-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K4/vDylOBl+7Gew2QOk8xf/MTpO77q1pdGCsQAG2vyfHMlBJp78q8IVrP1eErZUy l1yClbGkRLFo4Ru1VeHeWg== 0001047469-99-037933.txt : 19991018 0001047469-99-037933.hdr.sgml : 19991018 ACCESSION NUMBER: 0001047469-99-037933 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19991006 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINESYS PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001096328 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10SB12G SEC ACT: SEC FILE NUMBER: 000-27571 FILM NUMBER: 99723918 BUSINESS ADDRESS: STREET 1: 3771 JACOMBS ROAD STREET 2: UNIT 415 CITY: RICHMOND BC CANADA BUSINESS PHONE: 6042790363 MAIL ADDRESS: STREET 1: 3771 JACOMBS ROAD UNIT 415 CITY: RICHMOND BC CANADA STATE: A1 10SB12G 1 FORM 10-SB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 KINeSYS PHARMACEUTICALS, INC. - ------------------------------------------------------------------------------- (Name of Small Business Issuer in its Charter) Nevada 98-0210050 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3771 Jacombs Road, Unit 415 Richmond, B.C., Canada V6V 2L9 N/A - ----------------------------------- ------------------------------------ (Address of principal (Zip Code) executive offices) Issuer's telephone number: (604) 279-0363 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered N/A N/A - ----------------------------------- ------------------------------------ Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.00001 par value per share - -------------------------------------------------------------------------------- (Title of Class) 1 KINeSYS PHARMACEUTICALS, INC. FORM 10-SB TABLE OF CONTENTS PART I Item 1. Description of Business Item 2. Management's Discussion and Analysis Item 3. Description of Property Item 4. Security Ownership of Certain Beneficial Owners and Management Item 5. Directors, Executive Officers, Promoters and Control Persons Item 6. Executive Compensation Item 7. Certain Relationships and Related Transactions Item 8. Description of Securities PART II Item 1. Market Price of and Dividends on the Registrant's Common Equity and other Shareholder Matters Item 2. Legal Proceedings Item 3. Changes in and Disagreements with Accountants Item 4. Recent Sales of Unregistered Securities Item 5. Indemnification of Directors and Officers PART F/S Financial Statements PART III Item 1. Index to Exhibits Item 2. Description of Exhibits STATISTICAL INFORMATION RELATING TO THE SKIN CARE INDUSTRY INCLUDED IN THIS REGISTRATION STATEMENT IS DERIVED BY THE COMPANY FROM RECOGNIZED INDUSTRY REPORT REGULARLY PUBLISHED BY INDUSTRY ASSOCIATION AND INDEPENDENT CONSULTING AND DATA COMPILATION ORGANIZATIONS IN THESE INDUSTRIES, INCLUDING A.C. NEILSON CO. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW OF BUSINESS (1) Principal products and their markets KINeSYS Pharmaceuticals, Inc. ("Kinesys," "Company" or "Issuer") is engaged in the design, development, and marketing of a complete line of body and skin care products designed specifically for athletes and active individuals. KINeSYS' products are currently divided into three functional product lines: sun care, treatment and daily use products. Each product is designed specifically to meet the requirements of professional athletes and active, health conscious individuals. KINeSYS contracts the manufacturing of its products to several pharmaceutical manufacturers located in both British Columbia and Ontario, Canada. KINeSYS products are distributed for sale to customers in Canada and the United States. KINeSYS' PRODUCTS Kinesys' product line includes the following products, organized into three functional lines: sun care products, treatment products, and daily use products. SUN CARE PRODUCT LINE - - Quick Dry Sprays. KINeSYS' line of sunscreen sprays protect the skin effectively with hands-free application and without any greasy residue. The complete line of sunscreen sprays with SPF factors of 8, 15, and 30 are all PABA-free, alcohol-free, and oil-free, and are water, sweat and sand resistant. They are designed to protect all skin types from the sun's damaging UVA and UVB rays. - - Protective Creams. The KINeSYS SPF 30 cream is recognized by the Canadian Melanoma Foundation for containing the physical sun block titanium dioxide, resulting in superior protection for sensitive skin. - - Sun Stick. The KINeSYS SPF 30 Sun Protection Stick is specially formulated with titanium dioxide for protection of sensitive lips, nose and ears. - - Insect Repellent. The KINeSYS SPF 15 with Insect Repellent offers all the benefits of the quick spray sunscreen products with the added feature of a safe and effective insect repellent. With its the hands-free application it is popular with outdoor sporting and recreation enthusiasts. TREATMENT PRODUCT LINE - - Muscle Balm Analgesic Stick. This product uses a clean-hands mode of application to deliver a pain relieving and inflammation reducing balm. The muscle balm contains a higher concentration of rapidly absorbed active ingredients compared to the majority of other products of its kind on the non-prescription market. - - Athletic Foot Spray. The KINeSYS Foot Spray is a fast drying non-aerosol spray that prevents and treats minor fungal and bacterial infections while at the same time controlling foot odor. - - First Aid Treatment / After-Sun Soothing Spray. This spray contains a local anesthetic to soothe dry, chapped, wind and sunburned skin and to relieve the pain and/or itching associated with minor burns, scrapes, and non-poisonous insect bites. It has a pleasant fragrance and a non-oily aloe vera base and is applied via a non-aerosol pump. 3 DAILY USE PRODUCT LINE - - Daily Moisturizer. The KINeSYS Daily Moisturizer is an oil-free moisturizer that also contains a SPF 6 level sunscreen to provide light protection from ultra-violet radiation. It absorbs quickly, is non-greasy, non-comedogenic and is fragrance free. - - Sport Body Wash. The KINeSYS Sport Body Wash is a non-soap preparation that controls body odor and prevents infection with the inclusion of Triclosan, an anti-bacterial ingredient. - - Shampoos. The KINeSYS Sport Shampoo with conditioner is designed to control residue build up from swimming pools, salt water, and heavily mineralized tap water. The shampoo restores moisture lost through exposure to the elements such as the sun, salt water, chlorine, wind and blow-drying. Its special 2 in 1 formula with a built in conditioner is pH balanced and is gentle enough to use every day without losing its effectiveness. It also prevents hair discoloration that is commonly associated with chlorine and exposure to the elements. The KINeSYS Vigor Shampoo acts as a natural medicated shampoo that is perfect for the active individual who suffers from a dry itchy scalp and dandruff. Its active ingredients are eucalyptus, which refreshes, invigorates, and stimulates the scalp, and tea tree oil, which soothes and heals an irritated scalp. RESEARCH AND DEVELOPMENT Kinesys develops its products through the collaborative efforts of contract chemists, a Scientific Advisory Board comprised of Kinesys consultants, and Kinesys' own employees. The Scientific Advisory Board provides critical guidance and technical expertise in the area of research and development, resulting in products that are comprised of novel and high quality ingredients that meet and exceed the demands of athletes and active individuals. Each member of the Advisory Board contributes a unique area of expertise to Kinesys' product development, product evaluation, formulation optimization and quality control. (2) Distribution methods of the products Retail stores have traditionally been the primary distribution channels for all Kinesys products. The three main areas of retail distribution include pharmacies, supermarkets and mass merchandisers. Access to all three of these distribution systems is through distributors, agents and/or brokers. The Company generally works with distributors who purchase the product and marketing tools on a thirty-day term and resell the product to their accounts. In this relationship, the distributor assumes responsibility for product sales, promotion, marketing and managing their own receivables, thereby allowing Kinesys to simplify the administrative workload that accompanies expansion. The Company is presently working with agents in a focused market area of western Canada and the western United States. The agent/broker represents Kinesys products in concert with other products they represent and are paid by the Company a commission on the wholesale value of the products being distributed. In 1998, Kinesys products were represented in over 2,000 retail locations, up from 128 in 1997. Important accounts in Canada in 1998 included Shoppers Drug Mart, London Drugs, Pharmasave and Pharma Plus. In the United States, the Company was able to secure distribution with Rite Aid (formerly Thrifty - Payless Drugs). The secondary distribution channels for Kinesys products have been through sporting goods stores, specialty stores, and golf courses. These distribution channels have proven to be effective in establishing the Kinesys brand within its target market. The Company has numerous contracts with agents and distributors in these areas, including AMER Sports Canada Inc. with 27 sales representatives across Canada representing the Kinesys product in golf clubhouses and sporting goods stores. In 1998, these efforts resulted in Kinesys being distributed in over 400 locations, up from 200 in 1997. 4 A third distribution channel for Kinesys products is direct marketing. The Company has had some success over the past year in marketing its products directly in specialty markets such as golf tournaments, hotel mini bars, cruise lines and corporate accounts. The Company's final distribution channel is direct marketing through the Company's toll free telephone number from its website. The Company believes that this is an important and developing distribution channel and will be increasing its efforts to facilitate more sales through the Internet. (3) New products Kinesys intends to pursue the development of proprietary products specifically for its target market. Kinesys has several additional product concepts that are in the research stage and that are expected to extend the Kinesys product family. Some of these concepts involve extensions of the existing Kinesys product line to other market segments such as seniors or children's markets, while some concepts represent new products to meet specific active individual and athlete demands. All additional product concepts will only be introduced to the Kinesys product line when it is economically feasible to do so. (4) Competitive business conditions and the small business issuer's competitive position in the industry and methods of competition COMPETITORS The sun care category is represented by relatively few dominant multinational companies, balanced by smaller, niche focused companies. The industry is still developing as the public continues to become more aware of the dangers of excessive sun. The specific industry leaders and their percentage of market share are: Schering Plough (Coppertone) 32.3% Playtex (Banana Boat) 19.0% Neutrogena 8.7% Hawaiian Tropic 7.9% Private Label 7.3% No-Ad 5.3% Bain De Soleil 4.7% Panama Jack 1.3% Australian Gold 1.2% All Others combined 12.5% SOURCE: AC NEILSON CO. In the other two Kinesys product categories, treatment products and daily use products, there are a significant number of industry participants and niche categories. For example, in the external analgesic market there over 300 separate items on the shelves across North America (Source: Drug Store News: July 6, 1998). None of the competitors feature a muscle balm stick form of application combined with the concentration of active ingredients that Kinesys has. Specific competitors to the Kinesys Analgesic Muscle Balm product include Flex-All, Tiger Balm and Myoflex. Kinesys will compete with other market participants by publicizing the unique properties of its products, by building brand loyalty through creative product positioning, and by establishing marketing alliances that will ensure focused penetration into target markets. 5 INTELLECTUAL PROPERTY PROTECTION. The Company acquired its product formulas on a contract basis from an independent chemist. The Company owns these formulas and does not pay royalties to the developer. At the present time the Company and its predecessors have relied upon the secret and proprietary nature of the formulas to protect its products from the competition. It may in the future file, but at this time has not filed, for copyrights in the U.S. and Canada as well as other countries. The Company has no plans to seek patent protection for its formulations. The Company believes that any legal protection cannot prevent competitors from entering the market for skin care products similar to those developed by Kinesys. The Company relies on trade secrets and proprietary know-how which it seeks to protect, in part, through appropriate confidentiality and proprietary information agreements. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company is not to be disclosed to third parties, except in specific circumstances, and that all inventions conceived by the individual in the course of rendering services to the Company shall be the Company's exclusive property. There can be no assurance that confidentiality or proprietary information agreements will not be breached, that remedies for any breach would be adequate, or that the Company's trade secrets will not otherwise become known to, or independently developed by, competitors. (5) Sources and availability of raw materials and the names of principal suppliers The Company purchases the raw materials for its products primarily from a chemical broker, Van Waters & Rogers, which has offices globally. If Van Waters & Rogers ceased to supply products to the Company, the Company believes that other suppliers would be readily available. In some instances, the Company purchases these materials directly, while in other instances, the contract pharmaceutical manufacturer purchases materials on behalf of the Company. The Company owns the molds for production of its packaging and contracts the production of bottles from two companies, Polybottle and Richards Packaging, Inc. The caps or closures are purchased from either Seaquist Canada, Ltd., or McKernans. Present active contract pharmaceutical manufacturers include Biotech and Contract Pharmaceuticals Ltd. (6) Dependence on one or a few major customers The Company is not reliant on any particular relationship or avenue of distribution for its sales. Although the Company typically does business only with a few distributors at a time, it does not consider these relationships to be unique or proprietary. (7) Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including duration. The Company claims no patents, licenses, franchises, or concessions. It has no labor contracts. Kinesys Canada has entered into a royalty agreement dated December 17, 1996, with Douglas E. and Ed Ford covering revenues from North American operations. Royalties will be payable by the Company under this agreement when its annual gross revenues exceed CDN$1 million. The agreement will expire upon payment of an aggregate royalty of CDN$1,250,000 (if before October 1, 2001) or CDN$1,500,000 (if thereafter). Kinesys protects its name through trademark registrations of the Kinesys name and logo in Canada and the United States, the countries where it presently does business. In addition, the trademark of "Kinesys" is presently registered in New Zealand, Australia, the European Union, England, Malaysia, Singapore, Philippines and Thailand for use with cosmoceutical sports medicine products. The Company is presently pursuing trademark registration in Japan. 6 (8) Need for any government approval of principal products or services and effect of existing or probable governmental regulations on the business. Skin care products require governmental approval in most countries where the Company sells or expects to sell its products. The Kinesys products that require registration with the Food and Drug Administration (FDA) in the United States and the Health Protection Branch (HPB) in Canada have been registered. In addition, Kinesys SPF 15 with Insect Repellant has been registered with the Canadian Pest Control Management Regulatory Agency. Necessary registrations are being pursued in Japan. Although Kinesys believes it has received all regulatory approvals required to operate its business to date, regulations may change, resulting in unexpected costs and uncertainty. Kinesys may not be able to comply with the applicable requirements and necessary approvals may not be granted. We cannot predict the extent and impact of future governmental regulations. If we fail to comply with the applicable regulatory requirements, we may be subject to fines, injunctions, civil penalties, recall or product seizure, among other penalties. (9) Estimate of amount spent during each of the last two fiscal years on research and development activities, and the cost thereof borne directly by customers. During the last two years the Company has engaged in limited research and development activities, focusing its energy instead on sales and marketing of previously-developed products. The Company estimates that is spent approximately $25,000 prior to 1998 on its research and development efforts, and it expects to spend between $50,000 and $100,000 in 1999. These costs are not expected to be borne directly by customers but rather will be funded out of the Company's working capital. (10) Number of total employees and number of full time employees. The Company currently has 2 full time employees and regularly employs 3 independent contractors. The Company also employs approximately 8 contractors on a seasonal basis in order to enable it to meet summer production, sales and marketing demands. COMPANY HISTORY Kinesys was incorporated in Nevada on February 17, 1998 under the name of Goldsearch Corporation. On May 4, 1999, Goldsearch Corporation merged with Kinesys Pharmaceutical Inc. ("Kinesys Canada"), a Canadian corporation. In connection with the merger, 3,052,021 Goldsearch shares were issued to the former holders of Kinesys Canada stock. Immediately following the merger, the business of Kinesys Canada became the business of Goldsearch, and the former Kinesys Canada shareholders controlled approximately 39% of the outstanding Goldsearch voting equity. Goldsearch filed its Certificate of Amendment of Articles of Incorporation on March 29, 1999 to change the company's name to Kinesys Pharmaceuticals, Inc. Kinesys Canada survived the merger as a wholly-owned subsidiary of the Company. Kinesys Canada was incorporated in British Columbia, Canada, in December of 1993 under the name "Motion Pharmaceutical Inc." The Kinesys name was adopted in early 1994 as the company worked to develop a line of muscle balm and skin care products for athletes. Kinesys Canada launched its first products at the XV Commonwealth Games in Victoria, British Columbia in August of 1994. In April of 1995, Kinesys Canada listed its shares on the Alberta Stock Exchange after raising CDN$920,000 in a private equity offering. The company was subsequently returned to private control in September of 1996 when its founders purchased a majority of the outstanding publicly-held equity. At that time, the company was burdened with over CDN$350,000 of liabilities and was unable to meet the demands of its creditors. On February 19, 1997, the company filed a proposal to its creditors as an Insolvent Person under the Canadian Bankruptcy and Insolvency Act. Pursuant to this plan, creditors would receive $0.50 per dollar of 7 outstanding debt. The proposal was declared by the trustee in bankruptcy to have been fully performed on December 30, 1998 and the company is no longer subject to bankruptcy protection. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW Kinesys is a leading supplier of innovative high-performance skin care products aimed at professional and recreational athletes. By focusing on its current business strategy, the Company intends to solidify its market position in Canada and to expand to other geographical markets in the United States, overseas and via the company's website on the Internet. Founded in 1993, the Company spent its early years developing formulas, establishing markets for its sunscreen and related products and creating brand awareness. It has traditionally achieved most of its sales in Canada, with occasional sales and product interest in the United States. It now intends to focus on the United States market for its next phase of growth. Management recognizes that directing the Company's efforts to expand into new geographical markets will have a negative short-term impact on revenue, but believes it is warranted by the potential long-term opportunity of selling its primary suncare products in markets which are not as subject to the seasonal variations found in Canada. On May 4, 1999, Goldsearch Corporation, a Nevada corporation, merged (the "Merger") with Kinesys Canada. On May 4, 1999, Goldsearch issued 3,052,021 shares of its Common Stock to the holders of Kinesys Canada's issued and outstanding shares of common stock in exchange for 100% of the issued and outstanding common stock of Kinesys Canada. Prior to the Merger, Goldsearch had focused its operations in the area of mineral exploration and had only nominal assets and liabilities. After the merger, former Kinesys Canada stockholders owned approximately 39% of the issued and outstanding Common Stock of the Company. The merger has been accounted for using the purchase method of accounting with Kinesys Canada considered to be the predecessor business. Following the Merger, the business conducted by the Company is the business conducted by Kinesys Canada prior to the Merger with the additional focus of growth opportunities in the U.S., overseas, and on the Internet. In conjunction with the Merger, the Company changed its name to "Kinesys Pharmaceuticals, Inc." The Company's shares continue to be traded on the Over the Counter Bulletin Board operated by the National Association of Securities Dealers, Inc. under the symbol "KNES." In view of the evolving nature of its business and its limited operating history, the Company has limited experience forecasting its revenues. Therefore, the Company believes that period-to-period comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. To date, the Company has incurred substantial costs to develop its product line, establish brand recognition and secure sales and distribution channels. The Company will continue to incur costs to develop new products, develop new customers, build brand awareness and grow the business. These costs may not correspond with any meaningful increases in revenues in the near term. RESULTS OF OPERATIONS The results of operations compares financial results of Kinesys Canada, the predecessor as the historical operations of the Registrant have been discontinued. Previously, the Registrant was engaged in the mineral exploration and development business and had incurred expenditures in this regard of $147,265 for the period from incorporation (February 7, 1998) to January 31, 1999. No revenues were recognized from this business activity. 8 Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998 Revenue Sales of $127,649 and $621,735 for the six months ended June 30, 1999 and 1998 respectively, were derived primarily from the sale of the Company's sunscreen products. For the six months ended June 30, 1998, approximately 60% of the Company's revenue was derived from sales in the United States, while 40% was derived from sales in Canada. Of those sales, 90% was attributable to sun care products and the balance was attributable to treatment and daily use products. During the six months ended June 30, 1999, the Company devoted most of its efforts to consolidation, restructuring and refocusing of the Company's operations. During this period, the Company only actively solicited sales in British Columbia, the Company's head office location. As a result, sales declined substantially. Management believes that this decision will have long term benefits in the form of improved operations, systems and focused marketing as the company begins to implement its plan to expand its geographic and demographic markets. The Company hopes to derive future revenue from increased sales in the United States, predominantly in the western and southern states as well as an increasing sales component from the company's website. The Company's business model is based on building brand recognition through association with sports teams, high-profile athletes, grassroots athletic events and other more traditional forms of advertising. Operating expenses The Company's operating expenses consist of sales and marketing and general and administrative expenses. Operating expenses were $237,142 and $505,034 for the six months ended June 30, 1999 and 1998, respectively. Sales and marketing expenses (comprising advertising, promotion and commissions) for the six months ended June 30, 1999 of $71,362 decreased $197,882 or 73% from the comparable period in 1998. This is largely accounted for by decreased expenditures for sales commissions and related advertising and promotional giveaways. The sales and marketing expenses consist primarily of salaries related to developing business arrangements with prospective partners, establishing a more dynamic Internet presence, creating awareness of existing and new services and costs of communicating to the industry and potential consumers. General and administrative expenses consist primarily of salaries and related personnel expenses, rent, accounting and legal services and general operating expenses. For the six months ended June 30, 1999, general and administrative expenses of $165,780 decreased $ 70,010 or 30%. Most of this decline is attributable to a decrease in costs associated with sales, such as decreased fees and travel costs for participation in trade shows. YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenue Sales of $622,930 and $167,170 for the years ended December 31, 1998 and 1997 respectively, were derived primarily from the sale of the Company's sunscreen products. During 1997, the Company's attentions were primarily focussed on its creditor protection proceedings, with this process carrying over into 1998. During 1997 the Company was unable to focus its full attention on sales or marketing and sales accordingly suffered. As the Company emerged from creditor protection in 1998, it was able to begin to refocus its efforts on its business plan and sales improved substantially. However, as pointed out in the discussion of Revenue above the Company still lacked the proper systems and operations to properly manage the increased sales. Management expects sales to continue to improve in 1999 and 2000 as the Company continues on its present course of focused sales with proper operational systems. 