<PAGE> 1
Exhibit 99.1
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
LIFE SCIENCES, INC. AND SUBSIDIARY
May 31, 2000 and 1999
<PAGE> 2
LIFE SCIENCES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-KSB
FOR THE YEARS ENDED MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of May 31, 2000 and 1999 2
Consolidated Statements of Income for the years ended May 31, 2000 and 1999 3
Consolidated Statement of Stockholders' Equity for the years ended
May 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the years ended May 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
</TABLE>
<PAGE> 3
Report of Independent Certified Public Accountants
Board of Directors of
Life Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Life Sciences,
Inc. and Subsidiary as of May 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Life
Sciences, Inc. and Subsidiary as of May 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company had an accumulated deficit of $3,242,621 at
May 31, 2000 and, as of this date the Company's current liabilities exceeded
current assets by $177,931. These factors, among other things as discussed in
Note 3 to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Grant Thornton LLP
Tampa, Florida
August 23, 2000
1
<PAGE> 4
LIFE SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
----------------------------------
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 41,805 $ 81,955
Accounts receivable, net 262,702 257,268
Inventories 431,376 151,189
Prepaid expenses 14,080 5,000
------------ ------------
Total current assets 749,963 495,412
Property and equipment, net 187,183 150,589
Other assets 280,949 145,703
------------ ------------
Total assets $ 1,218,095 $ 791,704
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings, related parties $ 40,000 $ --
Notes payable -- 5,173
Accounts payable, trade 221,560 182,314
Accrued expenses 666,334 361,994
------------ ------------
Total current liabilities 927,894 549,481
Commitments and contingencies -- --
Stockholders' equity
Common stock - $.10 par value, authorized 7,000,000 shares, 4,196,670
shares issued and outstanding 419,667 419,667
Additional paid-in capital 3,113,155 3,113,155
Accumulated deficit (3,242,621) (3,290,599)
------------ ------------
Total stockholders' equity 290,201 242,223
------------ ------------
Total liabilities and stockholders' equity $ 1,218,095 $ 791,704
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 5
LIFE SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 1,475,766 $ 1,084,181
Costs and expenses
Cost of sales 647,025 503,780
Operating and administrative expenses 580,545 603,058
Research and development 163,730 118,298
Depreciation and amortization 35,146 42,419
------------ ------------
Total expenses 1,426,446 1,267,555
------------ ------------
Operating income (loss) 49,320 (183,374)
Other income (expense)
Gain on sale of fixed assets -- 194,700
Interest expense (1,342) --
Other -- 5,956
------------ ------------
(1,342) 200,656
------------ ------------
Income before income taxes 47,978 17,282
Income tax provision (benefit) -- --
------------ ------------
Net income $ 47,978 $ 17,282
============ ============
Net income per common share - basic and diluted $ .01 $ .01
============ ============
Weighted average shares of common stock outstanding:
basic 4,196,670 2,808,249
============ ============
diluted 4,363,969 2,812,512
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 6
LIFE SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares of Additional
common paid-in Accumulated
stock Amount capital deficit Total
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1998 2,796,743 $279,674 $ 827,601 $(3,307,881) $(2,200,606)
Issuance of common stock
on conversion of related
party debt (Note 9) 1,399,927 139,993 428,835 -- 568,828
Forgiveness of a note
payable and accrued
interest on all notes
payable to related parties
(Note 9) -- -- 1,100,244 -- 1,100,244
Excess of debt over the net
book value of land and
buildings exchanged with
a related party (Note 9) -- -- 756,475 -- 756,475
Net income -- -- -- 17,282 17,282
--------- -------- ---------- ---------- -----------
Balance at May 31, 1999 4,196,670 419,667 3,113,155 (3,290,599) 242,223
Net income -- -- -- 47,978 47,978
--------- -------- ---------- ----------- -----------
Balance at May 31, 2000 4,196,670 $419,667 $3,113,155 $(3,242,621) $ 290,201
========= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
4
<PAGE> 7
LIFE SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 47,978 $ 17,282
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 35,146 42,419
Gain on sale of property and equipment 1,084 (194,700)
Other -- (5,956)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,434) 15,331
(Increase) in inventories (280,187) (17,455)
(Increase) decrease in prepaid expenses (9,080) 15,706
(Increase) in other assets (65,544) (97,105)
Increase in accounts payable, trade 39,246 36,964
Increase (decrease) in accrued expenses 204,340 (73,405)
---------- ----------
Net cash used in operating activities (32,451) (260,919)
Cash flows from investing activities:
Purchase of property and equipment (42,526) (38,033)
Proceeds from sale of property and equipment -- 200,000
---------- ----------
Net cash provided by (used in) investing activities (42,526) 161,967
Cash flows from financing activities:
Proceeds from notes payable and advances from related entities 70,000 227,000
Payments on notes payable and advances from related entities (30,000) (123,835)
Payments on notes payable (5,173) (7,118)
---------- ----------
Net cash provided by financing activities 34,827 96,047
---------- ----------
Net decrease in cash (40,150) (2,905)
Cash, beginning of period 81,955 84,860
---------- ----------
Cash, end of period $ 41,805 $ 81,955
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,342 $ --
========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
In 1999, certain notes payable to related parties were converted to
1,399,927 shares of common stock (see Note 9).
