<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, 1997 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
---------
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, 1997 was approximately $859,000.
The number of shares outstanding of the Registrant's no par value common
stock as of September 20, 1997, was 2,327,359 shares.
<PAGE>
INDEX
PAGE
PART I
ITEM 1. Bussiness 2
ITEM 2. Properties 6
ITEM 3. Legal Proceedings 6
ITEM 4. Submission of Matters to a Vote of Security
Holders 6
PART II
ITEM 5. Market for the Registrant's Common Stock
And Related Security Holder Matters 6
ITEM 6. Selected Financial Data 7
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
ITEM 8. Financial Statements and Supplementary Data 10
ITEM 9. Disagreements on Accounting and Financial
Disclosure 10
PART III
ITEM 10. Directors and Executive Officers 10
ITEM 11. Executive Compensation 11
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 12
ITEM 13. Certain Relationships and Related Transactions 13
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 14
Signatures 15
Financial Statements F1-F14
EX-27 Financial Data Schedule 30
<PAGE>
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
formulas and patents when available, selects trademarks, designs product
packages and promotes and markets, through licensing agreements,
pharmaceutical and health care products. During fiscal 1997 the Company had
one subsidiary, Bear Laboratories, Inc., incorporated in April 1991 for the
purpose of exploiting VERIN a drug formulation developed by the Company.
Going Concern Opinion
- ---------------------
The Company's auditors have issued a report on August 29, 1997 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. Subsequent purchases of common stock have
increased Birklea, Ltd.'s holdings to 771,106 which represents approximately
33% of the outstanding shares of Common Stock of the Company.
The Agreement also provided that Birklea, Ltd. had 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 since expired.
Debt Forgiveness - 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. The note was 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. In March 1997, the balance (principal and interest) on
this note was $2,185,984, when the Company and Birklea agreed that the debt
was forgiven in consideration for the assignment of 25% of all future sources
of revenue from the Company's AZTEC formulation, and 5% of all future
revenues from other specified Company drug formulations up to $2,185,984. In
addition, the agreed to assign to Birklea, Ltd. the AZTEC formulation in the
event it has not licensed it prior to December, 1998.
Debt Forgiveness - Dr. James M. Dunn
- ------------------------------------
In March, 1997 the Company's president forfeited his right to receive
$2,605,204 in accrued salary and other benefits in consideration for the
2
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Company's assignment to him of 25% of all future sources of revenue from its
AZTEC formulation and 5% of the income derived from other specified Company
drug formulations up to $2,605,204.
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.
The following table summarizes licensing agreements in existence at
June 30, 1997:
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.
3
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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 1997.
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.
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, 1996 and 1997 clinical trials of AZTEC were
conducted at 15 sites in the United States at a cost of approximately
$1,100,000. The Company has been dependent upon Birklea, Ltd., Burroughs-
Wellcome (now Glaxo-Wellcome) and sale of its common stock for funding for
such trials.
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.
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.
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 infection. Early testing has shown
it to be particularly beneficial in the treatment of decubitus ulcers. A
trademark has been received.
4
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Psorex
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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.
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.
5
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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.
Employees
- ---------
The Company has three full-time employees, one of whom is an officer and
director.
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.
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.
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.
6
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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.
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High Low
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Fourth Qtr. (Ended June 30, 1997) $ 1.25 $0.75
Third Qtr. (Ended March 31, 1997) $ 2.00 $0.87
Second Qtr. (Ended December 31, 1996) $ 2.37 $1.44
First Qtr. (Ended September 30, 1996) $ 2.50 $2.25
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
- -----------------------------------------------------------------------
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, 1997, the Company had approximately 1,400 holders of
record of its common stock and the closing bid price on its common stock was
$0.75.
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.
