UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): March 30, 2000
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Sangui Biotech International, Inc.
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(Exact name of registrant as specified in its charter)
Colorado
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(State or other jurisdiction of incorporation)
0-29233 84-1330732
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(Commission File Number) (IRS Employer Identification No.)
1508 Brookhollow Drive, Suite 354, Santa Ana, CA 92705
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(Address of principal executive offices) (Zip Code)
(714) 429-7807
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Registrant's telephone number, including area code:
Felnam Investments, Inc.
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
(949) 719-1977
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(Former name, address and telephone number)
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ITEM 1. CHANGES IN CONTROL OF REGISTRANT
(a) Pursuant to a Stock Exchange Agreement (the "Exchange Agreement") dated
as of March 30, 2000 between MRC Legal Services LLC ("MRC"), a California
limited liability company and the sole shareholder of Felnam Investments, Inc.
("Felnam"), a Nevada corporation, and Sangui Biotech International, Inc.
("SGBI"), a Colorado corporation, all the outstanding shares of common stock of
Felnam held by MRC were exchanged for 100,000 shares of common stock of SGBI in
a transaction in which SGBI effectively became the parent corporation of Felnam.
The Exchange Agreement was adopted by the unanimous consent of the Board of
Directors of Felnam, MRC and SGBI on March 30, 2000. No approval of the
shareholders of either SGBI or Felnam is required under applicable state
corporate law.
Prior to the merger, Felnam had 1,461,000 shares of common stock
outstanding which shares were exchanged by MRC for 100,000 shares of common
stock of SGBI. By virtue of the exchange, SGBI acquired 100% of the issued and
outstanding common stock of Felnam.
Prior to the effectiveness of the Exchange Agreement, SGBI had an aggregate
of 40,334,360 shares of common stock, no par value, issued and outstanding, and
no shares of preferred stock outstanding.
Upon closing of the Exchange Agreement, SGBI had an aggregate of 40,434,360
shares of common stock outstanding.
The officers of SGBI continue as officers of SGBI subsequent to the
Exchange Agreement. See "Management" below. The officers, directors, and
by-laws of SGBI will continue without change.
A copy of the Exchange Agreement is attached hereto as an exhibit. The
foregoing description is modified by such reference.
(b) The following table sets forth certain information regarding beneficial
ownership of the common stock of SGBI as of December 31, 1999 (prior to the
issuance of 100,000 shares pursuant to the Exchange Agreement) by:
each person or entity known to own beneficially more than 5% of the common
stock;
* each of SGBI's directors;
* each of SGBI's named executive officers; and
* all executive officers and directors of SGBI as a group.
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner (1) Beneficial Ownership Class
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Common Stock Joerg Alte 101,000 0.2%
Brackleystr. 5
D-56410 Montabaur
Germany
Common Stock Dr. Wolfgang Barnikol (2) 1,853,600 4.6%
Arndtsr, 8, D-58453 Witten
Germany
Common Stock Dr. Oswald Burkhard 794,400 2.9%
Martinsgasse 1, D-67547 Worms
Germany
Common Stock Axel J. Kutscher 1,135,384 2.8%
Deutschhermufer 41, D-60554
Germany
Common Stock Helmut Kappes 1,086,848 2.7%
Franz-Liszt Str. 32a
D-46282 Dorstein
Germany
Common Stock Euro-American 10,076,377 24.9%
BeteiligungsVermittlungsgesellschaft mbH
Mulheim, Germany
Common Stock All Officers and Directors as
a Group (5 persons)
4,971,232 12.3 %
========= ======
</TABLE>
1. The number is based upon 40,334,360 shares total issued and outstanding.
2. Does not Include options to purchase 3,000,000 shares of Common Stock at
$.01 per share for assignments of all of his relevant patents to the Company.
The shares can be exercised at the point the Company completes the development
of the artificial oxygen carrier or the implantable sensor and receives
regulatory approval from either German, Singapore or the United States.
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) The consideration exchanged pursuant to the Exchange Agreement was
negotiated between MRC and SGBI.
In evaluating SGBI as a candidate for the proposed acquisition, MRC used
criteria such as SGBI's present stock price as set forth on the over-the-counter
bulletin board, its biotech and other businesses and other anticipated
operations, and SGBI's business name and reputation. MRC and SGBI determined
that the consideration for the merger was reasonable.
(b) SGBI intends to continue its historical businesses and proposed
businesses as set forth more fully immediately below.
BUSINESS
HISTORY
Sangui Biotech, Inc. ("SBT"), a wholly-owned subsidiary of the Company, was
incorporated in the Delaware on August 2, 1996 and began operations in October
1996. In March 1997, some of the shareholders of SGBI acquired a majority of
the common shares of Citadel Investment Systems, Inc. ("Citadel") which was
publicly traded on the over-the-counter bulletin board under the symbol "CIIS".
On or around August 9, 1997, Citadel acquired one hundred percent (100%) of the
outstanding common shares of SBT, and as a result, SBT became a wholly-owned
subsidiary of Citadel. Thereafter, Citadel changed its name to Sangui Biotech
International, Inc. and changed its NASDAQ symbol to SGBI. The Company also
operates through three other subsidiaries: Gluko Meditech AG ("GMTAG"), Sangui
Biotech AG ("SBTAG") and Sangui Biotech (Singapore) Pte Ltd. ("SBTS").
SBT is principally engaged in the development and manufacturing of, namely
Immunodiagnostic kits, which are sold by SBT in niche markets in the United
States and Europe. The officers of SBT as at the date hereof consist of
Professor Wolfgang Barnikol, Axel Kutscher, Oswald Burkhard and Hemut Kappes.
SBT is located in Santa Ana, California. The California laboratory facility,
approximately 3,360 square feet, is devoted to immunodiagnostic research,
development, manufacturing, and marketing, as well as the Company's overall
administrative functions.
SBTAG was established and organised under the laws of Germanyin Mainz,
Germany, on November 25, 1995. SBTAG is in the business of developing a blood
volume substitute and blood additive product (i.e. the Company's oxygen carrier)
and by-products thereof. The officers of SBTAG are Prof. Wolfgang Barnikol,
M.D., Ph.D., Oswald Burkhard, M.D., Ph.D. and Harald Potzschke. The directors
of SBTAG are Axel Kutscher, Helmut Kappes, and Doris Barnikol, Ph.D
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GMTAG was established and organised under the laws of Germany in Mainz,
Germany, on July 15, 1996. GMTAG is in the business of developing an in vivo
glucose implant sensor. The officers of GMTAG are Prof. Wolfgang Barnikol, M.D.,
Ph.D., Oswald Burkhard, M.D., Ph.D and Harald Potzschke. The directors of GMTAG
are Axel Kutscher, Helmut Kappes, and Doris Barnikol, Ph.D.
The facilities of SBTAG and GMTAG are located on the premises of the
University of Witten/Herbede, Witten, Germany since April 1998. Wolfgang
Barnikol, M.D., Ph.D., a director and Chairman of Sangui, is in charge of the
research and development of an implantable glucose sensor and artificial oxygen
carriers.
SBTS was incorporated in Singapore on May 15, 1999. The Singapore
subsidiary shall provide the head and regional office for SBGI and its
subsidiaries and will be engaged in the business of carrying out research &
development projects in Singapore for SBGI including the sale and marketing of
the the Company's products. The directors of the Singapore company are Ekkehard
Sahm and Tang Cheng Lin.
The principal activities of SBGI and its subsidiaries are those relating to
development, manufacturing and marketing of several products including (i)
immunodiagnostic kits; (ii) a hemoglobin based artificial oxygen carriers and
additives; and (iii) an implantable and long-term functioning glucose-sensor.
To date, neither SBGI nor any of its Subsidiaries has had profitable operations.
BUSINESS OF SBGI
SBGI's mission is the development of novel proprietary products with
special focus on providing for the first time in medical history:
artificial extracellular oxygen carriers capable of human organ support in
cases of acute and chronic lack of oxygen or blood loss due to surgery,
accident, arterial occlusion, anaemia or other causes. Its seeks to develop
and commercialise such artificial oxygen carriers with blood volume substitute/
blood additive technologies by reproducibly synthesizing polymers of defined
molecular sizes, in special formulations, with different oxygen affinities (low,
normal and high) and specially designed half-lives. The products, when
circulating in the blood system ,are designed to meet the varying clinical needs
arising from loss of blood or chronic oxygen deficiency. In chronic oxygen
deficiency, a new or second generation oxygen carrier with an oncotic pressure
lower than that of blood plasma is needed. SBGI believes that its technologies
can meet this need.
an in vivo implantable glucose sensor for the continuous monitoring of a
patient's glucose level, obviating the need for persistent blood sampling and
provides required information on a continuous basis, thereby minimizing the
harmful effects of peaks and troughs in the patient's blood sugar level.
The development of the abovementioned products are led by Professor
Barnikol and his staff including one deputy, four postdoctoral fellows, two
engineers and several technicians. Oswald Burkhard, M.D., Ph.D., a director and
Vice President of SBGI, is in charge of the necessary clinical trials for the
glucose sensor and the artificial oxygen carrier.
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SBGI has also completed the development of nine (9) niche in vitro
diagnostics and for-research-use-only products.
ARTIFICIAL OXYGEN CARRIER
There are two products in development which are polymers of natural
hemoglobins with oxygen arrying abilities similar to blood products which are
being developed. One is a substitute product, and the other is an additive
product. The substitute product ("blood volume substitute") is designed for use
as to replace red cell transfusion in a range of applications, such as: (i)
replacement of blood loss due to trauma and surgery; (ii) perfusate for
preserving organs for transplantation; and (iii) stockpile of the product for
military and other emergencies. The costs for developing this product cannot be
determined accurately at this time. The oxygen carrying blood additive ("blood
additive") is defined for use in chronic oxygen deficiency like heart
infarcation, stroke, peripheral perfusionary disorders
SBTAG seeks to develop and commercialize proprietary artificial blood
volume substitute/artificial oxygen carrier technologies by synthesizing
reproducible polymers of defined molecular sizes in special formulations with
different oxygen affinities (low, normal and high) and different half-lives,
when in circulation, to meet the varying clinical needs arising from loss of
blood. This subsidiary also intends to develop a new or second generation oxygen
carrier with an oncotic pressure lower than that of blood plasma which is needed
to address a potential market in chronic oxygen deficiency. The pre-clinical
data demonstrated that it is possible to polymerize native mammalian hemoglobins
from humans, pigs and cattle, resulting in huge soluble molecules, the so-called
hyperpolymers. SBTAG has decided to polymerize hemoglobines from pigs (porcine
blood).
Blood Volume Substitute
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The need for blood volume substitutes is growing because of: (i) reduced
willingness of the population to give blood; and (ii) rising contamination of
donors with HIV and hepatitis viruses. The worldwide market for stored blood is
estimated to total about US $ 5 billion per year.
Invasive surgery, resulting from such causes as transplantation or
accidents, can result in substantial loss of blood. In such circumstances, blood
volume has to be substituted to avoid shock. Blood substitution must be done
with an isoncotic solution which has the same colloid-osmotic pressure as blood
plasma. Such blood volume substitutes are called "plasma expanders". These
expanders use macromolecules like polysaccharides or gelation to generate the
oncotic pressure.
Blood additive
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In cases where the native blood oxygen carrier system does not deliver
enough oxygen to tissues of the heart, brain, extremities, kidneys and other
organs, a critical clinical situation arises requiring another oxygen carrier
strategy. In these cases, the patients do not have a blood volume deficiency,
but suffer from an oxygen deficiency. To compensate for this oxygen deficiency,
an artificial oxygen carrier must be introduced into the circulatory system and
this additive must have no influence on the oncotic pressure, i.e., it must have
a negligible oncotic pressure as compared to normal, which is about 30hPa.
SBTAG has polymerised various hyperpolymers in small quantities, as described
above with characteristics such as sufficiently low viscosity and a negligible
oncotic pressure at the desired concentration and desired hematocrit
concentration. Pre-clinical trial data also suggested promise with respect to
safety. Experiments conducted in alert rats with a magnetometric method appear
to demonstrate that the hyperpolymer hemoglobins irritate the
reticulo-endothelial system of the liver far less than emulsions of fluorocarbon
or encapsulated hemoglobins solutions (a technology used by one of the
competitors).
The management of SBTAG believes that the additive feature of the oxygen
carrier, under development, could potentially address a market possibly equal to
or larger than that of blood volume substitutes. It has been reported that the
oxygenation of solid tumors makes them more sensitive to radiotherapy. This is
reported to be especially true with respect to tumors of the head and neck,
which are relatively common forms of cancer. Management believes that its blood
additive technologies, for which there are no known competitive products, could
be very attractive in the medical field. Nonetheless, there can be no
assurances that such therapeutics will be well accepted in the market, if
developed. Therefore, the development of an artificial oxygen carrier has
become the primary focus of the management of SBGI. However, such a market
projection for plasma expanders and additives, as therapeutics for oxygen
deficiency disorders, cannot be ascertained, since such products are not
available in the marketplace. There also cannot be assurances that such
therapeutics, if developed, will be favorably accepted by the medical community.
If oxygen carriers can be used successfully in the cancer field, this could
be expected to speed the approval process for the use of blood volume
substitutes based on similar technologies. However, there can be no assurances
that these applications will be approved by the various government regulatory
agencies, including but limited to the FDA in the United States and the similar
agencies in Germany and other Western European countries.
CE Mark approval on the initial product designed for patients receiving
radiation therapy is targeted for 2003 and FDA approval in 2006. It should be
noted, that, this specialized or niche application, if successfully developed,
would have a market potential substantially smaller than the overall market of
artificial blood volume substitute or the therapeutic market (with oxygen
carrier as an additive or therapeutic agent) for more widespread oxygen
deficiency disorders such as myocardial infarction and stroke.
Small animal exchange experiments with artificial oxygen carriers prepared
by SBTAG have demonstrated, that these carriers are very effective in oxygen
transport already in small concentrations within the blood plasma (0.5 gram per
decilitre), and that they show a synergistic effect with native transport
systems. Also it was possible to synthesize hyperpolymeric oxygen carriers
which exhibit no immunogenicity in mice sensitized to hemoglobin.
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SBTAG has received a grant from the government of the German state
North-Rhine-Westphalia in an amount of more than US $ 2,000,000 which covers 40%
of the estimated costs of the research and pre-clinical development of the
Company's polymer hemoglobin based artificial oxygen carrier. SBTAG received
already the first portion of the grant to reimburse 40% of its relevant expenses
in the period from April 1998 to December 1998. The grant requires the Company's
economical ability to cover 60% of the project costs on its own as well as the
achievement of milestones. The Company has met these requirements.
GLUCOSE SENSOR
The need for a reliable, cost-effective and continuous glucose monitor for
diabetes patients is to prevent irreversible damage, i.e., damage to the kidney
and retina, and to avoid amputations of extremities. The management of GMTAG
believes that such a sensor could be the missing link to construct an artificial
pancreatic beta-cell. The implantable glucose sensor requires the successful
development of a stable miniaturized polarimeter and a biocompatible
ultrafiltration membrane. GMTAG presented its pre-prototype of a long-term
implantable glucose sensor at the Duesseldorf Medica Show in November 1998. At
the Dusseldorf Medica Show in November 1999, there was a demonstration of the
improved pre-prototype comprising of a final miniaturized optical system (which
includes the light source, diodes, light detectors) and an integrated sensor
electronics which is targeted to be miniaturized (using the one chip-technique)
by 2000.
In September 1999, GMTAG received a grant from the German state of
North-Rhine-Westphalia in the amount of DM4,340,764 for the long term
implantable glucose sensor. The grant will cover 40% of the budget project
costs from December 1998 to November 2001. The grant requires GMTAG to cover
60% of the project costs on its own as well as the achievement of milestones.
About 5% of the inhabitants of the industrialized countries suffer from
diabetes. About one tenth of these patients are afflicted with diabetes
mellitus Type 1, which means they are dependent for life on the parenteral
application of insulin.
diabetes Type I patients suffer from the irreversible destruction of the so
called beta cells of the pancreas (absolute insulin deficiency); the beta cells
normally produce the hormone, insulin
diabetes Type II patients suffer from a relative insulin deficiency; the
insulin receptors are insensitive to the hormone
The central problem of the diabetic is to properly and constantly measure
the blood glucose level, ideally 24 hours a day, and thereby to know how to
adjust, quantitatively, the glucose level in the tissues by administering
insulin, for example, in order to stabilise the blood sugar level at its normal
value of 1 g/L. Only a rough adjustment may be achieved during waking hours
when the patient is able to sample a drop of blood from the fingertips
periodically, and to determine the level of glucose with the aid of dipsticks.
Many patients have developed a sixth sense in adjusting their blood glucose
level.
Nevertheless, the permanent sampling of blood and the need to inject
insulin deteriorate the quality of life. An enormous danger for the diabetic
patient arises when he is asleep, i.e. one third of his life time, when he is
neither able to sample the glucose level in his blood system, nor to adjust it,
if necessary.
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Furthermore, as shown by measurements using a short time (only 3 days)
glucose monitoring system based on the enzymatic detection of glucose, (even in
patients who seem to be well adjusted) dramatic changes of the blood sugar occur
during night and day.
Infectious diseases and vegetative disorders are also reasons for
uncontrollable disturbances and variations of the glucose level, even during
waking hours. Those are very dangerous for the patient as it is explained
below:
A glucose level which remains too low over long periods of time results in
damage to organs with high metabolism, such as the brain. Brain cells which die
cannot be replaced. If a glucose level remains too high, the typical long term
sequelae of Type I diabetes occur, such as peripheral circulatory deficiencies
resulting in the need for amputation of extremities and detachment of the retina
resulting in blindness.
For the reasons given above, it would be of enormous advantage to
constantly and automatically monitor the blood sugar level of the patient. To
do so, the glucose monitor must stay at or in the patient for a long period of
time making the procedure cost effective and efficacious. Problems of
infection, comfort, and the risk of detachment all favor a permanently
implantable sensor.
This device should communicate via radio signals with a control panel/modem
outside the body and supply the patient with the necessary information. In
combination with a dosage pump for insulin (internal or external) an artificial
beta-cell could be realized.
Until now, an implantable glucose sensor has been the missing link in the
development of a beta cell for the automatic dispensation of insulin.
German insurance companies have estimated the possible savings for a
patient with Type I diabetes to range from between approximately $6,000 to
$8,000 per annum. Based on a unit price of about $7,000, the market potential
for the developed countries could amount to several billion dollars per year, if
such a sensor receives favorable market acceptance.
The following experimental results were obtained in furtherance of SGBI's
objective of developing an implantable glucose sensor on the basis of
polarimetric and infrared methods:
* polarimetric and infrared measurements of glucose concentrations in the
physiological range resulted in an electronic signals, sufficiently
high for further processing
* glucose is responsible for at least 95% of the optical rotation of
ultrafiltered blood plasma
* the concentration of glucose in ultrafiltrated tissue fluid equals that of
blood
* the level of glucose in an implanted ultrafiltrating hollow fiber did not
drift, in the sense of decreasing, over a period of three weeks
* the adjusting time of the glucose level in the hollow fiber is about ten
minutes and is also stable over a period of three weeks
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The implantable glucose sensor, GlukoTektor, will be equipped with an
insulin reservoir and pump, the BetaMitator, which will function as an
artificial endocrine pancreas. The device will be in telemetric contact with a
matchbox-sized monitor, which must be placed close to the patient. It will have
the following functions:
* receive a signal every 5 to 10 minutes, and
* show the glucose level on a LCD display
* warn the patient:
* optically and acoustically in case of danger
* if there is no signal from the sensor
The management of GMTAG projects that it will take about 5 years to develop
this product completely. Moreover, FDA approval of this product is required
before this product can be marketed in the United States.
DIAGNOSTICS
Management of SBGI believes that it can be strategically positioned with a
breadth of in vitro diagnostic products which will be competitive in the health
care industry. SBGI's current strategy is to develop truly niche
immunodiagnostic products with only few competitors, like the CDT test kit.
SBGI has completed the research and development of certain health care
products which are intended to be produced, promoted, marketed, and used
world-wide. SBGI's products consist of: (i) a Carbohydrate-Deficient
Transferrin test kit, which is used to detect chronic alcohol abuse; (ii) a
urinary micro-albumin test, which is a diagnostic test to detect small amounts
of proteinuria in diabetes mellitus; (iii) a C-Reactive Protein, which is an
acute phase protein and sensitive indicator of inflammation; (iv) two different
kits for the measurement of Parathyroid Hormone, which is a diagnostics adjunct
to the differential diagnosis of hyper- and hypo-parathyroidism. ; (v) ACTH
(Adrenocorticotropic Hormone), a niche endocrine test for adrenal cortex
function; (vi) Calcitonin, another endocrine test for a rare disease; (viii)
Erythropoietin (EPO), a test for certain types of anemia; and (ix) TSH (Thyroid
Stimulating Hormone or Thyrotropin), a common and popular thyroid function test,
but faced with over forty (40) competitors' products on the same test.
Currently, the Company has a total of nine (9) niche immunodiagnostic
products for distribution. All the products are based on the microplate format,
except for the PTH and TSH IRMA. This microplate or microtiter platform was
chosen, because microplate readers are quite common in the clinical and hospital
medical laboratory setting. All the test kits, except TSH, are targeted at the
niche laboratory market.
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* CDT (Carbohydrate Deficient Transferrin). Has been reported as the most
reliable test for identification of chronic alcohol abuse. The worldwide market
potential is estimated at US $ 2.5 million per annum. This test uses
microplate format Turbidimetric Immunoassay with prepackaged chromatography
columns. One of the SBGI CDT kits (a second version), to be trademarked as
ChronAlco I.D., has recently been called best CDT kit in the market" by two
German scientists, who are the "opinion" leaders.
* Intact-PTH on the ELISA Microplate format (2nd Generation). This product
has been cleared under the 510(k) regulations by the FDA in late December 1997.
It has one distinct advantage over the two other ELISA microplate PTH kits on
the market. It is faster and easier, with performance characteristics similar or
superior to the competitors. Nonetheless, the Company has derived insignificant
sales to date, mostly likely due to the current market trend of complete
turn-key (hands off or complete) automation in the laboratory business.
* Intact-PTH IRMA (ImmunoRadioMetricAssay). The radioactive version will
compete mainly based on price. The worldwide market potential for all the PTH
kits, with over 10 competitors, is estimated at US $ 50 million per annum.
* CRP (C-Reactive Protein). Highly sensitive Turbidimetric Immunoassay (TIA),
for the differential diagnosis of viral vs. bacterial infection. Valuable to
preclude overuse of antibiotic treatment in infections of viral etiology.
Recently, the CRP test has been reported to have applications in predicting the
outcome of stable angina patients. The worldwide market potential is estimated
at US $ 7 million per annum. However, the Company has derived negligible sales
for the last three years (since the completion of product development on this
product) due to market dominance of large companies, such as Roche/ Boehringer
Mannheim.
* Microalbumin quantitative test via TIA. Highly sensitive determination of
small quantities of albumin in urine. Early detection of microalbuminuria can
prevent subsequent irreversible renal impairment in patients with Diabetics
Mellitus. The worldwide market potential is estimated at US $ 5 million per
annum. However, the Company has derived negligible sales for the last three
years (since the completion of product development on this product) due to
market dominance of large companies, such as Roche/ Boehringer Mannheim.
* ACTH (Adrenocorticotropic Hormone) ELISA. This product is the only 2nd
Generation ELISA Kit in the market. This test is intended for the assessment of
adrenal cortex function such as Addison Disease and the differential diagnosis
of Cushing Syndrome. The estimated market potential size is US $ 5 million per
annum.
* Calcitonin ELISA. This product is the only ELISA in the market. This is
another calcium metabolism test. The test volume has been increasing in Europe
and the US. The estimated market potential size is US $ 1 million per annum.
* Erythropoietin (EPO) ELISA. Quantitation of serum erythropoietin
concentration serves as a diagnostic adjunct in determining the cause of anemia
or erythrocytosis (an increase of red blood cell mass). Also, Amgen, Inc.
manufacturers the drug Erythropoietin, trade-name Epogen. Hence, it is believed
that there is a small market for drug monitoring as well. However, there are
several competitors including at least one competitor with fully automated
system.
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* TSH IRMA. TSH (Thyrotropin) is a very useful, if not the most important
screening test for thyroid function assessment. However, there are at least
thirty (30) kits in the market-place, so this product is not a niche product.
The Company's kit is based on the ImmunoRadioMetricAssay and was developed
specifically for sale to a small German distributor, who currently purchases a
comparable kit (about US $1,000 per month) from a competitor. The worldwide
market for TSH is estimated at well over US $20,000,000 per annum.
The Company's two earlier products, developed in 1996 and 1997, CRP and
Microalbumin, have not been selling successfully, presumably due to competition
based on "turn-key" fully automated instrumentations marketed and distributed by
big corporations such as Boehringer Mannheim Corporation/Roche Diagnostics in
Germany and Beckman Instruments in the US. The Company intends to continue to
make efforts to sell these two products for at least another 12 months. The
majority of the sales and repeat orders are from Germany and the United States.
To date, the Company's efforts to sell its products to emerging markets such as
the mainland China, Hong Kong and Taiwan were unsuccessful and the sales to
date is very limited. At present, the Notified Bodies of the CE (European
Community) has not yet completed its final regulations on in vitro diagnostic
kits. The Company intends to comply with the CE Mark regulations in due course.
Although the Company has had positive experience with the US. FDA regulations in
clearing three (3) of its products filed under the 510 (k) process, there can be
no assurance that its effort in compliance with the CE Mark will be successful.
In the immunodiagnostic business, the Company continues to expand its sales
and distribution on products already developed and continually manufactured.
Such niche in vitro, immunodiagnostic tests which will enable physicians to
diagnose and treat patients for a variety of pathologic disorders.
OTHER BY PRODUCTS
During the course of developing the glucose sensor, Prof. Barnikol's long
term research and the sophisticated techniques of the glucose sensor result in
the development of the following by-products. They include:
A. Monitoring devices for patients in anesthesia, in intensive care and
sleep diagnostics
* a sensor tube
* a sensor connector for new borns
* a nose sensor
* a main stream respiratory oxygen sensor
* an oxygen sensor device for the skin
B. Equipment for small animal (also mice) experiments
* a respiratory microvalve
* a micro respiratory flow sensor
C. High precision analytical micro system for monitoring and controlling of
(bio)chemical processes in biotechnology, chemistry and Pharma industry.
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D. Module micro controlling and heating system for setting defined levels of
temperature on basis of Peltier technique.
At the Medica 99 in Dusseldorf, the prototype for the module micro
controlling system, the sensor tube and the equipment for small animals are
demonstrated.
COLLABORATION WITH OTHER COMPANIES
In an effort to provide to the Company short term revenue which will be
utilised to fund the various research and development programmes, the Company's
US Diagnostic Division provides services in performing research and development
and manufacturing as a sub-contractor and/or consultant to unaffiliated
companies which do not compete with the Company. There is no assurance or
certainty, however, that such subcontracts will continue. The management of the
Company plans to continue to explore such opportunities if deemed advantageous
to the Company.
DEVELOPMENT PROCESS
OXYGEN CARRIER
At this point in time, the formula of the artificial oxygen carrier is not
finalized. A preliminary formula is set out as follows:
Sangui's oxygen carrier is prepared from porcine hemoglobin. First, pure
porcine blood must be obtained from slaughterhouses. It is of great importance
to make sure that the blood is not contaminated with endotoxins released by
bacteria or other contaminating material. Therefore it must be guaranteed that
the pigs, of which the blood is taken, were neither ill nor had received
medicine. The state of health of the pigs has to be contractually fixed with the
-
pig breeders. The erythrocytes are then separated from the other blood compounds
and opened by osmotic hemolysis, thus releasing the hemoglobin molecules. The
released hemoglobin molecules are then further purified.
Next, about fifteen of the molecules are cross-linked to a hyperpolymer
molecule by a chemical reaction using glutaraldehyde as a cross-linker. The
hemoglobin hyperpolymer is the artificial oxygen carrier. An advantage of the
hyperpolymer structure is that it prevents the oxygen carrier from secreting via
the kidneys which would have harmful effects on the patients.
Pyridoxalphosphate is used as an effector by which the oxygen binding
properties of the hemoglobin hyperpolymer molecules, for instance the functional
oxygen transport capacity, are adjusted properly. During all preparation steps
defined conditions have to be chosen and maintained carefully (e.g. temperature,
pH of the solutions). After preparation of the oxygen carrying hyperpolymers,
they are separated into a high molecular part and a low molecular part to obtain
the blood additive and the blood volume substitute, respectively.
13
<PAGE>
The oxygen carrier will be injected or infused, normally into a vein
vessel. The elimination of the oxygen carrier takes place in the
reticuloentdothelium. The released hemoglobin momomers are then further degraded
via the physiological degradation mechanisms.
Timeline and stage of development:
November 1997 Decided that porcine hemoglobin should be used
as basic material
March 1999 Decided which hemoglobin heyperpolymer will go
into preclinical investigation and that
glutaraldehyde will be taken as cross-linker
and pyridoxalphoshate as effector
April 1999-December 1999 Fine adjustment of the formula for the
synthesis of the hyperpolymers, regarding
different conditions like amounts of
glutaraldehyde and pyridoxalphosphate,
incubation times, tempeature
Development of a method for the isolation
of larger amounts of pure hemoglobin from
porcine blood
Begin set up of an analytic unit (e.g. for
determining the purity of the oxygen carrier
and of the source materials)
January 2000- June 2000 Develop the method for the preparation of
large amounts of oxygen carrier for
preclinical trials
June 2000- November 2000 Drug production for preclinical* toxicology
aand pharmacology
November 2000 Begin preclinical toxicology
May 2001 Begin preclinical pharmacology
August 2001 Drug production for clinical trials
December 2001 Begin clinical trials phase I**
2002/2003 Simultaneous beginning of clinical trials
phase II*** and III****
2005/2006 Europeanb and FDA (Federal drug
administration) approval and beginning of
large scale production
14
<PAGE>
* experiments using animal models and tissue culture models to evaluate efficacy
and safety of the developed drug
** phase I is called "human pharmacology": application in healthy volunteers
*** phase II is called "therapeutic explanatory": trials with a small number of
ill patients
**** phase III is called "therapeutic confirmation": trials with a huge number
of ill patients
All stages are necessary according to regulatory requirements. Finalization
of each stage is a further step to reach approval (e.g. FDA-approval) and market
launching.
LONG-TERM IMPLANTABLE GLUCOSE-SENSOR
The development process of the glucose sensor is not finalized at this
juncture. The preliminary development process of the sensor is set out as
follows:
GMTAG's glucose sensor is based on physical methods for the determination
of the glucose level. The sensor consists of two parts: the detection system
and a microdialysizing exchange system.
For the detection system, a sufficiently sensitive and specific
polarimetric and an infrared system were developed as measuring methods. At the
moment it is not settled which one of the systems will be used in the first
generation of the sensor. It is also possible that both systems will be used to
increase the specificity and accuracy of the glucose determination.
The function of the dialysizing exchange system is to protect the fluid
within the measuring chamber of the glucose sensor from large compounds of the
interstitial fluid, especially from proteins; the effect of which would be to
increase the specificity of the detection system.
The sensor will be implanted in the subcutaneous fat tissue in the stomach
area near the belly button. GlukoMediTech endeavors to develop a glucose sensor
which might be implanted for a period of three to five years.
During the day, the measuring signal will be sent telemetrically to a
glucose watch which the diabetic patient will carry at his wrist. During the
night, the telemetric signal will be sent to a receiver near the bed which will
monitor the glucose level and warn the patient of hypoglycaemia and
hyperglycaemia.
The development of an appropriate implantable insulin pump and its
combination with the glucose sensor to a closed loop will enable the company to
produce a technical _-cell, so that the patient will be automatically supplied
properly with the necessary amounts of insulin.
15
<PAGE>
Timeline and stage of development:
November 1998 Presentation of a pre-prototype of the glucose
sensor at the MEDICA trade fair, Dusseldorf,
Germany: The pre-prototype of the glucose
sensor demonstrates that the optical systems
developed by GlukoMediTechare sufficiently
specific for the determination of glucose
levels in the physiological range of 50 to 500
milligram glucose per decilitre.
September 199 Completion of the miniaturization of the
sensors optical systems
October 1999 Currently Gluko's engineers are working on the
telemetric system. Begin development work on
the energy supply and the dialysis exchange
system
Beginning of 2000 Start of further and consequent miniaturization
of the sensors electronics("one-chip-
technique") with integrated light sources
(e.g. laser) Begin development work on insulin
pump and the glucose watch
Beginning of 2000 Targetted to present a prototype of a glucose
sensor
July 2000 First implantation into animals (sheep, monkey
or dog)
December 2001 Begin clinical trials* and first implantation
of the glucose sensor into patients
2002 Begin animal experiments for the technical
b-cell
2003 End of experimental phase for the glucose
sensor Begin clinical trials and first
implantation of the technical b-cell into
patients
2004 Except approval from CE Mark and FDA
Begin production and sales
2006/2007 Market entry of the technical b-cell
16
<PAGE>
All stages of clinical trials are necessary according to regulatory
requirements. Finalization of each stage is necessary to obtain regulatory
approval (e.g. FDA-approval).
*Unlike the oxygen carrier which are classified under pharmaceutical products,
glucose sensor being a medical device have a separate approval process and hence
do not have separate phases for clinical trials. The clinical trials for the
glucose sensor do not have different phases and entails doing studies
immediately with diabetics patients.
MARKETING AND DISTRIBUTION
Other than the immunodiagnostic products, SGBI and its subsidiaries have
not yet manufactured their products in commercial quantities.
SGBI markets its immunodiagnostic products through a carefully selected
specialty product distributor in a particular country. The products are
targeted at the smaller laboratories in Western Europe and the United States,
who may have insufficient test volume to justify the installation of "turn-key"
fully automated proprietary instrumentation by the large competitors. It also
includes end users like independent clinical, hospital or physician operated
laboratories.
The Company sells its CDT kits mainly through one German distributor or
selling directly to one customer in the US. To date, it appears that
significant product sales have been realized only on the CDT test. On the four
(4) ELISA products, although comparative increases in turnover and number of
orders from various distributors have been significant, the impact on profit and
loss is not yet significant. SGBI has limited experience in sales and marketing
of products. In general, the distributor is required to commit to a minimum
sales volume in order to maintain an exclusive position in a given territory. It
is not uncommon to provide a 30 to 50 % discount from the product list price. To
date, no minimum sales volume was required, because there was no exclusive
distribution agreement.
To raise its profile, SGBI regularly participates in various medical and
health related products exhibitions and trade fairs, for instance the latest
Medica 1999 held in Dusseldorf.
RESEARCH AND DEVELOPMENT
GENERAL
SBTAG and GMTAG are focused on the research and development of the oxygen
carrier and glucose sensor respectively.
