ITEM 1. BUSINESS -------- Background - ------------
The Company was organized under the laws of the State of Colorado on September 29, 1980. The objective of the Company is to acquire, develop and market pharmaceutical and health care products. The Company obtains formulas and patents when available, selects trademarks, designs product packages and promotes and markets, through licensing agreements, pharmaceutical and health care products. During fiscal 1998 the Company had one subsidiary, Bear Laboratories, Inc., incorporated in April 1991 for the purpose of exploiting VERIN, a drug formulation developed by the Company. Bear Laboratories, Inc., was disbanded on or about December 1999.
On or about March 31, 2000, PR Pharmaceuticals, Inc. ("PRP") , a privately held pharmaceuticals company in drug delivery systems, acquired 52,95% of the outstanding common stock of the company from certain of the shareholders and directors of the Company. The selling shareholders received one shre of PRP common stock for each 15 shares' of Verex common stock. In the purchase agreement, PRP agreed to make a tender offer to purchase the remaining shares of outstanding Verex common stock on a similar exchange basis or, at PRP's option for a cash purchase price. This agreement was based on the condition that audited financials of the Company would be issued on or before November 30, 2000, which condition was not met. The Company has received no notice of PRP's intention with respect to the tender offer.
Credit Facility - ---------------
On March 20, 2000 the Company obtained a $1 million cedit facility with PRP, Inc. Without the line, the Company may have been unable th continue to operate for any significant period. The Credit facility was also negotiated to provide payment of the accrued management compensation. At June 30, 2000 approximately $280,000 had been drawn on the credit facility to pay for operations and the accrued management compensation.
The unpaid amount of such accrued compensation approximated $629,000 at at June 30, 2000. Therefore, approximately $91,000 is available for uses other than accrued management compensation, subject to conditions of the loan agreement, which matures March 21, 2001. Considering other commitments such as rent, aged payables, etc., there is no assurance that funds will be available to support on-going operations or research and development. See \ Managements Discussion - Liquidity & Capital Resources, below.
Assignment of Certain Future Revenues - Birklea, Ltd. - -------------------------------------------------------
Effective November 30, 1993, the Company entered into a Credit Agreement with Birklea, Ltd., a major shareholder of the Company, whereby Birklea, Ltd. agreed to use its best efforts to provide up to $10,000,000 in financing to the Company. The note was secured by the Company's right, title and interest in patent applications, patents, tradenames, know-how and trade secrets relating to existing and future drug formulations relating to the drug commonly known as AZT. In March 1997, the balance (principal and interest) on this note was $2,185,984, when the Company and Birklea agreed that the debt was forgiven in consideration for the assignment of 25% of all future sources of revenue from the Company's AZTEC formulation, and 5% of all future revenues from other specified Company drug formulations up to $4,650,000 and $2,325,000 respectively. In addition, the Company agreed to assign to Birklea, Ltd. the AZTEC formulation in the event it has not licensed it prior to December 31, 1998. This assignment was not effectuated and on or about, January 27, 2000, the Company amended this royalty agreement with Birklea, Ltd., to change the AZTEC royalty to equal 7.5% of license royalty or on gross profit received by the Company on sales or licensing from the Aztec product only and to change all other future royalties to equal 3% of license royalty or on gross profit received by the Company on other specified drug formulations. The Company further modifiedthe aggregate royalty payment to equal $2,325,000 for all products including AZTEC formulations.
Assignment of Certain Future Revenues - Dr. James M. Dunn - -----------------------------------------------------------
In March, 1997 the Company's president forfeited his right to receive $2,605,204 in accrued salary and other benefits in consideration for the Company's assignment to him of 25% of all future sources of revenue from its AZTEC formulation and 5% of the income derived from other specified Company drug formulations up to $2,605,204. The Company amended this royalty agreement with Dr. Dunn and changed the AZTEC royalty to equal 7.5% of license royalty or on gross profit received by the Company on sales or licensing from the Aztec product only and to change all other future royalties to equal 3% of license royalty or on gross profit received by the Company on other specified drug formulations. The Company further modified the aggregate royalty payment to equal $2,517,339 for all products including AZTEC formulations.
Licensing Activities - ----------------------
The Company has licensing agreements with several foreign-based pharmaceutical companies covering the Company's patented constant-release rate formulation of AZTEC, VEREXAMIL, as well as its proprietary once daily delivery system for diltiazem, drugs used in the treatment of heart disease and hypertension. These agreements provide the licensee the exclusive right to 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. There is no assurance that these agreements will produce any significant revenue in the future.
The Company has not licensed its technology relating to other sustained release prescription drugs. Most licenses generally provide for the Licensee to obtain registration for the products.
