EXHIBIT 99.3
EUGENE SCIENCE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 2005 and 2004
CONTENTS
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets 2
Consolidated Statements of Stockholders' Deficit 3
Consolidated Statements of Operations 4 - 5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
EUGENE SCIENCE, INC.
We have reviewed the accompanying balance sheets of EUGENE SCIENCE,
INC. and subsidiary (the "Company") as at June 30, 2005 and 2004, and the
related statements of operations, stockholders' deficit, and cash flows for the
six-month periods then ended. These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to such consolidated interim financial statements for them
to be 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
----------------------------
TORONTO, CANADA CHARTERED ACCOUNTANTS
September 26, 2005
-1-
EUGENE SCIENCE, INC.
Consolidated Balance Sheets
June 30, 2005 and 2004
2005 2004
------------ ------------
ASSETS
CURRENT
Cash and cash equivalents (note 3) ..................... $ 58,018 $ 493,612
Accounts receivable (net of allowance for
doubtful accounts $317,492; 2004 - $263,178) (note 15) 2,405,187 2,297,554
Inventory (note 4) ..................................... 39,168 138,111
Advances to a related company (note 5) ................ 1,169,500 250,371
Prepaid and sundry assets .............................. 194,088 100,629
------------ ------------
3,865,961 3,280,277
PROPERTIES AND EQUIPMENT (note 6) .......................... 9,384,232 8,922,950
INVESTMENTS (note 7) ....................................... 531,470 613,875
INTANGIBLE ASSETS .......................................... 176,323 167,590
------------ ------------
$ 13,957,986 $ 12,984,692
============ ============
LIABILITIES
CURRENT
Accounts payable ....................................... $ 6,594,454 $ 3,988,121
Rental deposits (note 8) ............................... 154,880 194,625
Loans payable - current portion (note 9) ............... 10,249,831 5,286,385
Advances from shareholder and officer (note 10) ........ -- 8,068
------------ ------------
16,999,165 9,477,199
ACCRUED SEVERANCE .......................................... 475,907 331,018
DEPOSIT (note 16) .......................................... 1,561,868 1,568,678
LOANS PAYABLE (note 9) .................................... 313,879 1,668,113
CONVERTIBLE DEBENTURES (note 11) ........................... -- 1,726,994
------------ ------------
19,350,819 14,772,002
------------ ------------
STOCKHOLDERS' DEFICIENCY
CAPITAL STOCK (note 12) .................................... 2,786,822 2,538,572
PAID IN CAPITAL ............................................ 13,433,273 12,688,523
ACCUMULATED OTHER COMPREHENSIVE LOSS ....................... (1,676,818) (1,168,696)
ACCUMULATED DEFICIT ........................................ (19,936,110) (15,845,709)
------------ ------------
(5,392,833) (1,787,310)
------------ ------------
$ 13,957,986 $ 12,984,692
============ ============
APPROVED ON BEHALF OF THE BOARD
- ------------------------------- -------------------------------
Director Director
-2-
EUGENE SCIENCE, INC.
Consolidated Statements of Stockholders' Deficit
Six Months Ended June 30, 2005 and 2004
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,
2004 29,197,300 $ 2,538,572 $ 12,688,523 $ (1,167,171) $(14,293,380) $ (233,456)
Foreign exchange
on translation -- -- -- (1,525) -- (1,525)
Net loss ........ -- -- -- -- (1,552,329) (1,552,329)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30,
2004 29,197,300 $ 2,538,572 $ 12,688,523 $ (1,168,696) $(15,845,709) $ (1,787,310)
============ ============ ============ ============ ============ ============
Balance, January 1,
2005 29,197,300 $ 2,538,572 $ 12,688,523 $ (1,676,719) $(18,028,969) $ (4,478,593)
Issuance of
shares ....... 2,500,000 248,250 744,750 -- -- 993,000
Unrealized loss
on investments -- -- -- (52,828) -- (52,828)
Foreign exchange
on translation -- -- -- 52,729 -- 52,729
Net loss ........ -- -- -- -- (1,907,141) (1,907,141)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30,
2005 31,697,300 $ 2,786,822 $ 13,433,273 $ (1,676,818) $(19,936,110) $ (5,392,833)
============ ============ ============ ============ ============ ============
-3-
EUGENE SCIENCE, INC.
