<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington, DC
U.S.A. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934
Dated: August 11, 1998
Commission File Number: 0-13967
VERONEX TECHNOLOGIES, INC.
-----------------------------------------------
(Translation of Registrant's Name into English)
#701-475 Howe Street, Vancouver, British Columbia
Canada V6C 2B3
-----------------------------------------------
(Address of Principal Executive Offices)
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources, Ltd.)
Financial Statements
May 31, 1998, February 28, 1998 & 1997
<PAGE>
Schvaneveldt & Company
Certified Public Accountant
275 E. South Temple, Suite #300
Salt Lake City, Utah 84111
(801) 521-2392
Darrell T. Schvaneveldt, C.P.A.
Board of Directors
Veronex Technologies, Inc.
(Formerly International Veronex Resources, Ltd.)
I have audited the accompanying balance sheets of Veronex Technologies, Inc., as
of May 31, 1998 and February 28, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period ended May 31, 1998 and the
year ended February 28, 1998. These financial statements are the responsibility
of the Company's management. My responsibility is to express an opinion on
these financial statements based on my audit. The financial statements of
Veronex Technologies, Inc., for the year ended February 28, 1997, were audited
by other auditors whose report thereon, dated March 14, 1997, expressed an
unqualified opinion.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statements presentation. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of Veronex Technologies, Inc., as of
May 31, 1998 and February 28, 1998, and the results of its operations and its
cash flows for the period ended May 31, 1998 and the year ended February 28,
1998, in conformity with generally accepted accounting principles.
/S/ Schvaneveldt & Company
Salt Lake City, Utah
August 10, 1998
2
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Interim Consolidated Balance Sheets
For May 31, 1998 and 1997 and February 28, 1998
(In US Dollars)
<TABLE>
<CAPTION>
(Audited) (Unaudited) (Audited)
May May February
31, 1998 31, 1997 28, 1998
------------ ------------ ------------
Assets
Current Assets
- --------------
<S> <C> <C> <C>
Cash & Short Term Deposits $ 2,146,000 $ 1,577,000 $ 2,493,000
Deposit in U.S. Court 1,227,000
Accounts Receivable 2,021,000 104,000 130,000
Prepaid Expenses 12,000 17,000 17,000
------------ ------------ ------------
Total Current Assets 4,179,000 2,925,000 2,640,000
Software Acquisitions & Integration Costs (Note #3) 2,199,000 395,000 1,803,000
(Net of accumulated amortization of $2,000: 1997 $Nil)
Resource Properties & Related Deferred Costs (Note #4) 66,000 66,000 66,000
Fixed Assets & Depreciation
- ---------------------------
(Net of Accumulated Depreciation of
$105,000: 1997-$82,000) (Note #6) 21,000 17,000 24,000
Investments (Note #5) 152,000 150,000 152,000
----------- ------------ ------------
Total Fixed Assets 173,000 167,000 176,000
----------- ------------ ------------
Total Assets $ 6,617,000 $ 3,553,000 $ 4,685,000
=========== =========== ============
Liabilities & Shareholders' Equity
Current Liabilities
- -------------------
Accounts Payable (Note #7) $ 631,000 $ 908,000 $ 307,000
Shareholders' Equity
- --------------------
Share Capital (Note #8)
Authorized 100,000,000 Common Shares,
Without Par Value, 6,977,501 Shares,
(February 28, 1998, 6,897,501 Shares &
February 28, 1997, 5,455,001 Shares)
Issued & Outstanding 50,867,000 47,694,000 50,508,000
Accumulated Deficit (44,881,000) (45,049,000) (46,130,000)
------------ ------------ ------------
Total Shareholders' Equity 5,986,000 2,645,000 4,378,000
------------ ------------ ------------
Total Liabilities & Shareholders' Equity $ 6,617,000 $ 3,553,000 $ 4,685,000
============ ============ ============
Nature of Operations (Note #1)
Contingencies & Commitments (Note #13)
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Interim Consolidated Statements of Income
For the Three Months Ended May 31, 1998 and 1997
and the Years Ended February 28, 1998 and 1997
(In US Dollars)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended Year Ended Year Ended
May May February February
31, 1998 31, 1997 28, 1998 28, 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
- --------
Software Sales, Royalties and Services $2,083,000 $ $ 294,000 $
Oil & Gas Revenue 132,000
---------- ---------- ----------- ----------
Total Revenues 2,083,000 294,000 132,000
Expenses
- --------
Software Marketing Costs 239,000 669,000
Operating & Administrative 615,000 105,000 855,000 164,000
Amortization of Software Acquisition
& Integration Costs 2,000
Depletion & Depreciation 3,000 1,000 6,000 6,000
Exploration Costs 3,000 (5,000) (1,000) 59,000
Interest Expenses 3,000 4,000 26,000
---------- ---------- ----------- ----------
Total Expenses 862,000 104,000 1,533,000 255,000
Other Expenses (Income)
- -----------------------
Investing Activities 10,000 10,000
Interest (28,000) (34,000) (98,000) (35,000)
Sale of Oil & Gas Interest (38,000)
Gain on Settlement with
Former Attorneys (5,200,000)
---------- ---------- ----------- ----------
Total Other Expense (Income) (28,000) (34,000) (88,000) (5,263,000)
---------- ---------- ----------- ----------
Earnings (Loss) for the Year 1,249,000 (70,000) (1,151,000) 5,140,000
========== ========== =========== ==========
Earnings (Loss) Per Share $0.18 ($.01) ($0.19) $ 0.99
========== ========== ========== ==========
Weighted Average Number
of Shares 6,967,000 5,455,000 5,187,000 5,187,000
========== ========== ========== ==========
Fully Diluted Earnings Per Share 0.17 N/A N/A 0.94
Fully Diluted Weighted Average
Number Of Shares 7,174,000 N/A N/A 5,452,000
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Interim Consolidated Statement of Stockholders' Equity
From February 28, 1997 to May 31, 1998
(In US Dollars)
<TABLE>
<CAPTION>
Shares Issued Share Capital Deficit
----------------------------------------------
<S> <C> <C> <C>
Balance, February 28, 1997 5,355,001 47,628,000 44,979,000
Issued for Software Technology 100,000 66,000
----------------------------------------------
Balance, May 31, 1997 5,455,001 47,694,000
Issued in a Private Placement 502,000 1,614,000
Issued on the Exercise of Options 530,500 270,000
Issued for Software Technology 200,000 453,000
Issued for Subsidiary Company 200,000 454,000
Issued as a Finders' Fee 10,000 23,000
Net (Loss) 1,151,000
----------------------------------------------
Balance, February 28, 1998 6,897,501 50,508,000 46,130,000
Issued on Exercise on Options 80,000 359,000
Loss (Earnings) for the Period (1,249,000)
----------------------------------------------
Balance, May 31, 1998 6,977,501 $50,867,000 $44,881,000
==============================================
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Interim Consolidated Statements of Cash Flows
For the Three Month Period Ended May 31, 1998 and 1997
and the Year Ended February 28, 1998 and 1997
(In US Dollars)
<TABLE>
<CAPTION>
Three Three
Months Months Year Year
Ended Ended Ended Ended
May 31, May 31, February 28, February 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Cash Flows Provided (Used by) Operating Activities
- --------------------------------------------------
<S> <C> <C> <C> <C>
Earnings (Loss) for the Year Ended $ 1,249,000 $ (70,000) $ (1,151,000) $ 5,140,000
Items Not Affecting Cash:
Amortization of Software Acquisition & Integration
Costs 2,000
Depletion & Depreciation 3,000 1,000 6,000 6,000
Investing Activities 10,000 10,000
Changes in Operating Assets & Liabilities
Accounts Receivable & Prepaid Expenses (1,886,000) (87,000) (113,000) (29,000)
Accounts Payable 325,000 64,000 (538,000) (2,365,000)
------------ ------------ ------------ ------------
Net Cash Provided (Used) by Operating
Activities (307,000) (92,000) (1,786,000) 2,762,000
Cash Flows Provided (Used) by Financing Activities
- --------------------------------------------------
Due to Related Parties (182,000)
Share Capital Issued for Cash 359,000 -- 1,884,000 799,000
------------ ------------ ------------ ------------
Net Cash Provided by Financing Activities 359,000 1,884,000 617,000
Cash Flows Provided (Used) by Investing Activities
- --------------------------------------------------
Sale (Acquisition) of Investments (12,000) (150,000)
Software Acquisition and Integration Costs (396,000) (309,000) (787,000) (20,000)
Acquisition of Fixed Assets (11,000) (10,000)
------------ ------------ ------------ ------------
Net Cash Provided (Used) by Investing
Activities (396,000) (309,000) (810,000) (180,000)
------------ ------------ ------------ ------------
Changes in Cash & Short-Term Deposits (344,000) (401,000) (712,000) 3,199,000
Cash & Short-Term Deposits at
Beginning of Period 2,490,000 3,205,000 3,205,000 6,000
------------ ------------ ------------ ------------
Cash & Short Term Deposits at
End of Period $ 2,146,000 $ 2,804,000 $ 2,493,000 $ 3,205,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Consolidated Statements of Cash Flows -Continued-
For the Year Ended February 28, 1998
(In US Dollars)
<TABLE>
<CAPTION>
February 28,
1998
------------
Non-Cash Financing Activities
-----------------------------
<S> <C>
Share Capital Issued for Software Systems $ 519,000
Share Capital Issued for Subsidiary 454,000
Share Capital Issued as a Finders' Fee 23,000
---------
Total Non-Cash Financing Activities $ 996,000
=========
Non-Cash Investing Activities
- -----------------------------
Acquisition of Software Systems (519,000)
Acquisition of Subsidiary (454,000)
Finders Fees (23,000)
---------
Total Non-Cash Investing Activities $(996,000)
=========
Disclosures from Operating Activities
- -------------------------------------
Interest Expenses $ 0
Taxes 0
</TABLE>
The accompanying notes are an integral part of these financial statements
7
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #1 - Corporate History
- ---------------------------
On January 14, 1997, the Company entered into a Property Purchase Agreement
("the Agreement") with Thomas J. Price, a software developer, to acquire certain
software technology including, but not limited to, an automated information
manager and information management application system including a source program
analyzer (collectively referred to as the "I|Nova System").
