<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1996 or
-----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------- -------------
Commission file number 0-11232
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VEREX LABORATORIES, INC.
---------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Colorado 84-0850695
---------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Bldg. D, Suite 100, 14 Inverness Dr. East, Englewood, CO 80112
- -------------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 799-4499
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
-------------------- -------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - No Par Value
- ----------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---------- ---------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at September 20, 1996 was approximately $2,890,000.
The number of shares outstanding of the Registrant's no par value common
stock as of September 20, 1996, was 2,183,177 shares.
1
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PART I
ITEM 1. BUSINESS
- -----------------
Background
- ----------
The Company was organized under the laws of the State of Colorado on
September 29, 1980. The Company is in the business of acquiring, developing
and marketing pharmaceutical and health care products. The Company obtains
formulae and patents when available, selects trademarks, designs product
packages and promotes and markets, through licensing agreements,
pharmaceutical and health care products. During fiscal 1996 the Company had
two subsidiaries, Bear Laboratories, Inc., incorporated in April 1991 for the
purpose of exploiting VERIN® a drug formulation developed by the Company,
and Colorado Nut Company, a distributor of snack items, acquired during fiscal
1992. The Company sold Colorado Nut Company on June 28, 1996.
Going Concern Opinion
- ---------------------
The Company's auditors have issued a report on August 13, 1996 stating,
in effect, that there is substantial doubt as to the Company's ability to
continue as a going concern. See Financial Statements.
Birklea, Ltd.
- ------------
On January 6, 1993, the Company entered into a Stock purchase Agreement
("Agreement") with Birklea, Ltd., 28 Hardcourt Street, Dublin 2, Republic of
Ireland whereby Company sold 660,000 shares of its restricted common stock to
Birklea, Ltd. for $550,000. The $550,000 was to be expended by the Company as
agreed by Birklea, Ltd. and the Company's President. The newly issued shares
represented 37% of the Company's outstanding common stock after issuance
thereof. Subsequent purchases of common stock have increased Birklea, Ltd.'s
holdings to 745,106 which represents approximately 40% of the outstanding
shares of Common Stock of the Company.
The Agreement provided that Birklea, Ltd. had the right to designate one
director on management's slate of directors at the next annual meeting of
shareholders. Mark Banister of Westerham, Kent, England was designated by
Birklea, Ltd. and at a meeting of shareholders on May 4, 1993, was elected a
director.
The Agreement also provided that Birklea, Ltd. has an option through
September 1, 1994 to acquire for $2,400,000 such additional shares of common
stock of the Company at a price per share to be determined as will permit
Birklea, Ltd. to hold 60% of the issued and outstanding common stock of the
Company. This option has been extended to January 3, 1997 and may be extended
beyond that date.
2
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Birklea, Ltd. had an additional option through September 1, 1995 to purchase
common stock of the Company at $30.00 per share in such quantity as would
permit in Birklea, Ltd. to acquire an additional 5% of the issued and
outstanding common stock of the Company. This option has expired.
Credit Arrangements - Birklea, Ltd.
- -----------------------------------
Effective November 30, 1993, the Company entered into a Credit Agreement
with Birklea, Ltd., a major shareholder of the Company, whereby Birklea, Ltd.
agreed to use its best efforts to provide up to $10,000,000 in financing to
the Company. Advances under the arrangement bear interest at prime rate set
by Morgan Guaranty Bank, New York. The convertible promissory note thereunder
is secured by the Company's right, title and interest in patent applications,
patents, tradenames, know-how and trade secrets relating to existing and
future drug formulations relating to the drug commonly known as AZT. At June
30, 1996, the balance on this note was $1,667,000. Principal is payable July
15, 1996. Principal and interest are due upon 120 days written notice or July
15, 1997. Interest is accruing at bank prime rate, 8.25% at June 30, 1996.
The convertible promissory note grants Birklea, Ltd. the option to
convert the balance due under such note to common stock of the Company on the
same terms that Birklea, Ltd. may purchase common stock of the Company under
the Stock Purchase Agreement of January 6, 1993 between the Company and
Birklea, Ltd. See above.
Licensing Activities
- --------------------
The Company has licensing agreements with several foreign-based
pharmaceutical companies covering the Company's patented constant-release rate
formulation of VEREXAMIL®, as well as its proprietary once daily delivery
system for diltiazem, drugs used in the treatment of heart disease and
hypertension. These agreements provide the licensee the exclusive right to
manufacture and market the formulations in a certain geographical area for a
specified period of time subject to the licensee maintaining high quality of
material and workmanship for the product and require an initial licensing fee
payable to the Company and a royalty to the Company based on product sales or
other arrangements.
The Company has not licensed its technology relating to other sustained
release prescription drugs. Licenses provide for the Company to obtain health
registration for the products as well as manufacturing the finished dosage
form.
3
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The following table summarizes licensing agreements in existence at June
30, 1996:
Licensee and
Year of License Territory Drug
- ---------------- --------- ----
Sanofi GmbH W. Germany Verapamil
(Formerly Labaz GmbH)
(1985)
Laevosan Austria Verapamil
(1987 & 1988)
Approved 8/93
Trimel Life Sciences Canada Verapamil
(Formerly Galen
Pharma, Inc.)
(1988)
Trima Pharmaceutical Israel Verapamil,
(1993) Diltiazem
Trimel Life Sciences Canada and Nifedipine,
(Formerly Galen United States Naproxen,
Pharma, Inc.) Indomethacin
(1988)
Trimel Pharmaceutical Israel Verapamil,
(1992) Diltiazem
Productos BiotyLDA Portugal Verapamil
(1988)
Royalties on the foregoing licensing agreements range from 5% to 7.5% of
invoice sales and there is no minimum sales requirements pursuant to the
agreements. The Company has not received any significant royalties to date.
The Company intends to continue to pursue licensing arrangements with
respect to marketing and/or developing its drug formulations and compounds.
No such arrangements were entered into during fiscal 1996, primarily due to
research and clinical trials on AZTEC®.
AZT Formulation
- ---------------
The Company has developed a unique controlled release rate formulation of
zidovudine (AZT), the primary drug used in the treatment of persons diagnosed
as having Acquired Immunodeficiency Syndrome (AIDS) or being HIV positive.
The trademark name AZTEC® has been registered with the United States
Patent and Trademark Offices and a patent has been filed with authorities in
the U.S.
4
<PAGE>
and Europe. The Company's formulation has been the subject of a
clinical study at the University of Colorado Health Science Center which
concluded that the AZTEC® formulation had fewer adverse side effects,
produces longer duration blood level curves, and higher intercellular
phosphorated AZT levels than the currently used AZT drug (Retrovir®).
Further, AZTEC® is administered twice daily compared to 5-6 a day dosages
of Retrovir®. During the fiscal years ended June 30, 1995 and 1996
clinical trials of AZTEC® were conducted at fifteen sites in the United
States at a cost of approximately $885,000. The Company has been dependent
upon Birklea, Ltd. and Burroughs-Wellcome (now Glaxo-Wellcome) for funding for
such trials. The Company has engaged in extensive discussions with
Glaxo-Wellcome with a view to interesting that Company in licensing
AZTEC®, however these efforts have not been successful to date.
