<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Veridien Corporation
----------------------------------------------
(Name of Small Business Issuer in its charter)
Delaware 59-3020382
- ------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11800 28th Street North, St. Petersburg, Florida 33716
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (727) 572-5500
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- ------------------------------------ --------------------------------------
- ------------------------------------ --------------------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock
----------------
(Title of class)
----------------
(Title of class)
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I PAGE
<S> <C> <C>
Item 1 Description of Business 5
Item 2 Management's Discussion and Analysis or Plan of Operation 13
Item 3 Description of Property 18
Item 4 Security Ownership of Certain Beneficial
Owners and Management 19
Item 5 Directors, Executive Officers, Promoters and Control Persons 20
Item 6 Executive Compensation 24
Item 7 Certain Relationships and Related Transactions 26
Item 8 Description of Securities 27
PART II
Item 1 Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters 34
Item 2 Legal Proceedings 36
Item 3 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 37
Item 4 Recent Sales of Unregistered Securities 37
Item 5 Indemnification of Directors and Officers 40
PART F/S
Financial Statements 42
</TABLE>
<PAGE> 3
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description of Exhibit
- --- ----------------------
<S> <C>
*3.1 Certificate of Incorporation of VCT Acquisitions II, Inc. - Dated June 4, 1991
*3.2 Restated Certificate of Incorporation of VCT Acquisitions II, Inc. - Dated September 13, 1991
*3.3 Certificate of Amendment of Restated Certificate of Incorporation - November 6, 1991
*3.4 Bylaws of Veridien Corporation - 1998 as amended to date
*3.5 Certificate of the Powers, Preferences, Rights, Qualifications, Limitations and
Restrictions of Series B Convertible Preferred Stock - Dated September 11, 1998
*3.6 Certificate of Designation - Dated April 3, 1995
*3.7 Certificate of Amendment to the Certificate of Incorporation - Dated February 16, 1996
*4.1 Debenture Sample
*4.2 General Security Agreement between Veridien Corp. and Dunvegan Mortgage Corp. -
Dated October 19, 1995
*4.3 Loan and Security Agreement between Veridien Corp. and Dunvegan Mortgage Corp. -
Dated October 19, 1995
*4.4 General Security Pledge between Veridien Corp. and Dunvegan Mortgage Corp. -
Dated October 19, 1995
*4.5 Warrant Agreement regarding Warrants to purchase Common Stock of Veridien
Corporation-Series I - Dated October 19, 1995
*4.6 Warrant Agreement regarding Warrants to purchase Common Stock of Veridien
Corporation-Series II - Dated October 19, 1995
*4.7 Warrant to purchase Common Stock Series I and Series II - Dated December 12, 1995
*4.8 Common Stock Purchase Warrant: $0.135 per share - Dated June 10, 1998
*10.1 Building Lease
*10.2 Canadian Licensing Agreement - Dated February 28, 1998
*10.3 Contract Fill and Sub-lease Agreement with Horizon Pharmaceuticals, Inc. - Dated August 1, 1998
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
*10.4 Trademark - Virahol
*10.5 Trademark - Viraguard
*10.6 Trademark - Viragel
*10.7 Trademark - Vira- CD7
*10.8 Australian Patent No. 667,930/Sterihol
*10.9 Australian Patent No. 628,932/Virahol
*10.10 Canadian Patent No. 1,337,329/Virahol
*10.11 Mexican Patent No. 185,884/Virahol
*10.12 U.K. Patent No. 2,294,639/Virahol
*10.13 U.K. Patent No. 2,245,171/Virahol
*10.14 U.S. Patent No. 5,405,602/Sterihol
*10.15 U.S. Patent No. 5,145,663/Virahol
*10.16 U.S. Patent No. 5,441,723/Virahol
*10.17 U.S. Patent No. 5,637,307/Method of Immersion Sterilization & Organic
Cold Chemical Sterilant
*10.18 New Zealand Patent No. 269,419/Virahol
**10.19 Employment Agreement with Paul Simmons
**10.20 Employment Agreement with Andrew T. Libby, Jr.
*21.1 Subsidiaries
*27 Financial Data Schedule
</TABLE>
* Exhibit filed with Form 10-sb dated March 12, 1999, File No. 0-25555.
** Exhibit filed with Amendment No. 1 to Form 10-sb, File No. 0-25555.
4
<PAGE> 5
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ORGANIZATION/HISTORICAL BACKGROUND
We were incorporated in Delaware on June 4, 1991 as "VCT Acquisitions II,
Inc.". We then acquired all of the assets of another Delaware corporation
called Viral Control Technology, Inc. On September 13, 1991, we changed our
name to Viral Control Technology, Inc. On November 8, 1991, we again changed
our name and became Veridien Corporation.
The "Viral Control Technology, Inc." from which we acquired our assets was
created on August 3, 1989 by a reverse acquisition of a public shell called
Valencia Enterprises, Inc. by a private company named Viral Control Technology,
Inc. The original Viral Control Technology, Inc. was organized in Delaware on
August 10, 1988 while Valencia Enterprises was organized in Utah on February
10, 1984. Valencia, which had changed its name to Viral Control Technology,
Inc. after the reorganization, was redomesticated in Delaware on December 14,
1990.
The original private company called Viral Control Technology, Inc. was
organized by Paul L. Simmons and his wife. Mr. Simmons continues to be a
director and a substantial stockholder.
BUSINESS
We were founded to develop, manufacture, distribute and sell disinfectants,
antiseptics, and sterilants which are inherently non-toxic, posing no hazard to
people who use them and which are environmentally friendly, decomposing into
harmless naturally occurring organic molecules. To this end, we have developed
and patented a hard surface disinfectant, VIRAHOL(R), which has been
registered with the Environmental Protection Agency (EPA), and an antiseptic
hand gel sanitizer made in accordance with the applicable Food and Drug
Administration (FDA) Monograph, containing the patented VIRAHOL(R) composition.
In April 1998, we added a First Aid Antiseptic Spray containing the VIRAHOL(R)
composition made in accordance with the applicable FDA Monograph, to our
product line. Our products are manufactured in a leased 38,000 square foot
facility located in St. Petersburg, Florida, under Good Manufacturing Practices
(GMP).
We operate both a microbiological and chemical laboratory operating under Good
Laboratory Practices (GLP) and perform directly or contract out our research
and development activities (R&D). R&D activities currently underway include
development of a unique, fast acting, cold chemical sterilant for medical and
dental instruments, various medical and dental devices (some of which employ
the VIRAHOL(R) product), and on different applications for our existing
technology.
5
<PAGE> 6
CORPORATE FINANCE AND CAPITAL STRUCTURE
In October 1995 the Company entered into a Loan and Security Agreement with
Dunvegan Mortgage Corporation. Dunvegan is a company of which the Company's
current President and CEO (since June 1998) is an officer and director, but at
the time of the transaction there was no affiliation. Under the terms of the
Loan and Security Agreement, the lender was issued Common Stock Purchase
Warrants which guaranteed the lender could maintain a 51% ownership interest in
the Company so long as the debt was outstanding. Under the Loan and Security
Agreement, Dunvegan loaned the Company $2,500,000 and received a 10%
Convertible Senior Secured Promissory Note as evidence thereof.
In late 1997 it was noted that if all outstanding convertible securities were
converted and all outstanding common stock purchase warrants were exercised the
total number of shares issued and outstanding would exceed the then authorized
100,000,000 shares of Common Stock. Accordingly, on December 15, 1997 the
Company's Board of Directors approved a capital-restructuring plan whereby
preferred stock warrants would be issued in lieu of certain common stock
warrants. So far, only the Dunvegan portion of the capital-restructuring plan
has been implemented. On September 14, 1998 the Company designated the Series B
Convertible Preferred Stock and authorized the Series B Convertible Preferred
Stock Purchase Warrants. Thereupon, the total number of Common Stock Purchase
Warrants held by Dunvegan was reduced by the Common Stock equivalent of the
Preferred Stock Purchase Warrants issued.
That same day, Dunvegan elected to exercise a portion of its common stock and
preferred stock warrants and used $1,575,166 of the $2,500,000 indebtedness in
payment of the warrant exercise prices. At that time, based on a calculation of
51% of the Company's equity ownership, Dunvegan exercised 33,530,973 Common
Stock Purchase Warrants and 154,163 Preferred Stock Purchase Warrants and
received 33,530,973 shares of the Company's Common Stock and 154,163 shares of
the Company's Series B Preferred Stock. Since the 154,163 shares of the
Company's Series B Preferred Stock are convertible into 3,089,449 shares of the
Company's Common Stock, the calculated exercise price per share of Common Stock
was $.043. The remaining loan balance of $924,834 was assigned to another
lender.
At the Annual Meeting of Stockholders held November 6, 1998 the number of
shares of Common Stock authorized was increased from 100,000,000 to
200,000,000.
PRODUCTS
Our products are designed for use both in health care delivery environments and
for consumer and commercial applications where disinfectants and antiseptics
are sought. The patented VIRAHOL(R) composition is the basic infection control
ingredient used in the majority of our products. Our disinfectant products are
sold ready to use, not requiring dilution, and accomplish their germicidal
effects without the need for inherently toxic compounds, such as quaternary
ammonium compounds, phenols, iodophors, and chlorine, which may leave sublethal
toxic films
6
<PAGE> 7
that can exert genetic pressure on pathogens to alter themselves to more
resistant forms.
VIRAHOL(R) has been acknowledged by the United States Department of Agriculture
(USDA) as acceptable as an antimicrobial agent for surfaces requiring a water
rinse and requires no mask and/or gloves for application.
VIRAHOL(R) usage eliminates the need to use toxic chemicals, however, dilute
they may be, as disinfectants and antiseptics in the home, hospital, dental
office, restaurant, and any other environment where people are exposed to
pathogens.
Our products include the following under our own trademarks or as private label
products.
VIRAHOL(R) - Non-toxic, ready to use, hard surface
disinfectant/cleaner, tuberculocide, bactericide, virucide, and
fungicide packaged in sizes ranging from 1.2 oz. Pump sprays to 55
gallon drums. No aerosols, which may harm the environment, are
employed in any of our packaging. VIRAHOL(R) can be sprayed or wiped
onto surfaces such as toilet seats, door handles, public telephones,
counter tops, etc. Because of its wide range of materials
compatibility, it can be used full strength on bedspreads and all
types of fabrics. Because VIRAHOL(R) is not water-based, it is a
cleaner and disinfectant product for all types of electronic
equipment, including computer keyboards and monitors.
VIRAGEL(R) - Waterless, antiseptic hand sanitizer packaged in sizes
ranging from a 1/2 oz. Packet or purse container to 800 ml wall
mounted commercial sized dispensers with sealed replacement bags
supplying over 1,000 applications. VIRAGEL(R) is to be used to
supplement routine hand washing for the family or for the person on
the job when no water is available, to kill a wide variety of
pathogens fast. VIRAGEL(R) contains a moisturizing formula and will
not dry out the hands. VIRAGEL(R) employs a premium grade thickener,
insuring long product stability and the right feel in the hands. Among
the many pathogens killed in 30 seconds or less with VIRAGEL(R) are
bacteria know to cause intestinal disorders, such as Salmonella and
E.coli, and secondary infections such as Staphylococcus, including
strains of genetically altered pathogens resistant to certain
antibiotics.
VIRAGUARD(R) First Aid Antiseptic Spray - Packaged in a 3 oz. Pump
spray size. VIRAGUARD(R) First Aid Antiseptic Spray contains the
patented VIRAHOL(R) composition. A special no-sting formula is
featured with lidocaine.
VIRAHOL(R) products are also marketed in several different kit assemblies
designed for sales through various customer market segments. Different kits are
available for catalog sales, direct TV and radio sales, multi-level marketing,
fund raising sales, and the travel and hospitality industry.
THE COMPETITION AND VIRAHOL(R)
We have many competitors in our major product categories; (i) hard surface
disinfectants, (ii)
7
<PAGE> 8
waterless antiseptic hand sanitizers, and (iii) first aid antiseptic sprays.
The competitors, which include such companies as Johnson & Johnson, Proctor &
Gamble, Clorox, Quest, Inc., Betco, and Gojo Industries, have recognized
national brands that include Clorox, Lysol, First Medic, Quest, Sporidicin,
Metricide, and Purell. The competitors' products are based primarily on an
aqueous solution. Many of these products contain ingredients from one of the
following four families of ingredients: ammonium, phenol, chlorine, and/or
glutaraldehyde. One of the common characteristics of these types of active
ingredients is that they are toxic skin penetrants. Our product line,
containing the patented VIRAHOL(R) composition, has as the basic underlying
characteristic that the products are non-toxic and no-skin penetrating. The
products are non-aqueous based with the primary active ingredient being
isopropyl alcohol. Other active ingredients in our composition are propylene
glycol and citrus oils. Propylene glycol is a wetting agent that retards
evaporation and aids in the penetration of cell walls as well as lowers
flammability. Isopropyl alcohol and propylene glycol combine to create a
synergistic action that makes the formulation more effective than alcohol
without other ingredients.
To the best of our knowledge, no competitive products have the inherently
non-toxic feature of the patented VIRAHOL(R) composition, complete
biodegradability and efficacy against a broad range of pathogens. It has been
easier and cheaper for our competition to-date and to employ toxic materials,
diluted with water, as disinfectants than to find how to create an inherently
non-toxic formulation. That is why we have a proliferation of products
containing chlorine, ammonia, and pine oil. Government and environmental
agencies are starting to focus on the negative aspects of toxicity in
disinfectants and may prohibit the use of such products in the market place.
Many of our competitors, recognizing an untapped market potential in changing
consumer awareness in disease transmission, are expanding the market through
various marketing campaigns. This market expansion is deemed to be of great
importance to us as increased market growth of the market base (due to
increased awareness) will allow for an easier penetration by our products.
COMPANY SALES AND PRICING STRATEGIES
Our sales and management personnel serve the consumer markets along with key
specialty agents. The Company's "key specialty agents" are independent sales
representatives which market our products to focused groups of consumers, such
as the multi-level sales force of Nutrition For Life International, Inc. (home
sales) and the niche marketer, Duty Free Shops (the traveling public). In the
commercial market segments, multi-line industry segment distributors and
manufacturers' representatives are guided by Company sales personnel. Our
management and sales personnel provide distributor support and sales training.
Although the VIRAHOL(R) composition is inherently more expensive than the raw
materials of the competitive products, our pricing strategy is to remain as
close as possible to competitors' pricing to emphasize the clear price/value
comparison.
8
<PAGE> 9
AVAILABILITY OF RAW MATERIALS
The largest ingredients by weight for the VIRAHOL(R) composition are isopropyl
alcohol and propylene glycol. Both of these chemicals are readily available
from a wide variety of sources nationally and internationally, at competitive
prices. Although we prefer to use isopropyl alcohol as the monohydric alcohol
and propylene glycol as the polyhydric alcohol, our patent covers the full
range of both of these alcohol's so that a wide variety of choices are
available should a shortage in one or more chemicals occur. Substantial numbers
of companies produce both the plastic and corrugated packaging used by the
Company. Trade secret ingredients are employed for fragrances used in the
Company's products but are available from several sources.
MARKETING STRATEGY AND KEY MARKET SEGMENT
We have elected to pursue domestic marketing activities as a niche marketer,
recognizing that the large competitors, many of whom are part of large,
national, and multinational companies, pose formidable threats in head-to-head
marketing strategies at either the consumer or commercial user level. By
developing carefully crafted niche strategies in bother the consumer and
commercial markets, avoiding the most traditional levels of distribution, we
expect results that might only be expected through costly advertising and
promotional campaigns. Within the consumer market segment, the following niche
markets have been targeted: (i) multi-level marketing sales, (ii) direct
marketing through short form radio and TV infomercials, (iii) potential direct
marketing through Home Shopping Network ("HSN"), (iv) catalog sales, (v) fund
raising sales, and (vi) travel and hospitality sales. For the commercial
markets: (i) dental office sales, (ii) medical offices and clinics, (iii)
specialty hospital sales, (iv) schools and office buildings, (v)
restaurant/fast food sales, and (vi) emergency medical, police, and fire.