The terms of the Agreement provide for the Company to issue up to 12,000,000
shares of its common stock to acquire the I|Nova System contingent on the future
revenues earned from I|Nova System licensing fees. Pursuant to the terms of the
Agreement, up to 6,500,000 of these shares may be issued to Mr. Price. A
further 3,500,000 shares have been reserved for contingent issue to Promax
Conceptual Strategies ("Promax"), a California Company of which Mr. Price was
the majority shareholder and 2,000,000 shares have been allocated to the
Company's 1997 Contingent Stock Option Plan. These shares are to be issued on a
contingent basis. The Company paid $20,000 on signing the agreement and issued
100,000 shares of its capital stock to Mr. Price, and the remaining 6,400,000
shares will be issued to Mr. Price based on an earn-out formula contingent upon
future revenues generated from licensing sales and maintenance contracts of the
I|Nova System.
Effective January 14, 1997, the board of directors of Promax approved an
agreement to merge Promax with and into a yet to be incorporated wholly-owned
Subsidiary of the Company. On August 15, 1997, the Company incorporated in the
State of California, a wholly-owned Subsidiary, PCS Acquisition Corp., ("PCS"),
for the purpose of completing the merger with Promax. Approval of the merger by
the shareholders of Promax was obtained in August of 1997, and the merger
documents were filed with the California Secretary of State in September of
1997. PCS had no assets, liabilities or operations at February 28, 1998.
A finders fee will also be payable pursuant to the rules, policies and
guidelines of the regulatory authorities. The Company has also agreed to employ
Mr. Price for a period of five years at a salary of $120,000 per year.
By agreement dated August 1, 1997, the Company has acquired 100% of the issued
and outstanding shares of Mainstream Technologies, Inc., ("Mainstream"), a
Company incorporated in the State of California. As consideration for the
acquisition of Mainstream the Company issued 200,000 of its shares at a deemed
value of US $2.26875 per share. The Company also agreed to employ the vendor
for a period of two years at a salary of $90,000 per year. The acquisition
costs of Mainstream have been included in Software Acquisition and Integration
Costs (Note #3). These consolidated financial statements include the assets and
liabilities of Mainstream as of May 31, 1998 and February 28, 1998 and the
operations of Mainstream for the periods March 1, 1998 to May 31, 1998 and
August 1, 1997 to February 28, 1998.
8
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #1 - Corporate History -Continued-
- ---------------------------------------
By agreement dated August 1, 1997, the Company acquired exclusive rights to
software technology known as the Archidata System, ("Archidata"). As
consideration for the acquisition of Archidata the Company issued 200,000 of its
shares at a deemed value of US $2.26875 per share. The Company has also agreed
to employ the vendor for a period of two years at a salary of $90,000 per year.
The acquisition costs of the Archidata System have been included in Software
Acquisition and Integration Costs (Note #3).
Effective December 4, 1997, the Company formally changed its name to Veronex
Technologies, Inc.
As of May 31, 1998, the Company has signed four Strategic Alliance Agreements to
license the I|Nova System. The terms of the agreements provide for license fees
of between $2,000,000 and $2,500,000 to be paid out of the revenues generated by
the use and/or sub-licensing of the I|Nova System by the Licensees to its
clients. The Licensees are also required to share all gross revenues on a ratio
of 65% to Veronex, and 35% to the Licensees, until Veronex receives the entire
license fee. Thereafter, the revenues generated by the use and/or sub-licensing
of the I|Nova System by the Licensees to its clients will be shared on a ratio
of 65% of all gross revenues to the Licensees, and the remaining 35% of all
gross revenues to Veronex. As of May 31, 1998, Veronex has recorded $2,000,000
of revenue under a Strategic Alliance Agreement with Agiss Software Corporation
("Agiss"). (See Note #13 - Contingencies and Commitments). This revenue has
been included in accounts receivable of $2,021,000, and is secured by Agiss
common stock.
During the past several years, the Company has been a party to a number of legal
actions and appeals to court decisions, all arising out of an arbitration panel
award (the Arbitration Award), that resulted in the transfer of the Company's
interest in the Enim Oil Project in Indonesia to its former joint venture
partner Triton Energy Corporation ("Triton"), and/or its affiliates. The
Company fully provided for its interest in the Enim Project during the year
ended February 28, 1995.
During the year ended February 28, 1997, the Company settled the lawsuits
against its former attorneys and received a net cash payment of $5.2 million in
complete settlement of all complaints and cross-complaints against these
attorneys. As a result of a continuing action by Triton to enforce the
remaining balance of its arbitration award claim against the Company for
approximately $765,000 in connection with the Arbitration Award, $1.2 million of
cash was lodged with the US District Court for the Central District of
California pending a determination of Nordell's, (the Company's Subsidiary),
obligation to pay the Arbitration Award. On May 16, 1997, the US District Court
approved the application of these funds to retire the remaining Triton
liability. Triton was paid and the remaining funds were returned to the Company
on June 11, 1997.
9
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #2 - Significant Accounting Policies
- -----------------------------------------
Basis of Presentation
The Company is incorporated in the Province of British Columbia, Canada.
These consolidated financial statements have been prepared in accordance
with accounting principles and practices generally accepted in the United
States. Application of Canadian's generally accepted accounting principles
would not result in any material differences to the consolidated financial
statements.
Principles of Consolidation
These consolidated financial statements include the accounts of the
Company, and its subsidiaries (all of which are wholly owned) which are
listed below. Intercompany transactions and balances have been eliminated
in consolidation.
Align Energy, Inc.
Bonaparte Resources, Ltd.
High River Industries, Ltd.
Mainstream Technologies Inc. ("Mainstream")
Nordell International Resources Ltd. ("Nordell")
PCS Acquisition Corp. ("PCS")
Richport Resources Ltd. ("Richport")
Veronex Resources, Inc.
Resource Properties
Costs related to the acquisition of mineral properties are capitalized.
Mineral exploration costs are expensed in the year incurred. If it is
determined that a prospect contains economically recoverable reserves, all
costs relating to that prospect for the current and subsequent years,
including expenses net of revenues during the start-up phase, are
capitalized until the prospect is capable of sustained operations at
commercial production levels. These capitalized costs, together with
property acquisition and ongoing development costs, are amortized on a
unit-of-production method based on the estimated life of the ore reserves.
Management reviews annually the carrying value of the interest in each
property and, where necessary, properties are written down to fair market
value.
