ITEM 1. BUSINESS - ----------------- Background - ---------- The Company was organized under the laws of the State of Colorado on September 29, 1980. The Company is in the business of acquiring, developing and marketing pharmaceutical and health care products. The Company obtains formulae and patents when available, selects trademarks, designs product packages and promotes and markets, through licensing agreements, pharmaceutical and health care products. During fiscal 1996 the Company had two subsidiaries, Bear Laboratories, Inc., incorporated in April 1991 for the purpose of exploiting VERIN® a drug formulation developed by the Company, and Colorado Nut Company, a distributor of snack items, acquired during fiscal 1992. The Company sold Colorado Nut Company on June 28, 1996.
Going Concern Opinion - --------------------- The Company's auditors have issued a report on August 13, 1996 stating, in effect, that there is substantial doubt as to the Company's ability to continue as a going concern. See Financial Statements.
Birklea, Ltd. - ------------ On January 6, 1993, the Company entered into a Stock purchase Agreement ("Agreement") with Birklea, Ltd., 28 Hardcourt Street, Dublin 2, Republic of Ireland whereby Company sold 660,000 shares of its restricted common stock to Birklea, Ltd. for $550,000. The $550,000 was to be expended by the Company as agreed by Birklea, Ltd. and the Company's President. The newly issued shares represented 37% of the Company's outstanding common stock after issuance thereof. Subsequent purchases of common stock have increased Birklea, Ltd.'s holdings to 745,106 which represents approximately 40% of the outstanding shares of Common Stock of the Company.
The Agreement provided that Birklea, Ltd. had the right to designate one director on management's slate of directors at the next annual meeting of shareholders. Mark Banister of Westerham, Kent, England was designated by Birklea, Ltd. and at a meeting of shareholders on May 4, 1993, was elected a director.
The Agreement also provided that Birklea, Ltd. has an option through September 1, 1994 to acquire for $2,400,000 such additional shares of common stock of the Company at a price per share to be determined as will permit Birklea, Ltd. to hold 60% of the issued and outstanding common stock of the Company. This option has been extended to January 3, 1997 and may be extended beyond that date.
Birklea, Ltd. had an additional option through September 1, 1995 to purchase common stock of the Company at $30.00 per share in such quantity as would permit in Birklea, Ltd. to acquire an additional 5% of the issued and outstanding common stock of the Company. This option has expired.
Credit Arrangements - Birklea, Ltd. - ----------------------------------- Effective November 30, 1993, the Company entered into a Credit Agreement with Birklea, Ltd., a major shareholder of the Company, whereby Birklea, Ltd. agreed to use its best efforts to provide up to $10,000,000 in financing to the Company. Advances under the arrangement bear interest at prime rate set by Morgan Guaranty Bank, New York. The convertible promissory note thereunder is secured by the Company's right, title and interest in patent applications, patents, tradenames, know-how and trade secrets relating to existing and future drug formulations relating to the drug commonly known as AZT. At June 30, 1996, the balance on this note was $1,667,000. Principal is payable July 15, 1996. Principal and interest are due upon 120 days written notice or July 15, 1997. Interest is accruing at bank prime rate, 8.25% at June 30, 1996.
The convertible promissory note grants Birklea, Ltd. the option to convert the balance due under such note to common stock of the Company on the same terms that Birklea, Ltd. may purchase common stock of the Company under the Stock Purchase Agreement of January 6, 1993 between the Company and Birklea, Ltd. See above.
Licensing Activities - -------------------- The Company has licensing agreements with several foreign-based pharmaceutical companies covering the Company's patented constant-release rate formulation of VEREXAMIL®, as well as its proprietary once daily delivery system for diltiazem, drugs used in the treatment of heart disease and hypertension. These agreements provide the licensee the exclusive right to manufacture and market the formulations in a certain geographical area for a specified period of time subject to the licensee maintaining high quality of material and workmanship for the product and require an initial licensing fee payable to the Company and a royalty to the Company based on product sales or other arrangements.
The Company has not licensed its technology relating to other sustained release prescription drugs. Licenses provide for the Company to obtain health registration for the products as well as manufacturing the finished dosage form.
The following table summarizes licensing agreements in existence at June 30, 1996:
Licensee and Year of License Territory Drug - ---------------- --------- ---- Sanofi GmbH W. Germany Verapamil (Formerly Labaz GmbH) (1985)
Laevosan Austria Verapamil (1987 & 1988) Approved 8/93
Trimel Life Sciences Canada Verapamil (Formerly Galen Pharma, Inc.) (1988)
Trima Pharmaceutical Israel Verapamil, (1993) Diltiazem
Trimel Life Sciences Canada and Nifedipine, (Formerly Galen United States Naproxen, Pharma, Inc.) Indomethacin (1988)
Trimel Pharmaceutical Israel Verapamil, (1992) Diltiazem
Productos BiotyLDA Portugal Verapamil (1988)
Royalties on the foregoing licensing agreements range from 5% to 7.5% of invoice sales and there is no minimum sales requirements pursuant to the agreements. The Company has not received any significant royalties to date.
