<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10252
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VIRAGEN, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2101668
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2343 West 76th Street, Hialeah, Florida 33016
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 557-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Common Stock Outstanding:
Common Stock, $.01 par value - - 35,496,382 shares as of
November 6, 1995.
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for
the three months ended September 30, 1995 and September 30, 1994
include the accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three
months ended September 30, 1995 and September 30, 1994.
2) Consolidated Condensed Balance Sheets as of September 30,
1995 and June 30, 1995.
3) Consolidated Condensed Statements of Cash Flows for the three
months ended September 30, 1995 and September 30, 1994.
4) Notes to Consolidated Condensed Financial Statements as of
September 30, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
---- ----
<S> <C> <C>
INCOME
Revenues $ 104,225 $ 150,178
Interest and other income 26,191 13,866
---------- ----------
130,416 164,044
COSTS AND EXPENSES
Cost of goods sold 83,808 89,716
Depreciation and amortization 48,209 15,168
Research and development
costs 287,284 50,924
Selling, general and
administrative expenses 440,560 281,028
Contract termination fee 525,000
Directors & Officers options granted 183,144
Interest expense 22,960 25,742
---------- ----------
1,065,965 987,578
---------- ----------
NET LOSS (935,549) (823,534)
Deduct required dividends on
convertible preferred stock 863 863
---------- ----------
LOSS ATTRIBUTABLE TO COMMON
STOCK $ (936,412) $ (824,397)
========== ==========
LOSS PER COMMON SHARE,
after deduction for required
dividends on convertible
preferred stock $ (.03) $ (.03)
========== ==========
Weighted average shares outstanding 35,416,738 26,018,878
========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995 (A)
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,053,512 $1,904,687
Accounts and notes receivable,
less allowance of $19,039
at September 30, 1995 and
June 30, 1995 93,005 52,884
Inventory 104,928 211,200
Prepaid expenses 79,553 104,525
Other current assets 9,657 7,928
---------- ---------
TOTAL CURRENT ASSETS 1,340,655 2,281,224
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements 1,192,921 1,191,183
Equipment and furniture 1,388,000 1,353,068
--------- ---------
2,580,921 2,544,251
Less accumulated depreciation (1,559,849) (1,512,069)
--------- ---------
1,021,072 1,032,182
DEPOSITS AND OTHER ASSETS 15,486 16,300
--------- ---------
$2,377,213 $3,329,706
========= =========
</TABLE>
4
<PAGE> 5
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995 (A)
------------- ----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 54,637 $ 205,543
Accrued expenses and other
liabilities 338,228 399,190
Current portion of long-term debt 866,522 62,728
---------- ----------
TOTAL CURRENT LIABILITIES 1,259,387 667,461
ROYALTIES PAYABLE, less current portion 107,866 107,866
LONG-TERM DEBT, less current portion 38,829 856,593
STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative
preferred stock, $1.00 par value
Authorized 375,000 shares; issued
and outstanding 3,450 shares.
Liquidation preference value: $10
per share, aggregating $34,500 3,450 3,450
Common stock, $.01 par value.
Authorized 50,000,000 shares; issued
and outstanding 35,496,382 shares
at September 30, 1995 and
35,355,532 at June 30, 1995 354,964 353,555
Capital in excess of par value 18,658,867 18,406,086
Common stock subscribed 45,296
Deficit (18,046,150) (17,110,601)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 971,131 1,697,786
---------- ----------
$ 2,377,213 $ 3,329,706
========== ==========
</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1995 filed with the Securities and Exchange
Commission.
See notes to consolidated condensed financial statements.
5
<PAGE> 6
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
---- ----
<S> <C>
OPERATING ACTIVITIES:
Net loss $ (935,549) $ (823,534)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 48,209 33,168
Contract termination fee paid in stock 525,000
Compensation Expense on options 183,144
Increase (decrease) relating to
operating activities from:
Accounts receivable (40,121) (37,744)
Interferon inventory 106,272 (216,346)
Prepaid expenses and other
current assets 23,243 (42,868)
Deferred expenses and other assets 814 430
Accounts payable (150,906) (194,400)
Accrued expenses and other
liabilities ( 60,962) (189,495)
--------- ----------
Net cash used in operating
activities (825,856) (962,820)
INVESTING ACTIVITIES:
Additions to property, plant and
equipment, net of minor disposals (37,099) (71,751)
--------- ---------
Net cash used in investing
activities (37,099) (71,751)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of Common
Stock Warrants 25,750
Proceeds from sale of common stock
net of related expenses 2,273,716
Payments/reclassifications on
long-term debt (13,970) (7,500)
Payments to Medicore (5,368)
--------- ---------
Net cash provided by (used)
in financing activities (11,780) 2,260,848
--------- ---------
Increase (decrease) in cash and cash
equivalents (851,175) 1,226,277
Cash and cash equivalents
at beginning of period 1,904,687 879,926
--------- ---------
Cash and cash equivalents
at end of period $1,053,512 $2,106,203
========= =========
Non-cash items:
Maturities of long term debt $ 804,453
</TABLE>
See notes to consolidated condensed financial statements.
6
<PAGE> 7
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation: Viragen, Inc. and subsidiaries have been
engaged in the research, development and manufacture of certain immunological
products for commercial application. The consolidated financial statements
include the accounts of Viragen, Inc. and its wholly-owned subsidiaries,
Vira-Tech, Inc., Viragen Technology, Inc. and Viragen (Scotland) Limited. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Inventory: The Company has capitalized the human leukocyte interferon
manufactured in its laboratories at the lower of average cost or market.
During fiscal 1995 as part of an agreement reached with the Florida Department
of Health and Rehabilitation Services and determination of management to focus
efforts on obtaining regulatory approvals, the Company discontinued new patient
enrollments under the State of Florida 499 Program. Accordingly, the Company
recorded a write-down of its interferon inventory, effective December 1994, of
$788,000. At June 30, 1995 and September 30, 1995, the remaining interferon
inventory is comprised of finished goods.
Property, Plant and Equipment: Property, plant and equipment is stated at the
lower of cost or net realizable value. Depreciation was computed using the
straight-line method over the estimated useful life for financial reporting
purposes and using accelerated methods for income tax purposes.
Loss Per Share: Loss per share has been computed based on the weighted average
number of shares outstanding during each period. The effect of warrants and
stock options (common stock equivalents) are antidilutive. Fully diluted loss
per share data, which includes the assumed conversion of the convertible
preferred stock, has not been presented because it was not dilutive.
Reclassifications: Certain reclassifications have been made to the fiscal 1995
Financial Statements to conform to the fiscal 1996 presentations.
7
<PAGE> 8
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE B--INTERIM ADJUSTMENTS
The financial summaries for the three months ended September 30, 1995 and
September 30, 1994 include, in the opinion of management of the Company, all
adjustments, consisting of normal recurring accruals, considered necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the three months ended September 30, 1995
are not necessarily indicative of the results that may be expected for the
entire year ending June 30, 1996.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the Company's latest annual report on Form
10-KSB for the year ended June 30, 1995.
NOTE C--CAPITAL STOCK
In August 1994, the Company completed its $3.5 million Private Placement
offering of its common stock to accredited investors at $.40 per share with the
issuance of 8,919,000 shares. The net proceeds of the offering of
approximately $3,185,000 were utilized for the acquisition of laboratory
production equipment, purchase of a Company-wide computer system, development
of clinical study protocols, employment of additional research and
administrative personnel and working capital. At June 30, 1994, 2,534,375
shares had been recorded as subscribed. In connection with this offering, the
Company issued 765,650 common stock purchase warrants entitling the holder to
purchase one share of common stock at $.52 per share for a period of five years
from date of issuance.
In November 1994, the Company commenced a second Private Placement to
accredited investors to raise through the sale of Common Stock at $.60 per
share, a maximum of $3,000,000. This offering was completed on December 31,
1994 with the Company having realized gross proceeds of $2,056,000 upon the
issuance of 3,426,667 shares. The net proceeds of this offering of
approximately $1,980,000 are being used for the establishment of a research and
manufacturing facility in Europe and for general working capital purposes.