10
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #2 - Significant Accounting Policies -Continued-
- -----------------------------------------------------
Investments
Investments are recorded at cost unless there is a decline in market value
that is other than temporary.
Revenues Recognition
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountant Statement of Position 97-2 for software
revenue recognition, which requires that license fee revenues are
recognized upon evidence of a license agreement and delivery of software if
there are no significant implementation or installation obligations,
collection of the receivable is probable, the license fees are fixed or
determinable and the product has been accepted by the customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could subsequently differ from
those estimates.
Financial Instruments
Financial Instruments are classified in accordance with the substance of
the contractual arrangement. Financial liabilities, which are defined as
any contractual obligation to deliver cash or another financial asset to
another party, are classified as a liability.
Currency Translation
The Company uses the temporal method of currency translation, as applied to
integrated international operations, for translating the company's Canadian
operations from Canadian dollars to US dollars. Under this method,
monetary assets and liabilities in foreign currencies have been converted
at the exchange rate prevailing at the balance sheet date. Non-monetary
assets, liabilities, and equity are translated at historical rates. Gains
and losses on foreign exchange are included in income.
11
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #2 - Significant Accounting Policies -Continued-
- -----------------------------------------------------
Earnings (Loss) Per Share
Income (loss) per share computations are based on the weighted average
number of shares outstanding during the year.
In February 1997, SFAS No., 128, "Earnings Per Share" was issued effective
for periods ending after December 15, 1997. There is no impact on the
Company's financial statements from adoption of SFAS No., 128.
Depreciation Policy
The Company provides for depreciation on furniture and equipment at between
20% and 30% on a declining balance basis. The Company is capitalizing all
costs related to integrating the various components of its I|Nova software
system as Software Acquisition and Integration Costs and will continue to
do so until licensing sales reach commercial levels. Thereafter, all costs
associated with the production and marketing of the company's software
system will be charged to operations. Capitalized costs will be amortized
based on current and future revenues for the product with an annual minimum
amount equal to the straight-line amortization over the remaining estimated
economic life of the product.
Cash Equivalents
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three months
or less at the time of purchase.
Concentration of Credit Risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash. The Company maintains cash
accounts at two financial institutions. At May 31, 1998, cash on deposit
at these financial institutions exceeded federally insured amounts by
approximately $1,900,000. At February 28, 1998, cash on deposit at these
financial institutions exceeded federally insured amounts by approximately
$2,400,000. The Company periodically evaluates the credit worthiness of
financial institutions, and maintains cash accounts only in large high
quality financial institutions, thereby minimizing exposure for deposits in
excess of federally insured amounts.
12
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #3 - Software Acquisition and Integration Costs
- ----------------------------------------------------
Software acquisition and integration costs are capitalized when a product design
and a working model of the software product have been completed, and the
completeness of the working model and its consistency with the product design
have been confirmed by testing. The costs to integrate products into the I|Nova
System for an alternative future use are also capitalized. Software costs which
are capitalized are amortized on a product by product basis, based on the
anticipated future gross revenues compared to the gross revenues generated in
the period being reported on.
<TABLE>
<CAPTION>
May 31, February 28,
1998 1998
---------- ------------
<S> <C> <C>
Costs to acquire the components:
The I|Nova System $ 86,000 $ 86,000
The Archidata System 454,000 454,000
The infrastructure (Maintream) 409,000 409,000
Costs to integrate the components:
Personnel 895,000 663,000
Office and related 355,000 191,000
---------- ------------
Total $2,199,000 $ 1,803,000
========== ============
NOTE #4 - Resource Properties & Related Deferred Costs
- ------------------------------------------------------
a. Details of mineral property are as follows: 1998
------------
Mineral Property $ 66,000
============
</TABLE>
b. Details of Oil Properties are as follows:
Through an agreement with the Indonesian State Oil and Gas Company
("Pertamina"), the terms of which extended to October 28, 1996, the Company
was granted an interest in certain oil and gas properties known as the Enim
Oil Project on the Island of Sumatra, Indonesia.
13
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #4 - Resource Properties & Related Deferred Costs -Continued-
- ------------------------------------------------------------------
By an agreement dated October 7, 1988, effective for the period October 1,
1988, the Company farmed out 60% of its interest in the Enim Oil Project to
Triton Indonesia, Inc., ("Triton") and Triton Oil ("NZ") Limited. Under
the terms of the Farmout Agreement, the Company was required, after
Triton's investment of $24 million cash, to bear its participating share of
costs and expenses.
In November 1989, Triton claimed that its obligation to fund $24 million of
cash contributions had been satisfied and that the Company would be
responsible for bearing its share of future costs and expenses to maintain
its 40% working interest in the Enim Oil Project. The Company disputed the
operator's assertion regarding its cash obligation and other matters and
demanded an arbitration hearing to resolve the dispute. While the
arbitration proceedings were pending, certain additional information came
to the Company's attention which caused the Company to refuse to make
further cash payments commencing June 1990.
On December 13, 1990, the Arbitration Panel rendered its decision on the
dispute between the Company and Triton regarding the Enim Oil Project ("the
Arbitration Award"). The Arbitration Award reduced the Company's interest
in the Enim Oil Project, effective October 1, 1990, to a 5% net profits
interest as defined, and awarded costs and expenses of approximately
$931,000 to Triton. Payment of the awarded costs and expenses was due on
January 31, 1991. The Company filed a motion before the US District Court
to vacate the award. However, on February 27, 1992, the US District Court
entered a final judgement in favor of Triton.
Veronex and Nordell appealed the Arbitration Award to the United States
Court of Appeals for the Ninth Circuit. On July 23, 1993, the United
States Court of Appeals affirmed the Arbitration Award against the
Company's subsidiary, Nordell International Resources, Ltd., reversed the
Arbitration Award against the Company's Subsidiary, Nordell International
Resources, Ltd., reversed the Arbitration Award against the Company and
remanded certain issues to the U.S. District Court for further proceedings
to determine if the Company had either consented to the arbitration panel
determining its status as Nordell's alter ego or had acted, in fact, as
Nordell's alter ego. On May 31, 1994, the US District Court ruled that the
Company was not the alter ego of Nordell and, thus, the Company is not
liable for the approximately $931,000 awarded against Nordell.
14
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #4 - Resource Properties & Related Deferred Costs -Continued-
- ------------------------------------------------------------------
On May 3, 1996, the Ninth Circuit Court of Appeals issued an Order
affirming the US District Court order of May 31, 1994, which found that the
Company is not the alter ego of Nordell and that the Company is not bound
by the Arbitration Award. However, Triton attempted to pursue its
litigation against the Company in US District Court in Texas as noted
below.
On June 15, 1994, Triton filed a malicious and vindictive lawsuit against
Veronex in Texas. The lawsuit sought to have Veronex held responsible for
Nordell's performance under the Farmout Agreement pursuant to an alleged
guarantee by Veronex and claims, among other things, that Veronex should be
held liable for the Arbitration Award. The Company defended the lawsuit
based on the findings in the May 31, 1994 Order of the US District Court in
California which found that Veronex was not a party to the arbitration, was
not an alter ego of Nordell and was not liable to pay for the Arbitration
Award. On December 6, 1996, the US Court of Appeals for the Fifth Circuit
issued an Order which specifically found that the document which Triton
alleged to be a guarantee was not a guarantee.
On February 21, 1997, the US District Court for the Northern District of
Texas filed an Order of Stipulation of Voluntary Dismissal, dismissing
without prejudice, Triton's lawsuit against the Company. Triton knowingly
filed this lawsuit in Texas against the Company having already lost a
lawsuit in California based on similar evidence and facts. Further, as
noted below, Triton lost its lawsuit against a director of the Company.
Triton commenced a separate lawsuit in Texas State Court, against a
director of the Company to collect the Arbitration Award from that
director. On August 9, 1995, the US District Court issued a judgement
against the director. The judgement was appealed to the Fifth Circuit
Court of Appeals.
The Company agreed to fully indemnify the director against any losses
incurred with respect to that action. On December 6, 1996, the Fifth
Circuit Court of Appeals issued an Order reversing the judgement against
the director, thereby relieving the director of any liability for the
Arbitration Award.
On August 22, 1997, Veronex, Nordell and David A. Hite, filed a malicious
prosecution lawsuit against Triton et al. The outcome of this lawsuit is
not determined at this time.
