<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, 1998 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.)
Building D, Suite 100, 14 Inverness Dr. East, Englewood, CO 80112
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(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 -- -- No -- X --
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at September 20, 1998 was approximately $922,690.
The number of shares outstanding of the Registrant's no par value common
stock as of September 20, 1998, was 2,327,359 shares.
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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
formulas and patents when available, selects trademarks, designs product
packages and promotes and markets, through licensing agreements,
pharmaceutical and health care products. During fiscal 1998 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 Issue and Lack of Audit
- -------------------------------------
The Company's auditors have advised the Company, in effect, that there is
substantial doubt as to the Company's ability to continue as a going concern.
The Company is unable to pay its auditors and thus they have declined to issue
a report on the Company's financial statements included herein. Management
believes that the financial statements included herein are free from material
error and fairly present the financial position of the Company.
Assignment of Certain Future Revenues - 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 Company agreed to assign to Birklea, Ltd. the AZTEC formulation
in the event it has not licensed it prior to December, 1998.
Assignment of Certain Future Revenues - 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
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 AZTEC , 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
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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, 1998:
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 received licensing fees and royalties of $168,000
during 1998.
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
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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, 1997 and 1998 clinical trials of AZTEC were
conducted at 15 sites in the United States at a cost of approximately
$2,400,000.
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.
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.
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.
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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.
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 and one who is a 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 $6,826 per month pursuant to a lease through March 31, 2000.
The Company sublets a portion of the premises at $3,132 per month to an
officer of the Company and subleases another portion of the space to a
nonaffiliate at $1,000 per month.
ITEM 3. LEGAL PROCEEDINGS
-----------------
No legal proceedings are pending.
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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.
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, 1998) $1.43 $ .68
Third Qtr. (Ended March 31, 1998) $1.00 $ .70
Second Qtr. (Ended December 31, 1997) $2.00 $ .75
First Qtr. (Ended September 30, 1997) $1.17 $ .77
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
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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, 1998, the Company had approximately 1,400 holders of
record of its common stock and the closing bid price on its common stock was
$1.43.
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.
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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>
6/30/98 6/30/97 6/30/96 6/30/95 6/30/94
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
6/30/98 6/30/97 6/30/96 6/30/95 6/30/94
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working
Capital
(Deficit) $ (254,923) $ (348,112) $(1,881,892) $(2,037,850) $(1,187,055)
Total
Assets 170,514 206,464 657,936 716,558 824,122
Total
Liabi-
lities 1,201,564 488,558 4,519,380 3,896,283 3,258,004
Long
Term
Debt 933,970 117,406 2,207,823 1,368,357 1,473,437
Share-
holders'
(Deficit) (1,031,050) (282,034) (3,861,444) (3,179,725) (2,433,882)
Revenues 301,093 14,710 32,242 1,213,670 827,038
Net
(Loss) (748,957) (1,276,778) (1,847,440) (1,281,345) (1,872,285)
Net
(Loss)
Per
Share (.32) (.55) (.89) (.65) (.99)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Results of Operations
- ---------------------
1998 Compared to 1997
---------------------
Revenues for 1998 were $301,093 compared to $14,710 as the Company was
able to generate $124,048 from the sale of products, primarily of its
controlled release alpha lipoic acid formulation. In addition, the Company
had advance royalties from a licensing agreement on AZTEC and other royalties
totaling $168,000. No revenues from such sources were obtained during fiscal
1997. Losses for 1998 were $748,957 or $527,880 less than the losses for
fiscal 1997. This is accounted for by increased revenues of $286,383 and
reduced costs and expenses of $241,497. The principal items contributing to
reduced expenses were the lack of write down of patented drug products which
was $189,000 in fiscal 1997 and the lack of interest expense which was
$139,617 for that year. Cost of sales was $53,427 for 1998 compared to $0 for
1997 when the Company had no sales. Research and development expenses have
fallen by nearly 50% to $43,870 as the Company focused more on sales.