The Company intends to continue to pursue licensing arrangements with respect to marketing and/or developing its drug formulations and compounds. No such arrangements were entered into during fiscal 1996, primarily due to research and clinical trials on AZTEC®.
AZT Formulation - --------------- The Company has developed a unique controlled release rate formulation of zidovudine (AZT), the primary drug used in the treatment of persons diagnosed as having Acquired Immunodeficiency Syndrome (AIDS) or being HIV positive. The trademark name AZTEC® has been registered with the United States Patent and Trademark Offices and a patent has been filed with authorities in the U.S.
and Europe. The Company's formulation has been the subject of a clinical study at the University of Colorado Health Science Center which concluded that the AZTEC® formulation had fewer adverse side effects, produces longer duration blood level curves, and higher intercellular phosphorated AZT levels than the currently used AZT drug (Retrovir®). Further, AZTEC® is administered twice daily compared to 5-6 a day dosages of Retrovir®. During the fiscal years ended June 30, 1995 and 1996 clinical trials of AZTEC® were conducted at fifteen sites in the United States at a cost of approximately $885,000. The Company has been dependent upon Birklea, Ltd. and Burroughs-Wellcome (now Glaxo-Wellcome) for funding for such trials. The Company has engaged in extensive discussions with Glaxo-Wellcome with a view to interesting that Company in licensing AZTEC®, however these efforts have not been successful to date.
Nanospheres - ----------- The Company has developed (patent pending) a drug delivery system that will enable oral administration of many drugs of macromolecule size, particularly proteins, polypeptides and polysaccharides, which have low or no bioavailability when given orally. This technology involves the use of nanospheres which are loaded with active drug. These nanospheres are biodegraded over several days in the body and the active drug is released slowly. So far, Verex researchers have been successful in developing heparin nanospheres that, when given to animals as a single dose, produced therapeutic levels for seven days. An article has been published on this process, and patents and trademarks have been filed.
In early 1996, the Company was contacted by the Pediatric AIDS division of the National Cancer Institute, a part of the National Institutes of Health. The Company was asked if it could formulate a pediatric long acting AZT preparation. The Company obliged the NCI and made the formulation, which was subsequently tested in animal models and found to have activity at more than two weeks following a single dose. Scientists from the NCI are currently preparing studies to administer this new formulation to their primate models.
Amantex® - ----------- This is an antiviral compound, delivered in a controlled release formulation, for the treatment of recurrent herpetic lesions. The Company has received a trademark for this product.
Veraderm® - ------------ Veraderm is a wound dressing, made from a proprietary formulation of polymers that, when applied superficially to an open wound, can enhance healing while diminishing the chances of
infection. Early testing has shown it to be particularly beneficial in the treatment of decubitus ulcers. A trademark has been received.
Psorex® - ----------- The Company has discovered a treatment for psoriasis which it believes is safe and effective with no side effects. Psoriasis is a chronic inflammatory skin disease, characterized by skin scaling and ulcerations, which affects about 2% of the population. The formulation is a tablet, Psorex®, which contains safe ingredients and which the Company hopes to market over-the-counter after independent studies are completed and in compliance with FDA labeling requirements. The Company's preliminary studies indicate that about 85% of patients show marked improvement when taking one to three tablets daily at bed time. The Company has received a trademark for Psorex®.
Government Regulation - --------------------- Non-prescription drug products are regulated by various federal, state, municipal and foreign regulatory agencies with respect to safety, effectiveness, advertising and labeling. The principal regulatory agency in the United States is the Food and Drug Administration ("FDA") which requires evidence of safety and efficacy of a drug formulation before it can be marketed.
Non-prescription or over-the-counter ("OTC") drugs are generally recognized by the FDA as safe and effective if they meet certain conditions set forth in FDA regulations. These regulations relate to such items as ingredient quantity and quality, manufacturing practices, side effects, labeling, container components, dosage instructions and warnings for misuse. Independent advisory panels of qualified experts are appointed under FDA regulations to review the safety and efficacy of certain OTC drugs.
The Company has applied its constant release technologies to certain drugs that are prescription items, including verapamil, diltiazem, pseudoephedrine, erythromycin, quinidine, hydralazine, propranolol and indomethacin. Approval of the FDA is required before the Company or its licensees may market any of the foregoing formulations in the U.S. FDA regulations can substantially affect the cost and time involved in obtaining and maintaining approval to market new drugs and existing drugs with new delivery systems. The FDA requires scientific evidence of safety and efficacy before new drugs can be marketed.