15
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #4 - Resource Properties & Related Deferred Costs -Continued-
- ------------------------------------------------------------------
On June 24, 1992, the Company filed a malpractice lawsuit against its
former attorneys seeking $100 million in damages. These law firms, which
represented Nordell in the Arbitration proceeding, filed cross-complaints
seeking payment of certain legal bills and expenses in the amount of
approximately $360,000. These law firms entered into settlement agreements
with the Company and subsequently dropped their cross-complaints against
the Company for unpaid legal bills. The Company recorded the net proceeds
from these settlement agreements as a gain of $5,200,000 during the year
ended February 28, 1997.
The malpractice litigation provided the Company with the opportunity to
obtain certain documents from KPMG Peat Marwick (KPMG) relating to KPMG's
resignation as Triton's independent auditors. Specifically, the Company
was able to obtain a copy of KPMG's management letter dated October 14,
1991, which disclosed that KPMG had performed an independent inspection of
the physical inventory in Indonesia in May 1991.
The KPMG management letter disclosed that KPMG had discovered an inventory
shortage of approximately $5.3 million, which existed in Indonesia as of
May 31, 1991. Management believes that this $5.3 million of inventory
shortage is a material amount in relation to the Arbitration Award, the
arbitration calculations, Triton's revenues for fiscal 1991, and Triton's
net income for fiscal 1991. Triton failed to disclose this material fact
of the inventory shortage in its Form 10-K filed with the Securities and
Exchange Commission. Triton also failed to inform the Arbitration Panel of
this material fact. The fact is particularly relevant to the arbitration
because the arbitration panel based its monetary calculations for the
Arbitration Award on the KPMG report of September 30, 1990, which is in the
same fiscal period as the inventory shortage discovered by KPMG. In
management's view, the accounting rules and regulations, both in the
accounting profession and in the Securities Act, pertaining to a difference
between the inventory on the books and the actual physical inventory that
can be verified by an independent inspection are well defined. In the
opinion of management, the inventory shortage as of May 31, 1991 of $5.3
million is material to the Arbitration Award, material to Triton's gross
revenues and Triton's net profits and should have been disclosed to the
Arbitration Panel and in Triton's financial statements in its annual report
of Form 10K.
16
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #4 - Resource Properties & Related Deferred Costs -Continued-
- ------------------------------------------------------------------
c. US Securities and Exchange Commission Enforcement Action Against Triton
The following information is extracted from a US Securities and Exchange
Commission (SEC) Enforcement Section Release dated February 27, 1997.
The SEC instituted administrative proceedings against David Gore, Robert
Puetz, both former officers of Triton Energy Corporation ("Triton Energy"),
and William McClure and Robert P. Murphy, both former officers of Triton
Energy's subsidiary, Triton Indonesia, Inc., ("Triton Indonesia"). The
SEC's Order finds that during the years 1989 and 1990, Triton Indonesia
senior officers authorized numerous improper payments to Indonesia's
government employees for the purpose of influencing their decisions
affecting the business of Triton Indonesia. The SEC's Order finds that
these payments were made in violation of the Foreign Corrupt Practices Act.
The Order finds that Murphy, Triton Indonesia's controller, knowingly
participated in creating and recording false entries in Triton Indonesia's
books and records. According to the SEC's Order, McClure, Triton
Indonesia's commercial manager, failed to assure that the entries prepared
by Murphy accurately reflected the underlying transactions. The SEC's
Order also finds that Gore, formerly Triton Energy's president and a
director, and Puetz, formerly Triton Energy's senior vice president of
finance and chief financial officer, each received information indicating
that Triton Indonesia was engaged in conduct that was potentially unlawful,
but took no action to initiate an investigation of the serious issues
raised by Triton Energy's internal auditor.
Without admitting to or denying the SEC's findings, the respondents
consented to cease and desist from: causing any violation of Section 13 (b)
(2) (A) of the Exchange Act (Gore, Puetz, Murphy and McClure); causing any
violation of Section 30A of the Exchange Act (Gore and Puetz); and
violating Exchange Act Rule 13b2-1 (McClure and Murphy).
On February 27, 1997, the SEC filed a complaint in the United States
District Court for the District of Columbia against Triton Energy, Keever
and McAdoo, both former senior officers of Triton Indonesia. The SEC's
complaint alleges that McAdoo and Keever authorized numerous improper
payments to Roland Siouffi, Triton Indonesia's business agent acting as an
intermediary between Triton Indonesia and Indonesian government agencies,
knowingly or recklessly disregarding the high probability that Siouffi
either had or would pass such payments along to Indonesian government
employees for the purpose of influencing their
17
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #4 - Resource Properties & Related Deferred Costs -Continued-
- ------------------------------------------------------------------
decisions affecting the business of Triton Indonesia. The complaint alleges
that these payments were made in violation of the Foreign Corrupt Practices
Act. According to the complaint, McAdoo and Keever together with other
Triton Indonesian employees, also concealed these transactions as routine
business expenditures. The SEC seeks permanent injunctions and civil
monetary penalties from each of the three defendants.
Simultaneous with the filing of the complaint, defendant Triton Energy
consented, without admitting to or denying the allegations, to the entry of
a Final Judgement that permanently enjoins it from violating the books and
records and internal controls provisions of the Securities Act of 1934
(Exchange Act), and orders Triton Energy to pay a $300,000 penalty.
Defendant Keever also consented, without admitting or denying the
allegations, to the entry of a Final Judgement that permanently enjoins him
from violating the foreign corrupt practices and books and records
provisions of the Exchange Act, and orders Keevers to pay a $50,000
penalty.
On August 22, 1997, Veronex, Nordell and David A. Hite filed a malicious
prosecution lawsuit against Triton et al., in the Superior Court for
California in Los Angeles, California, alleging, among other things, abuse
of process, wrongful attachment, breach of fiduciary duty and fraud, the
lawsuit seeks damages, punitive and exemplary damages, specific performance
of the Arbitration Award and an accounting of the Enim Oil Project joint
venture. This lawsuit has been removed to the US District Court, Central
Division of California and is awaiting further instruction from the court.
The outcome of this litigation cannot be predicted at this time.
d. The Congress Property in British Columbia, Canada.
The Company has sold its 50% interest in the Congress Gold Property to
Yucca Gold, Inc., ("Yucca Gold"), in exchange for 3.4 million shares in
Yucca Gold. All costs associated with the Congress Gold Property, have
been written off in previous years. Yucca Gold is a private company whose
shares have no market value. Accordingly no value has been assigned to
this transaction. The Company will retain a 5% net smelter interest in the
Congress Gold Property.
18
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #4 - Resource Properties & Related Deferred Costs -Continued-
- ------------------------------------------------------------------
e. The Alexander Star Claims in California, USA
(i) On July 12, 1995, the Company entered into an agreement to acquire a
100% interest in four placer mining claims, known as the Alexander Star
Claims, in Avawatz Mining District, San Bernadino County, California,
subject to a 4% net smelter return. The Company has issued 100,000 common
shares at a value of $66,000 as consideration for the acquisition. The
Company has the right to acquire one-half of the net smelter return, which
is a 2% smelter return, for $500,000.
(ii) On November 20, 1995, the Company entered into an Agreement with a
group, including a director of the Company and others related to the
director, to acquire a 50% interest in eight placer mining claims in the
Avawatz Mining District, San Bernadino, California, subject to a 5% net
smelter return. To earn this interest, the Company must expend $350,000 on
exploration work by December 31, 1999.
(iii) Also on November 20, 1995, the Company entered into an agreement
with a group, including a director of the company and others relating to
the director, to acquire a 25% interest in one placer mining claim in the
Avawatz Mining District, San Bernadino County, California, subject to a 5%
net smelter return. To earn this interest, the Company must expend $50,000
on exploration work by December 31, 1999.
(iv) As of February 28, 1998, the Company has incurred $59,000 in
exploration costs on these properties.
NOTE #5 - Investments
- ---------------------
<TABLE>
<CAPTION>
Number of Shares Amount Market Value
1998 1997 1998 1997 1998 1997
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Electronic Mortgage
Bank Corporation 50,000 50,000 150,000 150,000 150,000 150,000
Semper Resources Ltd. 5,000 2,000 2,000
------ ------- ------- ------- -------
Totals 152,000 150,000 152,000 150,000
======= ======= ======= =======
</TABLE>
19
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #6 - Depreciation
- ----------------------
The Company capitalized the purchase of equipment and fixtures for major
purchases in excess of $1,000 per item. Capitalized amounts are depreciated
over the useful life of the assets using the straight-line method of
depreciation.