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>
6/30/97 6/30/96 6/30/95 6/30/94 6/30/93
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
6/30/97 6/30/96 6/30/95 6/30/94 6/30/93
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working
Capital
(Deficit) $(348,112) $(1,881,892) $(2,037,850) $(1,187,055) $ 111,093
Total Assets 206,464 657,936 716,558 824,122 957,123
Total
Liabilities 488,558 4,519,380 3,896,283 3,258,004 1,908,720
Long Term
Debt 117,406 2,207,823 1,368,357 1,473,437 1,223,129
Shareholders'
(Deficit) (282,034) (3,861,444) (3,179,725) (2,433,882) (951,597)
Revenues 14,710 32,242 1,213,670 827,038 902,974
Net (Loss) (1,276,778) (1,847,440) (1,281,345) (1,872,285) (888,971)
Net (Loss)
Per Share (.55) (.89) (.65) (.99) (.60)
</TABLE>
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Results of Operations
- ---------------------
1997 Compared to 1996
---------------------
Revenues for 1997 were $14,710 and expenses were $1,291,488 resulting in
a net loss of $1,276,778, however, $189,000 was a non-cash loss consisting of
a write down of patented drug products. Losses for fiscal 1997 were $519,315
less than fiscal 1996. The principal item of reduced expenditure was research
and development as the Company completed its clinical trials on AZTEC . In
addition, fiscal 1996 operations included $51,347 in losses from a business
which was sold in fiscal 1996. General and administrative expenses remained
relatively the same as fiscal 1996. Interest expense was slightly lower from
fiscal 1996 and should be nominal in fiscal 1998 as the Company should be
essentially debt fee. However, the Company needs to develop a source of
funding in order to continue.
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 $51,347 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 AZT 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.
Liquidity and Capital Resources
- -------------------------------
At August 29, 1997 the Company's auditors express concern as to the
ability of the Company to continue in light of recurring losses from
operations and net capital deficiency. See Financial Statements.
At June 30, 1997 the Company had a working capital deficiency of $348,112
compared to negative working capital of $1,881,892 at June 30, 1996. The
principal items contributing to the deficiency is the loss of $1,276,778 for
fiscal 1997.
The Company has no capital commitments other than salaries of the
president and two other employees, the payment of rent on its facilities lease
and a contract for approximately $233,000 for studies at the University of
Colorado Health Sciences Center. 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, 1997
without liquidity problems. In the past the Company has been dependent for
funding on Birklea, Ltd. and Glaxo Wellcome and the sale of newly issued
8
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common stock to private foreign purchasers. There is little expectation that
additional funding will be forthcoming from those sources in the future.
Subsequent to fiscal year-end the Company entered into a contract with a
Latin American corporation for the right to distribute AZTEC in two Latin
American countries. This company agreed to pay an advance royalty of $115,000
and the company will purchase all AZTEC product from Verex, for which Verex
will receive a mark-up.
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.
Future Business Strategy and Subsequent Events
- ----------------------------------------------
Since the beginning of fiscal year 1998, the Company has embarked on the
application of its long-established controlled release technologies on certain
nutritional supplements. Sales of nutritional supplements exceeds $15 billion
in the U.S. alone, and management recognizes a definite niche to enter the
product formulation side of this business and apply its controlled release
pharmaceutical formulation technology to numerous nutritional products. The
first such product the Company has undertaken is alpha-lipoic acid. This
natural compound is a known antioxidant with free radical quenching effects.
It has been on the market in Germany for more than 30 years and has been
introduced to the U.S. market within the past year. Recent clinical studies
have shown alpha-lipoic acid also improves insulin-stimulated glucose-disposal
in type 2 diabetics. Verex has reformulated the basic compound and its
delivery in the body to not only take advantage of these newfound attributes,
but preliminary testing done by San Francisco-based Medical Research Institute
has found the Verex formulation to also have appetite suppression effects.
These new indications are being vigorously pursued, and the Company is in
negotiations with Medical Research Institute to commercialize the Verex
formulation of alpha-lipoic acid on a global scale. The Company is hopeful
that revenues may be available from this product in early 1998. Nutritional
products are not regulated by the FDA in the U.S.; thus no regulatory approval
would be necessary.
In addition, the Company is currently negotiating with a private investor
for the purchase of a substantial amount of newly-issued common stock for cash
plus a right of first refusal on the marketing rights to certain Company drug
formulations. There is no assurance that such investment will be forthcoming.
Forward-Looking Statements
- --------------------------
Included under this Item 7 are "forward-looking statements" within the
meaning of Section 27 of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct since
the Company is not able to accurately predict if it will obtain adequate
funding to continue in business or license or market its products. Important
factors affecting its ability to do so include the extreme competitiveness of
the industry, the cost involved to market new drug and nutritional products,
the very limited resources of the Company and the regulatory environment in
which the Company operates.
9
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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.
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.
Name Age Occupation
- ---- --- ----------
James M. Dunn, M.D. (1) 60 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) 61 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 44 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.
10
<PAGE>
Mark Banister 34 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).
- ------------------------
(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, 1996 to June 30, 1997, the Board
of Directors met 4 times, and all directors attended the meetings, either in
person or by telephone.
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 $100,000 or more.