The following table summarizes licensing agreements in existence at June 30, 2000:
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)
ECR Pharmaceuticals USA Conquer (2000) (This license was subsequently terminated in December 2000.)
Royalties on the foregoing licensing agreements range from 5% to 7.5% of invoice sales and there are no minimum sales requirements pursuant to the agreements. The Company is not entitled to any royalties under the agreement with Sanofi. The company has been notified that Laevosan does not intend to sell Verapamil in Austria, and the Company intends to determine if other distributors may be interested in selling this product. The Company received $ 0 and $0 revenues from licensing fees and royalties during the fiscal years ending June 30, 1999 and 2000, respectively. The Company does not foresee receiving any significant income from those licensing agreements.
The Company intends to continue to pursue licensing arrangements through the services of PR Pharmaceuticals with respect to marketing and/or developing certain selected drug formulations and compounds.
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 covering this formulation of AZT was issued in the United States on Oct. 28, 1997. However, the use of the compound AZT for the treatment of HIV is protected by patents held by Glaxo Wellcome plc, which do not expire in the U.S. until 2005. 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 phosphorylated AZT levels than the currently used AZT drug (Retrovir). Further, AZTEC is administered twice daily. During the fiscal years ended June 30, 1995, 1996, 1997 and 1998 clinical trials of AZTEC were conducted at 15 sites in the United States at a cost of approximately $2,400,000. Clinical work and product registration activities were halted by the Company because of lack of resources. Management is currently assessing possible options with respect to continuing with this technology.
Future drug delivery system - ------------------------------
The Company has been in early stage development of a sustained drug delivery system that has the potential for oral administration of drugs of macromolecule size, particularly proteins, polypeptides and polysaccharides, which have low or no bioavailability when given orally. Subsequent to the filing date of this document, a patent application has been filed with respect to this technology. PR Pharmaceuticals, Inc. and Verex have agreed that PR Pharmaceuticals, Inc. will pay for certain intellectual property and research costs of this technology, and that the two companies will share equitably in any proceeds from the development of this technology.
Veraderm - -----------
This 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 that it might be beneficial in the treatment of decubitus ulcers. A trademark has been received. Licensing opportunities are currently being explored, along with the associated regulatory requirements and costs.
Psorex - ---------
The Company has discovered a treatment for alleviating the symptoms of 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. Further development and/or licensing opportunities are currently being explored, along with the associated regulatory requirements and costs.
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.
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.
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.
Employees - -----------
The Company has one full-time employee, who is also a director of the Company.
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 6,486 square feet of space at $4,459 per month pursuant to a lease through March 31, 2002. The Company sublets a portion of the premises at $2,106 per month to another unaffiliated company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
No legal proceedings are pending.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
There were no following 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.
- ----------------------------------------------------------------------- High Low - ----------------------------------------------------------------------- Fourth Qtr. (Ended June 30, 2000) $.56 $.35 Third Qtr. (Ended March 31, 2000) $.56 $.42 Second Qtr. (Ended December 31,1999) $.66 $.35 First Qtr. (Ended September 30,1999) $.44 $.35 Fourth Qtr. (Ended June 30, 1999) $.50 $.35 Third Qtr. (Ended March 31, 1999) $.63 $.19 Second Qtr. (Ended December 31, 1998) $1.38 $.41 First Qtr. (Ended September 30, 1998) $1.31 $.72 Fourth Qtr. (Ended June 30, 1998) $1.43 $.68 Third Qtr. (Ended March 31, 1998) $1.00 $.70 Second Qtr. (Ended December 31, 1997) $2.00 $.75 First Qtr. (Ended September 30, 1997) $1.17 $.77 Fourth Qtr. (Ended June 30, 1997) $1.25 $0.75 Third Qtr. (Ended March 31, 1997) $2.00 $0.87 Second Qtr. (Ended December 31, 1996) $2.37 $1.44 First Qtr. (Ended September 30, 1996) $2.50 $2.25 - -----------------------------------------------------------------------
The foregoing quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
As of June 30, 2000, the Company had approximately 1,236 holders of record of its common stock and the closing bid price on its common stock was $.40 per share.
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.
Year Ended Year Ended Year Ended Year Ended 6/30/00 6/30/99 6/30/98 6/30/97 ----------- ----------- ----------- -----------
Working Capital (Deficit) $ (774,685) $ (781,385) $ (254,923) $ (348,112)
Total Assets 197,162 199,772 170,514 206,464
Total Liabilities 1,260,635 2,077,868 1,201,564 488,558
Long Term Debt 407,391 1,238,153 933,970 117,406
Shareholders' (Deficit) (1,063,473) (1,878,096) (1,031,050) (282,034)
Revenues 31,550 104,205 301,093 14,710
Net(Loss) (215,003) (906,415) (748,957) (1,276,778)
Net(Loss) Per Share (.09) (.39) (. 32) (.55)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------
Results of Operations - -----------------------
2000 Compared to 1999 ---------------------
Revenues for 2000 were $31,550 compared to $104,205 in 1999. The principal difference in revenue between reporting periods is a non-recurring one time license fee of $85,000 that the Company received in 1999. The net loss for 2000 was $215,003 or $691,412 less than the net loss reported for fiscal 1999. This is principally attributed to the decrease in general and administrative expenses of $ 803,637 during the period ended June 30, 2000. The principal item contributing to reduced expenses was the reduction of executive compensation of approximately $570,000.