In 1999, the corporate office land and building was sold for $859,075. A
note payable, that was collateralized by the land and building, in the same
amount was held by the related party who purchased the property and was
used as consideration in the transaction (see Note 9).
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 8
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 1 - DESCRIPTION OF ORGANIZATION AND BUSINESS
Life Sciences, Inc. (the Company) is a biotechnology company with its primary
operations in the production and sale of molecular biology enzymes used in the
test tube synthesis of DNA and its manipulation in a variety of genetic
engineering applications. The Company specializes in enzyme products employed
by scientists to make genetic (DNA) sequences, which are utilized in basic
research and the genetic modification of plants, animals, and other organisms.
The Company sells its molecular biology enzyme products directly to end users
who perform nucleic acid related research and product development at
universities and diagnostic and pharmaceutical manufacturers, primarily in the
United States, Europe, and Asia. Sales to customers based in Europe and Asia
accounted for approximately 79% and 65% of net sales during fiscal years 2000
and 1999, respectively. The Company also utilizes independent distributors in
Europe and Asia to distribute its products in these regions of the world.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Life Sciences,
Inc. and an inactive subsidiary with insignificant net assets. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements conforms with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates and assumptions.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. There were no cash equivalents
at May 31, 2000 and 1999.
6
<PAGE> 9
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Inventories
Inventories are stated at the lower of cost or market with cost determined on a
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using accelerated methods similar to those used for
federal income tax reporting.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets (including
intangibles) in accordance with Statement of Financial Accounting Standards No.
121 ("SFAS No. 121"), Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires long-lived
assets to be reviewed for impairment whenever circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment is recognized
to the extent the sum of undiscounted estimated future cash flows expected to
result from the use of the asset is less than the carrying value. No impairment
exists for all periods presented.
Revenue Recognition
The Company recognizes revenue when product is shipped to its customers.
Research and Development Costs
Expenditures relating to the development of new products and processes, as well
as significant refinements to existing products, are expensed as incurred.
Research and development expenses charged to operations amounted to $163,730
and $118,298 for the years ended May 31, 2000 and 1999. Included in these
amounts were primarily payroll and related costs incurred to expand the
Company's offering of enzyme products for a major customer.
7
<PAGE> 10
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Net Income Per Common Share
Net income per common share, which represents both basic and diluted earnings
per share ("EPS"), is computed by dividing net income by the weighted average
common shares outstanding. The following table reconciles the numerator and
denominator of the basic and diluted EPS computation:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Numerator:
Net income $ 47,978 $ 17,282
----------- -----------
Denominator:
Weighted average number of common shares used in
basic EPS 4,196,670 2,808,249
Dilutive stock options 167,299 4,263
----------- -----------
Weighted average number of common shares and
dilutive potential common shares used in diluted EPS 4,363,969 2,812,512
=========== ===========
</TABLE>
For fiscal year 1999, options to purchase 480,000 shares of Common Stock were
outstanding during the year but were not included in the computation of diluted
earnings per share because the exercise prices of the options were greater than
the average market price of the Common Stock and, therefore, the effect would
be antidilutive.
Stock-Based Compensation
The Company presents only the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation, and
recognizes stock-based compensation using the intrinsic value method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees (Note 11). Under this method, compensation is recognized at the date
of grant by the amount that the fair value of the underlying stock exceeds the
exercise price.
Financial Instruments
The carrying amount of the Company's financial instruments, which include cash,
accounts receivable, accounts payable, accrued expenses and advances from
related parties, approximate fair value due to the short-term maturity of those
instruments.
8
<PAGE> 11
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
Deferred taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences, net operating losses and
tax credit carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities for financial reporting
purposes and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effect of changes in tax laws
and rates on the date of enactment.
Concentration of Credit Risk
The Company grants credit to customers who meet pre-established credit
requirements. The Company does not require collateral when trade credit is
granted to customers. Credit losses are provided for in the financial
statements and have been consistently within management's expectations. The
allowance for doubtful accounts related to accounts receivable at May 31, 2000
and 1999 was approximately $5,000.
