in
ARB 43, Chapter 4, the term "so abnormal" was not defined and
its application could lead to unnecessary noncomparability of
financial reporting. This Statement eliminates that term and
requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that
allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production
facilities. The adoption of Statement 151 will not have a
material impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29"
(Statement 153). This Statement amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance.
A non-monetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly
as a result of the exchange. The adoption of FAS 153 will not
have a material impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123R). This Statement
requires a public entity to measure the cost of employee
services received in exchange for an award of equity
instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over
the period during which the employee is required to provide
service in exchange for the award requisite service period
(usually the vesting period). No compensation cost is
recognized for equity instruments for which employees do not
render the requisite service. Employee share purchase plans
will not result in recognition of compensation cost if certain
conditions are met; those conditions are much the same as the
related conditions in Statement 123. This Statement is
effective for public entities that do not file as a small
business issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. This
Statement applies to all awards granted after the required
effective date and to awards modified, repurchased, or
cancelled after that date. The cumulative effect of initially
applying this Statement, if any, is recognized as of the
required effective date and is not expected to have a material
impact on the Company's consolidated financial statements.
-11-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
3. CASH AND CASH EQUIVALENTS
The following amounts included in cash and cash equivalents are
restricted for use by the Company:
a) The Company had $155,301 in cash as at December 31, 2003 that
it had received from the government to be used only for a
specific joint research and development project with the
government. The cash was spent on that project during 2004.
b) The Company had provided a $418,600 term deposit as at
December 31, 2003 as security for a loan of same amount taken
out by a company with the same major shareholder and chief
executive officer. During 2004, the term deposit was loaned to
the related company to pay off the loan.
c) The Company had provided a $9,751 (2003 - $41,860) bond as
security for payment on future purchases from a vendor.
4. INVENTORY
Inventory includes $6,955 (2003 - $41,429) of finished goods, $8,139
(2003 - $57,521) of raw materials, and no merchandise (2003 -
$230,172).
5. ADVANCES TO A RELATED COMPANY
Advances to a company which has the same major shareholder and chief
executive officer bear interest at 9% per annum and are due on demand.
The company is in financial difficulty, however it is finalizing an
agreement for additional financing and, as such, the Company expects
the loan to be collectible as described in note 17.
6. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised as follows:
2004 2003
ACCUMULATED Accumulated
COST DEPRECIATION Cost Depreciation
----------- ----------- ----------- -----------
Land ................... $ 4,400,971 $ -- $ 3,778,579 $ --
Buildings .............. 3,370,537 653,135 2,888,430 432,706
Equipment .............. 4,014,740 1,466,876 3,237,328 961,573
Furniture and fixtures . 948,357 834,490 863,771 644,091
----------- ----------- ----------- -----------
$12,734,605 $ 2,954,501 $10,768,108 $ 2,038,370
----------- ----------- ----------- -----------
Net carrying amount .... $ 9,780,104 $ 8,729,738
----------- -----------
-12-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
6. PROPERTIES AND EQUIPMENT (cont'd)
The land and buildings have been pledged as security for a bank loan as
described in note 9, the same bank's guarantee of a note payable as
described in note 9, and a rental deposit as described in note 8.
During the 2004 year, the Company defaulted on its payments of the
loans and the bank with the first charge on the Company's properties
was in the process of trying to auction off the Company's properties
through court action. And various creditors of the Company have put a
provisional seizure on the properties to protect their loans. The
appraised value of the properties is $9,952,000. However, subsequent to
the year-end, the auction of the properties has been cancelled by the
bank as described in note 19. Also, during the year, an agreement has
been reached to sell the properties, as described in note 18, which the
creditors are aware of.
7. INVESTMENTS
2004 2003
--------- ---------
Private company 7.5% $ 588,212 $ 579,699
Company with same major shareholder and CEO 4.58% 1 1
Other marketable securities 371 14,446
--------- ---------
$ 588,584 $ 594,146
========= =========
Included in investments are certain shares of a private company with
carrying value of $311,753 (2003 - $307,240) that are pledged as
security for a trade payable in the amount of $377,841 (2003 -
$155,238).