1999 Compared to 1998 ---------------------
Revenues for 1999 were $104,205 compared to $301,093 as the Company was able to generate $124,048 from the sale of products, primarily of its controlled release alpha lipoic acid formulation. In addition, the Company had advance royalties from a licensing agreement on AZTEC and other royalties totaling $168,000. No revenues from such sources were obtained during fiscal 1999. Losses for 1999 were $906,415 or $157,518 more than the losses for fiscal 1998. This is principally attributed to the decrease revenues of $196,948.
1998 Compared to 1997 ---------------------
Revenues for 1998 were $301,093 compared to $14,710 as the Company was able to generate $124,048 from the sale of products, primarily of its controlled release alpha lipoic acid formulation. In addition, the Company had advance
royalties from a licensing agreement on AZTEC and other royalties totaling $168,000. No revenues from such sources were obtained during fiscal 1997. Losses for 1998 were $748,957 or $527,880 less than the losses for fiscal 1997. This is accounted for by increased revenues of $286,383 and reduced costs and expenses of $241,497. The principal items contributing to reduced expenses were the lack of write down of patented drug products which was $189,000 in fiscal 1997 and the lack of interest expense which was $139,617 for that year. Cost of sales was $53,427 for 1998 compared to $0 for 1997 when the Company had no sales. Research and development expenses have fallen by nearly 50% to $43,870 as the Company focused more on sales.
Liquidity and Capital Resources - ---------------------------------
At June 30, 2000 the Company had a working capital deficiency of $774,685 compared to negative working capital of $781,385 at June 30, 1999. The principal items contributing to the deficiency is the loss of $906,415 for fiscal 1999.
The Company has no capital commitments other than the salary of its employee, the payment of deferred salaries to its employee and a former employee, aged accounts payable and the payment of rent on its facilities lease. Such commitments can not be satisfied from current or projected revenues. Further, the Company has very limited cash resources to operate the Company at its current level of expense without experiencing liquidity problems.
On March 31, 2000, PR Pharmaceuticals, Inc. (PRP) purchased approximately 53% of the outstanding stock from the majority stockholders. As part of the purchase agreement the employment agreement, royalty agreement and option agreement between the Company and its president and other company employees were either amended or terminated.
On or about March 22, 2000, the Company arranged a credit facility with PRP, Inc. to borrow up to $1,000,000 and matures March 21, 2001. All advances under this arrangement are secured by all of the Company's assets, including its technology, patents, trademarks and proprietary information and all updates, modifications, continuations and improvements thereto. The Company may request advances under this line of credit from time to time as long as it is in compliance with the "Conditions of Lending" under the Master Loan Agreement. Generally, PRP. Inc. will make advances pursuant to the "Conditions of Lending" as long as the Company is complying with the material terms of the Master Loan Agreement and there are no material adverse changes in its financial condition. As of June 30, 2000 the Company had drawn $280,000 under this line of credit. Management believes that unused line of credit of $720,000 may not be sufficient to meet minimum liquidity needs for the forseeable future. Since there remains $629,000 of accrued management compensation and aged payables of approximately $200,000 to pay from this loan, the availability from line of credit is not adequate to allow the Company to fund any research or development projects.
Industry Trends - ----------------
There is substantial competition with respect to delayed release drug delivery products from major, highly recognized, maufacturers with large advertising budgets. In addition, major drug manufacturers currently market recognized perscription formulations for Verapamil, Naproxen, Indomethicin and AZT.
Future Business Strategy and Subsequent Events - ---------------------------------------------- Management is reviewing the current business liquidity problem and is developing a plan to address these issues.
Forward-Looking Statements - ----------------------------
Included under this Item 7 are "forward-looking statements" within the meaning of Section 27 of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it an give no assurance that such expectations will prove to be correct since he Company is not able to accurately predict if it will obtain adequate funding to continue in business or license or market its products. Important factors affecting its ability to do so include the extreme competitiveness of the industry, the cost involved to market new drug products, the very limited resources of the Company and the regulatory environment in which the Company operates.
