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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-10252
VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 59-2101668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2343 WEST 76TH STREET, 33016
HIALEAH, FLORIDA (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (305) 557-6000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
10% SERIES A PREFERRED STOCK
5% SERIES B PREFERRED STOCK
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the common stock on September 20,
1996 was approximately $138,778,000.
As of September 20, 1996, the Company had outstanding 38,094,239 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registration Statement on form S-8, File No. 33-60131, dated June 9,
1995 -- Part IV, Exhibits.
Registration Statement on form S-8, File No. 33-88070, dated August 14,
1995 -- Part IV, Exhibits.
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VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1996
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 9
Item 3. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... 11
Item 6. Selected Financial Data...................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 12
Item 8. Financial Statements and Supplementary Data.................................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 17
Item 11. Executive Compensation....................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 23
Item 13. Certain Relationships and Related Transactions............................... 25
PART IV
Item 14. Exhibits and Reports on Form 8-K............................................. 28
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PART 1
ITEM 1. BUSINESS
INTRODUCTION
Viragen, Inc. (the "Company" or "Viragen") was organized in December 1980
to engage in the research, development and manufacture of certain immunological
products for commercial application, particularly human leukocyte interferon,
for antiviral and therapeutic applications.
Viragen, Inc. has four subsidiaries: Vira-Tech, Inc. ("Vira-Tech"), Viragen
Technology, Inc. ("Viragen Technology"), Viragen U.S.A. Inc., ("VUSA") and
Viragen (Europe), Ltd. ("VEL"). VEL is a majority owned publicly traded
subsidiary of which Viragen holds 72% of the outstanding Common Stock. VEL (OTC
Bulletin Board: "VERP"), owns all of the Common Stock of Viragen (Scotland)
Limited, a Scottish private company ("VSL"). Viragen, Vira-Tech, Viragen
Technology, VUSA, VEL and VSL are hereinafter referred to collectively as the
"Company," unless the context otherwise requires.
The Company's product is natural human leukocyte derived alpha interferon
("Natural Interferon"). Natural Interferon is a protein substance that
stimulates and modulates the human immune system inhibiting malignant cell
growth without materially interfering with normal cells. In addition, Natural
Interferon impedes the growth and propagation of various viruses. The Company
has developed two variations of its natural human leukocyte interferon product.
Alpha Leukoferon(TM), its original product, and Omniferon(TM), currently under
development, which are the trade names for the Company's products in injectable
form (referred to hereafter as a "Product" or collectively as the "Products").
Neither of the Company's Products have been approved by the United States Food
and Drug Administration ("FDA") nor the European Union ("EU") regulatory
authorities and there can be no assurance that such approvals will be obtained
at any time in the future.
The Company intends to seek FDA and EU approvals for various uses of its
Omniferon product in the future. Such approvals are expected to require several
years of clinical trials and substantial additional funding. To date, Viragen
has not distributed either Product other than for research purposes pursuant to
a limited Florida investigatory license and protocol which was discontinued in
March 1996 (with the exception of certain limited enrollments approved by the
Florida HRS for humanitarian purposes including the Company's HIV/AIDS study
currently being conducted at no charge to patients). Viragen expects to
concentrate its efforts in preparing, filing and processing its applications and
obtaining approvals for Omniferon from the FDA and the EU. The Company has
assembled an advisory committee consisting of scientists, medical researchers
and clinicians to assist the Company in its applications to the FDA and the EU.
The Company's majority owned subsidiary, Viragen (Europe) Ltd., acting
through its wholly-owned subsidiary Viragen (Scotland) Ltd., entered into a
License and Manufacturing Agreement with The Common Services Agency of Scotland
(the "Agency") an agency acting on behalf of the Scottish National Blood
Transfusion Service ("SNBTS"). Pursuant to such Licensing and Manufacturing
Agreement, SNBTS on behalf of VSL, will assist in the manufacture of VSL's
Omniferon product for exclusive distribution within the EU and non-exclusively
worldwide in return for certain royalties and preferential access to the Product
for Scottish Agency patients at preferential prices. The Agency has committed to
assist in the manufacture of Omniferon in sufficient scale to accommodate the EU
Clinical Trials and, subsequently, for limited commercial sales in amounts to be
agreed upon by the parties. The Agency will also work with the Company in
conducting studies relevant to Omniferon and cooperate with the Company to
enable it to comply with the laws and regulations of the EU in connection with
production, client trials and distribution of Omniferon.
RECENT DEVELOPMENTS
In June 1996, the Company obtained a financing commitment for up to $50
million from three private institutional investors. The funds are to be raised
through the issuance of 5% Series B Convertible Preferred Stock or related
series of preferred stock. The Company closed the first phase receiving $15
million in June 1996. The Company anticipates, subject to market and other
conditions, to close an additional $20
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million prior to December 31, 1996 and the final $15 million prior to April 30,
1997. The proceeds of these placements will be used to underwrite and expand
current research projects, support clinical trials and for general working
capital purposes. See Item 5, "Market for Registrants' Common Equity and Related
Stockholder Matters."