Summary Compensation
Annual Compensation Long-Term Compensation
---------------------------------- -----------------------------------
Awards Payouts
------------------ --------------
Other All
Annual Restricted LTIP Other
Name and Compen- Stock Pay- Compen-
Principal Salary Bonus sation Award(s) Options/ outs sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- --------- ---- ------ ----- ------- --------- -------- ------- -------
James M. 1997 143,150(3) -0- 23,622(2)(3) -0- -0- -0- -0-
Dunn, M.D. 1996 456,890(1) -0- 54,654(2) -0- -0- -0- -0-
(President 1995 403,970(1) -0- 45,530(2) -0- -0- -0- -0-
and Chairman
of the Board
- ------------------------
(1) Dr. Dunn was actually paid $31,251, $125,000 and $125,000 as salary
for the years ended June 30, 1997, 1996 and 1995, respectively. The annual
salaries set forth above are pursuant to Dr. Dunn's employment contract
discussed below.
(2) Dr. Dunn actually received $__________ in fiscal 1997, $34,902 in
fiscal 1996, and $27,957 in fiscal 1995, in other forms of compensation
comprised of premiums paid on life insurance and automobile lease and
maintenance expense. He earned $5,506 (3), $19,752, and $17,573, in vacation
allowance for fiscal 1997, 1996 and 1995, respectively and $0, $3,000 and
$3,000, respectively in product minimum royalties for fiscal 1997, 1996 and
1995, all of which was deferred 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.
(3) Excludes amounts accrued and forgiven by Dr. Dunn on march 31, 1997.
See Note 5 to the financial statements.
11
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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. At March, 1997, a
total of $2,605,204 was accrued in compensation pursuant to the agreement, and
Dr. Dunn waived his claims thereunder in exchange for 25% in future revenues
from AZTEC and 5% in future revenues from certain other Company drug
formulations up to $2,605,204 and certain assignment rights to AZTEC in the
event the Company has not licensed AZTEC prior to December 1998.
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, 1997 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:
Amount and Nature Percent of Shares
Name of of Beneficial of Common Stock
Beneficial Owner Ownership (1) Outstanding
- ---------------- ----------------- -----------------
James M. Dunn, M.D. 360,560 15.5%
Jerry R. Dunn 50,650 2.2%
Birklea Ltd.(2)(3) 771,106 33.1%
James Petre -0- 0%
Mark Banister(3) -0- 0%
Officers and Directors
as a Group (4 persons) 1,182,316(4) 50.8%
- ------------------------
(1) This table is based on 2,327,359 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..
12
<PAGE>
(3) Mr. Banister holds a power of authority to vote the shares held by
Birklea, Ltd.
(4) Includes shares held by Birklea, Ltd.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company leases facilities through March 31, 2000 at a current monthly
rate of $6,826 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 $2,500 per
month and subleases another portion of the space to a non-affiliate at $1,000
per month. Management believes the terms of the facilities sharing with Jerry
R. Dunn 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, 1997 the Company paid a total of $9,500 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.
13
<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, 1997 and 1996
For the years ended June 30, 1997, 1996 and 1995:
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. 0-11232, 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
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 Exhibits are attached hereto:
10.34 - Agreement with James M. Dunn, M.D.
and Birklea, Ltd. - March 1997
27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1997.
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.
(Registrant) VEREX LABORATORIES, INC.
BY(Signature) /s/James M. Dunn
(Date) October 3, 1997
(Name and Title) 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.