Nanospheres
- -----------
The Company has developed (patent pending) a drug delivery system that
will enable oral administration of many drugs of macromolecule size,
particularly proteins, polypeptides and polysaccharides, which have low or no
bioavailability when given orally. This technology involves the use of
nanospheres which are loaded with active drug. These nanospheres are
biodegraded over several days in the body and the active drug is released
slowly. So far, Verex researchers have been successful in developing heparin
nanospheres that, when given to animals as a single dose, produced therapeutic
levels for seven days. An article has been published on this process, and
patents and trademarks have been filed.
In early 1996, the Company was contacted by the Pediatric AIDS division
of the National Cancer Institute, a part of the National Institutes of
Health. The Company was asked if it could formulate a pediatric long acting
AZT preparation. The Company obliged the NCI and made the formulation, which
was subsequently tested in animal models and found to have activity at more
than two weeks following a single dose. Scientists from the NCI are currently
preparing studies to administer this new formulation to their primate models.
Amantex®
- -----------
This is an antiviral compound, delivered in a controlled release
formulation, for the treatment of recurrent herpetic lesions. The Company has
received a trademark for this product.
Veraderm®
- ------------
Veraderm is a wound dressing, made from a proprietary formulation of
polymers that, when applied superficially to an open wound, can enhance
healing while diminishing the chances of
5
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infection. Early testing has shown it to be particularly beneficial in the
treatment of decubitus ulcers. A trademark has been received.
Psorex®
- -----------
The Company has discovered a treatment for psoriasis which it believes is
safe and effective with no side effects. Psoriasis is a chronic inflammatory
skin disease, characterized by skin scaling and ulcerations, which affects
about 2% of the population. The formulation is a tablet, Psorex®, which
contains safe ingredients and which the Company hopes to market
over-the-counter after independent studies are completed and in compliance
with FDA labeling requirements. The Company's preliminary studies indicate
that about 85% of patients show marked improvement when taking one to three
tablets daily at bed time. The Company has received a trademark for
Psorex®.
Government Regulation
- ---------------------
Non-prescription drug products are regulated by various federal, state,
municipal and foreign regulatory agencies with respect to safety,
effectiveness, advertising and labeling. The principal regulatory agency in
the United States is the Food and Drug Administration ("FDA") which requires
evidence of safety and efficacy of a drug formulation before it can be
marketed.
Non-prescription or over-the-counter ("OTC") drugs are generally
recognized by the FDA as safe and effective if they meet certain conditions
set forth in FDA regulations. These regulations relate to such items as
ingredient quantity and quality, manufacturing practices, side effects,
labeling, container components, dosage instructions and warnings for misuse.
Independent advisory panels of qualified experts are appointed under FDA
regulations to review the safety and efficacy of certain OTC drugs.
The Company has applied its constant release technologies to certain
drugs that are prescription items, including verapamil, diltiazem,
pseudoephedrine, erythromycin, quinidine, hydralazine, propranolol and
indomethacin. Approval of the FDA is required before the Company or its
licensees may market any of the foregoing formulations in the U.S. FDA
regulations can substantially affect the cost and time involved in obtaining
and maintaining approval to market new drugs and existing drugs with new
delivery systems. The FDA requires scientific evidence of safety and efficacy
before new drugs can be marketed.
The Company's licensing agreements with foreign manufacturers provided
that the licenses of these respective drugs comply with applicable foreign
regulations prior to marketing such drugs.
6
<PAGE>
Patents and Trademarks
- ----------------------
The Company has developed proprietary technologies which relate to the
development of its drug formulations and business. These technologies relate
primarily to the constant release characteristics of such formulations. The
Company holds several patents and has filed other patent applications relating
to these technologies.
The Company has obtained several U.S. Trademarks, including one for its
name and others for capsules and formulations which have been utilized in
products and formulations relating to constant release rate delivery systems.
Competition and Markets
- -----------------------
The Company's drug formulations face severe competition from many
companies which have far greater financial and technical resources as well as
an established reputation.
The Company has sought licensing arrangement for its formulations rather
than engage in significant marketing efforts of its own. Its limited retail
marketing efforts have been undertaken primarily to enhance product licensing
opportunities.
Colorado Nut Company, Inc.
- --------------------------
For nearly five years the Company owned Colorado Nut Company, Inc., a
Colorado corporation. This company distributed snack items to retail
establishments in the Denver metro area prior to the acquisition and
continued such distribution and mail order snack sales thereafter. For the
year ended June 30, 1996 this wholly owned subsidiary had a net loss of
$(42,394). On June 28, 1996 the Company sold this subsidiary for $45,000 and
carried back two notes for $35,000, one which is secured by common stock of
Colorado Nut Company, Inc.
Employees
- ---------
The Company has three full-time employees, one of whom is an officer and
director. Further, during 1996 four persons worked for the Company's former
subsidiary, Colorado Nut Company, Inc.
ITEM 2. PROPERTIES
- -------------------
The Company leases office and research facilities at 14 Inverness Drive
East, Building D, Suite 100, Englewood, Colorado, consisting of 8,926 square
feet of space at $6,213 per month pursuant to a two-year lease through March
31, 1997. The Company sublets a portion of the premises at $4,100 per month
to an officer of the Company. For its snack distribution business, the
Company leased approximately 4,864 square feet for processing at 730 S.
7
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Jason Street, Denver, Colorado pursuant to a five-year lease at $1,611.75 per
month through July 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
No legal proceedings are pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to the Company's shareholders for a vote during
the Company's fiscal fourth quarter.
8
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Company's common stock is traded over-the-counter and its quotations
are carried in the Electronic Bulletin Board of the National Association of
Securities Dealers, Inc.
The following table sets forth the range of high and low bid quotations
for the Company's common stock for the periods indicated from sources the
Company deems reliable, however, no review of the daily Pink Sheets for the
periods indicated has been undertaken by the Company.
<TABLE>
<CAPTION>
__________________________________________________________________
High Low
<S> <C> <C>
Fourth Qtr. (Ended June 30, 1996) $ 7.25 $2.25
Third Qtr. (Ended March 31, 1996) $ 4.00 $2.50
Second Qtr. (Ended December 31, 1995) $11.00 $2.50
First Qtr. (Ended September 30, 1995) $ 9.00 $6.50
Fourth Qtr. (Ended June 30, 1995) $ 9.00 $4.00
Third Qtr. (Ended March 31, 1995) $10.00 $6.00
Second Qtr. (Ended December 31, 1994) $11.25 $5.25
First Qtr. (Ended September 30, 1994) $ 5.25 $1.75
</TABLE>
- -------------------------------------------------------------------------
The foregoing quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
As of September 20, 1996, the Company had approximately 1,400 holders of
record of its common stock and the closing bid price on its common stock was
$2.50.
The Company has not paid any dividends since its inception and presently
anticipates that all earnings will be retained for development of the
Company's business.
9
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ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Following is a summary of selected financial data. See the financial
statements included herein for more complete information.