In June 1996, the Company entered into a Letter of Intent with the American
Red Cross -- Biomedical Services Division. It is the Company's intention to form
a strategic alliance with the American Red Cross focusing on joint research
projects relating to the development of blood-derived products and processes
including the Company's Omniferon product in the United States. The Company is
currently negotiating the terms of the agreement establishing the scope of the
relationship and respective obligations of the parties.
In June 1995, the Company organized a wholly-owned subsidiary, Viragen
Technology, Inc., in order to facilitate the Company's marketing and technology
transfers in support of the contemplated distribution of Omniferon on a
worldwide basis. In July, 1995, the Company and its existing wholly-owned
subsidiary, Vira-Tech, Inc., assigned all of its proprietary rights, products
and technologies relating to the manufacture of human leukocyte interferon to
Viragen Technology, Inc. Concurrent with this transaction, Viragen Technology,
Inc. licensed to VSL, a then newly-organized wholly-owned subsidiary of the
Company, the right to manufacture and market Omniferon in those countries
comprising the European Union on an exclusive basis and on a non-exclusive basis
for other parts of the world except the United States and its territories.
In July 1995, the Company and VSL entered into a License and Manufacturing
Agreement with the Common Services Agency ("Agency") on behalf of the National
Health Service in Scotland. The Agency owns and operates a blood fractionation
facility in Edinburgh, Scotland, and has the physical and technical capacity and
expertise to manufacture the Company's Omniferon product, as well as providing a
reliable source of human leukocytes, a critical component in the manufacture of
Omniferon. The Agency is also providing the Company, on a fee basis, with
certain administrative and regulatory support in connection with the Company's
various regulatory filings associated with planned EU clinical trials.
In connection with the obtaining of the financing necessary to conduct the
initial phases of the clinical trial process in the EU, in September, 1995, the
Company and VSL entered into an Agreement and Plan of Reorganization with Sector
Associates, Ltd. ("Sector") a Delaware corporation, pursuant to which the
Company acquired a 94% equity interest in the then outstanding capital stock of
Sector in exchange for the transfer of 100% of the capital stock of VSL into
Sector. On May 2, 1996, Sector changed its name to Viragen (Europe) Ltd.,
("VEL").
Between November 1995 and March 1996, VEL realized gross proceeds of
approximately $6,000,000 from private placement offerings. Net proceeds of the
offerings are being utilized for the acquisition of laboratory production
equipment, establishment of a production facility in Edinburgh, Scotland,
development of EU clinical study protocols, employment of additional research,
manufacturing and administrative personnel and working capital for VEL.
OPERATIONS
Viragen initially obtained approval for use of Alpha Leukoferon through
approved investigational protocols in 1983 under Florida Statute 402.36 (Cancer
Therapeutic Act), the predecessor to Florida Statute 499. In 1984, Florida
Statute 499.018 (the "499 Program"), was amended to include the Company's
protocols and Florida Statute 402.36 was repealed. In 1986, the Company received
approval from the Florida HRS under the 499 Program, to distribute Alpha
Leukoferon under specific investigative clinical study protocols through
hospitals, pharmacies and Florida licensed physicians for the treatment of
patients within the State of Florida. The Company subsequently received
regulatory approval for the investigational use of Alpha Leukoferon in the
treatment of Multiple Sclerosis ("MS"), HIV/AIDS, AIDS Related Complex,
AIDS/Kaposi Sarcoma, 32 types of cancers, hepatitis and certain other viral
diseases. The Company is currently providing Alpha Leukoferon under the 499
Program on a no-charge basis for the treatment of HIV/AIDS. However, in December
1994, the Company discontinued enrollment of new patients in its Multiple
Sclerosis study 499 Program. In August 1995, the Company negotiated an agreement
with the Florida Department of Health and Rehabilitative Services ("HRS") which
provided for the elimination of the
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enrollment of new patients in its existing 499 Program (with the exception of
certain limited enrollments approved by the Florida HRS for humanitarian
purposes including the Company's HIV/AIDS study currently being conducted at no
charge to patients), the continued participation by previously enrolled patients
in the 499 Program and resolution of other issues. The Company believes the
discontinuation of the Company 499 Program will facilitate efforts to obtain FDA
and EU approvals based on management's concern that the continuation of the 499
Program, which involved the ongoing distribution of the Product and receipt of
limited revenues, was an impediment to obtaining such approvals. All other
previously approved indications and protocols for the use of Alpha Leukoferon
are inactive.
The Company will require additional financing to engage in and complete
clinical trials for the purpose of obtaining FDA and EU approvals for Omniferon.
Clinical testing toward FDA and EU approval is an expensive process which is
expected to take several years to accomplish with no assurance such approvals
will eventually be obtained.
THE PRODUCT
The Company derives its Product from human white cells (leukocytes).
Natural Interferon is one of the body's natural defensive responses to foreign
substances such as viruses, and is so named because it "interferes" with viral
growth. Interferon consists of protein molecules that induce antiviral,
antitumor and immunomodulatory responses within the body. Medical studies have
indicated that interferons may inhibit malignant cell and tumor growth without
affecting normal cell activity.
There are two basic types of interferon-alpha differentiated primarily by
their method of manufacture and resultant composition. The first, as produced by
the Company, is natural human leukocyte-derived alpha interferon produced by
cultivated human white blood cells, which are stimulated by the introduction of
a harmless virus. This process induces the cells to produce natural interferon.