The Company's licensing agreements with foreign manufacturers provided that the licenses of these respective drugs comply with applicable foreign regulations prior to marketing such drugs.
Patents and Trademarks - ---------------------- The Company has developed proprietary technologies which relate to the development of its drug formulations and business. These technologies relate primarily to the constant release characteristics of such formulations. The Company holds several patents and has filed other patent applications relating to these technologies.
The Company has obtained several U.S. Trademarks, including one for its name and others for capsules and formulations which have been utilized in products and formulations relating to constant release rate delivery systems.
Competition and Markets - ----------------------- The Company's drug formulations face severe competition from many companies which have far greater financial and technical resources as well as an established reputation.
The Company has sought licensing arrangement for its formulations rather than engage in significant marketing efforts of its own. Its limited retail marketing efforts have been undertaken primarily to enhance product licensing opportunities.
Colorado Nut Company, Inc. - -------------------------- For nearly five years the Company owned Colorado Nut Company, Inc., a Colorado corporation. This company distributed snack items to retail establishments in the Denver metro area prior to the acquisition and continued such distribution and mail order snack sales thereafter. For the year ended June 30, 1996 this wholly owned subsidiary had a net loss of $(42,394). On June 28, 1996 the Company sold this subsidiary for $45,000 and carried back two notes for $35,000, one which is secured by common stock of Colorado Nut Company, Inc.
Employees - --------- The Company has three full-time employees, one of whom is an officer and director. Further, during 1996 four persons worked for the Company's former subsidiary, Colorado Nut Company, Inc.
ITEM 2.
ITEM 2. PROPERTIES - ------------------- The Company leases office and research facilities at 14 Inverness Drive East, Building D, Suite 100, Englewood, Colorado, consisting of 8,926 square feet of space at $6,213 per month pursuant to a two-year lease through March 31, 1997. The Company sublets a portion of the premises at $4,100 per month to an officer of the Company. For its snack distribution business, the Company leased approximately 4,864 square feet for processing at 730 S.
Jason Street, Denver, Colorado pursuant to a five-year lease at $1,611.75 per month through July 31, 1998.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------- No legal proceedings are pending.
ITEM 4.
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.
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.
- ------------------------------------------------------------------------- The foregoing quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
As of September 20, 1996, the Company had approximately 1,400 holders of record of its common stock and the closing bid price on its common stock was $2.50.
The Company has not paid any dividends since its inception and presently anticipates that all earnings will be retained for development of the Company's business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Following is a summary of selected financial data. See the financial statements included herein for more complete information.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ------------------------------------ Results of Operations - --------------------- 1996 Compared to 1995 --------------------- Revenues were down $1,181,428 from 1995 during which the Company had licensing income of $1,200,000 from one source, Burroughs-Wellcome for clinical trials on AZTEC®. See page 4 above. Without this source of funds to pay for research and clinical trials the Company relied on capital infusions from the sale of its common stock to cover those and other operating expenses of the Company. For those reasons the Company's net loss for the year was 44% higher than the net loss for 1995. Included in the loss is a $42,394 loss from the Company's snack food subsidiary which was slightly lower than its loss for fiscal 1995.
Costs and expenses for fiscal 1996 were 25% lower than last years primarily due to a $603,810 reduction in research and development costs. This is largely as a result of the ATZ clinical trials expenses being higher in fiscal 1995 than in fiscal 1996 when the trials were completed. Marketing expenses were up $25,146 or 161% as the Company was more involved in marketing efforts, including licensing arrangements, for its drug formulations.
1995 Compared to 1994 --------------------- Revenues were up 89% from fiscal 1994 primarily due to the revenues generated from the Wellcome Agreement on AZTEC®. Sales at the Company's snack food subsidiary were down 56%.
Costs and expenses increased for fiscal 1995 $146,121 due primarily to the costs experienced relating to the clinical trials on the Company's AZTEC® formulation. See "BUSINESS - AZT Formulation." These costs are included in research and development which expense is approximately $178,000 higher for 1995. This item contributes the most to the Company's operating loss for 1995. AZTEC® generates no revenues for the Company since it is still in the clinical trial stage. There is no assurance this formulation will become a revenue generating product.
The Company's pharmaceutical segment accounts for 96% of the Company's $1,281,345 loss for 1995. This percentage is comparative to the 1994 loss percentage for this segment on $1,872,285 in total losses. Because of the relatively high costs of clinical trials and related activities for new prescription drug formulations such as for AZT and the lack of corresponding revenues pending action on regulatory application, it can be expected that significant losses for this segment will continue until there is corresponding revenue from these new potential products, of which there is no assurance.
1994 as Compared to 1993 ------------------------ Revenues were down 8% from fiscal 1993 primarily due to lower sales at the Company's snack food subsidiary. During the year this subsidiary moved its packaging and sales facility from Wheat Ridge to Denver, which in part may have affected sales. The Company's contract and other income of $211,192 increased substantially compared to 1993 when the Company only had $921 from these sources.