9 During 1998, the Company was successful in soliciting sales in the United States. One such sale in particular accounted for 59% of the Company's 1998 sales. Management intends to pursue similar types of transactions with U.S. customers in the latter half of 1999 and beyond, but cannot guarantee that its efforts will be successful. Any failure to secure sizeable sales accounts in the U.S. will constrain the Company's ability to meet its goals. Future revenue will be derived increasingly from sales in the United States, predominantly in the western and southern states, overseas and via the company's website. The Company's business model is based on building brand recognition through association with sports teams, high-profile athletes, grassroots athletic events and through other traditional forms of advertising. Operating expenses The Company's operating expenses consist of sales and marketing and general and administrative expenses. Operating expenses were $988,616 and $505,279 for the years ended December 31, 1998 and 1997, respectively. Sales and marketing expenses (comprising advertising, promotion and commissions) for the year ended December 31, 1998 of $310,829 increased $154,258 or 98% from the year earlier period. The Company's increased expenditures on advertising and promotion in 1998 included the cost of promotional giveaways and were coupled with an increase in commissions paid on the large sale into the U.S. discussed above. General and administrative expenses consist primarily of salaries and related personnel expenses, rent, accounting and legal services and general operating expenses. For the year ended December 31, 1998, general and administrative expenses of $677,787 increased $329,079 or 94%. Most of this increase is attributable to the recognition of an employee benefit relating to the grant of stock options to employees, consultants and directors in 1998 totaling $257,269. General operating expenses also increased as the Company increased its efforts to sell its product and grow its business. Extraordinary Item The Company reported a gain on debt restructuring of $59,203 and $179,816 for the years ended December 31, 1998 and 1997, respectively. These amounts were accounted for in connection with the Company's settlement with unsecured creditors and are not expected to occur again in the future. As the Company expands its business in 1999 and beyond, its research and development, sales and marketing, website development and general and administrative expenses will increase. Research and development expenses will increase as the Company adds products to its line. Sales and marketing expenses will increase as the Company participates in trade shows and similar events in order to build business relationships, sell product and build brand awareness. Internet costs will increase as the Company continues to develop its website and advertise it on the Internet and related media. In addition, advertising and public relations expenses will increase as the Company invests to grow its business. General and administrative expenses will increase as the Company continues to build its management infrastructure, including additional personnel as needed, office space and internal information systems. 10 INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY The Company's primary sources of liquidity are the $12,282 in cash that it has on hand, and the potential to raise additional cash through the exercise of stock options held by certain investors. The Company raised approximately $400,000 upon exercise of options to purchase 533,333 shares of Common Stock on May 30, 1999. The Company has additional outstanding options to purchase 400,000 Common shares at an exercise price of $1.00 per share and options to purchase 320,000 Common shares at an exercise price of $1.25 per share. These options are held by an unrelated third party and should be distinguished from options granted under our 1999 Stock Option Plan. Holders of these options are not required to exercise them, and if they do not exercise, there will be no cash proceeds to the Company. The Company's auditors, BDO Dunwoody LLP, have deemed that continuation of the Company as a "going concern," as defined by U.S. generally accepted accounting principles, is dependent upon the Company obtaining additional working capital. The Company is taking steps to raise additional capital, as its current cash reserves and proceeds from the additional options when exercised over the next three months are expected to allow the company to become self-sufficient at annual sales levels of $2,000,000. The Company intends to conduct private placement sales of its equity securities if and when its cash reserves are depleted or sales increase above $2,000,000. There can be no assurance that any shares of Common Stock of the Company can or will be sold or that other sources of loans or funds will be available to the Company if and when needed. The failure of the Company to obtain adequate additional capital may require the Company to postpone some or all of the expansion of its proposed business operations and, potentially, to cease its operations. Any additional equity financings may involve substantial dilution to the Company's then-existing shareholders. RECENT TRANSACTION The Company has recently entered into a one-year agreement with Venture Catalyst.com, a division of Inland Entertainment Corporation ("Venture Catalyst"). Pursuant to this agreement, Venture Catalyst will provide general consulting, investor relations, and financial communication services to the Company. The Company has also agreed to lease office space from Venture Catalyst in San Diego, California. This arrangement is expected to permit the Company to more effectively distribute and sell its products in the United States. INDUSTRY BACKGROUND AND TRENDS. The primary target market for Kinesys products is the active and health conscious individual in the 18-45 age category. This demographic represents the stage during which brand loyalty is being formed. Typically the primary Kinesys consumer is educated, sophisticated, upper income and living in an urban environment. The secondary target market is the competitive and professional athlete who demands a product that will meet the rigors of his or her sport. Word of mouth referral from the primary market, supported by endorsements of competitive and professional athletes and highlighted by strategic advertising results in a large tertiary target market, the general public. The skin care market in the US is valued excess of $8 billion and is growing at a rate of 7% per year while in Canada a similar growth rate is occurring in a market of over $615 million. The skin care product segment is expected to remain buoyant as consumers desire to look and feel younger, even as the North American population gets older. By 2010 the United States population in the 45-64 age bracket will have increased by 70% to represent 27% of the population, in contrast to the 1990 census numbers. By establishing brand loyalty now, Kinesys hopes to enjoy the benefit of this segment of the population utilizing more skin care products in the future. Equally important is that the 18-45 age brackets, Kinesys' present target market, will continue to represent approximately 40% of the population, up marginally by 3% over the same 20 year period. The incidence of sunburn in the general population has increased 9% over the past ten years and general skin cancer rates are increasing due to overexposure to sun and burns from as far back as 25 years 11 ago. As a result, the sun care segment of the skin care market was worth over $467 million in 1997, and sales are projected to increase at 12% per year to reach $758 million by 2000. In 1997, sales of sun care products primarily occurred in pharmacies ($158.1 million, or 45% of distribution), mass merchandisers ($160 million, or 29% of distribution), and food stores ($99.2 million, or 24% of distribution). The sport segment represents 8.7% of the total sun care industry and Kinesys is currently the only sun care company dedicated to the sport sun care segment in North America. Kinesys' Muscle Balm Analgesic Stick is positioned in one of the fastest growing segments of pharmacy sales--external analgesics. In 1998 the external analgesic market was valued at US$220 million and is projected to double to US$440 million by the year 2001 in order to serve an aging but still-active and fitness-oriented consumer. Sales distribution is 53% in pharmacies, 26% in mass merchandisers and 20% in food chains. INVESTMENT CONSIDERATIONS Investment in the shares of our common stock involves a high degree of risk. Investmors should carefully consider the risks described below, together with all of the other information included in this registration statment, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and investors may lose all or part of their investment. NEED FOR ADDITIONAL FINANCING During the next 12 months, the Company's foreseeable cash requirements will be met by a combination of existing cash, revenue generated by the Company's sales, and additional equity financing. The Company is currently devoting substantial resources to the development of its products and to the establishment of sales and distribution relationships. Substantial additional capital may be required in the future to fund product development and product launch cycles. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company or its shareholders. If needed capital is unavailable, the Company's ability to continue in business will be jeopardized. To the extent the Company raises additional capital by issuing equity or securities convertible into equity, ownership dilution to the Company's shareholders will result. COMPETITION. The market for sunscreen and other skin care products is highly competitive. The competition for the Company's products comes largely from large, well-established multinational companies with longer operating histories, greater name recognition, larger retail bases and significantly greater financial, technical, and marketing resources than the Company. Competition from these sources could materially adversely affect the Company's business, operating results or financial condition. Competitive factors in the athletic skin care market include innovative products, product quality, marketing and distribution resources and price. While the Company believes that it has the experience and ability to compete within its identified market, there can be no assurance that the Company will be able to compete successfully against current or future competitors. RELIANCE ON KEY INDIVIDUALS; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL. The Company is dependent upon the active participation of several key management personnel, including Jonathan Mara, Chief Executive Officer, Jeffrey Kletter, President, and Jocelyn Kletter, Vice President. The Company does not currently maintain key employee insurance policies. Additionally, the Company will likely need to recruit qualified personnel in order to expand according to its business plan. Although the Company is committed to offering competitive salaries, stock options, benefits and an appealing work environment, there can be no assurance that Kinesys will be able to attract such persons or retain any of its key personnel. The failure to attract and retain key personnel could have a material adverse effect on the Company's viability. 12 PRODUCT LIABILITY The Company's business exposes it to potential product liability claims which are inherent in the manufacture and sale of skin care products, and as such the Company may face liability to product users for damages resulting from the faulty design or manufacture of products. The Company maintains product liability insurance coverage; however, there can be no assurance that product liability claims will not exceed coverage limits or that such insurance will continue to be available at commercially reasonable rates, if at all. Consequently, a product liability claim or other claim in excess of insured liabilities or with respect to uninsured liabilities could have a material adverse effect on the Company. DEPENDENCE ON NEW MARKETS The Company's future growth, if any, depends in part on its ability to penetrate new markets. There can be no assurance that Kinesys will be successful in locating or penetrating any new markets for its products. HIGH COST OF INVENTORY Due to the nature of the Company's business, the Company is required to invest a significant portion of its capital in building and maintaining inventory. There can be no assurance that inventory held by the Company will not become unsalable or diminish in value prior to sale. A significant decline in the value or usability of inventory could have a significant adverse affect on the Company's financial position. LIMITED LIQUIDITY AND RESTRICTED TRANSFERABILITY An investment in the Company involves limited liquidity. There is currently only a limited public market for the Company's Common Stock, and no assurance can be given that a broader public market will develop. An investment in the Company is suitable only for sophisticated investors who have no need to have ready access to the capital that they commit to the Company. Potential investors must view an investment in the Company as a long-term commitment. RISKS OF LOW-PRICED STOCKS; PENNY STOCK REGULATIONS. The Company's Common Stock is traded over-the-counter on NASD'S "Electronic Bulletin Board." As such, the Company's Common Stock is subject to Rule 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers that sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company's Common Stock and may affect the ability of purchasers to sell any of the Common Stock acquired in the secondary market. SHARE PRICE VOLATILITY. The trading price of the Common Stock could be subject to wide fluctuations in response to quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the personal products industries and other events or factors. In addition, in recent years the stock market in general has experienced extreme price fluctuations. This volatility has had a substantial effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. 13 PRODUCT RECALLS. Products subject to governmental regulatory approval, such as the Company's products, can experience performance problems in the field that require review and possible corrective action by the manufacturer. The Company has on at least one occasion been required to recall a substantial amount of one of its products due to a labeling error. Similar product problems in the future could result in market withdrawals or recalls of products, which could have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 COMPLIANCE The Company is only moderately dependent on computer software programs and operating systems in its internal operations, but it relies upon third party vendors whose operations may be seriously affected by computer failures. The use of computer programs that rely on two-digit date programs to perform computations and decision-making functions may cause computer systems to malfunction in the year 2000 and lead to significant business delays and disruptions. While the Company believes that the software applications that it uses or has developed are year 2000 compliant, to the extent that any of these software applications contain source code that is unable to appropriately interpret the upcoming calendar year 2000, some level of modification or possible replacement of such source code or applications will be necessary. The Company is currently unable to predict the extent to which the year 2000 issue will affect its customers or strategic partners, or the extent to which it would be vulnerable to any failure by the customers or strategic partners to remedy any year 2000 issues on a timely basis. The failure of a customer or strategic partner subject to the year 2000 issues to convert its systems on a timely basis or a conversion that is incompatible with the Company's systems could have a material adverse effect on the Company's business, financial condition and results of operations. FORWARD-LOOKING STATEMENTS Certain items contained in this document, including ITEM 2 and the prior section, ITEM 1, are "forward looking" as that term is contemplated by Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding future business operations and projected earnings from its products and services, which are subject to many risks. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially as a result of certain factors, including those set forth under the caption "Investment Considerations" and elsewhere in this Form 10-SB. Potential investors should consider carefully the previously stated factors, as well as the more detailed information contained elsewhere in this Form 10-SB, before making a decision to invest in the common stock of the Company. ITEM 3. DESCRIPTION OF PROPERTY Principal Property The Company's headquarters are located in an office/warehouse facility of approximately 3,000 square feet at Unit 415 - 3771 Jacombs Road, Richmond, B.C., Canada V6V 2L9. The present facilities lease expired in mid-1998 and the Company is presently on a month to month contract. The property is leased from an unaffiliated third party for a monthly rental of CDN$2,310. The Company maintains tenant fire and casualty insurance on its property located in such building in an amount deemed adequate by the Company. The Company has recently agreed to sublease approximately 300 square feet of office space from Island Entertainment Corporation in San Diego, California for a one-year period beginning in November of 1999. The address of this office is 16868 Via Del Campo Court, Suite #200, San Diego, CA 92127. Rent of 14 US$2,000 is payable monthly. The Company will maintain tenant fire and casualty insurance on its property located in such building in an amount deemed adequate by the Company. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners The following table sets forth information, to the best knowledge of the Company as of July 7, 1999, with respect to each person known by the Company to own beneficially more than 5% of the Company's outstanding common stock, and the beneficial ownership of each officer and director, and all directors and executive officers as a group.
- ------------------------------------------- ----------------------------------- ------------------- Name and address of Amount and nature beneficial owner of beneficial owner Percent of class - ------------------------------------------- ----------------------------------- ------------------- Jonathan Mara 615,795 (note 1) 7.3% - ------------------------------------------- ----------------------------------- ------------------- Jeff Kletter 606,074 (note 2) 7.2% - ------------------------------------------- ----------------------------------- ------------------- Jocelyn Kletter 602,741 (note 3) 7.2% - ------------------------------------------- ----------------------------------- ------------------- Roberts & Scott Financial Inc. 440,000 5.3% - ------------------------------------------- ----------------------------------- ------------------- Bullock & Bryson Financial Inc. 435,000 5.2% - ------------------------------------------- ----------------------------------- ------------------- Smucker & Odgen Inc. 400,000 4.8% - ------------------------------------------- ----------------------------------- ------------------- Friedman Capital Ltd. 395,000 4.7% - ------------------------------------------- ----------------------------------- ------------------- Dr. Doug Clement 16,000 (note 4) 0.2% - ------------------------------------------- ----------------------------------- ------------------- Dr. Don Rix 47,704 (note 5) 0.6% - ------------------------------------------- ----------------------------------- ------------------- All directors and executive officers as a 1,888,314 22.5% group (5 persons) - ------------------------------------------- ----------------------------------- -------------------
Note 1. Mr. Mara's ownership is through Guardian Angel Investments Ltd. Mr. Mara has also been granted options to purchase 200,000 shares of common stock over a three-year period with 1/3 vesting per year. Note 2. Mr. Kletter has been granted options to purchase 200,000 shares of common stock over a three-year period with 1/3 vesting per year. Note 3. Ms. Kletter has been granted options to purchase 200,000 shares of common stock over a three-year period with 1/3 vesting per year. Note 4. Dr. Clement has been granted options to purchase 30,000 shares of common stock over a one-year period with vesting based on participation in Board of Directors and Scientific Advisory Board meetings. Note 5. Dr. Rix has been granted options to purchase 30,000 shares of common stock over a one-year period with vesting based on participation in Board of Directors meetings. 15 ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The directors and executive officers of the Company and their respective ages are as follows:
Name Age Position - ------------------------------------------------------------------------------------------------------------------- Jonathan Mara 39 Chief Executive Officer Jeffrey Kletter 37 President and Director Jocelyn Kletter 29 Vice President Dr. Don Rix 68 Chairman and Director Dr. Douglas B. Clement 65 Director
All directors hold office until the next annual meeting of stockholders and/or until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. On June 28, 1999, Dr. Rix was granted options to purchase 3,750 common shares and Dr. Clement was granted options to purchase 2,500 common shares per board meeting attended over a twelve-month period, at an exercise price of $1 per share. Aside from expenses to attend the Board of Directors meetings and the option grants to Drs. Rix and Clement, the Company has not compensated its directors for service on the Board of Directors or any committee thereof. Officers are appointed annually by the Board of Directors and each executive officer serves at the discretion of the Board of Directors. Jeff Kletter and Jocelyn Kletter are married; there are no other family relationships between any of the directors and executive officers. The Company does not have any standing committees at this time. Dr. Don Rix, age 68, has been Chairman of the Board of Directors of Kinesys since 1996. A pathologist, Dr. Rix serves as chairman and director of MDS Metro Laboratory Services and CanTest Ltd. Dr. Rix brings to the Board a wealth of information and experience in the management of high growth companies in the industrial, scientific, and medical areas. Dr. Rix serves as a director on the boards of Immune Network Research and Chai-Na-Ta Corp. Dr. Rix is involved as a present Director of the Vancouver Opera, a Member of the Benefactors Committee and past Board Member of the Vancouver Art Gallery and the Medical Director for the Air Canada Open. Dr. Douglas Clement, age 65, has been a director of Kinesys since its formation in 1993. Dr. Clement has, for the past five years, been co-director of the Allan McGavin Sports Medicine Centre and a professor of medicine at the University of British Columbia. He conducts research, teaches, and practices in the field of sports medicine. Dr. Clement has been a member of the Canadian Olympic Association Board of Directors from 1985 to 1993 and is the team physician for the Vancouver Canucks in the National Hockey League. Dr. Clement has been honored with a number of academic and professional awards, including: Coach of the Year (Sport BC), Order of Canada Medal, Fellowship of the American College of Sports Medicine, the Vanier Award, and the Sports Medicine Council of Canada Lifetime Achievement Award. Jonathan Mara, age 39, has been Chief Executive Officer of Kinesys since August 4, 1998. From July of 1997 through August of 1998, Mr. Mara was C.E.O. of Guardian Angel Investments Ltd., a consulting firm. Prior to his service at Guardian, he founded Vantage Securities Inc., an investment services firm, and was for approximately nine years its President and C.E.O. Mr. Mara was successful in growing Vantage Securities to annual sales of $275 million with all of the necessary systems in place to facilitate electronic ordering, compliance, accounting, administration, human resources, business development, corporate finance, sales management and marketing. Mr. Mara's focus at Kinesys is to administer the Company's finances, manufacturing, and operations in a controlled, systematized basis to allow the Company to grow profitably at a manageable high rate of growth. Mr. Mara is active in cycling, basketball, skiing and coaching youth basketball. Jeff Kletter, age 37, co-founded the company in 1993 and has been its President and a director since that time. Mr. Kletter has overseen the growth of the Company, formulated its marketing, philosophy, promotion, brand equity development and financing activities until the addition of Mr. Mara. Mr. Kletter 16 now focuses on brand equity and business and product development. Before founding Kinesys, Mr. Kletter developed an extensive background in marketing, sales and general management. Mr. Kletter is an active individual whose favorite sporting activities include skiing, golf, squash and general fitness. Jocelyn Kletter, age 29, co-founded the company and has been its Vice President since that time. Ms. Kletter has overseen the development of product specifications, product compliance with regulatory requirements, implementation of financial systems, control mechanisms and sales and marketing. Ms. Kletter currently focuses on brand equity, product distribution, sales and marketing. Prior to Kinesys, Ms. Kletter operated her own personal fitness training company in conjunction with teaching physical education at a British Columbia private school. Ms. Kletter also developed valuable sales and marketing experience as a Promotional Coordinator for Estee Lauder. Ms. Kletter actively participates in skiing, running and general fitness. ITEM 6. EXECUTIVE COMPENSATION The Summary Compensation Table shows certain compensation information for the Chief Executive Officer. Compensation data for other executive officers is not presented in the graphs because aggregate annual compensation for such officers does not exceed $100,000. This information includes the dollar value of base salaries, bonus awards, the number of SARs/options granted, and certain other compensation, if any, whether paid or deferred. SUMMARY COMPENSATION TABLE The following table sets forth the aggregate compensation paid by the Company to its Chief Executive Officer for services rendered during the periods indicated:
- ------------------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation --------------------------- --------------------------------------- Awards --------------------------------------- Other Annual Compensation All other Name and Year (1) Salary Restricted Securities compensation Principal Stock Awards Underlying Position Options/SARs - -------------- --------- ------------ -------------- ---------------- ---------------------- ---------------- Jonathan 1999-T CDN$25,000 $0 0 200,000 Shares 0 Mara, CEO 1998 CDN$19,800 0 0 0 0 - -------------- --------- ------------ -------------- ---------------- ---------------------- ----------------
(1) The results reported in the "Summary Compensation Table" for the period designated "1998-T" are for the six-month period ended June 30, 1999, and results for the period designated "1998" are for the year ended December 31, 1998. Option Grants In the Last Fiscal Year The following table summarizes all stock options granted to the Company's Chief Executive Officer for the transition period from January 31, 1999 to June 30, 1999. There were no grants to the named executive in the fiscal year ended January 31, 1999.