Reclassification
Certain prior year amounts have been reclassified to conform to fiscal 2000
presentation.
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a going concern.
Continuation of the Company as a going concern contemplates the realization of
assets, and settlement of liabilities and commitments, in the normal course of
business.
The Company had an accumulated deficit of $3,242,621 at May 31, 2000. The
Company has historically relied on loans and advances from related entities to
fund its operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts, or
amounts and classification of liabilities, that might be necessary should the
Company be unable to continue in existence. The following commentary addresses
the Company's operations for the year ended May 31, 2000 and its plan to
improve future results.
9
<PAGE> 12
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 3 - OPERATIONAL AND FUNDING MATTERS - CONTINUED
The Company's aggregate loss of $1.46 million accumulated beginning with fiscal
1996, arose largely from the Company's sustained effort through fiscal year
2000 to develop new products and services to offset declines in revenues from
the sale of its earlier anchor products, AMV reverse transcriptase and
specific-pathogen-free (SPF) mice, and to stimulate the Company's continued
growth. Sales of SPF mice ceased in 1997. In a further cost reduction effort in
1998, the Company shut down a joint venture effort for incineration of
biomedical waste. Development efforts since 1996, have focused primarily on
expanding markets for the Company's molecular biology enzyme products and the
development of technologies for rapid detection of biological and chemical
contaminants in food, water, and other environmental samples.
Beginning in 1998, the Company identified the NASBA (nucleic acid sequence
based amplification) technology owned by Organon Teknika, B.V., a member of the
Akzo Nobel family of companies, as its method of choice for detection of viral
and bacterial pathogens. In addition to becoming a supplier of certain
specially formulated molecular biology enzymes to Organon Teknika for use in
its NASBA based clinical diagnostic products, the Company also entered into
agreements with Organon Teknika and others to license NASBA and a suite of
supporting technologies that are together expected to enable the Company to
develop and sell NASBA based products for detection of water and food borne
pathogens worldwide, and clinical diagnostic products in certain geographic
regions.
In May 2000, the Company entered into an additional agreement with Organon
Teknika to supply it with NASBA enzymes until 2003. In order to assure the
continuity of supply of the enzymes the agreement, among other things, provides
a mechanism for Organon Teknika to advance the Company up to $200,000 in cash
through a one-time, forward purchase of substrates used in the production of
the AMV reverse transcriptase component of the NASBA enzyme mix.
Fiscal year 2000 revenues from the sale of molecular biology enzymes increased
36% over fiscal year 1999 to approximately $1.48 million. Almost 50% of this
amount arose directly from sales of a novel formulation of three enzymes for
NASBA, which the Company developed during fiscal years 1998 and 1999. Initially
sold almost exclusively to Organon Teknika, the Company expects during fiscal
year 2001 to expand the sale of NASBA enzymes to NASBA licensees world wide.
The Company also expects to extend its offering of enzymes and related products
to other manufacturers of molecular diagnostic tests, with particular emphasis
on dried, thermostable formulations that are expected to significantly expand
the range of settings in which such testing can be performed.
10
<PAGE> 13
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 3 - OPERATIONAL AND FUNDING MATTERS - CONTINUED
Enzymes and other components used in NASBA and similar reactions can be dried
into a pellet in precisely measured amounts, and in this manner are rendered
thermostable until reconstituted with diluents or buffers of various kinds. The
dried pellets may be shipped at ambient temperature and stored for extended
periods at temperatures above freezing. Not only are costs associated with air
transport using dry ice or other refrigerants minimized in this manner, the
shelf life of products is extended. Further, because the NASBA enzymes will in
many cases be dried in combination with precisely measured amounts of other
substrates used in the NASBA reaction, enhanced revenues and gross margins are
expected from the sale of the dried products.
Management believes the sale of dried NASBA components will enhance the
Company's already competitively advantaged position for NASBA enzyme sales, as
well as improve the Company's ability to market an expanded offering of enzymes
and related products world wide to support the development and commercialization
of tests intended for point-of-collection (POC) determination of the presence of
pathogenic organisms. Whether employed in bed-side diagnosis of disease, used in
the detection of biological warfare agents, or in the inspection of processing
operations in the production of prepared foods, drinking water and a host of
other products that are ingested by humans, POC testing eliminates the need to
send samples to an off-site laboratory and permits quick response to near
real-time test results. Management believes that these changes in biological
testing concepts provide opportunities for enhanced revenues for the Company.