Costs and expenses increased for fiscal 1994 $907,400 due primarily to the costs experienced relating to the clinical trials on the Company's AZTEC® formulation. See "BUSINESS - AZT Formulation." These costs are included in research and development which expense is nearly $1,000,000 higher for 1994. This item contributes the most to the Company's operating loss for 1994. AZTEC® generates no revenues for the Company since it is still in the clinical trial stage. There is no assurance this formulation will become a revenue generating product.
The Company's pharmaceutical segment accounts for 96% of the Company's $1,872,285 loss for 1994. This percentage is comparative to the 1993 loss percentage for this segment on $888,971 in total losses. Because of the relatively high costs of clinical trials and related activities for new prescription drug formulations such as for AZT and the lack of corresponding revenues pending regulatory application and action if the clinical trials are positive, it can be expected that significant losses for this segment will continue until there is corresponding revenue from these new potential products, of which there is no assurance.
Liquidity and Capital Resources - ------------------------------- At August 13, 1996 the Company's auditors express concern as to the ability of the Company to continue in light of losses and net capital deficiency. See Financial Statements.
At June 30, 1996 the Company had a working capital deficiency of $1,881,892 compared to negative working capital of $2,037,850 at June 30, 1995. The principal items contributing to the deficiency is the loss of $1,847,440 for fiscal 1996 and in excess of $1,600,00 in note payable and accrued interest to the Company's principal shareholder.
The Company has no capital commitments other than salaries of the president and two other employees and the payment of rent on its facilities lease. Such commitments are not satisfiable from current revenues. Further, the Company has very limited cash resources to operate the Company at its current level of expense through December 31, 1996 without liquidity problems. In the past the Company has been dependent for funding on Birklea, Ltd. which holds options to purchase common stock through January 3, 1997. During fiscal 1996 the Company it has been able to fund its
research, clinical trials and administrative costs from funds obtained from Burroughs-Wellcome (now Glaxo-Wellcome) and the sale of newly issued common stock to several private foreign purchasers. There is no assurance that additional funding will be forthcoming.
During the year ended June 30, 1996 the Company made sales of 175,639 shares of common stock to foreign purchasers pursuant to Regulation S under the Securities Act of 1933 raising approximately $840,721 in total. Subsequent to fiscal year-end and additional 26,000 shares of common stock were sold for $65,000. The Company may continue to raise capital to fund operations through this means in fiscal 1997.
Industry Trends - --------------- There is substantial competition with respect to delayed release drug delivery products from major, highly recognized, manufacturers with large advertising budgets. In addition, major drug manufacturers currently market recognized prescription formulations for verapamil, naproxen, indomethacin and AZT.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Attached hereto are financial statements responsive to this Item.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------- None.
PART III
ITEM 10.
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.
- ------------------------------ (1) Dr. James M. Dunn and Mr. Jerry R. Dunn are brothers and comprise all of the executive officers of the Company.
The Board of Directors does not have Audit, Compensation or Nominating Committees. During the period from July 1, 1995 to June 30, 1996, the Board of Directors met 13 times, and all directors attended the meetings, either in person or by telephone.
ITEM 11.
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 --------------------- ------------------------
_________________________
1 Dr. Dunn was actually paid $125,000, $125,000 and $125,000 as salary for the years ended June 30, 1996, 1995, and 1994, respectively. The annual salaries set forth above are pursuant to Dr. Dunn's employment contract discussed below. Certain amounts due to Dr. Dunn in excess of the amount paid in the respective periods have been deferred through January 1, 1997 pursuant to an agreement with Dr. Dunn. At June 30, 1996, the total deferred salary and benefits payable was $2,207,823.
2 Dr. Dunn actually received $34,902 in fiscal 1996, $27,957 in fiscal 1995, and $25,774 in fiscal 1994 in other forms of compensation comprised of premiums paid on life insurance and automobile lease and maintenance expense. He earned $19,752, $17,573, and $13,494 in vacation allowance for fiscal 1996, 1995 and 1994, respectively and $3,000, $3,000 and $14,000, respectively in product minimum royalties for fiscal 1996, 1995 and 1994, all of which he has agreed to defer along with accumulated amounts through January 1, 1998. Deferred accumulated royalty payments were $200,250 and $197,000, at June 30, 1996 and 1995, respectively. Accumulated vacation allowance is included in the deferred accumulated salary amount set forth in Note (1) above.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
- ------------------- (1) For such number of shares, to be determined, at $.80 per share, as will permit holder to acquire up to 25% of the outstanding common stock of the Company.
(2) For such number of shares, to be determined, at $.80 per share, as will permit holder to acquire up to 3% of the outstanding common stock of the Company.