- ----------------- --------------------- ------------------------- -------------------------- ------------------------- Name Number of Percent of total Exercise or base price Expiration date securities options/SARs granted to ($/Sh) underlying employees in 1998 Options/SARs granted (#) (1) - ----------------- --------------------- ------------------------- -------------------------- ------------------------- Jonathan Mara 200,000- 32.13% $1.00 6/28/09 - ----------------- --------------------- ------------------------- -------------------------- -------------------------
- --------------- 17 (1) The estimated fair market value of the common stock on June 28, 1999 (grant date) was $1.00, as determined by the Board of Directors. Aggregate Option Exercises and Option Values The following table sets forth information with respect to the named executive officer concerning option exercises for the fiscal year ended June 30, 1999 and exercisable and unexercisable options held as of June 30, 1999. The named executive officer did not hold options during the fiscal year ended January 31, 1999.
- -------------------- -------------- -------------- ------------------------------------ ------------------------------- Number of Securities Underlying Value of Unexercised Unexercised Options at 6/30/99 In-the-Money Options at # of Shares 6/30/98 - -------------------- -------------- -------------- -------------- --------------------- -------------- ---------------- Name Shares Value Exercisable Unexercisable Exercisable Unexercisable Acquired on Realized Exercise - -------------------- -------------- -------------- -------------- --------------------- -------------- ---------------- Jonathan Mara -- -- -- 200,000 -- -- - -------------------- -------------- -------------- -------------- --------------------- -------------- ----------------
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions during the last two years involving any Director or Executive Officer of the Company: Jonathan Mara, Chief Executive Officer of the Company, provides full time services to the Company on a contract basis through Guardian Angel Investments, Inc., a company controlled by Mr. Mara. Guardian Angel is paid $5,000 per month for services rendered. Jocelyn Kletter, Vice President of the Company, provides full-time consulting services to the Company on a contract basis through her company, Brand Equity Ltd. Brand Equity Ltd. is paid approximately $60,000 per year for services rendered. For the four years prior to the implementation of this consulting relationship on January 1, 1999, Ms. Kletter was an employee of the Company and Kinesys Canada. ITEM 8. DESCRIPTION OF SECURITIES The Company is authorized to issue two classes of shares, Common Stock and Preferred Stock. The total number of shares of Common Stock the Company is authorized to issue is 100,000,000 shares with a par value of $0.00001 each, of which 8,380,897 shares were issued and outstanding as of September 30, 1999. The total number of shares of Preferred Stock the Company is authorized to issue is 100,000,000 shares with a par value of $0.00001 each, of which none are issued and outstanding. Should the Company, in the future, deem it necessary or appropriate to issue Preferred Stock, the Board of Directors has the authority, under the Articles of Incorporation, to establish different series of any class of preferred stock and to determine the relative rights, preferences, privileges and limitations of each such series. The holders of the Common Stock are entitled to one vote per share of Common Stock in the election of directors and in each other matter coming before any vote of shareholders. Neither the Company's Articles of Incorporation nor its Bylaws provide for dividend, voting, or preemption rights. There are no provisions that would delay, defer, or prevent a change in control of the Company. On June 28, 1999, the Company adopted the 1999 Stock Option Plan, setting aside 900,000 Common Shares for issuance thereunder. As of July 6, 1999, the Company has granted to its employees, directors and consultants options exercisable for Company Common Stock. The exercise price for all grants to date is $1 per share; the exercise price of future grants will depend upon the market price of the Company's Common Stock on the grant date, among other factors. 18 There are currently 8,380,897 shares of Company common stock issued and outstanding, which includes 6,187,635 shares designated as "free trading" and 2,193,262 shares that are classified as "restricted securities." Of these "restricted securities," none have satisfied the one-year holding period of Rule 144. PART II ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS (a) Market information. The Company's common stock is traded over-the-counter on NASD'S Over the Counter Bulletin Board ("OTCBB") under the symbol "KNES". Quotations commenced in October of 1998. The price range of high and low bid for the Company's common stock for the periods shown is set forth below. The quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions.
Period (1) High Low ---------- ------- ------- Q4 - 98 0.26 0.15 Q1 - 99 0.21875 0.15 Q2 - 99* 1.3125 0.8125 Q3 - 99 1.75 0.53125
(1) Calendar quarters. *On May 4, 1999, the Company changed its trading symbol from GDCT (Goldsearch) to KNES (Kinesys) (b) Stockholders. As of June 21, 1999 there were approximately 113 shareholders of record of Kinesys Common Stock. No shares of preferred stock have been issued. (c) Dividends. The Company has never declared a cash dividend. Nevada law limits the Company's ability to pay dividends on its common stock if any such dividend would render the Company insolvent. ITEM 2. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceeding. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES On March 29, 1999, the Company issued 4,525,000 shares of common stock pursuant to Rule 504 to certain investors for an aggregate purchase price of $45,250. 19 On May 3, 1999, the Company issued 3,092,021 shares of its common stock pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, for an aggregate purchase price of $152,601.05. Approximately $400,000 was raised upon exercise of options to purchase 533,000 shares of Common Stock on May 30, 1999. In August of 1999, 564,000 shares of Common Stock were issued to three providers of advertising and promotional services in partial consideration for services rendered. The shares were exempt from registration under Section 4(2) of the Securities Act of 1933. The Company expects to enter into similar arrangements in the future. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Articles of Incorporation and Bylaws authorize the Company to indemnify its directors and officers. The Company currently does not maintain any liability insurance for its directors and officers but is currently seeking quotes for such coverage. Section 78.7502 of the Nevada Revised Statutes ("NRS") authorizes a Nevada corporation to indemnify any director, officer, employee, or corporate agent "who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation" due to his or her corporate role. Section 78.7502 extends this protection "against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding if he acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful." Section 78.7502 of the NRS also authorizes indemnification of the reasonable defense or settlement expenses of a corporate director, officer, employee or agent who is sued, or is threatened with a suit, by or in the right of the corporation. The party must have been acting in good faith and with the reasonable belief that his or her actions were not opposed to the corporation's best interests. Unless the court rules that the party is reasonably entitled to indemnification, the party seeking indemnification must not have been found liable to the corporation. To the extent that a corporate director, officer, employee, or agent is successful on the merits or otherwise in defending any action or proceeding referred to in Section 78.7502, Section 78.7502(3) of the NRS requires that he be indemnified "against expenses, including attorneys' fees, actually and reasonably incurred by him or her in connection with the defense." Section 78.751(1) of the NRS limits discretionary indemnification under Section 78.751(1) and 78.751(2) to situations in which either (a) the stockholders, (b) the majority of a disinterested quorum of directors, or (c) independent legal counsel determine that indemnification is proper under the circumstances. Pursuant to Section 78.751(2) of the NRS, the corporation may advance an officer's or director's expenses incurred in defending any action or proceeding upon receipt of an undertaking. Section 78.751(3)(a) provides that the rights to indemnification and advancement of expenses shall not be deemed exclusive of any other rights under any by-law, agreement, stockholder vote or vote of disinterested directors. Section 78.751(3)(b) extends the rights to indemnification and advancement of expenses to former directors, officers, employees and agents, as well as their heirs, executors and administrators. Regardless of whether a director, officer, employee or agent has the right to indemnity, Section 78.752 allows the corporation to purchase and maintain insurance on his behalf against liability resulting from his or her corporate role. 20 PART F/S Financial Statement and Supplementary Data. The Company's audited consolidated financial statements for the five-month period ended June 30, 1999 and the financial statements of Kinesys Canada for the period from January 1, 1999 to May 4, 1999 and for the year ended December 31, 1998 of the Company have been examined to the extent indicated in the report by BDO Dunwoody LLP, have been prepared in accordance with generally accepted accounting principles of the United States and pursuant to the Regulation S-B as promulgated by the Securities and Exchange Commission financial statements of the Company for the year ended January 31, 1999 were audited by Williams & Webster P.S. Audited financial statements for Kinesys Canada are not available for years prior to 1998; financial statements for 1997 are included in unaudited form only. (a) Audited Financial Statements for Kinesys Pharmaceutical Inc. (Kinesys Canada). Auditors' Report. Comments by Auditors for US Readers on Canada-US Reporting Differences. Balance Sheets as of December 31, 1998 and May 4, 1999. Statements of Operations for the Years Ended December 31, 1998 and 1997 (unaudited), for the unaudited six month periods ended June 30, 1999 and 1998, and for interim period from January 1, 1999 to May 4, 1999. Statement of Stockholders' Equity for the years ended December 31, 1998 and 1997 (unaudited) and for the period from January 1, 1999 to May 4, 1999. Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 (unaudited) and for the period January 1, 1999 to May 4, 1999. Summary of Significant Accounting Policies Notes to Financial Statements. (b) Audited Consolidated Financial Statements for Kinesys Pharmaceuticals, Inc. (Kinesys U.S.) Auditors' Report on the Consolidated Financial Statements for the five month period ended June 30, 1999. Comments by Auditors for US Readers on Canada-US Reporting Differences on the consolidated financial statements for the five month period ended June 30, 1999. Report of Independent Accountants on the financial statements for the year ended January 31, 1999. Consolidated Balance Sheets as of June 30, 1999 and January 31, 1999. Consolidated Statements of Operations for Five month periods ended June 30, 1999 and 1998 (unaudited), and for year ended January 31, 1999. Consolidated Statements of Stockholders' Equity for five month period ended June 30, 1999 and for the year ended January 31, 1999. 21 Consolidated Statements of Cash Flows for five month period ended June 30, 1999 and 1998 (unaudited), and for the year ended January 31, 1999. Summary of Significant Accounting Policies. Notes to Consolidated Financial Statements. (c) Pro Forma Financial Statements 22 KINeSYS PHARMACEUTICAL INC. FINANCIAL STATEMENTS MAY 4, 1999 (EXPRESSED IN US DOLLARS) 23 KINeSYS PHARMACEUTICAL INC. FINANCIAL STATEMENTS MAY 4, 1999 (EXPRESSED IN US DOLLARS)
CONTENTS - ------------------------------------------------------------------------------------------------------------------- AUDITORS' REPORT 25 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES 26 FINANCIAL STATEMENTS Balance Sheets 27 Statements of Operations 28 Statements of Stockholders' Deficit 29 Statements of Cash Flows 30 Summary of Significant Accounting Policies 31 - 33 Notes to Financial Statements 34 - 39
24 AUDITORS' REPORT TO THE STOCKHOLDERS OF KINeSYS PHARMACEUTICAL INC. We have audited the Balance Sheets of KINeSYS Pharmaceutical Inc. as at May 4, 1999 (acquisition date) and December 31, 1998 and the Statements of Operations, Stockholders' Deficit and Cash Flows for the period from January 1, 1999 to May 4, 1999 (acquisition date) and for the year ended December 31, 1998. 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 Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at May 4, 1999 and December 31, 1998 and the results of its operations and its cash flows for the period from January 1, 1999 to May 4, 1999 and for the year ended December 31, 1998 in accordance with accounting principles generally accepted in the United States. /s/ BDO Dunwoody LLP CHARTERED ACCOUNTANTS Vancouver, Canada July 23, 1999 25 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES TO THE STOCKHOLDERS OF KINeSYS PHARMACEUTICAL INC. In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1 to the financial statements. Our report to the stockholders dated July 23, 1999 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. BDO DUNWOODY LLP CHARTERED ACCOUNTANTS Vancouver, Canada July 23, 1999 26 KINeSYS PHARMACEUTICAL INC. BALANCE SHEETS (EXPRESSED IN US DOLLARS)
May 4 December 31 1999 (a) 1998 - ------------------------------------------------------------------------------------------------------------ ASSETS CURRENT Cash $ 4,851 $ 1,759 Accounts receivable, net 43,835 7,098 Inventories (Note 2) 107,431 126,807 Prepaid expenses 13,481 2,782 ---------------------------------- - 169,598 138,446 FIXED ASSETS (Note 3) 31,359 33,164 ---------------------------------- $ 200,957 $ 171,610 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES CURRENT Accounts payable and accrued liabilities $ 331,424 $ 216,189 Loans payable (Note 4) - 28,340 ---------------------------------- 331,424 244,529 ---------------------------------- STOCKHOLDERS' DEFICIT Share capital Authorized 10,000,000 Preferred shares, no par value of which the first series consists of 2,000,000 Series A preferred shares, no par value, redeemable and convertible 100,000,000 Common shares, no par value Issued 1,861,978 Series A Preferred shares (1998 - 1,861,978) 449,067 449,067 7,292,971 Common shares (1998 - 5,639,638) 359,220 348,225 ---------------------------------- 808,287 797,292 Additional paid-in capital 950,730 950,730 Accumulated other comprehensive income - foreign currency translation adjustment 17,558 29,385 Accumulated deficit (1,907,042) (1,850,326) ---------------------------------- (130,467) (72,919) ---------------------------------- $ 200,957 $ 171,610 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(a) Acquisition date by Goldsearch Corporation (Note 13) The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 27 KINeSYS PHARMACEUTICAL INC. STATEMENTS OF OPERATIONS (EXPRESSED IN US DOLLARS)
JUNE 30 January 1, 1999 December 31 June 30 December 31 1999 to 1998 1998 1997 For the periods (6 MONTHS)(b) May 4, 1999 (a) (12 Months) (6 Months) (12 Months) - -------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) SALES $ 127,649 $ 74,793 $ 622,930 $ 621,735 $ 167,170 COST OF SALES 41,721 26,902 255,578 250,116 80,800 85,928 47,891 367,352 371,619 86,370 EXPENSES Advertising and promotion 67,931 17,270 237,431 195,434 137,979 Bad debts 4,808 - 4,588 3,149 1,635 Bank charges and interest 5,213 296 11,589 4,213 4,349 Commissions 3,431 - 73,398 73,810 18,592 Consulting fees 45,530 31,823 66,398 36,477 48,743 Depreciation 5,129 3,653 10,631 7,149 12,358 Insurance 878 673 3,335 1,072 2,309 Interest 2,144 2,127 28,380 27,851 - Licenses and dues 4,643 3,731 15,586 5,425 5,598 Office supplies 11,174 6,299 28,639 27,355 20,957 Professional fees 28,860 15,169 38,668 10,789 29,585 Rent 7,238 3,748 18,797 9,189 18,498 Repairs and maintenance 1,759 405 6,502 495 4,924 Research and development - - - - 25,520 Salaries and benefits 25,534 7,491 104,194 56,214 118,298 Stock option compensation (Note 6) - - 257,269 - - Telephone and utilities 5,616 4,346 10,664 6,404 10,998 Trade shows 6,367 1,912 33,938 21,551 18,970 Travel 10,887 5,664 38,609 18,457 25,966 ------------------------------------------------------------------------- 237,142 104,607 988,616 505,034 505,279 ------------------------------------------------------------------------- LOSS BEFORE EXTRAORDINARY ITEM (151,214) (56,716) (621,264) (133,415) (418,909) EXTRAORDINARY ITEM Gain on debt restructuring (Note 7) - - 59,203 - 179,816 LOSS FOR THE PERIOD $ (151,214) $ (56,716) $ (562,061) $ (133,415) $ (239,093) - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- BASIC AND DILUTED LOSS PER SHARE: Before extraordinary item $ (0.02) $ (0.01) $ (0.13) $ (0.03) $ (0.09) Extraordinary item - - 0.01 - 0.04 After extraordinary item $ (0.02) $ (0.01) $ (0.12) $ (0.03) $ (0.05) - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES 6,754,039 6,506,304 4,847,706 4,432,503 4,432,503 - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
(a) Acquisition date by Goldsearch Corporation (Note 13) (b) Detailed for comparative purposes only; results include post-acquisition operations, but do not reflect acquisition adjustments The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 28 KINeSYS PHARMACEUTICAL INC. STATEMENTS OF STOCKHOLDERS' DEFICIT (EXPRESSED IN US DOLLARS)
ADDITIONAL FOREIGN CURRENCY TOTAL COMMON SHARES PREFERRED SHARES PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS' ------------------ ----------------- NUMBER AMOUNT NUMBER AMOUNT CAPITAL DEFICIT ADJUSTMENT DEFICIT - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1997 (unaudited) 4,432,503 $ 154,041 - $ - $ - $(1,049,172) $ - $ (895,131) Shares issued for cash - - 1,570,000 365,269 - - - 365,269 Net loss - - - - - (239,093) - (239,093) -------------------------------------------------------------------------------------------------------- Balance, January 1, 1998 4,432,503 154,041 1,570,000 365,269 - (1,288,265) - (768,955) Shares issued for cash 217,009 35,323 291,978 83,798 - - - 119,121 Shares issued on conversion of debt 990,126 158,861 - - - - - 158,861 Forgiveness of stockholders' loans - - - - 693,461 - - 693,461 (Note 5) Grant of options to employees and directors - - - - 257,269 - - 257,269 (Note 6) - ------------------------------------------------------------------------------------------------------------------------------------ 5,639,638 348,225 1,861,978 449,067 950,730 (1,288,265) - 459,757 -------------------------------------------------------------------------------------------------------- Net loss - - - - - (562,061) - (562,061) Change in unrealized gains - - - - - - 29,385 29,385 -------------------------------------------------------------------------------------------------------- Total comprehensive loss (562,061) 29,385 (532,676) -------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 5,639,638 348,225 1,861,978 449,067 950,730 (1,850,326) 29,385 (72,919) Shares issued on exercise of stock options 1,653,333 10,995 - - - - - 10,995 - ------------------------------------------------------------------------------------------------------------------------------------ 7,292,971 359,220 1,861,978 449,067 950,730 (1,850,326) 29,385 (61,924) -------------------------------------------------------------------------------------------------------- Net loss - - - - - (56,716) - (56,716) Change in unrealized gains - - - - - - (11,827) (11,827) -------------------------------------------------------------------------------------------------------- Total comprehensive loss - - - - - (56,716) (11,827) (68,543) -------------------------------------------------------------------------------------------------------- Balance, May 4, 1999 (a) 7,292,971 $ 359,220 1,861,978 $ 449,067 $ 950,730 $(1,907,042) $ 17,558 $ (130,467)
(a) Acquisition date by Goldsearch Corporation (Note 13) The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 29 KINeSYS PHARMACEUTICAL INC. STATEMENTS OF CASH FLOWS (EXPRESSED IN US DOLLARS)
JANUARY 1, 1999 December 31 December 31 TO 1998 1997 FOR THE PERIODS MAY 4, 1999 (a) (12 Months) (12 Months) - ------------------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the period $ (56,716) $ (562,061) $ (239,093) Items not involving cash Depreciation of fixed assets 3,653 10,631 12,358 Stock option compensation - 257,269 - Gain on debt restructuring - (59,203) (179,816) (Increase)/decrease in assets Accounts receivable (34,989) 25,181 (25,208) Inventories 25,991 11,159 (103,988) Prepaid expenses (10,150) 925 (1,313) Increase/(decrease) in liabilities Accounts payable and accrued liabilities 98,561 266,210 54,540 Customer deposits - (44,304) 47,461 - ----------------------------------------------------- 26,350 (94,193) (435,059) - ----------------------------------------------------- INVESTING ACTIVITIES Purchase of capital assets (1,848) (11,663) (18,162) - ----------------------------------------------------- FINANCING ACTIVITIES Payment of creditor protection amounts - (34,586) - Issuance of common shares 10,995 35,323 - Issuance of preferred shares - 83,798 365,269 Loans payable (28,340) 28,340 81,132 Bank indebtedness - (6,847) 6,820 - ----------------------------------------------------- (17,345) 106,028 453,221 - ----------------------------------------------------- EFFECT OF EXCHANGE RATE ON CASH (4,065) 1,186 - - ----------------------------------------------------- INCREASE IN CASH DURING THE PERIOD 3,092 1,759 - CASH, beginning of period 1,759 - - - ----------------------------------------------------- CASH, end of period $ 4,851 $ 1,759 $ - - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL INFORMATION Non cash financing activities: Conversion of debt to common shares $ - $ 158,861 $ - Forgiveness of shareholder loans $ - $ 693,461 $ - Interest paid $ 2,423 $ 39,969 $ 4,349 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(a) Acquisition date by Goldsearch Corporation (Note 13) The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 30 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - --------------------------------------------------------------------- BASIS OF PRESENTATION These financial statements are stated in US dollars and are prepared in accordance with accounting principles generally accepted in the United States. The previous fiscal year end of the Company was December 31 and the Company has changed its year end to June 30, effective in 1999. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of the Company's management, the Statement of Operations for the six-month periods ended June 30, 1999 and 1998 contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. Results for interim periods are not necessarily indicative of the results to be expected for an entire fiscal year. It is suggested that financial statements for these periods be read in conjunction with audited annual financial statements and notes thereto as of and for the year ended December 31, 1998. REVENUE RECOGNITION Sales are recorded upon shipment to third parties and net of returned product. INVENTORIES Inventories are stated at the lower of cost and net realizable value. Cost is generally determined on a weighted average basis. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is computed based on the estimated useful lives of the assets as follows: Computers - 30% declining-balance basis Furniture and fixtures, equipment and molds and dies - 20% declining-balance basis