17
<PAGE>
SBTAG seeks to develop two oxygen carrier products which are polymers of
natural hemoglobins with oxygen carrying abilities similar to blood products
which are being developed. One is a substitute product, and the other is an
additive product. The substitute product ("blood volume substitute") is
designed for use as to replace red cell transfusion in a range of applications,
such as: (i) replacement of blood loss due to trauma and surgery; (ii) perfusate
for preserving organs for transplantation; and (iii) stockpile of the product
for military and other emergencies. The oxygen carrying blood additive ("blood
additive") is defined for use in chronic oxygen deficiency like heart
infarction, stroke, peripheral perfusionary disorders
GMTAG seeks to develop an implantable glucose sensor which will be able to
monitor the blood sugar level in a continuous and automatic manner even during
the night. This depends on the successful development of a stable miniaturised
polarimeter and a biocompatible microdialysing system. Combined with an
implantable insulin pump, the sensor is the missing element on the way towards
developing a technical beta cell that would allow a regular and automatic supply
of the diabetic patient with insulin. At the D sseldorf Medica Show in November
1999, there was a demonstration of the improved pre-prototype comprising of a
final minaturized optical system (which includes the light source, diodes, light
detectors) and an integrated sensor electronics which is targeted to be
miniaturized (using the one chip-technique) by 2000.
RESEARCH AND DEVELOPMENT PROCEDURE
SBTAG and GMTAG have the following research and development procedures set
out as follows:
* Both companies establish the specification of their products to be
developed which may be continuously modified as new findings arise. Changes in
any condition and to new knowledge are reacted to immediately.
* Management establishes milestone schedules for product development so as to
control the progress of development. A fundamental basis of SGBI's research and
development is that at least two members of the companies' staff have the
necessary know how to carry out all experiments. By doing so, SBGI mitigates
---
the effect of possible staff turnover.
* The development of pharmaceuticals and medical devices requires compliance
with several guidelines. All researchers are obliged to keep detailed records in
compliance with the relevant guidelines. Such documents have to be
self-evident, i.e., any third party must be able to understand its content.
Standard operational procedures have to be drawn up for all processes.
* SGBI orients its research and development in such way that its products are
suitable for different applications and different market demands as well. SGBI
intends to develop its products for that application first, which offers
probably the soonest governmental approval in the countries of the targeted
major markets. The marketing of the products for those applications may support
the further promotion for other applications and the filing of approvals of
further indications.
18
<PAGE>
INTANGIBLE ASSETS
There are three patents issued to SBTAG pertaining to the polymerization of
hemoglobin. Similarly, seven patent applications submitted by SBTAG are
undergoing review by the patent office and another four patent applications
regarding hemoglobin have been submitted. Additionally, six patents issued to
GMTAG including one (1) pending are associated with the measurement of oxygen
to facilitate the development of the Company's oxygen carrier/additive
technologies.
Two patent applications relating to polarimetric measurements for the
development of the Company's implantable glucose sensor have been submitted by
GMTAG and are currently undergoing review by the patent office.
In addition to formal patent protection, SGBI also relies on trade secrets
and other unpatented proprietary information in its development activities. All
of the Company's employees have entered into agreements providing for
confidentiality and the Company enters into non-disclosure agreements to protect
the confidential information delivered to third parties in conjunction with
possible corporate collaborations or other business purposes.
The Company intends to continue its research and development and to protect
its proprietary information and products with patents in the significant market
areas of the world. These will provide barriers to competition as well as the
possibility of cross licensing and or royalty income, if determined to be in the
best interests of the Company.
In addition to internal development, licensing or cross-licensing of other
technologies will be considered as a means of improving and/or broadening the
Company's product line.
While the Company cannot guarantee that its patents and patent applications
pending will block competitive products, they should help the Company become one
of the leaders in its respective marketplaces.
MANUFACTURING AND QUALITY ASSURANCE
IMMUNODIAGNOSTIC KITS
SBGI has its manufacturing facility and distribution center in Santa Ana,
California for its immunodiagnostic kit business.
19
<PAGE>
SBGI has an established quality control testing procedure which is applied
to test for all diagnostic kits. The first released manufactured lot is
quality controlled and compared against the "GOLD" lot of materials. This
"GOLD" lot of materials is the basis for how the reagents should perform and how
specifications are determined, hence the performance of the first released
manufactured lot will set the precedence for future lots. The Quality Control
Manager is also the main technical research and development scientist. Hence,
there is minimal risk of lot to lot variability and reagent quality will be
maintained.
Quality control testing is performed at four stages:
* critical raw material qualification B testing is performed on samples of
raw material obtained from a qualified vendor. If the sample meets the
specifications (which are equivalent to improved performance compared to control
or previously released lot of materials), purchase bulk quantity. If the sample
does not meet specifications, reject the material and obtain additional samples
for testing.
* in process testing B testing is performed at the bulk reagent stage, which
refers to the final reagent not yet filled into vials or bottles, to assure
performance at that level. Testing at this stage allows for the bulk reagent to
be adjusted as needed if performance does not meet specifications. After
testing is done in accordance to the testing protocol against a previously
released lot of material, the data is reviewed with the Quality Control Manager
and the Manufacturing Chemist which will then either be approved for release for
filling/ labelling or the reagent adjusted accordingly if testing does not meet
specification.
* final component quality control testing B testing is performed after the
reagent is bottled which will make up the final kit configuration for
distribution. The component is tested against a previously released lot of
material.
* final kit quality control testing B testing is performed on the final kit
configuration containing the component lots selected to make up the final kit.
If testing meets specification, the kit will be released for packaging and
distribution. If it does not meet specifications, then re-work accordingly and
perform additional quality control testing. If re-work is not possible or is
unsuccessful, the lot will be rejected.
All documentation of the quality control testing will have to be filed and
maintained by Quality Assurance.
GOVERNMENT REGULATION
SGBI and its subsidiaries are, and will continue to be, subject to
governmental regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, and other
similar laws of general application, as to all of which SGBI believes it and its
subsidiaries are in material compliance. Any future of, and the cost of
compliance with, these laws and regulations could have a material adverse effect
on the business, financial condition, and results of operation of SGBI and its
subsidiaries.
20
<PAGE>
Because of the nature of the operations of SGBI and its subsidiaries and
the use of hazardous substances and their ongoing research and development and
manufacturing activities, SGBI and its subsidiaries are subject to stringent
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacturing, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although it is believed
that SGBI and its subsidiaries are in material compliance with all applicable
governmental and environmental laws, rules, regulations and policies, there can
be no assurance that the business, financial conditions, and results of
operations of SGBI and its subsidiaries will not be materially adversely
affected by current or future environmental laws, rules, regulations and
policies, or by liability occurring because of any past or future releases or
discharges of materials that could be hazardous.
Additionally, the clinical testing, manufacture, promotion and sale of a
significant majority of the products and technologies of the subsidiaries, and
to a much less extent to SGBI, if those products and technologies are to be
offered and sold in the United States, are subject to extensive regulation by
numerous governmental authorities in the United States, principally the FDA, and
corresponding state regulatory agencies. Additionally, to the extent those
products and technologies are to be offered and sold in markets other than the
United States, the clinical testing, manufacture, promotion and sale of those
products and technologies will be subject to similar regulation by corresponding
foreign regulatory agencies. In general, the regulatory framework for
biological health care products is more rigorous than for non-biological health
care products. Generally, biological health care products must be shown to be
safe, pure, potent and effective. There are numerous state and federal statutes
and regulations that govern or influence the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising,
distribution and promotion of biological health care products. Non-compliance
with applicable requirements can result in, among other things, fines,
injunctions, seizures of products, total or partial suspension of product
marketing, failure of the government to grant pre-market approval, withdrawal of
marketing approvals, product recall and criminal prosecution. Although the
Company has three of its four ELISA kits cleared by the FDA. Its lead product
in the diagnostics area, CDT test, has not yet been cleared by the FDA. The
competitor who sells another CDT test in significantly larger quantities does
not have FDA clearance either. Although, the Company may have certain
regulatory risks in offering this product to one American laboratory, who uses
this test for life insurance application, the legality for distributing this
product for such purposes is unclear. On the other hand, there are number of
diagnostic companies who have and still do distribute products as "for research
use only" with sales and capitalization much larger than that of the Company.
YEAR 2000 COMPLIANCE
The Y2K issue has arisen from the fact that some computer systems operate
on 2-digit year element and so are unable to make the proper transition from
year 1999 to year 2000 or process dates for the year 2000 and thereafter. This
problem affects information technology and all systems and equipment that rely
on embedded electronic chip technology. SGBI understands "Y2K Compliance" to
mean that the performance and functionality of its critical equipment or systems
will not be affected by data relating to dates prior to, during and after the
year 2000.
SGBI has set up a Y2K committee, comprising Mr Joerg Alte and Mr John Kiang
to review the extent of SGBI's exposure to the Y2K problem and to plan and
oversee systematic procedures to be taken to ensure that SGBI is Y2K ready.
21
<PAGE>
SGBI's manufacturing process use very little date related computerization.
The only area where date arithmetic is used pertains to simple calculations of
assigning the expiration date from the expiration interval. SGBI has tested
the programs and have the assurances that the software programs that SGBI uses
are 100% Y2K complaint as claimed by the software manufacturers. SGBI is
currently Y2K ready.
There can be no absolute assurance that problems will not be encountered.
The full impact on SGBI of any failure of systems and products of SGBI or third
parties is not known at this juncture. Nevertheless, based on current
knowledge, SGBI does not anticipate the Y2K issue to have any significant impact
on SGBI's business, cost and revenues as the Y2K issue will be addressed through
planned corrections and replacement of equipment and computer systems.
COMPETITION
IMMUNODIAGNOSTIC KITS
<TABLE>
<CAPTION>
<S> <C>
TYPE OF IMMUNODIAGNOSTIC KIT COMPETITORS
Intact-PTH on the ELISA Microplate format DPC
(2nd Generation) Nichols Institute Diagnostics
Diagnostic Systems Laboratories
Bio Rad
IncStar (owned by DiaSorin)
Intact-PTH IRMA Nichols
ACTH ELISA DPC
Nichols Institute Diagnostics
Diagnostic Systems Laboratories
CIS
IncStar (now owned by DiaSorin)
Euro Diagnostics
Calcitonin ELISA Nichols Institute Diagnostics
DPC
Mitsubishi
IncStar (now owned by DiaSorin)
Diagnostic Systems Laboratories
CDT Axis Biochemical
22
<PAGE>
Erythropoietin ELISA Amgen
Nichols Institute
Diagnostic Systems Laboratories
CRP BMC/ Hitachi
Beckman
Microalbumin quantitative test via TIA BMC/ Hitachi
Beckman
DPC
</TABLE>
The market for the products and technologies of SBGI is highly competitive,
and SBGI expects competition to increase. SBGI will compete with many other
health care research product suppliers, most of which will be larger than SBGI.
Some of the competitors of SBGI offer a broad range of equipment, supplies,
products and technology, including many of the products and technologies
contemplated to be offered by SBGI. To the extent that customers exhibit
loyalty to the supplier that first supplies them with a particular product or
technology, the competitors of SBGI may have an advantage over SBGI with respect
to products and technologies first developed by such competitors. Additionally,
many of the competitors of SBGI have, and will continue to have, greater
research and development, marketing, financial and other resources than SBGI
and, therefore, represent and will continue to represent significant competition
in the anticipated markets of SBGI. As a result of their size and the breadth
of their product offerings, certain of these companies have been and will be
able to establish managed accounts by which, through a combination of direct
computer links and volume discounts, they seek to gain a disproportionate share
of orders for health care products and technologies from prospective customers.
Such managed accounts present significant competitive barriers for SBGI. It is
anticipated that SBGI will benefit from their participation in selected markets
which, as they expand, may attract the attention of the competitors of SBGI.
Since the diagnostic industry in general faces severe competition, SBGI
intended to select opportunities in which the price competition was less severe
and the potential return was attractive. To date, the Company has realised some
meaningful sales for CDT kits and therefore believes that its strategy has
succeeded. However, the Company's strategy of selling niche endocrine test
kits has not yet succeeded. The Carbohydrate-Deficient Transferrin test was one
such rare market opportunity in the crowded diagnostic industry.
The competition in the US $ 20 billion diagnostic business is fierce,
mainly dominated by the large pharmaceutical and larger established
biotechnology companies such as Abbott Laboratories, Hoffmann La Roche etc.
23
<PAGE>
For its CDT kits, the Company's only competitor is Axis Biochemicals, ASA,
in Oslo, Norway which has entered into European and distributorship arrangements
with Bio Rad Laboratories, Inc. and Boehringer Mannheim Corporation/Roche
Diagnostics. Large competitors with complete automation with proprietary
instrumentation have offered packaged reagent rental programs to potential
customers, for which the use of instrument is not paid by the customers except
for some small commitment to purchase the products. Recently, these large
companies decided to offer such programs to end-users which only need to
purchase small quantities of kits, about 3 kits per month or about U.S. $900 per
month, in order either to increase or retain its market share. It is believed
that the profit margin of the in vitro diagnostics industry has eroded
significantly in recent years or even months.
BLOOD VOLUME SUBSTITUTE
In the business of blood volume substitute, there are at least six
companies who have obtained substantial capitalization either through equity
funding or through acquisition by large corporations, such as Baxter
International acquiring Somatogen. Other future competitors are Hemosol Inc. in
Canada, Northfield, Alliance Pharmaceutical and Enzon. Nearly all these
companies have already made strategic marketing alliances with large companies
with established marketing and distribution channels, such as Johnson and
Johnson, Eli Lilly and Company, and Pharmacia/Upjohn. Most of these companies
have already proceeded to Clinical Trial Phase II with the FDA. However, the
management of the Subsidiaries anticipate to withstand this competition by
developing well-characterized and differentiated products in unique formulations
which could capture some of the market as a new generation of oxygen
carrier/additives to address the markets of artificial blood volume substitutes
as well as the potential new market of therapeutics for oxygen deficiencies.
There can be no assurances that the management's objectives can be achieved.
BLOOD ADDITIVE
In the business of blood additive, SBTAG is not aware of any existing or
potential competitors.
GLUCOSE SENSOR
The Company is not aware of any glucose sensing implants available in the
marketplace. However, Johnson & Johnson has a significant market share in the
in vitro glucose measuring device, using a small amount of blood from finger
tips. Other large companies, such as Abbott Laboratories, Inc. also have
similar in vitro glucose measuring devices on the market. On devices close to
an implantable glucose sensor, MiniMed Inc. of Sylmar, CA has submitted to FDA a
Notification on a Continuous Glucose Sensor For Diabetes in December, 1997.
MiniMed Inc. announced its intention to produce and market this product. It
expects to utilize the sensor for a series of products, the first two of which
will be a physician diagnostic device and an alarm product to warn people with
diabetes of dangerously low glucose levels. However, the reagents for the
MiniMed's sensor are stable for only three days. By contrast to the objective
of an implantable long term glucose sensor by GMTAG, the MiniMed's sensor does
not solve the problem in the long term.
COMPETITIVE STRENGTHS
The Directors are of the view that SBGI's competitive strengths are as
follows:
24
<PAGE>
* Experienced professional team. Sangui is operated and managed by
-------------------------------
professionals with significant experience in various health care sciences and
----
technologies. There is a dedicated team of scientists led by Professor
Barnikol in the development of the glucose sensor and oxygen carrier which has
seen good progress. For the immunodiagnostic business, improvements in their
existing diagnostic kits e.g. the Chrono Alco I.D kit has seen the Group being
ranked by opinion leaders as being the "best CDT kit in the market". Staff in
SGBI I are able to improve their immunodiagnostic kits as they have a strong
understanding of the immunodiagnostic industry and its competitive market.
Further, having cultivated good relationships with outside collaborators which
have technical and/ or marketing strengths, SBT is able to get Their wide
ranging experiences in academic and applied sciences, as well as their knowledge
of industries and markets, will drive the Group's advancement in its product
development.
* Placing emphasis on technology and quality. The immunodiagnostic business
-------------------------------------------
is very competitive and SBT seeks to continuously innovate and deliver new
technology designs. For instance, its second generation ELISA format is an
improved one step sandwich reaction assay and reduces labor time and costs for
the end user. Unlike other ELISA kits which typically require a 2-step
incubation and washing in the sandwich reaction, only a single step incubation
is needed in our second generation ELISA.
* Efficiency of operations. SGBI is a lean organization as staff are
--------------------------
multi-tasked and are able to perform many functions minimising layers of upper
--
to middle management. Due to the size of the organization, there is more
sharing of research and development amongst SBTAG and GMTAG. SGBI is able to
respond to customers immediately and there is zero to minimal customer
backorders.
25
<PAGE>
MARKET FOR SGBI'S SECURITIES
SGBI has been a non-reporting publicly traded company. SGBI's common
stock is presently traded on the OTC Bulletin Board operated by Nasdaq under the
symbol SGBIE. SGBI has not become or otherwise been a reporting company under
the Securities Exchange Act of 1934. The Nasdaq Stock Market has implemented a
change in its rules requiring all companies trading securities on the OTC
Bulletin Board to become reporting companies under the Securities Exchange Act
of 1934. SGBI is required to become a reporting company by the close of
business on April 5, 2000 or no longer be listed on the OTC Bulletin Board.
SGBI effected the stock exchange transaction with Felnam on March 30, 2000 and
became a successor issuer thereto in order to comply with the reporting company
requirements implemented by the over-the-counter bulletin board.
The following table sets forth the high and low closing prices for shares
of SGBI common stock for the periods noted, as reported by the National Daily
Quotation Service and the Over-The-Counter Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
CLOSING PRICES
YEAR PERIOD HIGH LOW
----- ------ ---- ----
2000 First quarter $5.00 $2.00
1999 First quarter $4.75 $2.75
Second quarter $3.06 $2.06
Third quarter $4.19 $2.00
Fourth quarter $3.63 $1.50
1998 Second quarter $1.69 $1.31
Third quarter $2.25 $1.31
Fourth quarter $13.50 $1.13
In addition to freely tradeable shares, SGBI has numerous shares of common
stock outstanding which could be sold pursuant to Rule 144. In general, under
Rule 144, subject to the satisfaction of certain other conditions, a person,
including one of our affiliates, who has beneficially owned restricted shares of
common stock for at least one year is entitled to sell, in certain brokerage
transactions, within any three-month period, a number of shares that does not
exceed the greater of 1% of the total number of outstanding shares of the same
class, or the average weekly trading volume during the four calendar weeks
immediately preceding the sale. A person who presently is not and who has not
been an affiliate for at least three months immediately preceding the sale and
who has beneficially owned the shares of common stock for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the volume
limitations described above.
26
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors
and executive officers of SGBI who will remain so with the combined entity,
their principal offices and positions and the date each such person became a
director or executive officer. Our executive officers are elected annually by
the Board of Directors. Our directors serve one year terms until their
successors are elected. The executive officers serve terms of one year or until
their death, resignation or removal by the Board of Directors. There are no
family relationships between any of the directors and executive officers. In
addition, there was no arrangement or understanding between any executive
officer and any other person pursuant to which any person was selected as an
executive officer.
Our directors are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NAME . . . . . . . . . . . AGE ADDRESS RESIDENCE CURRENT POSITION
Prof. Wolfgang Barnikol. . 65 Arndtsr 8, D-58453 Germany Chairman, Senior Vice
M.D., Ph. D. Witten, Germany President, Executive Director
Axel J. Kutscher 48 Deutschherrnufer 41, Germany Executive Director
D-60554 Frankfurt
. . . . Germany
Helmut Kappes 42 Franz- Liszt- Str. 32a Germany Non-Executive Director
D-46282 Dorsten
Germany
Oswald Burkhard 49 Martinsgasse 1, D-67547 Germany Non-Executive Director
M.D., Ph.D. Worms, Germany
</TABLE>
None of the Directors are related to one another. None of the independent
Directors has a business or professional relationship with SGBI and/or the other
Directors and substantial shareholders of the Company.
The day-to-day operations of SGBI are entrusted to the Executive Directors
of the Company who are assisted by a management team of key executive officers
("Executive Officers"). The particulars of the Executive Officers are set out
below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NAME . . . . . . . . . . . AGE ADDRESS RESIDENCE CURRENT POSITION
Joerg Alte 38 Kirchweig 18 Germany President and Chief
57642 Alpenrod Executive Officer
Germany
Prof. Wolfgang Barnikol. . 65 Arndtsr 8, D-58453 Germany Senior Vice President
M.D., Ph. D. Witten, Germany
Oswald Burkhard 49 Martinsgasse 1, D-67547 Germany Vice President
M.D., Ph.D. Worms, Germany
</TABLE>
The business and working experience of the Directors and key Executive
Officers of the Company are set out below:
27
<PAGE>
PROF. WOLFGANG K. R. BARNIKOL, M.D., PH.D., Chairman, Vice President and
Executive Director of the Company, has studied chemistry, physics and medicine
at the Universities of Munster, Aachen and Mainz, Germany. In 1961, he received
a Diploma in chemistry from University of Mainz, Mainz, Germany. In 1964, he
obtained the doctorate in physical chemistry (Dr. rer. nat.) and in 1973 the
doctorate in medicine (Dr. med.) both from the University of Mainz, Mainz,
Germany. In that same year, he also was appointed professor in medical
physiology at University of Mainz, Mainz Germany. In 1996, Dr. Barnikol was
awarded a specialist in medical physiology by the medical association of
Rheinland-Pfalc, Germany. His research interest in physical chemistry focused
on the polymerization of styrene and the determination of molecular weights of
polymers with the electron microscope. Dr. Barnikol's research areas in
medicine are: (i) respiration; and (ii) blood and circulation. In the field of
respiration, he works on the functional analysis of the bronchial system and gas
exchange. Moreover, he is engaged in the development of respiratory and skin
oxygen sensors. In the field of blood and circulation, he works on the
development of artificial oxygen carriers for medical use, which are based on
polymerised soluble hemoglobins. As a third sphere of work, Dr. Barnikol is
engaged in the development of an implantable glucose sensor for patients with
diabetes Type I. Dr. Barnikol has published more than 100 scientific articles,
a text book in physiology and a review on the situation of German universities.
(Prof awards)
OSWALD BURKHARD, M.D., PH.D., Vice President and Non-Executive Director of
the Company, has more than 16 years of clinical experience in the diagnosis and
treatment of hematological and oncological diseases. Since 1989, Dr. Burkhard
has operated his own facilities in Worms, Germany, which specialize in
hematology and oncology. His practice offers patients all diagnostic and
therapeutic possibilities, necessary for internal oncology. From 1982 to 1989,
Mr. Burkhard was trained in hematology and oncology at the University School of
Medicine at Mainz, Mainz, Germany. During this time, he cared almost daily for
patients with hematological or oncological problems. Additionally, he was
trained in transfusion medicine. He became a specialist in internal medicine
and hematology. He has significant experience in clinical trials. From 1975 to
1989, he worked at the Institute for Physiology at the University of Mainz,
Mainz, Germany where he was involved in the physical chemistry of hemoglobin
solutions and the measurement of oxygen by fluorescence quenching. In 1988, he
obtained the Doctorate in Medicine from University of Mainz, Mainz, Germany.
Dr. Burkhard received several patents for his scientific work. In 1989, he
obtained the Tancre award of the University of Mainz, Mainz, Germany. Dr.
Burkhard has studied chemistry, physics and medicine at the University of Mainz,
Mainz, Germany. He received a diploma in Chemistry in 1973 from University of
Mainz, Mainz, Germany. In 1976, he obtained the Doctorate in Physical Chemistry
from University of Mainz, Mainz, Germany. During his thesis, Dr. Burkhard
synthesized approximately 20 new compounds.
AXEL J. KUTSCHER, Non-Executive Director of the Company and director of the
Subsidiaries, SanguiBioTech AG and GlukoMediTech AG, brings to the Company
experience 14 years in sales management from a variety of industries, including
the German securities industry. From 1985 until 1987, Mr. Kutscher was a
salesman at Deutsch-Amerikanische Corporation and International Stock Broker
Corporation in Essen, Germany. From 1988 until 1991, Mr. Kutscher was an
account executive in charge of marketing and research at Hetkamp and Partner
GmbH, Gelsenkirchen, Germany. For the next two years, Mr. Kutscher was an
account manager for several private clients in Frankfurt, Germany. After one
year as the sales manager at Euro-Pacific Security Service GmbH & Co KG,
Dusseldorf, Germany, in 1995 Mr. Kutscher became the Vice President and manager
of EURO-AMERICAN GmbH, Mulheim, Germany.
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HELMUT KAPPES, Director of the Company, and Director of the Subsidiaries,
SBTAG and GMTAG, brings to the Company 13 years experience in sales and general
management from a variety of industries, including the German securities
industry. In 1986, Mr. Kappes spent two years as a salesman at
Deutsch-Amerikanische Corporation and International Stock Broker Corporation in
Essen, Germany. From 1988 until 1991, Mr. Kappes was an account executive and
salesman at Hetkamp and Partner GmbH, Gelsenkirchen, Germany. For the next two
years, Mr. Kappes was a sport manager with Trotting Promotion GmbH, located in
Gelsenkirchen, Germany. After one year as the sales manager at Euro-Pacific
Security Service GmbH & Co KG, Dusseldorf, Germany, Mr. Kappes has been the Vice
President and manager of EURO-AMERICAN GmbH, Mulheim, Germany since 1994.
JOERG ALTE, President and Chief Executive Officer, is a German lawyer by
training and practice. After studying law and passing his second state
examination, he worked for more than 3 years at a German law office
predominantly engaged in economic and corporate laws with clients mainly of
public and private companies engaged in international businesses. Subsequently
he was a legal advisor with a well-known German diagnostic company, where he
also practised German and U.S. Securities laws.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following SGBI summary compensation table shows certain compensation
information for services rendered in all capacities for the three fiscal years
ended December 31, 1998 and 1999. No executive officer's salary and bonus
exceeded $100,000 in any of the applicable years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- -----------------------
Awards Payouts
------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($)
- ------------------ ------ ------- ----- ------------- ---------- ---------- ------ ------------
Wolfgang Barnikol 1999 -0- -0- -0- -0- 3,000,000 -0- -0-
Chairman and
Senior Vice President (1)
1998 -0- -0- -0- -0- -0- -0- -0-
Joerg Alte 1999 -0- -0- -0- -0- -0- -0- -0-
President and CEO (2)
1998 8,000 -0- -0- -0- -0- -0- -0-
John J. Kiang 1999 -0- -0- -0- -0- -0- -0- -0-
Former President and
Director (3)
1998 88,000 -0- -0- -0- -0- -0- -0-
Oswald Burkhard 1999 -0- -0- -0- -0- -0- -0- -0-
Vice-President (4)
1998 -0- -0- -0- -0- -0- -0- -0-
Patrick Onishi 1999 70,000 -0- -0- -0- -0- -0- -0-
Secretary
1998 70,000 -0- -0- -0- -0- -0- -0-
</TABLE>
(1) Professor Barnikol receives a yearly salary of an aggregtae $140,000 as
President of the two German subsidiaries Sangui AG and Gluko AG. Professor
Barnikol was issued 3,000,000 options to purchase common stock of the Company
for $0.01 per share exercisable until June 30, 2009 in consideration
for the transfer of all his patent rights to the Company.
(2) Joerg Alte receives a monthly fee of $8,000 as consultant of the
subsidiaries.
(3) John J. Kiang was President, Chief Executive Officer and Director until
November 1998.
(4) Oswald Burkhard receives a yaer compensation of approximately $6,000 as
Vice-President of the two German subsidiaries.
Compensation of Directors
To date, Directors of the Company have not received any compensation for
serving in such capacity.
Employment Agreements
The Company has no existing employment agreements with its officers or key
employees. Professor Barnikol has an agreement with the Company pursuant to
which he is entitled to 3% royalties of gross revenues earned with any product
based on his inventions.
CERTAIN TRANSACTIONS
Except as otherwise disclosed below, no Director, substantial shareholder
or Executive Officer of the Company was or is interested in any transaction
undertaken by SGBI within the last three years.
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EA
EA is a venture capital investment corporation organised and established
in GermanyAxel Kutscher and Helmet Kappes, who are Directors and substantial
shareholders of the Company, are also directors and shareholders of EA. On
October 29, 1996, EA granted a loan of US$1,000,000 to SGBI. Pursuant to a
Common Stock Conversion and Subscription Agreement dated March 24, 1997 between
EA and SGBI, it was agreed that 10,000,000 shares at a conversion price of
US$0.10 per Share be issued to EA, in satisfaction and full repayment of the
said loan.
During the period beginning March 24, 1997 up to June 10, 1999, the
Company had received a total funding of US $4,922,500 from EA in consideration
of the issuance of 16,750,000 shares at an average subscription price ranging
from approximately US$0.20 to US$1.15 per share.
In addition, on September 21, 1998, the Company issued 4,591,389 Shares to
EA at a subscription price of US $0.50 per share in consideration of US $800,000
cash; the issue to the Company of 9,644,986 shares at US $0.10 per share in the
capital of AMDL, Inc., a public company incorporated in the United States with
its shares traded on OTCBB under the symbol AMDD; and an amount of US $531,197
in the form of a promissory note payable by EA in monthly instalments of US
$24,267 at an interest rate of 9%. As at the date of the transaction, Axel
Kutscher, one of the Executive Directors of the Company, was also a director of
AMDL Inc. He has since resigned from the board of AMDL Inc.
Stock Option granted in favour of Professor Wolfgang Barnikol
The Company entered into a stock option agreement which took effect on
September 24, 1999, with Professor Wolfgang Barnikol, an Executive Director and
substantial shareholder of the Company. The Professor was granted a share
option of 3 million Shares at an exercise price of US$0.01 per share, in
consideration of the assignment of his patent rights to the Company. The
Professor is entitled to exercise the option at the point the Company completes
the development of the artificial oxygen carrier or the implantable sensor and
receives regulatory approval from either Germany, Singapore or the United
States. The option shall terminate and cease to be exercisable on June 30, 2009
unless terminated earlier in accordance with the stock option agreement. The
stock option agreement is governed under the laws of the State of California.
Rental received from related parties
In fiscal year 1997, NOHIV, a biotechnology company of which Messrs Axel
Kutscher and Helmut Kappes were former directors, rented some office space from
SGBI's premises in Santa Ana for approximately three quarters of a year. The
rental charge was based on prevailing market rates conducted on an arm's length
basis.
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Potential conflict of interests
None of the Directors, or Executive Officers has an interest in any company
carrying on the same business or dealing in similar products. Details of
internal control procedures undertaken or to be undertaken to ensure that the
interested person transactions are carried out on an arm's length basis are as
follows:
all interested person transactions shall be summarised and submitted to the
Audit Committee for regular and periodic review. Judgement as to whether the
terms are at arm's length shall be based on the following considerations;
when buying from an interested person, the prices and terms of at least two
other comparative offers from third parties, contemporaneous in time. The
purchase price shall not be higher than the most competitive price of the two
other comparative offers from third parties;
when selling to an interested person, the prices and terms of at least two
other successful sales to third parties, contemporaneous in time. The sale
price shall not be lower than the lowest sale price of the other two successful
sales to third parties; and,
before any agreement or arrangement that is not in the ordinary course of
business of the Company or its subsidiaries is transacted, prior approval must
be obtained from the Audit Committee.
The considerations in sub-paragraphs above will allow for variation from
the prices and terms of the comparative offers or, as the case may be, sales to
the extent that the volume of trade, creditworthiness of the buyer, differences
in service reliability or other relevant factors render justifiable and whether
or not a comparative offer or, as the case may be, sale, contemporaneous in
time, shall be judged on the reference to the volatility of the market for the
goods and services in question.
The Audit Committee will approve the internal control procedures and
arrangements for all future interested person transactions to ensure that they
are carried out on an arm's length basis and on normal commercial terms and will
not be prejudicial to the Company's shareholders. Ratification of the records
for all the interested person transactions to ensure that they comply with the
internal control procedures will be carried out by the Audit Committee during
its periodic review. The review includes the examination of the nature of the
transaction and its supporting documents or such other data deemed necessary by
the Audit Committee.
RISK FACTORS
An investment in SGBI involves significant risks associated with economic,
business, market and financial factors and developments which may have adverse
impacts on SGBI's future performance, including significant risks not normally
associated with investing in equity securities of United States companiesPrior
to making an investment decision, prospective investors should carefully read
and consider, along with other matters referred to herein:
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LIMITED OPERATING HISTORY OF THE COMPANY
The Company is a relatively new entity and owns all of the issued and
outstanding capital stock of its subsidiaries. SGBI has limited operating
histories upon which a significant evaluation of the Company's prospects can be
made. The prospects of SGBI must be considered keeping in mind the risks,
expenses, and difficulties frequently encountered in the establishment of a new
business in an ever changing industry and the research, development,
manufacture, commercialization, distribution, and commercialization of esoteric
medical technology, procedures, and products and related technologies. There can
be no assurance that unanticipated technical or other problems will not occur
which would result in material delays in product commercialization or that the
efforts of SGBI will result in successful product commercialization. SGBI has
been operating at a loss. Hence, the time frame for SGBI to achieve profitable
operations is uncertain.
DEPENDENCE ON KEY PERSONNEL
The future success of SGBI will depend on the service of their key
scientific personnel in its pharmaceutical chemistry and biochemistry
departments and, when appropriate, computer hardware and software engineering,
electrical and mechanical engineering and management personnel and,
additionally, their ability to identify, hire and retain additional qualified
personnel. There is intense competition for qualified personnel in the areas of
the activities of SGBI and there can be no assurance that SGBI will be able to
attract and retain personnel necessary for the development of the business of
SGBI. Because of the intense competition, there can be no assurance that SGBI
will be successful in adding technical personnel if needed to satisfy the
staffing requirements of the Subsidiaries. Failure to attract and retain key
personnel could have a material adverse effect on SGBI.
SGBI and its subsidiaries are dependent on the efforts and abilities of
their senior management. The loss of various members from management could have
a material adverse effect on the business and prospects of SGBI in particular
SGBI will depend on the service of Professor Barnikol because he is instrumental
in the research of oxygen carrier and glucose sensor. There can be no assurance
that upon the departure of key personnel from the service of SGBI or its
subsidiaries that suitable replacement personnel will be available.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
To achieve and maintain competitiveness of their products and technologies
and to conduct costly and time-consuming research and development, SGBI will be
required to raise substantial funds. SGBI reserves the right to offer sales of
additional shares as private placements to potentially qualified investors.
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<PAGE>
Thus, SGBI will require additional cash to implement their business
strategies, including cash for: (i) payment of increased operating expenses;
(ii) payment of research and development expenses; and (iii) further
implementation of those business strategies. Such additional capital may be
raised by additional public or private financing, as well as borrowings and
other resources. To the extent that additional capital is received by SGBI by
the sale of equity or equity-related securities, the issuance of such securities
will result in dilution to the Company's shareholders. There can be no
assurance that additional funding will be available on favorable terms, if at
all. If adequate funds are not available, SGBI may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require SGBI to relinquish rights
to certain of the technologies or product candidates that SGBI would not
otherwise relinquish. The inability of the Company to access the capital markets
or obtain acceptable financing could have a material adverse effect on the
results of operations and financial condition of the Company. Moreover, if
funds are not available from any sources, the Company may not be able to
continue to operate.