The assets, costs, lives, and accumulated depreciation at May 31, 1998, February
28, 1998 and February 28, 1997, are as follows:
<TABLE>
<CAPTION>
May February February Depreciation Expenses Accumulated Depreciation
1998 1998 1997 May February February May February February
Cost Cost Cost 1998 1998 1997 1998 1998 1997
-------- -------- -------- ------ -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Furniture, Fixture &
Computer Equipment $126,000 $126,000 $101,000 $3,000 $6,000 $6,000 $ 105,000 $102,000 $82,000
-------- -------- -------- ------ -------- -------- ---------- -------- --------
Totals $126,000 $126,000 $101,000 $3,000 $6,000 $6,000 $ 105,000 $102,000 $82,000
======== ======== ======== ====== ======== ======== ========== ======== ========
</TABLE>
NOTE #7 - Accounts Payable
- ----------------------------------
<TABLE>
May February May
31, 1998 28, 1998 31, 1997
-------- -------- --------
<S> <C> <C> <C>
Arbitration Award (see Notes #1 & #4) $ $ $765,000
Legal Fees 50,000
Accrued Management Salaries 277,000 230,000 79,000
Trade and Other 354,000 77,000 14,000
-------- -------- --------
Totals $631,000 $307,000 $908,000
======== ======== ========
</TABLE>
NOTE #8 - Share Capital
- ----------------------------------
<TABLE>
<CAPTION>
a. The authorized share capital of the Company is 100,000,000 shares without par value.
Number of shares (issued or allotted): May February May
31, 1998 28, 1998 31, 1997
-------- ---------- --------
<S> <C> <C> <C>
Balance - beginning of period $6,897,501 $5,355,001 $5,355,001
Issued to the public
Private Placements 502,000
Issued for exercise of stock options 80,000 530,500
Issued for software technology 300,000 100,000
Issued for subsidiary company 200,000
Issued as a finder fee 10,000
---------- ---------- ----------
Totals $6,977,501 $6,897,501 $5,455,001
========== ========== ==========
</TABLE>
20
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #8 - Share Capital -Continued-
- -----------------------------------
During the year ended February 28, 1998, the Company:
(i) Issued 502,000 shares at US $4.00 per share for net proceeds of US
$1,614,800 (Cdn $2,284,984) by way of private placement
(ii) Issued 530,500 shares at an average Cdn $0.70 for proceeds of Cdn
$373,920 on the exercise of share purchase options
During the three month period ended May 31, 1998, the Company:
(i) Issued 80,000 shares or the exercise of options at an average price
of Cdn $6.40 for total proceeds of Cdn $512,000.
b. Common share purchase options are outstanding; expiring at various dates to
December 1, 2002 for $498,658 (1997-530,500) common shares at prices
between Cdn $3.13 and Cdn $8.45 per share.
Outstanding stock options as of May 31, 1998 and February 28, 1998:
<TABLE>
<CAPTION>
May February
31, 1998 28, 1998
--------- ---------
<S> <C> <C>
Exercise price:
Less than Cdn $6.00 per share $ 38,658 $ 93,658
Between Cdn $6.00 and Cdn $8.00 per share 355,000 355,000
Greater than Cdn $8.00 per share 50,000 50,000
--------- ---------
Totals $ 443,658 $ 498,658
========= =========
</TABLE>
<TABLE>
<CAPTION>
May February February
31, 1998 28, 1998 28, 1997
--------- --------- ---------
<S> <C> <C> <C>
Number of Options:
Outstanding - beginning of period at average price
of Cdn $0.70 (1997-Cdn $.079; 1996-Cdn $.096) $ 498,658 $ 530,500 $ 235,377
Granted during the period at an average price of
Cdn $6.53 (1997-Cdn $.068; 1996-Cdn $0.65) 25,000 618,658 455,500
Exercised at an average price of Cdn $0.70
(1997-Cdn $0.52) (80,000) (530,500) (136,805)
Expired or canceled during the year at an average
price of Cdn $6.58 (1997 - Cdn $1.10) (120,000) (23,572)
--------- --------- ---------
Totals $ 443,658 $ 498,658 $ 530,500
========= ========= =========
</TABLE>
21
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #8 - Share Capital -Continued-
- -----------------------------------
c. During the period ended May 31, 1998, and the year ended February 28, 1998,
the Company:
(i) granted 25,000 options at $5.94
(ii) granted 618,658 (1997-455,500; 1996-83,247) options at exercise
prices ranging from Cdn $3.13 to Cdn $8.45 per share, expiring
between August 7, 2002 and November 13, 2002.
(iii) amended the exercise price on Nil (1997 - 118,257; 1996 - 177,120)
options
(iv) canceled 120,000 (1997 - 23,572; 1996 - 30,000) options
d. On September 12, 1997, the Company entered into a financing agreement with
Robb, Peck McCooey Clearing Corp, ("Robb Peck"). The agreement allowed
Robb, Peck and/or its clients to invest up to $15.4 million in Veronex.
Veronex agreed to pay Robb, Peck certain fees and expenses. On November 7,
1997, as a result of the agreement, 502,000 shares were issued at a price
of US$4.00 per share, for net proceeds of $1,614,000.
Attached to the shares are 502,000 transferable share purchase warrants
exercisable at a price of US $8.00 per share for a five year period
commencing after the final closing of the offering These warrants may be
redeemed by the Company at US $0.10 per warrant subject to certain
conditions and approvals.
In addition the Company has issued 100,400 placement agent's share purchase
warrants exercisable at a price of US $4.00 per share for a five year
period commencing after the final closing of the offering. On May 12,
1998, the Company cancelled the placement agent's warrants at the order of
the British Columbia Securities Commission. The Company is currently
seeking a Discretionary Order which would allow the Company to reissue
these warrants. In the event the discretionary Order is not granted, it is
the Company's intention to compensate the placement agent in an alternative
manner for its services.
e. As mentioned in Note #1, 2,000,000 shares of the 12,000,000 shares to be
issued contingent on revenue, for the acquisition of the I|Nova System have
been allocated to the Company's 1997 Contingent Stock Option Plan. As of
February 28, 1997, 1,315,000 of these contingent options have been
allocated at an average exercisable price of Cdn $2.82 to personnel
involved in the integration and marketing of the I|Nova System.
22
<PAGE>
- --------------------------------------------------------------------------------
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE # 9 - Income Taxes
- -----------------------
The Company has adopted the provisions of SFAS No., 109, "Accounting for Income
Taxes". SFAS 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Company has fully reserved the tax benefits of these operating losses
because the likelihood of realization of the tax benefits cannot be determined.
Temporary differences between the time of reporting certain items for financial
and tax reporting purposes consist primarily of compensation expense related to
the issuance of stock options.
<TABLE>
<CAPTION>
For the Period
March 1, 1998 Year Ended Year Ended
to May February February
31, 1998 28, 1998 28, 1997
-------------- ---------- -----------
<S> <C> <C> <C>
Tax at statutory rates $ 570,000 ($ 92,000) $ 2,307,000
Resource deductions claimed (2,357,000)
Net operating loss applied
Salary expense previously expensed for accounting
purposes now claimed for income tax purposes (568,000)
Losses recognized for income tax purposes ($ 570,000) 92,000 618,000
-------------- ---------- -----------
Totals $ NIL $ NIL $ NIL
============== ========== ===========
</TABLE>
No income taxes are currently payable. The Company and its Subsidiaries have
approximately $18,500,000 of Canadian and foreign resource property expenditures
and reported losses available to reduce taxable income in future years. Future
tax benefits relating to these amounts have been eliminated by the application
of a valuation allowance.
Income tax losses of the Company and its Subsidiaries, included above, expire as
follows:
<TABLE>
<S> <C> <C>
2000 Cdn$ $ 275,000
2001 929,000
2002 934,000
2003 614,000
2004 1,315,000
----------
Total $4,067,000
==========
</TABLE>
23
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #10 - Segmented Information
- --------------------------------
During the year ended February 29, 1996, the Company entered into three
agreements to acquire interests in 13 placer mining claims. All of the claims
are located in the Avawatz Mining District, San Bernardino County, California,
USA.
Prior to January 14, 1997, the Company's principal asset was its interest in the
Enim Oil Project on the Island of Sumatra, Indonesia, which was fully provided
for as of February 28, 1995, by a charge to operations (see Note #4).