<TABLE>
<CAPTION>
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
and for the and for the and for the and for the and for the
Year Ended Year Ended Year Ended Year Ended Year Ended
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Working
Capital $(1,881,892) $(2,037,850) $(1,187,055) $111,093 $4,606
Total
Assets 657,936 716,558 824,122 957,123 352,839
Total
Liabi-
lities 4,519,380 3,896,283 3,258,004 1,908,720 1,165,465
Long Term
Debt 2,207,823 1,368,357 1,473,437 1,223,129 1,007,379
Share-
holders'
Equity (3,861,444) (3,179,725) (2,433,882) (951,597) (812,626)
Revenues 32,242 1,561,099 827,038 902,974 458,127
Net Income
(Loss) (1,847,440) (1,281,345) (1,872,285) (888,971) (653,516)
Net Income
(Loss) Per
Share (.89) (.65) (.99) (.60) (.60)
</TABLE>
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
------------------------------------
Results of Operations
- ---------------------
1996 Compared to 1995
---------------------
Revenues were down $1,181,428 from 1995 during which the Company had
licensing income of $1,200,000 from one source, Burroughs-Wellcome for
clinical trials on AZTEC®. See page 4 above. Without this source of
funds to pay for research and clinical trials the Company relied on capital
infusions from the sale of its common stock to cover those and other operating
expenses of the Company. For those reasons the Company's net loss for the
year was 44% higher than the net loss for 1995. Included in the loss is a
$42,394 loss from the Company's snack food subsidiary which was slightly lower
than its loss for fiscal 1995.
Costs and expenses for fiscal 1996 were 25% lower than last years
primarily due to a $603,810 reduction in research and development costs. This
is largely as a result of the ATZ clinical trials expenses being higher in
fiscal 1995 than in fiscal 1996 when the trials were completed. Marketing
expenses were up $25,146 or 161% as the Company was more involved in marketing
efforts, including licensing arrangements, for its drug formulations.
1995 Compared to 1994
---------------------
Revenues were up 89% from fiscal 1994 primarily due to the revenues
generated from the Wellcome Agreement on AZTEC®. Sales at the Company's
snack food subsidiary were down 56%.
Costs and expenses increased for fiscal 1995 $146,121 due primarily to
the costs experienced relating to the clinical trials on the Company's
AZTEC® formulation. See "BUSINESS - AZT Formulation." These costs are
included in research and development which expense is approximately $178,000
higher for 1995. This item contributes the most to the Company's operating
loss for 1995. AZTEC® generates no revenues for the Company since it is
still in the clinical trial stage. There is no assurance this formulation
will become a revenue generating product.
The Company's pharmaceutical segment accounts for 96% of the Company's
$1,281,345 loss for 1995. This percentage is comparative to the 1994 loss
percentage for this segment on $1,872,285 in total losses. Because of the
relatively high costs of clinical trials and related activities for new
prescription drug formulations such as for AZT and the lack of corresponding
revenues pending action on regulatory application, it can be expected that
significant losses for this segment will continue until there is corresponding
revenue from these new potential products, of which there is no assurance.
11
<PAGE>
1994 as Compared to 1993
------------------------
Revenues were down 8% from fiscal 1993 primarily due to lower sales at
the Company's snack food subsidiary. During the year this subsidiary moved
its packaging and sales facility from Wheat Ridge to Denver, which in part may
have affected sales. The Company's contract and other income of $211,192
increased substantially compared to 1993 when the Company only had $921 from
these sources.
Costs and expenses increased for fiscal 1994 $907,400 due primarily to
the costs experienced relating to the clinical trials on the Company's
AZTEC® formulation. See "BUSINESS - AZT Formulation." These costs are
included in research and development which expense is nearly $1,000,000 higher
for 1994. This item contributes the most to the Company's operating loss for
1994. AZTEC® generates no revenues for the Company since it is still in
the clinical trial stage. There is no assurance this formulation will become a
revenue generating product.
The Company's pharmaceutical segment accounts for 96% of the Company's
$1,872,285 loss for 1994. This percentage is comparative to the 1993 loss
percentage for this segment on $888,971 in total losses. Because of the
relatively high costs of clinical trials and related activities for new
prescription drug formulations such as for AZT and the lack of corresponding
revenues pending regulatory application and action if the clinical trials are
positive, it can be expected that significant losses for this segment will
continue until there is corresponding revenue from these new potential
products, of which there is no assurance.
Liquidity and Capital Resources
- -------------------------------
At August 13, 1996 the Company's auditors express concern as to the
ability of the Company to continue in light of losses and net capital
deficiency. See Financial Statements.
At June 30, 1996 the Company had a working capital deficiency of
$1,881,892 compared to negative working capital of $2,037,850 at
June 30, 1995. The principal items contributing to the deficiency is the loss
of $1,847,440 for fiscal 1996 and in excess of $1,600,00 in note payable and
accrued interest to the Company's principal shareholder.
The Company has no capital commitments other than salaries of the
president and two other employees and the payment of rent on its facilities
lease. Such commitments are not satisfiable from current revenues. Further,
the Company has very limited cash resources to operate the Company at its
current level of expense through December 31, 1996 without liquidity
problems. In the past the Company has been dependent for funding on Birklea,
Ltd. which holds options to purchase common stock through January 3, 1997.
During fiscal 1996 the Company it has been able to fund its
12
<PAGE>
research, clinical trials and administrative costs from funds obtained from
Burroughs-Wellcome (now Glaxo-Wellcome) and the sale of newly issued common
stock to several private foreign purchasers. There is no assurance that
additional funding will be forthcoming.
During the year ended June 30, 1996 the Company made sales of 175,639
shares of common stock to foreign purchasers pursuant to Regulation S under
the Securities Act of 1933 raising approximately $840,721 in total.
Subsequent to fiscal year-end and additional 26,000 shares of common stock
were sold for $65,000. The Company may continue to raise capital to fund
operations through this means in fiscal 1997.
Industry Trends
- ---------------
There is substantial competition with respect to delayed release drug
delivery products from major, highly recognized, manufacturers with large
advertising budgets. In addition, major drug manufacturers currently market
recognized prescription formulations for verapamil, naproxen, indomethacin and
AZT.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Attached hereto are financial statements responsive to this Item.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
None.
13
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------
The By-laws of the Company provide that the affairs of the Company shall
be managed by its Board of Directors consisting of at least three persons.
There is a family relationship between the directors. The following table
sets forth information about each director of the Company.
<TABLE>
<CAPTION>
Name Age Occupation
<S> <C>
James M. Dunn, M.D. (1) 59 President and a Director of the Company
(1980-Present); Treasurer of the Company
(1981-Present); Chairman of the Board
of Directors and Chief Executive Officer
of the Company (1982-Present); Assistant
Professor, School of Medicine, Louisiana
State University (1979-1981); Vice-
President-Medical Affairs, Boots
Pharmaceutical, Inc. (1979-1980);
Director of Clinical Pharmacology and
Research, Wallace Laboratories (1976-
1979).