BY(Signature) /s/James M. Dunn
(Date) October 3, 1997
(Name and Title) James M. Dunn, M.D., Chief
Executive Officer, Chief Financial
Officer and Director
BY(Signature) /s/Jerry R. Dunn
(Date) October 3, 1997
(Name and Title) Jerry R. Dunn, Director
BY(Signature) /s/James Petre
(Date) October 3, 1997
(Name and Title) James Petre, Director
BY(Signature) /s/
(Date) October 3, 1997
(Name and Title) Mark Banister, Director
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report F - 2
Financial Statements
Consolidated Balance Sheets - June 30, 1997 and 1996 F - 3
Consolidated Statements of Operations -
For the Years Ended June 30, 1997, 1996 and 1995
and Cumulative from September 29, 1980 (inception) to
June 30, 1997 F - 4
Consolidated Statements of Stockholders' Deficit -
For the Years Ended June 30, 1997, 1996 and 1995
and Cumulative from September 29, 1980 (inception) to
June 30, 1997 F - 5
Consolidated Statements of Cash Flows -
For the Years Ended June 30, 1997, 1996 and 1995
and Cumulative from September 29, 1980 (inception) to
June 30, 1997 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, 1997 and 1996 and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the
period ended June 30, 1997 and the amounts for the years ended June 30,
1997, 1996 and 1995 included in the cumulative period from inception
(September 29, 1980) to June 30,1997. 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 significant estimates made by management,
as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Verex
Laboratories, Inc. and Subsidiaries at June 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997, and the amounts for the years ended June
30, 1997, 1996 and 1995 included in the cumulative period from inception
(September 29, 1980) to June 30, 1997 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 2 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 2. The consolidated financial
statements do not include any adjustments that might result from this
uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
August 29, 1997
Denver, Colorado
F-2
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
------- --------
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $13,915 $155,229
Receivables
Trade - 10,146
Note receivable - current (Note 3) - 18,877
Prepaid expenses 9,125 16,376
Patented drug products - 229,037
------ -------
23,040 429,665
------ -------
Property and equipment, at cost
Furniture and equipment 489,900 489,900
Leasehold improvements 1,317 1,317
------- -------
491,217 491,217
Less accumulated depreciation and amortization (464,334) (440,242)
--------- ---------
Property and equipment - net 26,883 50,975
--------- ---------
Other assets
Notes receivable - long-term (Note 3) - 16,123
Patents and trademarks, net of
accumulated amortization of $254,836
(1997) and $232,581 (1996) 156,541 161,173
--------- ---------
156,541 177,296
--------- ---------
Total $ 206,464 $ 657,936
========= =========
<CAPTION>
Liabilities and Stockholders' Deficit
Current liabilities
Checks written in excess of bank balance $ - $ 59,543
Accounts payable and other accruals 217,329 221,129
Accrued salary and benefits payable (Note 9) 101,910 4,615
Accrued interest - 359,270
Notes payable - stockholder (Note 4) - 1,667,000
Current portion of long-term
debt - related parties (Note 4) 51,913 -
------- ---------
371,152 2,311,557
Long-term liabilities
Accrued salary and benefits payable, net of
current portion (Note 9) 117,406 2,207,823
------- ---------
Total liabilities 488,558 4,519,380
------- ---------
Commitments and contingencies (Notes 2, 5, 9
and 10)
Stockholders' deficit (Notes 5 and 6)
Common stock, no par value, 100,000,000
shares authorized, 2,327,359 (1997) and
2,301,359 (1996) shares issued and
outstanding 2,304,422 2,285,331
Additional paid-in capital 10,332,114 5,495,017
Deficit accumulated during the development
stage (12,918,570) (11,641,792)
------------ ------------
(282,034) (3,861,444)
------------ -----------
Total $ 206,465 $ 657,936
============ ==========
</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,
1997 1996 1995 1997
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Net sales $ - $ - $ - $ 233,523
Licensing income - - 1,200,000 1,606,686
Contract income - 27,658 - 1,527,668
Interest income 391 3,933 13,264 918,590
Gain on sale of
investment - - - 334,881
Other 14,319 651 406 136,942
--------- --------- ---------- ----------
14,710 32,242 1,213,670 4,758,290
--------- --------- ---------- ----------
Costs and
expenses
Cost of sales - - 3,211 144,919
Write down of
patented drug
products 189,000 - - 495,250
General and
administrative 869,124 888,402 918,625 9,572,931
Research and
development 81,586 749,740 1,353,550 5,812,026
Operating 4,931 5,048 5,245 25,811
Marketing 7,230 40,762 15,616 766,795
Interest 139,617 144,383 143,123 513,910
------- ------- ------- -------
Loss on
disposal of
assets - - - 33,425
--------- --------- --------- ----------
1,291,488 1,828,335 2,439,370 17,365,067
--------- --------- --------- ----------
Net loss from
continuing
operations (1,276,778) (1,796,093) (1,225,700) (12,606,777)
Discontinued
operations
(Note 8)
Loss from
operations
of discon-
tinued
subsidiary - (42,394) (55,645) (302,840)
Loss on