While the Company has until now focused its efforts with respect to nucleic acid
amplification on Organon Teknika's NASBA technology, during fiscal year 2001 the
Company will also seek revenue opportunities related to the competing and more
widely practiced PCR method for amplification of nucleic acids. Management
believes that a 1999 U.S. District Court decision stripping patent protection
from the key enzyme used in PCR, Taq polymerase (Taq), will lead to the
availability of low cost Taq, thus reducing both the cost and risk of the
Company's entry into the market of selling dried, measured dose components,
including Taq, that may be used in PCR reactions. While the commercial market
for Taq is approximately $200 million annually, it is the backbone of the PCR
biochemical reaction, which supports diagnostic and analytic markets that
together generate approximately $3 billion in revenue annually for major
clinical diagnostic manufacturers and others. Although the Company will not be
competing for those end user revenues, it anticipates a growing role as a
supplier to the underlying commercial market. Indeed, management projects the
sale of dried substrates to support over one million PCR reactions during the
2001 fiscal year.
In addition to supplying enzymes and related substrates used in both the NASBA
and PCR reactions to others, the Company's short and intermediate term business
plan is also focused on the development and world wide sale of NASBA based
diagnostic products for detection of water borne and food borne pathogens, to
include biological warfare agents, and geographically restricted sales of other
NASBA based products for diagnosis of human disease.
11
<PAGE> 14
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 3 - OPERATIONAL AND FUNDING MATTERS - CONTINUED
The Company expects to begin in Autumn 2000 the sale of a NASBA based test for
the waterborne pathogen, Cryptosporidium parvum under an agreement with
Innovative Biotechnologies International, Inc. The Company expects to supply all
of the molecular biology components of the C. parvum test kit, including
enzymes, primers, and other substrates.
In addition, the Company has executed a letter of intent with 1144668 Ontario
Ltd (NumberCo) to form a joint venture to develop and sell NASBA based tests for
detection of food borne pathogens. Numberco is a NASBA licensee, and
additionally has developed a complete NASBA based test for detection of Listeria
monocytogenes; a food borne pathogen that according to the Centers for Disease
Control and Prevention's (CDC) most recent estimates, has the highest rate of
hospitalization caused by food borne pathogens (92% of cases) and the second
highest rate of food related deaths among hospitalized victims (20%). Indeed,
because of heightened Food Safety and Inspection Service inspection of certain
food products, over 32 million pounds of ready-to-eat meat products were
recalled by U.S. food processors during 1999. When development and regulatory
approval of this test for Listeria is completed, the Company expects that the
test's accuracy, speed, and ease of use should enable food processors to carry
out in-process and final-process testing of impacted food products and reduce
the need for product recalls.
To support these diagnostic product efforts, the Company has acquired, by
license and collaborative internal development, proprietary technology for
development of low-cost, man-readable (with the unaided eye) or
machine-readable, field portable devices for rapid analysis of the results of
NASBA reactions. The NASBA detection system now employed by the Company is
believed by management to reduce by more than 80% the industry's historical cost
of associated instrumentation. The technical and cost advantages of the
Company's detection system are expected to jump-start the Company's sale of
NASBA based products in both the institutional and POC testing arenas.
The favorable cost and throughput related characteristics of the Company's NASBA
detection system also have attracted substantial interest on the part of public
health authorities in the U.S. and China. In collaboration with CDC, the Company
has begun work on a NASBA based test for Norwalk-like virus, a food borne
pathogen that causes an estimated 23 million annual cases of illness in the
United States. With the encouragement of Chinese public health agencies, the
Company has investigated the potential use of the Company's NASBA diagnostic
system to monitor the virus-load of HIV patients and potentially screen
extremely large numbers of individuals for the presence of the pathogens that
cause HIV, hepatitis, and other sexually transmitted diseases. The Company is
presently seeking a capital commitment of $6-10 million for a China based joint
venture that would carry out the Company's plan to complete clinical trials in
China on a low-cost NASBA based test for virus load in HIV patients during
fiscal year 2001.
12
<PAGE> 15
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 3 - OPERATIONAL AND FUNDING MATTERS - CONTINUED
To further its China related efforts, in July 2000 the Company executed a letter
of intent with Vamed Medical Instruments Co. Ltd. (Vamed), a Foshan, Guangdong,
China based company, and Beijing Aokai Automation System Engineering Co.
(BAKASC), a Beijing, China based company, to form a joint venture to continue
the current business of Vamed and produce and sell nucleic acid based clinical
diagnostic products and molecular biology research products in China and other
countries in the region. The Company would hold 51% of the equity in the new
venture. The current operations of Vamed, the production of an Enhanced External
Counterpulsation (EECP) apparatus, together with all of its other assets, would
be absorbed into the proposed joint venture. The initial capitalization of the
joint venture would exceed US $1 million, of which US $600,000 would be cash.