Natural interferon is then separated from other natural proteins and purified to
produce a highly concentrated product for clinical use. The second, recombinant
alpha interferon, is a genetically engineered synthetic interferon generally
produced in bacterial cells not from natural human leukocytes by recombinant DNA
techniques ("synthetic interferon").
Clinical studies suggest that there may be significant therapeutic
differences between the use of Natural Interferon and synthetic interferon. The
Company is advised that studies have found that treatment with synthetic
interferon in certain cases may cause an immunological response ("the production
by the human immune system of neutralizing and/or binding antibodies") that
reduces the effectiveness of the treatment or which may cause adverse side
effects. The Company believes that the production of neutralizing and/or binding
antibodies is virtually non-existent in patients treated with Natural
Interferon. Furthermore, primarily due to other differences including dosage
requirements (less of the natural product is required to treat certain subject
diseases), the side effects of treatment with Natural Interferon, in certain
instances, may be less severe or non-existent.
THE INDUSTRY
Prior to 1985, natural interferon was the only type of interferon
available. Research institutions and other biomedical companies like the Company
were working to solve the high cost related to the industrial-scale production
of natural interferon. In 1985, Hoffman-LaRoche, Inc., and Schering Plough
Corporation, two major pharmaceutical companies, successfully developed
synthetic interferon using DNA technology and subsequently received FDA approval
to produce and market their respective recombinant alpha interferon products for
the treatment of hairy-cell leukemia, hepatitis and Kaposi's Sarcoma, an
AIDS-related skin cancer. See "Regulation" and "Competition" below. After the
development of recombinant alpha interferon, the medical community's interest in
Natural Interferon diminished due primarily to the high cost of production, and
most clinical studies thereafter utilized the synthetic product.
Hoffman-LaRoche, Inc., and Schering Plough Corporation continue to actively
market their products and promote the therapeutic benefits of their respective
Synthetic Interferon products. In 1993, Chiron Corp. received FDA approval for
its recombinant beta interferon for the treatment of relapsing/remitting
Multiple
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Sclerosis ("MS"). In 1996, Biogen, Inc. received FDA approval for its
recombinant beta interferon for MS. In addition to the manufacturers of
synthetic interferon, a domestic manufacturer of natural interferon-alpha,
Interferon Sciences, Inc., received FDA approval in 1989 to sell, in injectable
form, their natural interferon product for genital warts, the sale of which
appears to be inconsequential. They continue to conduct FDA sanctioned clinical
trials and attempt to market their product for the approved indication.
APPLICATIONS OF INTERFERON
HIV/AIDS
In July, 1990, the Company received approval from the Florida HRS for an
HIV/AIDS treatment protocol using Alpha Leukoferon in injectable form. This
Product had been previously approved for treatment of patients, who were
eligible Florida residents, with HIV/AIDS, AIDS Related Complex and AIDS/Kaposi
Sarcoma. In September 1993, the Company initiated distribution on a limited
basis of its Product under this protocol. However, in December 1994, HRS
informed the Company that no new patients may be enrolled under the 499 Program,
including those patients with HIV/AIDS, ARC and Kaposi's Sarcoma, until the
Company has satisfied HRS regarding compliance with FDA promulgated cGMP
requirements. In July 1995, the Company discontinued enrollment of new patients
in its 499 Program and in August 1995, reached a settlement agreement with the
Florida HRS which provided for the elimination of the enrollment of new patients
in its 499 Program (with the possible exception of certain limited enrollments
approved by the Florida HRS for humanitarian purposes), the continued
participation by previously enrolled patients in the 499 Program and the
resolution of other issues.
In March, 1996, the Company in collaboration with Biodoron, received
approval from the HRS under Florida's Investigational Drug Program to conduct an
investigational study in Florida, of Viragen's natural human alpha interferon
product, Alpha Leukoferon for the treatment of HIV/AIDS in hemophiliacs. The
Company entered into an agreement with Quantum Health Resources, Inc.,
("Quantum") which provided to the Company $330,000 toward the cost of the study.
Quantum, a subsidiary of Olsten Services Corp., is a national provider of
alternate site therapies and support services for people affected by chronic
disorders, including hemophilia. There are 45 patients enrolled in the study
which commenced in March 1996, pursuant to which 35 patients will receive Alpha
Leukoferon for a minimum of six months in combination with a comprehensive
HIV/AIDS treatment program.
MULTIPLE SCLEROSIS PROGRAM
In February, 1990, following regulatory approval for use of the Company's
product by HRS for the treatment of multiple sclerosis, the Company, entered
into a research agreement with the University of Miami School of Medicine,
Department of Neurology Multiple Sclerosis Center. Pursuant to the 499 Program
this study was a patient funded, multi-phase clinical trial for the treatment of
multiple sclerosis with Alpha Leukoferon. The study was conducted on a
double-blind basis with certain patients receiving different dosage levels of
the Product and certain patients receiving a placebo. The study terminated in
mid-1992. Published information on these trials indicated that, in many cases,
the Company's interferon product provided favorable results in the treatment of
patients afflicted with relapsing/remitting, relapsing progressive and chronic
and progressive MS.