8
<PAGE> 9
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE C--CAPITAL STOCK--Continued
During fiscal 1994, the Company entered into stock purchases and option
agreements with officers and directors totaling 2,250,000 shares obtainable at
$.30 per share, of which 1,125,000 shares were immediately exercisable and
1,125,000 shares were subject to certain performance criteria. During the
quarter ended September 30, 1994, the option related performance criteria were
met and the remaining 1,125,000 options became exercisable.
In April 1994, an officer purchased 750,000 shares of common stock at $.30 per
share, in accordance with the provisions of his employment agreement, $7,500
the par value of the stock, was charged to operations as compensation expense
and a note receivable was recorded for the remaining balance of $217,500. In
May 1995, the Board of Directors forgave this note receivable and related
interest.
In June 1994, two officers and an affiliate each purchased 125,000 shares of
common stock at $.30 per share, $3,750 the par value of the stock, was charged
to operations as compensation expense and a note receivable from each
individual was recorded on the remaining balance of $36,250. In May 1995, the
Board of Directors forgave these notes and related interest.
On March 31, 1995, 1,190,875 Class A common stock purchase warrants exercisable
at $1.63 per share, 600,000 Class B common stock purchase warrants exercisable
at $2.93 per share, and 3,029,270 Class C common stock purchase warrants
exercisable at $2.08 per share expired with no warrants being exercised.
There are 3,450 shares of 10% Cumulative, Convertible Series A preferred stock
of the Company outstanding at September 30 and June 30, 1995. Each share of
preferred stock provides for a 10% cumulative dividend, payable at the option
of the Company, in either cash or common stock and is convertible into 4.26
shares of common stock.
The holders of the preferred stock are not entitled to vote unless dividends
are in arrears for five annual dividend periods. The Company has the right to
call the preferred stock for redemption, in whole or in part, if the closing
bid for common stock is $6.00 per share or higher for a period of ten
consecutive business days ("Redemption Trigger Date"). The preferred stock is
redeemable at $11.00 per share for a period of five years from the Redemption
Trigger Date, and thereafter at $10.00 per share.
9
<PAGE> 10
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE C--CAPITAL STOCK--Continued
The Company has the authority to issue 1,000,000 shares of preferred stock, of
which 375,000 shares have been designated as Series A. No other classes of
preferred stock have been designated. Shares of the Company's common stock
reserved at September 30, 1995 for possible future issuance are as follows:
<TABLE>
<S> <C>
Warrants - consultants 730,340
Convertible preferred stock 14,697
Option plans - employees, officers & directors 5,998,000
Warrants - private placement 759,400
---------
7,502,437
=========
</TABLE>
On May 15, 1995 as amended in September 1995, the Company adopted its 1995
Stock Option Plan under which 4,000,000 shares of Common Stock were reserved
for issuance to officers, directors, employees and consultants of the Company
for stock options designated as "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code. During Fiscal 1995, 33,000 options
were granted at the market price at the respective date of grant. In September
1995, the Board of Directors granted 2,935,000 non-statutory options to
directors, officers and key employees of the Company under the provision of the
1995 Stock Option Plan. The options granted have an exercise price of $.50 per
share and are exercisable for a period of five years. During September 1995,
the Company recognized compensation expense of $183,144 as a result of these
options.
During September 1995, 75,000 warrants issued to a financial consultant having
an exercise price of $.30 per share and 6,250 warrants issued in connection
with the Company's August 1994 Private Placement offering with an exercise
price of $.52 per share were exercised into common stock of the Company. No
employee, officer or director options were exercised during the quarter ended
September 30, 1995.
10
<PAGE> 11
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE D--ROYALTY AGREEMENT
In May 1993, the Company renegotiated its royalty agreement with Medicore, Inc.
Under the new terms, the Company will pay Medicore 5% of sales to $7,000,000 4%
of the next $10,000,000 and 3% on the next $55,000,000 to a maximum of
$2,400,000 in royalty payments. Royalties incurred in prior years under the
previous agreement, totaling $108,000 are included in royalties payable. This
amount will be paid as the final payment under the $2,400,000 total royalty
agreement. Royalties expense incurred totaled $5,211 and $7,509 for the three
month periods ended September 30, 1995 and 1994, respectively.
NOTE E--LONG TERM DEBT
Long-term debt at September 30, 1995 is as follows:
<TABLE>
<S> <C>
Mortgage note secured by land, building and
equipment with a new book value of $1,021,072
at September 30, 1995.
Monthly principal payments of $2,500 plus
interest at prime plus 2% with the
unpaid balance due August 1, 1996.................... $475,939
Second mortgage secured by land, building,
equipment and accounts receivable.
Monthly principal payments of $1,789
plus interest at prime plus 1% with the
unpaid balance due August 1, 1996.................... 379,303
Capital lease obligations resulting from
acquisition of equipment, with a cost of
$54,200, capitalized at 10% over the term
of the lease ranging from three to five years........... 50,109
-------
905,351
Less current portion.................................... 866,522
-------
$ 38,829
=======
</TABLE>
The prime rate was 9.00% September 30, 1995 and at June 30, 1995.
Scheduled maturities of long-term debt at September 30, 1995 are:
1996-$866,522; 1997-$12,636; 1998-$8,395; 1999-$9,274;
2000-$6,716.
At June 30, 1995, the Company was in default of certain non financial covenants
on its mortgage note. The lender waived these defaults and waived compliance
with these covenants through July 1, 1996.
11
<PAGE> 12
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE E--LONG TERM DEBT--Continued
Medicore, Inc., the Company's former parent, has guaranteed the principal and
interest on the mortgage note and expenses and fees upon any default. Medicore
has the right to cure defaults and has an Acquisition Agreement with the
Company giving Medicore the right to assume the mortgage.
Interest payments on debt totaled $21,967 and $20,661 for the three month
periods ended September 30, 1995 and 1994, respectively.
During fiscal 1995, the Company acquired equipment under capital lease
agreements at a cost of $54,200 with a carrying value of $47,553 net of related
depreciation at September 30, 1995. Depreciation expense for this equipment
totaled $3,197 for the three months ended September 30, 1995. The aggregate
lease commitments at September 30, 1995 are: 1996-$15,719; 1997-$15,719;
1998-$11,772; 1999-$10,456 and 2000-$9,585.
NOTE F--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of June 30, 1995 are as
follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Tax over book depreciation....................... $ 65,000
Other............................................ 15,000
---------
Total deferred tax liabilities........... 80,000
Deferred tax assets:
Net operating loss carryforwards................. 4,781,000
Research and development credit.................. 230,000
Investment tax credit............................ 40,000
Other............................................ 255,000
---------
Total deferred tax assets................ 5,306,000
Valuation allowance for deferred tax assets........ 5,226,000
---------
80,000
---------
Net deferred taxes....................... $ -0-
=========
</TABLE>
The increase in the valuation allowance in 1995 was primarily a result of
operating losses during the year ended June 30, 1995.
12
<PAGE> 13
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE F--INCOME TAXES--Continued
At June 30, 1995, the Company has net operating loss carryforwards of
approximately $14,100,000 and tax credits of approximately $270,000 for income
tax purposes that expire in years 1996 through 2010. For financial reporting
purposes, a valuation allowance has been recognized to offset the deferred tax
assets related to these carryforwards. On December 31, 1994, the Company had
an ownership change as defined by Internal Revenue Code #382 which causes the
utilization of the above mentioned net operating loss and tax credits to be
limited to approximately $1,266,000 per year.
The difference between the amount that results from applying the statutory
income tax rate to the loss before income tax benefit and the amount of benefit
recognized ($-0-for both years) results primarily from the change in the
valuation allowance.