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 ----------------------------------------------------
On June 23, 2000, Verex Laboratories, Inc. ("Registrant") dismissed Ehrhardt Keefe Steiner & Hottman P.C. ("EKS&H") as RegistrantAEs independent principal accountant and engaged the services of Balukoff Lindstrom & Co., P.A. ("BL&Co."). EKS&H's report on the financial statements of the Registrant for the year ended June 30, 1997 stated in its report that the statements were prepared assuming that the Registrant will continue as a going concern and the report contained the firm's opinion that the Registrant's recurring operating losses and net capital deficiency raise substantial doubt about its ability to continue as a going concern. No audit was completed for the year ended June 30, 1999.
The decision to dismiss EKS&H and engage BL&Co. was approved by unanimous written consent of the Board of Directors of the Registrant on June 21, 2000.
here have been no disagreements between EKS&H and Registrant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The term "disagreement" is utilized in accordance with Item 304 of Regulation S-K.
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. The controlling shareholders of the Company elected a new slate of Directors and Executive Officers as indicated below. On April 1, 2000, Carolyn Dunn and Mark Banister resigned from the Board of Directors. These vacancies were filled by Dr. Patrick Bols and Steve Howe. During the reporting period the following Directors and Executive Officers were in office.
Name Age Occupation James M. Dunn M.D. 63 President of the Company (1980 - March 2000); Director of the Company (1980 - Present); Treasurer of the Company (1980 - March 2000); Chairman of the Board of Directors and Chief Executive Officer of the Company (1982 - March of 2000); Assistant Professor, School of Medicine, Louisiana State University (1979 - 1980); Vice President-Medical Affairs, Boots Pharmaceutical, Inc. (1979-1980); Director of Clinical Pharmacology and Research, Wallace Laboratories (1976-1979)
James B. Petre 47 Director of the Company (January 1993 - Present); Independent business consultant and advisor (1989 - Present); Senior Vice President and Director of Previews, Inc. Denver, Colorado; a worldwide real estate brokerage firm (1984-1989); Member of the Drug
Information Association. BS in Business Administration, University of Denver.
Steve Howe 48 Chairman of the Board of Directors (March 2000 - Present); Chief Executive Officer (March 2000 - Present); Secretary (March 2000- Present); Chairman of the Board of Directors and Chief Executive Officer, PR Pharmaceuticals Inc.; 43.82% Shareholder PR Pharmaceuticals Inc.; BA in Business Administration - University of Wyoming.
Patrick Bols, Ph.D. 50 Director (March 2000 - Present); President (March 2000 - Present); Director PR Pharmaceuticals Inc.; 17.50% Shareholder PR Pharmaceuticals Inc.; Director of Worldwide Business Development - Johnson & Johnson; Ph.D in Agricultrual Sciences - University of Gent, Belgium.
Edward C. Gruben 54 Treasurer (March 2000 - Present); Managing Parner - Cambridge Consulting Group LLP; Managing Partner - Cambridge Management Associates LLP; Member of the American Institute of Certified Public Accountants and the Colorado Society of CPA's; BSBA in Physical Sciences and Accounting - University of Colorado.
Messers Howe and Bols are major shareholders in PR Pharmaceuticals Inc. which owns 52.95% of the CompanyAEs issued and outstanding common stock.
The Board of Directors does not have Audit, Compensation or Nominating Committees. During the period from July 1, 1999 to June 30, 2000, the Board of Directors met two 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 $100,000 or more.
Summary Compensation Annual Compensation Long-Term Compensation ---------------------------------- ---------------------------------- Awards Payouts ---------------- -------------- Other All Annual Restricted Other Name and Compen- Stock LTIP Compen- Principal Salary Bonus sation Award(s) Options/ Payouts sation Position Year ($) ($) ($) ($) SARs(#) ($) ($) - --------- ---- ------ ----- ------- -------- ----- ------- ------- James M. 2000 125,000 -0- -0- -0- -0- -0- -0- Dunn, M.D. 1999 125,000 -0- 9,063 -0- -0- -0- -0- (Former 1998 125,000 -0- 12,621 -0- -0- -0- -0- President and Chairman of the Board)
- --------------------------
(1) Dr. Dunn was actually paid $31,250, $0, and $0 as salary for the years ended June 30, 2000, 1999 and 1998, respectively. The annual salaries set forth above are pursuant to Dr. Dunn's employment contract discussed below.
(2) Dr. Dunn actually received $0 in fiscal 2000, $9,063 in fiscal 1999 and $12,621 in fiscal 1998, in other forms of compensation comprised of premiums paid on life insurance and automobile lease and maintenance expense. He earned $ 5,506, $5,506 and $5,506 in vacation allowance for fiscal 2000, 1999 and 1998, respectively and $0, $0 and $0 respectively in product minimum royalties for each fiscal year: 2000, 1999 and 1998, all of which was deferred along with accumulated amounts through January 1, 2000. At June 30, 1998, the Company owed Dr. Dunn $789,000 in salary and vacation pay. Accumulated vacation allowance is included in the deferred accumulated salary amount set forth in Note (1) above.