8. RENTAL DEPOSITS
A rental deposit of $58,506 (2003 - $50,232) is secured by a charge on
the land and buildings as described in note 6. The charge is
subordinate to the prior claim held by the bank as described in note 9.
-13-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
9. LOANS PAYABLE
2004 2003
CURRENT LONG-TERM TOTAL Total
----------- ----------- ----------- -----------
Bank loans .................. $ 5,963,465 $ -- $ 5,963,465 $ 5,640,200
Bank loan #2 ................ 1,946,104 -- 1,946,104 --
Note payable #1 ............. 2,319,382 -- 2,319,382 --
Notes payable (#2, 3, 4, & 5) 178,728 -- 178,728 919,685
Government loans (#1, 2, & 3) 41,185 336,774 377,959 359,544
Loan payable - customer ..... 63,382 -- 63,382 167,440
----------- ----------- ----------- -----------
$10,512,246 $ 336,774 $10,849,020 $ 7,086,869
=========== =========== =========== ===========
Bank Loans
The bank loans bear interest at 4.5% to 18% and are due on demand. A
bank loan of $3,889,259 (2003 - $2,810,104) is secured by a first
charge on the land and buildings as described in note 6. The Company is
currently in default of these loans and, as such, as at December 31,
2004, the land and buildings were in the process of being auctioned
through court action by the request of the bank. Subsequent to the
year-end, the auction of the properties was cancelled by the bank as
described in note 19.
In addition to the security mentioned above, a loan in the amount of
$1,311,469 (2003 - $1,084,139) is guaranteed by Korea Technology Credit
Guarantee Fund, a government operated fund. Additionally, another bank
loan of $278,804 is guaranteed by the chief executive officer as at
December 31, 2004. As at December 31, 2003, a bank loan of $776,084 was
guaranteed by the bank with the first charge on the Company's
properties and repaid by the same bank in 2004.
Bank Loan #2
The bank loan bears interest at 4.6% per annum, is unsecured, and due
on maturity on December 22, 2005.
Note Payable #1
The note payable from Korea Technology Credit Guarantee Fund, a
government operated fund, bears interest at 21% per annum, is
guaranteed by the chief executive officer, and is due on demand.
Notes Payable #2, 3, 4, and 5
The notes payable bear interest at 0% to 9% and are due on demand. As
at December 31, 2003, a note payable of $819,619 was guaranteed by the
bank with the first charge on the Company's land and buildings as
described in note 6. The loan was repaid by the same bank in 2004.
-14-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
9. LOANS PAYABLE (cont'd)
Government Loan #1
The loan is non-interest bearing, unsecured, repayable in three annual
payments of $20,593 and matures February 2006. The Company is in
arrears on the 2004 annual payment. Total amount outstanding at the
year end was $61,779.
Government Loans #2 and 3
The loans are non-interest bearing, unsecured, and are repayable when
the projects related to the loans have been completed. The Company is
in default of one of the grants in the amount of approximately $62,000.
The loan was forgiven subsequent to the year end, but the Company will
not be allowed to participate in new government projects for a year as
described in note 19.
Loan Payable - customer
The loan payable from a customer is non-interest bearing and due on
demand.
10. ADVANCES FROM A RELATED COMPANY
The advances are from a company which has the same major shareholder
and chief executive officer, bears interest at 9%, and is due on
demand.
11. ADVANCES FROM SHAREHOLDER AND OFFICER
The advances from the chief executive officer, who is also a 32%
shareholder, bears interest at 9% per annum and is repayable on demand.
12. CONVERTIBLE DEBENTURES
Pursuant to SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" the Company
accounts for the convertible debentures as a liability at face value
and no formal accounting recognition is assigned to the value inherent
in the conversion feature.
As at December 31, 2003, the Company had a convertible debenture with a
face value of $1,666,791, a guarantee yield of 8.64% per annum on
maturity, and an annual coupon rate of 3% payable quarterly. The
debenture was convertible, to a maximum of 1,538,460 shares of common
stock at any time prior to three business days before the maturity date
of October 9, 2004. During 2004, the Company defaulted on the repayment
of convertible bond and its guarantor, KOTEC (Korea Technology Credit
Guarantee Fund) repaid the balance on behalf of the Company. The debt
to KOTEC is reflected in the books and records of the Company as note
payable #1 as described in note 9.