Currently we are selling the VIRAHOL(R) product line under the Enviro Defense
System label to the 100,000 distributors of Nutrition for Life International,
the Houston-based, NASDAQ multi-level marketing company (MLM). We plan to
expand the sales of our products through several different private labels to at
least two additional MLMs during 1999.
Our product has been featured in the Healthy Home Catalog (affiliated with
Aetna/U.S. Health Care) for the sale of kits of VIRAHOL(R) to consumers through
more than 4 million catalogs. Additional marketing activities are underway for
the major introduction of fund-raising product sales through a variety of
schools and the travel and hospitality market, as well as sourcing direct
marketing with outside resources.
We are expecting growth in our consumer marketing, with distributors from coast
to coast. Additionally, we are expecting growth in our dental and medical
markets with increasing sales of the waterless antiseptic hand sanitizer.
GOVERNMENTAL REGULATION
Those who develop products to control pests are subject to regulation under
several Federal Laws. However, only certain pest control products are subject
to registration. The Federal Insecticide, Fungicide and Rodenticide Act (FIFRA)
and Federal Food, Drug, and Cosmetic Act
9
<PAGE> 10
(FFDCA) As Amended by the Food Quality Protection Act (FQPA) of August 3, 1996,
requires that before any person in any state or foreign country can sell or
distribute any pesticide in the United States, they must obtain a registration
from the U. S. Environmental Protection Agency (EPA). The term "pesticide," as
defined in FIFRA section 2 (u), means any substance or mixture of substances
intended for preventing, destroying, repelling, or mitigating any pest, virus,
bacteria, or other micro-organism (except viruses, bacteria, or other
micro-organism on or in living man or other living animals). Pesticides include
fungicides, disinfectants, sanitizers, and germicides. After the registration
process and submission of required data, an accepted label is stamped accepted
and returned to the registrant for the registered product. Annual Pesticide
Maintenance Fees are required for registered products. Anyone who
sells/distributes a pesticide (including antimicrobial products such as
disinfectants, sanitizers, and germicides) must register that product in every
state and pay a registration fee. As of this date, Alaska does not require a
registration fee but does require registration.
In order to "produce," defined to mean "to manufacture, prepare, propagate,
compound, or process any pesticide . . . or to repackage or otherwise change
the container of any pesticide . . " the plant(s) and/or facility must be
registered. Upon registration an establishment number is assigned. The label
and/or container must bear the registration number as well as the establishment
number. Annual reports are required to be submitted to the US EPA indicating
the amount produced, repackaged/relabeled for the past year, amount
sold/distributed for the past year US and Foreign, and amount to be
produced/repackaged/relabeled for the current year.
The Company currently has two products registered with the United States
Environmental Protection Agency. They are as follows:
A. VIRAHOL(R) Hospital Disinfectant/Cleaner & Instrument Presoak, assigned EPA
Registration No. 60142-1, and has an EPA accepted label, is designed for
effective disinfecting, cleaning and deodorizing of hard inanimate surfaces
such as walls, sink tops, tables, chairs, telephones and bed frames.
B. VIRAHOL(R) Hospital Surface Disinfectant Towelette, assigned EPA
Registration No. 60142-3, and has an EPA accepted label, is designed for
effective cleaning, disinfecting and deodorizing of hard non-porous,
inanimate surfaces such as walls, sink tops, tables, chairs, telephones and
bed frames.
The Company facility in which the product(s) is produced is registered and
assigned EPA Establishment No. 60142-FL-1.
In addition, the Company manufactures and distributes Antiseptic Drug Products
per 21 CFR Parts 333 and 369 and respective monographs, Topical Antimicrobial
Drug Products for Over-the-Counter Human Use. Veridien Corporation's
establishment is registered and a Labeler Code Number was assigned. Per Title
21, Part 207 of the Code of Federal Regulations (CFR), the products are drug
listed with the Food and Drug Administration (FDA).
All regulated products, EPA and FDA, are manufactured in compliance with Good
Manufacturing Practices (GMPs).
10
<PAGE> 11
CANADIAN LICENSING
We have entered into an agreement with Backcourt Industries, Inc. (BII),
Toronto, Canada, licensing BII to produce and market the VIRAHOL(R) line in
Canada. BII has completed product registrations with Health Canada and plans to
market VIRAHOL(R) under the VIRAGUARD(R) trade name primarily through retail
distribution channels in specialty and mass merchandisers in Canada. The
product has received strong preliminary acceptance in Canada and aggressive
sales are forecast.
RESEARCH AND DEVELOPMENT
Research and development for 1998 was $377,344. this was an increase of
$131,940 or 53% compared with expenditures of $245,404 in 1997. The increase
can be attributed primarily to increased activity associated with development
of Sterihol(R) Part of the additional costs were incurred in patent
application.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We have had no need to spend monies on compliance with local, state and federal
laws. We are current for our annual filing of the Pesticide Registration
Maintenance Fee Filing Form for 1999, and our annual filing of the Pesticide
Report for Pesticide-Producing Establishments. The Company is in receipt of the
certificates of approval from all states that the registered product is
currently sold and/or distributed.
NUMBER OF EMPLOYEES
We employ nineteen persons, all of whom are full-time employees.
<TABLE>
<CAPTION>
Department Number of Employees
---------- -------------------
<S> <C>
Management & Finance 3
Sales 3
R&D 3
Production & Administration 10
</TABLE>
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains some forward-looking statements. "Forward-looking
statements" describe our current expectations or forecasts of future events.
These statements do not relate strictly to historical or current facts. In
particular, these include statements relating to future actions, prospective
products, future performance or results of current and anticipated products,
sales, efforts, the outcome of contingencies and financial results. Any or all
of the forward-looking statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions
11
<PAGE> 12
we might make or by known or unknown risks and uncertainties. Many factors,
such as product acceptance, competition and marketing capabilities, will be
important in determining future results. Consequently, no forward-looking
statements can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any future disclosures we make on related subjects
in our 10-QSB, 8-KSB, and 10-KSB reports to the SEC.
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products.
These are factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those listed here could
adversely affect us.
RISKS OF OUR BUSINESS
We are a small and relatively new company. To date, we have expended much of
our efforts and funds on development of products. We have only recently begun
concerted sales and marketing efforts. We are uncertain about the market
acceptance of our products.
As a small company, we are highly dependent upon the efforts and abilities of
our management. The loss of the services of any of them could have a
substantial adverse effect on us. We have not purchased "key man" insurance
policies on any of them.
To date the Company has not had significant sales. We expect the growth in our
sales to come primarily from others, such as independent manufacturer's
representatives and accessing existing distribution and fulfillment systems. We
cannot be certain about our ability to attract and retain representatives until
we have had greater experience with these groups and organizations. We are also
uncertain about their sales effectiveness for our products.
We have expended substantial capital on developing our products and beginning
sales and marketing. Until we are cashflow-positive from sales, we will need
additional financing to fund our growth. We are uncertain about our ability to
secure the financing. We are also uncertain about the costs of any financing
which we may obtain. We have many competitors in our major product categories.
We are uncertain about our ability to compete effectively.
We must be able to manage our expected growth. This means we must increase our
manufacturing capacity, expand and improve our timely management of orders, and
secure sufficient, reliable shipping. We must also have the systems to handle
ordering of raw materials and packaging supplies, as well as managing our
inventories.
Our current product line depends upon VIRAHOL(R), which is patented. If
VIRAHOL(R) were to become subject to a problem, such as loss of patent
protection, regulatory proceedings, or
12
<PAGE> 13
pressure from a directly competitive product, the impact on our revenues could
be significant.
RISKS OF OUR PRODUCTS
Our products, disinfectants and antiseptics, are subject to regulation by
various governmental agencies. Typically, they must be tested before they can
be introduced into the market. Our VIRAHOL(R) product is approved.
We are uncertain about approvals of future products.
Any failure of our products to fulfill their stated purpose could result in
lawsuits for product liability or breech of contract. We currently maintain
product liability insurance. A successful claim against us in excess of our
insurance coverage could have a material adverse effect on our result of
operations, financial condition or business. Even unsuccessful claims would
result in expenditure of funds in litigation, as well as diversion of
management time and resources.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes contained elsewhere in this document.
The discussion contained herein relates to the financial statements, which have
been prepared in accordance with GAAP.
OVERVIEW
We are organized as a Delaware corporation to engage in the development,
manufacture, distribution and sale of disinfectants, antiseptics, and
sterilants which are inherently non-toxic, posing no hazard to people who use
them, and which are environmentally friendly, decomposing into harmless,
naturally occurring organic molecules. To this end, we have developed and
patented a hard surface disinfectant, VIRAHOL(R), which has been registered
with the Environmental Protection Agency (EPA), and an antiseptic hand gel
sanitizer, made in accordance with the applicable FDA Monograph, to our product
line. We have incurred losses since our incorporation. At December 31, 1998, we
had an accumulated deficit of $27,589,451. We have financed our ongoing
research program and business activities through a combination of sales, equity
financing, and debt.
RESULT OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Consolidated revenues decreased by $49,254 or 5.6% to $ 820,065 compared with
$869,319 in 1997. The decrease in revenue was primarily due to discontinuance
of one line of product previously sold to the hospitality industry.
Product was returned by hospitality customers.
During 1998, a license agreement was granted to a Canadian company for an
initial license fee payment of $345,000 Canadian, of which $87,418 US has been
recorded as deferred revenue on the 1998 statements.
13
<PAGE> 14
Interest income for 1998 decreased by 53% to $2,899 compared with $6,213 in
1997.
Rental income for 1998 increased by 1500% to $51,290 compared with $3,459 in
1997. A major portion of the company's leased 38,000 square foot manufacturing
facility is subleased to a contract filler which manufactures Veridien's
products which relocated to our facility during August 1998. This space is
leased for an annual base amount of approximating $100,000 per annum.
The cost of goods sold for 1998 increased by 2% to $601,037 compared with
$589,215 in 1997. The increase in the cost of goods ratio as a percentage of
sales was 73% in 1998 compared to 68% in 1997. The increase in the cost of
sales resulted primarily from the increased labor of certain overhead items
during the transition to contract fill operator fulfilling production within
the plant facility.
General, selling, and administrative expenses for 1998 were $1,385,851 compared
with $1,627,518 in 1997. Increases that affected general and administrative
costs were associated with professional fees for 1998 that increased by 36% to
$361,878 compared with $264,927 in 1997. During 1998, sales expense decreased
by 70% to $212,177 compared with $697,496, primarily due to discontinued direct
operations in Nevada which had been set up to sell to the hospitality industry.
These direct operations were abandoned during 1997 in favor of servicing this
market through alternative means.
Research and development for 1998 increased by $131,940 or 53% compared with
expenditures of $245,404 in 1997. The increase can be attributed primarily to
increased activity associated with development of Sterihol(R). Part of the
additional costs was incurred in patent application.
Interest expense for 1998 increased by 21% to $500,872 compared with $413,882
in 1997. The increase in interest expense was due primarily to the issuance
during 1997 of $1,566,273 in Convertible Debentures bearing interest at the
rate of eleven percent compounded semi-annually due at maturity which has been
extended to June 30, 2000.
Operating losses decreased from $1,973,074 in 1997 to $1,883,554 in 1998. This
represented a 4.5% decrease, or $89,521 in the loss between the two years. This
1998 decrease was a result of constant sales accompanied by decreases in
selling expenses, including the closing of the Las Vegas, Nevada distribution
center.
YEAR ENDED DECEMBER 31, 1998, VS. YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Year Ended Percentage of
December 31 net revenue
1997 1998 1997 1998
(In thousands)
<S> <C> <C> <C> <C>
Net Sales $ 869 $ 820 100% 100%
Cost of Goods Sold 589 601 68% 73%
Gross Profit 280 219 32% 27%
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Operating Expenses
General & Administrative 1627 1386 187% 169%
Research & Development 245 377 28% 46%
(Loss) from Operations (1592) (1544) (183)% (188)%
Other Income (Expense) Net (380) (339) (44)% (41)%
Net (Loss) Before Taxes (1972) (1883) (227)% (229)%
Income Taxes 0 0 0% 0%
Net (Loss) (1972) (1883) (227)% (229)%
</TABLE>
LIQUIDITY AND WORKING CAPITAL
Historically, our principal source of financing for our research & development
and business activities has been through sales, equity offerings, and debt. As
of December 31, 1998, and December 31, 1997, we had working capital deficits of
approximately $2,219,479 and $3,373,547, respectively. Our independent
certified public accountants stated in their reports on the 1998 and 1997
consolidated financial statements that due to losses from operations and a
working capital deficit, there is substantial doubt about the Company's ability
to continue as a going concern. We believe that we are addressing the going
concern issue in virtually every aspect of our operation. We have seen sales in
the dental and the network marketing arenas increase from 36.1 and 31.5 per
cent of the total Company sales, respectively, in 1997 to 38.8 and 33.8 percent
of total Company sales, respectively, in 1998. By contracting a major
distributor in the dental market, we anticipate sales to reflect an even
greater percentage share of total sales in future years. We have cut operating
expenses and have signed two major distribution agreements, which we believe
will provide improved profit margins. Because of our significant losses
incurred since inception, we have become substantially dependent on loans from
officers, directors, third parties and from private placements of our
securities to fund operations. These financings and equity placements are
included in the following paragraphs.
During 1998, we received proceeds from the sale of preferred and common stock
in the amount of $533,736. We received funds in the amounts of: $470,050
through the sale of common stock under a Form 504 offering; $50,000 as proceeds
from a private placement; $29,500 by the conversion of debt to equity; and
$13,686 in payment of a warrant exercise price.
During 1998, we issued 450,000 common shares in exchange for a note receivable
in the amount of $22,500.
During 1997, we issued convertible debentures in the amount of $1,566,273 and
during 1998 in the amount of $585,333 to three investment companies in exchange
for cash received. The convertible debentures carry interest at a rate of 10% -
11% which has been accrued through December 31, 1998. The convertible
debentures maturing on December 31, 1997, were extended to June 30, 2000, and
in consideration for the extension, the conversion rate was reduced to the
lower of the existing conversion rate or $.15 to August 31, 1999, thereafter
reverting to the original conversion price which ranges from $.1851 to $.3868
per share. During 1997 and 1998 we also issued 9,563,677 warrants for
additional common shares in connection with the convertible debentures. The
warrants are exercisable at 100%-105% of the conversion price of the common
shares associated with the convertible debentures. The warrants expire five
15
<PAGE> 16
years from the original issue date of the convertible debentures.
During 1998, we received net borrowings of $116,479 from various sources at
zero interest rate. We have classified all such debt outstanding at December
31, 1998, as a current liability.
During 1997, we received $250,000 through the issuance of 1,000,000 shares of
common stock. We received an additional $956 and issued an additional 95,646
shares through the exercise of warrants.
During 1998, we utilized legal services and public relations services for which
we issued common stock valued at $123,800.
During 1998, accounts receivable increased $143,766 primarily due to increased
obligations of our contract-fill manufacturer which occupies a substantial
portion of our facility under a two year sublease agreement.
During 1998, accounts payable and accrued expenses increased $192,795 primarily
due to the accrual of interest expense on existing debt obligations.
During 1998, we received $165,164 of cash and inventory from a company owned by
a shareholder and recorded the advance in Due to Stockholder.
During 1998, we entered into a license agreement with a Canadian company for
the sale of products in Canada. We have recognized $87,418 as the portion of
the license agreement applicable to 1998.
