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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.
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(Name of Small Business Issuer in its Charter)
Nevada 98-0210050
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(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
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(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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00001 par value per share
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(Title of Class)
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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.
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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.
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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.
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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.
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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.
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(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
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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.
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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.
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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.
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
- ------------------------------------------- ----------------------------------- -------------------
Name and address of Amount and nature
beneficial owner of beneficial owner Percent of class
<S> <C> <C>
- ------------------------------------------- ----------------------------------- -------------------
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)
- ------------------------------------------- ----------------------------------- -------------------
</TABLE>
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
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company and their respective
ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
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
- -------------- --------- ------------ -------------- ---------------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan 1999-T CDN$25,000 $0 0 200,000 Shares 0
Mara, CEO 1998 CDN$19,800 0 0 0 0
- -------------- --------- ------------ -------------- ---------------- ---------------------- ----------------
</TABLE>
(1) The results reported in the "Summary Compensation Table" for the period
designated "1998-T" are for the six-month period ended June 30, 1999, and
results for the period designated "1998" are for the year ended December 31,
1998.
Option Grants In the Last Fiscal Year
The following table summarizes all stock options granted to the
Company's Chief Executive Officer for the transition period from January 31,
1999 to June 30, 1999. There were no grants to the named executive in the
fiscal year ended January 31, 1999.
<TABLE>
<CAPTION>
- ----------------- --------------------- ------------------------- -------------------------- -------------------------
Name Number of Percent of total Exercise or base price Expiration date
securities options/SARs granted to ($/Sh)
underlying employees in 1998
Options/SARs
granted (#) (1)
- ----------------- --------------------- ------------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Jonathan Mara 200,000- 32.13% $1.00 6/28/09
- ----------------- --------------------- ------------------------- -------------------------- -------------------------
</TABLE>
- ---------------
17
<PAGE>
(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.
<TABLE>
<CAPTION>
- -------------------- -------------- -------------- ------------------------------------ -------------------------------
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
- -------------------- -------------- -------------- -------------- --------------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Mara -- -- -- 200,000 -- --
- -------------------- -------------- -------------- -------------- --------------------- -------------- ----------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Period (1) High Low
---------- ------- -------
<S> <C> <C>
Q4 - 98 0.26 0.15
Q1 - 99 0.21875 0.15
Q2 - 99* 1.3125 0.8125
Q3 - 99 1.75 0.53125
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
KINeSYS PHARMACEUTICAL INC.
FINANCIAL STATEMENTS
MAY 4, 1999
(EXPRESSED IN US DOLLARS)
23
<PAGE>
KINeSYS PHARMACEUTICAL INC.
FINANCIAL STATEMENTS
MAY 4, 1999
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
CONTENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
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
</TABLE>
24
<PAGE>
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
<PAGE>
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
<PAGE>
KINeSYS PHARMACEUTICAL INC.
BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
May 4 December 31
1999 (a) 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
KINeSYS PHARMACEUTICAL INC.
STATEMENTS OF OPERATIONS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
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)
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
KINeSYS PHARMACEUTICAL INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN CURRENCY TOTAL
COMMON SHARES PREFERRED SHARES PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
------------------ -----------------
NUMBER AMOUNT NUMBER AMOUNT CAPITAL DEFICIT ADJUSTMENT DEFICIT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
(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
<PAGE>
KINeSYS PHARMACEUTICAL INC.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
JANUARY 1, 1999 December 31 December 31
TO 1998 1997
FOR THE PERIODS MAY 4, 1999 (a) (12 Months) (12 Months)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
- ---------------------------------------------------------------------
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:
<TABLE>
<S> <C>
Computers - 30% declining-balance basis
Furniture and fixtures, equipment and
molds and dies - 20% declining-balance basis
</TABLE>
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
<PAGE>
- ---------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
MAY 4 December 31
1999 1998
----------------------------------
<S> <C> <C>
Packaging $ 10,652 $ 10,050
Finished goods 96,779 116,757
----------------------------------
$ 107,431 $ 126,807
----------------------------------
----------------------------------
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
MAY 4 December 31
1999 1998
-------------------------------------------------------------
ACCUMULATED NET BOOK Net Book
COST DEPRECIATION VALUE Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
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
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE>
- ---------------------------------------------------------------------
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):
<TABLE>
<CAPTION>
Exercise Price Exercise Price Exercise Price Exercise Price
$0.01 $0.01 $0.333 $0.65
----- ----- ------ -----
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
- ---------------------------------------------------------------------
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:
<TABLE>
<S> <C>
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.