(3) Excludes amounts accrued and forgiven by Dr. Dunn on March 31, 1997. See Note 5 to the financial statements.
Employment Contract - James M. Dunn, M.D. - ------------------------------------------
On November 30, 1993, the Company entered into an employment agreement with its President, James M. Dunn, M.D. whereby Dr. Dunn agreed to serve as President of the Company until he reaches the age of 65 (2003) and agreed to assign to the Company all his right, title and interest in his inventions, discoveries, innovations, concepts and know-how during the period of the Agreement. Dr. Dunn is entitled to receive an annual salary of $338,000, subject to annual adjustments, a $3,000,000 life insurance policy, disability insurance equal to 80% of his gross income, and health insurance. In addition, he is entitled to a 2% royalty on the first $5,000,000 in net sale price of any Verex patented product, a 1% royalty on net sales
inexcess of $5,000,000 and a 2% royalty on Verex licensed technology. At March, 1997, a total of $2,605,204 was accrued in compensation pursuant to the agreement, and Dr. Dunn waived his claims thereunder in exchange for 25% in future revenues from AZTEC and 5% in future revenues from certain other Company drug formulations up to $2,605,204 and certain assignment rights to AZTEC in the event the Company has not licensed AZTEC prior to December 31, 1998. On March 31, 2000, Dr. Dunn resigned from the company as an employee, its President and Chairman. He is currently an employee of PRP. On March 31, 2000, Mr. Petre executed an employment agreement with the Company.
Employment and Royalty Agreements - ------------------------------------
On March 31, 2000 the Company and its prior President terminated all prior employment agreements and amended the royalty agreement. The prior President had a balance of accrued salaries of $395,833 owed for past services. The Company agreed to pay $9,461 for 24 months with a balloon payment of $176,321 plus any accrued interest on February 1, 2002. If during the twenty-four months the Company is able to commercialize any of its products, 30.49% of the net profit will be used to accelerate the payment of the accrued salary. The acceleration payments will be made to the balloon balance first, and then applied to the remaining monthly installments.
The prior President continues to act as a Director of the Company. On March 31, 2000 the prior President and PRP agreed to an employment agreement for five years. The prior President is paid $125,000 for the first year and increases in subsequent years based on contributions to PRP.
On March 31, 2000 the Company and one of its Employee/Director agreed to an employment contract. The employee is paid a base salary of $80,000 per year. This employee had a balance of accrued salaries of $253,333. The Company agreed to pay $5,854 for 24 months with a balloon payment of $112,845 plus any accrued interest on February 1, 2002. If during the twenty-four months the Company is able to commercialize any of its products, 19.51% of the net profit will be used to accelerate the payment of the accrued salary. The acceleration payments will be made to the balloon balance first, and then applied to the remaining monthly installments.
The Company amended the royalty agreement to pay its prior President 7.5% of license royalty or on gross profit received by the Company on sales or licensing from the Aztec product only. The amount to be paid to the prior President is not to exceed an accumulative total of approximately $2.5 million.
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 30, 2000 as to beneficial holders of more than 5% of the outstanding shares of Common Stock of the Company and as to Common Stock beneficially owned by all executive officers and directors of the Company as a group:
Amount and Nature Percent of Shares Name of of Beneficial of Common Stock Beneficial Owner Ownership Outstanding - ----------------- ----------------- -----------------
PR Pharmaceuticals, Inc. 1,345,517 52.95%
Steve R. Howe
Patrick Bols
James M. Dunn, M.D. -0- 0%
James B. Petre -0- 0%
Officers and Directors as a Group (2 persons) 1,345,517 52.95% - -----------------------
This table is based on 2,327,359 shares outstanding and does not include presently exercisable options to purchase shares of the Company's Common Stock held by each of the foregoing. See "Certain Relationships and Related Transactions" below for details. Beneficial ownership by any person includes direct or indirect voting power and investment power with respect to such shares of common stock of the Company.
Includes shares held by PR Pharmaceuticals, Inc.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
The Company leases facilities through March 31, 2002 at a current monthly rate of $4,459 plus a pro rata share of maintenance costs. A portion of the space is subleased to Jerry R. Dunn, a former officer of the Company at $2,106 per month. Management believes the terms of the facilities sharing with Jerry R. Dunn are as fair to the Company as could be arranged with an independent party.