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.
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Liquidity and Capital Resources
- -------------------------------
The Company's auditors have advised management of their 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, 1998 the Company had a working capital deficiency of $254,923
compared to negative working capital of $348,112 at June 30, 1996. The
principal items contributing to the deficiency is the loss of $748,957 for
fiscal 1998.
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 may not be 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, 1998 without liquidity
problems.
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
- ----------------------------------------------
During fiscal year 1998 and into the first quarter of fiscal year 1999
the Company has continued to work on the development of formulations for
nutritional supplements and botanical products, both for in-house development
and as contract formulation work for others. Most of the formulations done
for in-house involved applying for the Company's proprietary controlled
release techniques to numerous nutritional supplements that are targeted for
such a delivery system because of their need to be administered often on an
immediate release basis, or an increased efficacy of the product if it can be
kept at the receptor site in the body for extended periods of time, or in some
cases, continuously kept at the receptor site at therapeutic levels. Verex's
technology has allowed it to do this with three nutritional products, and an
additional four products will be entered into the development pipeline for
similar work in the fourth quarter of 1998 and first quarter of 1999. The
Company is negotiating with three parties that have expressed an interest in
licensing products developed thusfar and have expressed sincere interest in
the additional products, as well. The Company is hopeful to begin seeing
revenues from these products by early 1999. All of the nutritional products
being formulated by Verex come under the auspices of the Dietary Supplement
Health and Education Act of 1994 ("DSHEA") and not directly under the FDA in
the U.S., thus no regulatory approval will be needed.
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
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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.
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. The Company is unable to pay its auditors and they have declined
to issue a report on the Company's financial statements included herein.
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. 61 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).
Carolyn K. Dunn (1) 54 Director of the Company (May 1988-
Present); Operating Room Nurse, Fairfield
Community Hospital, Fairfield, CA
(1967-1975); Board of Directors, Macarter
Theater, Princeton University (1976-
1979); President and Chairman of
numerous civic and charitable
organizations, Denver Metropolitan Area;
a Principal in starting "The Gathering
Place", a temporary residence for
abused and abandoned women and mothers;
life member, Denver Ballet; wife of the
President of the Company
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Name Age Occupation
- ---- --- ----------
James B. Petre 45 Director of the Company January, 1993-
Present). Independent business
consultant and advisor (1989-present).
Senior Vice President and a director
of Previews, Inc., Denver, Colorado,
a worldwide real estate brokerage firm
(1984-1989). Member of the Drug
Information Association.
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 Carolyn Dunn are husband and wife.
The Board of Directors does not have Audit, Compensation or Nominating
Committees. During the period from July 1, 1997 to June 30, 1998, the Board
of Directors met 3 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 $100,000 or more.
Summary Compensation
Annual Compensation Long-Term Compensation
---------------------------------- -----------------------------------
Awards Payouts
------------------ --------------
Other All
Annual Restricted Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------- ---- ------ ----- ------- -------- ----- ------- -------
James M. 1998 125,000 -0- 12,621 -0- -0- -0- -0-
Dunn, M.D. 1997 143,150(3) -0- 23,622(2)(3) -0- -0- -0- -0-
(President 1996 456,890(1) -0- 54,654(2) -0- -0- -0- -0-
and Chairman
of the Board
- ------------------------
(1) Dr. Dunn was actually paid $0, $31,251 and $125,000 as salary for
the years ended June 30, 1998, 1997 and 1996, respectively. The annual
salaries set forth above are pursuant to Dr. Dunn's employment contract
discussed below.
(2) Dr. Dunn actually received $12,621 in fiscal 1998, $18,116 in fiscal
1997 and $34,902 in fiscal 1996, in other forms of compensation comprised of
premiums paid on life insurance and automobile lease and maintenance expense.