The Principal Investigator for this study authored, together with other
investigators, an abstract of the favorable results achieved in many cases with
the use of the Company's Alpha Leukoferon product in the treatment of all types
of multiple sclerosis. The abstract was published in the Annals of Neurology,
the official journal of the American Neurological Association in 1994. An
additional article was published by the investigators and the Company appearing
in the Journal of International Medical Research in 1996.
CANCER AND VIRAL DISEASES
The Company has distributed the Product in Florida for cancer patients
pursuant to a variety of protocols (specifically delineated structures of
treatment). Minimal revenues were obtained in 1991 and 1992 until the
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Company's inventory was depleted in June 1992. Production of the Company's
original product Alpha Leukoferon, recommenced in May 1993.
The Company received approval from the Florida HRS in January 1988 for the
intrastate distribution of interferon for the treatment of venereal warts,
herpes labialis and genital herpes using the Product in conformance with 499
Program. Prior to the Company receiving notification from the Florida HRS to
suspend enrollment of new patients under the 499 Program, HRS placed the cancer,
hepatitis and viral protocols on an inactive status. Any indications for the use
of interferon for cancer treatment would require resubmission of the respective
protocol for HRS approval. The Company presently does not plan to request
reactivation of these protocols.
MANUFACTURE OF INTERFERON
Human white blood cells (leukocytes) and a stimulating virus, which raw
materials are readily available to the Company, are needed to produce human
interferon. The FDA approved stimulating virus, which is harmless to humans, is
introduced into the white blood cell which induces the cell to produce
interferon. The interferon is then separated from other proteins and extracted.
The Company's natural human leukocyte interferon-alpha is distributed in Florida
on a compassionate, no-charge basis under the 499 Program under the name Alpha
Leukoferon. The Company's new Natural Interferon product, Omniferon, is
currently at its final development stage and the Company intends to submit
safety studies to the U.S. and EU regulatory authorities to begin clinical
testing.
Production methods developed by the Company, as well as enhanced methods
currently under development (see "Research and Development", below) will serve
to reduce the Company's cost of production and, therefore, the market price.
While production of the natural product is still believed to be somewhat more
costly on a per unit basis than recombinant interferon, the Company believes
that possible lower dosage requirements for the natural interferon make it a
cost-effective, alternate method of treatment. The Company anticipates that it
will be required to make significant capital expenditures. There can be no
assurances that such new manufacturing technology will enable the Company to
achieve the level of manufacturing proficiency and product improvement
anticipated by management.
The Company discontinued production of Alpha Leukoferon in January 1995.
Subsequently, the Company received notice from the HRS concerning cGMP
deficiencies as noted by the FDA in its Form 483 report relating to the
production of Alpha Leukoferon. The Company was advised by HRS that new patients
may not be enrolled that were not previously enrolled, and in July 1995, the
Company discontinued enrollment of new patients in the 499 Program. In August,
1995, the Company reached an agreement with the Florida HRS which provided for
the elimination of the enrollment of new patients in its 499 Program (with the
exception of certain limited enrollments approved by the Florida HRS for
humanitarian purposes, including the Company's current HIV/AIDS study), and
resolution of all other issues.
RESEARCH AND DEVELOPMENT
The entire process of research, development and FDA and/or EU approval (if
obtained), of a new pharmaceutical takes several years and requires substantial
funding. The Company is not currently engaged in any FDA or EU clinical trials
and, while proposed for the future, completion of such studies is dependent upon
obtaining significant additional funding. The Company's present focus is the
continued research and development of Omniferon for the treatment of Multiple
Sclerosis, HIV/AIDS and Hepatitis B and C.
In 1991, the Company, due to its then absence of available funds, suspended
its research and development activities. In 1993, following receipt of new
equity financing and the installation of new management, the Company personnel
recommenced limited research efforts focusing on improving production
techniques. Following the receipt of additional funding from private placement
offerings which were completed in August and December 1994, respectively,
research efforts and related costs increased and can be expected to continue to
increase as the Company continues its development of Omniferon. Research and
development costs totaled $1,503,434, $605,025 and $17,476 for fiscal years
ended June 30, 1996, 1995 and 1994, respectively.
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PURIFICATION SYSTEM
The Company has expended a substantial amount of time and resources towards
the research and development of improved cell stimulation and purification
techniques. These processes are believed to enhance the purity of the product
while increasing production yields. This results in lower production costs and,
eventually, reduces the sales price of the Product. In May, 1992, and January,
1994, the Company filed patent applications related to certain improved
purification processes.
ROYALTY AGREEMENT
In November 1991, in consideration of the Company's former parent,
Medicore, Inc., having financed the Company and deferring payment of certain
indebtedness (which was subsequently exchanged for an equity interest in the
Company), the Company modified its Royalty Agreement with Medicore pursuant to
which it was to pay Medicore a royalty of 12% of its net sales up to
$20,000,000, of interferon, transfer factor and products using such substances,
and a royalty of 7% for sales in excess of $20,000,000. The royalty agreement
was to expire on November 6, 2001.