Leasehold improvements are amortized over their estimated useful lives or the lives of the related leases, whichever is shorter. FOREIGN CURRENCY TRANSLATION The Company conducts its business primarily from its offices in Richmond, British Columbia, Canada and, therefore, a substantial portion of its business is conducted in Canadian currency. Canadian currency is considered the functional currency. The Company is now a subsidiary of a US company in the process of registering its securities with the Securities Exchange Commission ("SEC") in the United States (Note 13) and, as such, the US dollar is used as the reporting currency. Assets and liabilities of the Company are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange prevailing during the periods. Translation adjustments arising from the use of differing exchange rates from period to period are included in Stockholders' Deficit as an accumulated foreign currency translation adjustment. 31 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - --------------------------------------------------------------------- FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable, accounts payable and accrued liabilities, loans payable, and advances from shareholders. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted, since they are short term in nature or they are receivable or payable on demand. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's best estimates as additional information becomes available in the future. INCOME TAXES The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse. LOSS PER SHARE Loss per share is computed in accordance with SFAS No. 128, "Earnings per Share". Basic loss per share is calculated by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in earnings of an entity, similar to fully diluted earnings per share. In loss periods, dilutive common share equivalents are excluded as the effect would be anti-dilutive. Basic and diluted earnings per share are the same for the periods presented. For the period from January 1, 1999 to May 4, 1999, the six-month periods ended June 30, 1999 and 1998, and for the years ended December 31, 1998 and 1997, total stock options of Nil, Nil, Nil, 1,778,833 and Nil respectively were not included in the computation of diluted earnings per share because their effect was anti-dilutive. 32 - -------------------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. STOCK BASED COMPENSATION The Company applies Accounting Principles Board ("APB") 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options. Under APB 25, compensation cost is recognized for stock options granted at prices below the market price of the underlying common stock on the date of grant. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro-forma information regarding net income as if compensation cost for the Company's stock options had been determined in accordance with the fair value based method prescribed in SFAS No. 123. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standards on July 1, 2000 to affect its financial statements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") which provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 was effective for fiscal years beginning after December 15, 1998 with initial adoption reported as the cumulative effect of a change in accounting principle. Adoption of this standard did not have a material affect on the financial statements. 33 - -------------------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. NOTES TO FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND CONTINUED OPERATIONS The Company was incorporated in the Province of British Columbia, Canada in December 1993 and is engaged in selling cosmoceutical products for active individuals and athletes to wholesalers, distributors, retailers and the general public. The three main product lines include: suncare, treatment, and daily use products. Customers are located in Canada and the United States. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at May 4, 1999 the Company has posted overall operating losses since inception and had an accumulated deficit of $1,907,042. Negative working capital at May 4, 1999 totaled $161,826. The continuation of the Company is dependent upon the continuing financial support of creditors and its new parent company and obtaining long-term financing as well as achieving a profitable level of operations. Management's plan in this regard involve the Company's parent raising equity capital to finance the operations and capital requirements of the Company. It is management's intention that the Parent will raise approximately US$1.2 million within the upcoming year. Amounts raised will be used to develop a US focus for marketing arrangements, to enhance the Company's e-commerce ability through its website, to provide financing for the purchase and manufacture of inventories and for other working capital purposes including operational systems upgrades. While the Company is expending its best efforts to achieve the above plans, there is not assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty. - -------------------------------------------------------------------------------- 2. INVENTORIES
MAY 4 December 31 1999 1998 ---------------------------------- Packaging $ 10,652 $ 10,050 Finished goods 96,779 116,757 ---------------------------------- $ 107,431 $ 126,807 ---------------------------------- ----------------------------------
34 - -------------------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. NOTES TO FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - -------------------------------------------------------------------------------- 3. FIXED ASSETS
MAY 4 December 31 1999 1998 ------------------------------------------------------------- ACCUMULATED NET BOOK Net Book COST DEPRECIATION VALUE Value ------------------------------------------------------------- Computers $ 21,730 $ 16,056 $ 5,674 $ 7,244 Furniture and fixtures 21,841 7,326 14,515 14,542 Warehouse equipment 1,820 945 875 901 Molds and dies 22,284 11,989 10,295 10,477 ------------------------------------------------------------- $ 67,675 $ 36,316 $ 31,359 $ 33,164 ------------------------------------------------------------- -------------------------------------------------------------
- -------------------------------------------------------------------------------- 4. LOANS PAYABLE The balance at December 31, 1998 included a $10,382 loan with interest at 10% per annum and collateralized by equipment, an unsecured loan of $15,481 with interest at 3.25% per month and advances from former stockholders of the Company of $2,477 on a non-interest bearing basis. All loans were due on demand and were fully paid in 1999. - -------------------------------------------------------------------------------- 5. FORGIVENESS OF STOCKHOLDERS' LOANS Loans from two former stockholders of the Company were forgiven during 1998. The loans had no specific repayment terms and did not bear interest. 35 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. NOTES TO FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - --------------------------------------------------------------------- 6. SHARE CAPITAL a) The Series A Preferred Shares contain voting rights and are redeemable at the Company's option at the carrying value. The preferred shares also contain a conversion option that allows a holder to convert one Series A share for one common share of the Company. b) There is no formal stock option plan. The Company had outstanding options for the purchase of common shares, all of which were fully vested, as follows (exercise prices are stated in Canadian Dollars):
Exercise Price Exercise Price Exercise Price Exercise Price $0.01 $0.01 $0.333 $0.65 ----- ----- ------ ----- Balance, January 1, 1998 - - - - Granted during the year to directors and employees 140,000 1,533,333 100,000 5,000 Exercised during the year - - - - --------------------------------------------------------------------- Balance, December 31, 1998 140,000 1,533,333 100,000 5,000 Exercised during the period (120,000) (1,533,333) - - Cancelled during the period (20,000) - (100,000) (5,000) --------------------------------------------------------------------- Balance, May 4, 1999 - - - - --------------------------------------------------------------------- Expiry Date: Dec. 31, 1999 Dec. 31, 2002 Dec. 31, 1999 Dec. 31, 1999
There were no options granted during the period from January 1, 1999 to May 4, 1999. The weighted average exercise price of options granted in 1998 was CDN$0.03. The Company applies Accounting Principles Board ("APB") 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options. Under APB 25, the 1998 compensation expense of $257,269 related to the grant of options to employees and directors consisting of the difference between the exercise price and the market value of the Company's common stock at the grant date. Pro-forma information regarding Net Loss and Loss per Share is required under SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The weighted average fair value of options granted in 1998 was CDN$0.22. The fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following assumptions: no dividends, a risk-free interest rate of 5.69%, volatility factor of the expected market price of the Company's common stock of 0.001% and a weighted average expected life of the options of 12 months. Under the accounting provisions of SFAS No. 123, the Company's loss per share on a pro-forma basis would be unchanged for the period from January 1, 1999 to May 4, 1999 and for the year ended December 31, 1998. 36 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. NOTES TO FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - --------------------------------------------------------------------- 6. SHARE CAPITAL - CONTINUED On February 28, 1999, options were exercised for 1,653,333 common shares at a price of CDN$0.01 per share. The Company cancelled all the remaining unexercised stock options and as at May 4, 1999 there were no outstanding stock options. - --------------------------------------------------------------------- 7. GAIN ON DEBT RESTRUCTURING In 1996 the Company filed a Notice of Intent to make a proposal under the Bankruptcy and Insolvency Act. Under the proposal, the unsecured creditors of the day were paid 50% of amounts owing. This proposal was accepted by the courts in February 1997 and all repayments were made by the end of 1998. In 1997 the Company settled all amounts payable with a waiver by the creditors of an amount of $179,816 which was recognized as an extraordinary item. In 1998, a further $59,203 was waived and also treated as an extraordinary item. - --------------------------------------------------------------------- 8. RELATED PARTY TRANSACTIONS Related party transactions not disclosed elsewhere in these financial statements are as follows: a) The Company signed a three year contract with an investment company, which is owned by a stockholder of the Company's parent, for the provision of financial and management services at a monthly fee of CDN$5,000. The Company paid fees under terms of this contract as follows: Six months ended June 30, 1999 $ 20,114 Period from January 1, 1999 to May 4, 1999 $ 13,300 Year ended December 31, 1998 $ 19,800 Six months ended June 30, 1998 $ - Year ended December 31, 1997 $ - The contract expires in July, 2002.
37 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. NOTES TO FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - --------------------------------------------------------------------- 8. RELATED PARTY TRANSACTIONS - CONTINUED b) The Company also paid fees to a consulting company, which is owned by two stockholders of the Company's parent, for the provision of consulting services as follows: Six months ended June 30, 1999 $ 20,114 Period from January 1, 1999 to May 4, 1999 $ 13,300 Year ended December 31, 1998 $ - Six months ended June 30, 1998 $ - Year ended December 31, 1997 $ -
Related party transactions are recorded at the exchange amount, being the amount of consideration established and agreed to by the related parties. - --------------------------------------------------------------------- 9. INCOME TAXES At May 4, 1999 the Company had deferred tax assets of approximately $530,000 (December 31, 1998 - $500,000) principally arising from net operating losses carried forward in Canada. As management of the Company cannot determine if it is more likely than not that the Company will receive the benefit of this asset, a valuation allowance equal to the deferred tax asset has been established at May 4, 1999 and December 31, 1998. The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and this causes a change in management's judgement about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current income. At May 4, 1999, the Company had losses available for Canadian income tax purposes of approximately $1,180,000. These losses expire in the Company's fiscal years as follows: 2000 $ 100,000 2001 $ 460,000 2002 $ 37,000 2003 $ 181,000 2004 $ 345,000 2005 $ 57,000
38 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICAL INC. NOTES TO FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND THE YEAR ENDED DECEMBER 31, 1997 IS UNAUDITED - --------------------------------------------------------------------- 10. SEGMENTED INFORMATION For the six-month period ended June 30, 1999, approximately $4,000 (May 4, 1999 - $7,847; December 31, 1998 - $380,000; June 30, 1998 - 375,000; December 31, 1997 - $nil) of the Company's sales were made to customers in the United States. The remainder of sales were made to Canadian customers. - --------------------------------------------------------------------- 11. COMMITMENT Beginning at such time as the Company achieves annual gross revenue in North America of CDN$1,000,000, the Company will be subject to a Royalty Agreement which will require payment of 2.5% of gross North American revenues in excess of CDN$1,000,000. The agreement will expire upon payment of an aggregate royalty of CDN$1,250,000 before October 1, 2001 or CDN$1,500,000 thereafter. Management is presently attempting to renegotiate this agreement. - --------------------------------------------------------------------- 12. SALES AND CREDIT CONCENTRATION For the six months ended June 30, 1999 and for the period from January 1, 1999 to May 4, 1999, approximately 22% of sales is represented by one customer. Accounts receivable from this customer was $Nil at the respective period end dates. For the year ended December 31, 1998, approximately 81% of sales is represented by sales to two customers individually comprising 59% and 22% of sales for the year. Accounts receivable from these customers at December 31, 1998 was $Nil. - --------------------------------------------------------------------- 13. ACQUISITION On May 4, 1999, the Company's stockholders entered into a share exchange agreement, with Goldsearch Corporation ("Goldsearch"), a Nevada company incorporated on February 7, 1998. The acquisition resulted in Goldsearch acquiring all of the Company's issued and outstanding common and preferred shares. The agreement resulted in the Company becoming a subsidiary of Goldsearch. Goldsearch subsequently changed its name to "KINeSYS Pharmaceuticals, Inc." and is in the process of registering its securities with the SEC in the United States. 39 KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (EXPRESSED IN US DOLLARS) 40 KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (EXPRESSED IN US DOLLARS) CONTENTS - ------------------------------------------------------------------------------- AUDITORS' REPORT 42 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES 43 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 31, 1999. 44 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets 45 Statements of Operations 46 Statements of Stockholders' Equity 47 Statements of Cash Flows 48 Summary of Significant Accounting Policies 49 - 52 Notes to the Financial Statements 53 - 59 41 - ------------------------------------------------------------------------------- AUDITORS' REPORT - ------------------------------------------------------------------------------- TO THE STOCKHOLDERS OF KINeSYS PHARMACEUTICALS, INC. We have audited the Consolidated Balance Sheet of KINeSYS Pharmaceuticals, Inc. as at June 30, 1999 and the Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for the five-month period 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 audit. We conducted our audit in accordance with auditing standards generally accepted in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 1999 and the results of its operations and its cash flows for the five-month period then ended in accordance with accounting principles generally accepted in the United States. /s/ BDO Dunwoody LLP CHARTERED ACCOUNTANTS Vancouver, Canada July 23, 1999 42 - ------------------------------------------------------------------------------- COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCES - ------------------------------------------------------------------------------- TO THE STOCKHOLDERS OF KINeSYS PHARMACEUTICALS, INC. In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1 to the financial statements. Our report to the stockholders dated July 23, 1999 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. /s/ BDO Dunwoody LLP CHARTERED ACCOUNTANTS Vancouver, Canada July 23, 1999 43 Mr. Joe Cheung, President/Director Goldsearch Corporation. 13109 East 63rd Avenue Vancouver, British Columbia Canada V5S 2G9 INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheet of Goldsearch Corporation (a development stage company) as of January 31, 1999 and the related statements of comprehensive income (loss) and accumulated deficit, cash flows, and stockholders' equity (deficit) for the period from February 18, 1998 (inception) to January 31, 1999. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Goldsearch Corporation as of January 31, 1999, and the results of its operations and its cash flows for the period from February 18, 1998 (inception) to January 31, 1999, in conformity with generally accepted accounting principles. As discussed in Note 2, the Company has been in the development stage since its inception on February 18, 1998. Realization of a major portion of the assets is dependent upon the Company's ability to meet its future financing requirements, and the success of future operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Williams & Webster, P.S. Williams & Webster, P.S. Spokane, Washington April 6, 1999 44 - ------------------------------------------------------------------------------- KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (EXPRESSED IN US DOLLARS)
JUNE 30 January 31 1999 1999 - ------------------------------------------------------------------------------------------------ ASSETS CURRENT Cash $ 109,481 $ 69 Accounts receivable, net 34,640 - Inventories (Note 3) 112,061 - Prepaid expenses 18,936 536 ------------------------------ 275,118 605 FIXED ASSETS (Note 4) 29,340 - GOODWILL (Note 5) 707,324 - ------------------------------ $1,011,782 $ 605 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) LIABILITIES CURRENT Accounts payable and accrued liabilities $ 174,291 $ 2,098 ------------------------------ STOCKHOLDERS' EQUITY (DEFICIT) Share capital Authorized 100,000,000 Preferred shares, par value $0.00001 100,000,000 Common shares, par value $0.00001 Issued 8,380,897 Common shares (January 31, 1999 - 270,876 post-consolidation common shares) 84 68 Additional paid-in capital 1,195,279 149,046 Stock subscription receivable - (3,888) Accumulated deficit (370,312) (147,265) Accumulated other comprehensive income - foreign currency transaction adjustment 12,440 546 ------------------------------ 837,491 (1,493) ------------------------------ $1,011,782 $ 605 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 45 - ------------------------------------------------------------------------------- KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (EXPRESSED IN US DOLLARS)
For the period from February 17, For the five-month periods 1998 ended June 30, (incorporation) -------------------------- to January 31, 1999 1998 1999 (Unaudited) - ------------------------------------------------------------------------------------------------------- SALES $ 52,856 $ - $ - COST OF SALES 14,819 - - -------------------------------------------- 38,037 - - -------------------------------------------- EXPENSES Advertising and promotion 50,661 - - Amortization of goodwill 24,391 - - Depreciation 1,476 38 - Bad debts 4,808 - - Bank charges and interest 4,918 - - Commissions 3,431 - - Consulting fees 13,707 9,000 28,000 Financing arrangement fee (Note 6) 45,250 - - Insurance 204 - - Interest 18 - - Investor relations - 3,493 20,708 Licenses and dues 912 - - Office 11,687 3,376 7,423 Professional fees 65,789 15,542 24,791 Rent 3,490 6,000 20,838 Repairs and maintenance 1,354 - - Salaries and benefits 18,043 - - Telephone and utilities 1,270 2,208 5,301 Trade shows 4,454 - - Travel 5,221 - - -------------------------------------------- 261,084 38,657 107,061 -------------------------------------------- LOSS BEFORE DISCONTINUED OPERATIONS (223,047) (38,657) (107,061) LOSS ON DISCONTINUED OPERATIONS (Note 7) - (24,189) (40,204) -------------------------------------------- NET LOSS FOR THE PERIOD $ (223,047) $(62,846) $(147,265) - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- BASIC AND DILUTED LOSS PER SHARE Before discontinued operations $ (0.05) $ (0.15) $ (0.40) Discontinued operations - (0.09) (0.16) -------------------------------------------- After discontinued operations $ (0.05) $ (0.24) $ (0.56) - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES 4,161,818 262,700 265,183 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 46 KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (EXPRESSED IN US DOLLARS) - -------------------------------------------------------------------------------
STOCK FOREIGN ADDITIONAL SUB- CURRENCY TOTAL COMMON SHARES PAID-IN SCRIPTIONS ACCUMULATED TRANSLATION STOCKHOLDERS' NUMBER AMOUNT CAPITAL RECEIVABLE DEFICIT ADJUSTMENT(DEFICIT) EQUITY - ------------------------------------------------------------------------------------------------------------------------------ Issuance of common stock for cash: - in February 1998 at $0.0001 and $0.00001 per share 6,000,000 $ 60 $ 54 $ - $ - $ - $ 114 - in July 1998 through January 1999 at 718,500 7 143,693 (3,888) - - 139,812 $0.20 per share - in January 1999 at $0.10 per share 53,000 1 5,299 - - - 5,300 - ------------------------------------------------------------------------------------------------------------------------------ 6,771,500 68 149,046 (3,888) - - 145,226 - ------------------------------------------------------------------------------------------------------------------------------ Net loss for the year - - - - (147,265) - (147,265) Change in unrealized gains - - - - - 546 546 - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive loss (147,265) 546 (146,719) - ------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1999 6,771,500 68 149,046 (3,888) (147,265) 546 (1,493) 25 for 1 share consolidation (6,500,624) (65) 65 - - - - Stock subscription receipt - - - 3,888 - - 3,888 Issuance of common stock for cash in April 1999 at $0.01 per common share 4,525,000 45 45,205 - - - 45,250 Shares issued on May 4, 1999 for acquisition of subsidiary, valued at $0.197 per share (Note 2) 3,052,021 31 601,218 - - - 601,249 Shares issued on exercise of warrants 533,000 5 399,745 - - - 399,750 - ------------------------------------------------------------------------------------------------------------------------------ 8,380,897 84 1,195,279 - (147,265) 546 1,048,644 - ------------------------------------------------------------------------------------------------------------------------------ Net loss for the period - - - - (223,047) - (223,047) Change in unrealized gains - - - - - 11,894 11,894 - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive loss (223,047) 11,894 (211,153) - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1999 8,380,897 $ 84 $1,195,279 $ - $ (370,312) $ 12,440 $ 837,491
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 47 KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN US DOLLARS)
For the period For the five months from February ended 17, 1998 June 30 (incorporation) ----------------------- to January 31 1999 1998 1999 - ----------------------------------------------------------------------------------------------------------- (Unaudited) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the period from continuing operations $ (223,047) $ (38,657) $ (107,061) Items not involving cash Depreciation of fixed assets 1,476 38 - Amortization of goodwill 24,391 - - (Increase)/decrease in assets Accounts receivable 8,323 - - Inventories (6,467) - - Prepaid expenses (5,096) (658) (536) Increase/(decrease) in liabilities Accounts payable and accrued liabilities (151,478) 5,175 2,098 - ----------------------------------------------------- (351,898) (34,102) (105,499) Loss on discontinued operations - (29,189) (40,204) - ----------------------------------------------------- (351,898) (63,291) (145,703) - ----------------------------------------------------- INVESTING ACTIVITY Cash acquired on purchase of subsidiary 4,851 - - - ----------------------------------------------------- FINANCING ACTIVITIES Issuance of common stock 445,000 113,614 149,114 Stock subscriptions receivable 3,888 (26,287) (3,888) - ----------------------------------------------------- 448,888 87,327 145,226 - ----------------------------------------------------- EFFECT OF EXCHANGE RATE ON CASH 7,571 - 546 - ----------------------------------------------------- INCREASE IN CASH 109,412 24,036 69 CASH, beginning of period 69 - - - ----------------------------------------------------- CASH, end of period $ 109,481 $ 24,036 $ 69 - ----------------------------------------------------------------------------------------------------------- SUPPLEMENTAL INFORMATION: Interest paid $ 687 $ - $ - Non cash investing and financing activity - acquisition of subsidiary for common stock, less cash acquired (Note 2) $ 596,398 $ - $ - - -----------------------------------------------------------------------------------------------------------
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 48 KINeSYS PHARMACEUTICALS, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- BASIS OF PRESENTATION The previous fiscal year end of the Company was January 31, 1999 and the Company has changed its year end to June 30, effective in 1999. On May 4, 1999 the Company completed a major transaction acquiring all of the issued and outstanding common and preferred shares of KINeSYS Pharmaceutical Inc., a Canadian company engaged in the manufacture and distribution of cosmoceutical products (Note 2). As a result of the acquisition, the Company is no longer considered to be in the development stage. Subsequent to the acquisition, the Company changed its name from "Goldsearch Corporation" to "KINeSYS Pharmaceuticals, Inc." PRINCIPLES OF CONSOLIDATION These consolidated financial statements are expressed in US dollars and are prepared in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated on consolidation. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of the Company's management, the Statements of Operations and Cash Flows for the five-month period ended June 30, 1998 contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. REVENUE RECOGNITION Sales are recorded upon shipment to third parties net of returned product. INVENTORIES Inventories are stated at the lower of cost and net realizable value. Cost is generally determined on a weighted average basis. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is computed based on the estimated useful lives of the assets as follows: Computers - 30% declining- balance basis Furniture and fixtures, equipment and molds and dies - 20% declining- balance basis