The EECP apparatus produced by Vamed is an external blood circulation assist
device that, through a one hour per day course of treatment for 30 consecutive
days, stimulates the growth of new blood vessels at the heart. It is approved by
the U.S. Food and Drug Administration (FDA) and is distributed in the U.S. by
Vasomedical, Inc., a Westbury New York company. The therapy has been determined
in recent U.S. studies to relieve the pain related to angina in over 85% of the
subjects who did not respond to widely used drug therapies. Recent clinical
reports confirming the efficacy of EECP therapy and its approval for Medicaid
have contributed to an increase in Vasomedical's revenues from sales of EECP
devices by almost 300% for the nine months ended February 29, 2000, compared to
the same period in 1999. As a result, the Company's management currently
projects revenues for the proposed joint venture with Vamed and BAKASC to
approach US $2 million for the twelve months ending December 31, 2001 and to
provide a stable organizational frame work within which to initiate the
requisite clinical trials and initial sales of NASBA based diagnostic products
in China. Because Vamed is already approved by the U.S. FDA for production of
medical instrumentation, the Company expects that its world wide requirement for
NASBA related instrumentation can be fulfilled by the Foshan based joint
venture.
While management believes the financial support for its short term objectives
with respect to the increased sales of enzymes and related components in the
world wide molecular biology research market and to diagnostic kit manufacturers
should be provided from cash generated from the Company's operations, the
proposed expansion of the Company's product offering to include NASBA based
tests for the research market, test kits for waterborne and food borne
pathogens, and clinical diagnostic products to be sold in China, establishes
intermediate term objectives that exceed the Company's current technical and
financial resources.
13
<PAGE> 16
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 3 - OPERATIONAL AND FUNDING MATTERS - CONTINUED
In August 2000, the Company began talks with Organon Teknika to expand the scope
of the relationship between the two organizations. The proposals under
consideration include Organon Teknika's cooperation with the Company in its
proposed China based joint venture to accelerate the introduction of NASBA based
diagnostic products in China and the formation of a joint venture between the
Company and Organon Teknika's Rockville, Maryland based subsidiary, Advance
Biosciences Laboratories (ABL). The proposed joint venture with ABL is intended
to enhance the Company's capability to develop NASBA based tests for pathogenic
organisms, owing to ABL's successful history in developing NASBA based assays.
Management also believes the proposed joint venture with ABL would permit the
Company to speed the introduction of NASBA based environmental and food
diagnostic products into the U.S. and European markets, as well as catalyze the
development of NASBA based clinical diagnostic products to be sold by the
Company's proposed China based joint venture.
Management intends to continue to operate the Company in a conservative manner
and to limit any short-term expansion (exclusive of the contemplated China based
joint venture) to that which can be funded by cash flows from operations. While
management believes the Company will be able to operate without interruption, it
intends to continue discussions with potential business partners that can
enhance the Company's product and market position, as well as lay the foundation
for strategies for the enhancement of the capital of the Company in order to
raise the working capital necessary to fund its business plan.
NOTE 4 - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
May 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Finished goods consisting of:
Viruses $151,185 $ 59,126
Enzymes 280,191 92,063
-------- --------
Total $431,376 $151,189
======== ========
</TABLE>
14
<PAGE> 17
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
May 31,
Life -------------------------
(Years) 2000 1999
------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures 5 - 10 $ 135,234 $ 137,445
Machinery and equipment 5 - 20 1,046,530 990,083
---------- ----------
1,181,764 1,127,528
Less - Accumulated depreciation 994,581 976,939
---------- ----------
$ 187,183 $ 150,589
========== ==========
</TABLE>
Depreciation expense was $24,136 and $42,419 for the years ended May 31, 2000
and 1999, respectively.
NOTE 6 - OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
May 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Licensing fees, net of amortization of $6,176 at May 31, 2000 $248,824 $105,000
Deposits and other 32,125 40,703
-------- --------
$280,949 $145,703
======== ========
</TABLE>
The Company enters into licensing agreements to acquire the use of certain
technologies under patents that are necessary in the production of its products.
The agreements require up-front non-refundable fees upon the effective dates of
the agreements. These up-front fees are recorded in Other Assets and amortized
upon commencement of revenue from the product from which the technology is used
over the estimated benefit period, which generally approximates 17 years. Under
the terms of the agreements, the Company is also required to pay royalties, as
defined, to the licensor when net sales to certain end users obtain
pre-determined levels. No royalties have been paid to date under these licensing
agreements.