NOTE G--TRANSACTIONS WITH OTHER RELATED PARTIES
In November 1993, the Company issued $200,000 in 8 1/2%, three year convertible
debentures. The debentures at the holders option were immediately convertible
into common stock of the Company at $.30 per share. These debentures were held
by a fund managed by a director of the Company. In October 1994, these
debentures were converted into 666,668 shares of common stock. These shares
are held by Fundamental Growth Partners, Ltd., Fundamental Associates, Ltd.,
Hedge Fund Partners, Ltd., and Fundamental Resources, Ltd., which are
investment funds managed by William B. Saeger, a director of the Company.
NOTE H--AGREEMENT FOR SALE OF STOCK
On February 5, 1993, the Company entered into a Stock Agreement with Cytoferon
to purchase up to 11,640,000 shares of the Company's common stock for
consideration of $1,500,000 ("Maximum Investment"). By May 31, 1993, the
expiration of the investment period, the Company had received the Minimum
Purchase under the terms of the stock agreement, $1,000,000, in exchange for
6,000,000 shares of common stock at $.167 per share. This price reflects the
receipt, by Cytoferon, of a 20% bonus of common stock due upon having reached
the Minimum Purchase.
On November 19, 1993, the Company entered into an Additional Stock Purchase
Agreement under which terms Cytoferon purchased an additional 1,333,333 common
shares at $.30 per share.
13
<PAGE> 14
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE H--AGREEMENT FOR SALE OF STOCK--Continued
The funds invested enabled the Company to reinitiate production of its
interferon product, Alpha Leukoferon(TM), and to reinitiate the marketing of
the product through physicians specializing in the treatment of multiple
sclerosis and HIV/AIDS patients residing in the state of Florida.
Under the terms of the Stock Agreement, the Company had approved the Management
and Marketing Services Agreement ("MMS Agreement") subject to certain
modifications, which appointed Cytoferon as consultant to the Company relating
to production, administration, marketing and regulatory affairs for which
Cytoferon was to receive a consulting fee of $204,000 the first year and
$240,000 the next two years provided certain minimum sales requirements were
met. To the extent Cytoferon's investment in the Company was less than the
Maximum Investment, the consulting fee was reduced pro-rata. The MMS
Agreement also provided for a 4% gross sales commission for exclusive
distributorship for non-FDA approved products and non-exclusive marketing of
FDA approved products, none of which the Company presently has. The MMS
Agreement further provided for the Company to pay Cytoferon 50% fees paid for
foreign licensing, franchising and transfer of technology plus 20% royalties
the Company would have received from foreign agreements. All such fees and
commissions were subject to the Company generating certain minimum sales under
the MMS Agreement. For the three month period ended September 30, 1994 the
Company incurred management fees and sales commissions expenses of $60,000 and
$34,000 respectively.
In August 1994, the Board of Directors of the Company voted to terminate the
MMS Agreement with Cytoferon, subject to receipt of a fairness opinion, and
issue the 1,750,000 shares contingently issuable under the Additional Stock
Purchase Agreement. The Company's management believed that it was in the
long-term best interest of the Company to unify and consolidate management
functions and efforts and eliminate conflicts that may arise by virtue of
minimum sales requirements that could be inconsistent with the Company's plans
to introduce new production technologies and refinement of related protocols.
Accordingly, the Company executed a Subsequent Agreement which, subject to
receipt of a fairness opinion received in December 1994, terminated the MMS
Agreement and accelerated the issuance of the 1,750,000 shares contingently
issuable under the November 1993 Additional Stock Agreement concurrent with the
cancellation of the MMS Agreement and related contractual obligations. As a
result of this transaction, the Company recognized a contract termination fee
expense of $525,000 in August 1994.
14
<PAGE> 15
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--Continued
September 30, 1995
NOTE I--SUBSEQUENT EVENT
On September 20, 1995, the Company entered into an agreement and Plan
Reorganization ("Agreement") with Sector Associates, Ltd. ("Sector"), a
Delaware corporation. Under the terms of the Agreement, the Company will
acquire a 94% interest in Sector in exchange of it's 100% interest in Viragen
(Scotland) Limited in a reverse acquisition transaction. Sector is a publicly
traded corporation which will contain net cash assets of $800,000 at the
transaction closing date scheduled to occur in December 1995. The Company,
through Sector, plans to undertake additional financing transactions to
underwrite domestic and European research and clinical trial activities.
On November 7, 1995, the Agreement was amended to provide for an interim loan
of $500,000 by Sector to Viragen (Scotland) Limited, the filing of certain
financial reports by Sector prior to closing an additional $300,000 capital
contribution to Sector within thirty days, and the modification of a related
investment banking agreement. The loan was funded November 9, 1995, bearing
interest at 4% per annum, secured by a 3.77% equity interest in Viragen
(Scotland) Limited and is guaranteed by Viragen, Inc. Upon closing of the
Agreement, the principal amount of the note with related interest shall be
deemed contributed capital to Sector. Absent the successful closing of the
Agreement, the note and related interest are due May 7, 1996.
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company has incurred operational losses and operated with a
negative cash flow since its inception in December 1980. Losses have totaled
approximately $936,000, $3,955,000 and $1,087,000 for the three month period
ended September 30, 1995 and years ended June 30, 1995 and 1994 respectively.
See "Results of Operations" below
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $81,000 at September 30, 1995, a
decrease of $1,533,000 from the year end balance. This decrease was
attributable to operational losses during the quarter and the reclassification
as current two mortgages due August 1, 1996 totaling $855,242 previously
carried as long term liabilities. The Company is currently negotiating
replacement financing for these mortgages.
In August 1994, the Company completed a $3.5 million private placement
offering of its Common Stock to accredited investors at $.40 per share,
resulting in the issuance of 8,919,000 shares. The net proceeds of the
offering of approximately $3,185,000 were utilized for the acquisition of
laboratory production equipment, the purchase of a Company-wide computer
system, development of clinical study protocols, employment of additional
research and administrative personnel and working capital.
In December 1994, the Company completed a second private placement,
solely to accredited investors, of Common Stock at $.60 per share, realizing
gross proceeds of $2,056,000 in consideration for the issuance of 3,426,667
shares. The proceeds are being utilized for implementation of the initial
phase of the Company's European market strategy, which includes the
establishment of a research and manufacturing facility in Europe. It is the
Company's intention to commence European clinical trials and seek the necessary
approvals for the sale of its Omniferon(TM) in the EU subject to receipt of
additional funding necessary to conduct such trials.
Previously, the Company was being funded by Medicore, Inc.
("Medicore"), its former parent, and during 1992 received advances in the
amount of $301,000 to finance its minimal operations during this period.
Aggregate indebtedness due Medicore (inclusive of $108,000 in royalties due
under a previous agreement which is payable as the final payment under the
$2,400,000 total royalty to be paid) was $471,530 and $493,000 at September 30,
1995 and June 30, 1994, respectively. This indebtedness is secured by a
$429,000 note and mortgage on the realty and personal property of the Company.
This note matures August 1, 1996 and, accordingly has been classified as a
current liability at September 30, 1995.
16
<PAGE> 17
While subject to significant limitations, the Company has available
net tax operating loss carryforwards of approximately $14,800,000 expiring
between 1996 and 2010, which may be used to offset taxable income, if any,
during those periods.
In December 1994, the Company received notification from HRS to
postpone enrollment of new patients under its 499 Program until such time as
the Company provided certain administrative reports to the HRS and corrected to
their satisfaction certain FDA inspection-related comments concerning the
Company's manufacturing processes and facility. In July 1995, the Company
discontinued enrollment of new patients in its 499 Program and in August 1995,
reached an agreement with the Florida HRS providing for the elimination of new
enrollments, with the possible exception of a limited study for HIV/AIDS on a
humanitarian basis. The elimination of enrollment of new patients under the
499 Program will cause the loss of revenues the Company would have been able to
generate upon enrollment of new paying patients under its 499 Program, which
revenues could have offset, in part, the significant cost of conducting
clinical trials and obtaining regulatory approvals of Omniferon(TM).