Leasehold improvements are amortized over their estimated useful lives or the lives of the related leases, whichever is shorter. 49 KINeSYS PHARMACEUTICALS, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- GOODWILL Goodwill arising on the purchase of KINeSYS Pharmaceutical Inc. is being amortized on a straight-line basis over five years. Goodwill is evaluated for impairment when events or changes in circumstances indicate that the carrying amount of Goodwill may not be recoverable through the estimated undiscounted future cash flows resulting from the use of goodwill. When any such impairment exists, the goodwill will be written down to fair value in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets". FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, accounts receivable, and accounts payable and accrued liabilities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted, since they are short term in nature or they are receivable or payable on demand. INCOME TAXES The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes, which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse. FOREIGN CURRENCY TRANSLATION The Company conducts its business primarily from its offices in Richmond, British Columbia, Canada and, therefore, a substantial portion of its business is conducted in Canadian currency. The financial position and results of operations of the Company's subsidiary are determined using the Canadian Dollar as the functional currency. Assets and liabilities of the subsidiary are translated at the exchange rate at the period end. Income statement accounts are translated at the average rate of exchange prevailing during the periods. Translation adjustments arising from the use of differing exchange rates from period to period are included in the Accumulated Foreign Currency Translation Adjustment account in Stockholders' Equity. 50 KINeSYS PHARMACEUTICALS, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- LOSS PER SHARE Loss per share is computed in accordance with SFAS No. 128, "Earnings per Share". Basic loss per share is calculated by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in earnings of an entity, similar to fully diluted earnings per share. In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive. Basic and diluted earnings per share are the same for all periods presented. For the five month periods ended June 30, 1999 and 1998 and for the period from February 17, 1998 (incorporation) to January 31, 1999, stock options and warrants totaling 1,472,500, Nil and Nil were not included in the computation of diluted earnings per share because their effect was anti-dilutive. STOCK BASED COMPENSATION The Company applies Accounting Principles Board Opinion ("APB") 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for stock option plans. Under APB 25, compensation cost is recognized for stock options granted at prices below the market price of the underlying common stock on the date of grant. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro-forma information regarding net income as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method prescribed in SFAS No. 123. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's best estimates as additional information becomes available in the future. 51 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICALS, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - --------------------------------------------------------------------- NEW ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities on the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standards on July 1, 2000 to affect its financial statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") which provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 was effective for fiscal years beginning after December 15, 1998 with initial adoption reported as the cumulative effect of a change in accounting principle. Adoption of this standard did not have a material affect on the financial statements. 52 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - --------------------------------------------------------------------- 1. NATURE OF BUSINESS AND CONTINUED OPERATIONS The Company was incorporated in the state of Nevada on February 17, 1998. Until the acquisition of KINeSYS Pharmaceuticals Inc. on May 4, 1999 (Note 2), the Company was involved in the acquisition and exploration of mineral properties. The Company is now focusing on selling cosmoceutical products for active individuals and athletes to wholesalers, distributors, retailers and the general public. The three main product lines include: suncare, treatment, and daily use products. Customers are located in Canada and the United States. These accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at June 30, 1999 the Company has had no significant operations and the Company's subsidiary has posted overall operating losses since its inception. The continuation of the Company is dependent upon the continuing financial support of creditors and stockholders and obtaining long-term financing as well as achieving a profitable level of operations. Management plans to raise equity capital to finance the operations and capital requirements of the Company. It is management's intention to raise approximately $1.2 million within the upcoming year. Amounts raised will be used to develop a U.S. focus for marketing arrangements, to enhance the Company's e-commerce ability through its website, to provide financing for the purchase and manufacture of inventories and for other working capital purposes including operational systems upgrades. While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty. - --------------------------------------------------------------------- 2. ACQUISITION OF KINeSYS PHARMACEUTICAL INC. On May 4, 1999 the Company acquired all of the issued and outstanding common and preferred stock of KINeSYS Pharmaceutical Inc. KINeSYS Pharmaceutical Inc. is a company incorporated in December 1993 in British Columbia, Canada that is engaged in the manufacture and distribution of cosmoceutical products for active individuals and athletes. 53 - --------------------------------------------------------------------- KINeSYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - --------------------------------------------------------------------- 2. ACQUISITION OF KINeSYS PHARMACEUTICAL INC. - CONTINUED Consideration for the purchase was the issuance of 3,052,021 shares of common stock of the Company. The transaction was accounted for as a purchase. Accordingly, operations of KINeSYS Pharmaceutical Inc. have been included in the consolidated financial statements from May 4, 1999. The value of the consideration paid, being the common stock of the Company, was determined using quoted trading prices close to the date of substantial agreement to the terms of the acquisition of $0.197 per share. The value of the consideration paid exceeded the net book value of KINeSYS Pharmaceutical Inc. at the transaction date by $731,715. The excess consideration, or "goodwill", is being amortized to income on a straight-line basis over five years. The summarized unaudited pro-forma results of operations set forth below for the period from February 17, 1998 (incorporation) to January 31, 1999 and for the five months ended June 30, 1999 assume that the acquisition occurred as of February 18, 1998 (the incorporation date).
Period from February 17, FIVE MONTHS 1998 ENDED (incorporation) JUNE 30 to January 31, 1999 1999 ------------------------------------- Sales $ 123,474 $ 622,930 Net loss for the period before discontinued operations and extraordinary item $ (292,583) $ (914,872) Net loss for the period $ (292,583) $ (855,669) Basic and diluted loss per share $ (0.05) $ (0.26) - ---------------------------------------------------------------------
3. INVENTORIES
JUNE 30 January 31 1999 1999 ----------------------------------- Packaging $ 24,743 $ - Finished goods 87,318 - ----------------------------------- $ 112,061 $ - -----------------------------------
54 KINESYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- 4. FIXED ASSETS
JUNE 30 January 31 1999 1999 ----------------------------------------------------------------------- ACCUMULATED NET BOOK Net Book COST DEPRECIATION VALUE Value ----------------------------------------------------------------------- Computers $ 25,005 $ 20,186 $ 4,820 $ - Furniture and fixtures 21,453 7,637 13,816 - Warehouse equipment 1,788 968 820 - Leasehold improvements 6,758 6,758 - - Molds and dies 21,888 12,004 9,884 - ----------------------------------------------------------------------- $ 76,892 $ 47,553 $ 29,340 $ - ----------------------------------------------------------------------- -----------------------------------------------------------------------
- -------------------------------------------------------------------------------- 5. GOODWILL
JUNE 30 January 31 1999 1999 ---------------------------------------------------------------------- ACCUMULATED NET BOOK Net Book COST AMORTIZATION VALUE Value ---------------------------------------------------------------------- Goodwill $ 731,715 $ 24,391 $ 707,324 $ - ---------------------------------------------------------------------- ----------------------------------------------------------------------
- -------------------------------------------------------------------------------- 6. SHARE CAPITAL a) On April 6, 1999 the Company effected a 25 to 1 share consolidation. References to common shares issued and outstanding in comparative figures have been adjusted to post-consolidation amounts. As part of the restructuring, the Company issued 4,525,000 shares of common stock to certain investors at $0.01. Proceeds from the issuance of 4,525,000 shares totaling $45,250 were deposited in escrow to be released pro-rata in specified amounts to an individual as a financing arrangement fee within the upcoming year. The financing arrangement fee has been recognized in the Statement of Operations for the five-month period ended June 30, 1999. 55 KINESYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- 6. SHARE CAPITAL - CONTINUED b) On June 28, 1999, the Company's Board of Directors adopted the 1999 Stock Option Plan which provides for the granting of stock options to purchase up to 900,000 shares of the Company's common stock. The stock option plan permits the granting of incentive and non-qualifying stock options to officers, employees and consultants of the Company and its subsidiary. Under the 1999 Stock Option Plan exercise prices and terms are determined by the Board of Directors. For incentive options, the exercise price shall not be less than fair market value of the Company's common stock on the grant date. Options granted are not to exceed terms beyond ten years. On June 30, 1999, the Company granted options to employees, directors and consultants to purchase 752,500 shares of common stock at $1.00 with a weighted average remaining contractual life of the options of 2.65 years. All the options remained outstanding at June 30, 1999. There were no options granted during the year ended January 31, 1999. Outstanding options for the purchase of common shares, granted to employees, directors and consultants vest over a three-year period. Stock options exercisable at June 30, 1999 totalled 207,051. Pro-forma information regarding Net Loss and Loss per Share is required under SFAS No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The weighted average fair value of options granted in the five-month period ended June 30, 1999 was $0.05. The fair value of these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following assumptions: no dividends, a risk-free interest rate of 4.95%, volatility factor of the expected market price of the Company's common stock of 0.001% and a weighted average expected life of the options of four years. Under the accounting provisions of SFAS No. 123, the Company's Net Loss and Loss per Share on a pro-forma basis would be materially unchanged from the reported amounts for the five-month period ended June 30, 1999. 56 KINESYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- 6. SHARE CAPITAL - CONTINUED c) During the five-month period ended June 30, 1999, the Company granted the following warrants to purchase shares of common stock:
Exercise Price Exercise Price Exercise Price $0.75 $1.00 $1.25 ----- ----- ----- Balance, January 31, 1999 - - - Granted during the period - exercisable within 10 business days of acquisition of the Company's subsidiary 533,000 - - - exercisable upon 10 business days of the earlier of approval by the SEC of the Company's registration statement or September 1, 1999 - 400,000 - - exercisable by December 31, 1999 - - 320,000 Exercised during the period (533,000) - - - --------------------------------------------------------------- - 400,000 320,000 - --------------------------------------------------------------- - ---------------------------------------------------------------
No warrants were granted during the Company's year ended January 31, 1999. d) Subsequent to June 30, 1999, the Company issued 564,000 common shares in advance of future advertising and promotional services. e) Common stock held in escrow at June 30, 1999 totaled 2,880,000 (Nil in comparative periods). Stock is to be released from escrow based upon the exercise of stock purchase warrants. Subsequent to June 30, 1999, the Company commenced the process of filing documentation to release the first 960,000 shares of common stock from escrow. The remaining shares held in escrow will be released in tranches of 960,000 shares of common stock as warrants are exercised. - -------------------------------------------------------------------------------- 7. DISCONTINUED OPERATIONS On May 4, 1999, upon conclusion of the acquisition of KINeSYS Pharmaceutical Inc., the Company discontinued its involvement in mineral exploration activity. Mineral exploration expenses incurred to the measurement date totaled $Nil (January 31, 1999 - $40,204; June 30, 1998 - $24,189). There was no revenue earned during the five-month periods ended June 30, 1999 and 1998 or during the year ended January 31, 1999. There was no gain or loss recognized on discontinuance. 57 KINESYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- 8. RELATED PARTY TRANSACTIONS Related party transactions not disclosed elsewhere in these consolidated financial statements are as follows: a) The Company's subsidiary signed a three year contract with an investment company, which is owned by a stockholder, for the provision of financial and management services at a monthly fee of CDN$5,000. The Company paid $6,704 during the five-month period ended June 30, 1999 (January 31, 1999 - $Nil; June 30, 1998 - $Nil). The contract expires in July, 2002. b) The Company also paid fees to a consulting company, which is owned by two shareholders, for a provision of consulting services. During the five-month period ended June 30, 1999, fees totaled $6,704 (January 31, 1999 - $Nil; June 30, 1998 - $Nil) Related party transactions are recorded at the exchange amount, being the amount of consideration established and agreed to by the related parties. - -------------------------------------------------------------------------------- 9. SEGMENTED INFORMATION For the five-month period ended June 30, 1999, approximately $3,400 of the Company's sales were made to customers in the United States (January 31, 1999 and June 30, 1998 - $Nil). The remainder of sales were made to Canadian customers. 58 KINESYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN US DOLLARS) INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 IS UNAUDITED - -------------------------------------------------------------------------------- 10. INCOME TAXES At June 30, 1999 the Company had deferred tax assets of approximately $670,000 (January 31, 1999 - $50,000) principally arising from net operating losses carried forward in the subsidiary in Canada. As management of the Company cannot determine if it is more likely than not that the Company will receive the benefit of this asset, a valuation allowance equal to the deferred tax asset has been established at June 30, 1999, May 4, 1999 (the date of acquisition) and January 31, 1999. The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and this causes a change in management's judgement about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current income. At June 30, 1999, the Company's subsidiary had losses available for Canadian income tax purposes of approximately $1,300,000. These losses will expire as follows: 2000 $ 102,000 2001 $ 469,000 2002 $ 38,000 2003 $ 185,000 2004 $ 352,000 2005 $ 57,000 2006 $ 97,000
The Company has net operating losses carried forward for US tax purposes of approximately $250,000 which expires in 2018 and 2019. - -------------------------------------------------------------------------------- 11. COMMITMENT Beginning at such time as the Company's subsidiary achieves annual gross revenue in North America of CDN$1,000,000, the Company will be subject to a Royalty Agreement which will require payment of 2.5% of gross North American revenues of the Company's subsidiary in excess of CDN$1,000,000. The agreement will expire upon payment of an aggregate royalty of CDN$1,250,000 before October 1, 2001 or CDN$1,500,000 thereafter. Management is presently attempting to renegotiate this agreement. 59 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The Unaudited Pro Forma Consolidated Financial Information reflects financial information which gives effect to the acquisition of all the outstanding common shares of KINeSYS Pharmaceutical Inc. in exchange for 3,052,021 shares of common stock of the Registrant at a deemed value of $0.197 per share. The Pro Forma Consolidated Statements included herein reflect the use of the purchase method of accounting for the above transaction. Such financial information has been prepared from, and should be read in conjunction with, the historical financial statements and notes thereto included elsewhere in this 10-SB registration statement. The Pro Forma Consolidated Statement of Operations gives effect to the transaction as if it had occurred at the beginning of the earliest period presented, combining the results of the Registrant and KINeSYS Pharmaceutical Inc. for the five-month period ended June 30, 1999. Sales and income for the month of January 1999 for KINeSYS Pharmaceutical Inc. are not reflected in the pro forma consolidated financial information. Sales and the net loss for January 1999 amount to $4,175 and $23,765, respectively. As well, the Pro Forma Consolidated Statement of Operations combines the accounts of the Registrant and KINeSYS Pharmaceutical Inc. for the years ended January 31, 1999 and December 31, 1998, respectively. The Pro Forma Consolidated Financial Information is unaudited and is not necessarily indicative of the consolidated results which actually would have occurred if the above transactions had been consummated at the beginning of the periods presented; nor does it purport to present the results of operations for future periods. 60 KINeSYS PHARMACEUTICALS, INC. PRO FORMA STATEMENT OF OPERATIONS FOR THE FIVE-MONTH PERIOD ENDED JUNE 30, 1999 (EXPRESSED IN US DOLLARS) (UNAUDITED)
KINeSYS Pharmaceuticals, Inc. KINeSYS (formerly Goldsearch Pharmaceuticals Pro Forma Corporation) Inc. Adjustments Balance - ------------------------------------------------------------------------------------------------------------ SALES $ 52,856 $ 70,618 $ 123,474 COST OF SALES 14,819 25,197 40,016 ------------------------------------------------------------- 38,037 45,421 - 83,458 ------------------------------------------------------------- EXPENSES Advertising and promotion 50,661 13,242 63,903 Amortization of Goodwill 24,391 - 36,585(1) 60,976 Bad Debts 4,808 - 4,808 Bank Charges and Interest 4,918 255 5,173 Commissions 3,431 - 3,431 Consulting Fees 13,707 25,885 39,592 Depreciation 1,476 2,672 4,148 Financing Arrangement fee 45,250 - 45,250 Insurance 204 164 368 Interest 18 974 992 Licenses and dues 912 2,352 3,264 Office 11,687 5,071 16,758 Professional fees 65,789 8,841 74,630 Rent 3,490 2,309 5,799 Repairs and maintenance 1,354 204 1,558 Salaries and benefits 18,043 7,418 25,461 Telephone and utilities 1,270 3,216 4,486 Trade shows 4,454 1,579 6,033 Travel 5,221 4,190 9,411 ------------------------------------------------------------- 261,084 78,372 36,585 376,041 ------------------------------------------------------------- NET LOSS FOR THE PERIOD $(223,047) $(32,951) $(36,585) $(292,583) ------------------------------------------------------------- ------------------------------------------------------------- BASIC AND DILUTED LOSS PER SHARE (0.05) --------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING 6,054,054 --------- ---------
The accompanying notes are an integral part of these financial statements 61 KINeSYS PHARMACEUTICALS, INC. PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1999 (EXPRESSED IN US DOLLARS) (UNAUDITED)
KINeSYS Pharmaceuticals, Inc. KINeSYS (formerly Goldsearch Pharmaceutical Pro Forma Corporation) Inc. Adjustments Balance - ------------------------------------------------------------------------------------------------------------ SALES $ - $ 622,930 $ - $ 622,930 COST OF SALES - 255,578 - 255,578 -------------------------------------------------------------- - 367,352 - 367,352 -------------------------------------------------------------- EXPENSES Advertising and promotion - 237,431 - 237,431 Amortization of Goodwill - - 146,343 (1) 146,343 Bad Debts - 4,588 - 4,588 Bank Charges and Interest - 11,589 - 11,589 Commissions - 73,398 - 73,398 Consulting Fees 28,000 66,398 - 94,398 Depreciation - 10,631 - 10,631 Insurance - 3,335 - 3,335 Interest - 28,380 - 28,380 Investor relations 20,708 - - 20,708 Licenses and dues - 15,586 - 15,586 Office 7,423 28,639 - 36,062 Professional fees 24,791 38,668 - 63,459 Rent 20,838 18,797 - 39,635 Repairs and maintenance - 6,502 - 6,502 Salaries and benefits - 104,194 - 104,194 Stock Compensation Benefit - 257,269 - 257,269 Telephone and utilities 5,301 10,664 - 15,965 Trade shows - 33,938 - 33,938 Travel - 38,609 - 38,609 -------------------------------------------------------------- 107,061 988,616 146,343 1,242,020 -------------------------------------------------------------- LOSS FROM CONTINUING OPERATIONS (107,061) (621,264) (146,343) (874,668) -------------------------------------------------------------- -------------------------------------------------------------- BASIC AND DILUTED LOSS PER SHARE From continuing operations $ (0.26) ---------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING 3,317,204 ---------- ----------
The accompanying notes are an integral part of these financial statements 62 KINeSYS PHARMACEUTICALS, INC. NOTE TO PRO FORMA STATEMENTS (EXPRESSED IN US DOLLARS) (UNAUDITED) (1) To reflect the acquisition of Kinesys Pharmaceutical Inc. on May 4, 1999 in exchange for 3,052,021 shares of common stock at a deemed price of $0.197 per share totalling $601,249. The carrying value of net assets at the acquisition date approximated the fair values. The portion of the purchase price allocated to goodwill would have caused amortization to increase by $36,585 and $146,343 for the five-month period ended June 30, 1999 and for the year ended January 31, 1999, respectively. Goodwill of $731,715 is being amortized on a straight-line basis over five years. 63 PART III ITEM 1. INDEX TO EXHIBITS The following exhibits are filed with this Registration Statement:
Exhibit No. Exhibit Name - ----------- ------------ 2.1 Articles of Incorporation of Company, filed February 17, 1998. 2.2 Articles of Amendment of Articles of Incorporation of Company, filed March 29, 1999. 2.3 Bylaws of the Company 6.1 Royalty Agreement dated 12/17/96 6.2 KINeSYS 1999 Stock Option Plan. 27 Financial Data Schedule
ITEM 2. DESCRIPTION OF EXHIBITS See Item 1 above. SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. KINeSYS PHARMACEUTICALS, INC. (Registrant) Date: October 6, 1999 By: /s/ Jonathan Mara ---------------------- Jonathan Mara, CEO 64 EX-2.1 2 EXHIBIT 2.1 EXHIBIT 2.1 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF GOLDSEARCH CORPORATION ***** FIRST The name of the corporation is GOLDSEARCH CORPORATION. SECOND Its principal office in the state of Nevada is located at One East First Street, Reno, Nevada 89501. The name and address of its resident agent is The Corporation Trust Company of Nevada, One East First Street, Reno, Nevada 89501. THIRD The purpose or purposes for which the corporation is organized: To engage in and carry on any lawful business activity or trade, and any activities necessary, convenient, or desirable to accomplish such purposes, not forbidden by law or by these articles of incorporation. FOURTH The amount of the total authorized capital stock of the corporation is Two Thousand Dollars ($2,000.00) consisting of One Hundred Million (100,000,000) shares of common stock of the par value of $0.00001 each and One Hundred Million (100,000,000) shares of preferred stock of the par value of $.00001 each. FIFTH The relative rights, classes, preferences, designations, rates, conditions, privileges, limitations, dividend rates, conversion rights, preemptive rights, voting rights, rights and terms of redemption, liquidation preferences, and sinking terms of the preferred stock shall be determined by the Board of Directors, without any further vote or action by shareholders. The Board of Directors, without shareholder approval, may issue shares of preferred stock with dividend rights, liquidation preferences or other rights that are superior to the rights of holders of common stock. SIXTH The governing board of this corporation shall be known as directors, and the number of directors may from time to time be increased or decreased in such manner as shall be provided by the bylaws of this corporation. The names and addresses of the initial four members of the board of directors are:
NAME POST-OFFICE ADDRESS - ---- ------------------- 1. Gary Chapman Suite 401 - 1550 West 11th Ave. Vancouver, British Columbia Canada V6J 2B6 2. Michael Patellis 206 - 1770 Barclay Street Vancouver, British Columbia Canada V6G 1K5 3. John Payne 877 Lillooet Road North Vancouver, British Columbia Canada V7J 2H6 4. John P. Ryan 200 Riverwood Court Post Falls, Idaho 83814
The number of members of the Board of Directors shall not be less than four nor more than thirteen. SEVENTH The capital stock, after the amount of the subscription price, or par value, has been paid in, shall not be subject to assessment to pay the debts of the corporation. EIGHTH The name and addresses of each of the incorporators signing the Articles of Incorporation are as follows:
NAME POST-OFFICE ADDRESS - ---- ------------------- Conrad C. Lysiak 601 West First Avenue Suite 503 Spokane, Washington 99204
NINTH The corporation is to have perpetual existence. TENTH In furtherance, and not in limitation of the powers conferred by statute, the board of directors is expressly authorized: Subject to the bylaws, if nay, adopted by the stockholders, to make, alter or amend the bylaws of the corporation. To fix the amount to be reserved as working capital over and above its capital stock paid in, to authorize and cause to be executed mortgages and liens upon the real and personal property of this corporation. By resolution passed by a majority of the whole board, to designate one (1) or more committees, each committee to consist of one (1) or more of the directors of the corporation, which, to the extent provided in the resolution or in the bylaws of the corporation, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in the bylaws of the corporation or as may be determined from time to time by resolution adopted by the board of directors. When and as authorized by the affirmative vote of stockholders holding stock entitling them to exercise at least a majority of the voting power given at a stockholders' meeting called for that purpose, or when authorized by the written consent of the holders of at least a majority of the voting stock issued and outstanding, the board of directors shall have power and authority at any meeting to sell, lease or exchange all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions as its board of directors deem expedient and for the best interests of the corporation. ELEVENTH Meeting of stockholders may be held outside the State of Nevada, if the bylaws so provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Nevada at such place or places as may be designated from time to time by the board of directors or in the bylaws of the corporation. TWELFTH The corporation shall indemnify its officers, directors, employees and agents to full extent permitted by the laws of the State of Nevada. I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Nevada, do make and file these Articles of Incorporation, hereby declaring and certifying that the facts herein stated are true, and accordingly have hereunto set my hand this 13th day of February, 1998. /s/ Conrad C. Lysiak ------------------------- CONRAD C. LYSIAK STATE OF WASHINGTON ) ) COUNTY OF SPOKANE ) On this 13th day of February, 1998, before me, a Notary Public, personally appeared CONRAD C. LYSIAK, who severally acknowledged that he executed the above instrument. /s/ ---------------------------- Notary Public, residing in the State of Washington, residing in Spokane. My Commission Expires: October 9, 1998 EX-2.2 3 EXHIBIT 2.2 EXHIBIT 2.2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF GOLDSEARCH CORPORATION The undersigned, Yiu Joe Cheung, President and Secretary, of Goldsearch Corporation, does hereby certify: That the Board of Directors of said corporation at a meeting duly convened, held on the 19th day of March, 1999, adopted a resolution to amend the original articles as follows: ARTICLE FIRST is hereby amended to read as follows: "The name of the corporation is KINeSYS Pharmaceutical, Inc." The number of shares of the corporation outstanding and entitled to vote on an amendment to the Articles of Incorporation is 6,771,500; that the said change and amendment have been consented to and approved by a majority vote of the stockholders holding at least a majority of each class of stock outstanding and entitled to vote thereon. This Amendment shall be effective as of 9:00 A.M., April 2, 1999. /s/ Yiu Joe Cheung ----------------------------- Yiu Joe Cheung, President /s/ Yiu Joe Cheung ----------------------------- Yiu Joe Cheung, Secretary COUNTRY OF CANADA ) ) ss.: PROVINCE OF BRITISH COLUMBIA ) On March 23, 1999, Yiu Joe Cheung personally appeared before me, a Notary Public, who acknowledged that he executed the above instrument. /s/ ----------------------------- Notary Public EX-2.3 4 EXHIBIT 2.3 EXHIBIT 2.3 BYLAWS BYLAWS OF GOLDSEARCH CORPORATION I. SHAREHOLDER'S MEETING. .01 ANNUAL MEETINGS. The annual meeting of the shareholders of this Corporation, for the purpose of election of Directors and for such other business as may come before it, shall be held at the registered office of the Corporation, or such other places, either within or without the State of Nevada, as may be designated by the notice of the meeting, on the third week in April of each and every year, at 1:00 p.m., commencing in 1998, but in case such day shall be a legal holiday, the meeting shall be held at the same hour and place on the next succeeding day not a holiday. .02 SPECIAL MEETING. Special meetings of the shareholders of this Corporation may be called at any time by the holders of ten percent (10%) of the voting shares of the Corporation, or by the President, or by the Board of Directors or a majority thereof. No business shall be transacted at any special meeting of shareholders except as is specified in the notice calling for said meeting. The Board of Directors may designate any place, either within or without the State of Nevada, as the place of any special meeting called by the president or the Board of Directors, and special meetings called at the request of shareholders shall be held at such place in the State of Nevada, as may be determined by the Board of Directors and placed in the notice of such meeting. .03 NOTICE OF MEETING. Written notice of annual or special meetings of shareholders stating the place, clay, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be given by the secretary or persons authorized to call the meeting to each shareholder of record entitled to vote at the meeting. Such notice shall be given not less than ten (10) nor more than fifty (50) days prior to the date of the meeting, and such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his/her address as it appears on the stock transfer books of the Corporation. .04 WAIVER OF NOTICE. Notice of the time, place, and purpose of any meeting may be waived in writing and will be waived by any shareholder by his/her attendance thereat in person or by proxy. Any shareholder so waiving shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. .05 QUORUM AND ADJOURNED MEETINGS. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. A majority of the shares represented at a meeting, even if less than a quorum, may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. .06 PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his/her duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. .07 VOTING OF SHARES. Except as otherwise provided in the Articles of Incorporation or in these Bylaws, every shareholder of record shall have the right at every shareholder's meeting to one (1) vote for every share, standing in his/her name on the books of the Corporation, and the affirmative vote of a majority of the shares represented at a meeting and entitled to vote thereat shall be necessary for the adoption of a motion or for the determination of all questions and business which shall come before the meeting. II. DIRECTORS. .01 GENERAL POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors. 02. NUMBER, TENURE AND QUALIFICATIONS. The number of Directors of the Corporation shall be not less than four nor more than thirteen. Each Director shall hold office until the next annual meeting of shareholders and until his/her successor shall have been elected and qualified. Directors need not be residents of the State of Nevada or shareholders of the Corporation. .03 ELECTION. The Directors shall be elected by the shareholders at their annual meeting each year; and if, for any cause the Directors shall not have been elected at an annual meeting, they may be elected at a special meeting of shareholders called for that purpose in the manner provided by these Bylaws. .04 VACANCIES. In case of any vacancy in the Board of Directors, the remaining Director, whether constituting a quorum or not, may elect a successor to hold office for the unexpired portion of the terms of the Director whose place shall be vacant, and until his/her successor shall have been duly elected and qualified. .05 RESIGNATION. Any Director may resign at any time by delivering written notice to the secretary of the Corporation. .06 MEETINGS. At any annual, special or regular meeting of the Board of Directors, any business may be transacted, and the Board may exercise all of its powers. Any such annual, special or regular meeting of the Board of Directors of the Corporation may be held outside of the State of Nevada, and any member or members of the Board of Directors of the Corporation may participate in any such meeting by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time; the participation by such means shall constitute presence in person at such meeting. A. ANNUAL MEETING OF DIRECTORS. Annual meetings of the Board of Directors shall be held immediately after the annual shareholders' meeting or at such time anti place as may be determined by the Directors. No notice of the annual meeting of the Board of Directors shall be necessary. B. SPECIAL MEETINGS. Special meetings of the Directors shall be called at any time and place upon the call of the president or any Director. Notice of the time and place of each special meeting shall be given by the secretary, or the persons calling the meeting, by mail, radio, telegram, or by personal communication by telephone or otherwise at least one (1) day in advance of the time of the meeting. The purpose of the meeting need not be given in the notice. Notice of any special meeting may be waived in writing or by telegram (either before or after such meeting) and will be waived by any Director in attendance at such meeting. C. REGULAR MEETINGS OF DIRECTORS. Regular meetings of the Board of Directors shall be held at such place and on such day and hour as shall from time to time be fixed by resolution of the Board of Directors. No notice of regular meetings of the Board of Directors shall be necessary. .07 QUORUM AND VOTING. A majority of the Directors presently in office shall constitute a quorum for all purposes, but a lesser number may adjourn any meeting, and the meeting may be held as adjourned without further notice. At each meeting of the Board at which a quorum is present, the act of a majority of the Directors present at the meeting shall be the act of the Board of Directors. The Directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Directors to leave less than a quorum. .08 COMPENSATION. By resolution of the Board of Directors, the Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. .09 PRESUMPTION OF ASSENT. A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his/her dissent shall be entered in the minutes of the meeting or unless he/she shall file his/her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. .10 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee anti one of more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all the authority of the Board of Directors, but no such committee shall have the authority of the Board of Directors, in reference to amending the Articles of Incorporation, adoption a plan of merger or Consolidation, recommending to the shareholders the sale, lease, exchange, or other disposition of all of substantially all the property and assets of the dissolution of the Corporation or a revocation thereof, designation of any such committee and the delegation thereto of authority shall not operate to relieve any member of the Board of Directors of any responsibility imposed by law. .11 CHAIRMAN OF BOARD OF DIRECTORS. The Board of Directors may, in its discretion, elect a chairman the Board of Directors from its members; and, if a chairman has been elected, he/she shall, when present, preside at all meetings of the Board of Directors and the shareholders and shall have such other powers as the Board may prescribe. .12 REMOVAL. Directors may be removed from office with or without cause by a vote of shareholders holding a majority of the shares entitled to vote at an election of Directors. III. ACTIONS BY WRITTEN CONSENT. Any corporate action required by the Articles of Incorporation, Bylaws, or the laws under which this Corporation is formed, to be voted upon or approved at a duly called meeting of the Directors or shareholders may be accomplished without a meeting if a written memorandum of the respective Directors or shareholders, setting forth the action so taken, shall be signed by all the Directors or shareholders, as the case may be. IV. OFFICERS. .01 OFFICERS DESIGNATED. The Officers of the Corporation shall be a president, one or more vice presidents (the number thereof to be determined by the Board of Directors), a secretary and a treasurer, each of whom shall be elected by the Board of Directors. Such other Officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any Officer may be held by the same person, except that in the event that the Corporation shall have more than one director, the offices of president and secretary shall be held by different persons. .02 ELECTION, QUALIFICATION AND TERM OF OFFICE. Each of the Officers shall be elected by the Board of Directors. None of said Officers except the president need be a Director, but a vice president who is not a Director cannot succeed to or fill the office of president. The Officers shall be elected by the Board of Directors. Except as hereinafter provide, each of said Officers shall hold office from the date of his/her election until the next annual meeting of the Board of Directors and until his/her successor shall have been duly elected and qualified. .03 POWERS AND DUTIES. The powers and duties of the respective corporate Officers shall be as follows: A. PRESIDENT. The president shall be the chief executive Officer of the Corporation and, subject to the direction and control of the Board of Directors, shall have general charge and supervision over its property, business, and affairs. He/she shall, unless a Chairman of the Board of Directors has been elected and is present, preside at meetings of the shareholders and the Board of Directors. B. VICE PRESIDENT. In the absence of the president or his/her inability to act, the senior vice president shall act in his place and stead and shall have all the powers and authority of the president, except as limited by resolution of the Board of Directors. C. SECRETARY. The secretary shall: 1. Keep the minutes of the shareholder's and of the Board of Directors meetings in one or more books provided for that purpose; 2. See that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; 3. Be custodian of the corporate records and of the seal of the Corporation and affix the seal of the Corporation to all documents as may be required; 4. Keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholders; 5. Sign with the president, or a vice president, certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; 6. Have general charge of the stock transfer books of the corporation; and, 7. In general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him/her by the president or by the Board of Directors. D. TREASURER. Subject to the direction and control of the Board of Directors, the treasurer shall have the custody, control and disposition of the funds and securities of the Corporation and shall account for the same; and, at the expiration of his/her term of office, he/she shall rum over to his/her successor all property of the Corporation in his/her possession. E. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries, when authorized by the Board of Directors, may sign with the president or a vice president certificates for shares of the Corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The assistant treasurers shall, respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or the treasurer, respectively, or by the president or the Board of Directors, .04 REMOVAL. The Board of Directors shall have the right to remove any Officer whenever in its judgment the best interest of the Corporation will be served thereby. .05 VACANCIES. The Board of Directors shall fill any office which becomes vacant with a successor who shall hold office for the unexpired term and until his/her successor shall have been duly elected and qualified. .06 SALARIES. The salaries of all Officers of the Corporation shall be fixed by the Board of Directors. V. SHARE CERTIFICATES. .01 FORM AND EXECUTION OF CERTIFICATES. Certificates for shares of the Corporation shall be in such form as is consistent with the provisions of the Corporation laws or the State of Nevada. They shall be signed by the president and by the secretary, and the seal of the Corporation shall be affixed thereto. Certificates may be issued for fractional shares. .02 TRANSFERS. Shares may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by a written power of attorney to assign and transfer the same signed by the record holder of the certificate. Except as otherwise specifically provided in these Bylaws, no shares shall be transferred on the books of the Corporation until the outstanding certificate therefor has been surrendered to the Corporation. .03 LOSS OR DESTRUCTION OF CERTIFICATES. In case of loss or destruction of any certificate of shares, another may be issued in its place upon proof of such loss or destruction and upon the giving of a satisfactory bond of indemnity to the Corporation. A new certificate may be issued without requiring any bond, when in the judgment of the Board of Directors it is proper to do so. VI. BOOKS AND RECORDS. .01 BOOKS OF ACCOUNTS, MINUTES AND SHARE REGISTER. The Corporation shall keep complete books and records of accounts and minutes of the proceedings of the Board of Directors and shareholders and shall keep at its registered office, principal place of business, or at the office of its transfer agent or registrar a share register giving the names of the shareholders in alphabetical order and showing their respective addresses and the number of shares held by each. .02 COPIES OF RESOLUTIONS. Any person dealing with the Corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the president or secretary. VII. CORPORATE SEAL. The following is an impression of the corporate seal of this Corporation: VIII. LOANS. Generally, no loans shall be made by the Corporation to Its Officers or Directors, unless first approved by the holder of two-third of the voting shares, and no loans shall be made by the Corporation secured by its shares. Loans shall be permitted to be made to Officers, Directors and employees of the Company for moving expenses, including the cost of procuring housing. Such loans shall be limited to $25,000.00 per individual upon unanimous consent of the Board of Directors. IX. INDEMNIFICATION OF DIRECTORS AND OFFICERS. .01 INDEMNIFICATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a Director, Trustee, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Trustee, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, anti with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action proceeding, had reasonable cause to believe that such person's conduct was unlawful. .02 DERIVATIVE ACTION The Corporation, shall indemnify any person who was or is a party or is threatened to be mad a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in the Corporation's favor by reason of the fact that such person is or was a Director, Trustee, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Trustee, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees) and amount paid in settlement actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the .Corporation, and, with respect to amounts paid in settlement, the settlement of the suit or action was in the best interests of the Corporation; provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or willful misconduct in the performance of such person's duty to the Corporation unless and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. The termination of any action or suit by judgment or settlement shall not, of itself, create a presumption that the parson did not net In good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation. .03 SUCCESSFUL DEFENSE. To the extent that a Director, Trustee, Officer, employee or Agent of the Corporation has been successful on the merits or otherwise, in whole or in part in defense of any action, suit or proceeding referred to in Paragraphs .01 and .02 above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. .04 AUTHORIZATION. Any indemnification under Paragraphs .01 and .02 above (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, Trustee, Officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Paragraphs .01 and .02 above. Such determination shall be made (a) by the Board of Directors of the Corporation by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (b) is such a quorum is not obtainable, by a majority vote of the Directors who were not parties to such action, suit or proceeding, or (c) by independent legal counsel (selected by one or more of the Directors, whether or not a quorum and whether or not disinterested) in a written opinion, or (d) by the Shareholders. Anyone making such a determination under this Paragraph .04 may determine that a person has met the standards therein set forth as to some claims, issues or matters, but not as to others, and may reasonably prorate amounts to be paid as indemnification. .05 ADVANCES. Expenses incurred in defending civil or criminal action, suit or proceeding shall be paid by the Corporation, at any time or from time to time in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Paragraph .04 above upon receipt of an undertaking by or on behalf of the Director, Trustee, Officer, employee or agent to repay such amount unless it shall ultimately be by the Corporation .is authorized in this Section. .06 NONEXCLUSIVITY. The indemnification provided in this Section shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, bylaw, agreement, vote of shareholders or disinterested Directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, Trustee, Officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. .07 INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a Director, Trustee, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Trustee, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability assessed against such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability. .08 "CORPORATION" DEFINED. For purposes of this Section, references to the "Corporation" shall include, in addition to the Corporation, an constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had the power and authority to indemnify its Directors, Trustees, Officers, employees or agents, so that any person who is or was a Director, Trustee, Officer, employee or agent of such constituent corporation or of any entity a majority of the voting stock of which is owned by such constituent corporation or is or was serving at the request of such constituent corporation as a Director, Trustee, Officer, employee or agent of the corporation, partnership, joint venture, trust or other enterprise, shall, stand in the same position under the provisions of this Section with respect to the resulting or surviving Corporation as such person would have with respect to such constituent corporation if its separate existence had continued. X. AMENDMENT OF BYLAWS. .01 BY THE SHAREHOLDERS. These Bylaws may be amended, altered, or repealed at any regular or special meeting of the shareholders if notice of the proposed alteration or amendment is contained in the notice of the meeting. .02 BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered, or repealed by the affirmative vote of a majority of the entire Board of Directors at any regular or special meeting of the Board. XI. FISCAL YEAR. The fiscal year of the Corporation shall be set by resolution of the Board of Directors, XII. RULES OF ORDER. The rules contained in the most recent edition of Robert's Rules or Order, Newly Revised, shall govern all meetings of shareholders and Directors where those rules are not inconsistent with the Articles of Incorporation, Bylaws, or special rules or order of the Corporation. XIII. REIMBURSEMENT OF DISALLOWED EXPENSES. If any salary, payment, reimbursement, employee fringe benefit, expense allowance payment, or other expense incurred by the Corporation for the benefit of an employee is disallowed in whole or in part as a deductible expense of the Corporation for Federal Income Tax purposes, the employee shall reimburse the Corporation, upon notice and demand, to the full extent of the disallowance. This legally enforceable obligation is in accordance with the provisions of Revenue Ruling 69-115, 1969-1 C.B. 50, and is for the purpose of entitling such employee to a business expense deduction for the taxable year in which the repayment is made to the Corporation. In this manner, the Corporation shall be protected from having to bear the entire burden of disallowed expense items. EX-6.1 5 EXHIBIT 6.1 EXHIBIT 6.1 ROYALTY AGREEMENT ROYALTY AGREEMENT THIS AGREEMENT made as of the 17th day of December, 1996. BETWEEN: KINeSYS PHARMACEUTICAL INC., a body corporate incorporated under the laws of the Province of Alberta and having an office in the City of Vancouver, in the Province of British Columbia (hereinafter referred to as "KPI") - and - KINeSYS PHARMACEUTICAL (CANADA) INC., a body corporate incorporated under the laws of the Province of British Columbia and having an office in the City of Vancouver, in the Province of British Columbia (hereinafter referred to as the "Corporation") WHEREAS KPI, Jocelyn Kletter and Jeffrey Kletter have entered into a share purchase and sale agreement (the "Share Purchase Agreement") pursuant to which Jocelyn Kletter and Jeffrey Kletter have agreed to purchase certain common shares in the capital of the Corporation from KPI; and WHEREAS it is a condition of the Share Purchase Agreement that this Agreement be entered into; and WHEREAS the Corporation has agreed to grant KPI a royalty of 2.5% of the North American gross revenues of the Corporation on the terms and conditions set forth in this Agreement; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. INTERPRETATION 1.1 The headings of the Articles of this Agreement are inserted for convenience of reference only and shall not affect the construction or interpretation hereof. All references to Articles, Sections and Schedules are to Articles and Sections of and Schedules to this Agreement, The words "Agreement", "hereof", "herein", "hereunder", "hereby", "hereto" and similar expressions means and refer to this Agreement as the same may be amended, modified or supplemented at any time or from time to time. 1.2 Words importing the singular include the plural and vice versa, and words importing gender including the masculine, feminine and neuter genders. 