disposal of
subsidiary - (8,953) - (8,953)
------------ ------------ ------------ -------------
Net loss $(1,276,778) $(1,847,440) $(1,281,345) $(12,918,570)
============ ============ ============ =============
Net loss per
common share
from
continuing
operations
(Note 6) $ (.55) $ (.87) $ (.63) $ (5.43)
============ ============ ============ =============
Net loss per
common share
from discon-
tinued opera-
tions (Note 6) $ - $ (.02) $ (.02) $ (.13)
=========== ============ =========== ============
Net loss per
common share
(Note 6) $ (.55) $ (.89) $ (.65) $ (5.56)
=========== ============ =========== ============
</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, 1997
<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 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) - - -
Stock issuance
($2.35 per share) 48,750 114,563 275,437 -
Net loss for the
period September
29, 1980 (inception)
to June 30, 1994 - - - (8,513,007)
--------- --------- --------- -----------
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) 200,001 161,552 388,449 -
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 -
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)
Stock issuance
($2.50 per share) 26,000 19,091 45,909 -
Stockholder's contri-
bution (Note 5) - - 4,791,188 -
Net loss for the year
ended June 30, 1997 - - - (1,276,778)
--------- ---------- ----------- -------------
Balances - June 30, 1997 2,327,359 $2,304,422 $10,332,114 $(12,918,570)
========= ========== =========== =============
</TABLE>
See notes to consolidated 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, 1980
(inception to
For the Years Ended June 30, June 30,
1996 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss $(1,276,778) $(1,847,440) $(1,281,345) $(12,918,570)
------------ ------------ ------------ -------------
Adjustments to
reconcile net loss
to net cash used by
operating activities
Amortization 22,255 28,913 26,699 337,739
Depreciation 24,092 33,916 29,891 734,656
Impairment of patented
drug product 189,000 - - 189,000
Non-cash stockholder
contributions - 8,953 - 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 40,037 67,512 150,828 301,000
Receivables 10,146 7,319 38,695 20,610
Inventory - 19,337 11,263 8,448
Prepaid expenses
and other 7,251 (417) (9,071) (8,230)
Accounts payable and
other accruals (63,403) 127,411 62,666 196,236
Accrued interest 139,714 143,505 143,687 498,984
Accrued salary and
benefits payable 612,082 394,240 350,356 2,819,905
------- ------- ------- ---------
981,174 837,809 805,014 4,376,590
------- ------- ------- ---------
Net cash used by
operating activities (295,604) (1,009,631) (476,331) (8,541,980)
--------- ----------- --------- -----------
Cash flows from
investing activities
Proceeds from sale of
common stock - 1,123,601 535,502 2,799,103
Proceeds from sale of
securities - - - 404,588
Payment of note
receivable 35,000 - - 321,663
Acquisition of subsidiary - - - (21,898)
Proceeds from sale of
equipment - - - 40,200
Additions to property
and equipment - (30,382) (14,360) (838,359)
Additions to patents and
trademarks (17,623) (27,066) (42,102) (443,456)
Investment in securities - - - (69,707)
-------- -------- -------- ---------
Net cash provided by
investing activities 17,377 1,066,153 479,040 2,192,134
------- --------- ------- ---------
Cash flows from
financing activities
Sale of general and
limited partnership
units - - - 326,000
Proceeds from notes
payable 71,913 - 123,000 1,879,913
Payments on note payable - (42,059) (41,430) (214,114)
Net proceeds from issuance
of common stock 65,000 - - 4,371,962
------- ------- ------ ---------
Net cash provided by
financing activities 136,913 (42,059) 81,570 6,363,761
------- -------- ------ ---------
Net (decrease) increase
in cash and cash
equivalents (141,314) 14,463 84,279 13,915
Cash and cash
equivalents -
beginning of year 155,229 140,766 56,487 -
------- ------- ------ -------
Cash and cash
equivalents -
end of year $13,915 $155,229 $140,766 $13,915
======= ======== ======== =======
</TABLE>
Supplemental cash flow information:
Cash paid for interest was $0 (1997), $5,072 (1996) and $5,438 (1995).
Supplemental disclosure of noncash financing activities:
During the year ended June 30, 1997, the following liabilities were
forgiven by related parties (Note 5):
Note payable - stockholder $1,687,000
Accrued interest 498,984
Accrued salary and benefits payable 2,605,204
----------
Additional paid-in capital $4,791,188
==========
See notes to consolidated financial statements.
F-6
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
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 assembled
and sold 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.
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.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of financial instruments including cash and cash
equivalents, accounts payable, notes payable and accrued expenses
approximated fair value as of June 30, 1997 because of the relatively short
maturity of these instruments.
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.
Patents and Trademarks
- ----------------------
Patents and trademarks are stated at cost and are amortized on a straight-line
basis over a period of ten years.