Under its agreement with Florida HRS, upon completing the course of
treatment of patients currently enrolled under the 499 Program in March 1996,
the Company will no longer be authorized to ship any product under the existing
499 Program protocols.
On September 20, 1995, the Company entered into an Agreement and Plan
Reorganization ("Agreement") with Sector Associates, Ltd. ("Sector"), a
Delaware corporation. Under the terms of the Agreement, the Company will
acquire a 94% interest in Sector in reverse acquisition transaction. Sector is
a publicly traded corporation which will contain net cash assets of $800,000 at
the transaction closing date scheduled to occur in December 1995. The Company,
through Sector, plans to undertake additional financing transactions to
underwrite domestic and European research and clinical trial activities.
On November 7, 1995, the Agreement was amended to provide for an
interim loan of $500,000 by Sector to Viragen (Scotland) Limited, the filing of
certain financial reports by Sector prior to closing, the contribution of an
additional $300,000 capital contribution to Sector within thirty days, and the
modification of a related investment banking agreement. The loan was funded
November 9, 1995, bearing interest at 4% per annum, secured by a 3.77% equity
interest in Viragen (Scotland) Limited and is guaranteed by Viragen, Inc. Upon
closing of the Agreement, the principal amount of the note with related
interest shall be deemed contributed capital to Sector. Absent the successful
closing of the Agreement, the note and related interest are due May 7, 1996.
17
<PAGE> 18
Management believes that the Company's Omniferon(TM) product can be
manufactured in sufficient quantity and will be priced at a level to offer
patients an attractive alternative treatment to the Synthetic Interferons.
Management further believes that working capital currently on-hand, as well as
the continued limited distribution of its Alpha Leukoferon(TM) under the 499
Program through March 1996 to existing patients and the funding received and
scheduled under the Agreement and Plan of Reorganization will provide the
Company with the funds necessary to continue its current level of operations,
focused on current research projects, at least through September 30, 1996.
RESULTS OF OPERATIONS
For the past several years, the Company's limited revenues have been
derived from sales of the Company's Alpha Leukoferon(TM) product ("Product")
through Florida physicians (primarily Neurologists) for the treatment of
Multiple Sclerosis in accordance with Florida Statute 499. Distribution of the
Company's Product is limited to the State of Florida and is sanctioned by, and
subject to, the provisions of Florida Statute 499.018. This statute permits
controlled distribution of the Product in a clinical trial environment only
within the State. Commercialization of products under this statute is not
permitted. As indicated above, the Company discontinued enrollment of new
patients in its 499 Program and all revenues under this program will cease in
March 1996.
Following the final shipments of Product under 499 Program in March
1996, the Company will have no approved source of sales revenue until it
receives the necessary regulatory approvals from the U.S. Food and Drug
Administration and/or comparable European Union authorities. Such approvals
cannot be assured and are subject to the successful completion of lengthy
clinical trials and the Company's ability to raise significant investment
capital to fund such trials.
Losses from operations have been incurred since inception and totaled
approximately $936,000 and $824,000 for the three month periods ended September
30, 1995 and 1994, respectively.
Sales for the quarter ended September 30, 1995 totaled $104,000 and
were derived almost entirely from distribution of the Company's Alpha
Leukoferon(TM) product for the clinical study treatment of multiple sclerosis.
Sales during the comparable period totaled $150,000. This decline was due to
patients previously enrolled under the 499 Program completing their course of
treatment coupled with the discontinuance of new enrollments as discussed
above.
18
<PAGE> 19
Cost of sales as a percentage of sales revenues totaled 80% for the
three month period ended September 30, 1995 compared to 60% for the comparable
period of the preceding year. This increase is due to a significant (44%) drop
in the selling price of the Company's Alpha Leukoferon(TM) product during
fiscal 1994. This sharp price reduction reflects the Company's efforts to make
the Product more price competitive with the synthetic interferons, and
accordingly, a more viable alternative patient treatment.
Research and development costs of $287,000 for the first quarter of
fiscal 1996 reflect a $236,000 increase of the same period of the preceding
year. This sharp increase was attributable primarily to expanded research
efforts associated with the Company's newly developed Natural Interferon
(alpha) product Omniferon(TM). These costs are expected to continue to
increase for at least the next three quarters, as the Company works towards
regulatory approval submissions in the EU for Omniferon(TM), currently planned
for mid-calendar 1996. The expanded research efforts are focused on improved
methods of manufacturing aimed at maintaining or improving product quality and
manufacturing efficiencies. Components of the overall increase of approximately
$236,000 include the hiring of additional research personnel with salaries and
related taxes and benefits totaling approximately $113,000 or 47% of the
overall increase. Additionally, research laboratory supplies expense increased
approximately $115,000 between the periods. The increase was also due to
increase in consulting fees, travel and equipment rentals.
Selling general and administrative expenses increased approximately
57% during the quarter ended September 30, 1995 over the comparable previous
year period. Components of this net increase included an increase in
administrative salaries with related taxes and benefits of approximately
$96,000. Additionally, the quarter ended September 30, 1995 reflected an
increase in travel related expense of approximately $18,000 a significant
portion of which was attributed to European travel associated with the
establishment of a European production facility and related fact-finding and
marketing efforts.
In August 1994, the Company had recognized contract termination
expenses of $525,000 reflecting the termination of the contractual relationship
between the Company and Cytoferon and related issuance of 1,750,000 shares of
common stock. The transaction was initially approved by the Company's Board of
Directors in August 1994, subject to receipt of a fairness opinion. Said
opinion was received in December 1994. See Note F to Notes to Consolidated
Condensed Financial Statements.
19
<PAGE> 20
In September 1995, the Board of Directors granted 2,935,000
non-statutory options to directors, officers and key employees of the Company
under the provision of the 1995 Stock Option Plan. The options granted have an
exercise price of $.50 per share and are exercisable for a period of five
years. During September 1995, the Company recognized compensation expense of
$183,144 as a result of these options.
20
<PAGE> 21
PART II- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The Company has outstanding at September 30, 1995 and June 30, 1995,
3,450 shares of its preferred stock which provides for cumulative dividends at
an annual interest rate of 10% per share, when and as declared by the Board of
Directors, payable at the option of the Board, in common stock or cash. A
common stock dividend was paid to preferred shareholders of record in 1989 for
an aggregate dividend issuance of 36,579 shares of common stock. If at any
time dividends payable on the preferred stock are in arrears for five annual
dividend periods (which occurred in August 1994), the holders of the
outstanding shares of preferred stock, have the exclusive right, voting as a
class, to elect two directors of the Company, which right will continue until
all accumulated dividends have been paid in full.
21
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Part I Exhibits
(11) Statement re: computation of per share
earnings
(27) Financial Data Schedule (for SEC use only).
Part II Exhibits
(10) Material Contracts
(i) Amendment to Agreement and Plan of
Reorganization dated November 8, 1995.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRAGEN, INC.
By: /s/ Dennis W. Healey
------------------------------
DENNIS W. HEALEY, Executive
Vice President, Treasurer and
Principal Financial Officer
Dated: November 10, 1995
22
<PAGE> 1
EXHIBIT 10(i)
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
Amendment ("Amendment") to Agreement and Plan of Reorganization
entered into as of November 8, 1995 by and among Sector Associates, Ltd., a
Delaware corporation ("Acquiror"), Viragen (Scotland) Limited, a Scottish
private limited company ("Acquiree") and Viragen, Inc., a Delaware corporation
("Stockholder").
W I T N E S S E T H:
WHEREAS, Acquiror, Acquiree and Stockholder entered into an Agreement
and Plan of Reorganization, dated September 20, 1995, as modified by that
letter of agreement dated October 2, 1995 ("Agreement and Plan of
Reorganization");
WHEREAS, Acquiror, Acquiree and Stockholder deem it to be in their
respective best interests to amend the Agreement and Plan of Reorganization in
order to complete arrangements for the closing of the transaction identified
within the Agreement and Plan of Reorganization; and
WHEREAS, upon the terms and conditions set forth herein, Acquiror,
Acquiree and Stockholder have agreed to the following amendments to the
Agreement and Plan of Reorganization.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Closing Date. The Closing Date of the Agreement and Plan of
Reorganization shall occur five (5) days following the filing by Acquiror of
its Annual Report on Form 10-KSB for the year ended June 30, 1995 and its
Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
1995; provided, however, that the Closing Date shall occur no later than 30
days from the date hereof unless the parties mutually agree otherwise. The
parties agree that the extension of the Closing Date to accommodate the filing
of the aforementioned periodic reports are not intended to extend the period
for the undertaking of due diligence by Acquiree and Stockholder, and that such
period for completion of due diligence shall expire as of the date hereof,
notwithstanding Section 9.5 of the Agreement and Plan of Reorganization.