During the year ended February 28, 1997, the Company entered into an agreement
to acquire certain software technology ("the I|Nova System") as explained in
Note #1.
During the year ended February 28, 1998, the Company entered into an agreement
to acquire additional software technology ("the Archidata System"). In
addition, during the year ended February 28, 1998, the Company entered into an
agreement to acquire a software development company ("Mainstream Technologies,
Inc."), both acquisitions are explained in Note #1. As of February 28, 1998,
the Company's major business effort is directed toward the development and
licensing of it software systems.
NOTE #11 - Related Party Transactions
- -------------------------------------
a. During the year ended February 28, 1998, management and secretarial fees of
$10,000 (1997- $18,000; 1996-$40,000) were paid to a Company controlled by
a director of the Company.
b. During the year ended February 28, 1998, accounting fees of $2,000 (1997-
$10,000; 1995-NIL) were paid to an officer of the Company.
c. Included in accounts payable is approximately $277,000 at May 31, 1998 and
$230,000 at February 28, 1998, (1997 - $NIL), payable to an officer of the
Company under the terms of an employment contract and for reimbursement of
services. (See Note #13 - Contingencies and Commitments)
24
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #12 - Impact of Recently Issued Accounting Pronouncements
- --------------------------------------------------------------
a. Statement of Financial Accounting Standards No., 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (SFAS 121), was made effective for the period beginning after December
15, 1995. Under this standard, management of the Company must review the
net carrying value of each mineral property for impairment whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable.
Since the Company has not yet completed a feasibility study with respect to
its mineral property, information required to calculate the estimated
future cash flows as required under SFAS 121, is not yet available.
However, management reviews the carrying value of the property through its
ongoing program of exploration for commercially viable mineral reserves.
b. The Company has elected to follow Accounting Principles Board Opinion No.,
25, "Accounting for Stock Issued to Employees" (APB 225) and related
interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting under SFAS 123, "Accounting
for Stock-Based Compensation", requires the use of option valuation models
that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals that of the market price of the underlying stock at the date of
grant, no compensation expense is recognized.
The fair value for options granted during the year ended February 28, 1998,
as estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions for 1998:
- risk-free interest rates of between 5.42% and 5.93%
- dividend yield of 0%
- volatility factors of the expected market price of the Company's stock
of 80%
- an expected life of the option of one and one-half years
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective inputs assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
25
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #12 - Impact of Recently Issued Accounting Pronouncements -Continued-
- --------------------------------------------------------------------------
For pro forma disclosure, the estimated fair value of the option is
amortized to expense in the period the option is granted. For the year
ended February 28, 1998, the Company's pro forma net loss and pro forma
loss per share have been calculated to be $620,000 and $0.10, respectively.
For the year ended February 28, 1997, the Company's pro forma net earnings
and pro forma earnings per share were calculated to be $4,998,000 and
$0.97, respectively. Pro forma fully diluted loss per share for the year
ended February 28, 1998, has not been calculated as it would be anti-
dilutive. Pro forma fully diluted earnings per share for the year ended
February 28, 1997, was calculated to be $0.92.
c. New Technical Pronouncements
In February 1997, SFAS No., 129, "Disclosure of Information about Capital
Structure" was issued effective for periods ending after December 15, 1997.
The Company has adopted the disclosure provisions of SFAS No., 129
effective with the fiscal year ended February 28, 1998.
In June 1997, SFAS No., 130, "Reporting Comprehensive Income" was issued
effective for fiscal years beginning after December 31, 1997, with earlier
application permitted. The Company has elected to adopt SFAS No., 130
effective with the fiscal year ended February 28, 1998. Adoption of SFAS
No., 130 is not expected to have a material impact on the Company's
financial statements.
In June 1997, SFAS No., 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued effective for fiscal year beginning
after December 31, 1997, with earlier application permitted. The Company
has elected to adopt SFAS No., 131, effective with the fiscal years ended
February 28, 1998. Adoption of SFAS No., 131 is not expected to have a
material impact on the Company's financial statements.
NOTE #13 - Contingencies and Commitments
- ----------------------------------------
a. The Company has an employment contract with an officer and director for
$350,000 per annum that extends to December 15, 2002.
b. The Company has employment contracts, including those referred to in Note
#1, totaling $1,148,000 with personnel involved in the development,
integration and marketing of the I|Nova System.
26
<PAGE>
Veronex Technologies, Inc.
(Formerly International Veronex Resources Ltd.)
Notes to Financial Statements -Continued-
For May 31, 1998 and February 28, 1998
(In US Dollars)
NOTE #13 - Contingencies and Commitments -Continued-
- ----------------------------------------------------
c. The Company leases office facilities in Santa Ana, California under
operating leases expiring in September 1999.
Minimum future rental payments under the lease are:
<TABLE>
<CAPTION>
Year Ending Amount
- -------------------------- -------
<S> <C>
September 30, 1998 $18,480
September 30, 1999 33,545
-------
Total $52,025
=======
</TABLE>
Other office facilities in California and Vancouver, Canada are rented on a
month to month basis.
NOTE #14 - Subsequent Events
- ----------------------------
The Company has commenced litigation proceedings and become a party to
arbitration proceedings against certain of its former employees. In the
litigation, the Company has alleged, among other causes of action, that the
party defendants misappropriated the Company's intellectual property. In such
litigation, the Company was granted a temporary restraining order against the
party defendants. Further, the Company believes that the issues raised in the
arbitration proceedings are inextricably intertwined with the matters that are
the subject of the litigation.
NOTE #15 - Risks and Uncertainties
- ----------------------------------
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995: This report contains forward-looking statements relating to the expected
capabilities of Veronex Technologies, Inc., (the "Company") discussed herein.
Such forward-looking statements include expressions of belief, expectation,
contemplation estimation and other expression not relating to historical facts
and circumstances. These forward-looking statements are subject to numerous
risks and uncertainties, including the risk that (i) other companies will
develop products and services perceived to be superior to the present and
proposed products and services of the company, (ii) the products and services
may not be marketed effectively by the Company, and (iii) potential customers
may find other products and services more suitable for the applications marketed
by the Company, as well as other risks that may cause such statements not to
prove accurate. Any projections or estimates herein may assume certain economic
and industry conditions and parameters subject to change.
27
<PAGE>
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
General
- -------
Veronex acquired, on January 14, 1997, the worldwide rights to an automated
information management system and application manager technology (the "I|NOVA
System" which was formerly known as the "AIM System"). The corporate name
change to Veronex Technologies, Inc. reflects the Company's transition to the
computer software industry. The Company's Common Stock is registered under the
United States Securities Exchange Act of 1934, and its stock trades principally
on the OTC Bulletin Board in the United States of America under the symbol
"VXTK". The Company's Common Stock was formerly registered with and traded on
the Vancouver Stock Exchange in Canada under its previous name, International
Veronex Resources Ltd., under the symbol "IVX." The Company applied for a
voluntary delisting from the Vancouver Stock Exchange, and the Company's common
shares were voluntarily delisted from trading on the Vancouver Stock Exchange on
July 4, 1997.
Founded in 1974 in the Province of British Columbia, Canada, Veronex is a
Canadian company with operations in Canada and the United States of America. In
1978, Veronex began a long-term strategy to acquire and develop diversified
natural resource properties. The acquisition of these natural resource
opportunities was usually for a combination of cash and the issuance of new
shares of common stock. Generally, the issuance of a portion of these new
shares of common stock was contingent upon the discovery and successful
production of the desired natural resource. The Company's normal business
approach was to combine its own exploration and operational expertise with the
financial strength of a major partner.
In 1988 the Company entered into a Farmout Agreement with Triton Indonesia,
Inc., a wholly owned subsidiary of Triton Energy Corporation (collectively
"Triton"). Unbeknown to the Company, Triton was being operated in a pattern of
corrupt, illegal and fraudulent activities which resulted in the Company being
cheated out of its interest in the Enim Oil Project. Since 1990, the Company
was engaged in complex litigation with Triton and with the Company's former
attorneys. The litigation essentially concluded in November 1996, with the
exception of Veronex obtaining its 5% net profits interest earnings from Triton.