The Company and Medicore have further amended the Royalty Agreement to
provide for a maximum cap on royalties to be paid to Medicore of $2,400,000,
with a schedule of royalty payments of 5% of the first $7,000,000 of sales of
interferon and related products, 4% of the next $10,000,000 of sales and 3% of
the next $55,000,000 of sales until the total of $2,400,000 royalty is paid. The
amendment further provided that royalties of approximately $108,000 previously
accrued as payable to Medicore will be the final payment due under the
agreement.
The Company recognized royalties expense of $11,901, $28,826, and $28,000
for the years ended June 30, 1996, 1995 and 1994 respectively.
PATENTS
The Company believes its production techniques are unique and are capable
of yielding a superior quality product while reducing production costs which
will enable the Company to ultimately lower the price of its Omniferon(TM)
product. The Company may file additional patent applications relative to certain
production techniques currently under development. The Company has also
submitted several foreign patent applications relating to the Product for
topical use.
United States patents have been issued to others with respect to
genetically engineered and human derived interferon. Subject to the extent of
such existing patent claims, the Company may have to negotiate license
agreements with such patent holders to use such processes and products. The
Company believes that it does not infringe upon any current patent.
The validity and enforceability of a patent can be challenged by litigation
after its issuance and if the outcome of such litigation is adverse to the owner
of the patent, other parties may be free to use the subject matter covered by
the patent. The degree of protection afforded by foreign patents may be
different than in the United States. There can be no assurance that patents now
held or obtained in the future will be of substantial protection or commercial
benefit to the Company. (See "Competition" below).
REGULATION
Federal and European
The Company's activities and the Products and processes resulting from such
activities are subject to substantial government regulation, both state and
federal. The interstate manufacturing, advertising and sale of biologic
substances and pharmaceutical products are regulated by, and require approval
of, the FDA, European and state and local agencies. The Company, under State of
Florida HRS guidelines relating to its limited distribution of the Product, must
follow strict production and distribution procedures. The FDA has established
mandatory procedures and standards which apply to the clinical testing,
marketing and manufacture of the Products. Obtaining FDA approval for
commercialization of a new product can take significant
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time and capital since it involves extensive testing procedures and often
lengthy clinical trials including the measurement of product safety, toxicity,
and efficacy, if any, under specific protocols. The process of obtaining FDA or
EU regulatory approval initially includes extensive animal testing to
demonstrate product safety and preferred dosages. Subsequent human tests are
undertaken to show the same and to document such findings as effectiveness,
toxicity and side effects. Biostatistical analysis of data is then gathered in
such studies, followed by the submission of all information and data to the
regulatory authorities.
At the present time, the Company has no pending application relative to
Omniferon before the EU regulatory authorities or the FDA for the treatment of
any disease indications, although the Company intends to commence clinical
trials in the EU during 1997 and eventually submit an Investigative New Drug
Application to the FDA. For these purposes, the Company has assembled a Clinical
Advisory Committee comprised of scientists, medical researchers and clinicians
who will act in an advisory capacity in order to assist the Company in
developing the medical, scientific and clinical aspects in support of the
Company's anticipated applications to be filed initially with the EU and FDA
regulatory authorities.
In the United States and Europe, human clinical trial programs generally
involve a three phase process. Typically, Phase I trials are conducted in
animals and healthy volunteers to determine the early side effect profile and
the pattern of drug distribution and metabolism. Phase II trials are conducted
in groups of patients afflicted with the target disease to provide sufficient
data for the statistical proof of efficacy and safety required by federal
regulatory agencies. If Phase II evaluations indicate that a product has shown
indications of potential effectiveness and has an acceptable safety profile,
Phase III trials are undertaken to conclusively demonstrate clinical efficacy
and safety within an expanded patient population from multiple clinical study
sites. Regulatory authorities may also require Phase IV studies to track
patients after a product is approved for commercial sale.
Regulatory approval of a new pharmaceutical product often takes five years
or more (unless accelerated in certain instances for life-threatening diseases)
and involves the utilization and expenditure of substantial resources. Approval
depends on a number of factors, including the severity of the disease in
question, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials.
American pharmaceutical manufacturers who sell outside of the United States
are also subject to FDA jurisdiction. Semi-finished drugs may be shipped under
certain controlled circumstances for further processing, packaging, labeling and
distribution to third parties residing in approved foreign countries, subject to
such laws as apply in those countries. The Company will comply with FDA rules
and regulations as well as those of the country to which the Company intends to
ship the Product before it will be permitted to export crude or finished
interferon products outside the United States.
The Scottish Agreement
The European Union ("EU") regulations, in certain instances, may require
less stringent preclinical studies for naturally occurring substances such as
the Company's Omniferon product than for genetically engineered products.
Accordingly, while there can be no assurance, the Company expects to possibly
receive a more expeditious review of the various EU processes and clinical
trials prerequisite to market approval.
To secure a sufficient source of needed raw materials as well as expertise
in the area of the regulatory approval process, in July 1995, Viragen (Scotland)
Limited ("VSL"), a company incorporated under the laws of Scotland, entered into
a License and Manufacturing Agreement with the Common Services Agency of
Scotland ("Agency"). The Agency is an adjunct of the Scottish Government which
acts on behalf of the National Health Service in Scotland and the Scottish
National Blood Transfusion Service ("SNBTS"). The Agency owns and operates a
blood fractionation facility in Edinburgh, Scotland, and has the physical and
technical capacity to manufacture alpha interferon from human leukocytes
employing the Company's processes. Securing a sufficient qualified source of
blood derived raw materials within the EU was considered critical to enable the
Company to conduct EU clinical trials as well as providing a sufficient source
of raw materials necessary for subsequent commercial manufacturing.