Business Service Agreement - -----------------------------
On April 12, 2000 the Company signed a business services agreement with PRP. PRP is to provide administrative functions necessary in the management of the Company. Fees to be paid to PRP are not to exceed $5,000 per month, without the prior written consent of the Board of Directors of Verex. The business service agreement can be cancelled by either party with 60 days prior written notice.
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, 2000 and 1999
For the years ended June 30, 2000, 1999 and 1998:
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 10.34 - Credit Facility Agreement - PR Pharmaceuticals 10.35 - Agreement u James M. Dunn, M.D. and registrant regarding accrued salary at registrant 10.36 - Agreement James B. Petre regarding employment at Registrant and payment of accrued salary at Registrant. 10.37 - Royalty Agreement u James M. Dunn, M.D. amended March 2000 10.38 - Business Service Agreement - PR Pharmaceuticals
(b) The following Form 8-K's were filed by the Company during the quarter ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) VEREX LABORATORIES, INC. (Date) February 9, 2001
By:(Signature) /s/ Patrick Bols (Name and Title) Patrick Bols, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
(Registrant) VEREX LABORATORIES, INC. (Date) February 25, 2001
By:(Signature) /s/ Patrick Bols (Name and Title) Patrick Bols, President and Director
(Date) February 25, 2001
By:(Signature) /s/ Steve R. Howe (Name and Title) Steve R. Howe, Chairman of the Board, Secretary and Director
(Date) February 25, 2001
By:(Signature) /s/ Edward C. Gruben (Name and Title) Edward C. Gruben, Treasurer
(Date) February 25, 2001
By:(Signature) /s/ James M. Dunn, M.D. (Name and Title) James M. Dunn, M.D., Vice President of Medical Affairs and Director
(Date) February 25, 2001
By:(Signature) /s/ James B. Petre (Name and Title) James B. Petre, Director
VEREX LABORATORIES, INC. AND SUBSIDIARY
Financial Statements
Consolidated Balance Sheets - June 30, 2000 and 1999 F - 2
Consolidated Statements of Operations For the Years Ended June 30, 2000, 1999 and 1998 and Cumulative from September 29, 1980 (inception) to June 30, 2000 F - 3
Consolidated Statements of Stockholders' Deficit For the Years Ended June 30, 2000, 1999 and 1998 and Cumulative from September 29, 1980 (inception) to June 30, 2000 F - 4
Consolidated Statements of Cash Flows For the Years Ended June 30, 2000, 1999 and 1998 and Cumulative from September 29, 1980 (inception) to June 30, 2000 F - 5
Notes to Consolidated Financial Statements F - 6
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors Verex Laboratories, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Verex Laboratories, Inc. and Subsidiary as of June 30, 2000 and 1999, and the related consolidated statements of operations, shareholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Subsidiary as of June 30, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
Balukoff Lindstrom & Co. Boise, Idaho July 28, 2000
VEREX LABORATOIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET June 30, 2000 and 1999
VEREX LABORATORIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30, 1999 and 2000
VEREX LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT Years Ended June 30, 2000, 1999 and 1998
VEREX LABORATORIES, INC. AND SUBSIDAIRY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2000 and 1999
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Operations - ------------------ Verex Laboratories, Inc. (the "Company") was incorporated in Colorado on September 29, 1980 and began developmental activities in July 1981. The Company is primarily engaged in the business of developing and marketing non-prescription and prescription drug products utilizing constant release rate drug delivery systems. 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.
On March 31, 2000 PR Pharmaceuticals, Inc. (PRP) purchase approximately 53% of the outstanding stock from the majority stockholders. As part of the purchase agreement the employment agreement, royalty agreement and option agreement between the Company and its president and other company employees were either amended or terminated.
Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of its wholly-owned subsidiary Bear Laboratories, Inc. All intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments - ----------------------------------- The carrying amounts of financial instruments including cash and cash equivalents, accounts payable, notes payable and accrued expenses approximated fair value as of June 30, 2000 and 1999 because of the relatively short maturity of these instruments.
Property and Equipment - ---------------------- Property and equipment are recorded at cost and depreciated over the estimated useful lives (three to seven years) of the asset using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the remaining term of the office lease.
Patents - ------- Patents are stated at cost and are amortized on a straight-line basis over the estimated useful life of ten years.
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999 License Income - -------------- The Company has entered into licensing agreements with several pharmaceutical companies to manufacture and exclusively market two of the Company's patented drug products, a constant release rate formulation of Verapamil and Aztec products, in an established geographic area. The agreements generally require an initial non-refundable licensing fee to be paid to the Company and future royalty payments based on product sales. The non-refundable licensing income is recognized when received and royalty payments when earned.
Research and Development Costs - ------------------------------ The Company expenses all research and product development costs as incurred.