</TABLE>
37
<PAGE>
- ---------------------------------------------------------------------
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:
<TABLE>
<S> <C>
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 $ -
</TABLE>
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:
<TABLE>
<S> <C>
2000 $ 100,000
2001 $ 460,000
2002 $ 37,000
2003 $ 181,000
2004 $ 345,000
2005 $ 57,000
</TABLE>
38
<PAGE>
- ---------------------------------------------------------------------
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
<PAGE>
KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(EXPRESSED IN US DOLLARS)
40
<PAGE>
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
- -------------------------------------------------------------------------------
KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
JUNE 30 January 31
1999 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are
an integral part of these financial statements.
45
<PAGE>
- -------------------------------------------------------------------------------
KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
For the period
from February 17,
For the five-month periods 1998
ended June 30, (incorporation)
-------------------------- to January 31,
1999 1998 1999
(Unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are
an integral part of these financial statements.
46
<PAGE>
KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(EXPRESSED IN US DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCK FOREIGN
ADDITIONAL SUB- CURRENCY TOTAL
COMMON SHARES PAID-IN SCRIPTIONS ACCUMULATED TRANSLATION STOCKHOLDERS'
NUMBER AMOUNT CAPITAL RECEIVABLE DEFICIT ADJUSTMENT(DEFICIT) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
47
<PAGE>
KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
For the period
For the five months from February
ended 17, 1998
June 30 (incorporation)
----------------------- to January 31
1999 1998 1999
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
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 $ - $ -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
48
<PAGE>
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:
<TABLE>
<S> <C>
Computers - 30% declining-
balance basis
Furniture and fixtures,
equipment and molds and dies - 20% declining-
balance basis
</TABLE>
Leasehold improvements are amortized over their
estimated useful lives or the lives of the related
leases, whichever is shorter.
49
<PAGE>
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------
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
<PAGE>
- ---------------------------------------------------------------------
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
<PAGE>
- ---------------------------------------------------------------------
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).
<TABLE>
<CAPTION>
Period from
February 17,
FIVE MONTHS 1998
ENDED (incorporation)
JUNE 30 to January 31,
1999 1999
-------------------------------------
<S> <C> <C> <C>
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)
- ---------------------------------------------------------------------
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
JUNE 30 January 31
1999 1999
-----------------------------------
<S> <C> <C>
Packaging $ 24,743 $ -
Finished goods 87,318 -
-----------------------------------
$ 112,061 $ -
-----------------------------------
</TABLE>
54
<PAGE>
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
<TABLE>
<CAPTION>
JUNE 30 January 31
1999 1999
-----------------------------------------------------------------------
ACCUMULATED NET BOOK Net Book
COST DEPRECIATION VALUE Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 $ -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
5. GOODWILL
<TABLE>
<CAPTION>
JUNE 30 January 31
1999 1999
----------------------------------------------------------------------
ACCUMULATED NET BOOK Net Book
COST AMORTIZATION VALUE Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $ 731,715 $ 24,391 $ 707,324 $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Exercise Price Exercise Price Exercise Price
$0.75 $1.00 $1.25
----- ----- -----
<S> <C> <C> <C>
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
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
2000 $ 102,000
2001 $ 469,000
2002 $ 38,000
2003 $ 185,000
2004 $ 352,000
2005 $ 57,000
2006 $ 97,000
</TABLE>
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
<PAGE>
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
<PAGE>
KINeSYS PHARMACEUTICALS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE FIVE-MONTH PERIOD ENDED JUNE 30, 1999
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
KINeSYS
Pharmaceuticals, Inc. KINeSYS
(formerly Goldsearch Pharmaceuticals Pro Forma
Corporation) Inc. Adjustments Balance
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements
61
<PAGE>
KINeSYS PHARMACEUTICALS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
KINeSYS
Pharmaceuticals, Inc. KINeSYS
(formerly Goldsearch Pharmaceutical Pro Forma
Corporation) Inc. Adjustments Balance
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
62
<PAGE>
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
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
- ----------- ------------
<S> <C>
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
</TABLE>
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
<PAGE>
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.
<PAGE>
The names and addresses of the initial four members of the board of
directors are:
<TABLE>
<CAPTION>
NAME POST-OFFICE ADDRESS
- ---- -------------------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
NAME POST-OFFICE ADDRESS
- ---- -------------------
<S> <C>
Conrad C. Lysiak 601 West First Avenue
Suite 503
Spokane, Washington 99204
</TABLE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
.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
<PAGE>
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.
<PAGE>
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;
<PAGE>
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.
<PAGE>
.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.
<PAGE>
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.
<PAGE>
.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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
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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.
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"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
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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
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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;
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(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.
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(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
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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
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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.
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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.
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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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
(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.
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<PAGE>
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