Jerry R. Dunn (1) 60 Director of the Company (1980-Present);
Vice President of the Company (5/89-
Present); Vice President of Business
Operations (1992-Present); Secretary of
the Company (1981-5/89); Self-employed
Attorney (1965-Present); officer and
director of several closely-held
corporations and partner in various
partnerships involved in real estate and
real estate related enterprises (1971-
Present).
James B. Petre 43 Director of the Company January, 1993-
Present). Owner of Foremost Properties,
Englewood, Colorado a real estate
development and brokerage firm (1989-
present). Vice President and a director
of Previews, Inc., Denver, Colorado, a
real estate brokerage firm (1984-1989).
Mr. Petre is licensed as a real estate
broker with the Colorado Real Estate
Commission.
Mark Banister 33 Private Investor (1991-Present).
United States Equities Trader with
Morgan Stanley International, London,
England (1987-1991). Senior Dealer,
United States Equities for County
Securities Ltd., London, England (1982-
1986).
</TABLE>
- ------------------------------
(1) Dr. James M. Dunn and Mr. Jerry R. Dunn are brothers and comprise all
of the executive officers of the Company.
The Board of Directors does not have Audit, Compensation or Nominating
Committees. During the period from July 1, 1995 to June 30, 1996, the Board
of Directors met 13 times, and all directors attended the meetings, either in
person or by telephone.
14
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The following tabular information includes all plan and non-plan
compensation paid to the Company's President and to all other executive
officers whose total annual salary and bonus is $100,000 or more.
Summary Compensation
- --------------------
Annual Compensation Long-Term Compensation
--------------------- ------------------------
<TABLE>
<CAPTION>
Awards Payouts
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------- ---- -------- -------- ------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James M. 1996 456,8901 -0- 54,6542 -0- -0- -0- -0-
Dunn,
M.D. 1995 403,9701 -0- 45,5302 -0- -0- -0- -0-
(Pres-
ident 1994 360,0451 -0- 39,2682 -0- -0- -0- -0-
and
Chair-
man
of the
Board
</TABLE>
_________________________
1 Dr. Dunn was actually paid $125,000, $125,000 and $125,000 as salary for
the years ended June 30, 1996, 1995, and 1994, respectively. The annual
salaries set forth above are pursuant to Dr. Dunn's employment contract
discussed below. Certain amounts due to Dr. Dunn in excess of the amount paid
in the respective periods have been deferred through January 1, 1997 pursuant
to an agreement with Dr. Dunn. At June 30, 1996, the total deferred salary and
benefits payable was $2,207,823.
2 Dr. Dunn actually received $34,902 in fiscal 1996, $27,957 in fiscal 1995,
and $25,774 in fiscal 1994 in other forms of compensation comprised of
premiums paid on life insurance and automobile lease and maintenance expense.
He earned $19,752, $17,573, and $13,494 in vacation allowance for fiscal 1996,
1995 and 1994, respectively and $3,000, $3,000 and $14,000, respectively in
product minimum royalties for fiscal 1996, 1995 and 1994, all of which he has
agreed to defer along with accumulated amounts through January 1, 1998.
Deferred accumulated royalty payments were $200,250 and $197,000, at June 30,
1996 and 1995, respectively. Accumulated vacation allowance is included in
the deferred accumulated salary amount set forth in Note (1) above.
15
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Average
Options/SARs Options/SARs
at FY-End at FY-End
----------- -------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ------ --------------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
James M. 0 0 (1) (3)
Dunn, M.D.
Jerry R.
Dunn 0 0 (2) (3)
</TABLE>
- -------------------
(1) For such number of shares, to be determined, at $.80 per share, as
will permit holder to acquire up to 25% of the outstanding common stock of the
Company.
(2) For such number of shares, to be determined, at $.80 per share, as
will permit holder to acquire up to 3% of the outstanding common stock of the
Company.
(3) At fiscal year end, the average closing bid price of the Company's
common stock was $2.50 per share as reported by the Electronic Bulletin
Board. Thus, the value of such options are $1.70 per share which is the
difference between exercise price and market price and which assumes that such
shares could be sold on exercise which is not possible.
Employment Contract - James M. Dunn, M.D.
- -----------------------------------------
On November 30, 1993, the Company entered into a new employment agreement
with its President, James M. Dunn, M.D. whereby Dr. Dunn agreed to serve as
President of the Company until he reaches the age of 65 (2003) and agreed to
assign to the Company all his right, title and interest in his inventions,
discoveries, innovations, concepts and know-how during the period of the
Agreement. Dr. Dunn is entitled to receive an annual salary of $338,000,
subject to annual adjustments, a $3,000,000 life insurance policy, disability
insurance equal to 80% of his gross income, and health insurance. In
addition, he is entitled to a 2% royalty on the first $5,000,000 in net sale
price of any Verex patented product, a 1% royalty on net sales in excess of
$5,000,000 and a 2% royalty on Verex licensed technology.
16
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ----------------------------------------------------------
AND MANAGEMENT
--------------
Based on certain reports filed with the Securities and Exchange
Commission, the table on the following page reflects certain information as of
September 20, 1996 as to beneficial holders of more than 5% of the outstanding
shares of Common Stock of the Company and as to Common Stock beneficially
owned by all executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature Percent of Shares
Name of of Beneficial of Common Stock
Beneficial Owner Ownership (1) Outstanding
<S> <C> <C>
James M. Dunn, M.D. 360,560 16.5%
Jerry R. Dunn 50,650 2.3%
Birklea Ltd.(2)(3) 745,106 34.1%
James Petre -0- 0%
Mark Banister(3) -0- 0%
Officers and
Directors
as a Group
(4 persons) 1,156,316(4) 53.0%
</TABLE>
____________________
(1)This table is based on 2,183,177 shares outstanding and does not include
presently exercisable options to purchase shares of the Company's Common Stock
held by each of the foregoing. See "Certain Relationships and Related
Transactions" below for details. Beneficial ownership by any person includes
direct or indirect voting power and investment power with respect to such
shares of common stock of the Company.
(2)The Company is informed that the owner of all the voting and investment
power of Birklea, Ltd. is Peter Josse, c/o Birklea, Ltd., P.O. Box 303, St.
Helier, Jersey, Channel Islands, U.K..
(3)Mr. Banister holds a power of authority to vote the shares held by Birklea,
Ltd.
(4)Includes shares held by Birklea, Ltd.
17
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company leases facilities at a monthly rate of $6,213 plus a pro rata
share of maintenance costs. A portion of the space is subleased to Jerry R.
Dunn, an officer of the Company at $4,100 per month. Management believes the
terms of the foregoing facilities sharing are as fair to the Company as could
be arranged with an independent party.
Jerry R. Dunn, a non-salaried officer and director of the Company, from
time to time provides legal services to the Company. For the year ended June
30, 1996 the Company paid a total of $22,780 in fees for legal services to
Jerry R. Dunn. Management believes the terms on which these services are
performed and charged are as fair to the Company as could be obtained from an
independent lawyer.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ----------------------------------------------------------------------------
(a) (1) The following consolidated financial statements are included in
Part II, Item 8 of this Report:
Report of Independent Certified Public Accountants
Balance Sheets at June 30, 1996 and 1995
For the years ended June 30, 1996, 1995 and 1994
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) All schedules are omitted because they are not required, are
inapplicable, or the information is otherwise shown in the financial
statements or notes thereto.