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EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
13. CAPITAL STOCK
Authorized:
300,000,000 common shares,
par value $0.0869
2004 2003
---- ----
Issued:
29,197,300 common shares $ 2,538,572 $ 2,538,572
=========== ===========
Stock Warrants and Options
The Company has accounted for its stock options and warrants in
accordance with SFAS 123 "Accounting for Stock - Based Compensation"
and SFAS 148 "Accounting for Stock - Based compensation - Transition
and Disclosure." Value of options granted has been estimated by the
Black Scholes option pricing model. The assumptions are evaluated
annually and revised as necessary to reflect market conditions and
additional experience. The following assumptions were used:
2004 2003
---- ----
Interest rate 7.7% 7.7%
Expected volatility 0.1% 0.1%
Expected life in years 6 7
In 1999 the Board of Directors of the Company adopted an option plan to
allow employees to purchase ordinary shares of the Company.
In October 1999, the share option plan granted 928,350 stock options
for the common stock of the Company having a $0.869 nominal par value
each and an exercise price of $0.12. In 2000, 236,240 stock options
were cancelled.
In December 1999, 659,169 stock options were granted having a $0.0869
nominal par value each and an exercise price of $0.26.
In October 2000, 971,999 stock options were granted having a $0.0869
nominal par value each and an exercise price of $1.74. In 2000, 5,087,
in 2001, 162,848, in 2002, 40,712, and in 2003, 244,272 stock options
were cancelled.
In May 2001, 71,246 stock options were granted having a $0.0869 nominal
par value each and an exercise price of $1.53. In 2002, 20,356 stock
options were cancelled.
In March 2002, 1,000,000 stock options were granted having a $0.0869
nominal par value each and an exercise price of $1.51. In 2002, 330,000
stock options were cancelled. In 2003, an additional 110,000 stock
options were cancelled.
-16-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
13. CAPITAL STOCK (cont'd)
In September 2002, 220,000 stock options were granted having a $0.0869
nominal par value each and an exercise price of $1.64.
In March 2003, 350,000 stock options were granted having a $0.0869
nominal par value each and an exercise price of $1.60. In 2003, 180,000
stock options were cancelled. In 2004, an additional 20,000 stock
options were cancelled.
The options vest gradually over a period of 2 to 3 years from the date
of grant. The term of each option shall not be more than 7 years from
the date of grant. 519,080 and 270,890 options have vested in 2003 and
2004 respectively. However, since the exercise price of the options
were higher than the fair market value, no benefits have been recorded
for those years.
The stock options have not been included in the calculation of the
diluted earnings per share as their inclusion would be antidilutive.
The following table summarizes the stock option activity during 2004
and 2003:
2004 2003
---------- ----------
Outstanding, beginning of year ................. 2,871,249 3,055,521
Granted ........................................ -- 350,000
Cancelled ...................................... (20,000) (534,272)
---------- ----------
Outstanding, end of year ....................... 2,851,249 2,871,249
========== ==========
Weighted average fair value of
options granted during the year .............. $ -- $ --
========== ==========
Weighted average exercise price
of common stock options, beginning
of year ...................................... $ 0.97 $ 1.01
========== ==========
Weighted average exercise price
of common stock options granted
in the year .................................. $ -- $ 1.60
========== ==========
Weighted average exercise price
of common stock options, end of year ......... $ 1.12 $ 0.97
========== ==========
Weighted average remaining contractual
life of common stock options ................. 6 YEARS 7 years
========== ==========
-17-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
14. GOVERNMENT GRANT
In 2003, the Company received approximately $160,000 of government
grant for a project that commenced in 2004. The amount has been applied
to reduce research and development expense in 2004.