F-7
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
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.
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 1996 and 1995 consolidated financial statements have
been reclassified to conform with the 1997 presentation.
Use of Estimates
- ----------------
The preparation of consolidated 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 consolidated 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 Consolidated Financial Statements
(a Development Stage Enterprise)
Note 2 - Continued Operations and Realization of Assets
- -------------------------------------------------------
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. The Company
has suffered a significant loss from continuing operations of $1,278,139 in
1997 resulting in an accumulated deficit of $12,919,931 at June 30, 1997.
Management plans?
The accompanying consolidated financial statements do not include 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 3 - Notes Receivables
- --------------------------
June 30,
-----------------
1997 1996
-------- --------
Note receivable - paid in full during fiscal year 1997. $ - $ 12,500
Note receivable - paid in full during fiscal year 1997. - 22,500
-------- --------
- 35,000
Less current portion - (18,877)
-------- ---------
$ - $ 16,123
======== ========
Note 4 - Notes Payable and Long-Term Debt
- -----------------------------------------
June 30,
Note Payable Stockholder 1997 1996
- ------------------------ -------- -------
$10,000,000 credit agreement with a stockholder; debt
forgiven in fiscal year 1997, as discussed more fully
in Note 5. $ - $1,667,000
======== ==========
June 30,
Long-Term Debt 1997 1996
- -------------- -------- -------
Notes payable to officer of the Company; non interest
bearing and maturing from July 1997 to April
1998. The notes are not collateralized. $17,500 $ -
F-9
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
Note 4 - Notes Payable and Long-Term Debt (continued)
- -----------------------------------------------------
June 30,
1997 1996
------ ------
Notes payable to the president of the Company;
non interest bearing and maturing from July 1997
to May 1998. The notes are not collateralized. 34,413 -
------ ------
51,913 -
Less current portion (51,913) -
-------- ------
$ - $ -
======== ======
Note 5 - Stockholder Contributions
In March, 1997, the Company entered into an agreement with the Company's
president and another Stockholder whereby the two stockholders forgave the
Company's indebtedness of $2,605,204 and $2,185,984, respectively. The
total debt forgiven of $4,791,188, included $1,687,000 of note payable to
the stockholder, $498,984 of accrued interest on the note and $2,605,204 of
accrued salary and benefits to the president. As consideration for the debt
forgiveness, the Company agreed to assign each individual the right to
receive 25% of all licensing fees, royalties and all other sources of income
from the Company's Aztec formulation and 5% of the income derived from other
specified formulations up to the respective indebtedness from the Company
which was forgiven. In addition, the Company has agreed to assign the
patent for the Aztec formulation to the Stockholder in the event that the
Company is unsuccessful in securing any licensing or royalty agreements
prior to December 1998. The Stockholder would then be responsible for
marketing the rights and would distribute all earnings in accordance with
the terms of the original agreement. As discussed more fully in Note 11,
the Company entered into a licensing agreement for the Aztec formulation
subsequent to year end. The total amount of debt forgiven is reflected as
additional paid-in-capital for the year ended June 30, 1997 in the
accompanying consolidated financial statements.
Note 6 - 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 771,106 shares which represents approximately
33% of the outstanding shares of Common Stock of the Company as of June 30,
1997.
F-10
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
Note 6 - Common Stock (continued)
- ---------------------------------
Net Loss Per Common Share
- -------------------------
Net loss per common share for the years ended June 30, 1997, 1996, and 1995
has been computed on the basis of the weighted average number of common
shares outstanding of 2,323,956, 2,082,825 and 1,949,122, respectively.
Note 7 - 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 consolidated financial
statements.
June 30,
1997 1996
------ ------
Long-term deferred tax assets:
Operating losses $(3,941,926) $(2,441,937)
Deferred salary (83,340) (837,833)
Other - (138,276)
----------- -----------
Total long-term deferred assets 4,025,266 (3,418,046)
Valuation allowance (4,025,266) 3,418,046
----------- -----------
Net deferred tax $ - $ -
=========== ===========
At June 30, 1997, the Company has approximately $10,400,000 of net operating
loss carryforwards for income tax purposes that expire between June 30, 1999
and June 30, 2012.
Note 8 - 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 have been
reclassified as discontinued operations.
F-11
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
Note 8 - Discontinued Operations (continued)
Sales from the Colorado Nut Company were $241,346 and $347,429 for the years
ended June 30, 1996 and 1995, respectively. All expenses related to the
Colorado Nut Company have been allocated to discontinued operations
including interest of $5,072 and $5,438 for the years ended June 30, 1996
and 1995, 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.