(3) The following Exhibits were included as Exhibits to the Form S-18, SEC
File No. 2-82403-D filed March 11, 1983 and are incorporated herein by
reference:
3.1 - Restated Articles of Incorporation
3.2 - Restated By-laws
The following Exhibits were included as Exhibits to the Form 10-K, SEC
File No. 0-011232 filed September 30, 1988:
10.13 - Licensing Agreement with Galen Pharma, Inc.
(Trimel)
10.14 - Licensing Agreement #2 with Galen Pharma, Inc.
(Trimel)
The following Exhibits were included as Exhibits to the Form 8-K, SEC
File No. o-11232, filed January 14, 1993:
10.26 - Stock Purchase Agreement - Birklea, Ltd.
10.27 - Stock Option - James M. Dunn, M.D.
10.28 - Stock Option - Jerry R. Dunn
19
<PAGE>
The following Exhibits were included as Exhibits to the Form 10-K, SEC
File No. 0-11232, filed October 13, 1994.
10.29 - Credit Agreement - Birklea, Ltd.
10.30 - Convertible Promissory Note - Birklea, Ltd.
10.31 - Security Agreement - Birklea, Ltd.
10.32 - Employment Agreement - James M. Dunn, M.D.
The following Exhibit was included as an Exhibit to the Form 8-K, SEC File No.
0-11232, filed December 13, 1994.
10.33 - Option Agreement - Burroughs Wellcome Co.
The following Exhibit is attached hereto:
10.21 - Letter of James M. Dunn, M.D. re deferral of
certain compensation.
(b)No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1996.
20
<PAGE>
VEREX LABORATORIES,INC. AND SUBSIDIARIES
Table of Contents
-----------------
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . .F - 2
Financial Statements
Consolidated Balance Sheets - June 30, 1996 and 1995. . . . . . . .F - 3
Consolidated Statements of Operations -
For the Years Ended June 30, 1996, 1995 and 1994
and Cumulative from September 29, 1980 (inception)
to June 30, 1996 . . . . . . . . . . . . . . . . . . F - 4
Consolidated Statements of Stockholders' Deficit -
For the Years Ended June 30, 1996, 1995 and 1994
and Cumulative from September 29, 1980 (inception) to
June 30, 1996 . . . . . . . . . . . . . . . . . . . F - 5
Consolidated Statements of Cash Flows -
For the Years Ended June 30, 1996, 1995 and 1994
and Cumulative from September 29, 1980 (inception)
to June 30, 1996 . . . . . . . . . . . . . . . . . . F - 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .F - 7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Verex Laboratories, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Verex
Laboratories, Inc. (a development stage enterprise) and Subsidiaries as of
June 30, 1996 and 1995 and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended June 30, 1996 and the amounts for the years ended June 30, 1996, 1995
and 1994 included in the cumulative period from inception (September 29, 1980)
to June 30,1996. 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Verex
Laboratories, Inc. and Subsidiaries at June 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996, and the amounts for the years ended June 30, 1996,
1995 and 1994 included in the cumulative period from inception (September 29,
1980) to June 30, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that Verex Laboratories and Subsidiary (the Company) will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has a net capital
deficiency that raise substantial doubt about the entity's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from this uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
August 13, 1996
Denver, Colorado
F-2
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
June 30,
----------------------------------
1996 1995
------- ------
Assets
<TABLE>
<CAPTION>
Current assets
<S> <C> <C>
Cash and cash equivalents $155,229 $140,766
Receivables
Trade - (net of allowance for
doubtful accounts of $2,000
(1995)) 10,146 17,465
Note receivable - current (Note 2) 18,877 -
Inventory - 19,337
Prepaid expenses 16,376 15,959
Patented drug products 229,037 296,549
--------- ---------
429,665 490,076
--------- ---------
Property and equipment, at cost
Furniture and equipment 489,900 470,285
Leasehold improvements 1,317 11,358
Automobiles - 2,932
-------- ---------
491,217 484,575
Less accumulated depreciation and
amortization (440,242) (430,066)
--------- ---------
Property and equipment - net 50,975 54,509
--------- ---------
Other assets
Notes receivable - long-term (Note 2) 16,123 -
Goodwill - net of accumulated
amortization $26,188 (1995) - 48,668
Patents and trademarks, net of
accumulated amortization of
$232,581 (1996) and $211,155
(1995) (Note 3) 161,173 123,305
--------- ---------
177,296 171,973
--------- ---------
Total $657,936 $716,558
======== ========
Liabilities and Stockholders' Deficit
Current liabilities
Checks written in excess of
bank balance $59,543 $ -
Accounts payable and other accruals 225,744 157,876
Accrued interest 359,270 215,765
Notes payable - stockholder (Note 3) 1,667,000 1,667,000
Current portion of long-term debt
(Note 3) - 40,998
Accrued salary and benefits payable -
current portion (Note 7) - 446,287
----------- ----------
2,311,557 2,527,926
----------- ----------
Long-term liabilities
Accrued salary and benefits payable,
net of current portion (Note 7) 2,207,823 1,367,296
Long-term debt, net of current
portion (Note 3) - 1,061
----------- ----------
2,207,823 1,368,357
----------- ----------
Commitments and contingencies
(Notes 7 and 8)
Stockholders' deficit
Common stock, no par value,
100,000,000 shares authorized,
2,301,359 (1996) and 2,007,538
(1995) shares issued and
outstanding 2,285,331 1,942,923
Additional paid-in capital 5,495,017 4,671,704
Deficit accumulated during the
development stage (11,641,792) (9,794,352)
------------ -----------
(3,861,444) (3,179,725)
------------ -----------
Total $657,936 $716,558
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Cumulative
from
September 29,
1980
(inception) to
For the Years Ended June 30, June 30,
------------------------------------------------- ---------------
1996 1995 1994 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues
Net sales $ - $ - $ - $ 233,523
Licensing
income - 1,200,000 - 1,606,686
Contract
income 27,658 - 150,000 1,527,668
Interest
income 3,933 13,264 - 918,199
Gain on
sale of
investment - - - 334,881
Other 651 406 58,006 122,623
----------- ------------- ------------- -----------
32,242 1,213,670 208,006 4,743,580
----------- ------------- ------------- ----------
Costs and
expenses
Cost of
sales - 3,211 2,781 144,919
Write down
of inventory - - - 306,250
General and
administr-
ative 888,402 918,625 711,518 8,703,807
Research and
development 749,740 1,353,550 1,175,875 5,730,440
Operating 5,048 5,245 5,317 20,880
Marketing 40,762 15,616 39,735 759,565
Interest 144,383 143,123 65,350 374,293
Loss on
disposal
of assets - - - 33,425
----------- ------------ ------------ ------------
1,828,335 2,439,370 2,000,576 16,073,579
------------ ------------ ------------ ------------
Net loss
from
continuing
operations (1,796,093) (1,225,700) (1,792,570) (11,329,999)
Discontinued
operations