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Prior to the commencement of clinical trials, the Company's Scottish
manufacturing facility, currently under construction, must be licensed by EU
regulatory authorities to conduct such trials. The Company has engaged
professionally recognized consultants familiar with the EU regulatory process to
assist in the manufacturing and product submissions prerequisite to EU
approvals. In addition, the SNBTS has a full-time regulatory department that has
obtained approval in the EU of numerous EU blood-derived products. The SNBTS
will provide its best efforts, working in conjunction with the Company, to
obtain a manufacturing license and subsequent product approvals at the
conclusion of the EU clinical studies. At such time as the SNBTS obtains a
manufacturing license for Omniferon, Viragen intends to seek FDA manufacturing
approval of the Scottish manufacturing facility. There can be no assurance that
the EU regulatory authorities will approve the manufacturing or permit clinical
testing and distribution of Omniferon within the EU, or that the FDA will
license or approve the Scottish manufacturing facility or the Company's Product
for clinical trials and subsequent distribution in the United States.
VSL has been organized by the Company to undertake clinical trials and
ultimately, commercialization of Omniferon and related products in the EU and
other countries outside the United States. Viragen has transferred patent and
related proprietary rights associated with the production of its Product and
related technology to VSL for this purpose. Under the grant of license, VSL has
provided the Agency with an exclusive license to use the proprietary rights
covered by the License and Manufacturing Agreement for the preparation,
manufacture and supply of Omniferon within the EU. The Agency has committed to
manufacture Omniferon in sufficient scale to accommodate the EU clinical trials
and, thereafter, for subsequent commercial sales in amounts to be agreed upon by
the parties. The Agency is also expected to conduct certain studies relevant to
the Product and cooperate with VSL and the Company to enable them to comply with
the laws and regulations of the EU in connection with the production of
Omniferon.
VSL, VEL and the Company, pursuant to the License and Manufacturing
Agreement, is providing the Agency with full access to the proprietary
technology and specialized equipment, providing suitable training to the
Agency's personnel and defraying all costs associated with securing permits and
regulatory approvals, augmenting the Agency's facilities, if necessary, to
manufacture the Omniferon and securing documentation substantiating compliance
of the Omniferon with EU regulatory requirements. The Agency will receive
compensation for products manufactured for use in clinical trials in the EU, for
products manufactured for sales prior to obtaining new drug application
approval, and for sales following such approval, at varying percentages in
relation to costs. Products manufactured and utilized for humanitarian purposes
or for medical use by patients of the Scottish National Health Services or the
United Kingdom National Health Services will involve either no payments to the
Agency or payments at substantially discounted prices.
The term of the License and Manufacturing Agreement is for a five-year
period with two additional five-year extension terms at the option of VSL. The
Agreement also contains provisions protecting proprietary rights of VSL and the
Company and the preclusion of certain competitive activities by the Agency.
As a result of the completion of the private placements undertaken in March
1996, VEL received net proceeds of $5,102,000 which is being used for (i) the
leasing and improvement of a building and related facilities in Edinburgh,
Scotland, for the manufacture of Omniferon, (ii) the purchase of equipment for
use of VSL's Scottish facilities, (iii) the payment of royalties to Viragen
Technology commencing in calendar 1997 and (iv) for working capital purposes.
VSL will require additional financing to engage in and complete clinical trials
for the purpose of obtaining EU approval for the Product. Clinical testing
toward EU approval is an expensive process which is expected to take several
years to accomplish with no assurance that such approval will eventually be
obtained.
COMPETITION
Competition in the research, development and production of interferon, and
other immunological products is intense and involves major, well-established and
abundantly financed pharmaceutical and commercial entities as well as major
educational and scientific institutions. Many researchers, some of whom have
substantial private and government funding, are involved with interferon
production, including production of interferon through recombinant DNA
technology. A number of large companies including Hoffman-
8
<PAGE> 11
LaRoche, Inc., Schering Plough Corporation, Biogen, Inc., Chiron Corp., and
Berlex Laboratories are producing, selling, and conducting clinical trials with
recombinant interferons (alpha and beta) and other immunological products for
the treatment of cancer and viruses, including MS, HIV/AIDS, KS and Hepatitis.
Also, a United Kingdom manufacturer of alpha interferon-derived from
lymphoblastoid cells has been approved in certain European countries (not in the
United Stated) for Hepatitis C and certain cancers.
In addition to the manufacturers of synthetic interferons, a domestic
manufacturer of Natural Interferon-Alpha, received FDA approval in 1989 to sell,
in injectable form, their natural interferon product for genital warts. They
continue to conduct FDA sanctioned clinical trials and to market their product
for their approved indication.
The Company believes that competition is also based on production ability,
technological superiority and ultimately to obtain governmental approvals for
testing, manufacturing and marketing of the product.