(3) At fiscal year end, the average closing bid price of the Company's common stock was $2.50 per share as reported by the Electronic Bulletin Board. Thus, the value of such options are $1.70 per share which is the difference between exercise price and market price and which assumes that such shares could be sold on exercise which is not possible.
Employment Contract - James M. Dunn, M.D. - ----------------------------------------- On November 30, 1993, the Company entered into a new employment agreement with its President, James M. Dunn, M.D. whereby Dr. Dunn agreed to serve as President of the Company until he reaches the age of 65 (2003) and agreed to assign to the Company all his right, title and interest in his inventions, discoveries, innovations, concepts and know-how during the period of the Agreement. Dr. Dunn is entitled to receive an annual salary of $338,000, subject to annual adjustments, a $3,000,000 life insurance policy, disability insurance equal to 80% of his gross income, and health insurance. In addition, he is entitled to a 2% royalty on the first $5,000,000 in net sale price of any Verex patented product, a 1% royalty on net sales in excess of $5,000,000 and a 2% royalty on Verex licensed technology.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - ---------------------------------------------------------- AND MANAGEMENT -------------- Based on certain reports filed with the Securities and Exchange Commission, the table on the following page reflects certain information as of September 20, 1996 as to beneficial holders of more than 5% of the outstanding shares of Common Stock of the Company and as to Common Stock beneficially owned by all executive officers and directors of the Company as a group:
____________________
(1)This table is based on 2,183,177 shares outstanding and does not include presently exercisable options to purchase shares of the Company's Common Stock held by each of the foregoing. See "Certain Relationships and Related Transactions" below for details. Beneficial ownership by any person includes direct or indirect voting power and investment power with respect to such shares of common stock of the Company.
(2)The Company is informed that the owner of all the voting and investment power of Birklea, Ltd. is Peter Josse, c/o Birklea, Ltd., P.O. Box 303, St. Helier, Jersey, Channel Islands, U.K..
(3)Mr. Banister holds a power of authority to vote the shares held by Birklea, Ltd.
(4)Includes shares held by Birklea, Ltd.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The Company leases facilities at a monthly rate of $6,213 plus a pro rata share of maintenance costs. A portion of the space is subleased to Jerry R. Dunn, an officer of the Company at $4,100 per month. Management believes the terms of the foregoing facilities sharing are as fair to the Company as could be arranged with an independent party.
Jerry R. Dunn, a non-salaried officer and director of the Company, from time to time provides legal services to the Company. For the year ended June 30, 1996 the Company paid a total of $22,780 in fees for legal services to Jerry R. Dunn. Management believes the terms on which these services are performed and charged are as fair to the Company as could be obtained from an independent lawyer.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ---------------------------------------------------------------------------- (a) (1) The following consolidated financial statements are included in Part II, Item 8 of this Report:
Report of Independent Certified Public Accountants
Balance Sheets at June 30, 1996 and 1995
For the years ended June 30, 1996, 1995 and 1994
Statements of Operations Statements of Shareholders' Equity Statements of Cash Flows
Notes to Financial Statements
(2) All schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the financial statements or notes thereto.
(3) The following Exhibits were included as Exhibits to the Form S-18, SEC File No. 2-82403-D filed March 11, 1983 and are incorporated herein by reference:
3.1 - Restated Articles of Incorporation
3.2 - Restated By-laws
The following Exhibits were included as Exhibits to the Form 10-K, SEC File No. 0-011232 filed September 30, 1988:
10.13 - Licensing Agreement with Galen Pharma, Inc. (Trimel)
10.14 - Licensing Agreement #2 with Galen Pharma, Inc. (Trimel)
The following Exhibits were included as Exhibits to the Form 8-K, SEC File No. o-11232, filed January 14, 1993:
10.26 - Stock Purchase Agreement - Birklea, Ltd. 10.27 - Stock Option - James M. Dunn, M.D. 10.28 - Stock Option - Jerry R. Dunn
The following Exhibits were included as Exhibits to the Form 10-K, SEC File No. 0-11232, filed October 13, 1994.
10.29 - Credit Agreement - Birklea, Ltd. 10.30 - Convertible Promissory Note - Birklea, Ltd. 10.31 - Security Agreement - Birklea, Ltd. 10.32 - Employment Agreement - James M. Dunn, M.D.
The following Exhibit was included as an Exhibit to the Form 8-K, SEC File No. 0-11232, filed December 13, 1994.
10.33 - Option Agreement - Burroughs Wellcome Co.
The following Exhibit is attached hereto:
10.21 - Letter of James M. Dunn, M.D. re deferral of certain compensation.
(b)No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1996.