Note 9 - 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, 1997 and 1996, the Company owes
approximately $149,000 and $2,008,000, respectively, of vacation pay and
salary 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 for the years ended June 30, 1997, 1996 and 1995. The amount owed to
the President for such royalties was approximately $0 and $200,000, at
June 30, 1997 and 1996, 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.
As discussed more fully in Note 5, the president forgave the Company's
indebtedness of $2,605,204 for accrued salary, vacation and royalties as of
March 31, 1997 and treated the forgiven debt as a contribution to capital.
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.
F-12
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
Note 9 - Related Party Transactions (continued)
- -----------------------------------------------
Employment and Royalty Agreements (continued)
- ---------------------------------------------
The Company entered into an agreement with its President deferring a portion
of the payment of vacation pay, salary and royalties accrued as of June 30,
1997 until January 1, 1999. As of June 30, 1997 and 1996, approximately
$117,000 and $2,208,000, 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 $12,500, $22,780, and $53,251, for
1997, 1996 and 1995, respectively.
See Notes 4, 5, 6 and 10 for additional discussion of related party
transactions.
Note 10 - Leases and Commitments
- --------------------------------
Office
- ------
Currently, the Company occupies space under a lease agreement requiring
monthly payments of $6,826. The lease commitment expires March 31, 2000.
The Company sub-lets a portion of its office space to the officer described
in Note 9 (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 $37,471, $53,677, and $45,333, for
the years ended June 30, 1997, 1996 and 1995, respectively.
Vehicle
- -------
The Company has two operating leases for Company vehicles. The leases
require monthly lease payments of $530 and $474 and expire January 1999 and
1998, respectively. Lease expense is $12,369 and $11,688 for the years
ended June 30, 1997 and 1996, respectively.
The minimum annual lease payments through expiration of office and vehicle
leases are as follows:
1998 $91,590
1999 85,622
2000 61,434
--------
$238,646
========
F-13
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
Note 10 - Leases and Commitments (continued)
- --------------------------------------------
Vehicle (continued)
- -------------------
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 11 - Subsequent Event
- --------------------------
In August 1997, the Company entered into a licensing arrangement with an
Argentine Corporation (the Corporation). Per the terms of the agreement,
the Corporation has the right to use, sell and distribute the Aztec
formulation within the confines of Argentina and Paraguay for a period of
ten years. In consideration for these rights, the Corporation has agreed to
pay the Company $115,000 plus royalties equal to three percent of net sales.
In addition, the Company will develop, manufacture and package the product
for sale for fees specified in the agreement. The Agreement may be
terminated by the Company if quarterly minimum quantities are not sold.
F-14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,915
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,040
<PP&E> 491,217
<DEPRECIATION> 464,334
<TOTAL-ASSETS> 206,464
<CURRENT-LIABILITIES> 371,152
<BONDS> 0
0
0
<COMMON> 2,327,359
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 206,464
<SALES> 0
<TOTAL-REVENUES> 14,710
<CGS> 0
<TOTAL-COSTS> 1,291,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,617
<INCOME-PRETAX> (1,276,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,276,778)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
<PAGE>
EX-10.34
AGREEMENT
This Agreement made and entered into this 31st day of March, 1997, by and
between Verex Laboratories Inc., a Colorado Corporation (hereinafter
referred to as "VEREX"), James M. Dunn M.D. (hereinafter referred to as
"DUNN") and Birklea Ltd., a Irish Corporation (hereinafter referred to as
"BIRKLEA").
WITNESSETH
WHEREAS; all of the parties hereto mutually agree that VEREX is indebted to
DUNN in the amount of $2,517,239 as of March 31, 1997, and that;
WHEREAS; all of the parties hereto mutually agree that VEREX is indebted to
BIRKLEA in the amount of $2,325,000 as of March 31, 1997, and that;
WHEREAS; VEREX is desirous of creating a better financial picture of its
corporation for possible investors and/or joint venture possibilities, and
that;
WHEREAS; all of the parties hereto are desirous of improving the financial
picture of VEREX;
NOW THEREFORE; in consideration of the mutual promise between the parties it
is hereby agreed as follows:
1. DUNN hereby agrees to fully forgive and discarded the debt payable to
him by VEREX in the amount of $2,517,239 as provided by his Employment
Contract dated the 30th day of November, 1993.