LICENSES AND CONSENTS
The utilization or other exploitation of the products and services
developed by SGBI or its subsidiaries may require SGBI or its subsidiaries to
obtain licenses or consents from the producers or other holders of copyrights or
other similar rights relating to the products and technologies of SGBI or its
subsidiaries. In the event SGBI or its subsidiaries are unable, if so required,
to obtain any necessary license or consent on terms which the management of SGBI
or its subsidiaries consider to be reasonable, SGBI or its subsidiaries may be
required to cease developing, utilizing, or exploiting products or technologies
affected by those copyrights or similar rights. In the event SGBI or its
subsidiaries is challenged by the holders of such copyrights or other similar
rights, there can be no assurance that SGBI or its subsidiaries will have the
financial or other resources to defend any resulting legal action, which could
be significant.
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<PAGE>
TECHNOLOGICAL FACTORS
The market for the products and technology developed by SGBI is
characterized by rapidly changing technology which could result in product
obsolescence or short product life cycles. Similarly, the industry is
characterized by continuous development and introduction of new products and
technology to replace outdated products and technology. Accordingly, the
ability of SGBI to compete will be dependent upon the ability of SGBI to provide
new and innovative products and technology. There can be no assurance that
competitors will not develop technologies or products that render the proposed
products and technology of SGBI obsolete or less marketable. SGBI will be
required to adapt to technological changes in the industry and develop products
and technology to satisfy evolving industry or customer requirements, any of
which could require the expenditure of significant funds and resources, and SGBI
does not have a source or commitment for any such funds and resources.
Development efforts relating to the technological aspects of the various
products and technologies to be developed by SGBI are not substantially
completed. Accordingly, SGBI will continue to refine and improve those products
and technologies. Continued refinement and improvement efforts remain subject
to the risks inherent in new product development, including unanticipated
technical or other problems which could result in material delays in product
commercialization or significantly increased costs. In addition, there can be
no assurance that those products and technologies will prove to be sufficiently
reliable or durable in wide spread commercial application. The products or
technologies to be developed by SGBI will be the result of significant research
and development. Such research and development may result in errors which
become apparent subsequent to wide spread commercial utilization. In such
event, SGBI would be required to modify such products or technologies and
continue with additional research and development, which may delay the plans of
SGBI and cause SGBI to incur additional cost.
EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT
SGBI and its subsidiaries were founded to develop, manufacture, promote,
and market: (i) immunodiagnostic kits; (ii) oxygen carrier which include a blood
volume substitute or a blood additive and (iii) a glucose sensor product. To
achieve profitable operations, SGBI independently or in collaboration with
others, must successfully identify, develop, manufacture, and market proprietary
products. SGBI has developed nine products for which sales are increasing but
significantly below the level of achieving profitability or financial
independence. Other potential products of SGBI are at various stages of research
and development.
34
<PAGE>
The potential products of SGBI will require additional pre-clinical and
clinical development, regulatory approval and additional investment prior to
commercialization, either by SGBI independently or by others through
collaborative arrangements. Potential products that appear to be promising at
early stages of development may be ineffective or be shown to cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture, be uneconomical to
produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of others. There can be no assurance
that any potential products will be successfully developed, prove to be safe and
efficacious in clinical trials, satisfy applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs or
achieve commercial acceptance.
All products and technologies under development by SGBI will require
significant commitment of personnel and financial resources. Several products
will require extensive evaluation and pre-marketing clearance by the FDA and
comparable agencies in other countries prior to commercial sale. SGBI regularly
re-evaluate their product development efforts. On the basis of these
re-evaluations, SGBI may abandon development efforts for particular products. No
assurance can be given that any product or technology under development will
result in the successful introduction of any new product. The failure to
introduce new products into the market on a timely basis could have a material
adverse effect on the business, financial conditions or results of operation of
SGBI.
The technologies of SGBI have not yet been tested in humans and there can
be no assurance that human testing of potential products based on such
technologies will be permitted by regulatory authorities or, even if human
testing is permitted, that products based on such technologies will be shown to
be safe or efficacious. Potential products based on the technologies of SGBI
are at an early stage of testing and there can be no assurance that such
products will be shown to be safe or effective.
MARKET ACCEPTANCE
There can be no assurance that the products and technologies of SGBI will
achieve a significant degree of market acceptance, and that acceptance, if
achieved, will be sustained for any significant period or that product life
cycles will be sufficient ( or substitute products developed) to permit SGBI to
achieve or sustain market acceptance could have a material adverse effect on the
business, financial condition, and results of operations of SGBI.
GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL
35
<PAGE>
The clinical testing, manufacture, promotion, and sale of biotechnology and
pharmaceutical products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies prior to the introduction of
those products. Management of SGBI believes that many of the potential products
of SGBI will be regulated by the FDA under current regulations of the FDA.
Other federal and state statutes and regulations may govern or influence the
testing, manufacture, safety, effectiveness, labeling, storage, record-keeping,
approval, advertising, distribution and promotion of certain products developed
by SGBI. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, seizure of products, suspensions of regulatory
approvals, product recalls, operating restrictions, re-labeling costs, delays in
sales, cessation of manufacture of products, the imposition of civil or criminal
sanctions, total or partial suspension of product marketing, failure of the
government to grant pre-market approval, withdrawal of marketing approvals and
criminal prosecution.
The FDA's requirements include lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time-consuming
procedures. In particular, human therapeutic products are subject to rigorous
pre-clinical and clinical testing and other approval requirements by the FDA and
comparable foreign agencies. Although the time required for completing such
testing and obtaining such approvals is uncertain, satisfaction of these
requirements typically takes a number of years and varies substantially based on
the type, complexity and novelty of each product. Neither SGBI nor its
subsidiaries can accurately predict when product applications or submissions for
FDA or other regulatory review may be submitted. The lengthy process of
obtaining regulatory approval and ensuring compliance with appropriate federal
statutes and regulations requires the expenditure of substantial resources. Any
delays or failure by SGBI or its subsidiaries to obtain regulatory approval and
ensure compliance with appropriate standards could adversely affect the
commercialization of such products, the ability of SGBI to earn product or
royalty revenue, and their results of operations, liquidity and capital
resources.
Pre-clinical testing is generally conducted in laboratory animals to
evaluate the potential safety and effectiveness of a drug. The results of these
studies are submitted to the FDA, which must be approved before clinical trials
can begin. Typically, clinical evaluation involves a time consuming and costly
three-phase process. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile, the pattern of drug
distribution and metabolism. In Phase II, clinical trials are conducted with
groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors the
progress of each of the three phases of clinical trials and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.
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<PAGE>
Clinical trials and the marketing and manufacturing of products are subject
to the rigorous testing and approval processes of the FDA and foreign regulatory
authorities. The process of obtaining FDA and other required regulatory
approvals is lengthy and expensive. There can be no assurance that SGBI will be
able to obtain the necessary approvals to conduct clinical trials for the
manufacturing and marketing of products, that all necessary clearances will be
granted to SGBI or their licensors for future products on a timely basis, or at
all, or that FDA review or other actions will not involve delays adversely
affecting the marketing and sale of the products or SGBI. In addition, the
testing and approval process with respect to certain new products which SGBI may
seek to introduce is likely to take a substantial number of years and involve
the expenditure of substantial resources. There can be no assurance that
pharmaceutical products currently in development will be cleared for marketing
by the FDA. Failure to obtain any necessary approvals or failure to comply with
applicable regulatory requirements could have a material adverse effect on the
business, financial condition or results of operations of SGBI. Further, future
government regulation could prevent or delay regulatory approval of the products
of SGBI.
There can be no assurance as to the length of the clinical trial period or
the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety and effectiveness of the products of
SGBI. SGBI may encounter significant delays or excessive costs in their efforts
to secure necessary approvals, and regulatory requirements are evolving and
uncertain. Future United States or foreign legislative or administrative acts
could also prevent or delay regulatory approval of the products of SGBI. If
commercial regulatory approvals are obtained, they may include significant
limitations on the indicated uses for which a product may be marketed. In
addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or the failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product, or even the removal of the product from the market, as well as
possible civil or criminal sanctions. Failure of SGBI to obtain marketing
approval for any of their products under development on a timely basis, or FDA
withdrawal of marketing approval once obtained, could have a material adverse
effect on the business, financial condition and results of operations of SGBI.
The steps required before a product may be marketed in the United States
generally include pre-clinical studies and the filing of an investigational new
product application with the FDA. Reports of results of pre-clinical studies
and clinical trials for products are submitted to the FDA in the form of a
product license application ("PLA") for approval for marketing and commercial
shipment. Submission of a PLA does not assure FDA approval for marketing. The
PLA review process may take a number of years to complete, although reviews of
applications for treatments of life-threatening diseases may be accelerated or
expedited. Failure of SGBI or its subsidiaries to receive FDA marketing
approval for any of their products under development on a timely basis could
have a material adverse effect on the business, financial condition and results
of operations of SGBI. In addition to obtaining approval for each product, an
establishment license application ("ELA") usually must be filed and approved by
the FDA.
Among the other requirements for ELA approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices
("GMP") requirements. In complying with the FDA's GMP requirements,
manufacturers must continue to spend time, money and effort in production
record-keeping and quality control to assure that the product meets applicable
specifications and other requirements. Failure to comply with the FDA's GMP
requirements subjects the manufacturer to possible FDA regulatory action. There
can be no assurance that SGBI or its subsidiaries or their contract
manufacturers, if any, will be able to maintain compliance with the FDA's drug
GMP requirements on a continuing basis. Failure to maintain such compliance
could have a material adverse effect on the business, financial condition and
results of operations of SGBI.
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<PAGE>
Another requirement for many products is lot-by-lot release approval, which
necessitates FDA approval of the release of each lot of a biologic drug before
commercialization. The lot-by-lot release and ELA requirements may be applied
to some or all of the potential products of SGBI. Recently, the FDA amended its
regulations to permit certain products to be eligible for approval under a
product license that does not entail lot-to-lot release and establishment
licensing requirements. There can be no assurance that any of the products of
SGBI will be eligible for approval under a single product license or otherwise
be subject to less rigorous regulation than traditional products.
There can be no assurance that any approval will be granted on a timely
basis, or at all; that the FDA will not require post-marketing testing and
surveillance to monitor the product and continued compliance with regulatory
requirements; that the FDA will not require the submission of any lot of any
product for inspection and will not restrict the release of any lot that does
not comply with the FDA; that the FDA will not otherwise order the suspension of
manufacturing, recall or seizure of products; or that the FDA will not withdraw
its marketing clearance of any product if compliance with regulatory standards
is not maintained or if problems concerning safety or effectiveness of the
product are discovered following approval.
Any party that manufactures therapeutic or pharmaceutical products is
required to adhere to applicable standards for manufacturing practices and to
engage in extensive record keeping and reporting. Any manufacturing facilities
of SGBI are subject to periodic inspection by state and federal agencies,
including the FDA and comparable agencies in foreign countries.
The effect of governmental regulation may be to delay the marketing of new
products for a considerable period of time, to impose costly requirements on the
activities of SGBI or to provide a competitive advantage to other companies that
compete with SGBI. There can be no assurance that FDA or other regulatory
approval for any products developed by SGBI will be granted on a timely basis,
if at all or, if granted, that compliance with regulatory standards will be
maintained. Adverse clinical results by SGBI could have a negative impact on
the regulatory process and timing. A delay in obtaining, or failure to obtain,
regulatory approvals could preclude or adversely affect the marketing of
products and the liquidity and capital resources of SGBI. The extent of
potentially adverse governmental regulation that might result from future
legislation or administrative action cannot be predicted.
There can be no assurance that the FDA will not change its position with
regard to the safety or effectiveness of the products of SGBI or that the FDA
will agree with the position of SGBI regarding the regulators or status of their
products. In the event that the FDA takes a contrary position regarding any of
the products of SGBI, SGBI may be required to change its labeling or formulation
or possibly cease manufacture and marketing of such products. In addition, even
prior to any formal regulatory action, SGBI could decide voluntarily to cease
distribution and sale, or to recall, any of its products if concern about the
safety or efficacy of any of their products were to develop. Any such action
could have a material adverse effect on the business, financial condition or
results of operations of SGBI.
38
<PAGE>
There can be no assurance that unacceptable toxicities or side effects will
not occur at any time in the course of human clinical trials or, if any products
are successfully developed and approved for marketing, during commercial use of
the products of SGBI. The appearance of any such unacceptable toxicities or
side effects could interrupt, limit, delay or abort the development of any of
the products of SGBI or, if previously approved, necessitate their withdrawal
from the market. Furthermore, there can be no assurance that disease resistance
will not limit the effectiveness of potential products.
SGBI will be subject to foreign regulatory authorities governing clinical trials
and product sales if they seek to market their products outside the United
States. Whether or not FDA approval has been obtained, approval of a product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
approval set forth above, and approval by the FDA does not ensure approval by
the health authorities of any other country. There can be no assurance that any
foreign regulatory agency will approve any product submitted for review by SGBI.
SGBI is subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with its research
work. The extent and character of governmental regulation that might result
from future legislation or administrative action cannot be accurately predicted.
INTENSE COMPETITION
Competition in the biotechnology and pharmaceutical industries is intense
and is expected to increase. SGBI and its subsidiaries compete directly with the
research departments of biotechnology and pharmaceutical companies, chemical
companies and, possibly, joint collaborations between chemical companies and
research and academic institutions. Management of SGBI is aware that other
companies and businesses have developed and are in the process of developing
technologies and products which will be competitive with the products and
technologies developed and offered by SGBI. The biotechnology and
pharmaceutical industries continue to undergo rapid change. There can be no
assurance that competitors have not or will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by SGBI or which would render the technology and products of
SGBI obsolete. Many of the competitors of SGBI have substantially greater
experience, financial and technical resources and production, marketing and
development capabilities than SGBI. Accordingly, certain of those competitors
may succeed in obtaining regulatory approval for products more rapidly or
effectively than SGBI. If SGBI commence commercial sales of their products,
they will also be competing with respect to manufacturing efficiency and sales
and marketing capabilities, areas in which it has no experience.
39
<PAGE>
Historically, biotechnology and pharmaceutical companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of chemical compounds. Academic institutions, governmental
agencies and other research organizations are also conducting research in areas
in which SGBI and its subsidiaries are working, either on their own or through
collaborative efforts. In addition, SGBI and its subsidiaries compete with
several alternative technologies. The processes of SGBI and its subsidiaries
may be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of the competitors of SGBI. There
can be no assurance that the existing approaches of the competitors of SGBI and
its subsidiaries or new approaches or technology developed by those competitors
will not be more effective than those of SGBI.
UNCERTAINTIES ASSOCIATED WITH PATENTS AND PROPRIETARY RIGHTS
The success of SGBI and its subsidiaries may depend in large part on their
ability to obtain patents for their technologies and products, if any, resulting
from the application of such technologies, to defend patents once obtained and
to maintain trade secrets, both in the United States and in foreign countries.
The success of SGBI will also depend upon avoiding the infringement of patents
issued to competitors. There can be no assurance that SGBI will be able to
obtain patent protection for products based upon the technology of SGBI.
Moreover, there can be no assurance that any patents issued to SGBI or its
subsidiaries will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to SGBI.
Litigation, which could result in substantial cost to SGBI, may be necessary to
enforce the patent and license rights of SGBI or to determine the scope and
validity of its and others' proprietary rights.
Due to the length of time and expense associated with bringing new products
through development and the length of time required for the governmental
approval process, the biotechnology and pharmaceutical industries have
traditionally placed considerable importance on obtaining and maintaining patent
and trade secret protection for significant new technologies, products and
processes. The enforceability of patents issued to biotechnology and
pharmaceutical firms can be highly uncertain. Federal court decisions
establishing legal standards for determining the validity and scope of patents
in the field are in transition. In addition, there can be no assurance that
patents will be issued or, if issued, any such patents will afford SGBI
protection from infringing patents granted to others.
A number of biotechnology and pharmaceutical companies, and research and
academic institutions, have developed technologies, filed patent applications or
received patents on various technologies that may be related to the business of
Sangui and its Subsidiaries. Some of these technologies, applications or
patents may conflict with the technologies of SGBI. Such conflicts could also
limit the scope of the patents, if any, that SGBI or its subsidiaries may be
able to obtain or result in the denial of the patent applications of SGBI.
The lead product in SGBI's immunodiagnostic business segment pertains to a
Carbohydrate-Deficient Transferrin (CDT) serum (blood) test. The Company was
selling a CDT kit in small quantities since 1997. Later, the Company has
successfully developed a second assay, which has been registered as a trademark
in Germany as ChronAlco I.D.
40
<PAGE>
Pharmacia/Upjohn owns a patent on the isolation of CDT isoforms and
announced in November 1998 that it would discontinue this product for
distribution in Germany effective in 1999. A second and smaller competitor,
Axis Biochemicals, ASA ("Axis"), has a U.S. patent granted and expects a German
or European patent granted for a competing product. Pharmacia/Upjohn advised
their customers to obtain the product from Bio Rad laboratories, which
distributes one version of the Axis product on an exclusive basis.
The Company believes that this second assay should be relatively more
resistant to the current claims of the Axis patent application. The Company's
German and American patent attorneys both estimate that mostly likely the
Company should prevail if and when the ChronAlco I.D. is challenged by the
Company's competitor. However, there can be no assurance that SGBI will not
become involved in patent infringement litigation with Axis regarding the sale
of SGBI's original version of the CDT test. Despite the assurances from the
patent attorneys, the possibility that the Company may lose in a patent
law-suit, no matter how remote, can still exist. The Company has provided
$25,000 for the potential costs associated with legal fees for the exposure
resulting from the relative small volume of sales of the Company's first CDT
kit. Litigation generally and patent litigation in particular is time
consuming and costly. In the event SGBI becomes involved in litigation, unless
such litigation is resolved quickly, the resources of SGBI may be utilized to
pay the costs and fees incurred in such litigation. Thus, the resources of SGBI
to pursue research and development of the products of SGBI could be reduced by a
significant amount. The Company has ceased to sell the first version of the CDT
kit to minimize the legal exposure.
Many of the competitors of SGBI have, or are affiliated with companies
having, substantially greater resources than SGBI, and such competitors may be
able to sustain the costs of complex patent litigation to a greater degree and
for longer periods of time than SGBI. Uncertainties resulting from the
initiation and continuation of any patent or related litigation could have a
material adverse effect on the ability of SGBI to compete in the marketplace
pending resolution of the disputed matters. Moreover, an adverse outcome could
subject SGBI to significant liabilities to third parties and require SGBI to
license disputed rights from third parties or cease using the technology. In
the event that third parties have or obtain rights to intellectual property or
technology used or needed by SGBI, there can be no assurance that any licenses
would be available to SGBI or would be available on terms reasonably acceptable
to SGBI.
SGBI may rely on certain proprietary technologies, trade secrets, and
know-how that are not patentable. Although SGBI has taken steps to protect
their unpatented trade secrets and technology, in part through the use of
confidentiality agreements with their employees, consultants and certain of its
contractors, there can be no assurance that: (i) these agreements will not be
breached; (ii) SGBI would have adequate remedies for any breach; or (iii) the
proprietary trade secrets and know-how of SGBI will not otherwise become known
or be independently developed or discovered by competitors.
41
<PAGE>
RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE
The business of SGBI will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
pharmaceutical and therapeutic products. SGBI does not currently have product
liability insurance, and there can be no assurance that SGBI will be able to
obtain or maintain such insurance on acceptable terms or, if obtained, that such
insurance will be adequate to cover potential product liability claims or that a
loss of insurance coverage or the assertion of a product liability claim or
claims would not materially adversely affect the business, financial condition
and results of operations of SGBI. SGBI face an inherent business risk of
exposure to product liability and other claims in the event that the development
or use of its technology or products is alleged to have resulted in adverse
effects. Such risk exists even with respect to those products that are
manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale. There can be no assurance that SGBI
will avoid significant product liability exposure. While SGBI have taken, and
will continue to take, what they believe are appropriate precautions, there can
be no assurance that they will avoid significant liability exposure. An
inability to obtain product liability insurance at acceptable cost or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of products developed by SGBI. A product
liability claim could have a material adverse effect on the business, financial
condition and results of operations of SGBI.
UNCERTAINTIES RELATING TO PRICING AND THIRD-PARTY REIMBURSEMENT
The operating results of SGBI may depend in part on the availability of
adequate reimbursement for the products of SGBI from third-party payers, such as
government entities, private health insurers and managed care organizations.
Third-party payers are increasingly seeking to negotiate the pricing of medical
services and products. In some cases, third-party payers will pay or reimburse
a user or supplier of a product for only a portion of the purchase price of the
product. In the case of the products of SGBI, payment or reimbursement by
third-party payers of only a portion of the cost of such products could make
such products less attractive, from a cost perspective, to users, suppliers and
physicians. There can be no assurance that reimbursement, if available, will be
adequate. Moreover, certain of the products of SGBI may not be of type
generally eligible for third-party reimbursement. If adequate reimbursement
levels are not provided by government entities or other third-party payers for
the products of SGBI, the business, financial condition and results of
operations of SGBI would be materially adversely affected. A number of
legislative and regulatory proposals aimed at changing the nation's health care
system have been proposed in recent years. While SGBI cannot predict whether
any such proposals will be adopted, or the effect that any such proposal may
have on its business, such proposals, if enacted, could have a material adverse
effect on the business, financial condition or results of operations of SGBI.
RISK OF PRODUCT RECALL; PRODUCT RETURNS
42
<PAGE>
Product recalls may be issued at the discretion of SGBI, the FDA or other
government agencies having regulatory authority for product sales and may occur
due to disputed labeling claims, manufacturing issues, quality defects or other
reasons. No assurance can be given that product recalls will not occur in the
future. Any product recall could materially adversely affect the business,
financial condition or results of operations of SGBI. There can be no assurance
that future recalls or returns would not have a material adverse effect upon the
business, financial condition and results of operations of SGBI.
RISKS OF INTERNATIONAL SALES AND OPERATIONS
SGBI's results of operations are subject to fluctuations in the value of
the German Deutschmark against the U.S. dollar due to SGBI's German
subsidiaries. Although management of SGBI will monitor exposure to currency
fluctuations, there can be no assurance that exchange rate fluctuations will not
have a material adverse effect on the results of operations or financial
condition of SGBI. In the future, SGBI could be required to sell its products
in other currencies, which would make the management of currency fluctuations
more difficult and expose SGBI to greater risks in this regard.
The products of SGBI will be subject to numerous foreign government
standards and regulations that are continually being amended. Although SGBI
will endeavour to satisfy foreign technical and regulatory standards, there can
be no assurance that the products of SGBI will comply with foreign government
standards and regulations, or changes thereto, or that it will be cost effective
for SGBI to redesign its products to comply with such standards or regulations.
The inability of SGBI to design or redesign products to comply with foreign
standards could have a material adverse effect on SGBI's business, financial
condition and results of operations.
LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE
SGBI have not yet manufactured their products, other than their nine in
vitro immunodiagnostic products, in commercial quantities. Its subsidiaries
will be engaged in manufacturing pharmaceutical products which will be subject
to much more stringent regulatory requirements, as compared to the in vitro
diagnostic products engaged by the SGBI U.S. Diagnostic Division. No assurance
can be given that its subsidiaries, on a timely basis, will be able to make the
transition from manufacturing clinical trial quantities to commercial production
quantities successfully or be able to arrange for contract manufacturing. SGBI
and its subsidiaries have no experience in the sales, marketing and distribution
of products. There can be no assurance that SGBI will be able to establish
sales, marketing and distribution capabilities or make arrangements with
collaborators, licensees or others to perform such activities or that such
efforts will be successful.
43
<PAGE>
The manufacture of the products of SGBI involves a number of steps and
requires compliance with stringent quality control specifications imposed by
SGBI and by the FDA. Moreover, SGBI's products can only be manufactured in a
facility that has undergone a satisfactory inspection by the FDA. For these
reasons, SGBI would not be able quickly to replace its manufacturing capacity if
it were unable to use its manufacturing facilities as a result of a fire,
natural disaster (including an earthquake), equipment failure or other
difficulty, or if such facilities are deemed not in compliance with the FDA's
GMP requirements and the non-compliance could not be rapidly rectified. The
inability or reduced capacity of SGBI to manufacture their products would have a
material adverse effect on SGBI's business and results of operations.
SGBI may enter into arrangements with contract manufacturing companies to
expand its production capacities in order to satisfy requirements for its
products, or to attempt to improve manufacturing efficiency. If SGBI chooses to
contract for manufacturing services and encounters delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
its finished products, clinical trials, market introduction and subsequent sales
of such products would be adversely affected. Further, contract manufacturers
must also operate in compliance with the FDA's GMP requirements; failure to do
so could result in, among other things, the disruption of product supplies.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The research and development processes of SGBI involves the controlled
storage, use and disposal of hazardous materials and radioactive compounds.
SGBI is subject to federal, state and local laws and regulations governing the
use, generation, manufacturing, storage, handling, and disposal of such
materials and certain waste products. Although SGBI does not currently
manufacture commercial quantities of its product candidates, it produces limited
quantities of such products for its clinical trials and SGBI intends to
manufacture commercial quantities of its products. Although SGBI believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, SGBI could be held liable for any damages that
result, and any such liability could exceed the resources of SGBI. There can be
no assurance that SGBI will not be required to incur significant costs to comply
with current or future environmental laws and regulations nor that the
operations, business or assets of SGBI will not be materially or adversely
affected by current or future environmental laws or regulations.
UNCERTAINTY IN THE HEALTH CARE INDUSTRY
44
<PAGE>
The health care industry is subject to changing political, economic and
regulatory influences that will affect the procurement practices and operation
of health care organizations. Changes in current health care financing and
reimbursement systems could result in the need for unplanned product
enhancements, in delays or cancellations of product orders or shipments or in
the revocation of endorsement of the products of SGBI. Any of such occurrences
could have a material adverse effect on SGBI's business, financial condition and
results of operations. During the past several years, the United States health
care industry has been subject to an increase in governmental regulation of,
among other things, reimbursement rates. Certain proposals to reform the United
States health care system are periodically under consideration by Congress.
These programs may contain proposals to increase government involvement in
health care and otherwise change the operating environment for the customers of
SGBI. Health care organizations to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments in cost
containment tools and related technology such as the products of SGBI. SGBI
cannot predict what impact, if any, such factors might have on its business,
financial condition and results of operations. In addition, many health care
providers are consolidating to create integrated health care delivery systems
with greater regional market power. As a result, these emerging systems could
have greater bargaining power, which may lead to price erosion of the products
of SGBI. The failure of SGBI to maintain adequate price levels would have a
material adverse effect on SGBI's business, financial condition and results of
operations. Other legislative or market-driven reforms could have unpredictable
effects on SGBI's business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTY PROVIDERS
SGBI may become dependent upon various third parties for one or more
significant services or components required for the products or technology
developed by SGBI, which services or components, will be provided to SGBI
pursuant to agreements with such providers. In as much as the capacity for
certain services and components by certain third parties may be limited, the
inability of SGBI, for economic or other reasons, to continue to receive
services or components from existing providers or to obtain similar components
or services from additional providers could have a material adverse effect on
SGBI, e.g. in developing the long term implantable glucose sensor, the Company
requires the availability of microelectronic components developed by third
party.
DEPENDENCE ON MAJOR CUSTOMERS
The Company has a relatively small customer base. The Company's four
largest customers, Biodiagnostic GmbH, DPC Biermann GmbH, Heritage Labs,
Peninsular Laboratories, Inc. accounted for 82% of sales for the six months
ended June 30, 1999. Although the Company is currently the supplier of
certain immunodiagnostic kits to these customers, there is no assurance that
the Company will continue to be the supplier or the supplier of choice. In the
event that the Company loses the business from any of its major customers, this
would have a significant negative impact on the Company's sales.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not applicable
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
45
<PAGE>
ITEM 5. OTHER EVENTS
Successor Issuer Election.
Upon execution of the Exchange Agreement and delivery of the SGBI shares to
MRC as the sole shareholder of Felnam, pursuant to Rule 12g-3(a) of the General
Rules and Regulations of the Securities and Exchange Commission, SGBI became the
successor issuer to Felnam for reporting purposes under the Securities Exchange
Act of 1934 and elected to report under the Act effective March 30, 2000.
ITEM 6. RESIGNATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
Not applicable.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of SGBI for the fiscal years ending December
31, 1998 and June 30, 1999 are included herein in reliance on the report of
Jones, Jenson & Company, our independent public accountant. The unaudited
financial statements of SGBI for the six months ended December 31, 1999 are also
included herein.
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
F-1
<PAGE>
CONTENTS
Independent Auditors' Report . . . . . . . . . . . . 3
Consolidated Balance Sheet . . . . . . . . . . . . .. 4
Consolidated Statements of
Operations and Comprehensive Income (Loss) . . . . . 5
Consolidated Statements of
Stockholders' Equity . . . . . . . . . . . . . . . . 6
Consolidated Statements of
Cash Flows . . . . . . . . . . . . . . . . . . . . . 8
Notes to the Consolidated
Financial Statements . . . . . . . . . . . . . . . . 10
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Sangui BioTech International, Inc.
(A Development Stage Company)
Santa Ana, California
We have audited the accompanying consolidated balance sheet of Sangui BioTech
International, Inc. (a development stage company) as of December 31, 1998 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and from inception on
August 2, 1996 through December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Sangui BioTech, Inc., a consolidated subsidiary, for the year ended December 31,
1996 whose statements reflect total assets consisting of $122,017 of the related
consolidated total of $255,099. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it related to
the amounts included for Sangui USA, is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sangui
BioTech International, Inc. (a development stage company) as of December 31,
1998 and the results of their operations and their cash flows for the years
ended December 31, 1998 and 1997 and from inception on August 2, 1996 through
December 31, 1998, in conformity with generally accepted accounting principles.
Jones, Jensen & Company
Salt Lake City, Utah
March 31, 1999
F-3
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
December 31,
1998
-------------
CURRENT ASSETS
Cash $ 1,401,851
Accounts receivable 21,773
Inventory (Note 2) 39,886
Prepaids 113,140
-------------
Total Current Assets 1,576,650
-------------
PROPERTY AND EQUIPMENT - NET (Note 3) 597,561
-------------
OTHER ASSETS
Marketable securities (Note 4) 116,345
Patents and licenses 36,896
Other assets 20,579
-------------
Total Other Assets 173,820
-------------
TOTAL ASSETS $ 2,348,031
=============
</TABLE>
F-4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 24,267
Accrued expenses 60,022
Stock subscriptions (Note 6) 675,000
-----------
Total Current Liabilities 759,289
-----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock: no par value; 5,000,000 shares authorized,
505,000 shares issued and outstanding 5,050
Common stock: no par value; 50,000,000 shares authorized,
28,151,390 issued and outstanding 5,531,491
Stock subscriptions receivable (Note 6) (467,974)
Currency translation adjustment 96,614
Unrealized loss on marketable securities (Note 4) (814,413)
Deficit accumulated during the development stage 2,762,026
-----------
Total Stockholders' Equity 1,588,742
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,348,031
===========
</TABLE>
F-5
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Income (Loss)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
From
Inception on
August 2,
For the Years Ended 1996 Through
December 31, December 31,
1998 1997
-------------- ------------
SALES $ 102,147 $ 8,294 $ 110,441
COST OF GOODS SOLD 69,303 - 69,303
-------------- ------------ ------------
GROSS MARGIN 32,844 8,294 41,138
-------------- ------------ ------------
COSTS AND EXPENSES
Depreciation expense 39,549 15,874 59,032
Research and development 825,069 408,927 1,488,721
General and administrative 533,673 509,027 1,255,172
-------------- ------------ ------------
Total Costs and Expenses 1,398,291 933,828 2,802,925
-------------- ------------ ------------
Net Loss From Operations (1,365,447) (925,534) (2,761,787)
-------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 32,557 5,984 39,958
Interest expense (59) - (15,564)
Other income 855 246 1,101
Loss on sale of marketable securities (25,731) - (25,731)
-------------- ------------ ------------
Total Other Income (Expense) 7,622 6,230 (236)
-------------- ------------ ------------
BASIC LOSS (1,357,825) (919,304) (2,762,023)
-------------- ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized losses on marketable securities (814,413) - (814,413)
Foreign currency adjustments (59,767) (126,924) 96,614
-------------- ------------ ------------
Total Other Comprehensive
Income (Loss) (874,180) (126,924) (717,799)
-------------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (2,232,005) $(1,046,228) $(3,479,822)
============== ============ ============
BASIC LOSS PER SHARE $ (0.06) $ (0.07)
============== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 22,809,003 12,397,341
============== ============
</TABLE>
F-6
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Currency During the
Preferred Stock Common Stock Stock Translation Development
Shares Amount Shares Amount Subscriptions Adjustment Stage
--------------- ------------- --------- ------------- -------------- ----------- ----------
Balance at inception - $ - - $ - $- $ - $ -
Issuance of preferred stock
for cash at $0.01 per share 505,000 5,050 - - - - -
Issuance of common stock
for cash at $0.005 per
share - - 5,000,000 900 (1,600) - -
Recapitalization - - - (4,350) - - -
Currency translation
adjustment - - - - - 29,457 -
Net loss for the year ended
December 31, 1996 - - - - - - (484,897)
--------------- ------------- --------- ------------- -------------- ----------- ----------
Balance,
December 31, 1996 505,000 5,050 5,000,000 (3,450) (1,600) 29,457 (484,897)
Common stock issued for
note payable at $0.10 per
share - - 6,000,000 600,000 - - -
Common stock issued for
cash at $0.10 per share - - 4,000,000 400,000 - - -
Receipt of stock
subscription receivable - - - - 1,600 - -
Common stock issued for
the acquisition of Sangui
BioTech recorded at
predecessor cost - - 1,800,000 - - - -
Issuance of common stock
for cash at $0.40 per share - - 250,000 100,000 - - -
Issuance of common stock
for cash at $0.235 per share - - 2,744,681 645,000 (25,000) - -
Stock offering costs - - - (212,509) - - -
Currency translation
adjustment - - - - - 126,924 -
Net loss for the year ended
December 31, 1997 - - - - - - (919,304)
------- ------ ---------- ----------- --------- -------- ------------
Balance,
December 31, 1997 505,000 $5,050 19,794,681 $1,529,041 $(25,000) $156,381 $(1,404,201)
------- ------ ------------ ----------- --------- -------- ------------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Currency During the
Preferred Stock Common Stock Stock Translation Development
Shares Amount Shares Amount Subscriptions Adjustment Stage
--------------- ------------- ---------- ------------ --------------- ------------ ------------
Balance,
December 31, 1997 505,000 $ 5,050 19,794,681 $ 1,529,041 $ (25,000) $ 156,381 $(1,404,201)
Issuance of common stock
for cash at $0.235 per
share - - 755,320 177,500 25,000 - -
Issuance of common stock
for subscriptions receivable
at $0.50 per share - - 1,062,394 531,197 (531,197) - -
Issuance of common stock
for marketable securities
at $0.50 per share (Note 4) - - 1,928,995 964,498 - - -
Issuance of common stock
for cash at $0.50 per share - - 4,600,000 2,300,000 - - -
Issuance of stock options for
services valued at $1.375
per share - - - 13,650 - - -
Exercise of stock options at
$0.01 per share - - 10,000 100 - - -
Accrued interest
contributed to capital - - - 15,505 - - -
Receipt of stock
subscriptions (Note 6) - - - - 63,223 - -
Currency translation
adjustment - - - - - (59,767) -
Net loss for the year ended
December 31, 1998 - - - - - - (1,357,825)
--------------- ------------- ---------- ------------ --------------- ---------- -----------
Balance,
December 31, 1998 505,000 $ 5,050 28,151,390 $ 5,531,491 $ 467,974 $ 96,614 $(2,762,026)
=============== ============= ========== ============ =============== ========== ============
</TABLE>
F-8
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
From
Inception on
August 2,
For the Years Ended 1996 Through
December 31, December 31,
1998 1997 1998
-------------- ----------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (1,357,825) $ (919,304) $(2,762,023)
Adjustments to reconcile net loss to
cash (used) by operating activities:
Depreciation expense 39,549 15,874 59,032
Stock options issued for services 13,650 - 13,650
Loss on sale of securities 25,731 - 25,731
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (15,966) (5,807) (21,773)
(Increase) decrease in inventory (19,183) (19,708) (39,886)
(Increase) decrease in prepaid expenses
and deposits (110,620) 455 (113,140)
(Increase) decrease in other assets (8,645) (22,085) (57,873)
Increase (decrease) in accounts payable
and accrued expenses (25,564) 14,818 99,790
-------------- ----------- ------------
Net Cash (Used) by Operating Activities (1,458,873) (935,757) (2,796,492)
-------------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of marketable securities 8,008 - 8,008
Purchase of property and equipment (520,263) (75,668) (632,970)
-------------- ----------- ------------
Net Cash (Used) by Investing Activities (512,255) (75,668) (624,962)
-------------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of stock for cash 2,502,600 1,121,600 3,624,200
Proceeds from stock subscriptions 675,000 - 675,000
Stock offering costs - (212,509) (212,509)
Proceeds from notes payable - 40,000 640,000
Currency translation adjustment (59,767) 126,924 96,614
-------------- ----------- ------------
Net Cash Provided by Financing Activities 3,117,833 1,076,015 4,823,305
-------------- ----------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,146,705 64,590 1,401,851
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 255,146 190,556 -
---------- -------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,401,851 $255,146 $1,401,851
========== ======== ==========
</TABLE>
F-9
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
From
Inception on
August 2,
For the Years Ended 1996 Through
December 31, December 31,
1998 1997 1998
------------- -------------- -----------
CASH PAID FOR:
Interest $ 59 $ - $ 59
Income tax $ - $ - $ -
NON-CASH INVESTING AND
AND FINANCING ACTIVITIES:
Conversion of notes payable to equity $ - $600,000 $600,000
Stock options issued for services $ 13,650 $ - $ -
Conversion of accrued interest to equity $ 15,505 $ - $ 15,505
Common stock issued for marketable
securities $ 964,498 $ - $964,498
</TABLE>
F-10
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Activities and Summary of Significant Risk Factors
---------------------------------------------------------------------------
Sangui BioTech International, Inc. (a development stage Company) (the Company)
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc. is engaged in the development of
immunodiagnostic tests.