Acquiror represents and warrants that it is unaware of any material changes to
be included in the aforementioned periodic reports to be filed not otherwise
previously disclosed in the periodic reports filed by Acquiror or information
delivered in writing to Acquiree and Stockholder pursuant to the Agreement and
Plan of Reorganization.
2
<PAGE> 3
2. Interim Loan. Pending the closing contemplated by Paragraph
1 above, Acquiror agrees to make an interim loan to Acquiree of $500,000
pursuant to a Secured Promissory Note attached hereto as Exhibit A and Pledge
and Escrow Agreement attached hereto as Exhibit B. In the event the
aforementioned closing under the Agreement and Plan of Reorganization is not
undertaken as provided in Paragraph 1 above, the Secured Promissory Note shall
be due and payable on May 8, 1996. At such time as the contemplated closing
takes place, the Secured Promissory Note shall be deemed satisfied, and the
principal amount thereof and related interest shall be contributed to and shall
become part of the capital of the Acquiror to be on hand net of liabilities as
referred to in Section 8.4 of the Agreement and Plan of Reorganization.
3. Additional Contribution. Not later than 30 days from the date
hereof, there shall be contributed to the capital of Acquiror the sum of
$300,000 through a private placement to be undertaken on behalf of Acquiror of
the equivalent of 1,790,490 shares of common stock of Acquiror.
4. Determination of Net Worth. For purposes of determining cash
assets on hand net of liabilities of $800,000 as provided in Section 8.4 of the
Agreement and Plan of Reorganization and consisting of the sum of $500,000 to
be delivered simultaneously
3
<PAGE> 4
with the execution hereof as provided in Paragraph 2 above and the additional
$300,000 to be delivered as provided in Paragraph 3 above, such $800,000 of
assets on hand shall be net of those liabilities (existing, accrued or
contingent) as of the Closing Date, as well as those expenses associated with
(i) completing a private placement required to raise the balance of the
$800,000 and (ii) the preparation and filing of the Form 10-KSB for the fiscal
year ended June 30, 1995 and the Form 10-QSB for the quarterly period ended
September 30, 1995. It is understood, however, that information concerning the
Acquiree and the Stockholder provided to the Acquiror to be included in such
periodic reports shall be prepared at the costs of the Acquiree, and the costs
associated with filing of the Form 8-K Current Report subsequent to the closing
and reflecting (i) the completion of the acquisition of Acquiree and (ii) the
anticipated change in accountants will be borne by the Acquiree.
5. Capitalization. Upon the 30th day immediately following the
Closing Date and the issuance of the additional shares of Common Stock as
provided in Paragraph 3 above, Acquiror shall have an outstanding
capitalization that consists of no more than approximately 5,037,617 shares of
its common stock, inclusive of the shares issued in order to comply with
Section 8.4 and exclusive
4
<PAGE> 5
of the shares issued to the Stockholder on the Closing Date and any shares
issued other than in connection with Paragraph 8.4 of the Agreement and Plan of
Reorganization. The parties hereto do adopt the terms of correspondence dated
October 2, 1995 as though the same were set forth within this Amendment.
6. Composition of Board of Directors Immediately following the
Closing Date. On or prior to the Closing Date, all members except one member
of the present board of directors of Acquiror shall have tendered their
resignation in favor of a new member of the board of directors, with such
remaining member being a designee of the Stockholder. The new board of
directors shall remain in effect until the earlier of 30 days following the
Closing Date or the date of delivery of the balance of the funds necessary to
satisfy the requirements of Section 8.4 of the Agreement and Plan of
Reorganization.
7. Conversion of Acquiror Shares. The Acquiror Shares will
permit the Stockholder to convert into 78,400,000 shares of common stock of the
Acquiror, each share of Class B Convertible Preferred Stock to be convertible
into 39.2 shares of common stock of the Acquiror such that the Stockholder
shall hold no less than 94% of the capital stock and interest of the Acquiror.
5
<PAGE> 6
8. Investment Banking Arrangements. Pursuant to an Investment
Banking Agreement, FAC Enterprises, Inc. shall receive from the Stockholder
71,429 shares of the Acquiror Shares ("FAC Shares") upon delivery of the
balance of the funds necessary to satisfy the requirements of Section 8.4.
Until that time, the FAC Shares shall remain held by the Stockholder as
collateral for performance of delivery of the balance of the funds required
pursuant to Section 8.4 and this Amendment. In the event requirements of
Section 8.4 are not satisfied within 30 days of the Closing Date, the right to
the FAC Shares by FAC Enterprises, Inc. shall be forfeited. Furthermore, to the
extent that the outstanding capitalization of Acquiror exceeds 5,037,617 Shares
of common stock, exclusive of the shares held by Stockholder and those shares
not issued in connection with completing the funding requirements of Section 1
of this Amendment, at the end of the 30 days immediately following the Closing
Date, such excess amount shall be deducted from the FAC Shares in its common
stock equivalent (39.2 shares of common stock equal to one share of Class B
Convertible Preferred Stock.) The previous Investment Banking Agreement between
Stockholder and Rozel International Holdings Limited ("Rozel") has been
terminated and a release therefrom shall be provided by Rozel on or prior to
the Closing Date.
6
<PAGE> 7
9. Supersedes. Each of Acquiror, Acquiree and Stockholder agree
that this Amendment shall be read in conjunction with the Agreement and Plan of
Reorganization and all the terms and provisions contained herein, shall
supersede those terms and provisions of the Agreement and Plan of
Reorganization which are not currently stated or are contrary to those terms
and provisions of the Agreement and Plan of Reorganization.
10. Full Force and Effect. This Amendment only affects those
terms and provisions of the Agreement and Plan of Reorganization that are not
currently stated or are contrary to this Amendment, and the balance of the
Agreement and Plan of Reorganization shall remain in full force and effect.
11. Binding Agreement. This Amendment shall be binding upon the
parties hereto and inure to the benefit of the parties, their respective heirs,
administrators, executors, successors and assigns. The parties hereto shall
not assign their respective rights nor delegate their respective obligations
hereunder to any other party without the prior written consent of all other
parties hereto.
12. Counterparts. This Amendment may be executed simultaneously
in two or more counterparts, each of which shall be
7
<PAGE> 8
deemed an original, but all of which together shall constitute one and the same
instrument.
13. Facsimile Signature. This Amendment may be executed and
accepted by facsimile signature and such signature shall be in the same force
and effect as an original signature.
14. Governing Law. This Amendment shall be governed by the laws
of the State of Florida.
IN WITNESS WHEREOF, intending to be legally bound hereby the parties
hereto have caused this Amendment to be executed by their duly authorized
officers on the date first appearing above.
Attest: SECTOR ASSOCIATES, LTD.
__________________________ By: _________________________
Attest: VIRAGEN (SCOTLAND) LIMITED
__________________________ By: _________________________
Attest: VIRAGEN, INC.
__________________________ By: _________________________
AGREED AND ACKNOWLEDGED:
Attest: FAC ENTERPRISES, INC.