Cash Equivalents - ---------------- The Company considers investments that are purchased within three months of their date of maturity to be cash equivalents.
Income Taxes - ------------ Deferred tax liabilities and assets are determined based on the difference between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to occur. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
Use of Estimates - ---------------- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company used significant estimates in the accompanying financial statements related to estimated life of the patents. Actual results may change within the next year.
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999 NOTE B - NOTES PAYABLE AND LONG-TERM DEBT
2000 1999 ----------- ---------- Notes payable to the former president of the Company; non interest bearing and maturing from July 1997 to June 2000. The notes are not collateralized. $ 24,938 $ 16,313
Accrued salaries owed to the prior President and Officer/Director for past services with an interest rate of 7%, principle payments in monthly installments of $15,000 for twenty-four months with the remaining balance and interest due on February 1, 2002. 587,391 --
Note payable to PRP with an interest rate of 15.78%, interest paid quarterly with the principle balance due March 21, 2001, secured by the assets of the Company. 280,000 -- ----------- --------- 892,329 16,313 Less current portion (484,938) (16,313) ------------ ---------- $ 407,391 $ -- =========== ========== Maturities in future years are:
2001 $ 484,938 2002 407,391 ----------- $ 892,329 ===========
NOTE C - STOCKHOLDER CONTRIBUTIONS
In March 1997, the Company entered into an agreement with the Company's president and another Stockholder whereby the two stockholders forgave the Company's indebtedness of $2,605,204 and $2,185,984, respectively. The total debt forgiven of $4,791,188 included $1,687,000 of notes payable to a stockholder, $498,984 of accrued interest on the note and $2,605,204 of accrued salary and benefits to the president. As consideration for the debt forgiveness, the Company agreed to assign each individual the right to receive 25% of all licensing fees, royalties and all other sources of income from the Company's Aztec formulation and 5% of the income derived from other specified formulations up to the respective indebtedness from the Company which was forgiven. In addition, the Company has agreed to assign the patent for the Aztec formulation to the Stockholder in the event
that the Company is unsuccessful in securing any licensing or royalty agreements prior to December 1998. The Stockholder would then be responsible for marketing the rights and would distribute all earnings in accordance with the terms of the original agreement. The total amount of debt forgiven is reflected as additional paid-in-capital for the year ended June 30, 1997 in the accompanying consolidated financial statements. During the year ended June 30, 1998, $32,500 was accrued as royalty expense related to this agreement.
On March 31, 2000 the Company's former President and Officer/Director forgave the Company a total of $1,029,626 of deferred compensation and accrued vacation. The amount forgiven is reflected as additional paid-in-capital for the current year.
NOTE D - COMMON STOCK
Net Loss Per Common Share - ------------------------- Net loss per common share for the years ended June 30, l999, 1998, and 1997 has been computed on the basis of the weighted average number of common shares outstanding of 2,327,359.
Stock Options - ------------- The Corporation has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" for options granted to employees. Accordingly, no compensation cost has been recognized for the stock option plans.
Had compensation cost for the Company's stock options been determined based on the fair value at the grant date for awards in 1999 and 1998 consistent with the provisions of SFAS No. 123, the amount would have been immaterial to the financial statements.
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999
The following is a summary of options at June 30, 1999 and 1998:
Weighted Average Exercise Exercise Price Per Price Per Options Share Share --------- ---------- --------- Balance June 30, 1997 17,000 2.50 2.50 Granted 50,000 .75 1.19 ------- ------------ ---- Balance June 30, 1998 67,000 .75 - 2.50 1.19 Granted 913,500 .82 - 1.15 .82 ------- ------------ ----- Balance June 30, 1999 980,000 $ .75 - 2.50 $ .85 ======= ============ =====
On March 31, 2000 the stock option plan was terminated. There were no options granted or exercised prior to the termination.
NOTE E - INCOME TAXES
The Company has long-term deferred tax assets as a result of its net operating losses and deferred salary (assuming a tax rate of 38%) that is fully impaired due to uncertainty as to their utilization. Accordingly, there is no net deferred tax asset reflected in the accompanying consolidated financial statements.
June 30, 2000 1999 ----------- ---------- Long-term deferred tax assets Operating losses $ 3,978,156 $ 3,911,455 Deferred salary 223,209 533,573 --------------- --------------- Total long-term deferred assets 4,201,365 4,445,028 Valuation allowance (4,201,365) (4,445,028) --------------- --------------- Net deferred tax $ -- $ -- =============== ===============
At June 30, 2000, the Company has approximately $10,500,000 of net operating loss carryforwards for income tax purposes that expire between June 30, 2000 and June 30, 2015.