Sangui BioTech, Inc. (Sangui USA) develops and intends to manufacture and sell
immunodiagnostic tests based on research and technology already shown to be
feasible. Sangui USA's laboratory and headquarters are located in Santa Ana,
California, and this facility will be devoted to immunodiagnostic research,
development, manufacturing and distributing, marketing, and administrative
functions. The founders of Sangui USA are actively involved in the research and
development of the future products and were the only shareholders of Sangui USA
at December 31, 1996. Sangui USA was incorporated in the State of Delaware on
August 2, 1996. Sangui USA is the parent company of SanguiBioTech AG, and
GlukoMediTech, AG.
SanguiBioTech AG (SanguiAG) and GlukoMediTech, AG (Gluko) were incorporated in
Mainz, Germany on November 25, 1995 and July 15, 1996, respectively. These
wholly-owned subsidiaries of Sangui USA and are engaged in Germany in the same
business operations as the parent.
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued 5,000,000 shares of its common stock
in exchange for all of the outstanding common stock of Sangui USA. Immediately
prior to the Agreement and Plan of Reorganization, the Company had 1,800,000
shares of common stock issued and outstanding.
The acquisition was accounted for as a recapitalization of Sangui USA because
the shareholders of Sangui USA controlled the Company after the acquisition.
Therefore, Sangui USA is treated as the acquiring entity. There was no
adjustment to the carrying value of the assets or liabilities of Sangui USA in
the exchange. The Company is the acquiring entity for legal purposes and Sangui
USA is the surviving entity for accounting purposes.
The Company's continued existence as a going concern is ultimately dependent
upon the success of future operations. Management's efforts have focused
primarily on raising capital and research and development of new products. As
such, the Company is subject to the risks and uncertainties associated with a
new business. The success of the Company's future operations is dependent in
part, upon the Company's ability to (i) develop commercially feasible products,
(ii) successfully market the products developed and (iii) obtain additional
capital. The Company's future capital requirements will depend on many factors,
including those imposed by Sangui AG and Gluko.
Although it cannot be assured that the Company will successfully develop and
market its proposed products or obtain additional financing, management believes
that its short term strategy of selling the Company's securities, developing new
products, and increased marketing efforts should enable the Company to meet its
obligations and sustain its operations. Management's plans are discussed
further in Note 5.
F-11
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Method
------------------
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year end.
Cash and Equivalents
----------------------
The Company does not maintain its cash in bank depository accounts insured by
the Federal Deposit Insurance Corporation (FDIC). The Company has not
experienced any losses in such accounts. Cash and equivalents include time
deposits with a maturity of three months or less, and for which the Company has
no requirements for compensating balances. The Company also maintains cash
accounts in Germany which are not insured by the FDIC.
Inventories
-----------
Inventories are stated at the lower of cost or market. The cost of inventories
is determined using the first-in, first-out ("FIFO") method. The Company
regularly monitors inventory for excess or obsolete items and makes any
valuation corrections when such adjustments are needed.
Property and Equipment
------------------------
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations
Estimated
Useful Life
------------
Laboratory equipment 5 years
Office equipment 3 years
Impairment of Long Lived Assets
-----------------------------------
The Company adopted the recognition of economic impairment of long lived assets
in accordance with Statement of Financial Accounting Standards No. 121 (SFAS
121) during its fiscal year ended December 31, 1997. The Company had recorded
organization costs of $42,036 at September 30, 1996, but later determined the
life of the intangible was impaired during the period ended December 31, 1996,
in accordance with SFAS 121. As a result, the amount was eliminated from the
Company's books and charged to other operating expense.
Concentrations of Risk
------------------------
The Company has a relatively small customer base. The Company's four largest
customers accounted for 84% of sales in 1998. The loss of one of these
customers could have a significant negative effect on future sales.
F-12
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
-------------
The Company accounts for deferred income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Deferred income taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes.
The net difference between income tax expense and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or
liabilities are classified as current and non-current based on the
classification of the related asset or liability for financial reporting
purposes, or based on the expected reversal date for deferred taxes that are not
related to an asset or liability.
As of December 31, 1998, the Company had a net operating loss carryforwards for
federal income tax purposes of approximately $2,750,000 that may be used in
future years to offset taxable income. The net operating loss carryforwards
will begin to expire in 2011. The tax benefit of the cumulative carryforwards
has been offset by a valuation allowance of the same amount due to the
uncertainty that they will be utilized.
Research and Development Costs
---------------------------------
Research and development costs are charged to operations as they are
incurred.
Reclassification
----------------
Certain amounts have been reclassified within the prior period financial
statements to conform with the current period presentation.
Management Estimates
---------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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 those estimates.
Accounts Receivable
--------------------
The accounts receivable at December 31, 1998 and 1997 are shown net of an
allowance for doubtful accounts of $0 and $0, respectively.
NOTE 2 - INVENTORIES
The inventory balance of $39,886 at December 31, 1998 consists primarily of
finished goods. Inventories have been written down to estimated net realizable
value, and any adjustments are included in the results of operations. The
inventories are of immunodiagnostic products and related materials.
F-13
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consists of the following:
December 31,
1998
-------------
Leasehold improvements $ 302,952
Laboratory equipment 282,079
Office equipment 74,149
--------------
Total property and equipment 659,180
Less accumulated depreciation (61,619)
--------------
$ 597,561
==============
NOTE 4 - MARKETABLE SECURITIES
On September 15, 1998, the Company entered into a stock purchase agreement with
an investor. As part of the agreement, the Company accepted 9,644,986 shares of
a publicly traded company as payment for 1,928,995 shares of its common stock.
The share transaction was valued at $0.50 per share of the Company's stock or
$964,498. This value approximated the trading price of the stock received.
Subsequent to the exchange, the shares underwent a 1-for-20 reverse stock split,
reducing the Company's holdings to 482,250 shares. The Company sold 16,870 of
the post-split shares at a loss of $25,731. At December 31, 1998, the shares
were trading at $0.25 per share. The shares are classified as securities held
for sale and are valued at the estimated trading price as of December 31, 1998
or $116,345, which is the difference between the fair market value and the cost
of the shares. $814,413 has been classified as a separate component of equity.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Lease
----------------
The Company leases its office and laboratory facilities under three operating
leases which expire on December 1, 1999, March 31, 2003 and March 31, 2003. One
lease carries an option to extend the term of the lease for an additional three
years.
Future minimum lease payments under this lease, at December 31, 1998, are :
1999 $ 121,224
2000 90,840
2001 90,840
2002 90,840
2003 22,710
---------
Total minimum lease payments $ 416,454
=========
Rent expense for the years ended December 31, 1998 and 1997 was $90,566 and
$47,391, respectively.
F-14
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Patent Issues
--------------
The Company's lead product in its immunodiagnostic business segment is a blood
test kit (Kit 1). A competitor has filed patent applications in the U.S. and
Europe for a similar competing product. The Company's management is of the
opinion that the patent should not be granted. If the patent is granted, the
Company will no longer be able to sell Kit 1, and may be liable for damages
estimated to be approximately $12,000.
The Company has developed a similar blood test kit (Kit 2) which should
circumvent the patent if it is granted. The Company is seeking to sell Kit 2 in
place of Kit 1. Sales of Kit 1 in 1998 were approximately $25,000.
NOTE 6 - STOCK SUBSCRIPTIONS
During the year, the Company received cash payments which were subsequently
converted to common stock. The amounts were non-interest bearing and were
intended to be for the purchase of the Company's common stock. As of December
31, 1998, a balance of $675,000 had not been converted.
On September 15, 1998, the Company entered into an exchange agreement with the
same investor to sell 1,062,394 shares of its common stock at $0.50 per share,
or $531,197. Payment was in the form of a promissory note bearing interest at
9% with monthly payments of $24,267, maturing September 1, 2000. Principal
payments of $63,223 were made on the note during 1998.
NOTE 7 - MANAGEMENT PLAN
The Company is proceeding with its short-term business strategy of developing
niche immunodiagnostic tests which will enable physicians to diagnose and treat
patients for a variety of pathologic disorders, while the German companies
acquired during 1997 will perform the research and development on an artificial
blood substitute and an additive, long-term implantable glucose sensor and
oxygen detector.
Management is aware that it will have to raise additional capital or borrow
funds to continue operations. Management believes that its short-term strategy
of raising additional capital, developing new products, and increased marketing
efforts should enable the Company to meet its obligations and sustain its
operations.
The Company also anticipates that by completing its reorganization with Sangui
USA, a non-reporting publicly traded company, it will be better able to raise
additional capital in exchange for equity.
The operations of SanguiBioTech, AG and GlukoMediTech, AG are also expected to
contribute to the long-term profitability of the Company. However, since the
research performed by these companies related to the potential development of
pharmaceutical products is highly regulated and requires extensive clinical
trials by most countries, the time at which sales and profits may follow is
highly uncertain.
F-15
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 8 - SUBSEQUENT EVENT
Research Grant
---------------
The Company's wholly-owned subsidiary Sangui Biotech AG received a grant from
the "Forschungszentrum" (Center of Research) Juelich, Germany, which acts on
behalf of the German State North Rhine Westphalia. This grant serves to promote
the Company's project of research and development of an artificial oxygen
carrier and amounts to approximately $1,950,000, which covers approximately 40%
of the estimated project costs of $4,875,000. The grant is non-repayable, and
40% of the subsidiary's expenses on the promoted project will be reimbursed
periodically within the term of the grant from April 8, 1998 to March 31, 2001
in amounts up to $3,185,253 in 1999, $519,523 in 2000, and $91,552 in 2001. In
the beginning of 1999, the "Forschungszentrum Juelich" reimbursed $353,438 of
the total project expenses of $967,898 for 1998."
F-16
<PAGE>
Consolidated Financial Statements
Sangui BioTech International, Inc.
(A Development Stage Company)
Santa Ana
California/U.S.A.
Six months ended June 30, 1999
with Report of Independent Auditors
F-17
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Financial Statements
Six months ended June 30, 1999
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income and Comprehensive Income . . . . . 4
Consolidated Statements of Changes in Shareholders' Equity . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 9
F-18
<PAGE>
Report of Independent Auditors
The Shareholders
Sangui Bio Tech International, Inc.
(A Development Stage Company)
Santa Ana, California
We have audited the accompanying consolidated balance sheet of Sangui Bio Tech
International, Inc. (a development stage company) (the Company) as of June 30,
1999 and the related statements of consolidated income and comprehensive income,
shareholders' equity and cash flows for the six months then ended and for the
period August 2, 1996 (inception) through June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The financial statements for the period August 2,
1996 (inception) through December 31, 1998, were audited by other auditors whose
report dated March 31, 1999 expressed an unqualified opinion on those
statements. The financial statements for the period August 2, 1996 (inception)
through December 31, 1998 include total revenues, shareholders' equity and net
loss of $110,441, $1,588,742 and $3,078,950, respectively. Our opinion on the
consolidated statements of operations, shareholders' equity, and cash flows for
the period August 2, 1996 (inception) through June 30, 1999, insofar as it
relates to amounts for prior periods through December 31, 1998, is based solely
on the report of other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sangui Bio Tech International, Inc. (a
development stage company) at June 30, 1999 and the results of its operations
and its cash flows for the six months then ended and the period from August 2,
1996 (inception) through June 30, 1999, in conformity with accounting
principles generally accepted in the United States of America.
Ernst & Young
Dusseldorf
Federal Republic of Germany
March 24, 2000
F-19
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
JUNE 30,
1999
-------------
ASSETS
Current assets:
Cash $ 305,501
Accounts receivable 99,574
Inventories (Note 2) 112,036
Marketable securities 1,288,620
Prepaid assets 1,703,099
------------
Total current assets 3,508,830
Property and equipment -
net (Note 4) 407,601
Patents and licenses 66,185
Other assets 1,174,701
------------
Total assets $5,157,317
============
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
JUNE 30,
1999
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses
$ 102,420
Stock subscriptions (Note 8) 50,000
-------------
Total current liabilities 152,420
Commitments and Contingencies
(Note 7) 25,000
Stockholders' equity:
Preferred stock: no par value;
5,000,000 shares authorized,
505,000 shares issued and
outstanding 5,050
Common stock: no par value;
50,000,000 shares authorized,
31,867,878 issued and outstanding 10,277,373
Stock subscriptions receivable
(Note 8) (341,072)
Currency translation adjustment (63,068)
Deficit accumulated during the
development stage (4,898,386)
-------------
Total stockholders' equity 4,979,897
------------
Total liabilities and stockholders' equity $ 5,157,317
=============
</TABLE>
See accompanying notes to consolidated financial statements
F-21
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
<S> <C> <C>
From Inception
Six months on August 2,
period ended 1996 thruough
June 30, 1999 June 30, 1999
--------------------------------
Sales $ 178,835 $ 289,276
Cost of sales 117,464 186,767
-------------------------------
Gross margin 61,371 102,509
Costs and expenses:
Research and development 505,270 1,993,991
General and administrative 731,200 2,303,299
Depreciation 55,343 114,375
------------------------------
Total costs and expenses 1,291,813 4,411,665
------------------------------
Net loss from operations (1,230,442) (4,309,156)
Other income (expense):
Interest income 33,842 73,800
Interest expense - (15,564)
Other income 257,302 258,403
Loss on marketable securities (880,138) (905,869)
------------------------------
Total other income (expense) (588,994) (589,230)
------------------------------
Basic loss $ (1,819,436) $(4,898,386)
-------------------------------
Other comprehensive loss:
Recognition of permanent losses on marketable securities
(814,413) -
Foreign currency adjustments (159,682) (63,068)
Total other comprehensive loss --------------------------------
654,731 (63,068)
--------------------------------
Comprehensive loss (1,164,705) (4,961,454)
===============================
Basic loss per share (0.06)
============
Weighted average number of shares outstanding
29,417,956
============
</TABLE>
See accompanying notes to consolidated financial statements
F-22
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
-----------------------------------------------------------------------------------------------
Balance at inception August 2,
- - 3,400,000 98,465 - - - 98,465
Issuance of common stock
for cash at $0.001 per share - - 1,600,000 1,600 (1,600) - - -
Currency translation adjustment - - - - - 29,457 - 29,457
Net loss for the period ended
December 31, 1996 - - - - - - (539,853) (539,853)
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,000,000 $100,065 $ (1,600) $29,457 $(539,853) $(411,931)
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-23
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,000,000 $ 100,065 $ (1,600) $ 29,457 $(539,853) $(411,931)
Stock issued for the
acquisition of Sangui BioTech 505,000 5,050 1,800,000 900 - - - 5,950
recorded at predecessor cost
Common stock issued for
note payable at $0.10 per share - - 6.000,000 600,000 - - - 600,000
Common stock issued for cash
at $0.10 per share - - 4,000,000 400,000 - - - 400,000
Receipt of stock
subscription receivable - - - - 1,600 - - 1,600
Issuance of common stock
for cash at $0.40 per share - - 250,000 100,000 - - - 100,000
Issuance of common stock
for cash at $0.235 per share - - 2,744,681 645,000 (25,000) - - 620,000
Currency translation adjustment - - - - - 126,924 - 126,924
Net loss for the year ended
December 31, 1997 - - - - - - 1,181,272) (1,181,272)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 505,000 $ 5,050 19,794,681 $1,845,965 $(25,000) $ 156,381 $(1,721,125)$ 261,271
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-24
<PAGE>
Sangui BioTech International, Inc.(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 505,000 $ 5,050 19,794,681 $ 1,845,965 $ (25,000) $ 156,381 $(1,721,125) $ 261,271
Issuance of common stock
for cash at $.235 per share - - 755,320 177,500 25,000 - - 202,500
Issuance of common stock
for subscriptions receivable at
$0.50 per share - - 1,062,394 531,197 (531,197) - - -
Issuance of common stock
for marketable securities at
$0.50 per share - - 1,928,995 964,498 - - - 964,498
Issuance of common stock
for cash at $0.50 per share - - 4,600,000 2,300,000 - - - 2,300,000
Issuance of stock options for
services valued at $1.375 per
share - - - 13,650 - - - 13,650
Exercise of stock options at
0.01 per share - - 10,000 100 - - - 100
Accrued interest contributed
to capital - - - 15,505 - - - 15,505
Receipt of stock subscriptions - - - - 63,223 - - 63,223
Unrealized loss on marketable
securities - - - - - (814,413) - (814,413)
Currency translation adjustment - - - - - (59,767) - (59,767)
Net loss for the year ended
December 31, 1998 - - - - - - (1,357,825) (1,357,825)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 505,000 $5,050 28,151,390 $5,848,415 $(467,974) $(717,799) $(3,078,950) $ 1,588,742
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-25
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 505,000 $ 5,050 28,151,390 $5,848,415 $(467,974) $ (717,799) $ (3,078,950) $1,588,742
Issuance of common stock
for cash at $1.15 per share - - 650,000 747,500 - - - 747,500
Issuance of common stock
for services received valued at - 2,600,000 3,145,000 - - - 3,145,000
$1.21 per share
Issuance of common stock
for cash and forgiveness of - - 466,488 536,458 - - - 536,458
notes payable to shareholder
at $1.15 per share
Receipt of stock subscriptions - - - - 126,902 - - 126,902
Recognition of permanent loss
on marketable securities - - - - - 814,413 - 814,413
Currency translation adjustment - - - - - (159,682) - (159,682)
Net loss for the six months
ended June 30, 1999 - - - - - - (1,819,436) (1,819,436)
-------------------------------------------------------------------------------------------------
Balance at June 30, 1999 505,000 $ 5,050 31,867,878 $ 10,277,373 $ (341,072) $ (63,068) $(4,898,386) $4,979,897
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-26
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C>
From Inception
Six months on August 2,
period ended 1996 through
June 30, 1999 June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------
Net loss $ (1,819,436) $(4,898,386)
Adjustments to reconcile net loss to
cash (used) by operating activities:
Depreciation expense 55,343 114,375
Stock options and stock issued for services
467,500 481,150
Loss recorded on marketable securities 880,138 905,869
Changes in operating assets and liabilities:
Increase in accounts receivable (77,801) (99,571)
Increase in inventory (72,150) (112,036)
Decrease in prepaid
expenses and deposits (44,959) (158,099)
Increase in other assets (21,623) (79,496)
Increase in accounts payable
and accrued expenses 18,131 117,921
Increase in accrued commitments and
contingencies 25,000 25,000
---------------------------------
Net cash used in operating activities (589,857) (3,703,273)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities 50,620 58,628
Purchase of marketable securities (1,288,620) (1,288,620)
Grants for property and equipment 185,000 185,000
Purchase of property and equipment (79,671) (712,641)
---------------------------------
Net cash used in investing activities (1,132,671) (1,757,633)
FINANCING ACTIVITIES:
Issuance of stock for cash 608,958 4,233,158
Reverse acquisition 5,950
Change of stock subscription receivable 126,902 126,902
Proceeds from stock subscriptions 50,000 725,000
Proceeds from notes payable - 640,000
Currency translation adjustment (159,682) (63,068)
---------------------------------
Net cash provided in financing activities 626,178 5,667,942
Net increase in cash and cash equivalents (1,096,350) 207,036
Cash and cash equivalents at beginning of period
1,401,851 98,465
-------------------------------
Cash and cash equivalents at end of period $ 305,501 $ 305,501
===============================
</TABLE>
See accompanying notes to consolidated financial statements
F-27
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C>
Six months From Inception on
period ended August 2, 1996
June 30, 1999 through June 30, 1999
CASH PAID FOR:
Interest $ - $ 59
Income tax - -
</TABLE>
F-28
<PAGE>
25
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE ACTIVITIES AND BASIS OF PRESENTATION
Sangui BioTech International, Inc. (a development stage Company) (the "Company")
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc., is engaged in the development of
immunodiagnostic tests.
The Company's wholly owned subsidiary Sangui BioTech, Inc. ("Sangui USA")
develops, manufactures and sells immunodiagnostic tests. Sangui USA's laboratory
and headquarters are located in Santa Ana, California, and this facility is
devoted to immunodiagnostic research, development, manufacturing and
distributing, marketing, and administrative functions. Sangui USA was
incorporated in the State of Delaware on August 2, 1996. Sangui USA is the
parent company of two wholly owned subsidiaries, SanguiBioTech AG, and
GlukoMediTech, AG. SanguiBioTech AG ("Sangui AG") and GlukoMediTech, AG
("Gluko") were incorporated in Mainz, Germany on November 25, 1995 and July 15,
1996, respectively. Sangui AG and Gluko are engaged in Germany in the
development of artificial oxygen carriers and glucose sensors.
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued shares of its common stock in exchange
for all of the outstanding common stock of Sangui USA. The acquisition was
accounted for as a reverse acquisition of Sangui USA because the shareholders of
Sangui USA controlled the Company after the acquisition. The Company is the
acquiring entity for legal purposes and Sangui USA is the surviving entity for
accounting purposes. Accordingly, the accompanying financial statements present
the historical consolidated financial statements of Sangui USA from August 2,
1996 (date of inception), through the acquisition date of May 15, 1997 and the
consolidated financial statements of the Company and Sangui USA since that date.
Since the fair value of the net assets of the Company were equal to their net
book value on May 15, 1997 the assets and liabilities of the Company remained at
their historical cost following the acquisition.
F-29
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned domestic and foreign subsidiaries. All significant
inter-company accounts and transactions have been eliminated upon consolidation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's German operations are translated into
U.S. dollars at period-end exchange rates. Net exchange gains or losses
resulting from such translation are excluded from net earnings and accumulated
in a separate component of shareholders' equity. Income and expense accounts
are translated at weighted average exchange rates for the period.
CONCENTRATION OF RISK
The Company has a relatively small customer base. The Company's four largest
customers accounted for 82% of sales for the six months ended June 30, 1999. The
loss of one of these customers could have a significant negative effect on
future sales.
CASH AND EQUIVALENTS
The Company does not maintain its cash in bank depository accounts insured by
the Federal Deposit Insurance Corporation (FDIC). The Company has not
experienced any losses in such accounts. Cash and equivalents include time
deposits with a maturity of three months or less, and for which the Company has
no requirements for compensating balances. The Company also maintains bank
accounts in Germany.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories
is determined using the first-in, first-out (FIFO) method. The Company regularly
monitors inventory for excess or obsolete items and makes any valuations
corrections when such adjustments are needed.
F-30
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
The Company invests in various short-term debt securities with maturity dates
less than one year. These securities are classified as available-for-sale as
defined by FAS 115 Accounting for Certain Investments in Debt and Equity
Securities. The securities are valued at amortized cost which approximates fair
market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations.
Estimated
Useful Life
------------
Leasehold improvements 5 years
Technical and laboratory equipment 5 years
Office equipment 3 years
Company cars 5 years
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with FAS 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
PATENTS
Patents are recorded at cost and are depreciated using the straight-line method
over the expected useful lives noted below.
Estimated
Useful Life
------------
Patents 5 - 11 years
Licenses 3 years
F-31
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized when products are shipped to the customers.
RESEARCH AND DEVELOPMENT
Research and development are charged to operations as they are incurred. Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred.
GRANTS
The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment. Revenue
from grants for the reimbursement of research and development expenses are shown
as other income when the related expenses are incurred. Grants related to the
acquisition of tangible property are recorded as a reduction of the properties'
historical cost.
STOCK-BASED COMPENSATION
The company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25., 'Accounting for Stock Issued to
Employees,' and related interpretation.
INCOME TAXES
The Company accounts for deferred income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Deferred income taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes.
The net difference between income tax expense and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or
liabilities are classified as current and non-current based on the
classification of the related asset or liability for financial reporting
purposes, or based on the expected reversal date for deferred taxes that are not
related to an asset or liability.
F-32
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number of
common share outstanding each year.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1998, the U.S. Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Transactions".
Statement 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The new
statement requires all derivatives to be recorded on the balance sheet at fair
value and established "special accounting" for the following three types of
hedges: hedges of change in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of variable cash flows of net investments in foreign operations.
The Company will be required to adopt the statement during the year ended
December 31, 2001. Adoption of this statement is not expected to have a
material effect on the Company's financial condition or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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 those estimates.
F-33
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
2. BUSINESS ACQUISITIONS
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued 5,000,000 shares of its common stock
in exchange for all of the outstanding common stock of Sangui USA. Immediately
prior to the Agreement and Plan of Reorganization, the Company had 1,800,000 and
505,000 shares of common stock and preferred stock, respectively, issued and
outstanding. Generally accepted accounting principles require that the Company
be considered the acquired company for financial statement purposes (a reverse
acquisition). The Company had no operations at the time of the reverse
acquisition. In conjunction with the transactions, the Company incurred
approximately $200,000 of transaction costs which were charged to operations
during the year-ended December 31, 1997.
In January 1997, Sangui USA acquired 100% of the outstanding stock of both
Sangui AG and Gluko in exchange for 3,400,000 newly issued shares of Sangui USA
common stock. Since the shareholders of Sangui USA were also the shareholders
of Sangui AG and Gluko, this was accounted for as a merger of entities under
common control and hence, was accounted for as a pooling of interest.
Accordingly, the consolidated financial statements for the period August 2, 1996
through December 31, 1996 have been restated to include the accounts of Sangui
AG and Gluko. The following table presents a reconciliation of net loss
previously reported by Sangui USA to those presented in the accompanying
consolidated financial statements:
From Inception
on August 2, 1996
through December 31, 1996
------------------------
Net loss
Sangui USA 144,324
Sangui AG and Gluko 395,529
Combined net loss 539,853
3. INVENTORIES
The inventory balance of $112,036 at June 30, 1999 consists primarily of
finished goods. Inventories have been written down to estimated net realizable
value, and any adjustments are included in the results of operations. The
inventories are of immunodiagnostic products and related materials.
F-34
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 consists of the following:
June 30, 1999
-------------
Leasehold improvements 216,666
Technical and laboratory equipment 305,001
Office equipment 10,310
Company cars 8,266
Total property and equipment 540,243
Less accumulated depreciation 132,643
Net book value 407,600
-------
5. INTANGIBLE ASSETS
Intangible assets as of June 30, 1999 consist of the following:
June 30, 1999
=============
Patents 78,406
Licenses 1,528
Total patents and licenses 79,934
------
Less accumulated amortization 13,749
66,185
------
6. MARKETABLE SECURITIES
On September 15, 1998, the Company entered into a stock purchase agreement with
Euro-American GmbH, its underwriter who is also a shareholder. As part of the
agreement, the Company accepted 9,644,986 shares of a publicly traded company as
payment for 1,928,995 shares of its common stock. The share transaction was
valued at $0.50 per share of the Company's stock or $964,498. This value
approximated the trading price of the stock received. The co-owner of
Euro-American GmbH and director of the Company was also a director of the
publicly traded company.
Subsequent to the exchange, the shares received underwent a 1-for-20 reverse
stock split, reducing the Company's holdings to 482,250 shares. As of December
31, 1998, the shares were classified as securities available-for-sale and were
valued at the market price. The $814,413 unrealized loss on the shares was
classified as a separate component of equity, at December 31, 1998
F-35
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
6. OTHER INVESTMENTS (CONTINUED)
During the six months ended June 30, 1999, the Company began to actively sell
these shares. Additionally, the shares underwent a 1-for-10 reverse stock split.
As of June 30, 1999, the Company had 31,810 remaining shares. As a result of
the decline of shares' value, which is viewed by the management of the Company
as other than temporary, the shares have been written down to $0 and the
unrealized loss of $814,413 has been charged directly to the statement of
operations.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and laboratory facilities under three operating
leases which expire on December 1, 2002, March 31, 2003 and March 31, 2003.
Future minimum lease payments under this lease, at June 30, 1999 are:
1999 $ 66,419
2000 141,853
2001 147,278
2002 145,094
2003 189,217
2004 1,782
------------
Total minimum lease payments $ 691,643
Rent expense for the six months ended June 30, 1999 was $61,307.
PATENT ISSUES
The Company's lead product in its immunodiagnostic business is a blood test kit.
A competitor was granted a patent in the U.S. in August 1998 for a similar
competing product. The Company has reserved $25,000 for the potential costs
associated with defending its product against potential patent infringement
claims.
F-36
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
GRANTS
In November 1998, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Sangui AG, Witten, Germany, German Marks (DM) 3,574,575
for the research and development of the Company's artificial oxygen carrier. The
grant covers the period from April 1998 to March 2001. The grant covers 40% of
eligible research and development costs and capital expenditures and is subject
to the Company's ability to cover the remaining 60% of the costs. An additional
condition of the grant is the product must be developed and produced in the
German state of North-Rhine-Westphalia, if developed by 2003.
On September 8, 1999, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Gluko, Witten, Germany, DM 4,340,764 for the research and
development of the Company's long-term implantable glucose sensor. The grant
covers the period from December 1998 to November 2001, including retroactive
months. This grant includes the same terms and as the Sangui AG grant.
Based on research and development expenditures and capital expenditures through
June 30, 1999, the Company had qualified for $425,000 of the grants.
Approximately $240,000 related to research and development expenditures while
the remaining related to capital expenditures. The $240,000 related to research
and development expenditures has been recorded as other income, while the
$185,000 related to capital expenditures was recorded as a reduction to the
historical costs of property and equipment. Through June 30, 1999, $328,000 of
the grants amount has been received.
SEC INVESTIGATION
Certain officers and directors of the Company are being investigated by the U.S.
Securities and Exchange Commission ("SEC") related to the timing and nature of
certain common stock transactions. Although these officers and directors are
exposed to potential fines and penalties stemming from the SEC's investigation,
management of the Company believes that any exposure to the Company is minimal.
F-37
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of no par value common
stock. The holders of the Company's common stock are entitled to one vote for
each share held of record on all matters to be voted on by those shareholders.
On September 15, 1998, the Company entered into an exchange agreement with
Euro-American GmbH to sell 1,062,394 shares of its common stock at $0.50 per
share, or $531,197. Payment was in the form of a promissory note bearing
interest at 9% with monthly payments of $24,267, maturing September 1, 2000.
Principal payments of $126,902 were made on the note during the six months ended
June 30, 1999.
Through December 31, 1998, the Company received $675,000 of cash payments from
Euro-American GmbH which were recorded as non-interest bearing notes payable and
were intended to be used for the purchase of the Company's common stock. During
the six months ended June 30, 1999, the Company issued 650,000 and 466,488
shares of common stock to Euro-American GmbH in exchange for the forgiveness of
these notes and $608,958 of cash.
Through June 30, 1999, the Company received $50,000 of cash payments which were
recorded as non-interest bearing notes payable and are intended to be used for
the purchase of the Company's common stock.
In April 1999, the Company issued 2,600,000 million shares of its common stock
in April 1999 to an independent promotions company in exchange for a public
relations/promotions contract covering the period January 1999-December 2000.
The fair value of the services received is estimated to be $3,145,000 and is
based on the original proposal that the promotions company submitted to the
Company when negotiating the contract. This proposal was prepared on the
assumption that the Company would be paying cash for the services. Accordingly,
the common stock was valued at $3,145,000 with a corresponding prepaid asset
recorded for the value of the public promotions contract. The $3,145,000 is
being amortized during the contract period as the services are provided. As of
June 30, 1999, the Company had recognized $467,500 of expense leaving a prepaid
asset of $2,677,500 ($1,545,000 classified as short-term, $1,132,500 classified
as long-term).
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of non-voting no par value
preferred stock. The Board of Directors is empowered to issue liquidation
privileges, dividend, conversion or other rights. No such rights or privileges
have been granted.