1.3 All dollar amounts referred to in this Agreement are expressed in lawful money of Canada except where otherwise stated. 2. ROYALTY 2.1 Commencing the beginning of the fiscal year after the first year the Corporation achieves annual gross revenues from its North American operations of $1,000,000, the Corporation shall pay to KPI a royalty equal to 2.5% of the gross revenues of the Corporation in North America (the "Royalty"). 2.2 The Royalty shall be payable by the Corporation to KPI until: (a) KPI has received a total of $1,250,000 in royalty payments from the Corporation, provided these royalty payments are received by KPI prior to October 1, 2001; or (b) KPI has received a total of $1,500,000 in royalty payments from the Corporation. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION 3.1 The Corporation represents and warrants to KPI as follows: (a) the Corporation has been duly incorporated and organized, is validly existing and is up to date with all of its filings required under the laws of its jurisdiction of incorporation, has all necessary corporate power and authority and is duly qualified to own or lease its properties and assets and to carry on its business as now being conducted; (b) the Corporation has the requisite power, capacity and authority to enter into this Agreement and to pay the Royalty to KPI; and (c) this Agreement, when executed and delivered by the Corporation and when duly and properly executed and delivered by KPI, will be a valid and binding agreement, enforceable against the Corporation in accordance with its terms. 4. METHOD OF PAYMENT OF ROYALTY 4.1 Subject to the foregoing provisions, the Royalty shall be payable by the Corporation by a certified cheque of the Corporation to the registered office of KPI within 30 days of each fiscal quarter of the Corporation (the payments therefore are to be made by April 30, July 30, October 30 and January 30). 5. ROYALTY DISPUTE 5.1 The Corporation agrees to provide KPI, its representatives and its agents with access to al financial records of the Corporation during the term of this Agreement, upon two business days written notice. 5.2 In the event KPI disagrees with the amount of or raises any other dispute with respect to the royalty payments, KPI may refer the matter to an independent chartered accounting firm selected by KPI (the "Auditor"), and the parties agree the decision of the Auditor shall be final and binding upon the parties. 6. MISCELLANEOUS 6.1 Time shall be of the essence of this Agreement. 6.2 This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. The Corporation acknowledges that KPI may assign its rights under this Agreement to any other party without the consent of the Corporation. 6.3 Each of the parties hereto shall from time to time, at the re 6.4 This Agreement shall be governed by and construed in accordance with the laws of the Province of British Columbia. 6.5 Any notice required or permitted to be given hereunder shall be in writing and shall be effectively given if (i) delivered personally, (ii) sent by prepaid courier service or mail, or (iii) sent by prepaid telecopier, telex or other similar means of electronic communication (confirmed on the same or following day by prepaid mail), addressed in the case of notice to the Parties as follows: If to the Corporation: Jocelyn & Jeffrey Kletter P5 - 2428 W. 1st Avenue Vancouver, British Columbia V6K 6G6 Telecopier: (604) 736-1081 With a copy to: Burstall Ward 3100, 324 - 8th Avenue S.W. Calgary, Alberta T2P 2Z2 Attention: Douglas M. Stuve Telephone: (403) 234-3337 Telecopier: (403) 265-8565 If to KPI: KINeSYS Pharmaceutical Inc. #106, 1008 Beach Avenue Vancouver, British Columbia V6E 1Y7 Attention: Douglas E. Ford Telephone: (604) 685-0114 Telecopier: (604) 685-2533 Any notice so given shall be deemed conclusively to have been given and received on the date that it is so personally delivered or sent by telex, telecopier or other similar means of electronic communication, or on the second day following the date which it is sent by private courier or mail. Either party hereto may change its address for notice by giving notice to the other parties hereto in the manner aforesaid. 6.6 If any provision of this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction, the validity7, legality or enforceability of such provision in any other jurisdiction and the validity, legality or enforceability of any other provision of this Agreement shall not be affected. 6.7 This Agreement may be executed in on or more counterparts, each of which shall constitute an original and all of which shall constitute one and the same Agreement. IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of the date first above written. KINeSYS PHARMACEUTICAL (CANADA) INC. Per: --------------------------------- Name: -------------------------------- Title: ------------------------------- KINeSYS PHARMACEUTICAL INC. Per: --------------------------------- Name: Douglas Ford Title: Director EX-6.2 6 EXHIBIT 6.2 EXHIBIT 6.2 1999 STOCK OPTION PLAN KINESYS PHARMACEUTICALS, INC. 1999 STOCK OPTION PLAN ADOPTED: JULY 27, 1999 1. INTRODUCTIONS AND DEFINITIONS 1.1 THE PLAN This 1999 Stock Option Plan (hereinafter, this "Plan") establishes the right of and procedures for Kinesys Pharmaceuticals, Inc. (the "Company") to grant stock options to its employees, consultants and/or directors, and others. This Plan provides for the granting of two types of options, namely (1) Incentive Stock Options, as defined and governed by Section 422 of the Internal Revenue Code of 1986, as amended, and (2) Nonqualified Stock Options. This Plan sets forth provisions applicable to both types of options, to Incentive Stock Options only, and to Nonqualified Stock Options only. 1.2 DEFINITIONS Capitalized terms used in this Plan shall have the following meanings: "ACT" means the Securities Act of 1933 as from time to time amended or any replacement act or legislation. "BOARD" means the Board of Directors of the Company. "CAUSE" means dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Board, whose determination shall be conclusive and binding. "CHANGE OF CONTROL EVENT" means a merger, consolidation, tender offer, takeover bid, or sale of assets, as the case may be and as described in Subsections (1) through (3) of Section 2.5(a). "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means a committee appointed by the Board, pursuant to Section 2.3 hereof, to administer the provisions of this Plan, and in the absence of any such committee, references to the Committee shall mean the Board. "COMPANY" means Kinesys Pharmaceuticals, Inc. "CONSULTANT" means any person engaged by the Company or any current or future subsidiary of the Company to perform services as a non-employee service provider, advisor or consultant pursuant to the terms of a written plan or contract. "DIRECTOR" means a member of the Board. "EMPLOYEE" means, for purposes of this Plan, persons continuously employed by the Company or by any current or future foreign or domestic subsidiary of the Company on a regular basis, whether full-time or part-time, at any time during the duration hereof. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as from time to time amended, or any replacement act or legislation. "FAIR MARKET VALUE" of the Company's common stock shall be determined by the Board or, in the event the Company's securities are listed on any national securities exchange, Nasdaq or any other national over-the-counter or other stock trading market, then as of any time based upon the prevailing bid price of the Company's common stock as of such time. If the Company's securities are not listed on any national securities exchange, Nasdaq or any other national over-the-counter or other stock trading market and in the absence of a determination by the Board to the contrary, the Fair Market Value of the Company's equity securities shall equal the most recent appraised value per share as calculated by an independent appraisal firm hired by the Company. "INCENTIVE STOCK OPTION" means an option issued by the Company to purchase shares of stock of the Company that meets the definition of "incentive stock option" contained in Section 422 of the Internal Revenue Code of 1986, as amended, and that is issued by the Company to be an Incentive Stock Option. "NONQUALIFIED STOCK OPTION" means an option issued by the Company to purchase shares of stock of the Company that is not an Incentive Stock Option. "Nonqualified Stock Options" is the plural of Nonqualified Stock Option. "OPTIONED SHARES" means Shares subject to a Stock Option. "OPTIONEE" means the recipient of a Stock Option pursuant to a Stock Option Agreement. "PLAN" means this Kinesys Pharmaceuticals, Inc. 1999 Stock Option Plan. "SHARES" shall mean the Shares of the Company reserved for issuance under this Plan as further defined in Section 2.2. "STOCK OPTION" means an agreement entered into by the Company granting the recipient the right to purchase shares of stock of the Company, at certain times, and under certain conditions, subject to certain obligations and responsibilities as defined in this Plan and in the written Stock Option Agreement, whether an Incentive Stock Option or a Nonqualified Stock Option. "STOCK OPTION AGREEMENT" means the written contract by which a Stock Option is granted by the Company to an Optionee. 2. GENERAL PROVISIONS APPLICABLE TO BOTH NONQUALIFIED STOCK OPTIONS AND INCENTIVE STOCK OPTIONS GRANTED BY THE COMPANY. 2.1 OBJECTIVES OF THIS PLAN The purpose of this Plan is to encourage ownership of common stock of the Company by Employees and to provide a means of granting Stock Options to Consultants, Directors, and others. This Plan is intended to provide an incentive to Employees for maximum effort in the successful operation of the Company and is expected to benefit the shareholders by enabling the Company to attract and retain personnel of the best available talent through the opportunity to share in the increased value of the Company's shares to which such personnel have contributed. The benefits of this Plan are not a substitute for compensation otherwise payable to Employees pursuant to the terms of their employment. 2.2 STOCK RESERVED FOR THIS PLAN Subject to the provisions of Section 2.9, the number of shares reserved for issuance upon the exercise of Stock Options granted under this Plan shall be _________ shares of the ____ value common stock of the Company (the "Shares"), which Shares shall be reserved from the Company's authorized and unissued shares. Shares subject to any Stock Option under this Plan which are not exercised in full or Shares as to which the right to purchase is forfeited through default or otherwise, shall remain available for other Stock Options under this Plan. The aggregate number of Shares subject to Stock Options under this Plan or reserved for issuance by the Board shall not exceed the number approved by the shareholders at the time of adoption hereof unless such increase is approved by the Company's shareholders. Such approval shall be by the affirmative vote of shareholders holding a majority of the issued and outstanding shares of common stock of the Company entitled to vote at a meeting called to approve such increase. 2.3 ADMINISTRATION OF THIS PLAN This Plan shall be administered by the Board. The Board may appoint a Board committee (the "Committee") to administer this Plan in the name of the Board. The Board or the Committee so appointed shall have full power and authority to administer and interpret this Plan and to adopt, from time to time, such guidelines, rules, policies, regulations, forms of notice, and forms of agreements and instruments for the administration of this Plan as the Board or such Committee, as the case may be, deems necessary or advisable. Such powers include, but are not limited to (subject to the specific limitations described herein), authority to determine the Employees, Consultants and Directors to be granted Stock Options under this Plan, to determine the size, type, and applicable terms and conditions of grants to be made to such Employees, Consultants and Directors, to determine a time when Stock Options will be granted, and to authorize grants to eligible Employees, Consultants and Directors. For purposes of this Plan, references to the Board's authority to take certain actions or make certain determinations with respect to the Plan shall include a Committee to which the Board has delegated such authority. The Board's interpretations of this Plan and all Stock Option Agreements, including the definitions of terms used herein and in Stock Option Agreements, and all actions taken and determinations made by the Board concerning any matter arising under or with respect to this Plan or any Stock Options granted pursuant to this Plan, shall be final, binding, and conclusive on all interested parties, including the Company, its shareholders, and all former, present, and future Employees, Consultants and Directors of the Company. So long as the Company is not subject to the reporting requirements of the Exchange Act, the Board may delegate some or all of its power and authority hereunder to the duly elected officers of the Company, such delegation to be subject to such terms and conditions as the Board in its discretion shall determine. Such delegation of authority may be contained in guidelines, rules, and regulations adopted by the Board from time to with respect to this Plan. The Board may, as to questions of accounting, rely conclusively upon any determinations made by independent public accountants of the Company. 2.4 ELIGIBILITY; FACTS TO BE CONSIDERED IN GRANTING STOCK OPTIONS The Board shall have the authority to determine the persons eligible to receive a Stock Option, the time or times at which the Optioned Shares may be purchased and whether all of the Stock Options may be exercised at one time or in increments. 2.5 RIGHTS OF OPTIONEE IN CHANGE OF CONTROL EVENTS--MERGER, CONSOLIDATION, TENDER OFFER, TAKEOVER BID, SALE OF ASSETS--OR ON DISSOLUTION (a) Notwithstanding anything in this Plan to the contrary, the Optionee may purchase the full amount of Optioned Shares for which Stock Options have been granted to the Optionee and for which the Stock Options have not been exercised under the following conditions: (1) The Optionee may conditionally purchase any or all Optioned Shares during the period commencing twenty-seven (27) days and ending seven (7) days prior to the scheduled effective date of a merger or consolidation (as such effective date may be delayed from time to time) wherein the Company is not to be the surviving corporation, PROVIDED such merger or consolidation is not (i) between or among the Company and other corporations related to or affiliated with the Company or (ii) a merger or consolidation in which the surviving corporation agrees to assume this Plan and the Stock Options exercisable pursuant to it; (2) The Optionee may conditionally purchase any or all Optioned Shares during the period commencing on the initial date of a tender offer or takeover bid for the Shares (other than a tender offer by the Company) subject to the Securities Exchange Act of 1934 and the rules promulgated thereunder and ending on the day preceding the scheduled termination date of acceptance of tenders of Shares by the offeror under any such tender offer or takeover bid (as such termination date may be extended by such offeror); (3) The Optionee may conditionally purchase any or all Optioned Shares during the period commencing the date the shareholders of the Company approve a sale of substantially all the assets of the Company and ending seven (7) days prior to the scheduled closing date of such sale (as such closing date may be delayed from time to time); and (4) The Optionee may conditionally purchase any or all Optioned Shares during the period commencing the date the shareholders of the Company approve the dissolution of the Company and ending seven (7) days prior to the date of filing its Articles of Dissolution. (b) If the merger, consolidation, tender offer, takeover bid, sale of assets (collectively, a "Change of Control Event"), or dissolution, as the case may be and as described in subsections (1) through (4) of Section 2.5(a), once commenced, is canceled or revoked, the conditional purchase of Shares for which the option to purchase would not have otherwise been exercisable at the time of said cancellation or revocation, but for the operation of this Section 2.5, shall be rescinded. With respect to all other Shares conditionally purchased, the Optionee may rescind such purchase at Optionee's option. (c) If the Change of Control Event does occur or Articles of Dissolution are filed, as the case may be and as described in subsections (1) through (4) of Section 2.5(a), and the Optionee has not conditionally purchased all Optioned Shares, all unexercised options shall terminate on the effective, termination, closing, or filing date, as the case may be. (d) If the Company shall be the surviving corporation in any merger or consolidation or is a party to a merger or consolidation which is between or among the Company and other corporations related to or affiliated with the Company, any Stock Option granted hereunder shall pertain and apply to the securities to which a holder of the number of Shares of common stock subject to the Stock Option would have been entitled. (e) Nothing herein shall allow the Optionee to purchase Optioned Shares, the options for which have expired. 2.6 STOCK OPTION AGREEMENTS; TERMS AND EXPIRATION OF STOCK OPTIONS Each Stock Option granted under this Plan shall be pursuant to a written Stock Option Agreement in a form substantially similar to the form attached as ANNEX A, which shall designate whether the Stock Option is an Incentive Stock Option or Nonqualified Stock Option, shall be subject to such amendment or modification from time to time as the Board shall deem necessary or appropriate to comply with or take advantage of applicable laws or regulations and shall contain or be subject to provisions as to the following effect, together with such other provisions as the Board shall from time to time approve: (a) that, subject to the provisions of Section 2.6(b) below, the Stock Option, as to the whole or any part thereof, may be exercised only by the Optionee or Optionee's personal representative; (b) that neither the whole nor any part of the Stock Option shall be transferable by the Optionee or by operation of law other than by will of, or by the laws of descent and distribution applicable to, a deceased Optionee and that the Stock Option and any and all rights granted to the Optionee thereunder and not theretofore effectively and completely exercised shall automatically terminate and expire upon any sale, transfer, or hypothecation or any attempted sale, transfer, or hypothecation of such rights or upon the bankruptcy or insolvency of the Optionee or Optionee's estate; (c) that subject to the foregoing provisions, a Stock Option may be exercised at different times for portions of the total number of Shares for which the right to purchase shall have vested; (d) that no Optionee shall have the right to receive any dividend on or to vote or exercise any right in respect of any Shares unless and until the certificates for such Shares have been issued to such Optionee; (e) that the Stock Option shall expire with respect to vested Shares at the earliest of the following: (1) The date specified in the Stock Option Agreement; (2) With respect to any Employee, ninety (90) days after voluntary or involuntary termination of Optionee's employment for any reason other than termination as described in Paragraphs (5) or (6) below; (3) With respect to any Consultant, ninety (90) days after the earlier of (i) the date either the Company or Optionee notifies the other that the Company or the Optionee, as the case may be, is terminating the consultant relationship or (ii) the end of a period of one hundred twenty (120) days during which the Consultant has not performed any service for the Company, unless in either case, such termination is pursuant to events described in Paragraphs (5) or (6) below; (4) With respect to a Director, ninety (90) days after resignation or removal from the Board of the Company or other cessation of service as a director other than cessation of service as described in Paragraphs (5) or (6) below; (5) Immediately upon the discharge of Optionee (removal from the Board, in the case of a Director) for "cause" as defined in any employment or consulting agreement between the Company and Optionee or, if there shall be no such employment or consulting agreement, for Cause as defined herein; (6) Twelve (12) months after Optionee's death or disability; or (7) In the event of a Change of Control Event, or the filing of Articles of Dissolution, as the case may be and as described in subsections (1) through (4) of Section 2.5(a), on the date specified in Section 2.5(c). However, if the Change of Control Event does not occur or if Articles of Dissolution are not filed, as the case may be and as described in Subsections (1) through (4) of Section 2.5(a), all Stock Options which are terminated pursuant to this Subsection (e)(7) shall be reinstated as if no action with respect to any of said events had been contemplated or taken by any party thereto and all Optionees shall be returned to their respective positions on the date of termination; (f) that, to the extent a Stock Option Agreement provides for the vesting of the right to purchase in increments, such vesting shall cease, and the Stock Option shall expire with respect to unvested Shares, as of the date of the Optionee's death, disability, or, in the case of any Employee, voluntary or involuntary termination of Optionee's employment with the Company for any reason or, in the case of any Consultant, (i) the date either the Company or Optionee notifies the other that the Company or the Optionee, as the case may be, is terminating the consultant relationship or (ii) the end of a period of one hundred twenty (120) days during which the Consultant has not performed any service for the Company or, in the case of a Director, upon his resignation or removal from the Board of the Company or other cessation of his services as a director; (g) that the terms of the Stock Option Agreement shall be a contract between the Company and the Optionee, and the specific terms of any Stock Option Agreement shall govern over the more general terms hereof; and any guidelines, rules and regulations adopted by the Board from time to time with respect to this Plan. (h) that, with respect to Employees, the Stock Option Agreement shall not be affected by any changes of duties or position so long as the Optionee shall continue to be an Employee, subject to the terms hereof and any . 