VEREX LABORATORIES,INC. AND SUBSIDIARIES
----------------- Page ---- Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . .F - 2
Financial Statements
Consolidated Balance Sheets - June 30, 1996 and 1995. . . . . . . .F - 3
Consolidated Statements of Operations - For the Years Ended June 30, 1996, 1995 and 1994 and Cumulative from September 29, 1980 (inception) to June 30, 1996 . . . . . . . . . . . . . . . . . . F - 4
Consolidated Statements of Stockholders' Deficit - For the Years Ended June 30, 1996, 1995 and 1994 and Cumulative from September 29, 1980 (inception) to June 30, 1996 . . . . . . . . . . . . . . . . . . . F - 5
Consolidated Statements of Cash Flows - For the Years Ended June 30, 1996, 1995 and 1994 and Cumulative from September 29, 1980 (inception) to June 30, 1996 . . . . . . . . . . . . . . . . . . F - 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . .F - 7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Verex Laboratories, Inc. and Subsidiaries Denver, Colorado
We have audited the accompanying consolidated balance sheets of Verex Laboratories, Inc. (a development stage enterprise) and Subsidiaries as of June 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended June 30, 1996 and the amounts for the years ended June 30, 1996, 1995 and 1994 included in the cumulative period from inception (September 29, 1980) to June 30,1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Verex Laboratories, Inc. and Subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, and the amounts for the years ended June 30, 1996, 1995 and 1994 included in the cumulative period from inception (September 29, 1980) to June 30, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that Verex Laboratories and Subsidiary (the Company) will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from this uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
August 13, 1996 Denver, Colorado
VEREX LABORATORIES, INC. AND SUBSIDIARIES (a development stage enterprise)
Consolidated Balance Sheets
June 30, ---------------------------------- 1996 1995 ------- ------
Assets
See notes to consolidated financial statements.
VEREX LABORATORIES, INC. AND SUBSIDIARIES (a development stage enterprise)
Consolidated Statements of Operations
See notes to consolidated financial statements.
VEREX LABORATORIES, INC. AND SUBSIDIARIES (a development stage enterprise)
Consolidated Statements of Stockholders' Deficit For the Period September 29, 1980 (inception) to June 30, 1996
See notes to consolideted financial statements
VEREX LABORATORIES, INC. AND SUBSIDIARIES (a development stage enterprise)
Consolidated Statements of Cash Flows
Supplemental cash flow information: Cash paid for interest was $5,072 (1996), $5,438 (1995), and $5,850 (1994).
See notes to consolideted financial statements.
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial statements
Note 1 - Summary of Significant Accounting Policies - --------------------------------------------------- Development Activities - ---------------------- Verex Laboratories, Inc. (the "Company") was incorporated in Colorado on September 29, 1980 and began developmental activities in July 1981. The Company was primarily engaged in the business of developing and marketing non-prescription and prescription drug products utilizing constant release rate drug delivery systems. The Company had limited sales and marketing operations until October 3, 1991, when it acquired 100% of the outstanding stock of the Colorado Nut Company, Inc. The Colorado Nut Company assembles and sells snack food items. The Colorado Nut Company was sold in June 1996. Bear Laboratories, Inc., a wholly-owned subsidiary of the Company, was incorporated and began operations in April 1991. Bear Laboratories, Inc. was formed to market one of the Company's products through a national advertising campaign.
Going Concern - ------------- The Company and its subsidiaries incurred a loss of $1,847,440 for the year ended June 30, 1996 and continues to experience a net capital deficiency. The Company has entered into a credit agreement with a Stockholder where the Stockholder will advance the Company up to $10,000,000 at the Stockholder's discretion. There is no assurance these plans will be sufficient to sustain operations.
Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of its wholly-owned subsidiaries Bear Laboratories, Inc. and the Colorado Nut Company. All intercompany accounts and transactions have been eliminated in consolidation.
Inventory - --------- Inventory consists of snack food products and are recorded at the lower of cost or market on a first-in, first-out basis (FIFO) basis.
Patented Drug Products - ---------------------- Patented drug products include costs incurred to produce products to be used in clinical tests and are carried at the lower of cost or market on a specific identification basis.
Property and Equipment - ---------------------- Property and equipment is depreciated over the estimated useful lives (three to seven years) of the asset using various methods. Leasehold improvements are amortized on a straight-line basis over the remaining term of the office lease.
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Notes to financial Statements
Note 1 - Summary of Significant Accounting Policies (continued) - --------------------------------------------------------------- Goodwill, Patents and Trademarks - -------------------------------- Goodwill, patents and trademarks are stated at cost and are amortized on a straight-line basis over a period of ten years.
License Income - -------------- The Company has entered into licensing agreements with several pharmaceutical companies to manufacture and exclusively market two of the Company's patented drug products, a constant-release rate formulation of Verapamil and Aztec products in an established geographic area.. The agreements generally require an initial non-refundable licensing fee to be paid to the Company and future royalty payments based on subsequent product sales. Licensing income is recognized when earned.