He earned $5,506, $5,506, and $19,752 in vacation allowance for fiscal 1998,
1997 and 1996, respectively and $0, $0, and $3,000, respectively in product
minimum royalties for each fiscal year: 1997, 1996 and 1995, all of which was
deferred along with accumulated amounts through January 1, 2000. At June 30,
1998, the Company owed Dr. Dunn $789,000 in salary and vacation pay.
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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.
Employment Contract - James M. Dunn, M.D.
- -----------------------------------------
On November 30, 1993, the Company entered into an 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. 320,560 13.7%
Jerry R. Dunn 50,650 2.2%
Birklea Ltd.(2)(3) 765,106 32.9%
James Petre -0- 0%
Mark Banister(3) -0- 0%
Officers and Directors
as a Group (4 persons) 1,136,316(4) 48.8%
- ------------------------
(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.
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(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.
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, a former officer of the Company at $3,132
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 former non-salaried officer of the Company, from time to
time provides legal services to the Company. For the years ended June 30,
1998, 1997 and 1996, the Company paid a total of $0, $12,500 and $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.
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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, 1998 and 1997
For the years ended June 30, 1998, 1997 and 1996:
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:
10.27 - 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:
10.32 - 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
(b) No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
-13-
<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.
(Date) November 24, 1998
By:(Signature) /s/ James M. Dunn, M.D
(Name snd 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.
(Registrant) VEREX LABORATORIES, INC.
(Date) November 24, 1998
By:(Signature) /s/ James M. Dunn, M.D.
(Name and Title) James M. Dunn, M.D., Chief
Executive Officer, Chief Financial
Officer and Director
(Date) November 24, 1998
By:(Signature) /s/ Carolyn K. Dunn
(Name and Title) Carolyn K. Dunn, Director
(Date) November 24, 1998
By:(Signature) /s/ James B. Petre
(Name) James B. Petre, Director
(Date) November __, 1998
By:(Signature)
(Name and title) Mark Banister, Director
-14-
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Table of Contents
Financial Statements
Consolidated Balance Sheets - June 30, 1998 and 1997 F - 2
Consolidated Statements of Operations
For the Years Ended June 30, 1998, 1997 and 1996
and Cumulative from September 29, 1980 (inception)
to June 30, 1998 F - 3
Consolidated Statements of Stockholders' Deficit
For the Years Ended June 30, 1998, 1997 and 1996
and Cumulative from September 29, 1980 (inception)
to June 30, 1998 F - 4
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998, 1997 and 1996
and Cumulative from September 29, 1980 (inception)
to June 30, 1998 F - 5
Notes to Consolidated Financial Statements F - 6
F-1
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated Balance Sheets
UNAUDITED
<TABLE>
<CAPTION>
June 30
----------------------
1998 1997
------ ------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,428 $ 13,915
Prepaid expenses 8,243 9,125
-------- --------
12,671 23,040
-------- --------
Property and equipment, at cost
Furniture and equipment 494,028 489,900
Leasehold improvements 1,317 1,317
-------- --------
495,345 491,217
Less accumulated depreciation
and amortization (479,107) (464,334)
--------- ---------
Property and equipment - net 16,238 26,883
--------- ---------
Other assets
Patents and trademarks, net of
accumulated amortization of
$277,655 (1998) and $254,836 (1997) 141,605 156,542
--------- ---------
Total $ 170,514 $ 206,465
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and other accruals $ 218,781 $ 217,329
Accrued salary and benefits payable
(Note 8) - 101,910
Royalties due to related parties (Note 4) 32,500 -
Notes payable-related parties (Note 3) 16,313 51,913
--------- ---------
267,594 371,152
Long-term liabilities
Accrued salary and benefits payable,
net of current portion (Note 8) 933,970 117,406
--------- --------
Total liabilities 1,201,564 488,558