Consolidated Statements of Operations
Six Months Ended June 30, 2005 and 2004
2005 2004
------------ ------------
REVENUE
Manufacturing .............................. $ 294,791 $ 1,272,934
Merchandise ................................ 221,523 297,637
------------ ------------
516,314 1,570,571
------------ ------------
COST OF SALES
Manufacturing .............................. 238,229 1,152,737
Merchandise ................................ 175,541 337,834
------------ ------------
413,770 1,490,571
------------ ------------
GROSS PROFIT ................................... 102,544 80,000
------------ ------------
EXPENSES
Salaries, employee benefits, and retirement
allowance ............................... 473,195 442,397
Research and development ................... 215,022 182,287
Professional fees .......................... 121,222 69,237
Travel ..................................... 86,215 28,663
Repairs and maintenance .................... 42,466 30,969
Financing fees ............................. 32,422 --
Office and general ......................... 28,827 36,834
Utilities .................................. 25,566 32,153
Advertising, promotion, and entertainment .. 16,409 134,727
Bad debts .................................. 8,147 20,590
Insurance .................................. 4,043 9,725
Rent ....................................... 2,956 --
Foreign exchange ........................... -- 34
Depreciation ............................... 195,858 177,861
------------ ------------
1,252,348 1,165,477
------------ ------------
OPERATING LOSS ................................. (1,149,804) (1,085,477)
------------ ------------
OTHER INCOME (EXPENSES)
Net rental income .......................... 72,505 70,859
Miscellaneous income (loss) ................ 16,268 (54,807)
Interest expense - net ..................... (835,351) (482,002)
Loss on disposition of equipment ........... (10,759) (902)
------------ ------------
(757,337) (466,852)
------------ ------------
NET LOSS ....................................... $ (1,907,141) $ (1,552,329)
============ ============
BASIC LOSS PER SHARE ........................... $ (0.06) $ (0.05)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES .............. 30,863,967 29,197,300
============ ============
-4-
EUGENE SCIENCE, INC.
Consolidated Statements of Operations
Three Months Ended June 30, 2005 and 2004
2005 2004
------------ ------------
REVENUE
Manufacturing .............................. $ 50,593 $ 497,875
Merchandise ................................ 48,450 128,804
------------ ------------
99,043 626,679
------------ ------------
COST OF SALES
Manufacturing .............................. 44,394 387,997
Merchandise ................................ 38,887 212,633
------------ ------------
83,281 600,630
------------ ------------
GROSS PROFIT ................................... 15,762 26,049
------------ ------------
EXPENSES
Salaries, employee benefits, and retirement
allowance ............................... 242,571 241,675
Professional fees .......................... 87,693 53,358
Research and development ................... 84,100 90,798
Travel ..................................... 39,186 20,319
Repairs and maintenance .................... 24,914 15,919
Office and general ......................... 14,453 31,328
Advertising, promotion, and entertainment .. 13,876 83,621
Utilities .................................. 10,739 19,851
Bad debts .................................. 8,147 20,590
Rent ....................................... 2,956 --
Foreign exchange ........................... -- 34
Depreciation ............................... 79,263 85,880
------------ ------------
607,898 663,373
------------ ------------
OPERATING LOSS ................................. (592,136) (637,324)
------------ ------------
OTHER INCOME (EXPENSES)
Net rental income .......................... 32,721 52,160
Miscellaneous income (loss) ................ (7,048) (54,816)
Interest expense - net ..................... (581,205) (170,820)
Loss on disposition of equipment ........... (10,691) 646
------------ ------------
(566,223) (172,830)
------------ ------------
NET LOSS ....................................... $ (1,158,359) $ (810,154)
============ ============
BASIC LOSS PER SHARE ........................... $ (0.04) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES .............. 30,030,633 29,197,300