__________________________ By: _________________________
8
<PAGE> 9
EXHIBIT A
SECURED PROMISSORY NOTE
November 8, 1995 $500,000.00
FOR VALUE RECEIVED, the undersigned, VIRAGEN (SCOTLAND) LIMITED
("Maker"), a Scottish private limited company, hereby promises to pay to the
order of SECTOR ASSOCIATES, LTD. ("Payee"), a Delaware corporation, the
principal sum of Five Hundred Thousand Dollar ($500,000.00) with interest on
the unpaid principal amount at the rate of 4% per annum and on any overdue
payment of principal or interest at the rate of 1% per month (12% per annum),
and with the principal balance and all accrued interest being due and payable
on May 7, 1996, all as hereinafter provided. This Note shall be subject to the
terms and conditions of an Agreement and Plan of Reorganization dated as of
September 20, 1995, as Amended, between Maker, Payee and Viragen, Inc. (the
"Agreement and Plan of Reorganization"), particularly as it relates to the
satisfaction of this Note upon the Closing of the Agreement and Plan or
Reorganization.
1. Payments of Interest and Principal.
(a) Interest. Maker shall pay interest to Payee on the
unpaid outstanding principal balance owed to Payee hereunder at the rate of
four percent (4%) per annum to be paid at the time of payment of the principal
as herein provided.
(b) Principal. Maker shall have no duty or obligation to
pay any portion of the outstanding principal owed hereunder, except as
hereinafter provided, until May 7, 1996. On May 7, 1996, all accrued interest
and outstanding principal shall be due and payable, and shall be paid, to
Payee.
(c) Payments. All payments made hereunder shall be
applied as made first to the payment of interest then due, and the balance of
said payment shall be applied to the payment of the principal sum.
2. Place of Payment. So long as Payee shall hold this Note, all
payments of principal and interest shall be made at the address of Maker as
specified herein upon presentment of this Note.
<PAGE> 10
3. Prepayment. From and after the date hereof, Maker shall have
the option to prepay any portion or all of the remaining principal balance of
this Note without penalty or premium. All optional prepayments of principal
made pursuant to this Note shall be accompanied by the payment of all accrued
interest on such principal through the date of payment.
4. Security Interest.
(a) Security Interest. As collateral security for the
payment of this Note, Maker hereby pledges, transfers, assigns, sets over and
grants to Payee a first priority security interest in the Collateral (as
hereinafter defined) wherever located.
(b) Continuation of Security Interest. The security
interest granted in this Agreement shall continue in full force and effect
until the payment in full of this Note.
(c) Collateral. The term "Collateral" shall inventory,
shares of capital stock and refer to 3.77 shares of Common Stock of Maker,
including all replacements, modifications, alterations, additions,
substitutions and replacements therefore and all proceeds and products of the
foregoing now owned or hereafter acquired by Maker. The Collateral shall be
provided as security pursuant to a Pledge and Escrow Agreement entered into
simultaneously herewith.
(d) Further Assurance. Maker shall take such steps and
execute and deliver such financing statements and other documents relating to
the creation, validity or perfection of the security interests provided for
herein.
(e) Representations and Warranties. Maker hereby
represents and warrants that Maker has due authorization to issue the
Collateral free and clear of any and all liens, encumbrances or other security
interests whatsoever.
(f) Covenants of Maker. Until payment in full of the
Note, Maker hereby covenants and agrees as follows:
(i) Observe Covenants, etc. Maker shall
observe, perform and comply with the covenants, terms and conditions
of this Note.
2
<PAGE> 11
(ii) Payment of Proceeds. After the
occurrence of an "Event of Default," as hereinafter defined, and for
so long as such default is continuing, Maker shall forthwith upon
receipt of any proceeds of Collateral, pay such proceeds over for the
benefit of Payee, and such proceeds shall thereupon be used to the
full extent necessary to satisfy Maker's obligations to Payee.
(iii) Other Liens. Maker shall not incur, create
or permit to exist any mortgage, assignment, pledge, hypothecation,
security interest, lien or other encumbrance on any of the Collateral.
(g) Default. The occurrence of any of the following
shall constitute an event of default ("Event of Default"):
(i) Failure to Pay. Maker fails to pay, when
due, any of the obligations provided for in this Note at their due
date or under any other note or obligations of Maker to the Payee.
(ii) Denominated Events. The occurrence of any
event expressly denominated as an Event of Default in this Note.
(iii) Failure to Perform. Maker fails to perform
or observe any material covenant, term or condition of this Note, or
any other note or obligation issued or owing in respect to Payee and
to be performed or observed by Maker, and such failure continues
unremedied for a period of ten (10) days after written or facsimile
notice from Payee to Maker of such failure.
(iv) Petition By or Against Maker. There is filed
by or against Maker any petition or complaint with respect to its own
financial condition under any state or federal bankruptcy law or any
amendment thereto (including without limitation a petition or
reorganization, arrangement or extension of debts) or under any other
similar or insolvency laws providing for the relief of debtors; or
(v) Appointment of Receiver. A receiver,
trustee, conservator or liquidator is appointed for Maker, or
3
<PAGE> 12
for all or a substantial part of its assets; or Maker shall be
adjudicated bankrupt or in need of any relief provided to debtors by
any court.
(h) Remedies.
(i) Acceleration, Proceed Against
Collateral. Upon the occurrence of an Event of Default and for so
long as such default is continuing:
(1) The total amount of (i) of this Note
and all other sums owing to Payee which are (A) then due and
unpaid or (B) thereafter to become due and payable; and (ii)
interest on the foregoing sums, at the rate of one percent
(1%) per month from said occurrence until paid in full (the
"Default Amount") shall, at the option of Payee, become
immediately due and payable without notice or demand;
(2) The proceeds of the Collateral shall
be applied. First, to the payment of all reasonable fees and
expenses incurred by Payee as a result of such Event of
Default, including without limitation any legal fees and
expenses incurred in connection therewith; Second to pay the
Default Amount to the extent not previously paid by Maker; and
Third to pay any excess remaining thereafter to Maker;
(3) In lieu of any such sale, Payee may
retain the Collateral in full satisfaction of Maker's
obligations under this Note; and
(4) Payee may exercise any of the other
remedies provided under applicable laws.
(ii) Cumulative Remedies; Waivers. No
remedy referred to herein is intended to be exclusive, but each shall
be cumulative and in addition to any other remedy referred to above or
otherwise available to Payee at law or in equity. No express or
implied waiver by Payee of any default or Event of Default hereunder
shall in any way be, or be construed to be, a waiver of any future or
subsequent default or Event of Default. The failure or delay of Payee
in exercising any
4
<PAGE> 13
rights granted it hereunder under any occurrence of any of the
contingencies set forth herein shall not constitute a waiver of any
such right upon the continuation or recurrence of any such
contingencies or similar contingencies, and any single or partial
exercise of any particular right by Payee shall not exhaust the same
or constitute a waiver of any other right provided herein.
(iii) Costs and Expenses. Maker shall be liable
for all costs, charges and expenses incurred by Payee by reason of the
occurrence of any Event of Default or the exercise of Payee's remedies
with respect thereto.
(iv) No Marshalling. Payee shall be under no
obligation to proceed against any or all of the collateral before
proceeding directly against Maker. Payee shall be under no obligation
whatsoever to proceed first against any of the collateral before
proceeding against any other of the Collateral. It is expressly
understood and agreed that all of the collateral stands as equal
security for all obligations described above, and that Payee shall
have the right to proceed against any or all of the collateral in any
order, or simultaneously, as in its sole discretion it shall
determine. It is further understood and agreed that Payee shall have
the right, as it, in its sole discretion, shall determine, to retain,
sell or dispose of any or all of the Collateral in any order or
simultaneously.
(v) Other Remedies. The remedies granted to
Payee herein upon an Event of Default are not restrictive of any and
all other rights and remedies of Payee provided for by this Agreement,
any of the relevant documents and applicable law.
5. Contribution to Capital Upon Closing of Agreement and Plan of
Reorganization.
Upon closing of the Agreement and Plan of Reorganization, the
principal amount of this Note together with related interest shall be deemed
contributed to the capital of Sector Associates, Ltd., the payee of this Note,
and this Note shall be deemed satisfied at that time.