(Note 6)
Loss from
operations
of discon-
tinued
subsidiary (42,394) (55,645) (79,715) (302,840)
Loss on
disposal of
subsidiary (8,953) - - (8,953)
------------- ------------- ------------ -------------
Net loss $(1,847,440) $(1,281,345) $(1,872,285) $(11,641,792)
============= ============= ============ =============
Net loss
per common
share from
continuing
operations
(Note 4) $ (.87) $ (.63) $ (.94) $ (5.44)
============ ============= ============= =============
Net loss
per common
share from
discontinued
operations
(Note 4) $ (.02) $ (.02) $ (.05) $ (.15)
============ ============ ============ =============
Net loss
per common
share
(Note 4) $ (.89) $ (.65) $ (.99) $ (5.59)
============ ============ ============ =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Stockholders' Deficit
For the Period September 29, 1980 (inception) to June 30, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage
----------- ----------- ------------ ---------------
(Note 2)
<S> <C> <C> <C> <C>
Shares issued
to officers
and directors
in exchange for
cash on July 10,
1981 4,650,000 $ 100 $ - $ -
Sales of general
and limited
partnership
units in Novarex
Systems, Ltd.,
including
accrued interest
on notes 1,499,900 612,683 - -
Shares issued
to an officer
in exchange for
cash on
February 8, 1983 25,100 251 - -
Shares issued
($.83, $1.00 and
$2.35 per share),
net of offering
costs of $690,952
(Note 2) 5,745,121 1,038,534 4,018,057 -
Shares issued
in exchange
for services 30,000 19,500 - -
Reverse stock
split 1:10 (10,084,500) - - -
Net loss for
the period
September 29,
1980 (inception)
to June 30, 1993 - - - (6,640,722)
------------ ------------- ------------- --------------
Balances -
June 30, 1993 1,865,621 1,671,068 4,018,057 (6,640,722)
Stock issuance
($2.35 per share) 48,750 114,563 275,437 -
Net loss for the
year ended June
30, 1994 - - - (1,872,285)
------------ -------------- ------------- --------------
Balances -
June 30, 1994 1,914,371 1,785,631 4,293,494 (8,513,007)
Stock issuance
($4.00 per share) 11,750 13,805 33,195 -
Stock issuance
($6.00 per share) 81,417 143,487 345,015 -
Net loss for the
year ended June
30, 1995 - - - (1,281,345)
------------ -------------- -------------- -------------
Balances -
June 30, 1995 2,007,538 1,942,923 4,671,704 (9,794,352)
Stock issuance
($2.75 per
share) 81,819 66,089 158,912 -
Stock issuance
($6.00 per
share) 34,000 59,921 144,079 -
Stock issuance
($7.00 per
share) 52,800 108,563 261,037 -
Stock issued
for services
($6.00
per share) 7,020 12,372 29,748 -
Stock issuance
($2.75 per
share) 118,182 95,463 229,537 -
Net loss for
the year
ended June
30, 1996 - - - (1,847,440)
------------- ------------ ------------- ---------------
Balances -
June 30, 1996 2,301,359 $2,285,331 $5,495,017 $(11,641,792)
============ ============= ============= ===============
</TABLE>
See notes to consolideted financial statements
F-5
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative
from
September 29,
For the Years Ended June 30, 1980 (inception
---------------------------- to June 30,
1996 1995 1994 1996
------ ------ ------ ------------------
Cash flows
from operating
activities
<S> <C> <C> <C> <C>
Net loss $(1,847,440) $(1,281,345) $(1,872,285) $(11,641,792)
Adjustments
to reconcile
net loss to
net cash
used by
operating
activities
Amortization 28,913 26,699 25,235 315,484
Depreciation 33,916 29,891 30,302 710,564
Gain (loss)
on sale of
assets 8,953 - (140) 37,571
Non-cash loss
on sale of
investments (35,000) - - (369,881)
Other - - - 38,932
Common stock
issued for
services 42,120 - - 61,620
Change in
certain assets
and liabilities
Research and
development - - - (490,000)
Patented drug
products 67,512 150,828 42,623 260,963
Receivables 7,319 38,695 19,285 10,464
Inventory 19,337 11,263 12,135 8,448
Prepaid
expenses (417) (9,071) 10,328 840
Other assets - - 498 (16,321)
Accounts
payable
and other
accruals 127,411 62,666 (5,523) 259,639
Accrued interest 143,505 143,687 72,078 359,270
Accrued salary
and benefits
payable 394,240 350,356 240,098 2,207,823
----------- ----------- ------------ -------------
837,809 805,014 446,919 3,395,416
----------- ----------- ------------ -------------
Net cash used
by operating
activities (1,009,631) (476,331) (1,425,366) (8,246,376)
----------- ---------- ------------ ------------
Cash flows
from investing
activities
Proceeds from
sale of common
stock 1,123,601 535,502 390,000 2,799,103
Proceeds from
sale of
securities - - - 404,588
Acquisition
of subsidiary - - - (21,898)
Proceeds from
sale of
equipment - - - 40,200
Additions to
property and
equipment (30,382) (14,360) (37,014) (838,359)
Additions to
goodwill,
patents and
trademarks (27,066) (42,102) (62,098) (425,833)
----------- ---------- ----------- ------------
Investment in
securities - - - (69,707)
Net cash
provided by
investing
activities 1,066,153 479,040 290,888 1,888,094
----------- --------- ---------- ------------
Cash flows
from financing
activities
Sale of
general
and limited
partnership
units - - - 326,000
Proceeds from
note payable - 123,000 1,098,000 1,808,000
Payments on
note payable (42,059) (41,430) (55,369) (214,114)
Payment of
note
receivable - - - 286,663
Net proceeds
from insurance
of common
stock - - - 4,306,962
Long-term
borrowings - - - 49,470
Decrease in
long-term
borrowings - - - (49,470)
------------- ------------ -------------- --------------
Net cash
provided by
financing
activities (42,059) 81,570 1,042,631 6,513,511
------------- ----------- ------------- ---------------
Net increase
(decrease)
in cash
and cash
equivalents 14,463 84,279 (91,847) 155,229
Cash and cash
equivalents -
beginning of
year 140,766 56,487 148,334 -
------------ ----------- ----------- ----------------
Cash and cash
equivalents -
end of year $155,229 $140,766 $56,487 $155,229
=========== ========== ============ ================
</TABLE>
Supplemental
cash flow
information:
Cash paid for interest was $5,072 (1996), $5,438 (1995), and $5,850 (1994).
See notes to consolideted financial statements.
F-6
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Development Activities
- ----------------------
Verex Laboratories, Inc. (the "Company") was incorporated in Colorado on
September 29, 1980 and began developmental activities in July 1981. The
Company was primarily engaged in the business of developing and marketing
non-prescription and prescription drug products utilizing constant
release rate drug delivery systems. The Company had limited sales and
marketing operations until October 3, 1991, when it acquired 100% of the
outstanding stock of the Colorado Nut Company, Inc. The Colorado Nut
Company assembles and sells snack food items. The Colorado Nut Company was
sold in June 1996. Bear Laboratories, Inc., a wholly-owned subsidiary of the
Company, was incorporated and began operations in April 1991. Bear
Laboratories, Inc. was formed to market one of the Company's products through
a national advertising campaign.