F-38
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
In January 1998, a former director and officer of the Company issued, from his
personal holdings of the Company common stock, 266,000 options to three
employees of the Company to purchase Company common stock from him at an option
price of $0.001 per share. Since the Company is not a party to the agreement
and he is not a significant shareholder, this had no impact on the Company's
financial statements.
9. INCOME TAXES
During the six months ended June 30, 1999, the Company paid no income taxes. As
of June 30, 1999, the Company's German subsidiaries had net operating loss
carryforwards for corporate and trade income tax purposes of approximately
$550,000. These losses may be used in future years to offset taxable income and
do not expire. The Company has $800,000 of U.S. federal tax net operating loss
carryforwards which begin to expire in 2011. The tax benefit of the cumulative
carryforwards has been offset by a valuation allowance of the same amount due to
the uncertainty that they will be utilized.
F-39
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
10. COMPREHENSIVE INCOME
Effective at the beginning of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The statement
establishes standards for reporting and display of total comprehensive income
and its components in financial statements. The adoption of this statement has
no effect on the Company's net earnings or total stockholders' equity.
Total comprehensive income represents the net change in shareholders' equity
during a period from sources other than transactions with shareholders and as
such, includes net earnings. For the Company, the components of other
comprehensive income is the change in the cumulative foreign currency
translation adjustments and unrealized losses on other investments recorded in
shareholders' equity.
11. SEGMENT REPORTING
Substantially all of the Company's sales for the six months ended June 30, 1999,
of $178,835 to unaffiliated companies were derived from the US operations.
Property, plant, and equipment is broken down between the US operations of
$57,534 and the German subsidiaries of $350,067.
12. RELATED PARTY TRANSACTIONS
As described in Note 6, the Company received shares of a publicly traded company
in exchange for shares of the Company's common stock. At the date of the
exchange, the co-owner of Euro-American GmbH was also a director of the publicly
traded company.
As described in Note 8, the Company has sold shares of its common stock to
Euro-American GmbH. The co-owners of Euro-American also serves as directors of
the Company.
F-40
<PAGE>
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS
On November 3, 1999, the Company has entered into a stock option agreement with
the Company's chairman entitling him to purchase 3.000.000 shares of common
stock at an option price of $.01 per share in exchange for his contribution of
certain patents related to oxygen carrier, oxygen sensor and glucose sensor
technology. The options can be exercised at the point the Company completes the
development of the artificial oxygen carrier or the implantable sensor and
receives regulatory approval from either Germany, the United States of America
or Singapore.
On February 22, 2000, the Company entered into a subscription agreement to sell
8,000,000 shares of its common stock to Euro-American GmbH at $0.964 per share.
On March 23, 2000, the Company approved the issuance of 80,000 shares of its
common stock to an outside consultant for his assistance with the sale of its
shares of 8,000,000 common stock to Euro-American GmbH.
On March 24, 2000, the Company changed its fiscal year to June 30.
F-41
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JUNE 30, 1999
F-42
<PAGE>
C O N T E N T S
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income and Comprehensive Income . . . . 5
Consolidated Statements of Changes in Shareholders' Equity . . . . 6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 11
Notes to Consolidated Financial Statements . . . . . . . . . . .. . 13
F-43
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, June 30,
1999 1999
------------- ----------
(Unaudited)
CURRENT ASSETS
Cash $ 619,595 $ 305,501
Accounts receivable 55,235 99,574
Inventories (Note 2) 78,959 112,036
Marketable securities 788,018 1,288,620
Prepaid assets 1,545,000 1,703,099
------------- ----------
Total Current Assets 3,086,807 3,508,830
------------- ----------
PROPERTY AND EQUIPMENT - NET (Note 3) 487,073 407,601
------------- ----------
OTHER ASSETS
Patents and licenses (Note 4) 54,565 66,185
Other assets 346,250 1,174,701
------------- ----------
Total Other Assets 400,815 1,240,886
------------- ----------
TOTAL ASSETS $ 3,974,695 $5,157,317
============= ==========
</TABLE>
F-44
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, June 30,
1999 1999
-------------- ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 129,469 $ 102,420
Stock subscriptions (Note 7) - 50,000
-------------- ------------
Total Current Liabilities 129,469 152,420
-------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 6) 25,000 25,000
-------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock: no par value; 5,000,000 shares
authorized, 505,000 shares issued and outstanding 5,050 5,050
Common stock: no par value; 50,000,000 shares
authorized, 32,334,463 and 31,867,878 issued
and outstanding, respectively 10,813,831 10,277,373
Stock subscriptions receivable (Note 7) (561,928) (341,072)
Currency translation adjustment (90,477) (63,068)
Deficit accumulated during the development stage (6,346,250) (4,898,386)
-------------- ------------
Total Stockholders' Equity 3,820,226 4,979,897
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,974,695 $ 5,157,317
============== ============
</TABLE>
F-45
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Income
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the From
Six Months Inception on
For the and Year August 2,
Six Months Ended Ended 1996 Through
December 31, June 30, December 31,
- -
1999 1998 1999 1999
------------ -------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
SALES $ 215,457 $ 54,763 $ 178,835 $ 504,733
COST OF SALES 137,892 36,940 117,464 324,659
------------ -------------- ------------ ------------
GROSS MARGIN 77,565 17,823 61,371 180,074
------------ -------------- ------------ ------------
COST AND EXPENSES
Research and development 293,331 430,240 505,270 2,287,322
General and administrative 1,379,261 240,222 731,200 3,682,557
Depreciation 62,000 19,630 55,343 176,375
------------ -------------- ------------ ------------
Total Costs and Expenses 1,734,592 690,092 1,291,813 6,146,254
------------ -------------- ------------ ------------
NET LOSS FROM OPERATIONS (1,657,027) (698,000) (1,230,442) (5,966,180)
------------ -------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 35,761 17,600 33,842 109,561
Interest expense - - - (15,564)
Other income 173,402 - 257,302 431,802
Loss on marketable securities - (25,731) (880,138) (905,869)
------------ -------------- ------------ ------------
Total Other Income (Expense) 209,163 (8,131) (588,994) (380,070)
------------ -------------- ------------ ------------
BASIC LOSS (1,447,864) (680,400) (1,819,436) (6,346,250)
------------ -------------- ------------ ------------
OTHER COMPREHENSIVE LOSS
Foreign currency adjustments (27,409) (26,748) (159,682) (90,477)
------------ -------------- ------------ ------------
Total Other Comprehensive
Loss (1,475,273) (707,148) (1,979,118) (90,477)
------------ -------------- ------------ ------------
COMPREHENSIVE LOSS $(1,475,273) $ (707,148) $(1,979,118) $(6,436,727)
============ ============== ============ ============
BASIC LOSS PER SHARE $ (0.05) $ (0.05) $ (0.07)
============ ============== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 31,469,875 12,603,000 29,417,956
============ ============== ============
</TABLE>
F-46
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- ------- --------- ------- ------------- ------------- ------------ -------
Balance at inception August 2,
- - 3,400,000 98,465 - - - 98,465
Issuance of common stock
for cash at $0.001 per share - - 1,600,000 1,600 (1,600) - - -
Currency translation adjustment - - - - - 29,457 - 29,457
Net loss for the period ended
December 31, 1996 - - - - - - (539,853) (539,853)
--------- ------- --------- ------- ----------- --------- ----------- ------------
Balance, December 31, 1996 5,000,000 $100,065 $ (1,600) $29,457 $(539,853) $(411,931)
========= ======= =========== ======== =========== ========= =========== ============
</TABLE>
F-47
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
-------- ------- --------- --------- ------------ ----------- ----------- --------
Balance, December 31, 1996 - - 5,000,000 $ 100,065 $ (1,600) $ 29,457 $(539,853) $(411,931)
Stock issued for the
acquisition of Sangui BioTech 505,000 5,050 1,800,000 900 - - - 5,950
recorded at predecessor cost
Common stock issued for
note payable at $0.10 per share - - 6.000,000 600,000 - - - 600,000
Common stock issued for cash
at $0.10 per share - - 4,000,000 400,000 - - - 400,000
Receipt of stock
subscription receivable - - - - 1,600 - - 1,600
Issuance of common stock
for cash at $0.40 per share - - 250,000 100,000 - - - 100,000
Issuance of common stock
for cash at $0.235 per share - - 2,744,681 645,000 (25,000) - - 620,000
Currency translation adjustment - - - - - 126,924 - 126,924
Net loss for the year ended
December 31, 1997 - - - - - - 1,181,272) (1,181,272)
---------- ---------- ---------- ---------- --------- --------- ----------- -----------
Balance at December 31, 1997 505,000 $ 5,050 19,794,681 $1,845,965 $(25,000) $ 156,381 $(1,721,125)$ 261,271
========== ========== ========== =========== ========= ========= =========== ==========
</TABLE>
F-48
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- -------- --------- ----------- ------------- -------------- ----------- ---------
Balance, December 31, 1997 505,000 $ 5,050 19,794,681 $ 1,845,965 $ (25,000) $ 156,381 $(1,721,125) $ 261,271
Issuance of common stock
for cash at $.235 per share - - 755,320 177,500 25,000 - - 202,500
Issuance of common stock
for subscriptions receivable at
$0.50 per share - - 1,062,394 531,197 (531,197) - - -
Issuance of common stock
for marketable securities at
$0.50 per share - - 1,928,995 964,498 - - - 964,498
Issuance of common stock
for cash at $0.50 per share - - 4,600,000 2,300,000 - - - 2,300,000
Issuance of stock options for
services valued at $1.375 per
share - - - 13,650 - - - 13,650
Exercise of stock options at
0.01 per share - - 10,000 100 - - - 100
Accrued interest contributed
to capital - - - 15,505 - - - 15,505
Receipt of stock subscriptions - - - - 63,223 - - 63,223
------- ------ ---------- ---------- ---------- ----------- ------------ -----------
Balance Forward 505,000 $5,050 28,151,390 $5,848,415 $(467,974) $ 156,381 $(1,721,125) $ 3,820,747
======= ====== ========== ========== ========== ========== ============ ===========
</TABLE>
F-49
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- -------- --------- ----------- ------------- -------------- ----------- ---------
Balance Forward 505,000 $ 5,050 28,151,390 $ 5,848,415 $ (467,974) $ 156,381 $ (1,721,125) $3,820,747
Unrealized loss in AMDD
investment - - - - - (814,413) - (814,413)
Currency translation adjustment - - - - - (59,767) - (59,767)
Net loss for the year ended
December 31, 1998 - - - - - - (1,357,825) (1,357,825)
--------------- ------------- ---------- -------------- ------------- ----------- -----------
Balance at December 31, 1998 505,000 5,050 28,151,390 5,848,415 (467,974) (717,799) (3,078,950) 1,588,742
Issuance of common stock
for cash at $1.15 per share - - 650,000 747,500 - - - 747,500
Issuance of common stock
for services received - - 2,600,000 3,145,000 - - - 3,145,000
Issuance of common stock
for cash at $1.15 per share - - 466,488 536,458 - - - 536,458
Receipt of stock subscriptions - - - - 126,902 - - 126,902
Recognition of loss on
investments - - - - - 814,413 - 814,413
Balance Forward 505,000 $ 5,050 31,867,878 $10,277,373 $ (341,072) $ 96,614 $(3,078,950) $6,959,015
--------------- ------------- ---------- -------------- ------------ ------------ -----------
</TABLE>
F-50
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- -------- --------- ----------- ------------- -------------- ----------- ---------
Balance Forward 505,000 $ 5,050 31,867,878 $ 10,277,373 $ (341,072) $ 96,614 $ (3,078,950) $6,959,015
Currency translation
adjustment - - - - - (159,682) - (159,682)
Net loss for the six months
and year ended
June 30, 1999 - - - - - - (1,819,436) (1,819,436)
-------- ------- ----------- ----------- --------- ----------- ------------- ----------
Balance at June 30, 1999 505,000 5,050 31,867,878 10,277,373 (341,072) (63,068) (4,898,386) 4,979,897
Common stock issued for
cash at $1.15 per share
(unaudited) - - 466,585 536,458 (220,856) - - 315,602
Currency translation
adjustment (unaudited) - - - - - (27,409) - (27,409)
Net loss for the six months
ended December 31, 1999
(unaudited) - - - - - - (1,447,864) (1,447,864)
---------- -------- ---------- ------------ ---------- ------------ ------------- -----------
Balance at December 31,
1999 (unaudited) 505,000 $ 5,050 32,334,463 $ 10,813,831 $ (561,928) $ (90,477) $ (6,346,250) $3,820,226
=========== ======== =========== ============ =========== =========== ============== ==========
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
From
For the Inception on
For the Six Months August 2,
Six Months Ended Ended 1996 Through
December 31, June 30, December 31,
1999 1998 1999 1999
------------ -------------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(1,447,864) $ (680,400) $ (1,819,436) $(6,346,250)
Adjustments to reconcile net loss to
cash (used) by operating activities:
Depreciation expense 62,000 19,630 55,343 176,375
Stock options and stock issued for
services 786,250 13,650 467,500 1,267,400
Loss on sale of securities - 25,731 880,138 905,869
Changes in operating asset and
liabilities:
(Increase) decrease in accounts
receivable 44,339 (6,987) (77,801) (55,235)
(Increase) decrease in inventory 33,077 (6,854) (72,150) (78,959)
(Increase) decrease in prepaid
expenses and deposits 149,812 (54,832) (44,959) (8,287)
(Increase) decrease in other assets 11,620 - (21,623) (67,876)
Increase in accounts payable
and accrued expenses 27,049 45,037 18,131 144,973
Increase in accrued commitments
and contingencies - - 25,000 25,000
----------- ------------ -------------- -----------
Net Cash Used in Operating
Activities (333,717) (645,025) (589,857) (4,036,990)
----------- ------------- ------------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of securities 71,573 - 50,620 130,201
Purchase of marketable securities - - (1,288,620) (1,288,620)
Grants for property and equipment 429,517 - 185,000 614,517
Purchase of property and equipment (141,472) (265,046) (79,671) (854,113)
---------- ------------ ------------- -----------
Net Cash Provided (Used)
in Investing Activities $ 359,618 $(265,046) $(1,132,671) $(1,398,015)
---------- ---------- ------------ ------------
</TABLE>
F-52
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
From
For the Inception on
For the Six Months August 2,
Six Months Ended Ended 1996 Through
December 31, June 30, December 31,
1999 1998 1999 1999
------------ -------------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of stock for cash $315,602 $826,000 $ 608,958 $4,548,760
Reverse acquisition - - - 5,950
Change of stock subscription receivable - - 126,902 126,902
Proceeds from stock subscriptions - 25,000 50,000 725,000
Proceeds from notes payable - - - 640,000
Currency translation adjustment (27,409) - (159,68 (90,477)
--------- --------- ------------ -----------
Net Cash Provided in Financing
Activities 288,193 851,000 626,178 5,956,135
--------- --------- ------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 314,094 (59,071) (1,096,350) 521,130
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 305,501 307,480 1,401,851 98,465
--------- --------- ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $619,595 $248,409 $ 305,501 $ 619,595
========= ========= ============ ===========
CASH PAID FOR:
Interest $ - $ - $ - 59
Income tax $ - $ - $ - $ -
</TABLE>
F-53
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Development Stage Activities and Basis of Presentation
Sangui BioTech International, Inc. (a development stage company) (the "Company")
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc., is engaged in the development of
immunodiagnostic tests.
The Company's wholly-owed subsidiary Sangui BioTech, Inc. ("Sangui USA")
develops, manufactures and sells immunodiagnostic tests. Sangui USA's
laboratory and headquarters are located in Santa Ana, California, and this
facility is devoted to immunodiagnostic research, development, manufacturing and
distributing, marketing, and administrative functions. Sangui USA was
incorporated in the State of Delaware on August 2, 1996. Sangui USA is the
parent company of two wholly-owned subsidiaries SanguiBioTech AG, and
GlukoMediTech, AG. SanguiBioTech AG ("Sangui AG") and GlukoMediTech, AG
("Gluko") were incorporated in Mainz, Germany on November 25, 1995 and July 15,
1996, respectively, Sangui AG and Gluko are engaged in Germany in the
development of artificial oxygen carriers and glucose sensors.
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued shares of its common stock in exchange
for all of the outstanding common stock of Sangui USA. The acquisition was
accounted for as a reverse acquisition of Sangui USA because the shareholders of
Sangui USA controlled the Company after the acquisition. The Company is the
acquiring entity for legal purposes and Sangui USA is the surviving entity for
accounting purposes. Accordingly, the accompanying financial statements present
the historical consolidated financial statements of Sangui USA from August 2,
1996 (date of inception), through the acquisition date of May 15, 1997 and the
consolidated financial statements of the Company and Sangui USA since that date.
Since the fair value of the net assets of the Company were equal to their net
book value on May 15, 1997 the assets and liabilities of the Company were equal
to their net book value on May 15, 1997. The assets and liabilities of the
Company remained at their historical cost following the acquisition.
b. Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned domestic and foreign subsidiaries. All significant
intercompany accounts and transactions have been eliminated upon consolidation.
c. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected to change its year end from December 31 to
June 30. Accordingly, the income statement and statements of cash flows are for
the six months ended June 30, 1999.
F-54
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Foreign Currency Translation
Assets and liabilities of the Company's German operations are translated into
U.S. dollars at period-end exchange rates. Net exchange gains or losses
resulting form such translation are excluded from net earnings and accumulated
in a separate component of shareholders' equity. Income and expense accounts are
translated at weighted average exchange rates for the period.
e. Concentration of Risk
The Company has a relatively small customer base. The Company's four largest
customers accounted for 82% of sales for the six months ended December 31, 1999
and for the six months ended June 30, 1999. The loss of one of these customers
could have a significant negative effect on future sales.
f. Cash and Equivalents
The Company does not maintain its cash in bank depository accounts insured by
the Federal Deposit Insurance Corporation (FDIC). The Company has not
experienced any losses in such accounts. Cash and equivalents include time
deposits with a maturity of three months or less, and for which the Company has
no requirements for compensating balances. The Company also maintains bank
accounts in Germany.
g. Inventories
Inventories are stated at the lower of cost or market. The cost of inventories
is determined using the first-in, first-out (FIFO) method. The Company
regularly monitors inventory for excess or obsolete items and makes any
valuations corrections when such adjustments are needed.
h. Marketable Securities
The Company invests in various short-term debt securities with maturity dates
less than one year. These securities are classified as held-to-maturity
securities as defined by FAS 115 Accounting for Certain Investments in Debt and
Equity Securities. The securities are valued at amortized cost which
approximates fair market value.
i. Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations.
F-55
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Property and Equipment (Continued)
Estimated
Useful Life
------------
Leasehold improvements 5 years
Technical and laboratory equipment 5 years
Office equipment 3 years
Company cars 5 years
j. Impairment of Long Lived Assets
In accordance with FAS 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. There was
no material effect for the Company in the current period.
k. Patents
Patents are recorded at cost and are depreciated using the straight-line method
over te expected useful lives noted below.
Estimated
Useful Life
------------
Patents 5-11 years
Licenses 3 years
l. Revenue Recognition
Revenues are recognized when products are shipped to the customers.
m. Research and Development
Research and development are charged to operations as they are incurred. Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred.
n. Grants
The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment. Revenue
from grants for the reimbursement of research and development expenses are shown
as other income when the related expenses are incurred. Grants related to the
acquisition of tangible property are recorded as a reduction of the properties'
historical cost.
F-56
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
o. Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25., Accounting for Stock Issued to
Employees,' and related interpretation.
p. Income Taxes
The Company accounts for deferred income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Deferred income taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes.
The net difference between income tax expense and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or
liabilities are classified as current and non-current based on the
classification of the related asset or liability for financial reporting
purposes, or based on the expected reversal date for deferred taxes that are not
related to an asset or liability.
q. Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding each period. Fully diluted loss per share is not
presented becaue any common stock equivalents are antidilutive in nature.
r. Recently Issued Pronouncements
In June 1998, the U.S. Financial Accounting Standards board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Transactions".
Statement 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The new
statement requires all derivatives to be recorded on the balance sheet at fair
value and established "special accounting" for the following three types of
hedges: hedges of change in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of variable cash flows of net investments in foreign operations.
The Company will be required to adopt the statement during the year ended
December 31, 2001. Adoption of this statement is not expected to have a
material effect on the Company's financial condition or results of operations.
F-57
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
s. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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 those estimates.
t. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the adjustments
which, in the opinion of management, are necessary for a fair presentation.
Such adjustments are of a normal recurring nature.
NOTE 2 - BUSINESS ACQUISITIONS
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued 5,000,000 shares of its common stock
in exchange for all of the outstanding common stock of Sangui USA. Immediately
prior to the Agreement and Plan of Reorganization, the Company had 1,800,000 and
505,000 shares of common stock and preferred stock, respectively, issued and
outstanding. Generally accepted accounting principles require that the Company
be considered the acquired company for financial statement purposes (a reverse
acquisition). The Company had no operations at the time of the reverse
acquisition. In conjunction with the transactions, the Company incurred
approximately $200,000 of transaction costs which were charged to operations
during the year-ended December 31, 1997.
In January 1997, Sangui USA acquired 100% of the outstanding stock of both
Sangui AG and Gluko in exchange for 3,400,000 newly issued shares of Sangui USA
common stock. Since the shareholders of Sangui USA were also the shareholders
of Sangui AG and Gluko, this was accounted for as a merger of entities under
common control and hence, was accounted for as a pooling of interest.
Accordingly, the consolidated financial statements for the period August 2, 1996
through December 31, 1996 have been restated to include the accounts of Sangui
AG and Gluko. The following table presents a reconciliation of net loss
previously reported by Sangui USA to those presented in the accompanying
consolidated financial statements:
F-58
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 2 - BUSINESS ACQUISITIONS (Continued)
From
Inception on
August 2,
1996 Through
December 31,
1996
----------------
Net loss
Sangui USA $ 144,324
Sangui AG and Gluko 395,529
--------------
Combined Net Loss $ 539,853
===============
NOTE 3 - INVENTORIES
The inventory balance of $78,959 and $112,036 at December 31, 1999 and June 30,
1999 consisted primarily of finished goods. Inventories have been written down
to estimated net realizable value, and any adjustments are included in the
results of operations. The inventories are of immunodiagnostic products and
related materials.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and June 30, 1999 consisted of the
following:
December 31, June 30,
1999 1999
------------- ----------------
(Unaudited)
Leasehold improvements $ 216,666 $ 216,666
Technical and laboratory equipment 446,474 305,001
Office equipment 10,310 10,310
Company cars 8,266 8,266
------------- --------------
Total property and equipment 681,716 540,243
Less accumulated depreciation 194,643 132,642
------------ --------------
Net Book Value $ 487,073 $ 407,600
============= ===============
F-59
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 5 - INTANGIBLE ASSETS
Intangible assets as of December 31, 1999 and June 30, 1999 consisted of the
following:
December 31, June 30,
1999 1999
------------- --------------
(Unaudited)
Patents $ 78,406 $ 78,406
Licenses 1,528 1,528
-------------- --------------
Total patents and licenses 79,934 79,934
Less accumulated amortization 25,369 13,749
------------- ---------------
$ 54,565 $ 66,185
================ ================
NOTE 6 - OTHER INVESTMENTS
On September 15, 1998, the Company entered into a stock purchase agreement with
its underwriter and shareholder. As part of the agreement, the Company accepted
9,644,986 shares of a publicly traded company as payment for 1,928,995 shares of
its common stock. The share transaction was valued at $0.50 per share of the
Company's stock or $964,498. This value approximated the trading price of the
stock received. The transaction was a related party transaction as Axel
Kutscher, co-owner of the underwriting firm and director of the Company, was
also a director of the publicly traded company.
Subsequent to the exchange, the shares received underwent a 1-for-20 reverse
stock split, reducing the Company's holdings to 482,250 shares. As of December
31, 1998, the shares were classified as securities held for sale and were valued
at the shareholders trading price. The $814,413 unrealized loss on the shares
held was classified as a separate component of equity at December 31, 1998.
During the six months ended June 30 1999, the Company began to actively sell
these shares. Additionally, the shares underwent a 1-for-10 reverse stock
split. As of June 30 1999, the Company had 31,810 remaining shares. As a
result in the decline of shares' value, which is viewed by the management of the
Company as other than temporary, the shares have been written down to $-0- and
the unrealized loss has been charged directly to the statement of operations.
The Company sold the remaining shares for total consideration of $71,573. This
amount is recorded as other income.
F-60
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Operating Lease
----------------
The Company leases its office and laboratory facilities under three operating
leases which expire on December 1, 2002, March 31, 2003 and March 31, 2003.
Future minimum lease payments under this lease at December 31, 1999 are:
2000 $ 141,853
2001 147,278
2002 145,094
2003 189,217
2004 1,782
------------
Total minimum lease payments $ 625,224
=============
Rent expense for the six months ended December 31, 1999 and 1998, and for the
six months and year ended June 30, 1999 was $66,419, $62,408 and $61,307,
respectively.
Patent Issues
--------------
The Company's lead product in its immunodiagnostic business is a blood test kit.
A competitor was granted a patent in the U.S. in August 1998 for a similar
competing product. The Company has reserved $25,000 for the potential costs
associated with defending its product against potential patent infringement
claims.
Grants
------
In November 1998, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Sangui AG, Witten, Germany, $1,985,875 for the research an
development of the Company's artificial oxygen carrier. The grant covers the
period from April 1998 to March 2001. The grant covers 40% of eligible research
and development costs and capital expenditures and is subject to the Company's
ability to cover the remaining 60% of the costs. An additional condition of the
grant is the product must be developed and produced in the German state of
North-Rhine-Westphalia, if developed by 2003.
On September 8, 1999, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Gluko, Witten, Germany, $2,411,536 for the research and
development of the Company's long-term implantable glucose sensor. The grant
covers the period from December 1998 to November 2001, including retroactive
months. This grant includes the same terms as the Sangui AG grant.
F-61
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Based on research and development expenditures and capital expenditures through
June 30, 1999, the Company had qualified for $425,000 of the grants.
Approximately $240,000 related to research and development expenditures while
the remaining related to capital expenditures. The $240,000 related to research
and development expenditures has been recorded as other income, while the
$185,000 related to capital expenditures was recorded as a reduction to the
historical costs of property and equipment. Through June 30, 1999, $328,000 of
the grants amount has been received.
SEC Investigation
------------------
Certain officers and directors of the Company are being investigated by the U.S.
Securities and Exchange Commission related to the timing and nature of certain
common stock transactions. Although these offices and directors are exposed to
potential fines and penalties stemming from the SEC's investigation, management
of the Company believes that the Company has no contingency.
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
-------------
The Company is authorized to issue 50,000,000 shares of no par value common
stock. The holders of the Company's common stock are entitled to one vote for
each share held of record on all matters to be voted on by those shareholders.
On September 15, 1998, the Company entered into an exchange agreement with a
shareholder to sell 1,062,394 shares of its common stock at $0.50 per share, or
$531,197. Payment was in the form of a promissory note bearing interest at 9%
with monthly payments of $24,267, maturing September 1, 2000. Principal
payments of $126,902 were made on the note during the six months ended December
31, 1999.
In April 1999, the Company issued 2,600,000 million shares of its common stock
in April 1999 to an independent promotions company in exchange for a public
relations/promotions contract covering the period January 1999 - December 2000.
The fair value of the services received is estimated to be $3,145,000 and is
based on the original proposal that the promotions company submitted to the
Company when negotiating the contract. This proposal was prepared on the
assumption that the Company would be paying cash for the services. Accordingly,
the common stock was valued at $3,145,000 with a corresponding prepaid asset
recorded for the value of the public promotions contract. The $3,145,000 is
being amortized during the contract period as the services are provided. As of
December 31, 1999 and June 30, 1999, the Company had recognized $786,250 and
$467,500 of expense leaving a prepaid asset of $1,891,250 ($1,545,000 classified
as short-term, $346,250 classified as long-term):
F-62
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock
----------------
The Company is authorized to issue 5,000,000 shares of non-voting no par value
preferred stock. The Board of Directors is empowered to issue liquidation
privileges, dividend, conversion or other rights. No such rights or privileges
have been granted.
Stock Options
--------------
In January 1998, a former director and officer of the Company issued, from his
personal holdings of the Company common stock, 266,000 options to three
employees of the Company to purchase Company common stock from him at an option
price of $0.001 per share. Since the Company is not a party to the agreement
and he is not a significant shareholder, this had no impact on the Company's
financial statements.
The Company has entered into a stock option agreement with the Company's
chairman entitling him to purchase 3,000,000 shares of common stock at an option
price of $0.01 per share in exchange for his contribution of certain patents
related to oxygen carrier, oxygen sensor an glucose sensor technology. The
options can be exercised at the point the Company completes the development of
the artificial oxygen carrier or the implantable sensor and receives regulatory
approval from either Germany, the United States of America or Singapore.
Additionally, in consideration for his contribution of these patents, the
Company's chairman is entitled to receive a 3% royalty on all revenues generated
by Sangui AG and Gluko.
The proforma earnings prepared under the assumption that the stock options
granted to the Company's chairman had been accounted for based on their value as
determined under Statement of Financial Accounting Statements No. 13, Accounting
for Stock-Based Compensation, would be insignificant.
NOTE 9 - INCOME TAXES
During the six months ended December 31, 1999, the Company paid no income taxes.
As of December 31, 1999, the Company's German subsidiaries had net operating
loss carryforwards for corporate and trade income tax purposes of approximately
$1,200,000. These losses may be used in future years to offset taxable income
and do not expire. The Company has $1,800,000 of U.S. federal tax net operating
loss carryforwards which begin to expire in 2011. With the exception of the net
operating loss carryforwards, the Company has no significant temporary
differences. The tax benefit of the cumulative carryforwards has been offset by
a valuation allowance of the same amount due to the uncertainty that they will
be utilized.
F-63
<PAGE>
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 10 - COMPREHENSIVE INCOME
Effective at the beginning of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The statement
establishes standards for reporting and display of total comprehensive income
and its components in financial statements. The adoption of this statement has
no effect on the Company's net earnings or total stockholders' equity.
Total comprehensive income represents the net change in shareholders' equity
during a period from sources other than transactions with shareholders and as
such, includes net earnings. For the Company, the component of other
comprehensive income is the change in the cumulative foreign currency
translation adjustments.
NOTE 11 - SEGMENT REPORTING
Substantially all of the Company's sales for the six months ended December 31,
1999, of $215,457 to unaffiliated companies were derived from the US operations.
Property, plant and equipment is broken down between the US operations of
$68,490 and the German subsidiaries of $418,583
F-64
<PAGE>
FELNAM INVESTMENTS, INC.
CONSOLIDATED PROFORMA FINANCIAL STATEMENTS
DECEMBER 31, 1999
F-65
<PAGE>
C O N T E N T S
Consolidated Proforma Balance Sheet 3
Consolidated Proforma Statement of Operations 4
Statement of Assumptions and Disclosures 5
F-66
<PAGE>
FELNAM INVESTMENTS, INC.
Consolidated Proforma Balance Sheet
December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sangui Proforma
BioTech Felnam Adjustments
International, Investments, Increase Proforma
Inc. Inc. (Decrease) Consolidated
--------------- ------------- ------------- -------------
CURRENT ASSETS
Cash. . . . . . . . . . . $ 619,595 $ - $ - $ 619,595
Inventory . . . . . . . . 78,959 - - 78,959
Prepaid expenses. . . . . 1,545,000 - - 1,545,000
Marketable securities . . 788,018 - - 788,018
Accounts receivable, net. 55,235 - - 55,235
--------------- ------------- ------------- -------------
Total Current Assets. . . 3,086,807 - - 3,086,807
--------------- ------------- ------------- -------------
FIXED ASSETS (NET). . . . 487,073 - - 487,073
--------------- ------------- ------------- -------------
OTHER ASSETS
Patents and licenses. . . 54,565 - - 54,565
Other assets. . . . . . . 346,250 - - 346,250
--------------- ------------- ------------- -------------
Total Other Assets. . . . 400,815 - - 400,815
--------------- ------------- ------------- -------------
TOTAL ASSETS. . . . . . . $ 3,974,695 $ - $ - $ 3,974,695
=============== ============= ============= =============
F-67
<PAGE>
</TABLE>
FELNAM INVESTMENTS, INC.
Consolidated Proforma Balance Sheet (Continued)
December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sangui Proforma
BioTech Felnam Adjustments
International, Investments, Increase Proforma
Inc. Inc. (Decrease) Consolidated
---------------- -------------- ------------- --------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 129,469 $ - $ 25,000 $ 154,469
Commitments . . . . . . . . . . . . . 25,000 - - 25,000
---------------- -------------- ------------- --------------
Total Current Liabilities . . . . . . 154,469 - 25,000 179,469
---------------- -------------- ------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares
authorized, no par value . . . . . . 5,050 - - 5,050
Common stock, 75,000,000 shares
authorized, no par value . . . . . . 10,813,831 1,146 (26,146) 10,788,831
Stock subscriptions receivable. . . . (561,928) - - (561,928)
Currency translation adjustments. . . (90,477) - - (90,477)
Retained deficit. . . . . . . . . . . (6,346,250) (1,146) 1,146 (6,346,250)
---------------- -------------- ------------- --------------
Total Stockholders' Equity. . . . . . 3,820,226 - (25,000) 3,795,226
---------------- -------------- ------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . . . $ 3,974,695 $ - $ - $ 3,974,695
================ ============== ============= ==============
</TABLE>
F-68
<PAGE>
FELNAM INVESTMENTS, INC.
Consolidated Proforma Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Sangui Proforma
BioTech Felnam Adjustments
International, Investments, Increase Proforma
Inc. Inc. (Decrease) Consolidated
---------------- ------------- ------------- --------------
REVENUES . . . . . . . . . . . . . $ 394,292 $ - $ - $ 394,292
COST OF SALES. . . . . . . . . . . 255,356 - - 255,356
---------------- ------------- ------------- --------------
GROSS PROFIT . . . . . . . . . . . 138,936 - - 138,936
---------------- ------------- ------------- --------------
OPERATING EXPENSES
Research and development . . . . . 798,601 - - 798,601
Depreciation and amortization. . . 117,343 - - 117,343
General and administrative . . . . 2,110,461 - - 2,110,461
---------------- ------------- ------------- --------------
Total Operating Expenses . . . . . 3,026,405 - - 3,026,405
---------------- ------------- ------------- --------------
OPERATING INCOME (LOSS). . . . . . (2,887,469) - - (2,887,469)
OTHER EXPENSE
Other expense. . . . . . . . . . . (379,831) - - (379,831)
---------------- ------------- ------------- --------------
Total Other Expense. . . . . . . . (379,831) - - (379,831)
---------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES. (3,267,300) - - (3,267,300)
INCOME (TAXES) BENEFIT . . . . . . - - - -
---------------- ------------- ------------- --------------
NET INCOME (LOSS). . . . . . . . . $ (3,267,300) $ - $ - $ (3,267,300)
================ ============= ============= ==============
</TABLE>
F-69
<PAGE>
FELNAM INVESTMENTS, INC.