During 1998, we decreased inventory by 59% to $92,549 compared with $227,978 in
1997. The decrease resulted primarily from bartering a substantial amount of
obsolete inventory in exchange for purchase credits. The purchase credits for
this obsolete inventory will only be recorded when and if the purchase credits
are actually utilized by the Company.
We plan to utilize our current debt financing arrangements and pursue
additional equity and debt financing while managing cash flow in an effort to
provide funds to increase revenues to support operation, research and
development activities. We believe that our long-term success depends on
revenues from operations from product sales and ongoing royalties from
technologies. If such sources of funds are not adequate, we may seek to obtain
financing to meet operating and research expenses from other sources including,
but not limited to, future equity or debt financings.
As of March 1999, we have cash of approximately $124,000 and during March we
expect cash flow of $80,000 from operating activities. This level of liquidity
is sufficient to operate the Company for 60 days. The Company anticipates the
continuation of increasing sales, reduced operating expenses, and additional
private placement funding will contribute to continuous operations of the
Company.
At the present time the Company does not have any material commitments for
capital
16
<PAGE> 17
expenditures other than the acquisition computer hardware and software to
comply with the Year 2000 issues, for an estimated cost of less than $50,000.
We also anticipate being able to enter into a five-year lease/purchase
agreement whereby we will require a cash commitment of approximately $1,000 per
month. We envision generating sufficient cash from operations to provide for
these payments.
YEAR 2000 COMPLIANCE
We have analyzed our internal requirements and methods of complying with the
Year 2000 issue concerning our IT systems and non-IT systems utilized in both
R&D functions and general operations. A competent computer company has
performed a systems and software analysis and has recommended a course of
action to meet Year 2000 compliance requirements. The analysis has indicated
certain IT-systems and our accounting software is not Year 2000 compliant.
We have defined and developed our reporting and operations criteria and have
selected and purchased the appropriate computer equipment and accounting
software that would provide for full Year 2000 compliance and the adequate
protection of company assets and information. We expect the cost of obtaining
and installing new computer equipment and accounting software to be less than
$50,000. We are currently installing the equipment and software and should be
completed by November 5, 1999. In the unlikely event that we are not successful
in implementing our plans for upgrading our accounting software, we have
identified an accounting firm that could produce computerized financial
statements for our Company. We have identified an additional contract fill
manufacturer capable of providing finished product ready for sale to our
distributors. We do not anticipate any material increase in cost of goods by
retaining such an additional manufacturer.
We find that non-IT systems, such as scales and balances, utilized in R&D and
general operations of equipment are not date sensitive, therefore, the Year
2000 issue is not expected to require any changes to these existing systems.
We have material relationships with our two contract fill manufacturers who
produce all of our product for distribution. We have completed the process of
discussing their responses concerning their readiness with regards to Year 2000
issues. At this juncture, we have obtained information that leads us to believe
their production equipment is not time/date sensitive and they believe
production can continue as usual. They are continually confirming with all of
their raw material suppliers on the anticipated completion of their Year 2000
compliance. The availability of product for distribution is a material issue to
our Company. We expect to complete our discovery by November 5, 1999.
If disruptions occur in third party vendors that supply raw materials to our
contract fill manufacturers, we may experience the inability to have product
inventory for sale to our customers. Such events could have material adverse
effect on Veridien to compete effectively in the marketplace. While we believe
our existing contract fill manufacturers will be successful in locating
alternative sources of our commonly available raw materials and converting
these into finished products, we have begun a search for an additional contract
fill manufacturer who can
17
<PAGE> 18
assure us of the timely production of products. We anticipate having selected
such a manufacturer by November 5, 1999.
ITEM 3. DESCRIPTION OF PROPERTY
At present, we lease a 38,000 square foot facility that integrates offices,
warehouse space, manufacturing space and research and development space,
located at 11800 28th Street North, St. Petersburg, Florida 33716. We are
currently on a renewal option year of the lease that ends on August 31, 1999.
The rent is $19,237.53 a month. We have successive options to renew
year-to-year at the same rental. These premises should suffice for our
administrative office for the foreseeable future.
In addition, we own full commercial chemical and microbiological research
laboratories. We have a lease-to-buy on our phone system for $277.89 per month
and currently lease a postage meter and copier. We own all of the equipment and
furniture currently at the premises, which consists of computers, computer
accessories, office furniture, file cabinets, and miscellaneous equipment.
PATENTS AND TRADEMARKS
Our VIRAHOL(R) composition is covered under U.S. patens 5,145,664 and
5,441,723. These patents have been assigned by the inventor to us. In addition,
the VIRAHOL(R) composition is patented in Great Britain, Canada, Australia, New
Zealand, and Mexico, and pending in Japan. We have additional patents in the
U.S. and the European Economic Community for various formulations and medical
devices, which remain under development. (See "Property of the Company".)
The Company also has numerous trade names registered in the U.S. The Company
has patents for VIRAHOL(R) (Disinfectant) DSI, composition and usage are
covered under U.S. Patent No. 5,145,663 issued September 8, 1992 and U.S.
Patent No. 5,441,723 issued August 15, 1995. VIRAHOL(R) is also patented in
Australia (SI), United Kingdom (DSI), Great Britain (DSII), Canada (DSI), New
Zealand (DSII), Mexico (DSII); Patents pending in Japan DSI (S.N. P2-503111),
Australia DSII (S.N. 73298/94), Canada DSII (S.N. 2166810). The company also
holds patents for STERIHOL(R) (Cold Chemical) (CCSII) U.S. Patent No. 5,405,602
issued April 11, 1995 and METHOD (Sterilant) (CCSS) U.S. Patent No. 5,637,307
issued June 10, 1997. The Company has a U.S. Patent pending for a Cold Chemical
Sterilant-UREA, S.N. 109/186,432. STERIHOL(R) is also patented in Australia
(CCSII); Patent pending EPO (CCSII). The Company has U.S. Patents pending for a
Method and Accessory Adapter Apparatus of Disinfecting Medical and Dental
Instruments, S.N. 08/814,613, a Diagnostic Syringe Actuator Device, S.N.
08/882,570, a 911 Medical Diagnostic Console, S.N. 60,020,625, and an Umbilical
Surgical Scissors, S.N. 08/882,180. The Company has Trademarks for the
following brands: VIRAHOL(R) (USA) registered September 24, 1991, Trademark
number 1,657,969; VIRAGEL(R) (USA) registered July 20, 1993, Trademark number
1,783,204; VIRAHOL(R) (Mexico) registered September 27, 1994, Trademark number
474,986; VIRASONIC(R) (USA) registered November 15, 1994, Trademark number
1,863,033; VIRASCRUB(R) (USA) registered January 31, 1995,
18
<PAGE> 19
Trademark number 1,877,118; STERIHOL(R) (USA) registered February 28, 1995,
Trademark number 1,881,134; VERIDIEN registered September 5, 1995, Trademark
number 1,917,134; VIRAWASH(R) (USA) registered March 12, 1996, Trademark number
1,962,158; STERIHOL(R) (USA) registered June 16, 1998, Trademark number
2,166,502; VIRASCRUB(R) (USA) registered June 16, 1998, Trademark number
2,166,503; VIRASONIC(R) (USA) registered June 16, 1998, Trademark number
2,166,504;VIRA-CD7(R) registered January 6, 1998, Trademark number 2,127,866;
VIRA-RD12(R) registered March 24, 1998, Trademark number 2,146,770;
VIRA-GC18(R) registered May 12, 1998, Trademark number 2,157,635; VIRALUBE(R)
(USA) registered July 7, 1998, Trademark number 2,171,823; and VIRAGUARD(R)
(USA) registered September 1, 1998, Trademark number 2,186,559.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of December 31, 1998, information regarding
the beneficial ownership of shares of Common Stock by each person known by the
Company to own five percent or more of the outstanding shares of Common Stock,
by each of the Officers, by each of the Directors, and by the Officers and
Directors as a group. At the close of business on December 31, 1998, there were
78,152,833 shares issued and outstanding of record, as well as 12,035,118
shares issuable in the event of the conversion of the $2,494,198 of convertible
debentures outstanding and the $423,267 of interest thereon as of December 31,
1998.
<TABLE>
<CAPTION>
Shares of Percentage
Common As Of
Name and Address of Beneficial Owners Stock 12/31/98 (1)
- ------------------------------------- ----- ------------
<S> <C> <C>
Mark E. Schlussel 345,750 (2) 0.38%
100 Renaissance Center, 36th Floor
Detroit, MI 48243-1157
Sheldon C. Fenton 23,285,311 (3) 25.82%
160 Eglinton Avenue East, Suite 500
Toronto, Ontario M4P 3B5
Rene A. Gareau 0 --
4273 Boca Point Drive
Sarasota, Florida 34238
Dunvegan Mortgage Corporation 23,102,311 (4) 25.62%
222 Delaware Ave., PO Box 2306
Wilmington, Delaware 19899
Paul L. Simmons 3,087,000 3.42%
8825 Laurel Drive
Pinellas Park, Florida 33782
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C>
Russell Van Zandt 15,000 0.02%
1741 Brightwaters Blvd.
St. Petersburg, Florida 33704
Andrew T. Libby, Jr. 152,857 0.17%
806 South MacDill Avenue
Tampa, Florida 33609
Martin E. Kovnats 10,000 0.01%
Aird & Berlis
BCE Place, PO Box 754
181 Bay Street, Suite 1800
Toronto, Ontario M5J 2T9
Alfred A. Ritter 0 --
Rua Baronesa DeBeck
Malveira Da Serra
2750 Cascais Portugal
All Directors and Officers 26,895,918 29.82%
As a Group (8 persons)
</TABLE>
- ----------
(1) Based upon 78,152,833 shares issued and outstanding as of December 31,
1998, as well as 12,035,118 shares issuable on conversion of the
convertible debentures and interest thereon, for a total of 90,187,951.
(2) Does not include options to purchase 200,000 shares of Common Stock at an
exercise price of $.25 (see "Certain Relationships and Related
Transactions"). Also does not include options to purchase 200,000 shares
of Common Stock from Dunvegan Mortgage Corporation at an exercise price of
$.10.
(3) Includes Mr. Fenton's direct ownership of 183,000 shares, indirect
ownership of 20,610,551 shares owned by Dunvegan Mortgage Corporation, of
which Mr. Fenton is an officer and director, as well as 2,491,760 shares
issuable in the event of conversion of the $471,215 of convertible
debentures owned by Dunvegan Mortgage Corporation and the $58,169.42 of
interest thereon as of December 31, 1998. Does not include 2,236,264
convertible debentures owned by Dunvegan Mortgage Corporation. Also does
not include 25,174,039 Series I ($.499) and Series II ($.001) warrants
previously owned by Dunvegan Mortgage Corporation but assigned to 1192615
Ontario Limited, owned by Mr. Fenton's brother and in which he disclaims
any beneficial interest.
(4) Includes 2,491,760 shares issuable in the event of conversion of the
$471,215 of convertible debentures owned by Dunvegan Mortgage Corporation
and the $58,169.42 of interest thereon as of December 31, 1998. Does not
include 2,236,274 convertible debenture warrants or 154,163 shares of
Series B Preferred Stock or 90,515 Preferred Stock Warrants.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
DIRECTORS AND EXECUTIVE OFFICERS. The position(s) held by each of our executive
officers and Directors as of December 31, 1998 is shown in the following table.
Biographical information for each is set forth following the table. Our current
Directors were elected at the Annual Meeting Held on November 6, 1998. Each
Director serves for a one-year term and until a successor is elected and has
qualified. Currently, our Directors are not compensated for their services,
although their expenses in attending meetings are reimbursed.
20
<PAGE> 21
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark E. Schlussel 58 Chairman of the Board of Directors
Rene A. Gareau 57 Vice Chairman of the Board of Directors
Paul L. Simmons 70 Founder and Director
Sheldon C. Fenton 47 President and CEO/Director
Martin E. Kovnats 47 Director
Alfred A. Ritter 55 Director
Russell Van Zandt 58 Director
Andrew T. Libby, Jr. 50 Executive Vice President, COO & CFO,
Secretary/Director
</TABLE>
MARK E. SCHLUSSEL was the first named to the Board of Directors on April 3,
1995. Since January 1995 he has served Of Counsel to the law firm of Pepper
Hamilton & Scheetz in Detroit, Michigan. Previously, he was a partner at the
law firm of Miller Canfield in Detroit, Michigan.
Mr. Schlussel was appointed Chairman of Medi-I-Bank, Inc. in 1996 and CEO in
1998. He was a board member of the Great Lakes Health Plan from 1996 to 1998.
Currently, he is Trustee of Immerman and Embargement Foundations, and Chairman
of the Jewish Fund. Mr. Schlussel was graduated with a Bachelor of Arts from
Wayne State University in 1962 and a Juris Doctor from the University of
Michigan Law School in 1965. He was admitted to practice before the U.S.
Supreme Court in 1982.
RENE A. GAREAU was first named to the Board of Directors on March 13, 1996.
Since 1989, Mr. Gareau has been Chairman of the Board of Sarasota Quay, a real
estate management company located in Sarasota, Florida, specializing in
property and asset management for commercial properties. From 1982 to 1989, Mr.
Gareau was the Chairman of a private Canadian real estate development company
involved in the development and syndication of residential condominium and
commercial projects in a number of Canadian provinces. From 1981 to 1982 he was
President of Bank of America (Canada) with responsibilities for overseeing all
retail and mortgage banking operations in Canada. From 1974 to 1981 he was
Senior Vice President of Citicorp-Citibank in their International Division. He
had responsibilities in corporate and consumer banking with assignments in
Asia, Europe, South America, and the U.S.A.
PAUL L. SIMMONS has been a member of the Board of Directors since our
incorporation in 1991. He is a recognized authority by both the industry and
the FDA in plant manufacturing validation and certification, as well as
manufacturing plant and process design for the genetic,
21
<PAGE> 22
pharmaceutical, bulk pharmaceutical chemical, device and diagnostic industries.
Mr. Simmons (with his wife, Diane) is the founder of our Company, commencing
with one of our predecessors, ROST, Inc. founded in 1980.
Mr. Simmons served in a consulting capacity for manufacturing plant and process
design and regulatory compliance to more than 45 major biotech, pharmaceutical
and device firms, in 72 plant locations in the U.S., U.K., Europe and the Far
East. Mr. Simmons has formulated and designed many of the
qualification/validation programs and testing methods now in use in the
industry. He is a noted author, having written many technical papers for
national trade journals, as well as the writing and publication of a long list
of technical and procedural manuals. As a lecturer, Mr. Simmons has addressed
more than 55 trade and professional associations in 26 states and several
foreign countries, including the Parenteral Drug Association, Pharmaceutical
Manufacturer's Association, Association for Professionals In Infection Control,
Quality Control Managers Association, Philadelphia Academy of Pharmaceutical
Sciences, Biotech 84, Scale-up 84, Interphex and FDA Small Business Seminars.
Books published by Mr. Simmons include: Master Plan for Infection Control,
Hospital Engineering, Dry Heat Sterilization (1978 Technical Paper, Validation
of Steam Sterilizers (1079) Technical Paper, Pharmaceutical Lubrication Manual
(1980), Engineering Design and Construction Standards (1980) (Electrical,
Mechanical & Environmental), The Applications of the GMPs to the Genetic
Engineering and the Biotechnology Industry, The Impact of International GMPs on
the Drug, Device and Diagnostic Industries, The Impact of Good Manufacturing
Practice Regulations on the Manufacture of Bulk Pharmaceutical Chemicals, The
Impact of Good Manufacturing Practice Regulations on the Design and Manufacture
of Production Equipment (1987), The Design, Construction, Commissioning and
Compliance of a New Facility in Accordance with GMPs (1987).