Going Concern
- -------------
The Company and its subsidiaries incurred a loss of $1,847,440 for the year
ended June 30, 1996 and continues to experience a net capital deficiency.
The Company has entered into a credit agreement with a Stockholder where the
Stockholder will advance the Company up to $10,000,000 at the Stockholder's
discretion. There is no assurance these plans will be sufficient to sustain
operations.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of its wholly-owned
subsidiaries Bear Laboratories, Inc. and the Colorado Nut Company. All
intercompany accounts and transactions have been eliminated in consolidation.
Inventory
- ---------
Inventory consists of snack food products and are recorded at the lower of
cost or market on a first-in, first-out basis (FIFO) basis.
Patented Drug Products
- ----------------------
Patented drug products include costs incurred to produce products to be used
in clinical tests and are carried at the lower of cost or market on a specific
identification basis.
Property and Equipment
- ----------------------
Property and equipment is depreciated over the estimated useful lives (three
to seven years) of the asset using various methods. Leasehold improvements
are amortized on a straight-line basis over the remaining term of the office
lease.
F-7
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial Statements
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Goodwill, Patents and Trademarks
- --------------------------------
Goodwill, patents and trademarks are stated at cost and are amortized on a
straight-line basis over a period of ten years.
License Income
- --------------
The Company has entered into licensing agreements with several pharmaceutical
companies to manufacture and exclusively market two of the Company's patented
drug products, a constant-release rate formulation of Verapamil and Aztec
products in an established geographic area.. The agreements generally
require an initial non-refundable licensing fee to be paid to the Company and
future royalty payments based on subsequent product sales. Licensing income
is recognized when earned.
Research and Development Costs
- ------------------------------
The Company expenses all research and product development costs as incurred.
Cash Equivalents
- ----------------
The Company considers investments that are purchased within three months of
their date of maturity to be cash equivalents. Cash equivalents consist of
certificates of deposit. At June 30, 1996, the Company had approximately
$55,000 in excess of federally insured amounts.
Income Taxes
- ------------
Deferred tax liabilities and assets are determined based on the difference
between the financial statements and tax basis of assets and liabilities
using the enacted tax rates in effect for the year in which the differences
are expected to occur. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Reclassification
- ----------------
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities 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.
F-8
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 2 - Notes Receivables
- --------------------------
<TABLE>
<CAPTION>
June 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Note receivable - non interest bearing
due July 28, 1996 secured by common stock
in Colorado Nut Company, Inc. $ 12,500 $ -
Note receivable - 8% interest due December
30, 1997 payable in monthly principal and
interest payments of $2,000. Secured by
common stock in Colorado Nut Company, Inc. 22,500 -
--------- ---------
35,000 -
Less current portion (18,877) -
--------- ---------
$ 16,123 $ -
========= =========
</TABLE>
Note 3 - Notes Payable and Long-Term Debt
- -----------------------------------------
June 30,
-----------------------------
<TABLE>
<CAPTION>
Note Payable Stockholder
- ------------------------ 1996 1995
-------- --------
<S> <C> <C>
$10,000,000 credit agreement with a
stockholder; interest accrues at bank
prime, 8.25% at June 30, 1996; principal
and interest are due upon 120 day written
notice or July 15,1997. Convertible into
common stock under the same terms as the
Stockholder (Birklea, Ltd.) may purchase
common stock as described in Note 2.
Collateralized by patents, tradenames,
know-how and trade secrets relating to
certain drug formulations. $1,667,000 $1,667,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30,
-----------------------------
Long-Term Debt 1996 1995
-------- --------
<S> <C> <C>
Note payable to bank, paid in full. $ - $ 10,059
Note payable to a bank, paid in full. - 32,000
-------- --------
- 42,059
Less current maturities - (40,998)
-------- --------
$ - $ 1,061
======== ========
</TABLE>
F-9
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 4 - Common Stock
- ---------------------
Stock Purchase Agreement
- ------------------------
On January 6, 1993, the Company entered into a Stock Purchase Agreement
("Agreement") with Birklea, Ltd., whereby the Company sold 660,000 shares of
its restricted common stock to Birklea, Ltd. for $550,000. The newly issued
shares represented 37% of the Company's outstanding common stock after
issuance thereof. Subsequent purchases of common stock have increased
Birklea, Ltd.'s holdings to 745,106 shares which represents approximately 40%
of the outstanding shares of Common Stock of the Company.
The Agreement also provided that Birklea, Ltd. has an option through January
3, 1997 to acquire for $2,400,000 such additional shares of restricted common
stock of the Company at a price per share to be determined as will permit
Birklea, Ltd. to hold 60% of the issued and outstanding common stock of the
Company. Birklea, Ltd. had an additional option through September 1, 1995 to
purchase common stock of the Company at $30 per share in such quantity as will
permit in Birklea, Ltd. to acquire an additional 5% of the issued and
outstanding common stock of the Company. This option has expired.
Stock Options
- -------------
The President of the Company has the right through October 1, 1996 to acquire
such number of shares of common stock of the Company at $.80 per share to
permit him to hold 25% of the outstanding common stock of the Company.
Net Loss Per Common Share
- -------------------------
Net loss per common share for the years ended June 30, 1996, 1995, and 1994
has been computed on the basis of the weighted average number of common shares
outstanding of 2,082,825, 1,949,122, and 1,890,847.
Note 5 - Income Taxes
- ---------------------
The Company has long-term deferred tax assets as a result of its net operating
losses and deferred salary (assumed a tax rate of 38%) that is fully impaired
due to uncertainty as to their utilization. Accordingly, there is no net
deferred tax asset reflected in the accompanying financial statements.
F-10
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 5 - Income Taxes (continued)
- ---------------------------------
<TABLE>
<CAPTION>
June 30,
------------------------------
1996 1995
--------- ---------
<S> <C> <C>
Long-term deferred tax assets:
Operating losses $(2,441,937) $(2,274,622)
Deferred salary (837,833) (189,449)
Other (138,276) -
------------ ------------
Total long-term deferred assets (3,418,046) (2,464,071)
Valuation allowance 3,418,046 2,464,071
----------- ------------
Net deferred tax $ - $ -
=========== ============
</TABLE>
At June 30, 1996, the Company has approximately $6,500,000 of net operating
loss carryforwards for income tax purposes that expire between June 30, 1999
and June 30, 2009 and approximately $24,000 of investment tax credit
carryforwards that expire between June 30, 1997 and June 30, 2001.
Note 6 - Discontinued Operations
- --------------------------------
On June 28, 1996, the Company sold its investment in its wholly owned
subsidiary Colorado Nut Company, Inc. for $45,000. The Company retained the
accounts receivable, accounts payable and accrued expenses. Included in the
sale was inventory and net property and equipment. Operating results of the
Colorado Nut Company are recorded at discontinued operations for the year
ended June 30, 1996. Operating results for June 30, 1995 and 1994 have been
reclassified as discontinued operations.