Research and Development Costs - ------------------------------ The Company expenses all research and product development costs as incurred.
Cash Equivalents - ---------------- The Company considers investments that are purchased within three months of their date of maturity to be cash equivalents. Cash equivalents consist of certificates of deposit. At June 30, 1996, the Company had approximately $55,000 in excess of federally insured amounts.
Income Taxes - ------------ Deferred tax liabilities and assets are determined based on the difference between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to occur. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
Reclassification - ---------------- Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation.
Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
VEREX LABORATORIES, INC. AND SUBSIDIARIES Notes to financial statements
Note 2 - Notes Receivables - --------------------------
Note 3 - Notes Payable and Long-Term Debt - -----------------------------------------
June 30, -----------------------------
VEREX LABORATORIES, INC. AND SUBSIDIARIES Notes to financial statements
Note 4 - Common Stock - --------------------- Stock Purchase Agreement - ------------------------ On January 6, 1993, the Company entered into a Stock Purchase Agreement ("Agreement") with Birklea, Ltd., whereby the Company sold 660,000 shares of its restricted common stock to Birklea, Ltd. for $550,000. The newly issued shares represented 37% of the Company's outstanding common stock after issuance thereof. Subsequent purchases of common stock have increased Birklea, Ltd.'s holdings to 745,106 shares which represents approximately 40% of the outstanding shares of Common Stock of the Company.
The Agreement also provided that Birklea, Ltd. has an option through January 3, 1997 to acquire for $2,400,000 such additional shares of restricted common stock of the Company at a price per share to be determined as will permit Birklea, Ltd. to hold 60% of the issued and outstanding common stock of the Company. Birklea, Ltd. had an additional option through September 1, 1995 to purchase common stock of the Company at $30 per share in such quantity as will permit in Birklea, Ltd. to acquire an additional 5% of the issued and outstanding common stock of the Company. This option has expired.
Stock Options - ------------- The President of the Company has the right through October 1, 1996 to acquire such number of shares of common stock of the Company at $.80 per share to permit him to hold 25% of the outstanding common stock of the Company.
Net Loss Per Common Share - ------------------------- Net loss per common share for the years ended June 30, 1996, 1995, and 1994 has been computed on the basis of the weighted average number of common shares outstanding of 2,082,825, 1,949,122, and 1,890,847.
Note 5 - Income Taxes - --------------------- The Company has long-term deferred tax assets as a result of its net operating losses and deferred salary (assumed a tax rate of 38%) that is fully impaired due to uncertainty as to their utilization. Accordingly, there is no net deferred tax asset reflected in the accompanying financial statements.
VEREX LABORATORIES, INC. AND SUBSIDIARIES Notes to financial statements
Note 5 - Income Taxes (continued) - ---------------------------------
At June 30, 1996, the Company has approximately $6,500,000 of net operating loss carryforwards for income tax purposes that expire between June 30, 1999 and June 30, 2009 and approximately $24,000 of investment tax credit carryforwards that expire between June 30, 1997 and June 30, 2001.
Note 6 - Discontinued Operations - -------------------------------- On June 28, 1996, the Company sold its investment in its wholly owned subsidiary Colorado Nut Company, Inc. for $45,000. The Company retained the accounts receivable, accounts payable and accrued expenses. Included in the sale was inventory and net property and equipment. Operating results of the Colorado Nut Company are recorded at discontinued operations for the year ended June 30, 1996. Operating results for June 30, 1995 and 1994 have been reclassified as discontinued operations.
Sales from the Colorado Nut Company were $241,346, $347,429, and $615,846 for the years ended June 30, 1996, and 1995, and 1994, respectively. All expenses related to the Colorado Nut Company have been allocated to discontinued operations including interest of $5,072, $5,438 and $5,850 for the years ended June 30, 1996, 1995 and 1994, respectively.
The sale of Colorado Nut Company, Inc. resulted of a loss of approximately $9,000. Any tax benefit or expense resulting from the sale has been fully allowed for due to the continued net operating losses of the Company.
VEREX LABORATORIES, INC. AND SUBSIDIARIES Notes to financial statements
Note 7 - Related Party Transactions - -----------------------------------
Employment and Royalty Agreements - --------------------------------- On November 30, 1993, the Company entered into a new 8-year employment contract with its President. The contract may be extended by the President. Under the terms of the contract, the President receives an annual base salary of $338,000 and an annual cost of living adjustment plus 8%.
The contract also provides for certain insurance and employee benefits and entitles the President to participate in retirement and management incentive plans that the Company is required to establish. Such plans have not yet been established. As of June 30, 1996 and 1995, the Company owes approximately $2,008,000 and $1,616,000, respectively, of vacation pay and salary increases to its President under terms of the employment contract.