On October 6, 1998, Mr. Simmons filed a Petition for Reorganization under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Middle District of Florida, docketed to Number 98-17181-8P1.
SHELDON C. FENTON is President and CEO. Mr Fenton was first named to the Board
of Directors on June 3, 1998. Since 1981 Mr. Fenton has been President and CEO
of Tanlon Corporate Holdings Ltd. (and predecessor corporations), located in
Toronto, Canada. Tanlon is privately owned, fully integrated management
services company. They are involved with another of private and public
companies, providing them with expertise and assistance, notably in the areas
of capitalization and management. The group also has knowledge and experience
in the areas of strategic acquisitions, real estate development and
syndication, financing for private and public ventures, as well as asset and
property management. They are regarded as specialists in the areas of
structuring and restructuring of investments and negotiation with lenders and
other corporate stakeholders.
Mr. Fenton is also an officer and director of Dunvegan Mortgage Corporation, a
company which has been a primary lender to the Company, as described under
"Principal Shareholders."
22
<PAGE> 23
From 1979-1981 Mr. Fenton was employed by the Canadian Imperial Bank of
Commerce alternatively as Solicitor and Manager. In 1977-1978 he practiced
corporate and real estate law with the firm of Day Wilson & Campbell in
Toronto, Canada and in 1976-1979 worked as a financial consultant for FF.
Management in Toronto, Canada.
Mr. Fenton was graduated with honors with a Bachelor of Science degree from the
University of Toronto in 1974 and was graduated from the Faculty of Law with an
L.L.B. degree from the University of Western Ontario, Canada.
MARTIN E. KOVNATS was first named to the Board of Directors on October 28,
1997. Mr. Kovnats has been a partner with the Securities Law Group of the law
firm of Aird & Berlis in Toronto, Canada since 1995. He practices primarily in
the area of mergers and acquisitions and debt and equity financings.
Previously, he practiced law for sixteen years with the law firm of Goodman and
Carr, also located in Toronto. Mr. Kovnats is a past president of the
Securities Advisory Committee, appointed by the Ontario Securities Commission.
Mr. Kovnats was graduated with a Bachelor of Science from the University of
Manitoba in 1972 and an L.L. B. from the University of Manitoba in 1975. Mr.
Kovnats has lectured on securities, commercial law and border issues, and has
published articles on equity investments, acquisitions and securities law.
Since 1979, he has been a member of the Canadian Bar Association and the Law
Society of Upper Canada.
ANDREW T. LIBBY, JR. was named Executive Vice President, COO, CFO, and
Corporate Secretary on July 31, 1998. From November 1994 until joining the
Company, he was the owner of Financial Management Consultants, Inc., a
management and consulting firm specializing in helping manufacturing and
distribution companies. From June 1994 to November 1994 he served as CFO and
Corporate Secretary of Veridien Corporation. Previously, he held a series of
positions with different companies and governmental agencies in the area of
finance and accounting. From 1987 to 1994 he served as Director of Finance and
Accounting at University Medical Service Association, Inc., and Medical
Services Support Corporation. Mr. Libby was graduated from the University of
Tampa with an MBA in 1981 and was graduated from the University of South
Florida with a Bachelor of Arts in Management in 1971 and a Bachelor of Arts in
Accounting in 1976. He holds licenses as a CPA, a Certified Internal Auditor
(CIA) and is a licensed mortgage broker.
ALFRED A. RITTER was first named to the board of Directors on March 26, 1993.
Mr. Ritter has been the co-owner and director of EXPORATLAS, Lisbon, Portugal
since 1981. The company is an import/export firm involved in the paper and pulp
industry. Since 1996, Mr. Ritter has been the owner and director of TEOTONIO
INVESTMENTS, a commercial real estate and project development company based in
Vaduz, Liechtenstein. Additionally, since 1996, Mr. Ritter has been owner and
director of EUROVENTOS, which is developing alternative energy sources in
Portugal. Mr. Ritter has held positions with Credit Suisse in Zurich,
Switzerland, the Bank of London and South America, in London, England, and
Lloyd's Bank Ltd. in New York City. He currently operates a securities private
placement and investment management company in Lisbon, Portugal, and Vaduz,
Liechtenstein.
23
<PAGE> 24
RUSSELL D. VAN ZANDT was first named to the Board of Directors on October 28,
1997. Mr. Van Zandt was graduated in 1972 with a BA in Mathematics from St.
Michael's College in Vermont, and was graduated in 1973 with an MBA from
Florida Atlantic University in Florida. He also completed course work in 1975
for a doctorate in Business Administration from George Washington University in
Washington, DC.
Since July 1992, Mr. Van Zandt has been a corporate Vice President at Datascope
Corp., a NASDAQ listed company engaged in the health care and medical device
products industry. On behalf of Datascope Corp., he has alternately headed two
divisions as President. From July 1992 through September 1996, he was President
of the Intervascular, Inc. Division. This division is responsible for
manufacturing and marketing vascular grafts and patches on a worldwide basis.
Since 1996, he has been President of the Cardiac Assist Division which
manufactures and Markets intro-aortic balloon pumps and catheters. From
November 1969 until August 1992, Mr. Van Zandt worked with C.R. Bard, Inc., a
health care and medical device company listed on the New York Stock Exchange.
He started as personnel director at a division level and rose through the
company's ranks to reach, in 1992, the position of President of Bard Vascular
Systems Division and serve at the corporate headquarters of C.R. Bard, Inc.
ITEM 6. EXECUTIVE COMPENSATION
Currently, our Directors are not compensated for their services, although their
expenses in attending meetings are reimbursed.
COMPENSATION OF MANAGEMENT
We have entered into a series of employment agreements with Paul Simmons. He
has a written employment agreement under which he is paid $36,000.00 annually
personally for management services. Moreover ICT, Inc. (a company owned by Paul
Simmons) receives a 3%-5% sales commission for the service of procuring and
managing accounts initiated by ICT, Inc. We have also entered into an
employment agreement with Andrew T. Libby, Jr., our Executive Vice President,
COO, CFO, and Corporate Secretary, under which he is to be paid $130,000
annually, although he will receive only $90,000, with the balance accrued,
until such time as we have sufficient cash flow to make payment of the accruals
and the full salary.
The following table sets forth the compensation paid to our Chief Executive
Officer or such other officer who fulfilled the duties of the Chief Executive
Officer for the periods indicated. Except for the individuals named, no
executive officers had a total annual salary and bonus of $100,000 or more.
<TABLE>
<CAPTION>
Name & Principal Other
Position Year Salary Bonus Compensation
- -------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
John Priest, CEO1 1/96-12/96 $184,967 -0- -0-
John Priest, CEO1 1/97-5/97 $56,250 -0- $32,000
Rene Gareau, CEO 11/27/96-10/21/96 -0- -0- -0-
Robert M. Morrow, COO2 1996 $162,500 -0- -0-
Vic Conant, CEO 10/1/97-6/3/98 -0- -0- -0-
Robert M. Morrow, COO 1/97-10/97 $135,000 -0- -0-
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Michael B. Whiteman, COO3 11/97-12/97 $14,000 -0- -0-
Michael B. Whiteman, COO 1/98-7/98 $42,000 -0- -0-
Sheldon C. Fenton, President
& CEO 7/98-Present -0- -0- -0-
Andrew T. Libby, Jr., COO4 8/98-Present $130,000 -0- -0-
</TABLE>
None of the named persons has received stock options or other such non-cash
compensation.
- -----------
(1) John Priest had an annual salary of $250,000. He received 250,000 common
shares (restricted) upon termination. The Company assumed liability for
$32,000 obligation of Mr. Priest to a Company Director.
(2) Robert Morrow had an annual salary of $165,000.
(3) Michael B. Whiteman had an annual salary of $84,000.
(4) Andrew T. Libby, Jr. has an annual salary of $130,000; however, he is paid
at the rate of $90,000 per year with $40,000 accrued to be paid when we
have sufficient cash flow.
OPTION GRANTS
The following table sets forth information with respect to grants of stock
options to the named officers during 1998. None of these options were exercised
during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Name Number of Securities Exercise Price Expiration
Underlying Options/ ($/Share) Date
SARs Granted (#)
<S> <C> <C> <C>
Andrew T. Libby, Jr. 100,000 $0.20 August 10, 2003
Andrew T. Libby, Jr. 250,000 $0.10 August 10, 2003
</TABLE>
EMPLOYMENT AGREEMENTS
In October 1995, we entered into an employment agreement with Mr. Simmons, the
Founder of our company, which has an indefinite term, providing that our
company or Mr. Simmons may terminate the agreement upon six months notice. Mr.
Simmons is to be paid an annual salary of $36,000. Additionally, Mr. Simmons
will be paid sales commissions of 6% of New Product Gross Margin of certain
sales as may be obtained by Mr. Simmons.
In August 1998, we entered into an employment agreement with Mr. Libby that
continues until December 31, 2001, unless terminated earlier by us, either for
cause, death, or other specified circumstances. Under the terms of the
employment agreement, Mr. Libby is to be paid an annual salary of $130,000.
However, Mr. Libby will be paid at the rate of only $90,000 per year with
$40,000 accrued to be paid when we have sufficient cash flow. Concurrent with
the execution of the employment agreement, Mr. Libby was granted options to
purchase two hundred fifty thousand (250,000) shares of the Company's common
stock @ $0.10 per share, the bid price on
25
<PAGE> 26
the effective date of the agreement. Additional options to purchase one-hundred
thousand (100,000) shares of common stock @ $0.20 per share vested upon
continued employment to December 31, 1998, and options to purchase a maximum of
two hundred fifty thousand (250,000) shares of common stock @ $0.20 per share,
with one-twelfth vesting each calendar month, contingent upon continued
employment to December 31, 1999. Mr. Libby shall be granted additional options
to purchase up to four-hundred thousand (400,000) shares of common stock @
$0.20 per share upon achievement by the Company of certain definable events
such as completion of acquisitions, mergers, and other events as may be agreed
upon by the Company and Mr. Libby.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into financing transactions with Dunvegan Mortgage Corporation,
a corporation of which Sheldon C. Fenton, the Company's President/CEO and a
director, is an officer and a director. These transactions include:
1. On or about October 19, 1995, Dunvegan Mortgage Corporation agreed to loan
us $2,500,000 represented by a Master Promissory Note collateralized by a
Security Interest on all of our assets and our subsidiaries. We have drawn
down the entire amount. As a part of the loan transaction, we agreed to
issue Dunvegan Mortgage Corporation its assigns and its loan participants
(collectively "Dunvegan") warrants such that after exercise of all such
warrants Dunvegan could own 51% of the total number of shares then issued
and outstanding, on a fully diluted basis. For full description of the terms
of the transaction see Item 8 DESCRIPTION OF SECURITIES - Loan and Security
Agreement Warrants.
2. Subsequent to the Loan and Security Agreement being fully drawn down,
Dunvegan Mortgage Corporation has loaned us funds under Convertible
Debentures. In total Dunvegan Mortgage Corporation has advanced $471,215 (in
6 different advances between June 1997 and June 1998) by way of debenture.
These Debentures are convertible into common stock and had 2,236,264
warrants attached thereto. For full description of the debentures see Item 8
DESCRIPTION OF SECURITIES - Convertible Debentures.
On September 14, 1998 Dunvegan Mortgage Corporation and loan participants
converted $1,575,166 principal of their loan under the Loan and Security
Agreement of October 19, 1995 to 33,530,973 shares of Common Stock and 154,163
shares of Series B Cumulative Preferred Stock. Dunvegan retained 20,610,551
shares of the Common Stock and distributed the balance to its loan syndicate
participants.
On June 30, 1998, the Company purchased certain inventory for $120,000 (in
promissory notes) from International Center for Technology Transfer, Inc., a
corporation owned by Paul L. Simmons, a director.
In June, 1998, Mark E. Schlussel, Chairman of the Board, converted $24,500 owed
to him by the Company for consulting fees, to 122,500 shares of the Company's
Common Stock, a conversion price of $.20 per share.
26
<PAGE> 27
Options to purchase 200,000 shares of the Company's Common Stock at a price of
$.50 per share held by Mark Schlussel, Chairman of the Board, would have
expired on October 17, 1998 but were extended to October 17, 1999 with an
adjustment of the exercise price to $.25 per share.
ITEM 8. DESCRIPTION OF SECURITIES
CAPITAL STRUCTURE OF THE COMPANY
Our authorized capital structure consists of Convertible Debentures, shares of
Preferred Stock and Common Stock, both having a par value of $.001, and
Preferred Stock Purchase Warrants and Common Stock Purchase Warrants and
Options, all of which are described below following the table. The authorized
classes, and the amount or number of each which are authorized and outstanding
as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Authorized Outstanding
---------- -----------
<S> <C> <C>
Convertible Debentures $ -- (1) $ 2,494,198 (1)
$10 Conv. Red. Pref. Stock 100,000 shrs 6,000 shrs
Series B Pref. Stock 244,678 shrs 154,163 shrs
Common Stock 200,000,000 shrs 78,152,833 (2) shrs
Pref. Stock Purchase Warrants 21,250,000 shrs 4,125,000 (3) shrs
Common Share Warrants
Conv. Deb. Wts. (LSA) 2,236,264 2,236,264
Conv. Deb. Wts. (PTC) 465,357 465,357
Conv. Deb. Wts. (Wardeb) 2,705,465 2,705,465
Consultant Series 4,825,000 (4) 200,000 (4)
Series $0.01 6,177,478 (5) 110,000
Series B. Dunvegan 245,344 90,515
Series C-1 Wardeb 115,184 115,184
Series C-11 Wardeb 41,893 41,893
Series D. Dunvegan 890 890
Loan and Security Agreement Warrants
Series I ($.499) -- -- (6)
Series II ($.001) -- --
Options 1,100,000 200,000 (7)
</TABLE>
- ------------
(1) The authorized value of the Company's Convertible Debentures varies. The
Board of Directors specifically authorizes each issuance. The $2,494,198
represents the principal sum issued and outstanding on December 31, 1998.
(2) This represents the actual total shares issued and outstanding of record as
of December 31, 1998.
(3) This represents the vested Warrants issued and outstanding as of December
31, 1998, having a $.20 to $.25 exercise price. Up to an additional
4,375,000 Warrants are issuable if and when they vest having exercise
prices from $.20 to $.25. See "Preferred Stock Warrants".
(4) Warrants exercisable to purchase 100,000 shares expire January 31, 1999 and
Warrants exercisable to purchase 100,000 shares expire January 31, 2000.
(5) The total number of Warrants authorized was dependent upon a formula; this
represents the actual
27
<PAGE> 28
number originally issued. Warrants for 6,067,478 shares have been
exercised.
(6) The number of Warrants and the prices at which they are exercisable are to
be determined by a formula, applied at the date(s) of exercise. See "Loan
and Security Agreement Warrants" for a description.
(7) Options held by the Chairman of the Board to purchase 200,000 shares at a
price of $0.25 per share are scheduled to expire October 17, 1999.
During 1998, the Company completed a previously authorized and approved capital
restructuring plan.
CONVERTIBLE DEBENTURES
To secure funds, the Company has issued Convertible Debentures. The Debentures
bear interest at the rate of eleven percent (11%) compounded semi-annually due
at maturity, originally six months after issuance but now extended to June 30,
2000. Each of the Debentures is convertible at $0.15 until August 31, 1999,
after which it is convertible at a price per share of Common Stock based upon
the closing bid price for the five trading days prior to the issuance of the
Debenture (the "Base Conversion Price"). As an inducement to the lenders, the
Company issued to each Debenture holder, as of the date of the issuance of the
Debenture, Common Stock Purchase Warrants entitling the holder to purchase that
number of shares of Common Stock equal to the number of shares obtainable upon
conversion of the Debenture at an exercise price equal to 105% of the Debenture
Base Conversion Price. For example, the Debentures issued on May 29, 1997 are
convertible to 176,622 shares of Common Stock at a Base Conversion Price of
$.3114, while the holder received warrants to purchase an equal number of
shares, 176,622, at an exercise price of $.327 per share.