15. INCOME TAXES
The Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account
balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates. The effects of future changes in tax laws
or rates are not anticipated. Corporate income tax rates applicable to
the Company in 2004 and 2003 are 16.5 percent of the first 100 million
Korean Won ($84,000) of taxable income and 29.7 percent on the excess.
Under SFAS No. 109 income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax
liabilities and assets for future tax consequences of events that have
been recognized differently in the financial statements than for tax
purposes. The Company has deferred income tax assets arising from
research and development expenses. For accounting purposes, these
amounts are expenses when incurred. Under Korean tax laws, these
amounts are deferred and amortized on a straight-line basis over 5
years.
The Company has deferred income tax assets as follows:
2004 2003
----------- -----------
Deferred income tax assets
Research and development expenses
amortized over 5 years for tax
purposes .............................. $ 313,080 $ 345,399
Other timing differences ................... 64,895 352,912
Net operating loss carryforwards ........... 2,485,180 1,636,331
Valuation allowance for deferred income
tax assets .............................. (2,863,155) (2,334,642)
----------- -----------
$ -- $ --
=========== ===========
The Company provided a valuation allowance equal to the deferred income
tax assets because it is not presently more likely than not that they
will be realized.
-18-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
16. MAJOR CUSTOMERS
In 2003, the Company had one major customer which primarily accounted
for 64% of the total revenue. The customer is a company with the same
major shareholder and chief executive officer. In 2004, sales to three
major customers accounted for 87% of the total revenue.
17. RELATED PARTY TRANSACTIONS
FINISHED NET RENTAL ACCOUNTS ACCOUNTS
GOODS SALES INCOME PURCHASES RECEIVABLE PAYABLE
---------- ---------- ---------- ---------- ----------
Company #1 - same major
shareholder and chief
executive officer
- 2003 ................ $2,282,253 $ 86,912 $ 501,491 $1,981,863 $ 231,042
- 2004 ................ $1,156,969 $ 72,953 $ 603,693 $2,709,253 $ 269,098
Company #2 - controlled by a
relative of chief
executive officer
- 2003 ................ $ 64,207 $ -- $ 71,581 $ -- $ --
- 2004 ................ $ 194,168 $ -- $ -- $ -- $ --
Company #3 - controlled by a
relative of chief
executive officer
- 2003 ................ $ 1,512 $ -- $ 85,812 $ 414 $ --
- 2004 ................ $ 1,584 $ -- $ 77,547 $ 2,092 $ 88,085
The Company with the same major shareholder and chief executive officer
has negative working capital and loss of approximately $2 million in
the year ended December 31, 2004. However, the related company is set
to receive funding of $2.5 million in exchange for 22% of its shares in
2005 and the Company believes the receivable to be collectible in
future.
These transactions were in the normal course of business and recorded
at an exchange value established and agreed upon by the above mentioned
parties, which approximates fair market value.
-19-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
18. COMMITMENTS
In January 2004, the Company entered into a commitment to sell its land
and building, pending the outcome of the auction of the property as
described in note 19. The transfer of title is to occur on January 31,
2009. During the year, the Company has received an advance payment of
$1,768,344. Until legal transfer of the title in 2009, the Company is
to pay $4,400 monthly in cash. On any initial public offering, the
Company is to also provide shares based on initial public offering
price and the number of months since the agreement at $8,800 per month.
After the initial public offering, the Company is to pay $13,200 in
cash monthly.
Before entering into the agreement, management had made the purchaser
of the properties aware the properties were pledged as security against
the Company's loans as described in note 6. At the time of agreement,
management and the purchaser determined that in the case of an auction
of the properties by the creditors such as the one described in note
19, the remaining proceeds would allow the Company to return the
advance payment.
19. SUBSEQUENT EVENTS
a) In January 2005, a government loan repayable of approximately
$62,000 as described in note 9 was forgiven. However, the
Company is not allowed to participate in any new government
projects for one year.
b) In February 2005, the Company has obtained funding of $1
million in exchange for issuance of 2,500,000 common shares.
c) Subsequent to the year-end, the bank that has the first charge
on the Company's properties and had requested the auction of
the properties through court action, agreed to cancel the
auction of properties on the payment of administrative cost of
$173,000.
-20-