5
<PAGE> 14
6. Miscellaneous
(a) Waivers. No waiver of any term or condition of this
Note shall be construed to be a waiver of any succeeding breach of the same
term or condition. No failure or delay of Payee to exercise any power
hereunder, or it insists upon strict compliance by Maker of any obligations
hereunder, and no custom or other practice at variance with the terms hereof
shall constitute a waiver of the right of Payee to demand exact compliance with
such terms.
(b) Invalid Terms. In the event any provision contained
in this Note shall, for any reason, be held invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Note, and this Note shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein.
(c) Successors. This Note shall be binding upon Maker,
its legal representatives, successors and assigns, and insure to the benefit of
Payee, its legal representatives, successors and assigns.
(d) Controlling Law. This Note shall be read, construed
and governed in all respects in accordance with the laws of the State of
Delaware.
(e) Amendments. This Note may be amended only by an
instrument in writing executed by the party against which enforcement of the
amendment is sought.
(f) Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder shall be
sufficiently given if addressed to the Maker at 2343 W. 76th Street, Hialeah,
Florida 33016, and to the Payee at 401 City Avenue, Suite 725, Bala Cynwyd,
Pennsylvania 19004, posted in the U.S. Mail by certified or registered mail,
return receipt requested or by overnight mail, including appropriate receipts.
Any party may change said address by giving the other party hereto notice of
such change of address. Notice given as hereinabove prescribed shall be deemed
given on the date of its deposit in the U.S. Mail or with the overnight
delivery service.
6
<PAGE> 15
(g) Headings. All section and subsection headings
herein, wherever they appear, are for convenience only and shall not affect the
construction of any terms herein.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed by its duly authorized officer and its seal affixed hereto, as of the
day and year first above written.
VIRAGEN (SCOTLAND) LIMITED
By: ----------------------
Managing Director
ATTEST:
- ---------------------------
Secretary
GUARANTY
In consideration of the acceptance by Payee of the above Note and for
other good and valuable consideration, the undersigned hereby unconditionally
guarantees to Payee the payment of the Note together with all reasonable
attorneys' fees, costs and expenses of collection incurred by Payee. The
guarantee of payment of such interest on the Note shall not exceed the maximum
amount prescribed by law. The undersigned guarantor consents that at any time,
and without notice to the undersigned, payment of any sums due on the Note may
be extended, or the Note may be renewed, in whole or in part, without affecting
the liability of the undersigned. The undersigned hereby waives notice of
acceptance, presentment, demand for payment, protest or notice of dishonor or
non-payment of the Note.
VIRAGEN, INC.
By:
--------------------
President
37
<PAGE> 16
EXHIBIT B
PLEDGE AND ESCROW AGREEMENT
THIS PLEDGE AND ESCROW AGREEMENT made and entered into as of this 8th
day of November, 1995, by and between VIRAGEN (SCOTLAND), LIMITED ("Viragen
(Scotland)"), VIRAGEN, INC. ("Viragen") (Viragen (Scotland) and Viragen being
collectively referred to as "Pledgor"), SECTOR ASSOCIATES, LTD. (referred to as
"Pledgee"), and ATLAS, PEARLMAN, TROP & BORKSON, P.A. (hereinafter referred to
as "Escrow Agent").
W I T N E S S E T H:
WHEREAS, Viragen (Scotland) has heretofore executed a Promissory Note
(the "Note") in favor of Pledgee and Viragen has guaranteed the Note, a copy of
which is attached hereto as Exhibit "A;"
WHEREAS, to secure the payment of said Note, Pledgor has agreed to
grant to Pledgee a security interest in 3.77 shares of the Common Stock of the
Pledgor (the "Pledged Shares");
WHEREAS, the Pledgor and the Pledgee have requested the Escrow Agent
to act as escrow agent for the Pledged Shares in accordance with the terms of
this Agreement;
NOW, THEREFORE, in consideration of the premises, covenants and
agreements hereinafter set forth, the parties mutually agree as follows:
1. SECURITY INTEREST. Pledgor hereby grants to Pledgee a first
lien security interest, superior to all other liens and encumbrances, in and to
the Pledged Shares. Copies of Stock Powers representing such Pledged Shares,
endorsed in blank, and copies of the Certificates representing such Pledged
Shares, are attached as Exhibit "B." The Pledged Shares and Stock Powers shall
be held by Escrow Agent as collateral for the indebtedness owed by the Company
to Pledgee pursuant to the Note.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Pledgor hereby
represents, warrants and covenants that, except for the security interest
granted hereunder, the Pledged Shares are free
<PAGE> 17
and clear of all liens, charges, encumbrances and security interest of every
kind and nature, and that Pledgor will make no assignment, pledge, mortgage,
hypothecation or transfer of the Pledged Shares; that Pledgor has good right
and legal authority to pledge the Pledged Shares in the manner hereby done or
contemplated and will defend Pledgor's title to such Pledged Shares against the
claim of all person whomsoever; that the pledge of the Pledged Shares is
effective to vest in Pledgee the rights of the Pledgee in such Pledged Shares
set forth herein; and that the Pledged Shares have been duly and validly
authorized and issued and are fully paid and non-assessable.
3. ADJUSTMENTS. In the event that, during the term of this
Agreement, any stock dividend shall be declared on or with respect to any of
the Pledged Shares, or there is a reclassification, readjustment, merger,
consolidation, stock split or any other change is made in the capital structure
of the Pledgor, all new, substituted and additional shares or other securities
issued by reason of such a change shall be delivered and held by Escrow Agent
under the terms of this Agreement in the same manner as the Pledged Shares.
4. ESCROW. Pledgor shall deposit with Escrow Agent the Pledged
Shares, along with the aforesaid Stock Powers (all of which items shall
hereinafter be referred to as the "Pledged Documents," including all stock
assignments), to be held in escrow for future delivery as follows:
(a) Escrow Agent shall deliver the Pledged Documents to
Pledgee within ten (10) days after receiving an affidavit signed by
Pledgee stating that:
(i) Pledgor is in default under the Note
and all periods of time within which to cure such default have
expired;
(ii) Pledgee is accelerating the entire
unpaid balance due under the Note; and
(iii) Pledgee demands delivery of the
Pledged Documents.
2
<PAGE> 18
Pledgee shall simultaneously furnish Pledgor with a copy of
said affidavit. Upon such delivery of the Pledged Documents, Escrow Agent's
duties hereunder shall terminate.
(b) In the event Escrow Agent has not delivered the
Pledged Documents pursuant to subparagraph (a) above, then Escrow
Agent shall deliver the Pledged Documents to Pledgor within ten (10)
days after receipt of the original of the Note marked "satisfied in
full," accompanied by instructions from Pledgee indicating that said
Note has been satisfied in full and the Pledged Documents shall be
delivered to Pledgor at the address specified therein. Upon such
delivery of the Pledged Documents, Escrow Agent's duties hereunder
shall terminate. Pledgee agrees to deliver the Note to Pledgor marked
"satisfied in full," immediately upon satisfaction thereof.
5. DISPUTE. It is specifically understood and agreed that should
any dispute arise between the parties hereto concerning this Agreement or its
construction, or for any other reason, the Escrow Agent in its sole discretion,
shall have the right to deposit the Pledged Documents held by it pursuant to
this Escrow Agreement and Escrow Agent, with the Clerk of the Circuit Court of
Broward County, Florida, and notify all parties concerned, and whereupon, all
liability hereunder on the part of the Escrow Agent shall fully cease except to
the extent of accounting for the Pledged Documents and any other documents that
may have been delivered to it.
6. INTERPLEADER. In the event the Escrow Agent places the
Pledged Documents that have actually been delivered to Escrow Agent in the
registry of the Circuit Court in and for Broward County, Florida, and files an
action of interpleader naming Pledgor and Pledgee, and other necessary parties,
Escrow Agent shall be released and relieved from any and all further
obligations and liabilities hereunder or in connection herewith. Pledgor and
Pledgee hereby, jointly and severally, indemnify and hold Escrow Agent
harmless from any damages or losses arising hereunder or in connection
herewith, including, but not limited to, all costs and expenses incurred by
Escrow Agent in connection with the filing of such action and reasonable
attorneys' fees and costs for Escrow Agent's attorney(s) through and including
all appeals.