15
<PAGE> 18
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
May 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Pension costs $202,000 $202,000
Compensation and related payroll costs 151,167 124,906
Licensing fees 100,000 --
Rent (payable to related party) 90,000 --
Property taxes 33,500 --
Professional fees 20,935 --
Taxes and other 25,014 --
Other 43,718 35,088
-------- --------
$666,334 $361,994
======== ========
</TABLE>
NOTE 8 - SHORT TERM BORROWINGS, RELATED PARTIES
During the year ended May 31, 2000, the Company was advanced $70,000 from
related parties that was used to fund operations. The Company repaid $30,000
during the current year, with the remaining repaid in July 2000. Subsequent to
May 31, 2000, the Company was advanced from related parties an additional
$65,000.
NOTE 9 - STOCKHOLDERS' EQUITY
In 1999, the Company completed a major restructuring plan by eliminating debt
and related accrued interest totaling $2,528,148.
Notes payable to related parties, consisting of principal only, totaling
$568,828 were converted to equity by the issuance of 1,399,927 shares of the
Company's common stock. Also, a note payable to a related party totaling
$186,082 was forgiven. The accrued interest associated with these notes payable,
totaling $914,163 at May 31, 1998, was forgiven by the parties.
16
<PAGE> 19
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 9 - STOCKHOLDERS' EQUITY - CONTINUED
During the year ended May 31, 1999, the Company sold its land and building in
two distinct transactions. The first involved an unrelated third party, which
bought a portion of the Company's vacant land for $200,000 in cash. The second
transaction involved a related party who bought the remaining land and the
buildings housing the corporate and manufacturing headquarters, which was
immediately leased back to the Company under a five-year term without any
current provisions for renewal. The note payable collateralized by the property
was held by the related party who purchased the property and the $859,075
principal amount thereon was used as consideration in the transaction. As a
result, the note payable, which approximated the estimated fair value of the
property immediately before the sale, was deemed fully satisfied by the
transaction. The accrued interest related to this note payable was forgiven.
The notes had resulted from the related parties' funding the Company's
operations over a period of time exceeding four to five years. Prior to 1999,
the intent of all parties was that the debt would be repaid. The obligations
were represented by formal notes bearing market interest rates and containing
other provisions. With the elimination of the related party debt in 1999, the
parties agreed that interest would not accrue subsequent to May 31, 1998.
For financial statement reporting purposes, the restructuring, exclusive of the
sale of vacant land to an unrelated third party, is presented as capital
transactions reflecting the substance of the transactions with parties under
varying percentage of common ownership. Accordingly, the forgiveness of the
accrued interest and note payable of $914,163 and $186,082, respectively, are
reflected as additional paid-in capital and not as income in the statement of
income. The difference of $756,475, representing the difference between the
balance on the note payable and the basis in the related property of
approximately $102,600, is also presented as additional paid-in capital and not
as a gain on sale in the statement of income.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Supply Arrangement
The Company entered into a non-exclusive supply agreement with its principal
customer during May 2000. Under the supply agreement, the Company is to supply
certain products based upon a rolling twelve month forecast provided by its
customer at pre-determined prices through January 2003. Prices may be
renegotiated if major specifications of the products change, or raw materials
cost significantly increase. Among other provisions, the agreement requires the
Company to institute a contingency plan, including the establishment of an
alternate location for production, in order to assure uninterrupted supply of
the products in the event of a catastrophic loss of the Company's primary
production facility. In the event the Company is unwilling or unable to
continue to supply products under the terms of the arrangement, the customer
may require the Company to assign its agreements for the supply of critical
production material and for the contingent production facilities to the
customer. In such event of nonperformance by the Company, the customer may also
exercise its stand-by rights granted in the supply agreement to direct the
operation of the Company's enzyme production facility, in which case the
customer would purchase critical manufacturing substrates valued at up to
$200,000 from the Company. If the Company's nonperformance were to continue for
more than two thirty-six day purchase periods, the customer would further be
entitled under the supply agreement to obtain a non-exclusive license, with the
right for a single sublicense, to manufacture or have manufactured the
products. Such licensee rights in the customer's favor would terminate within
six months after the Company resumed the supply of the products.
The Company had net sales of approximately $115,000 under this arrangement and
additional sales of $570,000 to the same customer for the year ended May 31,
2000. Estimated annual revenues to the Company under the supply agreement are
approximately $480,000. The arrangement extends until January 2003, and can be
automatically extended by either party for a subsequent two-year period.
17
<PAGE> 20
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 10 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Leases
The Company leases its corporate offices from an entity owned by the Company's
President and Chairman and individuals related to the Company's President and
Chairman. The lease expires in the year 2004, without any current provisions for
renewal, and provides for annual commitments of $90,000, subject to adjustment
to reflect current market rates.