The Company's Convertible Debentures have been issued at various times, in
various amounts with various conversion prices:
<TABLE>
<CAPTION>
Date of Issuance Principal Amount Base Conversion Price
---------------- ---------------- ---------------------
<S> <C> <C>
November 27, 1996 $115,000.00 .3534
December 12, 1996 35,000.00 .3629
December 13, 1996 76,270.00 .3699
December 27, 1996 116,322.00 .3562
January 15, 1997 125,000.00 .3195
January 30, 1997 30,364.00 .3419
February 4, 1997 73,488.00 .3251
February 13, 1997 82,000.00 .3171
February 26, 1997 104,414.00 .3002
March 3, 1997 49,125.00 .2996
March 7, 1997 180,000.00 .3868
May 7, 1997 40,000.00 .2871
May 20, 1997 20,000.00 .2824
May 29, 1997 25,000.00 .3114
May 29, 1997 30,000.00 .3114
June 2, 1997 12,000.00 .3040
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Date of Issuance Principal Amount Base Conversion Price
---------------- ----------------- ---------------------
<S> <C> <C>
June 5, 1997 88,000.00 .2949
June 16, 1997 75,000.00 .2729
June 30, 1997 232,881.84 .2553
July 28, 1997 20,000.00 .2144
July 29, 1997 20,000.00 .1996
August 7, 1997 30,000.00 .2324
August 15, 1997 30,000.00 .1851
August 27, 1997 58,000.00 .2500
August 29, 1997 83,000.00 .2500
September 15, 1997 39,000.00 .2500
September 16, 1997 21,000.00 .2500
September 24, 1997 50,000.00 .2500
September 29, 1997 35,000.00 .2500
October 6, 1997 13,000.00 .2500
March 16, 1998 50,000.00 .1800
April 8, 1998 50,000.00 .1800
April 29, 1998 75,000.00 .1800
May 27, 1998 40,000.00 .1800
June 4, 1998 23,333.00 .1800
June 10, 1998 50,000.00 .1350
June 26, 1998 60,000.00 .1200
July 14, 1998 30,000.00 .1050
July 28, 1998 80,000.00 .1600
August 12, 1998 35,000.00 .1200
August 21, 1998 25,000.00 .1150
August 26, 1998 67,000.00 .1240
-------------
$2,494,197.84
=============
</TABLE>
PREFERRED STOCK
The 25,000,000 shares of Preferred Stock having a par value of $.001 authorized
are undesignated as to preferences, privileges and restrictions. As the shares
are issued, the Board of Directors must establish a "series" of the shares to
be issued and designate the preferences, privileges and restrictions applicable
to that series.
To date, the Board of Directors has designated two series, one called the $10
Convertible Redeemable Preferred Stock (considered to be the Series A Preferred
Stock), which consists of one hundred thousand shares, and one called the Class
B Preferred Stock, which consists of two hundred forty four thousand six
hundred seventy eight (244,678) shares.
The $10 Convertible Redeemable Preferred Stock series has been designated as
having a $10 per share par value, although the Certificate of Incorporation
originally set the par value at $.001 per share. Each share has a liquidating
preference of $10 per share plus all accrued and unpaid
29
<PAGE> 30
dividends. This series is entitled to an annual dividend of 10% or $1.00 per
share, to be paid prior to the payment of any dividends on the Common stock.
The dividends for the first year, under the terms of the Offering Memorandum
were to have been withheld from the proceeds of the offering and paid into
escrow for subsequent distribution. The Company has not done that and legally
may not do so because establishment of the par value at the offering price of
$10 prohibits any return of capital while due to its lack of earnings and
earned surplus the Company may not declare a dividend. The series is
non-voting. Each share of the series is convertible prior to redemption into
twenty shares of the Company's Common Stock at the option of the holder. Each
share of the series is redeemable by the Company at any time at its option, at
a redemption price of $10 plus all accrued and unpaid dividends. No dividends
may be declared on the Company's Common Stock until all accrued and unpaid
dividends on this series of the Preferred Stock have been paid. Holders of the
series have one-time demand registration rights and continuing piggy-back
registration rights.
The Series B Cumulative Preferred Stock was created on December 31, 1997 as a
concession to Dunvegan Mortgage Corporation to permit conversion of
indebtedness under the Loan and Security Agreement of October 19, 1995 by
exercise of the related Loan and Security Agreement Warrants without
sacrificing the intent of those warrants. See "Loan and Security Agreement
Warrants" The Series B Cumulative Preferred Stock has a par value of $.001 per
share and an initial stated capital of $10 per share, which is subject to
adjustment. This Series is senior to the Common Stock and is senior to all
other classes and series except that it is junior to the $10 Convertible
Redeemable Preferred Stock with respect to the payment of dividends. Each share
has that number of votes equal to the number of shares of Common Stock into
which it is convertible on the record date. Subject to adjustment in the event
of certain future Common Stock or convertible security issuances, each share is
convertible into 20.04010695 shares of Common Stock. These Shares are entitled
to receive an annual dividend equal to the greater of:
o 10% of the stated value, as adjusted from time to time; and
o the actual dividend per share of Common Stock as declared by the
Company's Board of Directors times the number of shares of Common
Stock into which each share of Series B Convertible Preferred Stock is
convertible on the dividend record date.
The dividend is cumulative, whether or not earned and, to the extent not paid
on a quarterly dividend payment date (commencing January 1, 1999), is added to
the stated value.
COMMON STOCK
The authorized common equity of the Company consists of 100,000,000 shares of
Common Stock, with a $.001 par value, of which 78,152,833 shares of Common
Stock are issued and outstanding. Our shareholders approved, at our Annual
Meeting of November 6, 1998, an amendment increasing the authorized number of
shares of Common Stock to 200,000,000. We have not yet filed a Certificate of
Amendment to our Certificate of Incorporation to change the number of
authorized shares of Common Stock to 200,000,000 but are in the process of
doing so. Shareholders (I) have general ratable rights to dividends from funds
legally available
30
<PAGE> 31
therefore, when, as and if declared by the Board of Directors; (ii) are
entitled to share ratably in all assets of the Company available for
distribution to shareholders upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or
conversion rights, nor are there any redemption or sinking fund provisions
applicable thereto; and (iv) are entitled to one vote per share on all matters
on which shareholders may vote at all shareholder meetings. All shares of
Common Stock now outstanding are fully paid and nonassessable and all shares of
Common Stock to be sold in this offering will be fully paid and nonassessable
when issued.
The Common Stock does not have cumulative voting rights, which means that the
holders of more than fifty percent of the Common Stock voting for election of
directors can elect one hundred percent of the directors of the Company if they
choose to do so. The Company, which has had no earnings, has not paid any
dividends on its Common Stock and it is not anticipated that any dividends will
be paid in the foreseeable future. Dividends upon Preferred shares must have
been paid in full for all past dividend periods before distribution can be made
to the holders of Common Stock. In the event of a voluntary or involuntary
liquidation, all assets and funds of the Company remaining after payments to
the holders of Preferred Stock will be divided and distributed among the
holders of Common Stock according to their respective shares.
COMMON STOCK PURCHASE WARRANTS
There are various types or series of warrants as described as follows:
Consultant Series
The Consultant Series Warrants were issued pursuant to certain consulting and
services agreements. Each such Warrant currently outstanding entitles the
holder to purchase one share of Common Stock at exercise prices ranging from
$.20 to $.25 per share. Future such Warrants, if and when issued upon vesting,
will have exercise prices ranging from $.20 to $.25 per share.
$.01 Warrants
The $.01 Warrants were issued as part of Units sold in a private placement in
1995. The number of $.01 Warrants in each Unit was set to provide the investor,
who purchased a Unit for a set price of $.50, with an averaged per share price
equal to the current market price on the date he invested. Each such Warrant
entitles the holder to purchase one share of Common Stock at an exercise price
of $.01 per share.
Convertible Debenture Warrants
The Convertible Debenture Warrants were issued to the lenders who purchased the
Company's Convertible Debentures. The Warrants, issued as of the date of
issuance of the related Convertible Debenture, entitle the holder to purchase
the same number of shares as the related Convertible Debenture would be
convertible into, at an exercise price of 105% of the related Convertible
Debenture's conversion price. The Warrants expire three (3) years after the
date of issuance.
31
<PAGE> 32
RESTRUCTURING WARRANTS
The following described warrants are being issued as a result of the capital
restructuring plan. These warrants are referred to as "Preferred Stock"
Warrants. However, they are exercisable to purchase Common Stock, provided that
a sufficient number of shares of Common Stock remain authorized but unissued.
If the number of shares is inadequate, the Company may substitute shares of its
10% Convertible Redeemable Preferred Stock (see description above) which are
convertible into twenty (20) shares of Common Stock. At the Annual Meeting of
Shareholders held on November 6, 1998, the shareholders approved an increase in
the authorized number of shares of Common Stock to 200,000,000. The Company is
presently amending its Certificate of Incorporation to increase its authorized
Common Stock, which would permit the Company to issue Common Stock upon
exercise.
Series B
These Warrants are being issued to Dunvegan Mortgage Corporation or assigns
based on a calculation retroactive to December 31, 1997. They are intended to
provide Dunvegan with the ability to acquire sufficient shares of Common Stock
in addition to the Loan and Security Agreement Warrants described below to
maintain the option to acquire 51% of the Company's then issued and outstanding
Common Stock, on a fully diluted basis. The Warrants are exercisable at a price
of $10 per share of a new series of Preferred Stock, each share of which would
be convertible into twenty shares of Common Stock.
Series C-I
These Warrants are being issued retroactive to December 31, 1997 to Wardeb
Investment Corporation, in exchange for previously issued Common Stock Purchase
Warrants which are being canceled. The Warrants are exercisable at a price of
$10 per share of Preferred Stock, each share of which would be convertible into
29.783 shares of Common Stock.
Series C-II
These Warrants are being issued retroactive to December 31, 1997 to Wardeb
Investment Corporation, in exchange for previously issued Common Stock Purchase
Warrants which are being canceled. The Warrants are exercisable at a price of
$10 per share of Preferred Stock, each share of which would be convertible into
40.1176 shares of Common Stock.
Series D
These Warrants are being issued to Dunvegan Mortgage Corporation as a new
issuance for a new series of Preferred Stock, each share of which will have
25,000 votes per share. The intent of this issuance is to provide Dunvegan with
voting rights equivalent to the number of votes it has otherwise given up as a
result of waiving its rights to the delivery of certain common shares and
warrants.
32
<PAGE> 33
LOAN AND SECURITY AGREEMENT WARRANTS
On or about October 19, 1995, Dunvegan Mortgage Corporation, a Delaware
corporation of which Sheldon Fenton, current CEO of Veridien, is also an
officer and a director, and loan participants agreed to loan us $2,500,000.00
represented by a Master Promissory Note collateralized by a Security Interest
on all of our assets and our subsidiaries. We have drawn down the entire
amount. As a part of the loan transaction, we agreed to issue Dunvegan Mortgage
Corporation, its assigns and its loan participants (collectively "Dunvegan")
two series of warrants, one series exercisable at $.001 per share and the other
series exercisable at $.499 per share. The warrants must be exercised in tandem
and the number of warrants of each series to be exercised is determined by a
formula.
The formula requires that Dunvegan be issued that number of warrants, each
warrant to purchase one (1) share of Common Stock, such that after exercise of
all such warrants, Dunvegan could own 51% of the total number of shares then
issued and outstanding, on a fully diluted basis. For example, the adjusted
(corrected) number of shares issued and outstanding on a fully diluted basis,
on July 31, 1998, excluding Dunvegan, was 61,587,238. However, Dunvegan had
waived its rights with respect to the issuance of 5,745,000 shares.
Accordingly, if Dunvegan were to have exercised on that date it would have
received warrants to purchase that number of shares which would equal 51% of
the total shares issued and outstanding after exercise of those Warrants,
excluding the waived shares. This would have been 58,121,513 shares. (As of
December 31, 1998, this would be 61,794,461 shares of which the common share
equivalent of 36,620,422 shares had been exercised.)
The price of the warrants to be issued is also determined by the formula. The
combination of $.499 and $.001 Warrants to be exercised is calculated by (I)
dividing the $2,500,000 principal amount of the loan by the number of shares
needed to be acquired to achieve up to the 51% position so as to determine a
per share price and then (ii) calculating the number of $.499 shares and $.001
shares required to approximate that per share price as an average.
On September 14, 1998 Dunvegan exercised warrants and converted $1,575,166
principal of its loan under the Loan and Security Agreement to 33,530,973
shares of Common Stock and 154,163 shares of Series B Cumulative Preferred
Stock. Dunvegan itself retained all of the Series B Cumulative Preferred Stock
and 20,610,551 shares of the Common Stock and distributed the balance of the
Common Stock to its loan syndicate participants. Following such exercise and
conversion, Dunvegan Mortgage Corporation assigned the balance of the loan
outstanding ($924,834.00) and the remaining Loan and Security Agreement
Warrants to 1192615 Ontario Limited, a company owned by Mr. Fenton's brother.
Mr. Fenton disclaims any beneficial interest in such loan balance or in the
remaining Loan and Security Agreement Warrants.
33
<PAGE> 34
DIVIDEND POLICY.
We have never had net profits on operations and therefore are currently
proscribed under the Delaware General Corporation Law from declaring dividends.
We have not paid any cash dividends on our Common Stock or our Preferred Stock.
Moreover, our Board of Directors has no present intention of declaring any cash
dividends, as we expect to re-invest all profits in the business for additional
working capital for continuity and growth. The declaration and payment of
dividends in the future will be determined by our Board of Directors
considering the conditions then existing, including the Company's earnings,
financial condition, capital requirements, and other factors.
At present there is a series of 100,000 shares of Preferred Stock, created on
April 3, 1995, titled "10% Cumulative Convertible Redeemable Preferred Stock".
These shares are entitled to receive an annual dividend of $1.00 per share
before any dividend is paid to holders of the Common Stock. Any dividend not
declared and paid is accumulated and must be paid before any dividend or
distribution is made on our Common Stock. As of December 31, 1998 the
accumulated dividend is $30,995.
Also, at present there is a series of 244,678 shares of Preferred Stock created
on December 31, 1997, titled "Series B Convertible Preferred Stock". These
Shares are entitled to receive an annual dividend equal to the greater of:
o 10% of the stated value, as adjusted from time to time; and
o the actual dividend per share of Common Stock as declared by the
Company's Board of Directors times the number of shares of Common
Stock into which each share of Series B Convertible Preferred Stock is
convertible on the dividend record date. The dividend is cumulative,
whether or not earned and, to the extent not paid on a quarterly
dividend payment date (commencing January 1, 1999) is added to the
stated value.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Our Common Stock is traded on the NASDAQ Bulletin Board.
(b) Our Common Stock was listed on the NASDAQ Bulletin Board on
approximately December 20, 1993. The closing price on that date was
$0.87. Prior ot that date our stock was trading on the Pink Sheets.
(c) The Company's Common Stock is approved for trading on the NASDAQ
Bulletin Board, trading under the stock symbol "VRDE". The chart below
breaks down the high bid and the low bid prices for each of the last 8
quarters (as reported by NASDAQ Trading & Market Services) which
quotations reflect inter-dealer price, without retail mark-up,
mark-down or commission, and may not reflect actual transactions.