============ ============
-5-
EUGENE SCIENCE, INC.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2005 and 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................... $(1,907,141) $(1,552,329)
Adjustments for:
Depreciation ............................... 332,740 298,805
Amortization of intangible assets .......... 18,696 15,596
Loss on disposition of equipment ........... 10,759 902
Change in non-cash working capital
Accounts receivable ........................ 301,581 9,129
Inventory .................................. (24,616) (200,070)
Accounts payable ........................... 906,329 179,971
Accrued severance .......................... 53,585 20,036
Prepaid and sundry assets .................. (25,089) (696)
Rental deposits ............................ -- 55,704
Deposit .................................... (197,060) 1,554,152
----------- -----------
(530,216) 381,200
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ...... (13,037) (395,479)
Investments ................................ 53,772 --
Intangible assets .......................... (9,822) (10,594)
----------- -----------
30,913 (406,073)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from a related company ............ -- (13,115)
Loans payable .............................. (210,002) (364,292)
Advances from shareholder and officer ...... (6,234) (75,992)
Convertible debentures ..................... -- 4,811
Advances to a related company .............. (255,472) 248,053
Issuance of common stock ................... 993,000 --
----------- -----------
521,292 (200,535)
----------- -----------
FOREIGN EXCHANGE ON CASH AND CASH EQUIVALENTS .... (652) 21,070
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................... 21,337 (204,338)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD .. 36,681 697,950
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD ........ $ 58,018 $ 493,612
=========== ===========
-6-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
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 CZ(TM) series cholesterol-lowering
functional food ingredients, beverages and capsules fortified
with CZ(TM) series ingredients, and ordinary corn oil. The
merchandise sales include the purchase and resale of vegetable
oil products which include the ingredients of CZ(TM) 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 periods ended June 30, 2005 and 2004, the
Company experienced net losses of $1,907,141 and $1,552,329
respectively.
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 CZ(TM)
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 CZ(TM) and food enriched with CZ(TM). The Company
expects that the favorable change in the regulation will
strongly help in selling CZ(TM) to major food companies. The
Company has also developed new capsule products that are
efficient and convenient in delivering the health function of
CZ(TM). The Company is actively developing sales channels for
CZ(TM) 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
June 30, 2005 and 2004
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 17, subsequent to the year-end, the
Company entered into a reverse-takeover transaction with
Ezcomm Enterprises, Inc. ("EZCE"), a public Delaware
corporation.
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
June 30, 2005 and 2004
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
June 30, 2005 and 2004
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". Available-for-sale
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
June 30, 2005 and 2004
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
June 30, 2005 and 2004
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 provided a $432,500 term deposit as at June
30, 2004 (2005 - $nil) as security for a loan of same amount
taken out by a company with the same chief executive officer
who is the major shareholder of the Company and owns 13% of
the related company.
b) The Company had provided a $9,680 (2004 - $43,250) bond as
security for payment on future purchases from a vendor.
4. INVENTORY
Inventory includes $38,966 (2004 - $66,986) of finished goods, $124
(2004 - $55,505) of raw materials, and $78 (2004 - $15,620) of
merchandise.
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 and thus, collectability of the
advances is uncertain. Management maintains that the full amount of the
loan will be collected.
6. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised as follows:
2005 2004
ACCUMULATED Accumulated
COST DEPRECIATION Cost Depreciation
----------- ----------- ----------- -----------
Land ................... $ 4,368,926 $ -- $ 3,904,050 $ --
Buildings .............. 3,345,996 722,450 2,989,965 513,198
Equipment .............. 3,987,649 1,656,965 3,532,913 1,153,762
Furniture and fixtures . 941,452 880,376 893,223 730,241
----------- ----------- ----------- -----------
$12,644,023 $ 3,259,791 $11,320,151 $ 2,397,201
----------- ----------- ----------- -----------
Net carrying amount .... $ 9,384,232 $ 8,922,950
----------- -----------
-12-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
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
attempted to auction off the Company's properties through court action.
Also, various creditors of the Company have put a provisional seizure
on the properties to protect their loans. The appraised value of the
properties was $9,952,000. However, subsequent to the period-end, the
auction of the properties was cancelled by the bank as described in
note 17.
7. INVESTMENTS
2005 2004
--------- ---------
Private company 7.5% $ 583,930 $ 598,948
Company with same major shareholder and CEO 4.58% 1 1
Other marketable securities 367 14,926
--------- ---------
$ 584,298 $ 613,875
========= =========
Included in investments are certain shares of a private company with
carrying value of $281,484 (2004 - $317,443) that are pledged as
security for a trade payable in the amount of $344,760 (2004 -
$219,782).
8. RENTAL DEPOSITS
A rental deposit of $58,080 (2004 - $51,900) 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
June 30, 2005 and 2004
9. LOANS PAYABLE
2005 2004
CURRENT LONG-TERM TOTAL Total
----------- ----------- ----------- -----------
Bank loans .................. $ 5,757,868 $ -- $ 5,757,868 $ 5,536,328
Bank loan #2 ................ 1,931,934 -- 1,931,934 --
Note payable #1 ............. 2,302,494 -- 2,302,494 --
Notes payable (#2, 3, 4 & 5) 162,326 -- 162,326 1,007,113
Government loans (#1, 2, & 3) 61,329 313,879 375,208 354,832
Loan payable - customer ..... 33,880 -- 33,880 56,225
----------- ----------- ----------- -----------
$10,249,831 $ 313,879 $10,563,710 $ 6,954,498
=========== =========== =========== ===========
Bank Loans
The bank loans bear interest at 4.5% to 18% and are due on demand. A
bank loan of $3,723,346 (2004 - $3,669,659) 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, the land and
buildings were in the process of being auctioned through court action
by the request of the bank. Subsequent to the period-end, the auction
of the properties was cancelled by the bank as described in note 17.
However, collection proceedings remained.
In addition to the security mentioned above, a loan in the amount of
$1,301,919 (2004 - $1,163,389) is guaranteed by Korea Technology Credit
Guarantee Fund, a government operated fund. Additionally, another bank
loan of $276,774 is guaranteed by the chief executive officer as at
June 30, 2005.
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 June 30, 2004, a note payable of $846,835 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 the second half of
2004.
-14-
EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
9. LOANS PAYABLE (cont'd)
Government Loan #1
The loan is non-interest bearing, unsecured, repayable in three annual
payments of $20,443 and matures February 2006. The Company is in
arrears on the 2004 and 2005 annual payments. Total amount outstanding
at June 30, 2005 was $61,329.
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.
Loan Payable - customer
The loan payable from a customer is non-interest bearing and due on
demand.
10. ADVANCES FROM SHAREHOLDER AND OFFICER
The advances from the chief executive officer, who is also a 30% (2004
- 32%) shareholder, bears interest at 9% per annum and is repayable on
demand.
11. 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 June 30, 2004, the Company had a convertible debenture with a
face value of $1,726,994, 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
June 30, 2005 and 2004
12. CAPITAL STOCK
Authorized:
300,000,000 common shares,
par value $0.0879 (2004 - $0.0869)
2005 2004
---- ----
Issued:
31,697,300 (2004 - 29,197,300)
common shares $ 2,786,808 $ 2,538,572
In February 2005, the Company issued 2,500,000 common shares in
exchange for funding of approximately $1 million.
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:
2005 2004
---- ----
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.