Sales from the Colorado Nut Company were $241,346, $347,429, and $615,846 for
the years ended June 30, 1996, and 1995, and 1994, respectively. All expenses
related to the Colorado Nut Company have been allocated to discontinued
operations including interest of $5,072, $5,438 and $5,850 for the years ended
June 30, 1996, 1995 and 1994, respectively.
The sale of Colorado Nut Company, Inc. resulted of a loss of approximately
$9,000. Any tax benefit or expense resulting from the sale has been fully
allowed for due to the continued net operating losses of the Company.
F-11
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 7 - Related Party Transactions
- -----------------------------------
Employment and Royalty Agreements
- ---------------------------------
On November 30, 1993, the Company entered into a new 8-year employment
contract with its President. The contract may be extended by the President.
Under the terms of the contract, the President receives an annual base salary
of $338,000 and an annual cost of living adjustment plus 8%.
The contract also provides for certain insurance and employee benefits and
entitles the President to participate in retirement and management incentive
plans that the Company is required to establish. Such plans have not yet been
established. As of June 30, 1996 and 1995, the Company owes approximately
$2,008,000 and $1,616,000, respectively, of vacation pay and salary increases
to its President under terms of the employment contract.
In addition, the President receives certain royalties on the net sales from
the Company's products, and minimum annual royalties of $10,000 per product
through November 30, 1993 and $1,000 thereafter. Such royalties amounted to
$3,000, $3,000, and $14,000 for the years ended June 30, 1996, 1995 and
1994. The amount owed to the President for such royalties was approximately
$200,000 and $197,000, at June 30, 1996 and 1995, respectively. In return
for this compensation, the President is obligated to assign all title and
ownership of his inventions, formulations and products to the Company.
In the event that the Company terminates the President's employment prior to
expiration of the contract, the Company is obligated to provide the President
the specified annual salary for the remaining term of the agreement, and pay
certain insurance benefits for a period of three years. The President would
continue to be entitled to royalties on net sales of the Company's products.
The Company entered into an agreement with its President deferring payment of
vacation pay, salary increases and royalties accrued as of June 30, 1996 until
January 1, 1997. As of June 30, 1996 and 1995, approximately $2,208,000 and
$1,367,000, respectively, were accrued as a long-term liability.
Legal Fees
- ----------
Legal fees were incurred by the Company for legal services provided by an
officer of the Company. Such fees were $22,780, $53,251, and $19,028, for
1996, 1995 and 1994, respectively.
See Notes 3, 4 and 8 for additional discussion of related party transactions.
F-12
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 8 - Leases and Commitments
- -------------------------------
Office
- ------
Currently, the Company occupies space under various lease agreements requiring
monthly payments of $4,610. The lease commitment expired July 31, 1998, with
options to renew. The Company sub-lets a portion of its office space to the
officer described in Note 7 (under legal fees) for $2,500 per month. The
Company sub-lets to an unrelated third party for $1,000 per month.
Rent expense, net of sublease income was $53,677, $45,333, and $45,930, for
the years ended June 30, 1996, 1995 and 1994, respectively.
Vehicle
- -------
The Company has two operating leases for Company vehicles. The two and three
year leases require monthly lease payments of $500 and $474, respectively.
Lease expense is $11,688 and $3,896 for the years ended June 30, 1996 and
1995, respectively.
The minimum annual lease payments through expiration of office and vehicle
leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 65,106
1998 3,318
1999 -
---------
$ 68,424
=========
</TABLE>
The Company has contracted with the University of Colorado Health Sciences
Center for various studies relating to drug products. The commitment by the
Company for future periods approximates $233,000.
Note 9 - Fair Value of Financial Instruments
- --------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value. Fair value estimates are made at a specific point in time for
the Chapter's financial instruments; they are subjective in nature and
involve uncertainties, matters of significant judgment and, therefor, cannot
be determined with precision. Fair value estimates do not reflect the total
value of the Chapter as a going concern.
Cash, Receivables, Patented Drug Products and Accounts Payable
- --------------------------------------------------------------
The carrying value approximates fair value to its liquid or short-term nature.
F-13
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Note 9 - Fair Value of Financial Instruments (continued)
- -------------------------------------------------------
Note Receivable and Notes Payables - Stockholders
- -------------------------------------------------
Rates currently available to the Company for debt and capital lease
obligations with similar terms and remaining maturities are used to estimate
the fair value of existing debt.
The estimated fair values of the Company's financial instruments at June 30,
1996 were as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
Assets --------- ---------
<S> <C> <C>
Cash $155,229 $155,229
Accounts receivable 10,146 10,146
Notes receivable 35,000 35,000
-------- --------
$200,375 $200,375
========= =========
</TABLE>
F-14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
VEREX LABORATORIES, INC.
Registrant
Date: September 27, 1996 By: /s/ James M. Dunn
-------------------------
James M. Dunn, M.D.,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 27, 1996 By: /s/ James M. Dunn
----------------------------
James M. Dunn, M.D., Chief
Executive Officer, Chief
Financial Officer and
Director
Date: September 27, 1996 By: /s/ Jerry R. Dunn
-------------------------
Jerry R. Dunn, Director
Date: September 27, 1996 By: /s/ James Petre
-----------------------
James Petre, Director
Date: By:_____________________________
Mark Banister, Director
21
<PAGE>
VEREX LABORATORIES, INC.
14 Inverness Drive East, D-100
P.O. Box 3817
Englewood, Colorado 80112
(303) 790-4499
(303) 799-1734 - Facsimile
August 28, 1996
Board of Directors
Verex Laboratories, Inc.
14 Inverness Drive East
Building D, Suite 100
Englewood, Colorado 80112
Re: Employment Agreement
Dear Members of the Board:
Whereas, I have entered in the above-captioned employment agreement
contract with Verex Laboratories, Inc. (the "Company"), and said contract
among other things, provides for an annual salary increase, vacation pay and
certain royalties, and since I have not received said items of compensation
from the company totaling approximately $2,208,050 at June 30, 1996, I hereby
agree to defer any obligation of the Company to pay me this amount through
January 1, 1998, in exchange for $10.00 and other good and valuable
consideration, receipt of which is acknowledged hereby.
Sincerely,
/s/ James M. Dunn, M.D.
3236 E. Hinsdale Place
Littleton, Colorado 80122
EXHIBIT 10.21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 155,229
<SECURITIES> 0
<RECEIVABLES> 12,146
<ALLOWANCES> 2,000
<INVENTORY> 0
<CURRENT-ASSETS> 429,665
<PP&E> 491,217
<DEPRECIATION> 440,242
<TOTAL-ASSETS> 657,936
<CURRENT-LIABILITIES> 2,311,557
<BONDS> 0
2,301,359
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 657,936
<SALES> 0
<TOTAL-REVENUES> 32,242
<CGS> 0
<TOTAL-COSTS> 1,828,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,383
<INCOME-PRETAX> (1,847,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,796,093)
<DISCONTINUED> (42,394)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,847,440)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> (.89)
</TABLE>