During 1997 and 1998, its high and low bid and asked prices were as
follows:
34
<PAGE> 35
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
December 31, 1998 $.10 $.04
September 30, 1998 .17 .07
June 30, 1998 .24 .06
March 31, 1998 .45 .21
December 31, 1997 .50 .20
September 30, 1997 .62 .14
June 30, 1997 .44 .23
March 31, 1997 .45 .21
</TABLE>
On March 4, 1999 the closing prices of the Company's Common Stock were $0.125
bid and $0.133 asked, as quoted on the NASDAQ Bulletin Board.
To date no dividends have been declared or paid on the Common Stock. (See part
I, Item 8, "Dividend Policy")
Veridien Corporation was formed in June, 1991 under the laws of the State of
Delaware. We initially authorized the issuance of 50,000,000 shares of Common
Stock, and 25,000,000 shares of Preferred Stock, both having a par value of
$.001. On February 20, 1996 we filed a Certificate of Amendment to our Stock to
100,000,000 shares at a par value of $.001. Our shareholders approved, at our
Annual Meeting on November 6, 1998 , an amendment increasing the authorized
number of shares of Common Stock to 200,000,000.
DIVIDEND. We have never had net profits on operations and therefore are
currently proscribed under the Delaware General Corporation Law from declaring
dividends. We have not paid any cash dividends on our Common Stock or our
Preferred Stock. Our Board of Directors has no present intention of declaring
any cash dividends, as we expect to re-invest all profits in the business for
additional working capital for continuity and growth. The declaration and
payment of dividends in the future will be determined by our Board of Directors
considering the conditions then existing, including the Company's earnings,
financial condition, capital requirements, and other factors.
At present there is a series of 100,000 shares of Preferred Stock, created on
April 3, 1995, titled "10% Cumulative Convertible Redeemable Preferred Stock".
These shares are entitled to receive an annual dividend of $1.00 per share
before any dividend is paid to holders of the Common Stock. Any dividend not
declared and paid is accumulated and must be paid before any dividend or
distribution is made on our Common Stock.
Also, at present there is a series of 244,678 shares of Preferred Stock created
on December 31, 1997, titled "Series B Convertible Preferred Stock". These
Shares are entitled to receive an annual dividend equal to the greater of:
o 10% of the stated value, as adjusted from time to time; and
35
<PAGE> 36
o the actual dividend per share of Common Stock as declared by the
Company's Board of Directors times the number of shares of Common
Stock into which each share of Series B Convertible Preferred Stock is
convertible on the dividend record date.
The dividend is cumulative, whether or not earned and, to the extent not paid
on a quarterly dividend payment date (commencing January 1, 1999) is added to
the stated value.
ITEM 2. LEGAL PROCEEDINGS
Except for the two legal actions and FAA proposed penalty described below, we
are not a party to any pending legal proceedings. We are not aware of any legal
proceedings pending, threatened or contemplated, against any of our officers or
directors, respectively, in their capacities as such.
A lawsuit was filed against Veridien Corporation on November 4, 1997 by Michael
L. Childers as Trustee of the Money Purchase Plan and Michael L. Childers and
Deana F. Childers as Joint Tenants in the Circuit Court of the Sixth Judicial
Circuit in and for Pinellas County, Florida. The suit alleges that Veridien
made misleading statements including that the Food & Drug Administration (FDA)
had approved a new product developed by Veridien. Veridien is accused of
publishing "Misinformation and fail(ing) to disclose the material, negative
information at a time when it did not know whether the information was true or
was false." The Plaintiffs bought 5,900 shares of stock at $6.00 per share
whose value has been "dramatically" reduced to less then $.50 per share.
Plaintiffs seek damages in excess of $15,000 in a trial by jury. The Company is
actively defending this law suit.
Veridien Corporation is a defendant in an action brought by Creative
Technologies, Inc. ("CTI") of Greenville, South Carolina. In the action,
docketed to No. 98-CP-23-2521 in the Court of Common Pleas of Greenville
County, South Carolina, CTI seeks to recover $45,000 claimed to be due and
owing as the result of the settlement of a consulting contract. In addition,
CTI claims actual damages, punitive damages, prejudgment interest and other
remedies for alleged false product representations which CTI relied upon in
representing Veridien to its clients. The Company has been actively defending
this law suit and the parties have entered into a settlement agreement.
On November 30, 1998, under Case No. 97-GL-76-0135 the Federal Aviation
Administration proposed to assess a civil penalty against the Company in the
amount of $60,000 for one incident which lead to alleged violations of various
Hazardous Material Regulations. This proposed civil penalty is based upon a
shipment made by a Company employee of product samples intended for use at a
trade show. It is proported that the samples were not marked as required under
the Hazardous Material Regulations nor was the shipment accompanied by a
"Shipper's Certification of Declaration of Dangerous Goods". The Company did
not direct or authorize the actions of the employee. The Company is actively
contesting the civil penalty and has retained a specialist in such matters
seeking to present facts and circumstances which do not warrant a civil
penalty.
36
<PAGE> 37
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have selected Carter & Cartier P.A., CPA's with offices at 424 Central
Avenue, Suite 1000, St. Petersburg, Florida 33701, as our independent
accountants and auditors, for the audit of our financial statements for 1997
and 1998. We have included our audited financial statements for the fiscal
years ended December 31, 1997 and December 31, 1998, in this filing in reliance
on the report of that firm and upon the authority of that firm as expert in
auditing and accounting.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During 1995 the Company made a private placement under Section 4(2) of Units
consisting of shares of its 10% Convertible Redeemable Preferred Stock and its
$.01 Warrants.
1996
On March 19, 1996, an investor in the 1995 private placement converted 7,065
shares of the Preferred Stock to 141,300 shares of the Company's Common Stock
and exercised 402,162 Warrants to purchase 402,162 shares of the Company's
Common Stock. These issuances were considered exempt from registration by
reason of Sections 3(a)(9) and 4(2) of the Securities Act.
On June 27, 1996, another investor in the 1995 private placement converted
4,800 shares of the Preferred Stock to 96,000 shares of the Company's Common
Stock and exercised 304,000 Warrants to purchase 304,000 shares of the
Company's Common Stock. These issuances were considered exempt from
registration by reason of Sections 3(a)(9) and 4(2) of the Securities Act.
On or about August 1, 1996 the Company issued 250,000 shares of its Common
Stock to its terminated President/CEO as a severance payment in lieu of
remaining salary. This issuance was considered exempt from registration by
reason of Section 4(2) of the Securities Act.
On August 8, 1996, another investor in the 1995 private placement converted
1,000 shares of the Preferred Stock to 20,000 shares of the Company's Common
Stock . This issuance was considered exempt from registration by reason of
Section 3(a)(9) of the Securities Act.
On or about September 1, 1996, various other investors in the 1995 private
placement converted 24,065 shares of the Preferred Stock to 481,300 shares of
the Company's Common Stock . These issuances were considered exempt from
registration by reason of Section 3(a)(9) of the Securities Act.
On or about September 1, 1996 the Company issued Warrants to purchase 100,000
shares of its Common Stock and 300,000 shares of its Common Stock respectively
to two companies as payment for services. These issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act.
37
<PAGE> 38
On or about September 26, 1996 the Company issued 2,930 shares of its Common
Stock to an investor in the 1995 private placement to settle a disagreement
about the amount of funds invested and the shares to which the investor was
entitled. This issuance was considered exempt from registration by reason of
Section 4(2) of the Securities Act.
On or about September 1, 1996 another investor in the 1995 private placement
converted 250 shares of the Preferred Stock to 5,000 shares of the Company's
Common Stock and exercised 155,000 Warrants to purchase 155,000 shares of the
Company's Common Stock. These issuances were considered exempt from
registration by reason of Sections 3(a)(9) and 4(2) of the Securities Act.
At various times between November 27, 1996 and December 27, 1996 an investor
advanced funds totaling $342,592 and was issued Convertible Debentures for that
principal sum together with 954,610 Convertible Debenture Warrants. This
issuance was considered exempt from registration by reason of Section 4(2) of
the Securities Act.
1997
On January 31, 1997 the Company issued 100,000 Common Stock Purchase Warrants
as compensation for services of a company. This issuance was considered exempt
from registration by reason of Section 4(2) of the Securities Act.
On November 14, 1997 an investor in the 1995 private placement exercised 91,111
Warrants to purchase 91,111 shares of the Company's Common Stock. This issuance
was considered exempt from registration by reason of Section 4(2) of the
Securities Act.
On November 19, 1997 the Company issued 1,000,000 shares of its Common Stock to
an investor in a private placement. This issuance was considered exempt by
reason of Rule 506 of Regulation D and Section 4(2) of the Securities Act.
On December 4, 1997 an investor in the 1995 private placement exercised 4,535
Warrants to purchase 4,535 shares of the Company's Common Stock. This issuance
was considered exempt from registration by reason of Section 4(2) of the
Securities Act.
At various times during 1997 various lenders advanced funds totaling $1,566,272
and were issued Convertible Debentures for that principal sum together with
5,534,138 Convertible Debenture Warrants. These issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act.
1998
On February 13, 1998 the entity to which the Company had previously issued
300,000 Common Stock Purchase Warrants for services in 1996 exercised such
Warrants. This issuance was considered exempt from registration by reason of
Section 4(2) of the Securities Act.
38
<PAGE> 39
On February 13, 1998 the Company issued 231, 667 shares of its Common Stock as
compensation for services. This issuance was considered exempt from
registration by reason of Section 4(2) of the Act.
On April 1, 1998 another investor in the 1995 private placement converted 5,000
shares of the Preferred Stock to 100,000 shares of the Company's Common Stock .
This issuance was considered exempt from registration by reason of Section
3(a)(9) of the Securities Act.
On April 1, 1998 the Company issued 450,000 shares of its Common Stock to an
investor in the 1995 private placement for a promissory note for $22,500 to
settle a dispute about the conversion ratio. This issuance was considered
exempt from registration by reason of Sections 3(a)(9) and 4(2) of the
Securities Act.
On September 14, 1998 the Company issued 122,500 shares of its Common Stock to
a creditor upon conversion of existing indebtedness. This issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act.
On September 14, 1998 another investor in the 1995 private placement converted
10,000 shares of the Preferred Stock to 200,000 shares of the Company's Common
Stock and exercised 911,111 Warrants to purchase 911,111 shares of the
Company's Common Stock. In addition, in lieu of the accrued dividend on the
Preferred Stock the Company issued 73,059 shares of its Common Stock. These
issuances were considered exempt from registration by reason of Sections
3(a)(9) and 4(2) of the Securities Act.
On September 14, 1998 investors under the Loan and Security Agreement were
issued 33,530,973 shares of the Company's Common Stock upon exercise of the
Loan and Security Agreement Warrants and received 154,163 shares of the Series
B Preferred Stock. These issuances were considered exempt from registration by
reason of Sections 3(a)(9) and 4(2) of the Securities Act.
On November 24, 1998 the Company issued 221,055 shares of its Common Stock as
compensation for past services. This issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act.
On December 15, 1998 the Company issued 1,000,000 shares of its Common Stock to
an investor in a private placement. This issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act.
At various times after July 31, 1998 the Company issued 6,929,295 shares of its
Common Stock in an offering conducted under Rule 504 of Regulation D. These
issuances were considered exempt from registration by reason of Rule 504 of
Regulation D and Section 3(b) of the Securities Act.
At various times during 1998 various lenders advanced funds totaling $585,333
and were issued
39
<PAGE> 40
Convertible Debentures for that principal sum together with 4,029,540
Convertible Debenture Warrants. These issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act.
1999
At various times to February 28, 1999 the Company issued 3,866,226 shares of
its Common Stock for cash and 428,572 shares of its Common Stock for services
in a continuation of the offering conducted under Rule 504 of Regulation D.
These issuances were considered exempt from registration by reason of Rule 504
of Regulation D and Section 3(b) of the Securities Act.
During the period to February 28, 1999 the Company issued 3,450,000 shares of
its Common Stock to eight investors in a private placement. This issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DELAWARE GENERAL CORPORATION LAW
Section 145 of the Delaware General Corporation Law contains provisions
authorizing our indemnification of directors, officers, employees or agents
against certain liabilities and expenses which they may incur as directors,
officers employees or agents of the Company or of certain other entities. The
law also provides that such indemnification may include payment by the Company
of expenses incurred in defending a civil or criminal action or proceeding in
advance of the final disposition of such action or proceeding upon receipt of
an undertaking by the person indemnified to repay such payment if he shall be
ultimately found not to be entitled to indemnification. Indemnification may be
provided even though the person to be indemnified is no longer a director,
officer, employee or agent of the Company or such other entities. Section
145(g) also contains provisions authorizing the Company to obtain insurance on
behalf of any such director, officer employee or agent against liabilities,
whether or not the Company would have the power to indemnify such person
against such liabilities under the provisions of the Section.
The indemnification and advancement of expenses provided pursuant to Section
145(f) are not exclusive, and subject to certain conditions, we may make other
or further indemnification or advancement of expenses of any of our directors,
officers, employees or agents. Because our Articles of Incorporation, as
amended, do not otherwise provide, notwithstanding our failure to provide
indemnification and despite a contrary determination by the Board of Directors
or our shareholders in a specific case, a director, officer, employee or agent
of the Company who is or was a party to a proceeding may apply to a court of
competent jurisdiction for indemnification or advancement of expenses or both,
and the court may order indemnification and advancement of expenses, including
expenses if it determines that the petitioner is entitled to mandatory
indemnification pursuant to Section 145(c) because he has been successful on
the merits, or because the Company has the power to indemnify on a
discretionary basis pursuant to Section 145(b) or because the court determines
that the petitioner is fairly and reasonably entitles
40
<PAGE> 41
indemnification or advancement of expenses or both in view of all the relevant
circumstances.
ARTICLES OF INCORPORATION AND BY-LAWS
The Articles of Incorporation and By-laws of the Company, as amended, empower
the Company to indemnify our current or former directors, officers, employees
or agents of the Company or persons serving by our request of the Company in
such capacities in any other enterprise or persons who have served by our
request of the company in such capacities in any other enterprise to the full
extent permitted by the laws of the State of Delaware.
LIMITATION ON LIABILITY
Our Articles of Incorporation limit directors' and officers' liabilities to the
maximum permitted under Delaware law. Thus, even if such an officer or director
loses a lawsuit, it is possible, unless such an officer or director was guilty
of gross negligence or willful misconduct in the performance of his/her duties,
that we or our insurance carrier will pay the amount of such judgment or
settlement and reasonable legal fees.
OFFICERS AND DIRECTORS LIABILITY INSURANCE
At present, we maintain Officers and Directors Liability Insurance with
Executive Risk Indemnity, Inc. of Dover, Delaware.
INDEMNITY AGREEMENTS
At present, we do not have indemnity agreements in place with any of our
current officers or directors.
SEC POSITION ON INDEMNIFICATION FOR SECURITY ACT LIABILITY
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that is the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suite or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
41
<PAGE> 42
PART F/S Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Veridien Corporation
We have audited the accompanying consolidated balance sheets of Veridien
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related statements of operations, changes in deficit in
stockholders' equity for the years then ended. 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 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
the significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Veridien
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note B to the
consolidated financial statements, the Company, since its inception, has
sustained substantial losses, has a deficit in stockholders' equity, a deficit
in working capital, and is experiencing a continued cash flow deficiency. Those
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans regarding these matters are described in Note
B. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Carter and Cartier, P.A.