On January 14, 1997 the Company entered into a Property Purchase Agreement (the
"Agreement") with Thomas J. Price, a software developer, to acquire certain
software technology including, but not limited to, an information management
application system, including a source program analyzer (collectively referred
to as the "I|NOVA System"). The
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<PAGE>
terms of the Agreement provide for Veronex to pay a fee of $20,000 and to issue
up to 12,000,000 shares of Common Stock to acquire the I|NOVA System. Veronex
issued 100,000 shares of its Common Stock and will issue the balance of the
shares of common stock based on a contingent earn-out formula, contingent upon
future revenues generated from licensing sales and maintenance contracts of the
I|NOVA System. A finder's fee will be payable pursuant to the rules, policies
and guidelines of the regulatory authorities.
Effective the same date, the Agreement was amended to reduce by 5,500,000 the
number of shares of Common Stock to be issued based on a contingent earn-out
formula. Of such reduction, 3,500,000 shares were reserved for contingent
issuance to ProMax Conceptual Strategies ("ProMax"), a California corporation of
which Mr. Price was the majority shareholder; the balance of the 2,000,000
contingent earn-out shares were allocated to the Company's 1997 Contingent Stock
Option Plan, which shares are also to be issued on a contingent basis.
Effective as of January 14, 1997, the board of directors of ProMax approved an
agreement to merge ProMax with and into PCS Acquisition Corp., a California
corporation and wholly-owned subsidiary of the Company. Approval by the ProMax
shareholders was obtained in August of 1997, and the merger documents were filed
with the California Secretary of State's office in September of 1997.
Effective August 1, 1997, the Company acquired additional, complementary
technologies through two additional transactions:
(i) a Property Purchase Agreement with Terry G. Goodbody, a software
developer; and
(ii) a Stock Purchase Agreement with Thomas A. Speed, pursuant to which
Mainstream Technologies, Inc., a California corporation owned by Mr.
Speed, became a wholly-owned subsidiary of the Company.
As a result of these two transactions, the Company acquired additional software
technology and expertise to assist in its efforts in furthering the development
and marketing of the I|NOVA System and related software products, as is more
fully explained below.
I|NOVA SYSTEM TECHNOLOGY
- --------------------------
At the beginning of 1997, the Company redirected its business focus, becoming a
computer software development and publishing company with a fully integrated
business application engineering and re-engineering system, the I|NOVA System.
Veronex's goal is to be the leading software provider for business application
systems for
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the New Millennium. Management believes that the I|NOVA System's unique features
provide users of mainframe, mini and micro-computers with greater application
programming flexibility and responsiveness than any other computer business
application software currently available.
Computer systems worldwide are presently faced with a software crisis commonly
referred to as the Year 2000 Problem or Y2k problem. The Y2k problem was
created by computer software programmers attempting to save space in computer
memory in the very early days of the information age. The date was expressed as
six (6) digits for MM,DD,YY or 00-00-00 in stead of eight (8) digits for
MM,DD,YYYY or 00-00-0000. Consequently, computers were programmed to always
assume the century was 1900. The effect of this programming decision will be a
complete disruption in all date sensitive computations in computer systems
worldwide at century's end. When January 1, 2000 arrives and the YY rolls over
to 00, computers will believe that the century date is 1900 instead of 2000.
Medicare and Social Security retirement benefits are just two of the areas of
date sensitive computations that will be affected by the Y2k problem.
The Y2k problem provides Veronex with a unique marketing opportunity for its
I|Nova System because all business software systems worldwide will need to be
repaired, re-engineered or replaced. Unlike other Y2k solutions, Veronex's
I|NOVA System goes one step further - fully upgrading the business application
system, providing an actual return on an investment made by a business to solve
its Y2k problem. The Automated Information Management System (the "I|NOVA
System") includes:
(i) the I|Nova Approach Methodology, which details all steps necessary to
create new systems using a data driven, re-engineering approach.
Following this planned approach, DataBase Architectures, Data
Warehouses, Application Systems Architectures and Network
Architecture may be rapidly created and put into production in less
than 60 days.
(ii) the I|Nova DataCentric Analyzer, which was designed to solve COBOL-
based legacy code problems, including Y2k. It automatically performs
inventory, assessment, analysis, repair, revitalization (by source
code reduction), conversion and testing of legacy source code at
extremely high speed.
(iii) the I|NOVA Rapid Application Development System, a "NoCode"
application software development system (the "Rapid Application
Development System") with a capability that takes the first step in
software development beyond legacy source code problems, including
Y2k. The Rapid Application
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Development System offers users the opportunity to create and migrate
the enterprise to a new generation of codeless software technology.
(iv) an I|Nova Application Manager (the "AppManager"), which has the
capability to turn functional business applications into operational
applications, on any platform from mainframe to PC.
The I|Nova System was assembled using a corporate acquisition strategy to
achieve the mission of Veronex to become the software provider of choice for the
new millennium. The first acquisition was in January 1997 of the DataCentric
Analyzer (DCA) from Thomas J. Price, a software developer; of the Rapid
Application Development System (RADS) and the Application Manager (AppManager)
from ProMax Conceptual Strategies.
The Company then acquired the ArchiData methodology technology which is an ITAA
Y2k certified compliant method for repairing the Y2k problem and designing
DataBase Architectures, Data Warehouses, Application Systems Architectures and
Network Architecture. This methodology technology was over 15 years in
development and has been used as the basis for systems development and
installation at many corporations.
At the same time, the Company acquired Mainstream Technologies, Inc. a proven
software engineering and re-engineering firm with a complete software service,
support, training and installation infrastructure. This complete software
service, support, training and installation infrastructure technology has been
in service for over 10 years and has proven successful.
Concurrent with these two acquisitions, the Company re-engineered its system
analyzer and upgraded its capabilities to include Y2k analysis and repair. The
unique features of the DataCentric Analyzer allow it to automatically perform
inventory, assessment, analysis, repair, revitalization (by source code
reduction), conversion and testing of legacy source code at extremely high
speeds. The Company has applied for patents on the many unique features of the
DataCentric Analyzer.
In summary, management believes that the I|NOVA System has several distinct
advantages to users. The I|NOVA System provides (i) added value and a return on
the investment required to repair the Y2k problem; (ii) updated business
applications software technology; (iii) a return of control of the information
system department to senior management; and, (iv) perhaps most importantly,
substantial cost savings and more flexibility for the information system
department by reducing program source code size and maintenance costs by up to
60%, by reducing the information system department size by up to 50%, and by
reducing systems application development time by up to 50%. The cost savings
expected to be provided by Veronex's technology should continue to provide a
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<PAGE>
return on the investment necessary to fix the Y2k problem for years to come.
Effective February 1, 1998, the Company signed its first Strategic Alliance
Agreement to License the I|Nova System to VentureTech 2000, Inc. The terms of
the agreement provide for a license fee of $2,500,000 to be paid out of the
revenues generated by the use and/or sub-licensing of the I|Nova System by
VentureTech 2000 to its clients. VentureTech 2000 is also required to share all
gross revenues on a ratio of 65% to Veronex and 35% to VentureTech 2000 until
Veronex receives the entire $2,500,000 license fee, thereafter, the revenues
generated by the use and/or sub-licensing of the I|Nova System by VentureTech
2000 to its clients will be shared on a ratio of 65% of all gross revenues to
VentureTech 2000 and the remaining 35% to Veronex. Veronex has elected to treat
this transaction as a non-revenue event until such time as there are actual
revenues generated by VentureTech 2000 by the use and/or sub-licensing of the
I|Nova System and these revenues are received by Veronex. The Company has
elected to defer the revenue from this first Strategic Alliance until such time
as VentureTech 2000 begins to make payments on the license fee. Accordingly,
the Company will not commence to amortize the deferred development costs until
that time.
The Company has completed three additional Strategic Alliance Agreements as of
July 31, 1998. The terms of the agreements all call for a one time license fee
and permit the Company to share in gross revenues generated from the use of the
I|Nova System.
One agreement provides for the payment of the one time licensing fee to be
guaranteed by a pledge of common stock. Accordingly, Veronex has recognized
this transaction as revenue for the quarter ended May 31, 1998.
LIQUIDITY AND CAPITAL REQUIREMENTS
- ----------------------------------
Veronex's financial performance is dependent on many external factors which are
not controllable by management nor predictable as to future fluctuations.
Additionally, in the current period of worldwide economic uncertainty, the
availability and cost of funds have become increasingly hard to project.