The timing of the entry of a new pharmaceutical product into the market is
an important factor in determining that product's eventual success. Early
marketing has advantages in gaining product acceptance and market share. The
Company's ability to develop products, complete clinical studies and obtain
governmental approval in the past have been hampered by a lack of adequate
capital. The Company reinitiated production and marketing operations in May 1993
and is not presently a competitive factor in revenue participation in the
biopharmaceutical industry.
EMPLOYEES
As of August 20, 1996, the Company has 26 employees, of which 15 are
Research and Development and Quality Assurance/Quality Control personnel. The
remaining 11 employees are management, regulatory and/or administrative. (See
Item 1, "Business -- Recent Developments").
ITEM 2. PROPERTIES
The Company owns a 14,000 square foot building at 2343 West 76th Street,
Hialeah, Florida. The facility includes executive offices, a laboratory for
biomedical research and development activities. The Company refinanced its
building through a $600,000 borrowing with a Florida bank under a five year note
and mortgage. The loan was reduced in equal monthly principal payments of $2,500
with interest at 2% in excess of the prime rate. The mortgage was on the land,
building and improvements, equipment and fixtures used in connection with the
realty. Medicore, former parent of the Company, had guaranteed the principal and
interest on this loan together with expenses and fees upon any default. Medicore
also had an Acquisition Agreement with the Company giving it the right to cure
defaults and assume the mortgage and take title to the property in the event the
Company were to default under its now satisfied mortgage agreement. A balloon
payment of $450,000 was due in August, 1996, and was paid-in-full at maturity.
Prior to the receipt of equity capital in 1993, the Company received
advances from Medicore for operating capital. Aggregate indebtedness due
Medicore resulting from such advances (exclusive of amounts due under the
amended Royalty Agreement) was $366,405, $385,000 and $437,000 at June 30, 1996,
1995 and 1994, respectively. This indebtedness was secured by a $429,400 note
and mortgage on the realty and personal property of the Company. See Item 13
"Certain Relationships and Related Transactions." This note was paid in-full
upon maturity in August 1996. As of August 1996, there are no mortgages on the
Company's Florida facility and all assets previously secured by such mortgages
are free from incumberance.
The Company has leased 2,800 square feet in this building to Medicore for
the latter's administrative offices. The lease is for five years through
December 31, 1997, with two five year renewals, at an annual rental of $19,600
plus taxes and utilities.
The Company has entered into negotiations with Medicore to sell its
facility located in Dade County, Florida. Based on these negotiations, the
Company has recorded a reduction in the net book value of this facility of
$316,000 during fiscal 1996. The Company is presently negotiating to lease and
construct a new facility in south Florida during the first quarter of 1997.
9
<PAGE> 12
In June 1996, the Company, through VSL, entered into a five year lease
agreement in a biotechnology park in the Edinburgh area of Scotland. This
facility comprised of approximately 8,100 sq. ft., will contain the Company's
laboratory and production facilities. This location will augment other
productive assets located with the SNBTS facility which are available to the
Company under the Scottish Agreement. The monthly rental for the facility is
British Pounds 6,140 or approximately US$9,800 subject to adjustment for common
area maintenance charges. The Company has the right to renew the lease for four
additional five year terms. The Company considers that its property, including
its new facility under construction, as suitable and adequate to carry on the
Company's business. The Company further believes that it maintains sufficient
insurance coverage on the Company's real and personal property.
The Company considers that its property is generally in good condition,
well-maintained and is generally suitable and adequate to carry on the Company's
business. The Company further believes that it maintains sufficient insurance
coverage on the Company's real and personal property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in nor is subject to any material claims or
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year to a
vote of security holders through the solicitation of proxies or otherwise.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the NASDAQ SmallCap under the
symbol "VRGN" since June 4, 1996. Prior thereto, the Company's Common Stock was
traded on the OTC Bulletin Board. The following table sets forth the high and
low bid quotations for the Common Stock for the two years ended June 30, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- ---
<S> <C> <C>
1994 - 1995
First Quarter ended 09/30/94................................ $1 13/16 $ 3/8
Second Quarter ended 12/31/94............................... 1 13/16 1/2
Third Quarter ended 03/31/95................................ 1 7/16 1/2
Fourth Quarter ended 06/30/95............................... 1 7/16 1/8
1995 - 1996
First Quarter ended 09/30/95................................ $1 1/16 $ 1/4
Second Quarter ended 12/31/95............................... 15/16 1/8
Third Quarter ended 03/31/96................................ 4 9/16 1/8
Fourth Quarter ended 06/30/96............................... 9 5/8 3 3/4
</TABLE>
The above quotations represent prices between dealers, and do not include
retail mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
As of September 20, 1996 there were approximately 2,900 stockholders of
record.
The Company has not paid any dividends on its common stock since its
incorporation in December 1980. Since the Company had been in the development
state, has experienced losses since inception (see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"), has
significant capital requirements in the future, and presently intends to retain
future earnings, if any, to finance the expansion of its business. It is not
anticipated that any cash dividends will be paid in the foreseeable future.