In addition, the President receives certain royalties on the net sales from the Company's products, and minimum annual royalties of $10,000 per product through November 30, 1993 and $1,000 thereafter. Such royalties amounted to $3,000, $3,000, and $14,000 for the years ended June 30, 1996, 1995 and 1994. The amount owed to the President for such royalties was approximately $200,000 and $197,000, at June 30, 1996 and 1995, respectively. In return for this compensation, the President is obligated to assign all title and ownership of his inventions, formulations and products to the Company.
In the event that the Company terminates the President's employment prior to expiration of the contract, the Company is obligated to provide the President the specified annual salary for the remaining term of the agreement, and pay certain insurance benefits for a period of three years. The President would continue to be entitled to royalties on net sales of the Company's products.
The Company entered into an agreement with its President deferring payment of vacation pay, salary increases and royalties accrued as of June 30, 1996 until January 1, 1997. As of June 30, 1996 and 1995, approximately $2,208,000 and $1,367,000, respectively, were accrued as a long-term liability.
Legal Fees - ---------- Legal fees were incurred by the Company for legal services provided by an officer of the Company. Such fees were $22,780, $53,251, and $19,028, for 1996, 1995 and 1994, respectively.
See Notes 3, 4 and 8 for additional discussion of related party transactions.
VEREX LABORATORIES, INC. AND SUBSIDIARIES Notes to financial statements
Note 8 - Leases and Commitments - ------------------------------- Office - ------ Currently, the Company occupies space under various lease agreements requiring monthly payments of $4,610. The lease commitment expired July 31, 1998, with options to renew. The Company sub-lets a portion of its office space to the officer described in Note 7 (under legal fees) for $2,500 per month. The Company sub-lets to an unrelated third party for $1,000 per month.
Rent expense, net of sublease income was $53,677, $45,333, and $45,930, for the years ended June 30, 1996, 1995 and 1994, respectively.
Vehicle - ------- The Company has two operating leases for Company vehicles. The two and three year leases require monthly lease payments of $500 and $474, respectively. Lease expense is $11,688 and $3,896 for the years ended June 30, 1996 and 1995, respectively.
The minimum annual lease payments through expiration of office and vehicle leases are as follows:
The Company has contracted with the University of Colorado Health Sciences Center for various studies relating to drug products. The commitment by the Company for future periods approximates $233,000.
Note 9 - Fair Value of Financial Instruments - -------------------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Fair value estimates are made at a specific point in time for the Chapter's financial instruments; they are subjective in nature and involve uncertainties, matters of significant judgment and, therefor, cannot be determined with precision. Fair value estimates do not reflect the total value of the Chapter as a going concern.
Cash, Receivables, Patented Drug Products and Accounts Payable - -------------------------------------------------------------- The carrying value approximates fair value to its liquid or short-term nature.
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Note 9 - Fair Value of Financial Instruments (continued) - ------------------------------------------------------- Note Receivable and Notes Payables - Stockholders - ------------------------------------------------- Rates currently available to the Company for debt and capital lease obligations with similar terms and remaining maturities are used to estimate the fair value of existing debt.
The estimated fair values of the Company's financial instruments at June 30, 1996 were as follows:
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VEREX LABORATORIES, INC. Registrant
Date: September 27, 1996 By: /s/ James M. Dunn ------------------------- James M. Dunn, M.D., President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: September 27, 1996 By: /s/ James M. Dunn ---------------------------- James M. Dunn, M.D., Chief Executive Officer, Chief Financial Officer and Director
Date: September 27, 1996 By: /s/ Jerry R. Dunn ------------------------- Jerry R. Dunn, Director
Date: September 27, 1996 By: /s/ James Petre ----------------------- James Petre, Director
Date: By:_____________________________ Mark Banister, Director
VEREX LABORATORIES, INC. 14 Inverness Drive East, D-100 P.O. Box 3817 Englewood, Colorado 80112 (303) 790-4499 (303) 799-1734 - Facsimile
August 28, 1996
Board of Directors Verex Laboratories, Inc. 14 Inverness Drive East Building D, Suite 100 Englewood, Colorado 80112
Re: Employment Agreement
Dear Members of the Board:
Whereas, I have entered in the above-captioned employment agreement contract with Verex Laboratories, Inc. (the "Company"), and said contract among other things, provides for an annual salary increase, vacation pay and certain royalties, and since I have not received said items of compensation from the company totaling approximately $2,208,050 at June 30, 1996, I hereby agree to defer any obligation of the Company to pay me this amount through January 1, 1998, in exchange for $10.00 and other good and valuable consideration, receipt of which is acknowledged hereby.
Sincerely,
/s/ James M. Dunn, M.D. 3236 E. Hinsdale Place Littleton, Colorado 80122
EXHIBIT 10.21