2. BIRKLEA hereby agrees to fully forgive and discharge the debt payable to
it by VEREX in the amount of $2,325,000 pursuant to the Convertible Secured
Note dated the 30th day of November, 1993.
3. In consideration of the forgiveness of these obligations to VEREX by DUNN
and BIRKLEA, VEREX agrees that the security interest that BIRKLEA now has in
the Aztec product of VEREX shall not be disturbed except to the extent
provided herein.
4. It is agreed that in consideration of the forgiveness of these debts that
VEREX will attempt to continue the development of Aztec and find a buyer for
the product, either through an outright sale of the product or through a
licensing and royalty agreement.
<PAGE>
5. It is agreed that all monies obtained from whatever source, whether it be
licensing fees, advanced royalties, royalties or any other source of income
from Aztec shall be divided as follows:
1. Fifty percent (50%) of such income shall go directly to VEREX, twenty
five percent (25%) shall go to BIRKLEA and twenty five percent (25%) to
DUNN, until such time as the entities have been paid the following amounts:
BIRKLEA - $4,650,000 and DUNN - $5,034,678
6. This incentive amount is being paid on a contingent basis if the sale of
Aztec can be made and in consideration of DUNN and BIRKLEA forgiving their
existing debt owed by VEREX.
7. It is agreed that in the event no money is received by VEREX on the sale
of Aztec through any licensing or royalty agreement by December 31, 1998,
and there are no signed contract by which any money is forthcoming from the
sale of Aztec, BIRKLEA and Dunn will enter into a subsequent agreement. The
agreement will reverse their existing relationship to the extent that DUNN
will assign the patent for Aztec to VEREX and VEREX will then assign the
patent to BIRKLEA .
BIRKLEA will sign all of the necessary documentation satisfactory to both
parties such that BIRKLEA will be the new owner with full right of ownership
to the Aztec product. BIRKLEA will sign a security interest in the product
similar to the one it now holds as a secured party to the Aztec product over
to DUNN to the extent of $5,034,678. At that time and for a period of ten
years (10) BIRKLEA shall have all rights title and interest to the product
and shall attempt to sell the product under whatever fashion it can and will
pay to DUNN twenty five percent (25%) of any and all proceeds derived from
the sales of the product until such time as the debt of $5,034,678 is paid
in full. After that time BIRKLEA will have no further obligation to pay any
money to DUNN for this product.
8. In addition to this amount, VEREX agrees that it shall divide ten percent
(10%) of all income through licensing fees, advance royalties, royalties and
any other source on VEREX formulations of Verin, C-R naproxen, C-R niacin and
C-R dipyridamole to offset the forgiven debt of BIRKLEA and DUNN in the
following amounts:
BIRKLEA - $2,325,000 and DUNN - $2,517,339
9. The incentive amount described in Paragraph 5 above shall only be paid out
of funds from the sale of Aztec. The funds described in Paragraph 8 above
shall be used to reduce the actual debt amount that has been forgiven by way
of this agreement.
<PAGE>
10. The list of products stated in Paragraph 8 above specifically does not
include the nanosphere technology. The reason for this is that VEREX is
attempting to make some progress with outside investors and/or licensing
companies for the nanosphere technology and including this product in this
incentive of debt repayment agreement could greatly hinder the progress of
VEREX in its attempt to accomplish this goal. However, it is specifically
agreed that any and all agreements made on the nanosphere technology shall
remain with VEREX and no agreements shall be made for that technology
outside of VEREX. All income whether through licensing fees, royalties,
sale of product or whatever fees generated from the nanosphere technology
will remain as assets of VEREX.
11. It is agreed that the indebtedness as provided by the employment contract
to DUNN dated the 30th day of November, 1993, shall be set at a firm amount
as of this day as set out in the terms and conditions and the document
creating the debt shall be frozen at this amount. No further obligation
will be incurred under that agreement.
12. It is agreed that the indebtedness as provided by the Convertible
Secured Note to BIRKLEA dated the 30th day of November, 1993, shall be set
at a firm amount as of this day as set out in the terms and conditions and
the document creating the debt shall be frozen at this amount. No further
obligation will be incurred under that agreement.
The parties have entered into this agreement on the date first above written.
(Registrant) VEREX LABORATORIES, INC., a Colorado Corporation
BY(Signature) /s/James M. Dunn
(Name and Title) James M. Dunn, M.D., President
BIRKLEA, Ltd., a Irish Corporation
BY(Signature) /s/
BY(Signature) /s/
James M. Dunn, M.D., individually