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999 NOTE F - RELATED PARTY TRANSACTIONS
Employment and Royalty Agreements - --------------------------------- On March 31, 2000 the Company and its prior President terminated all prior employment agreements and amended the royalty agreement. The prior President had a balance of accrued salaries of $395,833 owed for past services. The Company agreed to pay $9,461 for 24 months with a balloon payment of $176,321 plus any accrued interest on February 1, 2002. If during the twenty-four months the Company is able to commercialize any of its products, 30.49% of the net profit will be used to accelerate the payment of the accrued salary. The acceleration payments will be made to the balloon balance first, and then applied to the remaining monthly installments.
The prior President continues to act as a Director of the Company. On March 31, 2000 the prior President and PRP agreed to an employment agreement for five years. The prior President is paid $125,000 for the first year and increases in subsequent years based on contributions to PRP.
On March 31, 2000 the Company and one of its Officer/Director agreed to a new employment contract for five years. The Officer/Director continues as an employee of the Company but is no longer a Director of the Company. The employee is paid a base salary of $80,000 per year. The prior Officer/Director had a balance of accrued salaries of $253,333. The Company agreed to pay $5,854 for 24 months with a balloon payment of $112,845 plus any accrued interest on February 1, 2002. If during the twenty-four months the Company is able to commercialize any of its products, 19.51% of the net profit will be used to accelerate the payment of the accrued salary. The acceleration payments will be made to the balloon balance first, and then applied to the remaining monthly installments.
The Company amended the royalty agreement to pay its prior President 7.5% of license royalty or on gross profit received by the Company on sales or licensing from the Aztec product only. The amount to be paid to the prior President is not to exceed an accumulative total of approximately $2.5 million.
Business Service Agreement - -------------------------- On April 12, 2000 the Company singed a business services agreement with PRP. PRP is to provide administrative functions necessary in the management of the Company. Fees to be paid to PRP is not to exceed $5,000 per month, without the prior written consent of the Board of Directors of Verex. The business service agreement can be cancelled by either party with a 60 days prior written notice.
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999
NOTE G - LEASES
Office - ------ Currently, the Company occupies space under a lease agreement requiring monthly payments of $4,459. The lease commitment expires March 31, 2002. For the first nine months of 2000 and during 1999 and 1998 the company subleased a portion of the leased space for $1,783 per month.
Rent expense, net of sublease income was $45,269, $44,294, and $37,471 for the years ended June 30, 2000, 1999 and 1998, respectively.
Vehicle - ------- The Company had two operating leases for vehicles. The leases required monthly lease payments of $530 and $582 and expire January 1999 and 2000, respectively. Lease expense was $10,694 and $12,588, for the years ended June 30, 1999 and 1998, respectively.
The minimum annual lease payments through expiration of the office lease are as follows:
2001 $ 53,913 2002 41,346 ----------- $ 95,259 ===========
NOTE H - COMMITMENTS
The Company has commitments to issue approximately 130,000 shares of common stock in exchange for cash and forgiveness of accounts payable of approximately $70,000.
On March 31, 2000 the Company amended its royalty agreement with Birklea. In accordance with the terms of the amended agreement the Company will pay Birklea 7.5% of licensing royalty or on gross profit received by the Company on sales or licensing from the Aztec product and 3% of license royalty or on gross profit received by the Company on sales or licensing of other technologies. Royalty payments are not to exceed approximately $2.3 million dollars.
NOTE G - GOING CONCERN CONTINGENCY
The Company incurred significant operating losses during the years ended January 31, 1999 and 1998 due primarily to tough competition in the pharmaceutical industry. The Company's ability to continue as a going concern is primarily dependent upon two factors: increasing licensing
VEREX LABORATORIES, INC. AND SUBSIDAIRY NOTES TO FINANCIAL STATEMENTS June 30, 2000 and 1999
revenues from its current patents and minimizing operating costs, and the Company has access to $1 million security agreement with PRP. On or about March 22, 2000, the Company arranged a credit facility with PRP, Inc. to borrow up to $1,000,000 and matures March 21, 2001. All advances under this arrangement are secured by all of the Company's assets, including its technology, patents, trademarks and proprietary information and all updates, modifications, continuations and improvements thereto. The Company may request advances under this line of credit from time to time as long as it is in compliance with the "Conditions of Lending" under the Master Loan Agreement. Generally, PRP, Inc. will make advances pursuant to the "Conditions of Lending" as long as the Company is complying with the material terms of the Master Loan Agreement and there are no material adverse changes in its financial condition. As of June 30, 2000 the Company had drawn $280,000 under this line of credit. Management believes that unused line of credit of $720,000 may not be sufficient to meet minimum liquidity needs for the foreseeable future. Since there remains $629,000 of accrued management compensation and aged payables of approximately $200,000 to pay from this line, the availability from line of credit is not adequate to allow the Company to fund any research or development projects.