--------- --------
Commitments and contingencies
(Notes 2, 4 ,8 and 9)
Stockholders' deficit (Notes 5 and 6)
Common stock, no par value, 100,000,000
shares authorized, 2,327,359 shares
issued and outstanding 2,304,422 2,304,422
Additional paid-in capital 10,332,114 10,332,114
Deficit accumulated during the
development stage (13,667,586) (12,918,629)
---------- ----------
(1,031,050) (282,093)
--------- ----------
Total $ 170,514 $ 206,465
========= ==========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated Statements of Operations
UNAUDITED
<TABLE>
<CAPTION>
Cumulative
From
September 29,
1980
Inception
For the Years Ended June 30, to June 30,
1998 1997 1996 1998
------- ---------- --------- ---------------
Revenues
<S> <C> <C> <C> <C>
Net sales $ 124,048 $ - $ - $ 357,571
Licensing income 168,000 - - 1,774,686
Contract income - - 27,658 1,527,668
Interest income 7 391 3,933 918,597
Gain on sale of
investment - - - 334,881
Other 9,038 14,319 651 145,980
------- ------- ------- ---------
301,093 14,710 32,242 5,059,383
------- ------- ------- ---------
Costs and expenses
Cost of sales 53,417 - - 198,346
Write down of
patented
drug products - 189,000 - 495,250
General and
administrative 933,573 869,124 888,402 10,506,504
Research and
development 43,870 81,645 749,740 5,855,896
Operating 5,764 4,931 5,048 31,575
Marketing 13,416 7,230 40,762 780,211
Interest - 139,617 144,383 513,910
Loss on disposal
of assets - - - 33,425
--------- --------- --------- ----------
1,050,050 1,291,547 1,828,335 18,415,117
--------- --------- --------- ----------
Net loss from
continuing
operations (748,957) (1,276,837) (1,796,093) (13,355,734)
Discontinued
operations
(Note 7)
Loss from
operations
of discontinued
subsidiary - - (42,394) (302,840)
Loss on disposal
of subsidiary - - (8,953) (8,953)
--------- --------- --------- ----------
Net loss $ (748,957) $(1,276,737) $ (1,847,440) $(13,667,527)
========= ========= ========= ==========
Net loss per
common share
from
continuing
operations
(Note 5) $ (.32) $ (.55) $ (.87) $ (5.74)
========= ======== ========== =========
Net loss per
common share
from
discontinued
operations
(Note 5) $ - $ - $ (.02) $ (.13)
========= ========== ========= =========
Net loss per
common share
(Note 5) $ (.32) $ (.55) $ (.89) $ (5.87)
========= ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated Statements of Stockholders Deficit
For the Period September 29, 1980 (inception) to June 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage
---------- ----------- ------------- --------------
<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., inclu-
ding 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 -
Stock issuance
($4.00 and $6.00
per share) 93,167 157,292 378,210 -
Net loss for the
period September
19, 1980
(inception) to
June 30, 1995 - - - (9,794,352)
--------- --------- --------- ---------
Balances -
June 30, 1995 2,007,538 1,942,923 4,671,704 (9,794,352)
Stock issuance
($2.75 per share) 1 200,001 161,552 388,449 -
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
contribution
(Note 5) - - 4,791,188 -
Net loss for
the year ended
June 30, 1997 - - - (1,276,837)
Balances -
June 30, 1997 2,327,359 2,304,422 10,332,114 (12,918,629)
--------- --------- ---------- ----------
Net loss for
the year ended
June 30, 1998 - - - (748,957)
--------- --------- ---------- ----------
Balances -
June 30, 1998 2,327,359 $2,304,422 $10,332,114 $(13,667,586)
========= ========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
UNAUDITED
<TABLE>
<CAPTION>
Cumulative
from September
29, 1980
(inception to
For the Years Ended June 30, June 30,
Cash flows from
operating activities 1998 1997 1996 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net loss $(748,957) $(1,276,778) $(1,847,440) $(13,667,527)
-------- --------- --------- ----------
Adjustments to reco-
ncile net loss to net
cash used by
operating activities
Amortization 22,819 22,255 28,913 360,560
Depreciation 14,733 24,092 33,916 749,429
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 67,512 301,000
Receivables - 10,146 7,319 20,610
Inventory - - 19,337 8,448
Prepaid expenses
and other 882 7,251 (417) (7,348)
Accounts payable
and other accruals 1,452 (63,403) 127,411 193,556
Accrued interest - 139,714 143,505 503,116
Royalties due to
related parties 32,500 - - 32,500
Accrued salary
and benefits
payable 714,654 612,082 394,240 3,534,559
-------- -------- -------- ----------