Summary of Assumptions and Disclosures
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business Organization
The accompanying proforma financial statements are prepared to present the
acquisition of Sangui BioTech International, Inc. (Sangui) by Felnam
Investments, Inc. (Felnam) to aid the user in understanding the acquisitions.
The proforma balance is presented as though the acquisition took place on
December 31, 1999 and the statement of operations as though the acquisition took
place on December 31, 1998.
Felnam Investments ("Company") is currently a development stage company under
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7.
The Company was incorporated under the laws of the State of Nevada on March 12,
1996. It is managements' objective to seek a merger with an existing operating
company.
Felnam entered into an Agreement and plan of Reorganization with Sangui BioTech
International, Inc., a Colorado corporation, (Sangui), and the stockholders of
Sangui effective March 30, 2000, as a result of which Felnam acquired in excess
of 80% of the outstanding common stock of Sangui. Management of Felnam
presently intends that its sole business activity is to be the holding parent of
Sangui and to continue the business operations of Sangui.
Sangui BioTech International, Inc. (a development stage company) (the "Company")
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc., is engaged in the development of
immunodiagnostic tests.
The Company's wholly-owed subsidiary Sangui BioTech, Inc. ("Sangui USA")
develops, manufactures and sells immunodiagnostic tests. Sangui USA's
laboratory and headquarters are located in Santa Ana, California, and this
facility is devoted to immunodiagnostic research, development, manufacturing and
distributing, marketing, and administrative functions. Sangui USA was
incorporated in the State of Delaware on August 2, 1996. Sangui USA is the
parent company of two wholly-owned subsidiaries SanguiBioTech AG, and
GlukoMediTech, AG. SanguiBioTech AG ("Sangui AG") and GlukoMediTech, AG
("Gluko") were incorporated in Mainz, Germany on November 25, 1995 and July 15,
1996, respectively. Sangui AG and Gluko are engaged in Germany in the
development of artificial oxygen carriers and glucose sensors.
F-70
<PAGE>
FELNAM INVESTMENTS, INC.
Summary of Assumptions and Disclosure
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
b. Proforma Adjustments
1. The proforma financial statements have been prepared as though the merger
of Sangui occurred on December 31, 1999.
Common stock $ 25,000
Accounts payable (25,000)
-------
$ -
=======
To record the estimated costs of the acquisition.
2. Common stock $ 1,461
Retained earnings (1,461)
------
$ -
=======
To eliminate the accumulated deficit of Felnam.
F-71
<PAGE>
ITEM 8. CHANGE IN FISCAL YEAR
SGBI as the successor issuer has a fiscal year end of June 30. Felnam's
fiscal year was December 31. SGBI will retain its June 30 fiscal year end.
EXHIBITS
1.1 Exchange Agreement between MRC Legal Services LLC and Sangui Biotech
International, Inc., dated as of March 31, 2000.
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
23.1 Consent of Jones, Jenson & Company, independent public accountant
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 8-K to be signed on its behalf by
the undersigned hereunto duly authorized.
SANGUI BIOTECH INTERNATIONAL, INC.
/s/ Joerg Alte
----------------------------------
President and Director
Date: March 31, 2000
STOCK EXCHANGE AGREEMENT
Agreement dated as of March 31, 2000 between Sangui Biotech International,
Inc., a Colorado corporation ("SGBI"), on the one hand, and MRC Legal Services
LLC ("MRC" or the "Shareholder").
1. THE ACQUISITION.
1.1 Purchase and Sale Subject to the Terms and Conditions of this
Agreement. At the Closing to be held as provided in Section 2, SGBI shall sell
the SGBI Shares (defined below) to the Shareholder and the Shareholder shall
purchase the SGBI Shares from SGBI, free and clear of all Encumbrances other
than restrictions imposed by Federal and State securities laws.
1.2 Purchase Price. SGBI will exchange 100,000 shares of its
restricted common stock (the "SGBI Shares") for 1,461,000 shares of Felnam
Investments, Inc. ("Felnam"), representing 100% of the issued and outstanding
common shares of Felnam (the "Felnam Shares"). The SGBI Shares shall be issued
and delivered to the Shareholder or assigns as set forth in Exhibit "A" hereto.
2. THE CLOSING.
2.1 Place and Time. The closing of the sale and exchange of the SGBI
Shares for the Felnam Shares (the "Closing") shall take place at Cutler Law
Group, 610 Newport Center Drive, Suite 800, Newport Beach, CA 92660 no later
than the close of business (Orange County California time) on or before April 3,
2000 or at such other place, date and time as the parties may agree in writing.
2.2 Deliveries by the Shareholders. At the Closing, the Shareholder
shall deliver the following to SGBI:
a. Certificates representing the Felnam Shares, duly endorsed for transfer
to SGBI and accompanied by appropriate medallion guaranteed stock powers; the
Shareholder shall immediately change those certificates for, and to deliver to
SGBI at the Closing, a certificate representing the Felnam Shares registered in
the name of SGBI (without any legend or other reference to any Encumbrance other
than appropriate federal securities law limitations).
b. The documents contemplated by Section 3.
c. ll other documents, instruments and writings required by this Agreement
to be delivered by the Shareholder at the Closing and any other documents or
records relating to Felnam's business reasonably requested by SGBI in
connection with this Agreement.
<PAGE>
2.3 Deliveries by SGBI. At the Closing, SGBI shall deliver the
following to the Shareholder:
a. The SGBI Shares for further delivery to the Shareholder or assigns as
contemplated by section 1.
b. The documents contemplated by Section 4.
c. All other documents, instruments and writings required by this Agreement
to be delivered by SGBI at the Closing.
3. CONDITIONS TO SGBI'S OBLIGATIONS.
The obligations of SGBI to effect the Closing shall be subject to the
satisfaction at or prior to the Closing of the following conditions, any one or
more of which may be waived by SGBI:
3.1 No Injunction. There shall not be in effect any injunction, order
or decree of a court of competent jurisdiction that prevents the consummation of
the transactions contemplated by this Agreement, that prohibits SGBI's
acquisition of the Felnam Shares or the SGBI Shares or that will require any
divestiture as a result of SGBI's acquisition of the Felnam Shares or that will
require all or any part of the business of SGBI to be held separate and no
litigation or proceedings seeking the issuance of such an injunction, order or
decree or seeking to impose substantial penalties on SGBI or Felnam if this
Agreement is consummated shall be pending.
3.2 Representations, Warranties and Agreements. (a) The
representations and warranties of the Shareholder set forth in this Agreement
shall be true and complete in all material respects as of the Closing Date as
though made at such time, and (b) the Shareholder shall have performed and
complied in all material respects with the agreements contained in this
Agreement required to be performed and complied with by it at or prior to the
Closing.
3.3 Regulatory Approvals. All licenses, authorizations, consents,
orders and regulatory approvals of Governmental Bodies necessary for the
consummation of SGBI's acquisition of the Felnam Shares shall have been obtained
and shall be in full force and effect.
3.4 Resignations of Director. Effective on the Closing Date, all of
officers and directors shall have resigned as an officer, director and employee
of Felnam.
4. CONDITIONS TO THE SHAREHOLDER'S OBLIGATIONS.
The obligations of the Shareholder to effect the Closing shall be subject
to the satisfaction at or prior to the Closing of the following conditions, any
one or more of which may be waived by the Shareholder:
<PAGE>
4.1 No Injunction. There shall not be in effect any injunction, order
or decree of a court of competent jurisdiction that prevents the consummation of
the transactions contemplated by this Agreement, that prohibits SGBI's
acquisition of the Felnam Shares or the Shareholder's acquisition of the SGBI
Shares or that will require any divestiture as a result of SGBI's acquisition of
the Shares or the Shareholder's acquisition of the SGBI Shares or that will
require all or any part of the business of SGBI or Felnam to be held separate
and no litigation or proceedings seeking the issuance of such an injunction,
order or decree or seeking to impose substantial penalties on SGBI or Felnam if
this Agreement is consummated shall be pending.
4.2 Representations, Warranties and Agreements. (a) The
representations and warranties of SGBI set forth in this Agreement shall be true
and complete in all material respects as of the Closing Date as though made at
such time, and (b) SGBI shall have performed and complied in all material
respects with the agreements contained in this Agreement required to be
performed and complied with by it at or prior to the Closing.
4.3 Regulatory Approvals. All licenses, authorizations, consents,
orders and regulatory approvals of Governmental Bodies necessary for the
consummation of SGBI's acquisition of the Felnam Shares and the Shareholder's
acquisition of the SGBI Shares shall have been obtained and shall be in full
force and effect.
5. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER.
The Shareholder represents and warrants to SGBI that, to the Knowledge of
the Shareholder (which limitation shall not apply to Section 5.3), and except as
set forth in an Felnam Disclosure Letter:
5.1 Organization of Felnam; Authorization. Felnam is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Nevada. This Agreement constitutes a valid and binding obligation of
the Shareholder, enforceable against it in accordance with its terms.
5.2 Capitalization. The authorized capital stock of Felnam consists of
75,000,000 authorized shares of stock, par value $.001, and 10,000,000 preferred
shares, of which 1,461,000 common shares are presently issued and outstanding.
No shares have been registered under state or federal securities laws. As of
the Closing Date, all of the issued and outstanding shares of common stock of
Felnam are validly issued, fully paid and non-assessable. As of the Closing
Date there will not be outstanding any warrants, options or other agreements on
the part of Felnam obligating Felnam to issue any additional shares of common or
preferred stock or any of its securities of any kind. Except as otherwise set
forth herein, Felnam will not issue any shares of capital stock from the date of
this Agreement through the Closing Date.
<PAGE>
5.3 No Conflict as to Felnam. Neither the execution and delivery of
this Agreement nor the consummation of the sale of the Felnam Shares to SGBI
will (a) violate any provision of the certificate of incorporation or by-laws of
Felnam or (b) violate, be in conflict with, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under
any agreement to which Felnam is a party or (c) violate any statute or law or
any judgment, decree, order, regulation or rule of any court or other
Governmental Body applicable to Felnam.
5.4 Ownership of Felnam Shares. The delivery of certificates to SGBI
provided in Section 2.2 will result in SGBI's immediate acquisition of record
and beneficial ownership of the Felnam Shares, free and clear of all
Encumbrances subject to applicable State and Federal securities laws. There are
no outstanding options, rights, conversion rights, agreements or commitments of
any kind relating to the issuance, sale or transfer of any Equity Securities or
other securities of Felnam.
5.5 Consents and Approvals of Governmental Authorities. Except with
respect to applicable State and Federal securities laws, no consent, approval or
authorization of, or declaration, filing or registration with, any Governmental
Body is required to be made or obtained by Felnam or SGBI or any of its
Subsidiaries in connection with the execution, delivery and performance of this
Agreement by Felnam or the consummation of the sale of the Felnam Shares to
SGBI.
5.6 Other Consents. No consent of any Person is required to be obtained
by Felnam or SGBI to the execution, delivery and performance of this Agreement
or the consummation of the sale of the Felnam Shares to SGBI, including, but not
limited to, consents from parties to leases or other agreements or commitments,
except for any consent which the failure to obtain would not be likely to have a
material adverse effect on the business and financial condition of Felnam or
SGBI.
5.9 Financial Statements. Felnam has delivered to SGBI the consolidated
balance sheet of Felnam as at December 31, 1998 and December 31, 1999, and
statements of income and changes in financial position for the twelve month
periods then ended and the period from inception to the period then ended,
together with the report thereon of Felnam's independent accountant (the "Felnam
Financial Statements"). The Felnam Financial Statements are accurate and
complete in accordance with generally accepted accounting principles.
<PAGE>
5.9 Title to Properties. Felnam owns all the material properties and
assets that it purports to own (real, personal and mixed, tangible and
intangible), including, without limitation, all the material properties and
assets reflected in the Felnam Financial Statements, and all the material
properties and assets purchased or otherwise acquired by Felnam since the date
of the Felnam Financial Statements. All properties and assets reflected in the
Felnam Financial Statements are free and clear of all material Encumbrances and
are not, in the case of real property, subject to any material rights of way,
building use restrictions, exceptions, variances, reservations or limitations of
any nature whatsoever except, with respect to all such properties and assets,
(a) mortgages or security interests shown on the Felnam Financial Statements as
securing specified liabilities or obligations, with respect to which no default
(or event which, with notice or lapse of time or both, would constitute a
default) exists, and all of which are listed in the Felnam Disclosure Letter,
(b) mortgages or security interests incurred in connection with the purchase of
property or assets after the date of the Felnam Financial Statements (such
mortgages and security interests being limited to the property or assets so
acquired), with respect to which no default (or event which, with notice or
lapse of time or both, would constitute a default) exists, (c) as to real
property, (i) imperfections of title, if any, none of which materially detracts
from the value or impairs the use of the property subject thereto, or impairs
the operations of Felnam or any of its Subsidiaries and (ii) zoning laws that
do not impair the present or anticipated use of the property subject thereto,
and (d) liens for current taxes not yet due. The properties and assets of
Felnam and its Subsidiaries include all rights, properties and other assets
necessary to permit Felnam and its Subsidiaries to conduct Felnam's business
in all material respects in the same manner as it is conducted on the date of
this Agreement.
5.10 Buildings, Plants and Equipment. The buildings, plants, structures and
material items of equipment and other personal property owned or leased by
Felnam are, in all respects material to the business or financial condition of
Felnam and its Subsidiaries, taken as a whole, in good operating condition and
repair (ordinary wear and tear excepted) and are adequate in all such respects
for the purposes for which they are being used.
5.11 Litigation. There is no action, suit, inquiry, proceeding or
investigation by or before any court or Governmental Body pending or threatened
in writing against or involving Felnam which is likely to have a material
adverse effect on the business or financial condition of Felnam, SGBI and any
of their Subsidiaries, taken as whole, or which would require a payment by
Felnam in excess of $2,000 in the aggregate or which questions or challenges
the validity of this Agreement. Felnam is not subject to any judgment, order or
decree that is likely to have a material adverse effect on the business or
financial condition of Felnam, SGBI or any of their Subsidiaries, taken as a
whole, or which would require a payment by Felnam in excess of $2,000 in the
aggregate.
5.12 Absence of Certain Changes. Since the date of the Felnam Financial
Statements, Felnam has not:
a. suffered the damage or destruction of any of its properties or assets
(whether or not covered by insurance) which is materially adverse to the
business or financial condition of Felnam or made any disposition of any of its
material properties or assets other than in the ordinary course of business;
b. made any change or amendment in its certificate of incorporation or
by-laws, or other governing instruments;
<PAGE>
c. issued or sold any Equity Securities or other securities, acquired,
directly or indirectly, by redemption or otherwise, any such Equity Securities,
reclassified, split-up or otherwise changed any such Equity Security, or granted
or entered into any options, warrants, calls or commitments of any kind with
respect thereto;
d. organized any new Subsidiary or acquired any Equity Securities of any
Person or any equity or ownership interest in any business;
e. borrowed any funds or incurred, or assumed or become subject to, whether
directly or by way of guarantee or otherwise, any obligation or liability with
respect to any such indebtedness for borrowed money;
f. paid, discharged or satisfied any material claim, liability or obligation
(absolute, accrued, contingent or otherwise), other than in the ordinary course
of business;
g. prepaid any material obligation having a maturity of more than 90 days
from the date such obligation was issued or incurred;
h. canceled any material debts or waived any material claims or rights,
except in the ordinary course of business;
i. disposed of or permitted to lapse any rights to the use of any material
patent or registered trademark or copyright or other intellectual property owned
or used by it;
j. granted any general increase in the compensation of officers or
employees (including any such increase pursuant to any employee benefit plan);
k. purchased or entered into any contract or commitment to purchase any
material quantity of raw materials or supplies, or sold or entered into any
contract or commitment to sell any material quantity of property or assets,
except (i) normal contracts or commitments for the purchase of, and normal
purchases of, raw materials or supplies, made in the ordinary course business,
(ii) normal contracts or commitments for the sale of, and normal sales of,
inventory in the ordinary course of business, and (iii) other contracts,
commitments, purchases or sales in the ordinary course of business;
l. made any capital expenditures or additions to property, plant or
equipment or acquired any other property or assets (other than raw materials and
supplies) at a cost in excess of $100,000 in the aggregate;
m. written off or been required to write off any notes or accounts
receivable in an aggregate amount in excess of $2,000;
<PAGE>
n. written down or been required to write down any inventory in an
aggregate amount in excess of $ 2,000;
o. entered into any collective bargaining or union contract or agreement;
or
p. other than the ordinary course of business, incurred any liability
required by generally accepted accounting principles to be reflected on a
balance sheet and material to the business or financial condition of Felnam.
5.13 No Material Adverse Change. Since the date of the Felnam Financial
Statements, there has not been any material adverse change in the business or
financial condition of Felnam.
5.14 Contracts and Commitments. Felnam is not a party to any:
a. Contract or agreement (other than purchase or sales orders entered into
in the ordinary course of business) involving any liability on the part of
Felnam of more than $2,000 and not cancelable by Felnam (without liability to
Felnam) within 60 days;
b. Lease of personal property involving annual rental payments in excess of
$2,000 and not cancelable by Felnam (without liability to Felnam) within 90
days;
c. Employee bonus, stock option or stock purchase, performance unit,
profit-sharing, pension, savings, retirement, health, deferred or incentive
compensation, insurance or other material employee benefit plan (as defined in
Section 2(3) of ERISA) or program for any of the employees, former employees or
retired employees of Felnam;
d. Commitment, contract or agreement that is currently expected by the
management of Felnam to result in any material loss upon completion or
performance thereof;
e. Contract, agreement or commitment that is material to the business of
Felnam with any officer, employee, agent, consultant, advisor, salesman, sales
representative, value added reseller, distributor or dealer; or
f. Employment agreement or other similar agreement that contains any
severance or termination pay, liabilities or obligations.
All such contracts and agreements are in full force and effect. Felnam is not in
breach of, in violation of or in default under, any agreement, instrument,
indenture, deed of trust, commitment, contract or other obligation of any type
to which Felnam is a party or is or may be bound that relates to the business of
Felnam or to which any of the assets or properties of Felnam is subject, the
effect of which breach, violation or default is likely to materially and
adversely affect the business or financial condition of Felnam. SGBI has not
guaranteed or assumed and specifically does not guarantee or assume any
obligations of Felnam.
<PAGE>
5.15 Compliance with Law. The operations of Felnam have been conducted in
accordance with all applicable laws and regulations of all Governmental Bodies
having jurisdiction over it, except for violations thereof which are not likely
to have a material adverse effect on the business or financial condition of
Felnam or which would not require a payment by Felnam in excess of $2,000 in
the aggregate, or which have been cured. Felnam has not received any
notification of any asserted present or past failure by it to comply with any
such applicable laws or regulations. Felnam has all material licenses, permits,
orders or approvals from the Governmental Bodies required for the conduct of its
business, and is not in material violation of any such licenses, permits, orders
and approvals. All such licenses, permits, orders and approvals are in full
force and effect, and no suspension or cancellation of any thereof has been
threatened.
5.16 Tax Matters.
a. Felnam (1) has filed all nonconsolidated and noncombined Tax Returns and
all consolidated or combined Tax Returns required to be filed through the date
hereof and has paid any Tax due through the date hereof with respect to the time
periods covered by such Tax Returns and shall timely pay any such Taxes required
to be paid by it after the date hereof with respect to such Tax Returns and (2)
shall prepare and timely file all Tax Returns required to be filed after the
date hereof and through the Closing Date and pay all Taxes required to be paid
by it with respect to the periods covered by such Tax Returns; (B) all such Tax
Returns filed pursuant to clause (A) after the date hereof shall, in each case,
be prepared and filed in a manner consistent in all material respects (including
elections and accounting methods and conventions) with such Tax Return most
recently filed in the relevant jurisdiction prior to the date hereof, except as
otherwise required by law or regulation. Any such Tax Return filed or required
to be filed after the date hereof shall not reflect any new elections or the
adoption of any new accounting methods or conventions or other similar items,
except to the extent such particular reflection or adoption is required to
comply with any law or regulation.
<PAGE>
b. All Tax Returns (except those described in subparagraph (a) above)
required to be filed by any person through the date hereof that are required or
permitted to include the income, or reflect the activities, operations and
transactions, of Felnam for any taxable period have been timely filed, and the
income, activities, operations and transactions of Felnam have been properly
included and reflected thereon. Felnam shall prepare and file, or cause to be
prepared and filed, all such Tax Returns that are required or permitted to
include the income, or reflect the activities, operations and transactions, of
Felnam with respect to any taxable year or the portion thereof ending on or
prior to the Closing Date, including, without limitation, Felnam's consolidated
federal income tax return for such taxable years. Felnam will timely file a
consolidated federal income tax return for the taxable year ended December 31,
1999 and such return shall include and reflect the income, activities,
operations and transactions of Felnam for the taxable period then ended, and
hereby expressly covenants and agrees to file a federal income tax return, and
to include and reflect thereon the income, activities, operations and
transactions of Felnam for the taxable period through the Closing Date. All Tax
Returns filed pursuant to this subparagraph (b) after the date hereof shall, in
each case, to the extent that such Tax Returns specifically relate to Felnam or
any of its Subsidiaries and do not generally relate to matters affecting other
members of Felnam's consolidated group, be prepared and filed in a manner
consistent in all material respects (including elections and accounting methods
and conventions) with the Tax Return most recently filed in the relevant
jurisdictions prior to the date hereof, except as otherwise required by law or
regulation. Felnam has paid or will pay all Taxes that may now or hereafter be
due with respect to the taxable periods covered by such consolidated or combined
Tax Returns.
c. Felnam has not agreed, or is not required, to make any adjustment (x)
under Section 481(a) of the Code by reason of a change in accounting method or
otherwise or (y) pursuant to any provision of the Tax Reform Act of 1986, the
Revenue Act of 1987 or the Technical and Miscellaneous Revenue Act of 1988.
d. Neither Felnam nor any Affiliate has, at any time, filed a consent under
Section 341(f)(1) of the Code, or agreed under Section 341(f)(3) of the Code, to
have the provisions of Section 341(f)(2) of the Code apply to any sale of its
stock.
e. There is no (nor has there been any request for an) agreement, waiver or
consent providing for an extension of time with respect to the assessment of any
Taxes attributable to Felnam or its assets or operations and no power of
attorney granted by Felnam with respect to any Tax matter is currently in force.
f. There is no action, suit, proceeding, investigation, audit, claim,
demand, deficiency or additional assessment in progress, pending or threatened
against or with respect to any Tax attributable to Felnam or its assets or
operations.
g. All amounts required to be withheld as of the Closing Date for Taxes or
otherwise have been withheld and paid when due to the appropriate agency or
authority.
h. No property of Felnam is "tax-exempt use property " within the meaning of
Section 168(h) of the Code nor property that Felnam will be required to treat as
being owned by another person pursuant to Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended and in effect immediately prior to the
enactment of the Tax Reform Act of 1986.
i. There have been delivered or made available to SGBI true and complete
copies of all income Tax Returns (or with respect to consolidated or combined
returns, the portion thereof) and any other Tax Returns requested by SGBI as may
be relevant to Felnam or its assets or operations for any and all periods ending
after December 31, 1998, or for any Tax years which are subject to audit or
investigation by any taxing authority or entity.
<PAGE>
j. There is no contract, agreement, plan or arrangement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of Felnam or its Subsidiaries that, individually or collectively, could
give rise to the payment of any amount that would not be deductible pursuant to
Section 280G or 162 of the Code.
k. Felnam has no liabilities not disclosed in the Felnam Financial
Statements or otherwise.
5.18 Representations and Warranties. None of the representations or
warranties made by Felnam herein or in any Schedule hereto, or in any
certificate furnished by Felnam pursuant to this Agreement, or the Felnam
Financial Statements, when all such documents are read in their entirety,
contains or will contain at the time of closing any untrue statement of a
material fact, or omits or will omit at that time to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
5.17 Brokers or Finders. Felnam has not employed any broker or finder or
incurred any liability for any brokerage or finder's fees or commissions or
similar payments in connection with the sale of the Felnam Shares to SGBI.
6. REPRESENTATIONS AND WARRANTIES OF SGBI.
SGBI represents and warrants to the Shareholder that, to the Knowledge of
SGBI (which limitation shall not apply to Section 6.3). Such representations
and warranties shall survive the Closing for a period of two years.
6.1 Organization of SGBI; Authorization. SGBI is a corporation duly
organized, validly existing and in good standing under the laws of Colorado with
full corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement have been duly authorized by all necessary corporate action of
SGBI and this Agreement constitutes a valid and binding obligation of SGBI;
enforceable against it in accordance with its terms.
6.2 Capitalization. The authorized capital stock of SGBI consists of
50,000,000 shares of common stock, no par value, and 5,000,000 shares of
non-voting preferred stock. As of the date of this Agreement, SGBI had
40,334,360 shares of common stock issued and outstanding and no shares of of
Preferred Stock issued and outstanding. As of the Closing Date, all of the
issued and outstanding shares of common stock of SGBI are validly issued, fully
paid and non-assessable. The Common Stock of SGBI is presently listed and
trading on the Nasdaq Over-the-Counter Bulletin Board under the symbol "SGBIE."
<PAGE>
6.3 Ownership of SGBI Shares. The delivery of certificates to Felnam
provided in Section 2.3 will result in the Shareholder or assigns immediate
acquisition of record and beneficial ownership of the SGBI Shares, free and
clear of all Encumbrances other than as required by Federal and State securities
laws.
6.4 No Conflict as to SGBI and Subsidiaries. Neither the execution and
delivery of this Agreement nor the consummation of the sale of the SGBI Shares
to the Shareholders will (a) violate any provision of the certificate of
incorporation or by-laws (or other governing instrument) of SGBI or any of its
Subsidiaries or (b) violate, or be in conflict with, or constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or excuse performance by any Person of any of its obligations
under, or cause the acceleration of the maturity of any debt or obligation
pursuant to, or result in the creation or imposition of any Encumbrance upon any
property or assets of SGBI or any of its Subsidiaries under, any material
agreement or commitment to which SGBI or any of its Subsidiaries is a party or
by which any of their respective property or assets is bound, or to which any of
the property or assets of SGBI or any of its Subsidiaries is subject, or (c)
violate any statute or law or any judgment, decree, order, regulation or rule of
any court or other Governmental Body applicable to SGBI or any of its
Subsidiaries except, in the case of violations, conflicts, defaults,
terminations, accelerations or Encumbrances described in clause (b) of this
Section 6.4, for such matters which are not likely to have a material adverse
effect on the business or financial condition of SGBI and its Subsidiaries,
taken as a whole.
6.5 Consents and Approvals of Governmental Authorities. No consent,
approval or authorization of, or declaration, filing or registration with, any
Governmental Body is required to be made or obtained by SGBI or any of either of
their Subsidiaries in connection with the execution, delivery and performance of
this Agreement by SGBI or the consummation of the sale of the SGBI Shares to the
Shareholders.
6.6 Other Consents. No consent of any Person is required to be obtained
by Felnam or SGBI to the execution, delivery and performance of this Agreement
or the consummation of the sale of the SGBI Shares to the Shareholders,
including, but not limited to, consents from parties to leases or other
agreements or commitments, except for any consent which the failure to obtain
would not be likely to have a material adverse effect on the business and
financial condition of Felnam or SGBI.
<PAGE>
6.7 Financial Statements. Prior to closing, SGBI shall have delivered
to the Shareholder audited consolidated balance sheets of SGBI and its
Subsidiaries as at December 31, 1998 and June 30, 1999, and statements of income
and changes in financial position for each of the twelve month periods then
ended, together with the report thereon of SGBI's independent accountant, as
well as the unaudited consolidated balance sheet of SGBI and its Subsidiaries as
at December 31, 1999 and statements of income and changes in financial position
for the six month period then ended (the "SGBI Financial Statements"). Such SGBI
Financial Statements and notes fairly present the consolidated financial
condition and results of operations of SGBI and its Subsidiaries as at the
respective dates thereof and for the periods therein referred to, all in
accordance with generally accepted United States accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto, and shall be utilizable in any SEC filing in compliance with Rule
310 of Regulation S-B promulgated under the Securities Act.
6.8 Brokers or Finders. Other than MRC Legal Services LLC, SGBI has not
employed any broker or finder or incurred any liability for any brokerage or
finder's fees or commissions or similar payments in connection with the sale of
the SGBI Shares to the Shareholders.
6.9 Purchase for Investment. SGBI is purchasing the Felnam Shares
solely for its own account for the purpose of investment and not with a view to,
or for sale in connection with, any distribution of any portion thereof in
violation of any applicable securities law.
7. Access and Reporting; Filings With Governmental Authorities; Other
Covenants.
7.1 Access Between the date of this Agreement and the Closing Date.
Each of the Shareholder and SGBI shall (a) give to the other and its authorized
representatives reasonable access to all plants, offices, warehouse and other
facilities and properties of Felnam or SGBI, as the case may be, and to its
books and records, (b) permit the other to make inspections thereof, and (c)
cause its officers and its advisors to furnish the other with such financial and
operating data and other information with respect to the business and properties
of such party and its Subsidiaries and to discuss with such and its authorized
representatives its affairs and those of its Subsidiaries, all as the other may
from time to time reasonably request.
7.2 Regulatory Matters. The Shareholder and SGBI shall (a) file with
applicable regulatory authorities any applications and related documents
required to be filed by them in order to consummate the contemplated transaction
and (b) cooperate with each other as they may reasonably request in connection
with the foregoing.
8. CONDUCT OF FELNAM'S BUSINESS PRIOR TO THE CLOSING. The Shareholder shall
use its best efforts to ensure the following:
8.1 Operation in Ordinary Course. Between the date of this Agreement
and the Closing Date, Felnam shall cause conduct its businesses in all material
respects in the ordinary course.
8.2 Business Organization. Between the date of this Agreement and the
Closing Date, Felnam shall (a) preserve substantially intact the business
organization of Felnam; and (b) preserve in all material respects the present
business relationships and good will of Felnam.
<PAGE>
8.3 Corporate Organization. Between the date of this Agreement and the
Closing Date, Felnam shall not cause or permit any amendment of its certificate
of incorporation or by-laws (or other governing instrument) and shall not:
a. issue, sell or otherwise dispose of any of its Equity Securities, or
create, sell or otherwise dispose of any options, rights, conversion rights or
other agreements or commitments of any kind relating to the issuance, sale or
disposition of any of its Equity Securities;
b. create or suffer to be created any Encumbrance thereon, or create, sell
or otherwise dispose of any options, rights, conversion rights or other
agreements or commitments of any kind relating to the sale or disposition of any
Equity Securities;
c. reclassify, split up or otherwise change any of its Equity Securities;
d. be party to any merger, consolidation or other business combination;
e. sell, lease, license or otherwise dispose of any of its properties or
assets (including, but not limited to rights with respect to patents and
registered trademarks and copyrights or other proprietary rights), in an amount
which is material to the business or financial condition of Felnam except in the
ordinary course of business; or
f. organize any new Subsidiary or acquire any Equity Securities of any
Person or any equity or ownership interest in any business.
8.4 Other Restrictions. Between the date of this Agreement and the
Closing Date, Felnam shall not:
a. borrow any funds or otherwise become subject to, whether directly or by
way of guarantee or otherwise, any indebtedness for borrowed money;
b. create any material Encumbrance on any of its material properties or
assets;
c. increase in any manner the compensation of any director or officer or
increase in any manner the compensation of any class of employees;
d. create or materially modify any material bonus, deferred compensation,
pension, profit sharing, retirement, insurance, stock purchase, stock option, or
other fringe benefit plan, arrangement or practice or any other employee benefit
plan (as defined in section 3(3) of ERISA);
e. make any capital expenditure or acquire any property or assets;
f. enter into any agreement that materially restricts SGBI, Felnam or any of
their Subsidiaries from carrying on business;
g. pay, discharge or satisfy any material claim, liability or obligation,
absolute, accrued, contingent or otherwise, other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities or obligations
reflected in the Felnam Financial Statements or incurred in the ordinary course
of business and consistent with past practice since the date of the Felnam
Financial Statements; or
h. cancel any material debts or waive any material claims or rights.
<PAGE>
9. DEFINITIONS.
As used in this Agreement, the following terms have the meanings specified
or referred to in this Section 9.
9.1 "Business Day" C Any day that is not a Saturday or Sunday or a day
on which banks located in the City of New York are authorized or required to be
closed.
9.2 "Code" C The Internal Revenue Code of 1986, as amended.
9.3 "Encumbrances" C Any security interest, mortgage, lien, charge,
adverse claim or restriction of any kind, including, but not limited to, any
restriction on the use, voting, transfer, receipt of income or other exercise of
any attributes of ownership, other than a restriction on transfer arising under
Federal or state securities laws.
9.4 "Equity Securities" C See Rule 3aB11B1 under the Securities
Exchange Act of 1934.
9.5 "ERISA" C The Employee Retirement Income Security Act of 1974, as
amended.
9.6 "Governmental Body" C Any domestic or foreign national, state or
municipal or other local government or multi-national body (including, but not
limited to, the European Economic Community), any subdivision, agency,
commission or authority thereof.
9.7 "Knowledge" C Actual knowledge, after reasonable investigation.
9.8 "Person" C Any individual, corporation, partnership, joint venture,
trust, association, unincorporated organization, other entity, or Governmental
Body.
9.9 "Subsidiary" C With respect to any Person, any corporation of which
securities having the power to elect a majority of that corporation's Board of
Directors (other than securities having that power only upon the happening of a
contingency that has not occurred) are held by such Person or one or more of its
Subsidiaries.
10. TERMINATION.
10.1 Termination. This Agreement may be terminated before the Closing
occurs only as follows:
a. By written agreement of the Shareholder and SGBI at any time.
b. By SGBI, by notice to the Shareholders at any time, if one or more of the
conditions specified in Section 3 is not satisfied at the time at which the
Closing (as it may be deferred pursuant to Section 2.1) would otherwise occur or
if satisfaction of such a condition is or becomes impossible.
c. By the Shareholder, by notice to SGBI at any time, if one or more of the
conditions specified in Section 4 is not satisfied at the time at which the
Closing (as it may be deferred pursuant to Section 2.1), would otherwise occur
of if satisfaction of such a condition is or becomes impossible.
d. By either the Shareholders or SGBI, by notice to the other at any time
after April 5, 2000, if the transaction has not been completed.
<PAGE>
10.2 Effect of Termination. If this Agreement is terminated pursuant to
Section 10.1, this Agreement shall terminate without any liability or further
obligation of any party to another.
13. NOTICES. All notices, consents, assignments and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given when (a) delivered by hand, (b) sent by telex or facsimile (with receipt
confirmed), provided that a copy is mailed by registered mail, return receipt
requested, or (c) received by the delivery service (receipt requested), in each
case to the appropriate addresses, telex numbers and facsimile numbers set forth
below (or to such other addresses, telex numbers and facsimile numbers as a
party may designate as to itself by notice to the other parties).
(a) If to SGBI:
1508 Brookhollow Drive
Santa Ana, CA 92705
Attn: Joerg Alte, President
Facsimile
(b) If to the Shareholder:
c/o Cutler Law Group
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
Facsimile No.: (949) 719-1988
Attention: M. Richard Cutler, Esq.