Changes and new events in the social, monetary and economic marketplace could
materially affect the financial performance of Veronex in the future.
As of May 31, 1998, the Company had working capital of $3,548,000. Further, the
Company anticipates that it will have adequate cash for all of its planned
operations for the next twelve months.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
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<PAGE>
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995: Certain statements in this report, including statements of the Company and
management's expectations, intentions, plans, and beliefs, including those
contained in or implied by "Managements Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to Consolidate Financial
Statements, contain forward-looking statements relating to the expected
capabilities of the Company, as defined in Section 21D of the Securities
Exchange Act of 1934, that are dependent on certain events, risks, and
uncertainties that are outside the Company's and/or management's control. Such
forward-looking statements include expressions of belief, expectation,
contemplation, estimation and other expressions not relating to historical facts
and circumstances. These forward-looking statements are subject to numerous
risks and uncertainties, including the risk that (i) other companies will
develop products and services perceived to be superior than the present and
proposed products and services of the Company; (ii) the products and services
may not be marketed effectively by the Company; (iii) potential customers may
find other products and services more suitable for the applications marketed by
the Company; (iv) the future outcome of regulatory and litigation matters are
not determinable; (v) the assumptions described in this report underlying such
forward-looking statements as well as other risks that may cause such statements
not to prove accurate. Any projections or estimates herein made assume certain
economic and industry conditions and parameters subject to change. Any opinions
and/or projections expressed herein are solely those of Veronex Technologies,
Inc. and are subject to change without notice. Any projections or estimates
herein made assume certain economic and industry conditions and parameters
subject to change. Actual results and developments could differ materially
from those expressed in or implied by such statements due to a number of factors
including those described in the context of such forward-looking statements.
RESULTS OF THE THREE MONTHS ENDED MAY 31, 1998 COMPARED TO THE THREE MONTHS
- ---------------------------------------------------------------------------
ENDED MAY 31, 1997
- ------------------
Veronex reported net income of $1,249,000 ($0.18 per share) for the three months
ended May 31, 1998 compared to a net loss of $70,000 ($0.01 per share) for the
three months ended May 31, 1997.
During the three months ended May 31, 1998, the company recorded revenue of
$2,083,000 from the licensing and maintenance of its software products.
$2,000,000 of this revenue was earned from the licensing of the I|Nova System.
Offsetting this revenue is $239,000 in software marketing costs and $2,000 in
amortization of costs previously capitalized as software acquisition and
integration costs. No software related income and costs were recorded during the
three months ended May 31, 1997.
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<PAGE>
The increase of $510,000 in operating and administration costs was a result of
several factors. Professional fees increased by $221,000 primarily as a result
of legal fees associated with the arbitration and litigation proceedings against
certain former employees. Shareholder relations costs increased by $171,000
primarily as a result of disseminating corporate information to shareholders and
potential investors. Office and travel costs increased by $73,000 and $38,000,
respectively, reflecting the significantly increased infrastructure required to
market the company's I|Nova System.
During the three months ended May 31, 1998, the company incurred $3,000 in
expenditures on its California gold properties. No expenditures were incurred
during the three months ended May 31, 1997, however, the company reallocated as
software acquisition and integration costs $5,000 recorded as exploration costs
during the year ended February 28, 1997.
Other changes to the various elements of the Statements of Income (Loss) were a
decrease in interest income of $6,000 due to lower cash and investment balances
and a decrease of $3,000 in net interest expense.
RESULTS OF THE THREE MONTHS ENDED MAY 31, 1997 COMPARED
- -------------------------------------------------------
TO THE THREE MONTHS ENDED MAY 31, 1996
- --------------------------------------
Veronex reported net losses of $70,000 ($0.01 per share) and $214,000 ($0.04 per
share) for the three months ended May 31, 1997 and 1996, respectively.
During the three months ended May 31, 1997, the company reallocated as software
acquisition and integration costs $5,000 recorded as exploration costs during
the year ended February 28, 1997. No exploration costs were incurred during the
three months ended May 31, 1997. During the three months ended May 31, 1996, the
company incurred $6,000 in exploration costs on its California gold properties.
The loss of $10,000 from investing activities during the three months ended May
31, 1996 was a result of a write-down of the company's American Exploration
Drilling Program.
The company earned $34,000 in interest income during the three months ended May
31, 1997 as a result of funds generated by the settlement of malpractice
lawsuits against its former attorneys.
Other changes to the various elements of the Statements of Loss were a decrease
of $82,000 in administration expenses principally as a result of capitalizing a
portion of these expenses as software acquisition and integration costs and a
decrease of $7,000 in net
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<PAGE>
interest expense resulting from the retirement of an interest-bearing liability
to a related company.
RESULTS OF FISCAL 1998 COMPARED TO FISCAL 1997
- ----------------------------------------------
Veronex reported a net loss of $1,151,000 ($0.19 per share) for the fiscal year
ended February 28, 1998 and a net income of $5,140,000 ($0.99 per share) for the
fiscal year ended February 28, 1997, on revenues of $294,000 and $132,000,
respectively.
Revenues of $294,000 for the fiscal year ended February 28, 1998 were generated
from licensing fees and support of the Company's software products.
During the fiscal year ended February 28, 1997, the Company recorded a gain of
$5,200,000 as a result of a malpractice lawsuit settlement with the firms of
attorneys which represented the Company during the Arbitration proceedings in
1990. During the fiscal year ended February 28, 1997, the Company recorded
$132,000 of prior years' net profits on the Enim Oil Project. Previously, the
Company had not been accruing Enim Oil Project earnings. In addition, during
the fiscal year ended February 28, 1997, the Company recorded a gain of $38,000
on the 1995 sale, by forfeiture, of its net profits interest in the Enim Oil
Project. No such income and gain was recorded during the fiscal year ended
February 28, 1998.
During the fiscal year ended February 28, 1998, the Company recovered $1,000 in
exploration expense on its California gold properties due to a reclassification
of expenditures. The Company incurred $59,000 in exploration expenses during
the fiscal year ended February 28, 1997. The Company earned $98,000 in interest
during the fiscal year ended February 28, 1998 as a result of investing the
funds generated by the settlement of malpractice lawsuits against its former
attorneys and by a private placement of the Company's common shares.
The loss of $10,000 from investing activities during the fiscal year ended
February 28, 1998 was a result of a write-down of the Company's American
Exploration Drilling Program.
Other changes to the various elements of the Statements of Operations were an
increase of $691,000 in administration expenses as a result of the write-off
during the fiscal year ended February 28, 1997, of accrued legal costs and
expanded operations in fiscal 1998. A portion of administration expense incurred
during the fiscal year ended February 28, 1998 has been capitalized as software
integration costs. Additionally, the Company incurred $669,000 of software
marketing costs related to the sales efforts on the I|Nova
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System. The decrease of $22,000 in interest expense resulted from the payment in
full of the arbitration award and the increase of $63,000 in interest income
resulted from the increase in the company's cash balances.
YEAR 2000 CONSIDERATIONS
- ------------------------
Veronex is in the computer software business and the I|Nova System offers a Y2k
solution which management believes to be the best Y2k solution available at this
time. All of the Company's internally developed products have been designed and
tested to be year 2000 compliant. The Company has established a formal program
to address potential year 2000 compliance issues relating to its (i) internal
operating systems, (ii) products, and (iii) distributors, resellers and vendors.
The Company has completed an assessment of all of its internal operating systems
which operate on personal computers and were just completely updated in 1997.
The Company plans to update its internal operating systems again in 1998 or 1999
and anticipates that these systems will be year 2000 compliant. The cost of the
Company's year 2000 compliance program has not had and is not expected to have a
material adverse effect on the Company's results of operations or liquidity.
However, there can be no assurance that the Company will not experience material
adverse consequences in the event that the Company's year 2000 compliance
program is not successful or its distributors, resellers or vendors are unable
to resolve their year 2000 compliance issues in a timely manner.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
- ---------------------------------------------
Inflation may affect the operations of Veronex by its effect on the prices of
goods, services and personnel. Veronex's current operations span two countries:
Canada and the United States of America. The strength or weakness of the
Canadian dollar versus the United States dollar could affect the long-term value
and/or operations and planning of the Company.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/ THOMAS J. PRICE
Date: August 14, 1998 By: ___________________________
Thomas J. Price, President
/s/ PEGGY MARTIN
Date: August 14, 1998 By: ___________________________
Peggy Martin, Secretary