787,080 981,174 837,809 5,163,672
-------- -------- -------- ----------
Net cash used by
operating acti-
vities 38,123 (295,604) (1,009,631) (8,503,855)
-------- -------- --------- ---------
Cash flows from
investing activi-
ties
Proceeds from
sale of common
stock - - 1,123,601 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 (4,128) - (30,382) (842,487)
Additions to
patents and trade-
marks (7,882) (17,623) (27,066) (451,340)
Investment in
securities - - - (69,707)
Net cash
provided by
investing activ-
ities (12,010) 17,377 1,066,153 2,180,122
------- ------- ---------- ----------
Cash flows from
financing
activities
Sale of general
and limited
partnership
units - - - 326,000
Proceeds from
notes payable 2,100 71,913 - 1,882,013
Payments on
note payable (37,700) - (42,059) (251,814)
Net proceeds
from issuance
of common stock - 65,000 - 4,371,962
Net cash
provided by
financing
activities (35,600) 136,913 (42,059) 6,328,161
------- -------- -------- ----------
Net (decrease)
increase in cash
and cash
equivalents (9,487) (141,314) 14,463 4,428
Cash and cash
equivalents-
beginning of
year 13,915 155,229 140,766 -
-------- -------- --------- ---------
Cash and cash
equivalents-
end of year $ 4,428 $ 13,915 $ 155,229 $ 4,428
======== ======= ========= =======
</TABLE>
Supplemental cash flow information:
Cash paid for interest was $0 (1998), $0 (1997) and $5,072 (1996).
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 2,605,203
----------
Additional paid-in capital $ 4,791,188
==========
See notes to consolidated financial statements
F-5
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
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
subsidiary Bear Laboratories, Inc. Prior to June 28, 1996, the financial
statements also included the accounts of the wholly owned subsidiary Colorado
Nut Company. As discussed more fully in Note 7, the investment was sold on
this date. 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, 1998 because of the relatively short maturity of
these instruments.
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.
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 product sales. Licensing income is recognized when
earned.
F-6
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
Note 1 - Summary of significant Accounting Policies (continued)
- --------------------------------------------------------------
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 1997 and 1996 consolidated financial statements have
been reclassified to conform with the 1998 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.
Accounting Standards Not Yet Adopted
- ------------------------------------
In December 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 incorporates the all-inclusive concept of income
recognition. It requires that all items that are required to be recognized as
comprehensive income (adjustments to equity) be reported in a financial
statement that is displayed with the same prominence as other financial
statements. FAS 130 is effective for fiscal years beginning after December
15, 1997, consequently, the Company has not yet adopted FAS 130.
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 $723,321 in 1998
resulting in an accumulated deficit of $13,641,950 at June 30, 1998.
F-7
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
Note 2 - Continued Operations and Realization of Assets (continued)
- ------------------------------------------------------------------
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 Payable and Long-Term Debt
- -----------------------------------------
June 30,
-----------------------
1998 1997
-------- --------
Notes payable to an officer of the Company;
paid in full during fiscal year 1997. $ - $ 17,500
Notes payable to the president of the Company;
non interest bearing and maturing from
July 1997 to June 1999. The notes are not
collateralized. 16,313 34,413
------- --------
16,313 51,913
Less current portion (16,313) (51,913)
$ - $ -
====== =======
Note 4 - 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 notes payable to a
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. 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. During the year ended June 30, 1998, $32,500 was
accrued as royalty expense related to this agreement.
F-8
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
Note 5 - 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, 1998.