Legal Proceedings
In October 1998, Imaging Science Technologies, Inc. filed an action in the
Pinellas County, Florida Circuit Court against the Company. The complaint seeks
unspecified damages based on allegations that the Company failed to return
confidential information to the Plaintiff and used such information for its own
purposes. The Company has denied the material allegations of the complaint. At
this time, management believes the Plaintiff's claims are without merit and the
ultimate resolution of this matter will not have a material effect on the
Company's financial position or results of operations.
NOTE 11 - STOCK OPTIONS
In May 2000, the Board of Directors adopted a 2000 stock option plan under
which incentive options may be granted to full-time employees. A total of
600,000 shares of Common Stock have been reserved for issuance under the plan.
The exercise price on options granted shall not be less than the fair market
value of the stock on the date of grant and will expire no later than ten years
from the date of grant. In the case of a stockholder owning more than 10% of
the outstanding stock of the Company, the exercise price of an incentive option
may not be less than 110% of the fair market value of the stock on the date of
grant, and such options will expire no later than five years from the date of
grant. Also, the aggregate fair market value of the stock with respect to which
incentive stock options are exercisable for the first time by any individual in
any calendar year may not exceed $100,000. No options have been granted under
this plan.
18
<PAGE> 21
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 11 - STOCK OPTIONS - CONTINUED
Also, the Company has a 1990 stock option plan under which incentive or
non-incentive stock options may be granted to directors, officers, and key
employees. A total of 500,000 shares of Common Stock have been reserved for
issuance under the plan. The exercise price on options granted shall not be less
than the fair market value of the stock on the date of grant and will expire no
later than ten years from the date of grant. In the case of a stockholder owning
more than 10% of the outstanding stock of the Company, the exercise price of an
incentive option may not be less than 110% of the fair market value of the stock
on the date of grant, and such options will expire no later than five years from
the date of grant. Also, the aggregate fair market value of the stock with
respect to which incentive stock options are exercisable for the first time by
any individual in any calendar year may not exceed $100,000. Options to purchase
270,000 shares of common stock were outstanding under the terms of the 1990
plan.
At May 31, 2000, options to purchase 65,000 shares of common stock were
outstanding under stock option plans that have been terminated. Additionally,
non-statutory options to purchase 210,000 shares of common stock were granted in
1999 not within the terms of the 2000 and 1999 stock option plans.
The exercise price of each outstanding option equals the market price of the
Company's stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plans. Had compensation cost for the plans been determined
based on the fair value of the options at the grant dates, the Company's
historical net loss and historical net loss per common share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the year ended May 31,
--------------------------
2000 1999
-------- --------
<S> <C> <C> <C>
Historical net income (loss) As reported $ 47,978 $ 17,282
Pro forma $ 47,978 $(83,518)
Historical net income (loss) per
common share - basic As reported $ .01 $ .01
Pro forma $ .01 $ (.03)
Historical net income (loss) per
common share - diluted As reported $ .01 $ .01
Pro forma $ .01 $ (.03)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
Binomial options-pricing model with the following weighted average assumptions
used for grants in 1999: no dividend yield, expected volatility of 50%,
risk-free interest rate of 6.0% and expected lives of 5 years.
19
<PAGE> 22
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 11 - STOCK OPTIONS - CONTINUED
A summary of the status of the Company's stock options as of May 31, 2000 and
1999 and changes during the years ended on those dates are as follows:
<TABLE>
<CAPTION>
May 31, 2000 May 31, 1999
-------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Price Price
--------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 545,000 $ .42 65,000 $ .50
Granted -- -- 480,000 .405
Canceled -- -- -- --
------- -------
Outstanding at end of year 545,000 $ .42 545,000 $ .42
======= =======
Options exercisable at end
of year 545,000 $ .42 545,000 $ .42
======= =======
Weighted average fair
value per share of options
granted during the year -- $ .405
</TABLE>
The following table summarizes information about Common Stock options
outstanding at May 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
Weighted
Number Average Weighted
Outstanding Remaining Average
At May 31, Contractual Exercise
Exercise Prices 2000 Life Price
--------------- ----------- ----------- ---------
(in Years)
<S> <C> <C> <C>
$ .405 480,000 9 $ .405
$ .50 65,000 1 $ .50
</TABLE>
20
<PAGE> 23
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 12 - DEFINED PENSION PLAN
Effective October 1, 1999, the Company elected to freeze future service benefits
under its defined benefit pension plan. The Company sponsors a noncontributory
defined benefit pension plan that covers substantially all full-time employees
through October 1, 1999. The plan provides for benefits to be paid to eligible
employees at retirement, based upon years of service with the Company and
compensation rates near retirement. Contributions to the plan reflect benefits
attributed to employees' services to date, as well as services expected to be
earned in the future. The Company's general funding policy is to contribute
amounts deductible for federal income tax purposes. Plan assets primarily
consist of common and preferred stock, investment grade corporate bonds, and
U.S. government obligations. The Company has the right to modify, amend, or
terminate the plan.