14. MISCELLANEOUS.
14.2 Expenses. Each party shall bear its own expenses incident to the
preparation, negotiation, execution and delivery of this Agreement and the
performance of its obligations hereunder.
14.3 Captions. The captions in this Agreement are for convenience of
reference only and shall not be given any effect in the interpretation of this
agreement.
14.4 No Waiver. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
14.5 Exclusive Agreement; Amendment. This Agreement supersedes all prior
agreements among the parties with respect to its subject matter with respect
thereto and cannot be changed or terminated orally.
<PAGE>
14.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be considered an original, but all of which
together shall constitute the same instrument.
14.7 Governing Law, Venue. This Agreement and (unless otherwise provided)
all amendments hereof and waivers and consents hereunder shall be governed by
the internal law of the State of California, without regard to the conflicts of
law principles thereof. Venue for any cause of action brought to enforce any
part of this Agreement shall be in Orange County, California.
14.8 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and assigns,
provided that neither party may assign its rights hereunder without the consent
of the other, provided that, after the Closing, no consent of Felnam shall be
needed in connection with any merger or consolidation of SGBI with or into
another entity.
IN WITNESS WHEREOF, the corporate parties hereto have caused this Agreement
to be executed by their respective offi-cers, hereunto duly authorized, and
entered into as of the date first above written.
SANGUI BIOTECH INTERNATIONAL, INC.
a Colorado corporation
/s/ Joerg Alte
_______________________________________________
By: Joerg Alte, President
MRC LEGAL SERVICES LLC
/s/ M. Richard Cutler
_______________________________________________
By: M. Richard Cutler, President
<PAGE>
EXHIBIT A
FELNAM SHAREHOLDER AND ASSIGNS
MRC Legal Services LLC 58,500 shares
James Stubler 10,000 shares
Brian A. Lebrecht 18,000 shares
Vi Bui 13,500 shares
<PAGE>
ARTICLES OF INCORPORATION
OF
CITADEL INVESTMENT SYSTEMS, INC.
KNOW ALL MEN BY THESE PRESENTS that the undersigned Incorporator being a
natural person of the age of eighteen years of age or older and desiring to form
a body corporate under the laws of the State of Colorado does hereby sign,
verify and deliver in duplicate to the Secretary of State of the State of
Colorado these Articles of Incorporation:
ARTICLE I
NAME
----
The name of the Corporation is CITADEL INVESTMENT SYSTEMS, INC.
ARTICLE II
PERIOD OF DURATION
------------------
This Corporation shall exist in perpetuity, from and after the date of
filing these Articles of Incorporation with the Secretary of State of Colorado
unless and until dissolved according to the laws of the State of Colorado.
ARTICLE III
PURPOSES
--------
Section 1. Specific Purposes
------------------
A. To engage in the business of developing computer based real
estate investment programs in digital form.
B. To provide management services to corporations utilizing real
estate computer programs.
Section 2. General Purposes
-----------------
A. To own, operate and maintain such real or personal property as
may be necessary to conduct such business and to do all of the things in
connection with the real or personal property which might be done by an
individual.
B. To hire and employ agents and employees, and to enter into
agreements of employment and collective bargaining agreements for the purpose of
advancement and performance of the purpose of this Corporation.
C. To carry on any other business, whether or not related to the
foregoing, including the transaction of all lawful business for which
corporations may be organized pursuant to the Colorado corporation Act, to have
and exercise all powers, privileges and immunities now or hereafter conferred
upon or permitted to corporations by the laws of the State of Colorado, and to
do any and all things herein set forth to the same extent as natural persons
could do insofar as permitted by the laws of the State of Colorado.
<PAGE>
D. To do those things that are authorized and permitted by
Colorado Corporations Code.
E. To do all things authorized by law or incidental
thereto.
ARTICLE IV
POWERS
------
The powers of the Corporation shall be those powers granted by Article Two
of the Colorado Corporate Code under which this Corporation is formed. In
addition, the Corporation shall have the following specific powers:
Section 1. Officers. The Corporation shall have the power to elect or
---------
appoint officers and agents of the Corporation and to fix their compensation.
Section 2. Capacity. The Corporation shall have the power to act as an
--------
agent for any individual, association, partnership, corporation or other legal
entity, and to act as general partner for any limited partnership.
Section 3. Acquisitions. The Corporation shall have the power to receive,
------------
acquire, hold, exercise rights arising our of ownership or possession thereof,
sell, or otherwise, dispose of, shares or other interests in, or obligations of,
individuals, associations, partnerships, corporations or governments.
Section 4. Earned Surplus. The Corporation shall have the power to
---------------
receive, acquire, hold, pledge, transfer, or otherwise dispose of shares of the
Corporation, but such share may only be purchased, directly or indirectly, out
of earned surplus.
Section 5. Gifts. The Corporation shall have the power to make gifts or
-----
contributions for the public welfare or for charitable, scientific or
educational purposes.
ARTICLE V
CAPITAL STRUCTURE
-----------------
Section 1. Authorized Capital. The aggregate number of shares and the
-------------------
amount of the total authorized capital of said Corporation shall consist of
50,000,000 shares of common stock, no par value per share, and 5,000,000 shares
of non-voting preferred stock, no par value per share.
Section 2. Share Status. All common shares will be equal to each other,
--------------
and when issued, shall be fully paid and nonassessable, and the private property
of shareholders shall not be liable for corporate debts. Preferred shares shall
have such preferences as the Directions may assign them prior to issuance. Each
holder of a common share of record shall have one vote for each share of stock
outstanding in his name on the books of the Corporation and shall be entitled to
vote said stock.
<PAGE>
Section 3. Consideration for Shares. The common stock of the Corporation
-------------------------
shall be issued for such consideration as shall be fixed from time to time by
the Board of Director. In the absence of fraud, the judgment of the Directors
as to the value of any property or services received in full or partial payment
for shares shall be conclusive. When shares are issued upon payment of the
consideration fixed by the Board of Directors, such shares shall be taken to be
fully paid stock and shall be nonassessable.
Section 4. Pre-Emptive Rights. Except as may otherwise be provided by the
------------------
Board of Directors, holders of shares of stock of the Corporation shall have no
pre-emptive right to purchase, subscribe for or otherwise acquire shares of
stock of the Corporation, rights, warrants or options to purchase stocks or
securities of any kind convertible into stock of the Corporation.
Section 5. Dividends. Dividends in cash, property or shares of the
---------
Corporation may be paid, as and when declared by the Board of Directors, out of
funds of the Corporation to the extent and in the manner permitted by law.
Section 6. Distribution in Liquidation. Upon any liquidation, dissolution
---------------------------
or winding up of the Corporation, and after paying or adequately providing for
the payment of all its obligations, the remainder of the assets of the
Corporation shall be distributed, either in cash or in kind, pro rata to the
holders of the common stock, subject to preferences, if any, granted to holders
of the preferred shares. The Board of Directors may, from time to time,
distribute to the shareholders in partial liquidation from stated capital of the
Corporation, in cash or property, without the vote of the shareholders, in the
manner permitted and upon compliance with limitations imposed by law.
ARTICLE VI
VOTING BY SHAREHOLDERS
----------------------
Section 1. Voting Rights; Cumulative Voting. Each outstanding share of
-----------------------------------
common stock is entitled to one vote and each fractional share of common stock
is entitled to a corresponding fractional vote on each matter submitted to a
vote of the shareholders. Cumulative voting shall not be allowed in the
election of Directors of the Corporation and every shareholder entitled to vote
at such election shall have the right to vote the number of shares owned by him
for as many persons as there are Directors to be elected, and for whose election
he has a right to vote. Preferred shares have no voting rights unless granted
by amendment to this Article of Incorporation.
Section 2. Majority Vote. When, with respect to any action to be taken by
--------------
the Shareholders of the Corporation, the Colorado Corporation Code requires the
vote or concurrence of the holders of two-thirds of the outstanding shares
entitled to vote thereon, or of any class or series, any and every such action
shall be taken, notwithstanding such requirements of the Colorado Corporations
Code, by the vote or concurrence of the holders of a majority of the outstanding
shares entitled to vote thereon, or of any class or series.
<PAGE>
ARTICLE VII
REGISTERED AND INITIAL PRINCIPAL OFFICE AND REGISTERED AGENT
------------------------------------------------------------
The registered office and initial principal office of the Corporation is
located at 1291 South Lincoln Street, Denver, Colorado 80210, and the name of
the registered agent of the Corporation at such address is Edward H. Hawkins.
ARTICLE VIII
INCORPORATOR
------------
The name and address of the Incorporator is Edward H. Hawkins, 1291 South
Lincoln Street, Denver, Colorado 80210.
ARTICLE IX
BOARD OF DIRECTORS
------------------
Section 1. The corporate powers shall be exercised by a majority of the
Board of Directors. The number of individuals to serve on the Board of
Directors shall be set forth in the Bylaws of the Corporation; provided,
however, that the initial Board of Directors shall consist of one person
below-named to manage the affairs of the Corporation until such time as he
resigns or his successor is elected by a majority vote of the Shareholders:
Name of Director Address
------------------ -------
Edward H. Hawkins 1291 South Lincoln Street,
Denver, Colorado 80210
Section 2. If in the interval between the annual meetings of shareholders
of the Corporation, the Board of Directors of the Corporation deems it desirable
that the number of Directors be increased, additional Directors may be elected
by a unanimous vote of the Board of Directors of the Corporation then in office,
or as otherwise set forth in the Bylaws of the Corporation.
Section 3. The number of Directors comprising the whole Board of Directors
may be increased or decreased from time to time within such foregoing limit as
set forth in the Bylaws of the Corporation.
<PAGE>
ARTICLE X
POWERS OF THE BOARD OF DIRECTORS
--------------------------------
In furtherance and not in limitation of the powers conferred by the State
of Colorado, the Board of Directors is expressly authorized and empowered:
Section 1. Bylaws. To make, alter, amend and repeal the Bylaws, subject
-------
to the power of the shareholders to alter or repeal the Bylaws made by the Board
of Directors.
Section 2. Books and Records. Subject to applicable provisions of the
--------------------
Bylaws then in effect, to determined, from time to time, whether and to what
extent, and at what times and places, and under what conditions and regulations,
the accounts and books of the Corporation or any of them, shall be open to
shareholder inspection. No shareholder shall any right to inspect any of the
accounts, books or documents of the Corporation, except as permitted by law,
unless and until authorized to do so by the resolution of the Board of Directors
or of the shareholders of the Corporation.
Section 3. Power to Borrow. To authorize and issue, without shareholder
----------------
consent, obligations of the Corporation, secured and unsecured, under such terms
and conditions as the Board, in its sole discretion, may determine, and to
pledge, or mortgage, as security therefor, any real or personal property of the
Corporation, including after-acquired property.
Section 4. Dividends. To determine whether any and, if so, what part, of
----------
the earned surplus of the Corporation shall be paid in dividends to the
shareholders, and to direct and determine other use and disposition of any such
earned surplus.
Section 5. Profits. To fix, from time to time, the amount of the profits
--------
of the Corporation to be reserved as working capital or for any other lawful
purposes.
Section 6. Employee's Plans. From time to time to provide and carry out
------------------
and to recall, abolish, revise, amend, alter, or change a plan or plans for the
participation by all or any of the employees, including Directors and Officers
of this Corporation or of any corporation in which or in the welfare of which
the Corporation has any interest, and those actively engaged in the conduct of
this Corporation's business, in the profits of this Corporation or of any branch
of division thereof, as a part of this Corporation's legitimate expenses, and
for the furnishing to such employees and persons, or any of them , at this
Corporation's expense, of medical services, insurance against accident,
sickness, or death, pensions during old age, disability, or unemployment,
education, housing social services, recreation, or other similar aid for their
relief or general welfare, in such manner and upon such terms and condition as
may be determined by the Board of Directors.
Section 7. Warrants and Options. The Corporation, by resolution or
----------------------
resolutions of its Board of Directors, shall have power to create and issue,
whether or not in connection with the issue and sale of any shares of any other
securities of the Corporation, warrants, rights, or options entitling the
holders thereof to purchase from the Corporation any shares of any class or
classes of any other securities of the Corporation, such warrants, rights or
options to be evidenced by or in such instrument or instruments as shall be
approved by the Board of Directors. The terms upon which, the time or times
(which may be limited or unlimited in duration), and the price or prices (not
less than the minimum amount prescribed by law, if any) at which any such
warrants, rights or options may be issued and any such shares or other
securities may be purchased from the Corporation upon the exercise of such
warrant, right or option shall be such as shall be fixed and stated in the
resolution or resolutions of the Board of Directors providing for the creations
and issue of such warrants, rights or options. The Board of Directors is hereby
authorized to create and issue any such warrants, rights or options from time to
time for such consideration, and to such persons, firms, or corporations, as the
Board of Directors may determine.
<PAGE>
Section 8. Compensation. To provide for the reasonable compensation of
-------------
its own members, and to ix the terms and conditions upon which such compensation
will be paid.
Section 9. Not in Limitation. In addition to the powers and authority
--------------------
hereinabove, or by statute expressly conferred upon it, the Board of Directors
may exercise all such powers and do all such acts and things as may be exercised
or done by the Corporation, subject, nevertheless, to the provisions of the laws
of the State of Colorado, of these Articles of Incorporation and of the Bylaws
of the Corporation.
ARTICLE XI
RIGHT OF DIRECTORS OF CONTRACT WITH CORPORATION
-----------------------------------------------
No contract or other transactions between this Corporation and one or more
of its Directors or any other corporation, firm, association, or entity in which
one or more of its Directors are directors or officers or are financially
interested shall be either void or voidable solely because of such relationship
or interest or solely because such directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves or ratifies
such contract or transaction or solely because their votes are counted for such
purposes if:
A. The fact of such relationship of interest is disclosed or known to
the Board of Directors or committee which authorizes, approves, or ratifies the
contract or transaction by a vote or consent sufficient for the purpose without
counting the votes of consents of such interested Directors; or
B. The fact of such relationship or interest is disclosed or known to
the shareholders entitled to vote and they authorize, approve or ratify such
contract or transaction by vote or written consent; or
C. The contact or transaction is fair and reasonable to the Corporation.
ARTICLE XII
CORPORATE OPPORTUNITY
---------------------
The officers, Directors and other members of management of the Corporation
shall be subject to the doctrine of "corporate opportunities" only insofar as it
applies to business opportunities in which this Corporation has expressed an
interest as determined from time to time by this Corporation's Board of
Directors as evidenced by resolutions appearing in the Corporation's minutes.
Once such areas of interest are delineated, all such business opportunities
within such areas of interest which come to the attention of the officers,
Directors and other members of management of this Corporation shall be disclosed
promptly to this Corporation and made available to it. The Board of Directors
may reject any business opportunity presented to it and thereafter any officer,
Director or other member of management may avail himself of such opportunity.
Until such time as this Corporation, through its Board of Directors, has
designated an area of interest, the officers, Directors and other members of
management of this Corporation shall be free to engage in such areas of interest
on their own and this doctrine shall not limit the right of any officer,
Director or other member of management of this Corporation to continue a
business existing prior to the time that such area of interest is designated by
the Corporation. This provision shall not be construed to release any employee
of this Corporation (other than an officer, Director, or other member of
management) from any duties, which he may have to this Corporation.
<PAGE>
ARTICLE XIII
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
-------------------------------------------------
The Board of Directors of the Corporation shall have the power to:
A. Indemnify any person who was or is a party of is threatened to be
made a party to any threatened, pending or completed action, suit or 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 he is or was
a director, officer, employee or agent of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonable incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonable believed to be in the best interests of the Corporation and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his conduct was unlawful. The termination of any such action, suit or
proceeding by judgment, order, settlement or conviction or upon a plea or nolo
----
contendereor its equivalent shall not of itself create a presumption that the
---------
person did not act in good faith and in a manner which he reasonably believed to
-
be in the best interests of the Corporation and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
lawful.
B. Indemnify any person who was or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of the Corporation, partnership, joint venture, trust of other enterprises
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith in a manner he reasonably believed to be in the best
interests of the Corporation; but no indemnification shall be made in the
respect of any claim, issue or matter as to which such person has been adjudged
to be liable for negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the court in which such action or
suit was brought determines upon application that, despite the adjudication of
liability, but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnification for such expenses which such court
deems proper.
C. Indemnify a Director, officer, employee or agent of the Corporation
to the extent that such person has been successful on the merits in defense of
any action, suit or proceeding referred to in Subparagraph A or B of this
Article of in defense of any claim, issue or matter therein, against expenses
(including attorney's fees) actually and reasonable incurred by him in
connection therewith.
<PAGE>
D. Authorize indemnification under Subparagraph A or B of this Article
(unless ordered by a court) in the specific case upon a determination that
indemnification of the Director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Subparagraph A or B. Such determination shall be made by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to
such action, suite or proceeding, or is such a quorum is not obtainable or even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or by the shareholders.
E. Authorize payment of expenses (including attorney's fees) incurred
in defending a civil or criminal action, suit or proceeding in advance of the
final disposition of such action, suite or proceeding as authorized in
Subparagraph D of this Article upon receipt of any undertaking by or on behalf
of the Director, officer, employee or agent to repay such amount unless it is
ultimately determined that he is entitled to be indemnified by the Corporation
as authorized in this Article.
F. Purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Corporation or who is or was
serving at the request of the Corporation as a Director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provision of this Article.
The indemnification provided by the Article shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under these
Articles of Incorporation, and the Bylaws, agreement, vote of shareholders or
disinterested directors or otherwise, and any procedure provided for by any of
the foregoing, both as to action in his 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, officer, employee or agent and shall inure to
the benefit of heirs, executors and administrators of such a person.
<PAGE>
ARTICLE XIV
RIGHT TO AMEND
--------------
The right is expressly reserved to amend, alter, change or repeal any
provision or provisions contained in these Articles of Incorporation or any
Article herein by a majority vote of the members of the Board of Directors, and
a majority vote of the shareholders of the Corporation.
IN WITNESS WHEREOF, the undersigned has set his hand and seal the 13th day
----
of July, 1995.
----
/s/ Edward H. Hawkins
- ------------------------
Edward H. Hawkins, Incorporator
CONSENT OF AGENT
The undersigned hereby consents to the appointment as agent for the above
named Corporation under the Section 105 of the Colorado Business Corporation
Act, until such times as he resigns such position.
/s/ Edward H. Hawkins
- ------------------------
Edward H. Hawkins, Agent
1291 So. Lincoln St.
Denver, CO 80210
<PAGE>
BYLAWS
OF
CITADEL INVESTMENT SYSTEMS, INC.
ARTICLE 1
Offices
-------
The principal office of the Corporation in Colorado shall be initially
location in Denver, Colorado. The Corporation may have such other offices,
either within or outside the State of Colorado, as the Board of Director may
designate, or as the business of the Corporation may require from time to time.
The registered office of the Corporation required by the Colorado Business
Corporation Act to be maintained in the State of Colorado may be, but need not
be, identical with the principal office, and the address of the registered
office may be changed from time to time by The Board of Directors.
ARTICLE II
Shareholders
------------
Section 1. Annual Meeting.
----------------
The annual meeting of the shareholders shall be held pursuant to notice
given by the Board of Director for the purpose of electing directors and for the
transaction of such other business as may come before the meeting.
Section 2. Special Meetings.
------------------
Special meetings of the shareholders, for any purpose, unless otherwise
prescribed by statue, may be called by the President or by the Board of
Directors, and shall be called by the President at the request of holders of not
less than ten (10%) percent of all the outstanding shares of the Corporation
entitled to vote at the meeting. Such request shall state the purposes of the
proposed meeting.
Section 3. Adjournment.
------------
a. When the annual meeting is convened, or when nay special meeting is
convened, the presiding officer may adjourn it for such period of time as may be
reasonable necessary to reconvene the meeting at another place and another time.
b. The presiding officer shall have the power to adjourn any meeting of
the shareholders for any proper purpose, including, but not limited to, lack of
a quorum, t secure a more adequate meeting place, to elect officials to count
and tabulate votes, to review any shareholder proposals or pass upon any
challenge which may properly come before the meeting.
<PAGE>
c. When a meeting is adjourned to another time or place, it shall not
be necessary to give any notice of the adjourned meeting if the time and place
to which the meeting is adjourned is announced at the meeting at which the
adjournment is taken, and any business may be transacted at the adjourned
meeting that might have been transacted on the original date of the meeting.
If, however, after the adjournment, the Board fixes a new record date for the
adjourned meeting, a notice of the adjourned meeting shall be given in
compliance with Subsection 94)(a) of this Article II to each shareholder of
record on the new record date entitle to vote at such meeting.
Section 4. Notice of Meeting: Purpose of Meeting: Waiver.
---------------------------------------------------
a. Each shareholder of record entitled to vote at any meeting shall be
given in person, or by first class mail, postage prepaid, written notice of such
meeting which, in the case of a special meeting, shall set for the purpose(s)
for which the meeting is called, not less than ten (10) ore more than fifty (50)
days before the date of such meeting. If mailed, such notice is to be sent to
the shareholder's address as it appears on the stock transfer books of the
Corporation unless the shareholder shall have requested of the Secretary in
writing at least fifteen (15) days prior to the distribution of any required
notice intended for him to be sent to some other address, in which case the
notice may be sent to the address so designated. Notwithstanding any such
request by a shareholder, notice sent to a shareholder's address, as it appears
on the stock transfer books of this Corporation as of the record date shall be
deemed properly given. Any notice of a meeting sent by the United States mail
shall be deemed delivered when deposited with proper postage thereon with the
United States Postal Service or in any mail receptacle under its control.
b. A shareholder waives notice of any meeting by attendance, either in
person or by proxy, at such meeting or by waiving notice in writing either
before during or after such meeting. Attendance at a meeting for the express
purpose of objecting that meeting was not lawfully called or convened, however,
will not constitute a waiver of notice by a shareholder stating at the beginning
of the meeting, his objection that the meeting was not lawfully called or
convened.
c. Whenever the holders of at least eight (80%) percent of the capital
stock of the Corporation having the right to vote shall be present at any annual
or special meeting of shareholders, however, called or notified, and shall sign
a written consent thereto on the minutes of such meeting, the meeting shall be
valid for all purposes.
d. A Waiver of Notice signed by all shareholders entitled to vote at a
meeting of shareholders may also be used for any other purpose including, but
not limited to, designating any place within or without the State of Colorado as
the place for holding such a meeting.
e. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of shareholders needs to be specified in any written
Waiver of Notice.
<PAGE>
Section 5. Closing of Transfer Books; Record Date; Shareholders' List
-----------------------------------------------------------
a. In order to determine the holders of record of the capital stock of
the Corporation who are entitled to notice of meetings, to vote at a meeting or
adjournment thereof, or to receive payment of any dividend, or for any other
purpose, the board of Directors may fix a date not more than fifty (50) days
prior tot he date set for any of the above-mentioned activities for such
determination of shareholders.
b. If the stock transfer books shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least ten (10) days immediately
preceding such meeting.
c. In lieu of closing the stock transfer books, the Board of Directors
may fix in advance a date as the date for such determination of shareholders,
such date in any case to be not more than fifty (50) days, and in case of a
meeting of shareholders, not less than ten (10) days prior to the date on which
the particular action, requiring such determination of shareholders, is to be
taken.
d. If the stock transfer books are not closed and no record date is
fixed for the determination of shareholders entitled to notice or to vote at a
meeting of shareholders, or to receive payment of a dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the Board
of Directors declaring such dividend adopted, as the case may be, shall be the
record date for such determination of shareholders.
e. When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, unless the Board of Directors fixes a
new record date under this section for the adjourned meeting.
f. The officer or agent having charge of the stock transfer books of
the Corporation shall make, as of a date at least ten (10) days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting or any adjournment thereof, with the address of each shareholder
and the number and class and series, if any, of shares held by each shareholder.
Such list shall be kept on file at the registered office of the Corporation or
at the office of the transfer agent or registrar of the Corporation for a period
of ten (10) days prior to such meeting and shall be available for inspection by
any shareholder at any time during usual business hours. Such list shall also
be produced and kept open at the time and place of any meeting of shareholders
and shall be subject to inspection by any shareholder at any time during the
meeting.
g. The original stock transfer books shall be prima facie evidence as
to the shareholders entitled to examine such list or stock transfer books or to
vote at any meeting of shareholders.
h. If the requirements of Subsection 5(f) of the Article II have not
been substantially complied with them, on the demand of any shareholder in
person or by proxy, the meeting shall be adjourned until such requirements are
complied with.
<PAGE>
i. If no demand pursuant to Section 5(f) is made, failure to comply
with the requirements of the Section shall not affect the validity of any action
taken at such meeting.
j. Subsection 59g) of the Article II shall be operative only at such
time(s) as the Corporation shall have six (6) or more shareholders.
Section 6. Quorum.
-------
a. At any meeting of the shareholders of the Corporation, the presence,
in person or by proxy, of shareholders owning a majority of the issued and
outstanding shares of the capital stock of the Corporation entitled to vote
thereat shall be necessary to constitute a quorum for the transaction of any
business. If a quorum is present, the affirmative vote of a majority of the
shares represented at such meeting and entitled to vote on the subject matter
shall be the act of the shareholders. If there shall not be a quorum at any
meeting of the shareholders of the Corporation, then the holders of a majority
of the shares of the capital stock of the Corporation who shall be present at
such meeting, in person or by proxy, may adjourn such meeting from time to time
until holders of a majority of the share of the capital stock shall attend. At
any such adjourned meeting at which a quorum shall be present, any business may
be transacted which might have been transacted at the meeting as originally
scheduled.
b. The shareholders at a duly organized meeting having a quorum may
continue to transact business until adjournment notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
Section 7. Presiding Officer: Order of Business
----------------------------------------
a. Meetings of the shareholders shall be presided over by the Chairman
of the Board, or, if he is not present, by the President, or, if he is not
present, by a Vice President, or if none of the Chairman of the Board, the
President, a Vice President present, the meeting shall be presided over by a
Chairman to be chosen by a plurality of the shareholders entitled to vote at the
meeting who are present, in person or by proxy. The presiding officer of nay
meeting of the shareholders may delegate the duties and obligations of thee
presiding officer of the meeting as he sees fit.
b. The Secretary of the Corporation, or in his absence, an Assistant
Secretary shall has as Secretary of every meeting of the shareholders, but if
neither the Secretary nor an Assistant Secretary is present, the presiding
officer of the meeting shall choose any person present to act as Secretary of
the meeting.
c. The order of business shall be as follows:
1. Call of meeting to order.
2. Proof of notice of meeting.
3. Reading of minutes of last previous shareholders meeting of a Waiver
thereof.
4. Reports of officers
5. Reports of committees
6. Election of directors
7. Regular and miscellaneous business
8. Special matters
9. Adjournment
<PAGE>
d. Notwithstanding the provisions of Article II, Section 7, Subsection
c, the order and topics of business to be transacted at any meeting shall be
determined by the presiding officer of the meeting in his sole discretion. In
no event shall any variation in the order of business or additions and deletions
from thee order of business as specified in Article II, Section 7, subsection c,
invalidate any actions properly taken at any meeting.
Section 8. Voting
------
a. Unless otherwise provided for in the Certificate of Incorporation,
each shareholder shall be entitled, at each meeting and upon each proposal to be
voted upon, to one vote for each share of voting stock recorded in his name on
the books of the corporation on the record date fixed as provided for in Article
II, Section 5.
b. The presiding officer at any meeting of the shareholders shall have
the power of determine the method and means of voting when any matter is to be
voted upon. The method and means of voting may include, but shall not be
limited to, vote by ballot, vote by hand or vote by voice. However, no method
of voting may be adopted which fails to take account of any shareholder's right
to vote by proxy as provided for in Section 10 of this Article II. In no event
may any method of voting be adopted which would prejudice the outcome of the
vote.
Section 9. Action Without meeting.
-------------------------
a. Any action required to be taken at any annual or special meeting of
the shareholders of the Corporation, or any action which may be taken at any
annual or special meeting of such shareholders, may be taken without a meeting,
without prior notice and without a vote. If a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be signed by the holders of
the outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. If any class of shares
is entitled to vote thereon as a class, such written consent shall be required
of the holders of a majority of the shares of each class of shares entitled to
vote thereon.
b. Within ten (10) after obtaining such authorization by written
consent, notice must be given to those shareholders who have not consented in
writing. The notice shall fairly summarize the material features of the
authorized action and, if the action be a merger, consolidation or sale or
exchange of assets for which dissenters' rights are provided under the Colorado
Business Corporation Act, the notice shall contain a clear statement of the
right of the shareholders dissenting information to be paid the fair value of
their share upon compliance with further provisions of the Colorado Business
Corporation Act regarding rights of dissenting shareholders.
<PAGE>
c. In the event that the action to which the shareholders' consent is
such as would have required the filing of a certificate under the Colorado
Business Corporation Act if such action had been voted on by shareholders at a
meeting thereof, the certificate filed under such other section shall state the
written consent has been given in accordance with the provisions of this Article
II, Section 9.
Section 10. Proxies.
--------
a. Every shareholder entitled to vote at a meeting of shareholders or
to express consent or dissent without a meeting, or his duly authorized
attorney-in-fact may authorize another person or persons to act for him by
proxy.
b. Every proxy must be signed by the shareholder or his
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the shareholder executing it, except
as otherwise provided in this Article II, Section 10.
c. The authority of the holder of the proxy to act shall not be revoked
by the incompetence or the death of the shareholder who executed the proxy
unless, before the authority is exercised, written notice of an adjudication of
such incompetence or of such death is received by the corporate office
responsible for maintaining the list of shareholders.
d. Except when other provisions shall have been made by written
agreement between the parties, the record holder of shares held as pledges or
otherwise as security or which belong to another, shall issue to the pledgor or
to such owner of such shares, upon demand therefor and payment of necessary
expenses thereof, a proxy to vote or take other action thereon.
e. A proxy which states that it is irrevocable when it is held by any
of the following or a nominee of any of the following: (I) a pledgee; (ii) a
person who has purchased or agreed to purchase the shares; (iii) a creditor or
creditors of the Corporation who extend or continue to extend credit to the
Corporation in consideration of the proxy; if the proxy states that it was given
in consideration o such extension or continuation of credit, the amount thereof,
and the name of the person extending or continuing credit; (iv) a person who has
contracted to perform services as an officer of the Corporation, if a proxy is
required by the contract of employment, of the proxy states that was given in
consideration of such contract of employment and states the name of the employee
and the period of employment contracted for, and (v) a person designated by or
under and agreement as provided in Article XI hereof.
f. Notwithstanding a provision in a proxy stating that it is
irrevocable, the proxy become revocable after the pledge is redeemed, or the
debt of the Corporation is paid, of the period of employment provided for in the
contract of employment has been terminated, or the agreement under Article XII
hereof, has terminated and, in a case provided for in Subsection 10(e)(iii) or
Subsection 10(e)(iv) of this Article become irrevocable three years after the
date of the proxy or at the end of the period, if any, specified therein,
whichever period is less, unless the period of irrevocability is renewed from
time to time by the execution of a new irrevocable proxy as provided in Article
II, Section 10. This subsection 10(f) does not affect the duration of a proxy
under subsection 10(b) of this Article II.
<PAGE>
g. A proxy may be revoked, notwithstanding a provision making it
irrevocable, by a purchaser of shares without knowledge of the existence of the
provision unless the existence of the proxy and its irrevocability is noted
conspicuously on the ace of back of the certificate representing such shares.
h. If a proxy for the same shares confers authority upon two (2) or
more persons and does not otherwise provide a majority of such persons present
at the meeting, or if only one is present, then that one may exercise all the
powers conferred by the proxy. If the proxy holders present at the meeting are
equally divided as the right and manner of voting in any particular case, the
voting of such shares shall be prorated.
i. If a proxy expressly provides, any proxy holder may appoint in
writing a substitute to act in his place.
Section 11. Voting of Shares By Shareholders
------------------------------------
a. Shares standing in the name of another Corporation, domestic or
foreign, may be voted by the officer, agent, or proxy designated by the Bylaws
of the corporate shareholder or, in the absence of any applicable Bylaw, by such
person as the Board of Directors of the corporate shareholders may designate.
Proof of such designation may be mad by presentation of a certified copy of the
Bylaws or other instrument of the corporate shareholder. In the absence of any
such designation, or in the case of conflicting designation by the corporate
shareholder, the Chairman of the Board, the President, any vice president,
secretary and treasurer of the corporate shareholder, in that order shall be
presumed to possess authority to vote such shares.
b. Shares held by an administrator, executor, guardian or conservator
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but not trustee shall be entitled to vote
shares held by him without a transfer of such shares into his name.
c. Shares standing in the name of a receiver may be voted by such
receiver. Shares held by or under the control of a receiver but not standing in
the name of such receiver without the transfer thereof into his name if
authority to do so is contained in an appropriate order of the court by which
such receiver was appointed.
d. A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred in to the name of the pledge.
e. Shares of the capital stock of the Corporation belonging to the
Corporation or held by it in fiduciary capacity shall not be voted, directly or
indirectly, at any meeting, and shall not be counted in determining the total
number of outstanding votes.
<PAGE>
ARTICLE III
Directors
---------
Section 1. Board of Directors; Exercise of Corporate Powers
------------------------------------------------------
a. All corporate powers shall be exercised by or under the authority
of, and the business and affairs of the Corporation shall be managed under the
direction of the Board of Director except as may be otherwise provided in the
Articles of Incorporation. If any such provision is made in the Articles of
Incorporation, the powers and duties conferred or imposed upon the Board of
Directors shall be exercised or performed to such extend by such person or
persons as shall be provided in the Articles of Incorporation.
b. Directors need not be residents of the state of incorporation unless
the Articles of Incorporation so require.
c. The Board of Directors shall have the authority to fix the
compensation of the Directors unless otherwise provided for in the Articles of
Incorporation.
d. A Director shall perform his duties as Director, including his
duties has a member of any committee of the Board upon which he may serve, in
good faith, in a manner he reasonably believes to be in the best interests of
the Corporation, and with such care as an ordinarily prudent person in a like
position would use under similar circumstance.
e. In performing his duties, a Director shall be entitled to rely on
information, opinions, reports or statement, including financial data, in each
case prepared or presented by (I) one or more officers or employees of the
Corporation whom the Director reasonably believes to be reliable and competent
in the matters presented; (ii) counsel, public accountants or other persons as
to matters which the Director reasonably believes to be within such persons'
professional or expert competence; or (iii) a committee of the Board upon which
he does not serve, duly designated in accordance with a provision of the
Articles of Incorporation or the Bylaws, as to matters within its designated
authority, which committee the Director reasonably believes to merit confidence.
f. A Director shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause such reliance
described in Subsection 1(e) of this Article III to be unwarranted.
g. A person who performed his duties in compliance with this Article
III, Section 1 shall have no liability by reason of being or having been a
Director of the Corporation.
h. 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 consents
thereto unless he votes against such action or abstains from voting in respect
thereto because of an asserted conflict of interest.