February 24, 1999
42
<PAGE> 43
VERIDIEN CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash $ 17,158 $ 88,045
Accounts receivable - trade
Less allowance for doubtful accounts
Of $6,096 and $24,231, respectively 203,148 59,382
Note receivable 22,500 --
Inventory 92,549 227,978
Prepaid expenses and other current assets 20,580 19,272
-------- --------
Total current assets 355,935 394,677
Property and equipment:
Leasehold Improvements 83,806 83,806
Furniture and fixtures 372,697 356,490
-------- --------
456,503 440,296
Less accumulated depreciation 414,333 399,778
-------- --------
42,170 40,518
Other Assets:
Patents, less accumulated amortization of
$482,378 and $479,230, respectively 32,004 35,152
Loan costs, less accumulated amortization of
$49,633 and $33,541, respectively 28,160 44,251
Security deposits and other assets 40,389 40,389
-------- --------
100,553 119,792
-------- --------
$498,658 $554,987
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
43
<PAGE> 44
VERIDIEN CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Liabilities and Deficit in Stockholders' Equity
Current liabilities:
Notes payable $ 1,066,273 $ 2,704,460
Accounts payable 244,343 353,611
Accrued compensation 39,000 12,483
Other accrued liabilities 949,059 673,513
Due to stockholders 189,321 24,157
Deferred revenue - licensing agreement 87,418 --
------------ ------------
Total current liabilities 2,575,414 3,768,224
Convertible debentures 2,494,198 1,908,865
Deficit in stockholders' equity:
Undesignated preferred stock, $.001
par value, 25,000,000 shares authorized
Convertible redeemable preferred stock,
$10 par value, 100,000 authorized;
6,000 and 16,000 issued and outstanding
at December 31, 1998 and 1997 60,000 160,000
Series B Preferred Stock,
$.001 par value, 245,344 authorized,
154,163 and 0 issued and outstanding
at December 31, 1998 and 1997 154 --
Common stock - $.001 par value; 200,000,000
Shares authorized, 78,152,833 and 33,463,173
Shares issued and outstanding at
December 31, 1998 and 1997 78,154 33,464
Additional paid-in capital 22,858,790 17,796,043
Common stock warrants 26,399 2,599,288
Accumulated deficit (27,589,451) (25,705,897)
------------ ------------
(4,565,954) (5,117,102)
Stock subscriptions receivable (5,000) (5,000)
------------ ------------
Total stockholders' deficit (4,570,954) (5,122,102)
------------ ------------
$ 498,658 $ 554,987
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
44
<PAGE> 45
VERIDIEN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 820,065 $ 869,319
Operating costs and expenses:
Cost of sales 601,037 589,215
General and administrative 1,399,251 1,627,518
Research and development 377,344 245,404
------------ ------------
2,377,632 2,462,137
------------ ------------
Loss from operations (1,557,567) (1,592,818)
Other Income (expense):
Interest expense (525,872) (413,882)
Rental income 51,290 3,459
Licensing fees 145,696 --
Miscellaneous -- 23,954
Interest income 2,899 6,213
------------ ------------
(325,987) (380,256)
Net loss $ (1,883,554) $ (1,973,074)
============ ============
Net loss per common share $ (.04) $ (.06)
============ ============
Weighted average share outstanding 48,299,890 32,549,756
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
45
<PAGE> 46
VERIDIEN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN DEFICIT IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Convertible
Redeemable Series B Number Additional Stock Stockholders'
Preferred Preferred Common Common Paid-in Stock Accumulated subscriptions equity
Stock Stock Shares Stock Capital Warrants Deficit receivable (deficit)
----------- --------- ---------- ------- ----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1997 $ 135,367 $ - 32,367,527 $32,367 $17,561,242 $2,608,092 $(23,732,823) $ (5,000) $(3,400,755)
Exercise of stock
warrants for notes - - 91,111 91 8,109 (7,289) - - 911
Exercise of stock
warrants for cash - - 4,535 6 1,554 (1,515) - - 45
Issuance of stock
warrants for cash - - 1,000,000 1,000 249,000 - - - 250,000
Amortization of
preferred stock
costs 24,633 - - - (23,862) - - - 771
Net (loss) - - - - - - (1,973,074) - (1,973,074)
---------- ------ ---------- ------- ----------- ---------- ----------- ---------- -----------
Balances at
December 31, 1997 160,000 - 33,463,173 33,464 17,796,043 2,599,288 (25,705,897) (5,000) (5,122,102)
Exercise of
warrants
conversion for
services - - 300,000 300 (300) - - - -
Issuance of stock
for services - - 452,722 453 123,347 - - - 123,800
Conversion of
preferred
shares to
common
Correction
to prior
conversion - - 100,000 100 (100) - - - -
Issuance of stock
for note - - 450,000 450 22,050 - - - 22,500
Issuance of stock for
debt conversion - - 742,500 743 178,757 - - - 179,500
Conversion of
preferred
shares to common (100,000) - 200,000 200 99,800 -
Exercise of 1995
PPM Warrants - - 984,170 984 85,591 (72,889) - - 13,686
Conversion of partial
loan/security
agreement - 154 33,530,973 33,531 4,041,481 (2,500,000) - - 1,575,166
Proceeds from Section
504 offering - - 6,929,295 6,929 463,121 - - - 470,050
Proceeds from Private
Placement - - 1,000,000 1,000 49,000 - - - 50,000
Net (loss) - - - - - - (1,883,554) - (1,883,554)
---------- ------ ---------- ------- ----------- ---------- ----------- ---------- -----------
Balances at
December 31, 1998 $ 60,000 $ 154 78,152,833 $78,154 $22,858,790 $ 26,399 $27,589,451 $ (50,000) $(4,570,954)
========== ====== ========== ======= =========== ========== =========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
46
<PAGE> 47
VERIDIEN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net (loss) $(1,883,554) $(1,973,074)
Adjustments to reconcile net (loss) to net cash
(used) by operating activities:
Depreciation and amortization 33,794 61,500
Other, not requiring cash flow 123,800 --
(Increase) decrease in:
Accounts receivable (143,766) (4,223)
Prepaid and other current assets (1,308) (9,238)
Inventories 135,429 (134,837)
Increase (decrease) in:
Accounts payable and accrued expenses 192,795 274,364
Due to stockholders 165,164 (165,257)
Deferred revenue 87,418 --
----------- -----------
Net cash (used) by operating activities (1,290,228) (1,950,765)
Cash flow from investing activities:
Purchases of property and equipment (16,207) (3,949)
Patent development -- (20,283)
----------- -----------
Net cash (used) by investing activities (16,207) (24,232)
Cash flow from financing activities:
Proceeds from convertible debentures 585,333 1,566,273
Net proceeds from borrowings 116,479 129,757
Proceeds from sale of preferred and common stock 533,736 250,956
----------- -----------
Net cash provided by financing activities 1,235,548 1,946,986
----------- -----------
Net (decrease) in cash (70,887) (28,011)
Cash at beginning of year 88,045 116,056
----------- -----------
Cash at end of year $ 17,158 $ 88,045
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
47
<PAGE> 48
VERIDIEN CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows.
1. Organization, Business and Control
On June 4, 1991, the Company was incorporated in Delaware as "VCT Acquisitions
II, Inc.". The Company then acquired all of the assets of another Delaware
corporation called Viral Control Technology, Inc. On September 13, 1991, the
Company changed its name to Viral Control Technology, Inc. Subsequently, on
November 8, 1991, the Company again changed its name and became Veridien
Corporation (the Company).
The "Viral Control Technology, Inc." from which the Company acquired its assets
was created on August 3, 1989, by a reverse acquisition of a public shell
called Valencia Enterprises, Inc., by a private company named Viral Control
Technology, Inc. The original Viral Control Technology, Inc., was organized in
Delaware on August 10, 1988, while Valencia Enterprises was organized in Utah
on February 10, 1984. Valencia, which had changed its name to Viral Control
Technology, Inc., after the reorganization, was redomesticated in Delaware on
December 14, 1990. The original private company called Viral Control
Technology, Inc., was organized by Paul L. Simmons and his wife.
The Company was founded to develop disinfectants and sterilants which will pose
no hazard to people who use them and will not harm the environment. To this
end, the Company has developed a hard surface disinfectant (VIRAHOL(R)), which
has been registered with the Environmental Protection Agency (EPA), and a cold
chemical sterilant (STERIHOL(R)), for which the Company is currently seeking
regulatory approval. The Company's research and development efforts are
currently focused on further development of infection control chemicals and on
devices, both medical and commercial, which utilize the Company's liquid
products and are in keeping with the corporate philosophy of environmentally
friendly products. In June 1996, the Company added Vira-RD12(TM) a heavy-duty
rotational disinfectant and Vira-CD7(TM) a detergent disinfectant for large
areas to its infection control line.
In October 1995, the Company entered into a 10% Convertible Senior Secured Term
Loan agreement to finance marketing efforts for its line of products, to fund
operating cash flow deficiencies, and to continue its research and development
activities.
48
<PAGE> 49
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- CONTINUED
The agreement requires the Company to issue to the lender warrants, in
sufficient quantity, that at all times the loan agreement is in force the
lender can obtain 51% of all classes of outstanding stock for a $2,500,000
exercise price. During 1998, $1,575,166 of the debt and the lender's warrants
were converted into 33,530,973 common shares. During 1998, the Company was
authorized to increase its capital structure to 200,000,000 authorized shares
of common stock.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the company and
its subsidiaries, each of which is wholly-owned. All intercompany balances and
transactions have been eliminated in consolidation.
3. Accounting Estimates
The presentation 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. Accounts Receivable
The Company uses the allowance method of accounting for doubtful accounts. The
year-end balance is based on historical collections and management's review of
the current status of existing receivables and estimate as to their
collectibility.
5. Inventories
Inventories, consisting primarily of raw materials and finished goods, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method. At December 31, 1998, raw materials and finished goods
amounted to approximately $64,000 and $29,000, respectively. At December 31,
1997, raw materials and finished goods amounted to approximately $78,000 and
$150,000, respectively.
6. Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over their estimated useful
lives ranging from three to seven years. Leasehold improvements are amortized
on the straight-line method over the shorter of the lease term or estimated
useful life. Major renewals, betterments and replacements are capitalized.
Maintenance and repairs are charged to expense as incurred.
49
<PAGE> 50
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
7. Patents
The Company capitalizes certain costs, primarily legal and other fees, related
to patents. Accumulated costs are amortized over the estimated lives of the
patents using the straight-line method, commencing at the time the patents are
issued.
8. Loan Costs
Loan costs are amortized by the straight-line method over the term of the
respective loans.
9. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
10. Reclassification
Certain reclassifications have been made to the 1997 financial statements to be
in conformity with the 1998 presentation.
11. Net Loss per Share
Net loss per share is calculated by dividing the net loss by the weighted
average number of common shares outstanding during the period. Weighted average
number of common shares outstanding is calculated as the sum of the month-end
balances of shares outstanding, divided by the number of months. The weighted
average shares outstanding were 48,299,890 and 32,549,756 for the years ended
December 31, 1998 and 1997, respectively. Common stock equivalents (stock
options, warrants, convertible debentures and convertible redeemable preferred
stock) are not included in the weighted average number of common shares because
the effects would be anti-dilutive.
NOTE B - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. Since inception, the Company
has incurred losses of approximately $27.6 million, resulting primarily from
research and development, sales and marketing, and administrative expenses
being substantially in excess of sales revenue. The Company has a
50
<PAGE> 51
NOTE B - REALIZATION OF ASSETS - CONTINUED
deficit in stockholders' equity of $4,631,108, a deficit in working capital of
$2,219,479, and is experiencing a continuing cash flow deficiency.
For the year ended December 31, 1998, the Company's operating activities
resulted in cash outflows of $1,414,028. In addition, the Company used $16,207
for patent development and equipment purchases. In order to fund these cash
outflows, the Company sold $687,036 of preferred and common stock and received
net proceeds of $672,312 from notes payable and convertible debentures. These
proceeds, together with the cash balance at the beginning of the year, did not
fund the Company's cash outflows, resulting in a net cash decrease of $70,887
for the year ended December 31, 1998.
The company plans to utilize its current debt financing arrangements and pursue
additional equity and debt financing while managing cash flow in an effort to
provide funds to increase revenues to support operations, research and
development activities. Management anticipates cash flow from product sales
will meet and exceed cash requirements in the Fall of 1999. The company plans
to pursue additional cash through sales of equity, through Rule 504 and 506
offering(s).
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon the continued operations of the
Company and that such operations will be profitable and provide adequate cash
flows. Further, the ability of the Company to continue its operations and
successfully defend itself against potential claims or assessments is dependent
on the ability to obtain additional debt and equity financing, employ cash
management techniques and aggressively market its products.
The consolidated financial statements do not contain any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should the Company be
unable to continue in existence.
NOTE C - RELATED PARTY TRANSACTIONS
In March 1996, the Company entered into a repayment agreement with the
principal stockholder to reimburse for costs incurred in prior years for the
development of certain products. The agreement provides for the repayment of
$169,000 from a percentage of income derived from future product sales or
earlier at the option of the Company. The amount was charged to research and
development expense for the year ended December 31, 1996. During 1997, the
Company exercised its option and paid the balance due.
In June 1996, the Company entered into a settlement and general release
agreement with the then Chief Executive Officer and Chairman of the Board for
voluntary resignation of employment and resignation from the Board of
Directors. The agreement provides for the payment of $135,000 in twelve equal
monthly installments. In addition, the Company delivered
51
<PAGE> 52
NOTE C - RELATED PARTY TRANSACTIONS - CONTINUED
250,000 shares of common stock and assumed an existing note payable to the
principal stockholder in the amount of $32,000. This obligation was satisfied
in full during 1997.
At December 31, 1998 and 1997, the Company owed $189,321 and $24,157,
respectively to stockholders who have made advances of cash or material to the
Company.
During 1998, the Company purchased $104,444 of inventory from a company owned
by a shareholder and has recorded the advance in Due to stockholder. The
Company has the ability to convert the advances into Company common stock at
$.20 per share.
The Company has entered into numerous financing transactions with Dunvegan
Mortgage Corporation, a corporation of which the Company's President and CEO is
an officer and a director. These transactions are detailed elsewhere in these
footnotes.
NOTE D - NOTES RECEIVABLE
The Company issued 450,000 of common stock to a shareholder in exchange for a
note receivable in the amount of $22,500. The note is non-interest bearing, can
be satisfied in full by the return of the Company common stock, and is due in
full on December 31, 1999. At December 31, 1998, the 450,000 common shares had
an approximate market value of $27,000.
NOTE E - NOTES PAYABLE
In October 1995, the Company secured a 10% Convertible Senior Secured Term Loan
of up to $2,500,000 with a mortgage company. During 1998, the mortgage company
converted $1,575,166 of the $2,500,000 debt into 33,530,973 common shares. On
October 5, 1998, the remaining balance of $924,834 was assigned to another
lender. The maturity date and other terms remain the same.
The loan agreement grants the lender warrants to purchase 51% of the Company's
outstanding common and preferred stock. The note is collateralized by the
assets and intellectual properties of the Company and its subsidiaries and
requires semi-annual payments of interest only with the entire principal
balance due in November 2000. As of December 31, 1998, the Company was advanced
$924,834 and has accrued $308,995 of interest under the agreement. The Company
has been in technical default on the loan since March 1996 with respect to
certain financial criteria. Furthermore, the lender has not waived compliance
regarding these criteria and has continued to fund the monthly working capital
needs of the Company, as previously agreed. Accordingly, the accompanying
consolidated financial statements have presented the amounts advanced under the
note as a current liability.
During 1998, the original lender advanced $75,000 under a short-term bridge
loan at 0% stated interest rate.
52
<PAGE> 53
NOTE E - NOTES PAYABLE - CONTINUED
The company has negotiated promissory notes with a leasing company at varying
terms and maturities. The remaining balance amounted to $66,439 and $54,460 at
December 31, 1998 and 1997, respectively. The Company renegotiated the loans
during April 1998. The note carries an interest rate of 9% per annum payable
monthly, with principal payments of $21,924 due on May 1, 1999, and 2000, with
the remaining principal due on May 1, 2001.