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EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
12. CAPITAL STOCK (cont'd)
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. In 2004, an additional 100,000 stock options
were cancelled.
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. 285,806 and 651,360 options have vested in 2004 and
2005 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 the six
months ended June 30, 2005 and 2004:
2005 2004
--------- -----------
Outstanding, beginning of year .............. 2,751,249 2,871,249
Cancelled ................................... -- (120,000)
--------- -----------
Outstanding, end of year .................... 2,751,249 2,751,249
========= ===========
Weighted average fair value of
options granted during the year ........... $ -- $ --
========= ===========
Weighted average exercise price
of common stock options,
beginning of year ......................... $ 1.12 $ 0.97
========= ===========
Weighted average exercise price
of common stock options
granted in the year ....................... $ -- $ --
========= ===========
Weighted average exercise price
of common stock options, end
of year ................................... $ 1.12 $ 1.12
========= ===========
Weighted average remaining
contractual life of common
stock options ............................. 6 YEARS 6 years
========= ===========
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EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
13. 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 2005 and 2004 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:
2005 2004
----------- -----------
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 ............... 2,790,323 1,884,704
Valuation allowance for deferred income tax
assets ...................................... (3,168,298) (2,583,015)
----------- -----------
$ -- $ --
=========== ===========
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.
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EUGENE SCIENCE, INC.
Notes to Consolidated Financial Statements
June 30, 2005 and 2004
14. MAJOR CUSTOMERS
In 2004, the Company had two major customers which primarily accounted
for 63% of the total revenue. In 2005, sales to two of the same major
customers and another major customer accounted for 86% of the total
revenue.
15. RELATED PARTY TRANSACTIONS
FINISHED NET RENTAL ACCOUNTS ACCOUNTS
GOODS SALES INCOME PURCHASES RECEIVABLE PAYABLE
---------- ---------- ---------- ---------- ----------
Company #1 - same chief
executive officer
- 2004 ................ $ 518,889 $ 40,426 $ 159,554 $2,257,764 $ --
- 2005 ................ $ 93,627 $ 45,057 $ 176,319 $2,359,804 $ --
Company #2 - controlled by a
relative of chief
executive officer
- 2004 ................ $ 103,288 $ -- $ -- $ -- $ --
- 2005 ................ $ 31,475 $ -- $ -- $ 2,700 $ --
Company #3 - controlled by a
relative of chief
executive officer
- 2004 ................ $ 771 $ -- $ 38,968 $ 999 $ --
- 2005 ................ $ 887 $ -- $ 40 $ 3,035 $ 99,089
The Company with the same major shareholder and chief executive officer
has negative working capital and loss of approximately $650,000 in the
six months ended June 30, 2005 and thus, collectability of accounts
receivable is uncertain.
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
June 30, 2005 and 2004
16. 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 17. The transfer of title is to occur on January 31,
2009. The Company has received an advance payment of $1,561,868. 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
17, the remaining proceeds would allow the Company to return the
advance payment.
17. SUBSEQUENT EVENTS
a) On July 4, 2005, the bank that has the first charge on the
Company's properties and had requested the auction of the
properties through court action, cancelled the auction of
properties on the payment of administrative cost of $173,000.
b) In July and August 2005, six employees exercised their stock
options and 1,028,810 shares have been issued for $196,624.
c) In accordance with a Share Exchange Agreement dated September
1, 2005, the Company entered into a reverse-takeover
transaction with Ezcomm Enterprises, Inc. ("EZCE"), a public
Delaware corporation, whereby 89.5% of all the outstanding
shares of the Company were exchanged for 272,790,948 shares of
EZCE. As a result of the transaction, the shareholders of
Eugene Science, Inc. will control 88.5% of EZCE. While EZCE is
the legal parent, the Company, as a result of the
reverse-takeover, became the parent company for accounting
purposes. As EZCE is an inactive shell, the transaction will
be accounted as a recapitalization of interests.
-20-