<PAGE>
Section 2. Number; Election; Classification of Directors; Vacancies
-----------------------------------------------------------
a. The Board of Directors of this Corporation shall consist of not less
than three (3) nor more than seven (7) members, unless the number of
shareholders of less than three, in which the Corporation shall have as many
directors as they are shareholders. The number of directors shall be fixed by
the initial Board of Directors. The number of directors constituting the
initial Board of Directors shall be fixed by the Articles of Incorporation. The
number of Directors may be increased from time to time by the Board of
Directors, but no decrease shall have the effect of shortening the term of any
incumbent director.
b. Each person named in the Articles of Incorporation as a member of
the initial Board of Directors, shall hold office until the first annual meeting
of shareholders, and until his successor shall have been elected and qualified
or until his earlier resignation, removal from office of death.
c. At the first annual meeting of the shareholders and at each annual
meeting thereafter thee shareholders shall elect directors to hold office until
the next succeeding annual meeting, except in the case of the classification of
directors as permitted by the Colorado Business Corporation Act. Each director
shall hold office for the term for which he is elected and until his successor
shall have been elected and qualified or until his earlier resignation, removal
from office or death.
d. The shareholders, by amendment to these Bylaws, may provide that the
directors be divided into not more than four classes, as nearly equal in number
as possible, whose term of office shall respectively expire at different times,
but no such term shall continue longer than four (4) years, and at least
one-fifth (1/5) in number of the directors shall be elected annually.
e. If directors are classified and the number of directors is
thereafter changed, any increase or decrease in directorships shall be so
apportioned among the classes as to make all classes as nearly equal in number
as possible.
f. Any vacancy occurring in the Board of Directors including any
vacancy created by reason of any increase in the number of directors, may be
filled by the affirmative vote of a majority of the remaining directors through
less than a quorum o the Board of Directors. A director elected to fill a
vacancy shall hold office only until the next election of directors by the
shareholders.
Section 3. Removal of Directors.
----------------------
a. At a meeting of shareholders called expressly for that purpose,
directors may be removed in the manner provided in this Article III, Section 3.
Any director or the entire Board of Directors may be removed, with or without
cause, by a vote of the holders of a majority of the shares then entitled to
vote at an election of directors.
b. If the Corporation has cumulative voting, if less than the entire
Board is to be removed, no one of the directors may be removed if the votes cast
against his removal would be sufficient to elect him if then cumulatively voted
at an election of the entire Board of Directors, or, if there be classes of
directors, at an election of the class of directors of which he is a member.
<PAGE>
Section 4. Director Quorum and Voting.
-----------------------------
a. A majority of the number of directors fixed in the manner provided
in theses Bylaws shall constitute a quorum for the transaction of business
unless a greater number is required elsewhere in these Bylaws.
b. A majority of the members of an Executive Committee or other
committee shall constitute a quorum for the transaction of business at any
meeting of such Executive Committee or other committee,
c. The act of the majority of the directors present at a Board meeting at
which a quorum is present shall be the act of the Board of Directors.
d. The act of the majority of the member of an Executive Committee
present at an Executive Committee meeting at which a quorum is present shall be
the act of the Executive committee.
e. The act of the majority of member of any other committee present at a
committee meeting at which a quorum is present shall be the act of the
committee.
Section 5. Director Conflicts of Interest.
----------------------------------
a. No contract or other transaction between this Corporation and one or
more of its directors or any other Corporation, firm, association or entity in
which one or more of its directors are directors or officers or are financially
interested, shall be either void or voidable because of a relationship or
interest or because such directors or directors are present at the Board of
Directors or a committee thereof which authorizes, approves or ratifies such
contract or transaction or because his or their votes are counted for such
purpose, if:
(i) The fact of such relationship of interest is disclosed or known
to the Board of Directors or committee which authorizes, approves or ratifies
the contract or transaction by a vote or consent sufficient for the purpose
without counting the votes or consents of such interested directors; or
(ii) The fact of such relationship or interest is disclosed or known
to the shareholders entitled to vote and they authorize, approve or ratify such
contract or transaction by vote or written consent; or
(iii) The contract or transaction is fair and reasonable as to the
Corporation at the time it is authorized by the board, a committee, or its
shareholders.
b. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof, which authorizes, approves or ratifies such contract or transaction.
Section 6. Executive and Other Committees: Designation; Authority
-----------------------------------------------------------
<PAGE>
a. 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 and one or more other committees each of which, to the extent provided
in such resolution or in the Articles of Incorporation, of these Bylaws, shall
have and may exercise all the authority of the Board of Directors, except that
no such committee shall have the authority to: (I) approve or recommend to
shareholders actions or proposals required by the Colorado Business Corporation
Act to be approved by the shareholders; (ii) designate candidates for the office
of director for purposes of proxy solicitation or otherwise; (iii) fill
vacancies on the Board of Directors or any committee thereof; (iv) amend the
Bylaws; or (v) authorize or approve the issuance or sale of, or any contract to
issue or sell, shares or designate the terms of a series of class shares, unless
the Board of Directors, having acted regarding general authorization for the
issuance or sale of shares, or any contract therefor, and, in the case of a
series, the designation thereof, has specified a general formula or method by
resolution or by adoption of a stock option or other plan, authorized a
committee to fix the terms upon which such shares may be issued or sold,
including, without limitation, the price, the rate or manner of payment of
dividends for redemption, inking fund, conversion and voting preferential
rights, and provisions for other features of a class of shares, or a series of
class of shares, with full power in such committee to adopt any final resolution
setting forth all the terms thereof and to authorize the statement of the terms
of a series for filing with the Secretary of State under the Colorado Business
Corporation Act.
b. The Board, by resolution adopted in accordance with Article III,
Subsection 6(a) may designate one or more directors as alternate members of such
committee, who may act in the place and stead of any absent member of members at
any meeting of such committee.
c. Neither the designation of any such committee, the delegation
thereto of authority, nor action by committee pursuant to such authority shall
constitute compliance by any member of the Board of Directors, not a member of
the committee in question, with his responsibility to act in good faith, in a
manner he reasonably believes to be in the best interests of the Corporation,
and with such care as an ordinarily prudent person in a like position would use
under similar circumstances.
Section 7. Place; Time; Notice and Call of Directors' Meetings.
----------------------------------------------------------
a. Meeting of the Board of Directors, regular or special, may be held
either within or without this state.
<PAGE>
b. A regular meeting of the Board of Directors of the Corporation shall
be held for the election of officers of the Corporation and for the transaction
of such other business as may come before such meeting as promptly as
practicable after the annual meeting of the shareholders of this Corporation
without the necessity of other notice than this Bylaw. Other regular meetings
of the Board of Directors of the Corporation may be held at such times and at
such place as the Board of Directors of the Corporation may from time to time
resolve without other notice than such resolution. Special meetings of the
Board of Directors may be held at any time upon call of the Chairman of the
Board or the President or a majority of the Directors of the Corporation, at
such time an at such place as shall be specified in the call thereof. Notice of
any special meeting of the Board of Directors must be given at least two (2)
days prior thereto, if by written notice delivered personally; or at least five
(5) days prior thereto, if mailed; or at least two (2) days prior thereto, if by
telegram; or at least two (2) days prior thereto, if by telephone. If such
notice is given by mail, such notice shall be deemed to have been delivered when
deposited with the United States Postal Service addressed to the business
address of such director with postage thereon prepaid. If notice is give by
telegram, such notice shall be deemed delivered with the telegram is delivered
to the Telegraph Company. If notice is given by telephone, such notice shall be
deemed delivered when the call is completed.
c. Notice of a meeting of the Board of Directors need not be given to
any director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting shall constitute waiver of notice of such
meeting and waiver of any and all objections to the place of the meeting, the
time of the meeting, or the manner in which it has been called or convened,
except when a director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully called or
convened.
d. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
e. A majority of directors present, whether or not a quorum exists, may
adjourn any meeting of the Board of Directors to another time and place. Notice
any such adjourned meeting shall be given to the directors who were not present
at the time of the adjournment and, unless the time and place of the adjourned
meeting are announced at the time of the adjournment, to the other directors.
f. Members of the Board of Directors may participate in a meeting of
such Board 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. Participation by such means shall constitute
presence in person at a meeting.
Any action required by the Colorado Business Corporation Act to be
taken at a meeting of the directors of the Corporation, or a committee thereof,
may be taken without a meeting if a consent in writing, setting forth the action
so to be taken, signed by all of the directors, or all of the members of the
committee, as the case may be, is filed in the minutes of the proceedings of the
Board or of the committee. Such consent shall have the same effect as a
unanimous vote.
Section 9. Compensation.
------------
The directors and members of the Executive and any other committee of the
Board of Directors shall be entitled to such reasonable compensation for their
services and on such basis as shall be fixed from time to time by resolution of
the Board of Directors. The Board of Directors and members of any committee of
the Board of Directors shall be entitled to reimbursement for any reasonable
expense incurred in attending any Board or committee meeting. Any director
receiving compensation under this section shall not be prevented from serving
the Corporation in any other capacity and shall not be prohibited from receiving
reasonable compensation such other services.
<PAGE>
Section 10. Resignation.
------------
Any Director of the Corporation may resign at any time without acceptance
by the Corporation. Such resignation shall be in writing and may provide that
such resignation shall take effect immediately or on any future date state in
such notice.
Section 11. Removal.
--------
Any Director of the Corporation may be removed for cause by a majority vote
of the other members of the Board of Directors as then constituted or with or
without cause by the vote of the holders of a majority of the outstanding shares
of capital stock shareholders of the Corporation called for such purpose.
Section 12. Vacancies.
----------
In the event that a vacancy shall occur on the Board of Directors of the
Corporation whether because of death, resignation, removal, an increase in the
number o directors or any other reason, such vacancy may be filled by the vote
of a majority of the remaining directors of the Corporation even though such
remaining directors represent less than a quorum. An increase in the number of
directors shall create vacancies for the purpose of this section. A director of
the Corporation elected to fill a vacancy shall hold office for the unexpired
term of his predecessor, in the case of an increase in the number of directors,
until the election and qualification of directors at the next annual meetings of
the shareholders.
ARTICLE IV
Officers
--------
Section 1. Election; Number; Terms of Office.
--------------------------------------
a. The officers of the Corporation shall consist of a Chairman of the
Board, a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors at such time and in such manner as may be prescribed
by these Bylaws. Such other officers and assistant officers and agents as may
be deemed necessary may be elected or appointed by the Board of Directors.
b. All officers and agents, as between themselves and the Corporation,
shall have such authority and perform such duties in the management of the
Corporation as are provided in these Bylaws, or as may be determined by
resolution of the Board of Directors not inconsistent with these Bylaws.
c. Any two (2) or more offices may be held by the same person except
the offices of the President and Secretary.
<PAGE>
d. A failure to elect a Chairman of the Board, a President, a Secretary
and a Treasurer shall not affect the existence of the Corporation.
Section 2. Removal.
--------
An officer of the Corporation shall hold office until the election and
qualification of his successor, however, any officer of the Corporation may be
removed from office by the Board of Directors whenever in its judgment the best
interests of the Corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of any officer shall not of itself create any contract
right to employment or compensation.
Section 3. Vacancies.
----------
Any vacancy in any office from any cause may be filled for the unexpired
portion of the term of such office by the Board of Directors.
Section 4. Powers and Duties.
--------------------
a. The Chairman of the Board shall be the Chief Executive Officer of
the Corporation. The Chairman of the Board shall preside at all meetings of the
shareholders and of the Board of Directors. Except where by law the signature
of the President is required or unless the Board of Directors shall rule
otherwise, the Chairman of the Board shall possess the same power as the
President to sign all certificates, contracts and other instruments of the
Corporation which may be authorized by the Board of Directors. Unless a
Chairman of the Board is specifically elected, the President shall be deemed to
be the Chairman of the Board.
b. The President shall be the Chief Operating Officer of the
Corporation. He shall be responsible for the general day-to-day supervision of
the business and affairs of the Corporation. He shall sign or countersign all
certificates, contracts or other instruments of the Corporation as authorized by
the Board of Directors. He may, but need not, be a member of the Board of
Directors. In the absence of the Chairman of the Board, the President shall be
the Chief Executive Officer of the Corporation and shall preside at all meetings
of the shareholders and the Board of Directors. He shall make reports to the
Board of Directors and shareholders. He shall perform such other duties as are
incident to his office or are properly required of him by the Board the
Directors. The Board of Directors will at times retain the power to expressly
delegate the duties of the President to any other officer of the Corporation
c. The Vice President(s), if any, in the order designated by the Board
of Directors, shall exercise the functions of the President during the absence,
disability, death, or refusal to act of the President. During the time that any
Vice President is properly exercising the functions of President, such Vice
President shall have all the powers and be subject to all the restriction upon
the President. Each Vice President shall have such other duties as are assigned
to him from time to time by the Board of Directors or by the President of the
Corporation.
<PAGE>
d. The Secretary of the Corporation shall keep the minutes of the
meeting of the shareholders of the Corporation and, if so requested, the
Secretary shall keep the minutes of the meeting of the Board of Directors of the
Corporation. The Secretary shall be the custodian of the minute books of the
Corporation and such other books and records of the Corporation as the Board of
Directors of the Corporation may direct. The Secretary shall make or cause to
be made all proper entries in al corporate books that the Board of Directors of
the Corporation may direct. The Secretary shall have general responsibility for
maintaining the stock transfer books of the Corporation, or of supervising the
maintenance of the stock transfer books of the Corporation by the transfer
agent, if any, of the Corporation. The Secretary shall be the custodian of the
corporate seal of the Corporation and shall affix the corporate seal of the
Corporation on contracts and other instruments as the Board of Directors of the
Corporation may direct. The Secretary shall perform such other duties as are
assigned to him from time to time by the Board of Directors or the President of
the Corporation.
e. The Treasurer of the Corporation shall have custody of all funds and
securities owned by the Corporation. The Treasurer shall cause to be entered
regularly in the proper books of account of the Corporation full and accurate
records of the receipts and disbursements of the Corporation. The Treasurer of
the Corporation shall render a statement of cash, financial and other account of
the Corporation whenever he is directed to render such a statement by the Board
of Directors or by the President of the Corporation. The Treasurer shall at all
reasonable times make available thee Corporation's books and financial accounts
to any Director of the Corporation during normal business hours. The Treasurer
shall perform all other acts incident to the office of the Treasurer of the
Corporation, and he shall have such other duties as are assigned to him from
time to time by the Board of Directors of the President of the Corporation.
f. Other subordinate or assistant officers appointed by the Board of
Directors or by the President, if such authority is delegated to him by the
Board of Directors, shall exercise such powers and perform such duties as may be
delegated to them by the Board of Directors or by the President, as the case may
be.
g. In case of the absence or disability of any officer of the
Corporation and of any person authorized to act in his place during such period
of absence or disability, the Board of Directors may from time to time delegate
the powers and duties of such officer to any other officer or any director or
any other person whom it may select,
Section 5. Salaries.
--------
The salaries of all of the officers of the Corporation shall be fixed by
the Board of Directors. No officer shall be ineligible to receive such salary
by reason of the fact the he is also a Director of the Corporation and receiving
compensation therefor.
<PAGE>
ARTICLE V
Loans to Employees and Officers;
--------------------------------
Guaranty of Obligations of Employees and Officers
-------------------------------------------------
Section 1. Certificates Representing Shares.
-----------------------------------
a. This Corporation may lend money to, guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of a
subsidiary, including any officer of employee who is a Director of the
Corporation or of a subsidiary; whenever, in the judgment of the Directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest, and may be unsecured, or secured in such manner as the Board of
Directors shall approve including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Article shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of this Corporation at
common law of under any statute.
ARTICLE VI
Stock Certificates: Voting Trusts; Transfers
--------------------------------------------
Section 1. Certificates Representing Shares.
-----------------------------------
a. Every holder of shares in this Corporation shall be entitled to one
or more certificates, representing all shares to which he is entitled and such
certificates shall be signed by the President or a Vice President and Secretary
or an Assistant Secretary of the Corporation and may be sealed with the seal of
the Corporation or a facsimile thereof. The signatures of the President or Vice
President and the Secretary or Assistant Secretary may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar,
other than the Corporation itself or an employee of the Corporation. In case
any officer who signed or whose facsimile signature has been placed upon such
Certificate shall have ceased to be an officer before such certificate is
issued, it may be used by the Corporation with the same effect as if he were
such officer at the date of its issuance.
b. Each certificate representing shares shall state upon the face
thereof: (i) the name of the Corporation; (ii) that the Corporation is organized
under the laws of this state; (iii) the name of the person or persons to whom
issued; (iv) the number and class of shares, and the designation of the series,
if any, which such certificate represents; and (v) the par value of each share
represented by such certificate, or a statement that the shares are without par
value.
c. No certificate shall be issued for any shares until such shares are
fully paid.
<PAGE>
Section 2. Transfer Book.
---------------
The Corporation shall keep at its registered office or principal place of
business or in the office of its transfer agent or registrar, a book (or books
where more than one kind, class or series of stock is outstanding) to be known
as the Stock Book, containing the names, alphabetically arranged, addresses and
Social Security numbers of every shareholder, and the number of shares of each
kind, class or series of stock held of record. Where the Stock Book is kept in
the office of the transfer agent, the Corporation shall keep at its office in
the State of Colorado copies of the stock lists prepared from said Stock Book
and sent to it from time to time by said transfer agent. The Stock Book or stock
lists shall show the current status of the ownership of shares of the
Corporation provided, if the transfer agent of the Corporation be located
elsewhere, a reasonable time shall be allowed for transit or mail.
Section 3. Transfer of Shares
--------------------
a. The name(s) and address(s) of the person(s) to whom shares of stock
of this Corporation are issued, shall be entered on the Stock Transfer Books of
the Corporation, with the number of shares and date of issuance.
b. Transfer of shares of the Corporation shall be made on the Stock
Transfer Books of the Corporation by the Secretary or the transfer agent, only
when the holder of record thereof or the legal representative of such holder of
record or attorney-in-fact of such holder of record, authorized by power of
attorney duly executed and filed with the Secretary or transfer agent of the
Corporation, shall surrender the Certificate representing such shares for
cancellation. Lost, destroyed or stolen Certificates shall be replaced pursuant
to Section 5 of this Article VI.
c. The person or persons in whose names shares stand on the books of
the Corporation shall be deemed by the Corporation to be the owner of such
shares for all purposes, except as otherwise provided pursuant to Section 10 and
11 of Article II, or Section 4 of this Article VI.
Section 4. Voting Trusts.
---------------
a. Any number of shareholders of the Corporation may create a voting
trust for the purpose of conferring upon a trustee or trustees the right to vote
or otherwise represent their shares, for a period not to exceed ten (10) years,
by: (i) entering into a written voting trust; (ii) depositing a counterpart of
the agreement with the Corporation at its registered office; and (iii)
transferring their shares to such trustee or trustees for the purposes of this
Agreement. Prior to the recording of the Agreement, the shareholder concerned
shall tender the stock certificate(s) described therein to the corporate
secretary who shall note on each certificate:
"This Certificate is subject to the provisions of a voting trust
agreement dated _________, recorded in Minute Book _____________, of the
Corporation.
__________________
Secretary"
b. Upon the transfer of such shares, voting trust certificates shall be
issued by the trustee or trustees to the shareholder who transfer their share in
trust. Such trustee or trustees shall keep a record of the holders of the voting
trust certificates evidencing a beneficial interest in the voting trust, giving
the names and addresses of all such holders and the number and class of the
shares in respect of which voting trust certificates by each are issued, and
shall deposit a copy of such record with the Corporation at its registered
office.
<PAGE>
c. The counterpart of the voting trust agreement and a copy of such
record so deposited with the Corporation shall be subject to the same right of
examination by a shareholder of the Corporation, in person or by agent or
attorney, as are the books and records of the Corporation, and such counterpart
and such copy of such record shall be subject to examination by any holder of
record of voting trust certificates either in person or by agent or attorney, at
any reasonable time for any proper purpose.
d. At any time before the expiration of a voting trust agreement as
originally fixed or as extended one or more times under this Article VI,
Subsection 4(d) one or more holders of voting trust certificates may, by
agreement in writing, extend the duration of such voting trust agreement,
nominating the same or substitute trustee or trustees, for an additional period
not exceeding ten (10) years. Such extension agreement shall not affect the
rights or obligations of persons not parties to the agreement, and such persons
shall be entitled to remove their shares from the trust and promptly to have
their stock certificates reissued upon the expiration date of the original term
of the voting trust agreement. The extension agreement shall in every respect
comply with and be subject to all provisions of this Article VI, Section 4
applicable to the original voting trust agreement except that the ten (10) year
maximum period of duration shall commence on the date of adoption of the
extension agreement.
e. The trustees under the terms of the agreements entered into under
the provisions of this Article VI, Section 4 shall not acquire the legal title
to the shares but shall be vested only with the legal right and title to the
voting power which is incident to the ownership of the shares.
Section 5. Lost, Destroyed or Stolen Certificates.
-------------------------------------------
No certificate representing shares of the stock in the Corporation shall be
issued in place of any Certificate alleged to have been lost, destroyed, or
stolen except on production of evidence, satisfactory to the Board of Directors,
of such loss, destruction or theft, and, if the Board of Directors so requires,
upon the furnishing of an indemnity bond in such amount (but not to exceed twice
the fair market value of the shares represented by the Certificate) and with
such terms and with such surety as the Board of Directors may, in its
discretion, require.
ARTICLE VII
Books and Records
-----------------
a. The Corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of its shareholders, Board of
Directors and committees of Directors.
<PAGE>
b. Any books, records and minutes may be in written form or in any
other form capable of being converted into written form within reasonable time.
c. Any person who shall have been a holder of record of one quarter of
one percent of all shares or of voting trust certificates therefor at least six
months immediately preceding his demand or shall be the holder of record of, or
the holder of record of voting trust certificates for, at least five (5%)
percent of the outstanding shares of any class or series of the Corporation,
upon written demand stating the purpose thereof, shall have the right to
examine, in person or by agent or attorney, at any reasonable time or times, for
any proper purpose, its relevant books and records of account, minutes and
record of shareholders and to make extracts therefrom.
d. No shareholder who within two (2) years has sold or offered for sale
any list of shareholders or of holders of voting trust certificates for shares
of this Corporation or ant other Corporation; has aided or abetted any person in
procuring any list of shareholders or of holders of voting trust certificates
for any such purpose; or has improperly used any information secured through any
prior examination of the books and records of account, minutes, or record of
shareholders or of holders of voting trust certificates for shares of the
Corporation or any other Corporation; shall be entitled to examine the documents
and records of the Corporation as provided in Subsection (c) of this Article
VII. No shareholder who does not act in good faith or for a proper purpose in
making his demand shall be entitled to examine the documents and records of the
Corporation as provided in Subsection (c) of this Article VII.
e. Unless modified by resolution of the shareholders, this Corporation
shall prepare not later than four (4) months after the close of each fiscal
year:
(i) A balance sheet showing in reasonable detail the financial conditions of
the Corporation as of the date of its fiscal year.
(ii) A profit and loss statement showing the results of its operation
during its fiscal year.
f. Upon the written request of any shareholder or holder of voting
trust certificates for shares of the Corporation, the Corporation shall mail to
such shareholder or holder of voting trust certificates a copy of its most
recent balance sheet and profit and loss statement.
g. Such balance sheets and profit and loss statements shall be filed
and kept for at least five (5) years in the registered office of the Corporation
in this state and shall be subject to inspection during business hours by any
shareholder or holder of voting trust certificates.
ARTICLE VIII
Dividends
---------
The Board of Directors of the Corporation may, from time to time, declare
and the Corporation may pay dividends on its shares in cash, property or its own
shares, except when the Corporation is insolvent or when the payment thereof
would render the Corporation insolvent subject to the following provisions:
<PAGE>
a. Dividends in cash or property may be declared and paid, except as
otherwise provided in this Article VIII, only out of the unreserved and
unrestricted earned surplus of the Corporation or out of the capital surplus,
however arising, but each dividend paid out of capital surplus shall be
identified as a distribution of capital surplus, and the amount per share paid
from such capital surplus shall be disclosed to the shareholders receiving the
same concurrently with the distribution.
b. Dividends may be declared and paid in the Corporation's treasury
shares.
c. Dividends may be declared and paid in the Corporation's authorized
but unissued shares out of any unreserved and unrestricted surplus of the
Corporation upon the following conditions:
(i) If a dividend is payable in the Corporation's own shares
having a par value, such shares shall be issued at not less than the par value
thereof and there shall be transferred to stated capital at the time such
dividend is paid an amount of surplus equal to the aggregate par value of the
shares to be issued as a dividend.
(ii) If the dividend is payable in the Corporation's own shares
without par value, such shares shall be issued at such stated value as shall be
fixed by the Board of Directors by resolution adopted at the time such dividend
is declared, and there shall be transferred to stated capital at the time such
dividend is paid an amount of surplus equal to the aggregate stated value so
fixed in respect of such shares; and the amount per share so transferred to
stated capital shall be disclosed to the shareholder receiving such dividend
concurrently with the payment thereof.
d. No dividend payable in shares of any class shall be paid to the
holders of shares of any other class unless the Articles of Incorporation so
provide or such payment is authorized by the affirmative vote or written consent
of the holders of at least a majority of the outstanding shares of the class in
which the payment is to be made.
e. A split or division of the issued shares of any class into a greater
number of shares of the same class without increasing the stated capital of the
Corporation shall not be constructed to be a stock dividend within the meaning
of this Article VIII.
ARTICLE IX
Indemnification
---------------
Section 1. Action etc. Other Than by or in the Right of the
----------------------------------------------------------
Corporation.
<PAGE>
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding or investigation, whether civil, criminal or administrative,
and whether external or internal to the Corporation, (other than a judicial
action or suit brought by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or that, being or having been such a director, officer, employee or
agent, he is or was serving at the request of the Corporation as a director,
officer, employee, or trustee or agent of another corporation, partnership,
joint venture, trust or other enterprise (all such persons being referred to
hereafter as "Agent"), against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, or any appeal therein, if such
person acted in good faith and in a manner he 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 such conduct
was unlawful. The termination of any action, suit or proceeding - whether 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 he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, that such person had reasonable cause to believe
that his conduct was unlawful.
Section 2. Action etc. by or in the Right of the Corporation
----------------------------------------------------------
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened pending or completed judicial
action or suit brought by or in thee right of the Corporation to procure a
judgment in its favor by reason off the fact that he is or was an Agent (as
defined above) against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense, settlement or appeal
of such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
except 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 his or her 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 the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
Section 3. Determination of Right of Indemnification
---------------------------------------------
Any indemnification under Section 1 or 2 (unless ordered by a court) shall
be made by the Corporation unless a determination is reasonably and promptly
made (i) by the Board by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders, that such person acted in bad faith and in a manner that such
person did not believe to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal proceeding, that such person
believed or had reasonable cause to believe that his conduct was unlawful.
Section 4. Indemnification Against Expenses of Successful Party
---------------------------------------------------------
<PAGE>
Notwithstanding the other provisions of this Article, to the extent that an
Agent has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice or the settlement of an
action without admission of liability, in defense of any proceeding or in
defense of any claim, issue or matter therein, or on appeal from any such
proceeding, action, claim or matter, such Agent shall be indemnified against all
expenses incurred in connection therewith.
Section 5. Advances of Expenses
----------------------
Except as limited by Section 6 of this Article, costs, charges and expenses
(including attorneys' fees) incurred in any action, suit, proceeding or
investigation or any appeal therefrom shall be paid by the Corporation in
advance of the final disposition of such matter, if the Agent shall undertake to
repay such amount in the event that it is ultimately determined, as provided
herein, that such person is not entitled to indemnification. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board of Directors or if a majority vote of
a quorum of disinterested directors cannot be obtained, then by independent
legal counsel in a written opinion, that, based upon the facts known to the
Board or counsel at the time such determination is made, such person acted in
bad faith and in a manner that such person did not believe to be in or not
opposed to the best interest of the Corporation, or, with the respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe his conduct was unlawful. In no event shall any advance be made in
instances where the Board or independent legal counsel reasonably determines
that such person deliberately breached his duty to the Corporation or its
shareholders.
Section 6. Right of Agent to Indemnification Upon Application; Procedure
----------------------------------------------------------------
Upon Application.
---------------
Any indemnification under Section 1, 2 or 4 or advance under Section 5 of
this Article, shall be made promptly, and in any event within ninety (90) days,
upon written request of the Agent, unless with respect to application under
Sections 1, 2 or 5, a determination is reasonably and promptly made by the Board
of Directors by a majority vote of a quorum of disinterested directors that such
Agent acted in a manner set forth in such Sections as to justify the
Corporation's not indemnifying or making an advance to the Agent. In the event
no quorum of disinterested directors is obtainable, the Board of Directors shall
promptly direct that independent legal counsel shall decide whether the Agent
acted in the manner set forth in such Sections as to justify the Corporation's
not indemnifying or making an advance to the Agent. The right to indemnification
or advances as granted by this Article shall be enforceable by the Agent in any
court of competent jurisdiction, if the Board or independent legal counsel
denies the claim, in whole or in part, or if no disposition of such claim is
made within ninety (90) days. The Agent's costs and expenses incurred in
connection with successfully establishing his right to indemnification, in whole
or in part, in any such proceeding shall also be indemnified by the Corporation.
Section 7 Contribution
------------
<PAGE>
In order to provide for just and equitable contribution in circumstances in
which the indemnification provided for in this Article is held by a court of
competent jurisdiction to be unavailable to an indemnitee in whole or part, the
Corporation shall, in such an event, after taking into account, among other
things, contributions by other directors and officers of the Corporation
pursuant to indemnification agreements or otherwise, and, in the absence of
personal enrichment, acts of intentional fraud or dishonesty or criminal conduct
on the part of the Agent, contribute to the payment of Agent's losses to the
extent that, after other contributions are taken into account, such losses
exceed: (i) in the case of a director of the Corporation or any of its
subsidiaries who is not an officer of the Corporation or any of its
subsidiaries, the amount of fees paid to him for serving as a director during
the 12 months preceding the commencement of the suit, proceeding or
investigation; or (ii) in the case of a director of the Corporation or any of
its subsidiaries who is also an officer of the Corporation or any of such
subsidiaries, the amount set forth in clause (i) plus 5% of the aggregate cash
compensation paid to said director for service in such office(s) during the 12
months preceding the commencement of the suit, proceeding or investigation; or
(iii) in the case of an officer of the Corporation or any of its subsidiaries,
5% of the aggregate cash compensation paid to such officer of service in such
office(s) during the 12 months preceding the commencement of such suit,
proceeding or investigation.
Section 8 Other Rights and Remedies.
-----------------------------
The indemnification provided by this Article shall not be deemed exclusive
of, and shall not effect, any other rights to which the Agent seeking
indemnification may be entitled under any law, Bylaw, or charter provision,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be an
Agent and shall inure to the benefit of heirs, executors and administrators of
such a person. All rights to indemnification under this Article shall be deemed
to be provided under a contract between the Corporation and the Agent who serves
in such capacity at any time while these Bylaws and other relevant provisions of
the general corporation law and other applicable law, if any are in effect. Any
repeal or modification thereof shall not affect any rights or obligations then
existing.
Section 9 Insurance.
----------
Upon resolution passed by the Board, the Corporation may purchase and
maintain insurance on behalf of any person who is or was an Agent against any
liability asserted against such person and incurred by him in any such capacity,
or arising out of his status as such, whether or not the Corporation would have
the power to indemnify such person against such liability under the provisions
of this Article. The Corporation may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
<PAGE>
Section 10 Constituent Corporation
------------------------
For the purposes of this Article, references to the "Corporation" include
all constituent corporations absorbed in a consolidation or merger as well as
the resulting or surviving corporation, so that any person who is or was a
director, officer, employee, agent or trustee of such a constituent corporation,
or who, being or having been such a director, officer, employee or trustee, is
or was serving at the request of such constituent corporation as a director,
officer, employee, agent or trustee of another corporation, partnership, joint
venture, trust or other enterprise shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation as such person would if he had served the resulting or surviving
corporation in the same capacity.
Section 11 Other Enterprises, Fines and Serving at Corporation's
-----------------------------------------------------------
Request.
--
For purposes of this Article, references to "other enterprise" in Sections
1 and 10 shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service by the Agent as director, officer, employee, trustee
or agent of the Corporation which imposes duties on, or involves services by,
such agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
Section 12 Savings Clause
---------------
If this Article or any portion thereof shall be invalidated on any ground
by any court of competent jurisdiction, then the Corporation shall nevertheless
indemnify each Agent as to expenses (including attorneys' fees), judgments,
fines and amounts paid in settlements with respect to any action, suit, appeal,
proceeding or investigation, whether civil, criminal or administrative, and
whether internal or external, including a grand jury proceeding and an action or
suit brought by or in the right of the Corporation, to the full extent permitted
by any applicable portion of this Article that shall not have been invalidated,
or by any other applicable law.
ARTICLE X
Amendment of Bylaws
-------------------
a. The Board of Directors shall have the power to amend, alter, or
repeal these Bylaws, and to adopt new Bylaws, from time to time.
b. The shareholders of the Corporation, may, at any annual meeting of
the shareholders of the Corporation or at any special meeting of the
shareholders of the Corporation called for the purpose of amending these Bylaws,
amend, alter, or repeal these Bylaws, and adopt new Bylaws, from time to time.
<PAGE>
c. The Board of Directors shall not have the authority to adopt or
amend any Bylaw if such new Bylaw of such amendment would be inconsistent with
any Bylaw previously adopted by the shareholders of the Corporation. The
shareholders may prescribe in any Bylaw made by them that such Bylaw shall not
be altered, amended or repealed by the Board of Directors.
ARTICLE XI
Shareholder Agreements
----------------------
Unless the shares of this Corporation are listed on a national securities
exchange or are regularly quoted by licensed securities dealers and brokers, all
the shareholders of this Corporation may enter into agreements relating to any
phase of business and affairs of the Corporation and which may provide for,
among other things, the election of directors of the Corporation in a manner
determined without reference to the number of shares of capital stock of the
Corporation owned by its shareholders, the determination of management policy,
and division of profits. Such agreement may restrict the discretion of the Board
of Directors and its management of the business of the Corporation or may treat
the Corporation as if it were a partnership or may arrange the relationships of
the shareholders in a manner that would be appropriate only among partners. In
the event such agreement shall be inconsistent in whole or in part with the
Articles of Incorporation and/or Bylaws of the Corporation, the terms of such
agreement shall govern. Such agreement shall be binding upon any transferee of
shares of this Corporation provided such transferee has actual notice thereof or
a legend referring to such agreement is noted on the face or back of the
certificate or certificates representing the shares transferred to such
transferee.
ARTICLE XII
Fiscal Year
-----------
The fiscal year of this Corporation shall be determined by the Board of
Directors.
Date: 1/4/96 /s/
Secretary
<PAGE>
[insert accountants consent]