The Company had borrowed funds from an individual in the amount of $150,000 at
December 31, 1997. Interest at 8% per annum is payable quarterly starting
September 20,1997. During the second quarter of 1998, the note and all accrued
interest thereon was converted by the holder to equity.
NOTE F - DEFERRED REVENUE/LICENSING FEES
During 1998, the Company entered into a marketing agreement with a Canadian
company and awarded exclusive sales rights in Canada for a period of five
years. The Company is entitled to minimum annual license fees and in 1998
received $233,114 for year one. The initial period for determining sales
subject to the licensing agreement is February 28, 1998, through June 30, 1999.
At December 31, 1998, $87,418 of this licensing fee has been deferred.
Minimum annual license fees have scheduled increases through approximately
$676,000 in year five. The licensing fees are based on 10% of sales as defined
in the agreement and are subject to a yearly minimum.
NOTE G - CONVERTIBLE DEBENTURES
During 1998 and 1997, the Company received $585,333 and $1,566,273,
respectively of proceeds from the sale of convertible debentures to various
investment companies. Interest is accrued at various rates from 10% - 11% per
annum, compounded in full at maturity of December 31, 1998. Prior to the
retirement of the debentures, the investment companies may convert any or all
amounts owed into common stock. The conversion price for each debenture ranges
from $.1050 to $.3868 per share. The conversion privilege terminates when all
principal plus interest due has been paid in full. In addition, the investment
companies were issued 10,518,287 warrants for additional common shares for 100
- - 105% of the convertible debentures per share conversion price. The additional
warrants expire five years from the original date of the debentures.
The expiration of the convertible debentures were extended to June 30, 2000,
and in consideration for the extension, the conversion rate was reduced to the
lower of the existing conversion rate or $.15 to August 31, 1999, thereafter
reverting to the original conversion price.
53
<PAGE> 54
NOTE H - COMMITMENTS AND CONTINGENCIES
Claims and Litigation
The Company is being sued by a shareholder for a potential rescission of common
stock in the amount of $15,000 as defined above. The company is vigorously
defending the suit and believes it to be without merit.
The Company is involved in additional litigation arising in the normal course
of business. The Company has filed suit against a former Chairman and certain
former officers and directors seeking recovery of over $110,000 which the
Company alleges such persons misappropriated from the Company. Further, the
Company successfully defended itself in a suit by that former Chairman claiming
damages for alleged misrepresentations in the sale of Company stock which he
purchased. The former Chairman was seeking damages of at least $285,000. In
addition, the Company was awarded and received approximately $100,000 as
reimbursement for attorney fees and costs incurred in defense of the suit.
In 1997 the Federal Aviation Authority (FAA) notified the Company that it had
violated certain rules regarding the labeling and air transportation of one
shipment of product considered to be hazardous material. During 1998, the FAA
proposed a potential fine in the amount of $60,000. The Company is working with
an outside consultant to reduce or eliminate the proposed penalty.
Operating Leases
The company leases manufacturing and office facilities under a lease that
expires June 2001 with an additional five year option period. Rent expense was
approximately $214,000 and $209,000 in 1998 and 1997, respectively.
The following table reflects approximate future minimum annual rental expense
amounts:
Year Amount
---- --------
1999 $233,500
2000 238,900
2001 244,500
2002 123,700
NOTE I - CONVERTIBLE REDEEMABLE PREFERRED STOCK
In 1994, the Company prepared an Offering Circular to raise approximately
$1,000,000 of 10% Cumulative Convertible Redeemable Preferred Stock with a $10
par value. At the option of the Company, the shares can be redeemed after two
years at $10 per share plus accrued and unpaid dividends in aggregate amounts
not to exceed $250,000 annually. Each preferred share is convertible into
twenty common shares. Additionally, the Offering Circular provides for common
stock purchase warrants with an exercise price of $.01 per share. The number of
54
<PAGE> 55
NOTE I - CONVERTIBLE REDEEMABLE PREFERRED STOCK - CONTINUED
warrants issued, when exercised in combination with conversion of the preferred
stock into common stock, will result in an effective cost for each share of the
common stock equal to the closing bid price of the common stock, in the
over-the-counter market, on the day of the subscription to the Offering
Circular. The warrants may be redeemed for $.001, at the election of the
Company, upon thirty days' written notice after the bid price of the common
stock in the then existing public market has been $1.00 or more for thirty
continuous days in which the market is open for business. Through December 31,
1997, $622,000 of preferred stock was issued for cash and $318,150 was issued
in satisfaction of debt and services at $10 per share. Preferred shareholders
have converted 88,015 shares of preferred stock into 1,760,300 shares of common
stock. At December 31, 1998, preferred stock dividends in arrears totaled
approximately $24,000.
NOTE J - SERIES B CUMULATIVE PREFERRED STOCK
The Series B Cumulative Preferred Stock was created on December 31, 1997, as a
mechanism of permitting the conversion of part of the indebtedness under the
Loan and Security Agreement, without sacrificing the intent of the original
Loan and Security Agreement warrants. The Series B Cumulative Preferred Stock
has a par value of $.001 per share and an initial stated capital of $10 per
share, which is subject to adjustment. This Series is senior to the Common
Stock and is senior to all other classes and series except that it is junior to
the Convertible Redeemable Preferred Stock with respect to the payment of
dividends. Each share has that number of votes equal to the number of share of
Common Stock into which it is convertible on the record date. Subject to
adjustment in the event of certain future Common Stock or convertible security
issuances, each share is convertible into 20.04010695 shares of Common Stock.
These shares are entitled to receive an annual dividend equal to the greater of
10% of the stated value and the actual dividend per share of common stock
declared by the Company's Board of Directors times the number shares of Common
stock into which each share of Series B is convertible on the dividend record
date. The dividend is cumulative, whether or not earned and, to the extent not
paid on a quarterly dividend payment date is added to the stated value.
NOTE K - STOCK OPTIONS
Options to acquire 200,000 shares were granted in 1995 to a director of the
Company in consideration of his efforts relating to business services. These
options remain in force at December 31, 1998 and expire on October 17, 1999.
55
<PAGE> 56
NOTE K - STOCK OPTIONS - CONTINUED
Non-qualified stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Exercise
Under Price
Option Range
----------- ------------
<S> <C> <C> <C>
Outstanding at January 1, 1997 1,357,822 $ .01 - 3.00
1997 Granted - N/A
Expired ( 257,822) .01 - 3.00
----------- ------------
Outstanding at December 31, 1997 1,100,000 .50 - 3.00
1998 Granted - N/A
Expired ( 900,000) .50 - 3.00
----------- ------------
Outstanding at December 31, 1998 200,000 $ .25
=========== ============
</TABLE>
NOTE L - STOCK WARRANTS
In 1998, as additional consideration for the convertible debentures, the
Company issued 4,029,539 warrants at exercise prices ranging from $.105 to
$.180, 100% of the debenture conversion price, and that expire five years from
date of issuance.
In 1997, as additional consideration for the convertible debentures, the
Company issued 4,338,138 warrants at exercise prices ranging from $.1944 to
$.3590, 105% of the debenture conversion price, and that expire five years from
the date of issuance.
In 1996, as additional consideration for the convertible debentures, the
Company issued 954,610 warrants at exercise prices ranging from $.3711 to
$.3884, 105% of the debenture conversion price, and that expire five years from
the date of issuance.
In 1997, as additional consideration for a consulting agreement, the Company
issued 100,000 warrants. The warrants have an exercise price of $1.00 per share
and expire three years from the date of issuance.
In September 1993, the Company granted a stock purchase warrant to a foreign
private foundation in recognition of its purchases of over 1,000,000 shares of
common stock. The warrant entitles the holder to acquire up to 250,000 shares
of the Company's authorized common stock. The purchase price of each share is
$1.00, and the warrant was exercisable through October 31, 1998. During 1998,
the warrant expired.
56
<PAGE> 57
NOTE L - STOCK WARRANTS-CONTINUED
As described in Note I, the Company offered $1,000,000 of 10% Cumulative
Convertible Redeemable Preferred Stock along with common stock purchase
warrants at $.01 per share. The number of warrants issued, when exercised in
combination with conversion of the preferred stock into common stock results in
an effective cost for each share of the common stock equal to the closing bid
price of the common stock, in the over-the-counter market, on the day of the
subscription to the Offering Circular. The warrants are recorded at their fair
market value at the time of issuance less the exercise price of $.01 and
reported as a reduction to preferred stock. The value assigned to the warrants
is amortized over the shorter of the life or the exercise of the warrant.
Through December 31, 1998, 6,177,478 warrants were issued in connection with
sales of the preferred stock, 701,595 warrants have been issued for services,
and 1,606,134 were issued for extinguishment of debt. At December 31, 1998,
110,000 of these warrants had not been exercised.
As described in Note A, in October 1995, the Company entered into a 10%
Convertible Senior Secured Term Loan agreement. The agreement required the
Company to issue to the lender warrants, in sufficient quantity, that at all
times the loan agreement is in force the lender can obtain 51% of all classes
of outstanding stock for a $2,500,000 exercise price. On September 14, 1998,
when the lender converted a portion of the loan, the latest capital numbers
available were as at July 31, 1998. Effective July 31, 1998, the Company's
fully diluted capital position was equivalent to 55,842,238 common shares.
Hence the lender was entitled to 58,121,513 warrants at a cumulative exercise
price of $2,500,000 in order to be able to obtain 51% under the terms of the
loan agreement. This equated to an effective cost of $0.0430133 per share. The
lender on September 14, 1998, converted $1,575,166 of the debt and the lender's
warrants were exercised into 33,530,973 common shares and 154,163 Series B
Preferred Shares (convertible into 3,089,449 common shares) at a combined cost
of equivalent to $0.0430133 per common share.
57
<PAGE> 58
NOTE L - STOCK WARRANTS - CONTINUED
Warrants issued and exercised is summarized as follows:
<TABLE>
<CAPTION>
Exercise
Price
Common Stock Warrants Range
---------------------------------------------- ------------- ----------
<S> <C> <C>
Outstanding at January 1, 1997 41,988,340 .01 - 1.00
1997:
Granted 17,491,653 .01 - .406
Exercised ( 95,646) .01
Converted to preferred warrants ( 10,027,922) .25 - .34
----------- -----------
Outstanding at December 31, 1997 49,356,425 .01 - 1.00
1998:
Granted 14,712,853 .105 -.180
Exercised ( 1,211,111) .01 - .125
Expired ( 250,000) 1.00
Loan & Security Agreement Conversion ( 33,530,973) .001- .499
----------- ------------
Outstanding at December 31, 1998 29,077,194 $ .01 - 1.00
=========== ============
</TABLE>
Effective December 31, 1997, the Board of Directors created the Series B
Cumulative Preferred Stock (as discussed in Note J) and issued 245,344 warrants
for this Preferred Stock to the lender under the Loan and Security Agreement to
replace 4,916,720 common stock warrants already issued to them. The warrants
expire on November 18, 2000, and have a $10 exercise price. During 1998,
154,163 of these warrants were exercised by the holder and 666 warrants were
cancelled due to recalculation of the warrant entitlement.
Effective December 31, 1997, the Board of Directors created the Series CI
Preferred Stock and issued 115,184 warrants for this Preferred Stock to a
Convertible Debenture holder to replace 3,430,555 common stock warrants already
issued to them. The warrants expire on December 31, 2001, and have a $10
exercise price. No warrants have been exercised to date.
58
<PAGE> 59
NOTE L - STOCK WARRANTS - CONTINUED
Effective December 31, 1997, the Board of Directors created the Series CII
Preferred Stock and issued 41,893 warrants for this Preferred Stock to a
Convertible Debenture holder to replace 1,680,647 common stock warrants already
issued to them. The warrants expire on December 31, 2001, and have a $10
exercise price. No warrants have been exercised to date.
<TABLE>
<CAPTION>
Equivalent #
Common
Shares on Pref.
Pref. Share Exercise Share
Preferred Stock Warrants Price Conversion
- ------------------------------ --------- --------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1997 0 0
1997 Granted:
Series B 245,344 $ 10.00 4,916,720
Series CI 115,184 $ 10.00 3,430,555
Series CII 41,893 $ 10.00 1,680,647
--------- ----------
Outstanding at December 31, 1997 402,421 10,027,922
1998 Exercised:
Exercised Series B ( 154,163) $ 10.00 (3,089,443)
Cancelled Series B ( 665) ( 13,347)
--------- ----------
Outstanding at December 31, 1998 247,593 6,925,132
========= ==========
</TABLE>
NOTE M - INCOME TAXES
There is no income tax provision for the years ended December 31, 1998 and 1997
due to net operating losses for which no benefit is currently available. The
Company has net operating loss carryforwards of approximately $25,674,000 at
December 31, 1998, of which $14,954,000 are available to offset future taxable
income from 1999 through 2018.
In October 1995, in connection with a loan and security agreement in the amount
of $2,500,000 (See Note E), the Company to outside lenders granted rights to
acquire up to 51% of the common stock of the Company. Under Internal Revenue
Code Section 382 and the Treasury Regulations promulgated thereunder, the
Internal Revenue Service might take the position that under all the facts and
circumstances the Company experienced a change in ownership that has the effect
of limiting the carryforward of net operating losses incurred since that date.
If the IRS were to take that position and a court of competent jurisdiction
were to agree with the IRS, the actual amount of net operating loss carry
forward that would be deductible each year for a maximum carryforward period of
twenty years, is based on the value of the Company at the date of the deemed
change of ownership, multiplied by the applicable tax-exempt long-term bond
rate.
59
<PAGE> 60
NOTE M - INCOME TAXES - CONTINUED
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Net Operating loss carry forwards $ 9,628,000 $ 9,082,000
Less valuation allowance ( 9,628,000) ( 9,082,000)
------------- -------------
Net deferred tax assets $ - $ -
============= =============
</TABLE>
NOTE N - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $4,435 and $11,291 for 1998 and 1997,
respectively.
During 1998, the Company issued 450,000 common shares in exchange for a note
receivable of $22,500. The Company issued 34,273,473 common shares in exchange
for debt conversion in the amount of $1,754,666. In 1998, $100,000 of preferred
stock and $72,889 of stock warrants (representing 911,111 warrants) were
converted into 1,184,170 shares of common stock.
In 1997, common stock warrants of $7,289 were exercised for 91,111 shares of
common stock in exchange for a note receivable of $911. The Company recorded
warrant amortization of $23,862 to additional paid in capital upon the lapse of
time. The Company accepted services for the exercise of common stock warrants
at a value of $100,000.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has financial instruments, none of which are held for trading
purposes. The Company estimates that the fair value of all financial
instruments at December 31, 1998 and 1997, do not differ materially from the
aggregate carrying value of its financial instruments recorded in the
accompanying consolidated balance sheet. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required in
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
60
<PAGE> 61
NOTE P - SUBSEQUENT EVENTS
(1) Deficit Funding
Subsequent to year-end, the Company received $351,800 in proceeds from
the remainder of the 504 offering. In addition, the Company received
$263,500 from private placement. These funds will be utilized to
partially fund operations.
(2) Computer Software
The Company is analyzing methods of complying with the year 2000 issue
concerning computer software. An initial systems analysis has been
performed by a competent computer software company and a recommended
course of action has been accepted. The Company anticipates
implementing upgrades to the software and hardware system prior to
June 30, 1999. In conjunction with this systems analysis, a review of
all internal control procedures will be done to verify that new system
upgrades will provide adequate protection for company assets and
information. Management expects that the cost of obtaining the
upgraded software and network support will be less than $50,000.
61
<PAGE> 62
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Veridien Corporation
---------------------------------------
(Registrant)
Date: November 10, 1999 By /s/ Andrew T. Libby, Jr.
------------------------------------
Andrew T. Libby, Jr., COO
By /s/ Sheldon C. Fenton
------------------------------------
Sheldon C. Fenton, CEO
62