7. NATURE OF ESCROW AGENT'S DUTIES. It is agreed that the duties
of Escrow Agent are only such as are herein specifically
3
<PAGE> 19
provided and are purely ministerial in nature. Hence, Escrow Agent shall not
be held liable for any matter or thing except for Escrow Agent's gross
negligence or willful misconduct. Pledgor and Pledgee shall at all times
hereafter, jointly and severally, indemnify Escrow Agent and hold Escrow Agent
harmless from any claim asserted against it and from any damages, costs,
expenses, liability and/or losses sustained by Escrow Agent (except for Escrow
Agent's gross negligence or willful misconduct), including, but not limited to,
reasonable attorneys' fees and costs for Escrow Agent's attorneys(s) through
and including all appeals and whether or not litigation is instituted. The
obligations and duties of the Escrow Agent are confined to those specifically
enumerated in this Agreement. The Escrow Agent shall not be subject to nor be
under any obligation to ascertain or construe the terms and conditions of any
obligation to ascertain or construe the terms and conditions of any instrument
whether or not now or hereafter deposited with or delivered to the Escrow Agent
be obliged to inquire as to the form, execution and sufficiency or validity or
any instruments, or to inquire as to the identity, authority or rights of any
person executing or delivering the same.
8. RETENTION OF LEGAL COUNSEL. It is agreed that Escrow Agent
shall have full discretion as to whom it may retain as legal counsel to protect
its interests (including retaining itself as a law firm) and same shall not
affect or in any way prejudice or limit Escrow Agent's entitlement to
reasonable attorneys' fees for the services of such attorneys as set forth in
this Escrow Agreement.
9. VENUE. It is recognized that this Escrow Agreement shall be
deemed to have been entered into by the parties hereto in Broward County,
Florida, and that the property which is the subject of this Escrow Agreement is
located in Broward County, Florida. Therefore, it is agreed that venue with
respect to any matter arising herefrom shall only lie in Broward County,
Florida, except to the extent, and only to the extent, that this provision with
respect to venue is deemed in contravention of any applicable law.
10. AMBIGUITY; CONFLICTING INSTRUCTIONS. In the event the Escrow
Agent shall be uncertain as to its duties or rights hereunder or shall receive
instructions, claims or demands from any of the parties hereto or from third
persons with respect to the Pledged Documents held hereunder, which in its sole
opinion, care
4
<PAGE> 20
in conflict with any provision of this Agreement, it shall be entitled to
refrain from taking any action until it shall be directed otherwise in writing
by all the parties hereto and said third persons, if any, or by a final order
or judgment of a court of competent jurisdiction.
11. NOTICES. Notices and deliveries under this Agreement shall be
given or made by certified mail, return receipt requested, as follows:
PLEDGOR:
VIRAGEN (SCOTLAND), LIMITED
VIRAGEN, INC.
2343 W. 76th Street
Hialeah, FL 33016
PLEDGEE:
SECTOR ASSOCIATES LTD.
401 City Avenue, Suite 725
Bala Cynwyd, PA 19004
ESCROW AGENT:
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
200 E. Las Olas Boulevard, Suite 1900
Ft. Lauderdale, FL 33301
or such other address as any of the above-mentioned parties shall have
designated in writing to the other parties.
12. TERMINATION. All parties agree that the services of the
Escrow Agent may be terminated by the Escrow Agent or by the joinder of both
Pledgee and Pledgor upon ten (10) days written notice to the other. In the
event of such termination, the Pledgee and Pledgor shall mutually agree to a
Successor Escrow Agent. Failing such mutual agreement, application shall be
made to the appropriate court of Broward County, Florida, for the appointment
of a Successor Escrow Agent. Upon such appointment, ATLAS, PEARLMAN, TROP &
BORKSON, P.A. shall deliver all escrow documents to such successor for
continuation of the escrow in accordance with the terms of this Agreement.
5
<PAGE> 21
13. MISCELLANEOUS.
(a) Benefit of Agreement. This Agreement shall be
binding upon the parties hereto and their successors and assigns.
(b) Modification. The Escrow Agent shall not be bound by
any modification, cancellation or rescission of this Agreement unless in
writing and signed by the parties hereto. In no event, however, shall any
modification of this Agreement, which shall affect the rights or duties of the
Escrow Agent, be binding upon Escrow Agent unless it shall have given its prior
written consent.
(c) Attorneys' Fees. In the event Pledgor or Pledgee
shall seek to enforce this Agreement, whether or not through litigation, the
prevailing party shall be entitled to receive reasonable attorneys' fees and
all costs incurred in connection with such enforcement, including fees and
costs of appeal.
(d) Further Cooperation. From and after the date of this
Agreement, each of the parties hereto agrees to execute whatever additional
documentation or instruments as are necessary to carry out the intent and
purposes of this Agreement.
(e) Waiver. No indulgences extended by any party hereto
or any other party shall be construed as a waiver of any breach on the part of
such other party, nor shall any waiver of one breach be construed as a wavier
of any rights or remedies with respect to any subsequent breach.
(f) Construction. It is the intention of the parties
that the laws of the State of Florida shall govern the validity of this
Agreement, the construction of its terms, and the interpretation of the rights
and duties of the parties. The parties agree and acknowledge that each party
has reviewed and revised this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting parties shall not be employed in the interpretation of this Agreement
or any amendment or exhibits thereto.
(g) Truth of Recitals. The recitals and statements
contained on page 1 of this Agreement are true and correct and are hereby
incorporated into this Agreement.
6
<PAGE> 22
(h) Entire Agreement. This Agreement sets forth the
entire agreement and understanding of the parties on the subject matter hereof
and supersedes all prior agreements and understandings relating thereto.
(i) Severability. The invalidity or unenforceability of
any particular provision of this Agreement shall not affect the other
provisions hereof and this Agreement shall be construed in all respects as if
such invalid or unenforceable provision was omitted.
(j) Headings. The headings used in this Agreement are
used for reference purposes only and are not to be deemed controlling with
respect to the contents thereof.
(k) Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall for all purposes be
deemed to be an original.
(l) Incorporation by Reference. The Exhibits referred to
in this Agreement are hereby incorporated into this Agreement by reference.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
PLEDGOR:
VIRAGEN (SCOTLAND), LIMITED
By:
--------------------------------
VIRAGEN, INC.
By:
--------------------------------
PLEDGEE:
SECTOR ASSOCIATES, LTD.
By:
--------------------------------
ESCROW AGENT:
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
By:
--------------------------------
7
<PAGE> 1
EXHIBIT 11 COMPUTATION OF LOSS PER COMMON SHARE
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
EXHIBIT 11 COMPUTATION OF LOSS PER COMMON
SHARE (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1994
---- ----
<S> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares
outstanding 35,416,738 26,018,878
========== ==========
Net loss $ (935,549) $ (824,397)
Deduct required
dividends on convertible
preferred stock 863 863
----------- ----------
Loss attributable to
common stock $ (936,412) $ (824,397)
=========== ==========
Net loss per common share
after deduction for
required dividends on
convertible preferred
stock $ (.03) $ (.03)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 1,053,512
<SECURITIES> 0
<RECEIVABLES> 93,005
<ALLOWANCES> 0
<INVENTORY> 104,928
<CURRENT-ASSETS> 1,340,655
<PP&E> 1,192,921
<DEPRECIATION> 1,388,000
<TOTAL-ASSETS> 2,377,213
<CURRENT-LIABILITIES> 1,259,387
<BONDS> 38,829
<COMMON> 354,964
0
3,450
<OTHER-SE> 612,717
<TOTAL-LIABILITY-AND-EQUITY> 2,377,213
<SALES> 104,255
<TOTAL-REVENUES> 130,416
<CGS> 83,808
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,043,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,960
<INCOME-PRETAX> (935,549)
<INCOME-TAX> 0
<INCOME-CONTINUING> (935,549)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (935,549)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