The following table provides a reconciliation of the changes in the benefit
obligations and the fair value of the plan assets for the years ended May 31,
2000 and 1999 and statements of the funded status as of May 31, 2000 and 1999:
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Components of net periodic benefit cost
Service cost $ -- $ 18,000
Interest cost 14,000 17,000
Expected return on plan assets (8,000) (8,000)
---------- ----------
Net periodic benefit cost $ 6,000 $ 27,000
========== ==========
Reconciliation of benefit obligation
Projected benefit obligation at beginning of year $ 258,000 $ 226,000
Service cost -- 18,000
Curtailment gain (45,000) --
Interest cost 14,000 17,000
Benefits paid (3,000) (3,000)
Net experience gain (17,000) --
---------- ----------
Projected benefit obligation at end of year $ 207,000 $ 258,000
========== ==========
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year $ 103,000 $ 101,000
Return on plan assets 6,000 5,000
Benefit payments (3,000) (3,000)
---------- ----------
Fair value of plan assets at end of year $ 106,000 $ 103,000
========== ==========
</TABLE>
21
<PAGE> 24
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 12 - DEFINED PENSION PLAN - CONTINUED
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Funded status
Funded status $ (101,000) $ (155,000)
Unrecognized (gain) loss (28,000) (13,000)
Unrecognized curtailment gain (45,000) --
Other (28,000) (34,000)
---------- ----------
Prepaid (accrued) benefit cost $ (202,000) $ (202,000)
========== ==========
</TABLE>
The Company has not made a contribution to the plan since April 1990. As a
result, the plan is under funded as defined by the rules and regulations of the
Internal Revenue Code. A minimum contribution of approximately $115,000 plus
related excise taxes of approximately $20,000 is currently required to be paid
by December 2000 to rectify this deficiency and mitigate further related
assessments and consequences. The Company has chosen not to recognize the above
mentioned curtailment gain until these matters are fully resolved.
The assumptions used in the measurement of the Company's benefit obligations are
shown in the following table:
<TABLE>
<CAPTION>
May 31,
-------------
2000 1999
---- ----
<S> <C> <C>
Weighted-average assumptions
Discount rate 7.5% 7.5%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 0.0% 5.0%
</TABLE>
22
<PAGE> 25
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 13 - INCOME TAXES
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Current tax provision (benefit) $ -- $ --
Deferred:
Net operating loss carryforwards previously not
recognized as the amount was fully offset by a
valuation allowance (34,000) (429,000)
Reduction of deferred tax assets previously not
recognized as the amount was fully offset by a
valuation allowance 34,000 429,000
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Reconciliation of the amount of income taxes, as calculated by applying the
federal statutory income tax rate of 34% to the Company's pre-tax income to that
reported by the Company, is as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Federal income taxes at statutory rates $ 16,300 $ 5,900
State income taxes, net of federal benefit 1,800 600
Gain on forgiveness of note payable, related party
recognized for federal income tax purposes -- 70,000
Gain on sale of building recognized for federal income
tax purposes -- 285,000
Non-deductible interest and penalties 15,500 37,500
Recognition of prior operating losses (34,000) (429,000)
Other 400 30,000
---------- ----------
$ -- $ --
========== ==========
</TABLE>
23
<PAGE> 26
LIFE SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2000 and 1999
NOTE 13 - INCOME TAXES - CONTINUED
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,000 $ 2,000
Accrued pension contribution 76,000 76,000
Net operating loss carryovers 514,000 548,000
---------- ----------
592,000 626,000
Less valuation allowance (592,000) (626,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
At May 31, 2000, the Company has approximately $1,370,000 of net operating loss
carryforwards that expire between years 2008 through 2011.
NOTE 14 - SIGNIFICANT CUSTOMERS
Sales to three customers accounted for approximately 79% and 67% of net sales
for the years ended May 31, 2000 and 1999, respectively.
NOTE 15 - SUBSEQUENT EVENT
In July 2000, the Company signed a letter of intent to enter into a joint
venture with two unrelated companies located in China. The joint venture is
being formed to create, market, and distribute in China certain products as
defined in the letter of intent. Under the proposed agreement, the Company would
contribute its 51% pro rata share of initial capital consisting of cash of
$306,000 and, additionally, would be required to contribute certain intellectual
property and equipment. The agreement is to be executed prior to October 15,
2000.
24