2.7 NOTICE OF INTENT TO EXERCISE STOCK OPTION The Optionee (or other person or persons, if any, entitled hereunder) desiring to exercise a Stock Option as to all or part of the Shares covered thereby shall in writing notify the Company at its principal office in Richmond, British Columbia, specifying the number of Optioned Shares to be purchased and, if required by the Company, representing in form satisfactory to the Company that the Shares are being purchased for investment and not with a view to resale or distribution. The Company from time to time may issue or specify to Optionees a written form for use in connection with any such exercise. With respect to any Shares conditionally purchased pursuant to Section 2.5(a) above and for which such purchase has not been voluntarily or otherwise rescinded pursuant to Section 2.5(b), the Optionee shall be deemed to have given to the Company the notice of exercise required by this Section 2.7 as of ten (10) days prior to the closing or effective date of the Change of Control Event or the filing of Articles of Dissolution, as the case may be and as described in Subsections (1) through (4) of Section 2.5(a). 2.8 METHOD OF EXERCISE OF STOCK OPTION Within ten (10) days after receipt by the Company of the notice provided in Section 2.7, but not later than the expiration date specified in Section 2.5(e), the Stock Option shall be exercised as to the number of Shares specified in the notice by payment by the Optionee to the Company of the amount specified below in Section 3.2 and Section 4.5, as applicable. Payment of such purchase price shall be made in cash, or in accordance with procedures for a "cashless exercise" as the same may have been established from time to time by the Company and the brokerage firm, if any, designated by the Company to facilitate exercises of Stock Options and sales of Shares under this Plan. Payment in shares of the Company's common stock shall be deemed to be the equivalent of payment in cash at the Fair Market Value of those shares. For purposes of the preceding sentence, "Fair Market Value" shall be determined by the Board in the same manner as utilized in determining the Fair Market Value at the time other Stock Options are granted. 2.9 RECAPITALIZATION The aggregate number of Shares for which Stock Options may be granted hereunder, the number of Shares covered by each outstanding Stock Option, and the price per Share thereof in each such Stock Option Agreement shall be proportionately adjusted for an increase or decrease in the number of outstanding shares of common stock of the Company resulting from a stock split or reverse split of shares or any other capital adjustment or the payment of a stock dividend or other increase or decrease in such shares effected without receipt of consideration by the Company excluding any decrease resulting from a redemption of shares by the Company. If the adjustment would result in a fractional Share the Optionee shall be entitled to one (1) additional Share, provided that the total number of Shares to be granted under this Plan shall not be increased above the equivalent number of Shares initially allocated or later increased by approved amendment to this Plan. Any adjustment shall be made by the Board whose determination shall be final, binding and conclusive. 2.10 SUBSTITUTIONS AND ASSUMPTIONS The Board shall have the right to substitute, replace, or assume options in connection with mergers, reorganizations, separations, or other "corporate transactions" as that term is defined in the Code and to the extent that such substitutions and assumptions are permitted by Section 425 of the Code and the regulations promulgated thereunder. The number of Shares reserved pursuant to Section 2.2 may be increased by the corresponding number of options assumed and, in the case of a substitution, by the net increase in the number of Shares subject to options before and after the substitution. 2.11 TERMINAL DATE OF PLAN This Plan shall not extend beyond a date ten (10) years from the date of adoption hereof by the Board, provided that any Stock Option to purchase shares duly granted hereunder prior to such date shall be exercisable pursuant to its terms and the terms hereof until expiration or earlier termination of such Stock Option. 2.12 GRANTING OF STOCK OPTIONS The granting of any Stock Option pursuant to this Plan shall be entirely in the discretion of the Board and nothing herein contained shall be construed to give any person any right to participate under this Plan or to receive any Stock Option under it. The granting of a Stock Option pursuant to this Plan shall not constitute any agreement or an understanding, express or implied on the part of the Company or a subsidiary to employ or retain the Optionee for any specified period. 2.13 WITHDRAWAL An Optionee may at any time elect in writing to abandon a Stock Option with respect to the number of Shares as to which the Stock Option shall not have been exercised. 2.14 GOVERNMENT REGULATIONS This Plan and the granting and exercise of any Stock Option hereunder and the obligations of the Company to sell and deliver Shares under any such Stock Option shall be subject to all applicable laws, rules, and regulations and to such approvals by any governmental agencies as may be required. 2.15 PROCEEDS FROM SALE OF STOCK Proceeds of the purchase of Optioned Shares by an Optionee shall be used for the general business purposes of the Company. 2.16 SHAREHOLDER APPROVAL This Plan shall be submitted to the shareholders for their approval within twelve (12) months from the date hereof. The Company may grant Stock Options prior to such approval which shall be conditioned upon subsequent shareholder approval. 2.17 COMPLIANCE WITH SECURITIES LAWS The Board shall have the right to: (a) require an Optionee to execute, as a condition of exercise of a Stock Option, a letter evidencing Optionee's intent to acquire the Shares for investment and not with a view to the resale or distribution thereof; (b) place appropriate legends upon the certificate or certificates for the Shares; and (c) take such other acts as it deems necessary in order to cause the issuance of Optioned Shares to comply with applicable provisions of state and federal securities laws. In furtherance of the foregoing, and not by way of limitation thereof, no Stock Option shall be exercisable unless such Stock Option and the Shares to be issued pursuant thereto shall be registered under appropriate federal and state securities laws, or shall be exempt therefrom, in the opinion of the Board upon advice of counsel to the Company. Each Stock Option Agreement shall contain adequate provisions to assure that there will be no violation of such laws. This provision shall in no way obligate the Company to undertake registration of Stock Options or Shares hereunder. Issue, transfer or delivery of certificates for Shares pursuant to the exercise of Stock Options may be delayed, at the discretion of the Board until the Board is satisfied that the applicable requirements of the federal and state securities laws have been met. The dollar value and number of Stock Options granted under this Plan are limited pursuant to Rule 701 promulgated by the Securities and Exchange Commission which provides an exemption from the registration requirements under the Act. Any guidelines adopted pursuant to this Plan shall contain the current limitations specified in said Rule 701 until the Company's securities are registered under the Act. 3. PROVISIONS APPLICABLE SOLELY TO NONQUALIFIED STOCK OPTIONS In addition to the provisions of Section 2 above, the following paragraphs shall apply to any Stock Options granted under this Plan which are not Incentive Stock Options. 3.1 OPTION PRICE The option or purchase price of each Share optioned as a Nonqualified Stock Option under this Plan shall be determined by the Board and set forth in the Stock Option Agreement. 3.2 METHOD OF EXERCISE OF STOCK OPTION The amount to be paid by the Optionee upon exercise of a Nonqualified Stock Option shall be the exercise price provided for in the Stock Option Agreement, together with the amount of federal, state, and local income and FICA taxes required to be withheld by the Company. An Optionee may elect to pay Optionee's federal, state, or local income and FICA withholding tax by having the Company withhold shares of Company common stock having a value equal to the amount required to be withheld. The value of the shares to be withheld is deemed to equal the Fair Market Value of the shares on the day the option is exercised. An election by an Optionee to have shares withheld for this purpose will be subject to the following restrictions: (a) If an Optionee has received multiple Stock Option grants, a separate election must be made for each grant; (b) The election must be made prior to the day the Stock Option is exercised; (c) The election will be irrevocable; (d) The election will be subject to the disapproval of the Board; (e) If the Optionee is an "officer" of the Company within the meaning of Section 16 of the Exchange Act ("Section 16") as defined in Rule 16a-1 promulgated by the Securities and Exchange Commission, the election may not be made within six (6) months following the grant of the Stock Option; and (f) If the Optionee is an "officer" of the Company within the meaning of Section 16 as so defined, the election must be made either six (6) months prior to the day the Stock Option is exercised or during the period beginning on the third business day following the date of release of the Company's quarterly or annual summary statement of sales and earnings and ending on the twelfth business day following such date. 3.3 ASSIGNMENT The Company may allow limited assignment rights for the gifting by Optionee of rights hereunder to vested Nonqualified Stock Options, on terms to be determined by the Board from time to time. 4. PROVISIONS APPLICABLE SOLELY TO INCENTIVE STOCK OPTIONS In addition to the provisions of Section 2 above, the following paragraphs shall apply to any Stock Options granted under this Plan which are Incentive Stock Options. 4.1 CONFORMANCE WITH INTERNAL REVENUE CODE Stock Options granted under this Plan which are "Incentive Stock Options" shall conform to, be governed by, and be interpreted in accordance with Section 422 of the Code and any regulations promulgated thereunder and amendments to the Code and regulations. Only Employees may be granted Incentive Stock Options hereunder--Consultants and non-employee Directors may NOT receive Incentive Stock Options hereunder. 4.2 OPTION PRICE The option or purchase price of each Share optioned as an Incentive Stock Option under this Plan shall be determined by the Board at the time of the action for the granting of the Stock Option and set forth in the Stock Option Agreement, but shall not, in any event, be less than the Fair Market Value of the Company's common stock on the date of grant. 4.3 LIMITATION ON AMOUNT OF INCENTIVE STOCK OPTION The aggregate Fair Market Value of the Optioned Shares, as determined on the date of grant, vesting in any one calendar year with respect to which an Employee has the right to purchase (under this Plan or any other plan of the Company which authorizes Incentive Stock Options) shall not exceed $100,000; and to the extent any Stock Option purporting to be an Incentive Stock Option grants an Employee the right to purchase Optioned Shares with an aggregate Fair Market Value vesting in any one calendar year in excess of $100,000, as so determined (under this Plan or any other plan of the Company which authorizes Incentive Stock Options), shall be deemed a Nonqualified Stock Option for such excess amount. 4.4 LIMITATION ON GRANTS TO SUBSTANTIAL SHAREHOLDERS It is the Company's intent that in the case of any Employee who, immediately prior to the grant of a Stock Option hereunder, owns stock in the Company representing more than ten percent (10%) of the voting power of all classes of stock of the Company, will not be granted Incentive Stock Options unless the per share option price specified by the Board for the Incentive Stock Options granted such an Employee is at least one hundred ten percent (110%) of the Fair Market Value of the Company's stock on the date of grant and such Stock Option, by its terms, is not exercisable after the expiration of five (5) years from the date such Stock Option is granted. Any Stock Option that by its terms purports to be an Incentive Stock Option that is issued to an Employee who owns stock in the Company representing more than ten percent (10%) of the voting power of all classes of stock of the Company that does not have an exercise price of at least one hundred ten percent (110%) of the Fair Market Value of the Company's stock on the date of grant or that is, by its terms, exercisable after the expiration of five (5) years from the date such Stock Option is granted, shall be deemed a Nonqualified Stock Option. 4.5 METHOD OF EXERCISE OF STOCK OPTION The amount to be paid by the Optionee upon exercise of an Incentive Stock Option shall be the purchase price per share provided for in the Stock Option Agreement. 5. COMPANY'S OPTION TO REPURCHASE 5.1 OPTION TO REPURCHASE Subject to the provisions of Section 5.3 below, and unless otherwise specified by the Board, upon the termination of an Optionee's employment or business relationship with the Company or any subsidiary, the Company shall have the right to repurchase all Shares purchased upon the exercise of Stock Options granted while the Optionee was an Employee, Consultant or Director of the Company or a subsidiary, as the case may be, at their then-current Fair Market Value, as determined by the Board. The Company shall give written notice to the Optionee of its intention to repurchase within sixty (60) days after the date of termination. The purchase price for the Shares to be repurchased shall be payable in cash on the sixtieth (60th) day after the notice is given and shall be offset against any amounts that may be due and owing to the Company. For purposes of this Section 5.1, "Fair Market Value" shall be determined by the Board in the same manner as utilized in determining the Fair Market Value for purposes of Stock Option grants at such time. The Board's determination of Fair Market Value shall be final. 5.2 RIGHT OF FIRST REFUSAL Subject to the provisions of Section 5.3 below, and unless otherwise specified by the Board, the Optionee (or his personal representative) shall not sell or encumber the Shares purchased hereunder unless he or she has first offered to sell such Shares to the Company, as follows: If the Optionee proposes to encumber or transfer such Shares, he or she shall advise the Company of the name of the proposed recipient, the number and class of Shares and the proposed price and terms. The Company shall have an option, which option must be exercised in writing within sixty (60) days after receipt of written notice of the proposed transfer, to purchase such Shares upon the same terms and conditions as are stated in the notice or at their then-current Fair Market Value, whichever is lower. The purchase price shall be paid by the Company within thirty (30) days of the giving of its notice of intent to repurchase. Fair Market Value shall be determined by the Board as provided in Section 5.1 above. In the event the Company does not elect to repurchase hereunder, the Optionee shall have the right to encumber or transfer such Shares in accordance with the price and terms and to the recipient stated in the notice for a period of ninety (90) days; but, if such Shares are not encumbered or transferred within said ninety (90) days, the Optionee shall not thereafter encumber or transfer such Shares without again complying with the requirements of this Section 5.2. 5.3 TERMINATION OF COMPANY'S RIGHTS The Company's repurchase rights stated in Sections 5.1 and 5.2 above shall terminate in the event the Company successfully concludes a registered public offering of its common stock under the Act. 6. TERMINATION AND AMENDMENT This Plan and all guidelines, rules and regulations adopted in respect hereof may be terminated, suspended, or amended at any time by a majority vote of the Board, provided that no such action shall adversely affect any material rights of Optionees granted under this Plan prior to such action without the consent of such Optionees, and provided further that to the extent required for compliance with Section 422 of the Code or any applicable law or regulation, shareholder approval will be required for any amendment that will (a) increase the total number of shares as to which Options may be granted under the Plan, (b) modify the class of persons eligible to receive Options, or (c) otherwise require shareholder approval under any applicable law or regulation. The Board may amend the terms and conditions of outstanding Stock Options, provided, however, that (i) no such amendment would be adverse to the holders of such Stock Options without their consent, (ii) no such amendment shall extend the period for exercise of a Stock Option, and (iii) the amended terms of a Stock Option would be permitted under this Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Optionee, be made in a manner so as to constitute a "modification" that would cause such Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. 7. FOREIGN OPTIONEES Without amending this Plan, the Board may grant Stock Options to eligible Optionees who are foreign nationals on such terms and conditions different from those specified in this Plan as may in the judgment of the Board be necessary or desirable to foster and promote achievement of the purposes of this Plan, and, in furtherance of such purposes the Board may make such modifications, amendments, procedures, subplans, and the like as may be necessary or advisable to comply with the provisions of the laws in other countries in which the Company operates or has Employees, Directors or Consultants. 8. REGISTRATION, LISTING, AND QUALIFICATION OF SHARES Each Stock Option shall be subject to the requirement that if at any time the Board shall determine that the registration, listing, or qualification of the shares covered thereby upon any securities exchange or under any foreign, federal, state, or local law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Stock Option or the purchase of shares thereunder, no such Stock Option may be exercised unless and until such registration, listing, qualification, consent, or approval shall have been effected or obtained free of any condition not acceptable to the Board. Any person exercising a Stock Option shall make such representations and agreements and furnish such information as the Board may request to assure compliance with the foregoing or any other applicable legal requirements. 9. NO RIGHTS TO STOCK OPTIONS OR EMPLOYMENT; NO RESTRICTIONS No Employee or other person shall have any claim or right to be granted a Stock Option under this Plan. Having received a Stock Option under this Plan shall not give an Employee or other person any right to receive any other grant or Stock Option under this Plan. An Optionee shall have no rights to or interest in any Stock Option except as set forth herein. Neither this Plan nor any action taken hereunder shall be construed as giving any Employee any right to be retained in the employ of the Company or any Consultant or Director any right to be retained or engaged by the Company, or otherwise in any way affect any right and power of the Company to terminate the employment or engagement of any Employee, Consultant or Director at any time with or without assigning a reason therefor. Nothing in this Plan shall restrict the Company's rights to adopt other option plans pertaining to any or all of the Employees, Consultants or Directors covered under this Plan or other Employees, Consultants or Directors not covered under this Plan. Each Stock Option granted hereunder may be affected, with regard to both vesting schedule and termination, by leaves of absence, a reduction in the number of hours worked, partial disability, and other changes in Optionee's Employee, Consultant or Director status, as the case may be. The Company's policies in such matters shall be contained in guidelines, rules and regulations adopted by the Board. The guidelines, rules, and regulations and the policies contained therein may be amended at any time and from time to time by the Board, in its sole discretion and with or without notice. Optionee's rights hereunder or under any Stock Option granted hereunder at any time shall be governed by the guidelines, rules and regulations in effect at the time of any change in Optionee's employment status as contemplated above. 10. COSTS AND EXPENSES Except as provided herein with respect to the payment of taxes, all costs and expenses of administering this Plan shall be borne by the Company and shall not be charged to any grant or any Optionee receiving a grant. 11. PLAN UNFUNDED This Plan shall be unfunded. Except for the Board's reservation of a sufficient number of authorized shares to the extent required by law to meet the requirements of this Plan, the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure payment of any grant under this Plan. 12. GOVERNING LAW This Plan shall be governed by and construed in accordance with the laws of the state of Washington. 13. SPECIAL PROVISIONS RELATING TO CALIFORNIA RESIDENTS Notwithstanding anything to the contrary herein, the following provisions shall govern all options granted under the Plan to residents of the State of California (referred to herein as "California Options"). The following provisions are intended to comply with Rule 260.140.41 of the Regulations of the Department of Corporations of the State of California (the "California Regulations"). When issuing California options, the Company shall indicate on the options that they are issued subject to these special provisions. (a) The total number of shares granted pursuant to the Plan is as set forth in Section 2.2 of the Plan. (b) The option price or purchase price of each Share optioned under the Plan under a California Option shall be determined by the Board at the time of the action for the granting of the option but shall not, in any event, be less than eighty-five percent (85%) of the Fair Market Value of the Common Stock on the date of grant. With respect to any California Option granted to any person who owns stock possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Company, the option price shall be at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant. (c) The exercise period with respect to California Options shall not exceed one hundred twenty (120) months from the date of grant. (d) California Options shall not be transferable other than by will or the laws of descent and distribution, by instrument to an inter vivos or testamentary trust in which the options are to be passed to beneficiaries upon the death of the trustor (settlor), or by gift to "immediate family" as that term is defined in 17 C.F.R. 240.16a-1(e). (e) In the event of a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Company's stock, the number of shares subject to a California Option shall be adjusted in accordance with the provision of Section 2.9 of the Plan. (f) California Options shall, at a minimum, be exercisable at a rate of twenty percent (20%) per year from the date of grant. (g) Unless employment is terminated for cause as defined by applicable law, the terms of the Plan or option grant or a contract of employment, the right to exercise a California Option in the event of termination of employment with the Company, to the extent that the California Option is exercisable on the date of such termination of employment, is as follows: at least six (6) months from the date of termination if termination was caused by death or disability and at least thirty (30) days from the date of termination if termination was caused by other than death or disability. (h) There shall be no California Options granted under the Plan later than ten (10) years from the date the Plan was adopted or the date the Plan is approved by the shareholders, whichever is earlier. (i) The Plan shall be approved by the shareholders within twelve (12) months after the date of adoption of the Plan by the Board of Directors. No option may be exercised before shareholder approval is obtained. (j) The Company will comply with Section 260.140.46 of the California Code of Regulations regarding information required to be received by employees of the Company residing in the State of California. (k) The provisions of subsections (a) through (c) of Section 2.5 and paragraph (4) of subsection (f) of Section 2.6 of the Plan shall not apply to California Options with the effect that there shall be no reference in the Plan to the acceleration of the exercise period for California Options in relation to mergers, consolidations and takeovers in which the Company is not the surviving entity. 14. SEVERABILITY In the event any provision of this Plan or any Stock Option Agreement is found to be invalid or unenforceable, such provision shall be deemed reformed to the extent necessary to render it valid and enforceable. The invalidity or unenforceability of any provision in this Plan or any Stock Option Agreement shall not in any way affect the validity or enforceability of any other provision of this Plan or the Stock Option Agreement, as the case may be, and this Plan and the Stock Option Agreement shall be construed in all respects as if such invalid or unenforceable provision had never been included. EX-27 7 EXHIBIT 27
5 5-MOS JUN-30-1999 FEB-01-1999 JUN-30-1999 109,481 0 34,640 0 112,061 275,118 29,340 0 1,011,782 174,291 0 0 0 84 1,195,279 1,011,782 52,856 52,856 14,819 261,084 0 0 0 (223,047) 0 (223,047) 0 0 0 (223,047) (0.05) (0.05)
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