Net Loss Per Common Share
- -------------------------
Net loss per common share for the years ended June 30, l998, 1997, and 1996
has been computed on the basis of the weighted average number of common shares
outstanding of $2,327,359, $2,323,956 and $2,082,825, respectively.
Stock Options
- -------------
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" for options granted to employees. Accordingly, no compensation
cost has been recognized for the stock option plans.
Had compensation cost for the Company's stock optons been determined based on
the fair value at the grant date for awards in 1998 consistent with the
provisions of SFAS No. 123, the amount would have been immaterial.
The folowing is a summary of options at June 30, 1998:
Weighted Average
Exercise Price Exercise Price
Options Per Share Per Share
------- -------------- ---------------
Balance-June 30, 1996 12,000 $6.80 - 7.00 $ 6.91
Granted 17,000 2.50 2.50
Exercised (12,000) 5.80 - 7.00 6.91
Balance-June 30, 1997 17,000 2.50 2.50
Granted 50,000 .75 1.19
Exercised - - -
Canceled - - -
------- ----------- ------
Balance-June 30, 1998 67,000 $.75 - 2.50 $ 1.19
======= =========== ======
F-9
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
Note 6 - Income Taxes
- ---------------------
The Company has long-term deferred tax assets as a result of its net operating
losses and deferred salary (assuming 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,
------------------------
1998 1997
--------- ----------
Long-term deferred tax assets:
Operating losses $ 3,756,606 $ 3,756,270
Deferred salary 365,074 83,340
--------- ---------
Total long-term deferred assets 4,121,680 3,839,610
Valuation allowance (4,121,680) (3,839,610)
--------- ---------
Net deferred tax $ - $ -
========= =========
At June 30, 1998, the Company has approxanately $10,400,000 of net operating
loss carryforwards for income tax purposes that expire between June 30, 1999
and June 30, 2012.
Note 7 - Discontinued Operations
On June 28, l996, the Company sold its investment in its wholly owned
subsidiary Colorado Nut Company, Inc. for $45,000. The Company regained 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.
Sales from the Colorado Nut Company were $241,346 for the year ended June 30,
1996. All expenses related to the Colorado Nut Company have been allocated to
discontinued operations for the year ended June 30, 1996.
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-10
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
Note 8 - 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 so establish. Such plans have not yet been
established. As of June 30, 1998 and 1997, the Company owes approximately
$789,000 and $149,000, respectively, of vacation pay and salary to its
President under terms of the employment contract. The President has extended
the due date to January 1, 2000.
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, l997, 1996 and l995. The amount owed to
the President for such royalties was approximately $3,000 and $0 at June 30,
1998 and 1997, 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.
Legal Fees
- ----------
Legal fees were incurred by the Company for legal services provided by a
former officer of the Company. Such fees were $0, $12,500 and $22,780 for
1998, l997 and 1996, respectively.
See Notes 3, 4 and 5 for additional discussion of related party transactions.
F-11
<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(a Development Stage Enterprise)
UNAUDITED
Note 9 - 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 $3,132 per month. The Company sub-lets to an
unrelated third party for $1,000 per month.
Rent expense, net of sublease income was $35,873, $37,471 and $53,677 for the
years ended June 30, 1998, 1997 and 1996, respectively.
Vehicle
- -------
The Company has two operating leases for Company vehicles. The leases require
monthly lease payments of $530 and $582 and expire January 1999 and 2000,
respectively. Lease expense was $12,588, $12,369 and $11,688 for the years
ended June 30, 1998, 1997 and 1996, respectively.
The minimum annual lease payments through expiration of office and vehicle
leases are as follows:
1999 $ 90,779
2000 66,213
-------
$156.991
=======
Note 10 - Unaudited Financial Statements
- ----------------------------------------
The Company currently is not in a position to pay its auditors to report on
the financial statements set forth above. Management believes these financial
statements fairly present the financial position of the Company at and for the
periods set forth and are free from material error.
F-12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
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