Future dividend policy will depend on the Company's earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
The Company has 2,650 shares of 10% Series A Preferred Stock outstanding
which do not trade. Each share of Series A Preferred Stock is immediately
convertible into 4.26 shares of Common Stock. Dividends on the Series A
Preferred Stock are cumulative, have priority to the Common Stock and are
payable in either cash or Common Stock, at the option of the Company. The Series
A Preferred Stock has voting rights only if dividends are in arrears for five
annual dividend periods. Upon such occurrence, the voting would be limited to
the election of two directors. Dividends continue to accumulate but do not
become an obligation of the Company until declared by the Board of Directors.
The Board of Directors anticipate declaring a cumulative dividend in the 10%
Series A Preferred Stock during the fourth calendar quarter 1996.
In June 1996, the Company issued 15,000 shares of 5% Series B Cumulative
Convertible Preferred Stock for $15,000,000. The Series B Preferred Stock is
convertible into Common Stock of the Company at the lesser of (i) an amount
equal to the 85% of the average market price for the five consecutive trading
days ending on the trading day prior to the Conversion Notice, subject to
adjustment, or $8.74. As of September 20, 1996, no portion of the Series B
Preferred Stock had been converted into Common Stock and no dividend had been
declared or paid. The Board of Directors anticipate declaring a quarterly
dividend of $187,500 during the fourth calendar quarter 1996.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEARS ENDED
YEARS ENDED JUNE 30, FOR THE PERIOD DECEMBER 31,
------------------------------------ BETWEEN JANUARY 1, -----------------------
1996 1995 1994 AND JUNE 30, 1993 1992 1991
---------- ---------- ---------- ------------------ ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 739 $ 722 $ 677 $ 53 $ 52 $ 147
Net loss...................... (4,672) (3,952) (1,083) (311) (563) (716)
Loss attributable to common
stock....................... (4,723) (3,955) (1,087) (313) (573) (730)
Loss per average common
shares...................... (.13) (.12) (.06) (.02) (.05) (.07)
Weighted average shares
outstanding................. 36,198,302 32,137,693 18,686,751 14,463,038 11,478,914 10,933,669
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
YEARS ENDED
YEARS ENDED JUNE 30, FOR THE PERIOD DECEMBER 31,
------------------------- BETWEEN JANUARY 1, ---------------
1996 1995 1994 AND JUNE 30, 1993 1992 1991
------- ------ ------ ------------------ ----- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Working Capital...................... $18,266 $1,614 $ 795 $ 250 $(942) $(1,115)
Total Assets......................... 20,617 3,330 2,744 1,462 983 1,070
Long-term Debt....................... 116 857 976 1,034 529 --
Stockholder's Equity (Deficit)....... 17,275 1,698 546 101 (588) (88)
</TABLE>
ITEM 7. 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 $4,672,000,
$3,952,000 and $1,083,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totalled approximately $18,266,000 at June 30, 1996, an
increase of $16,652,000 over the previous year end balance. This increase was
attributable primarily to the receipt of proceeds of $15,000,000 from the
issuance of 5% Series B Convertible Preferred Stock in June 1996 and the receipt
of approximately $5,102,000 in net proceeds from two Private Placement Offerings
by Viragen (Europe) Ltd. completed in March 1996 after related expenses of
$317,500, reduced by operational losses during the period. In connection with
the sale and issuance of the Series B Preferred Stock, the Company issued
warrants to purchase 225,000 shares of Common Stock at $10.59 per share through
June 1999 and cash fees of $900,000 to certain finders and an investor
representative who participated in the transaction.
In June 1996, the Company entered into a Securities Purchase Agreement (the
"Agreement") with GFL Performance Ltd., GFL Advantage Fund Ltd. and Proton
Global Asset Management, LDC (collectively the "Purchaser") pursuant to which
the Purchaser acquired 15,000 shares of the Company's newly established 5%
Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock") for $15,000,000. The sale of the Series B Preferred Stock represented
the completion of the first stage of a $50 million financing commitment. The
Company anticipates completing the balance of the financing, subject to market
and other conditions, representing an additional $20 million prior to December
31, 1996 and $15 million prior to April 30, 1997.
Under the terms of the Series B Preferred Stock, the Purchaser is entitled
to receive a cash dividend equal to 5% of the stated value of the Series B
Preferred Stock payable quarterly commencing September 7,
12
<PAGE> 15
1996, although the Company has the option to utilize shares of its Common Stock,
under certain conditions, to satisfy the dividend requirement. The Purchaser has
the right to convert the Series B Preferred Stock commencing August 21, 1996
into shares of Common Stock of the Company at a conversion price equal to the
lesser of 85% of the average market price for the Company's Common Stock, as
described in the Agreement, prior to the conversion date or $8.74. The Company
also has a right to require the Purchaser, under certain terms and conditions,
to convert the Series B Preferred Stock commencing 180 days following the
effective date of a Registration Statement registering the resale of the shares
of Common Stock of the Company underlying the Series B Preferred Stock. The
Series B Preferred Stock does not carry any voting rights except as required
under the Delaware General Corporation Law.
In September 1995, the Company entered into an Agreement and Plan
Reorganization ("Agreement") with Sector Associated, Ltd. ("Sector"). Under the
terms of the Agreement, the Company acquired a 94% interest in Sector in a
reverse acquisition transaction. Sector was a publicly traded corporation which
contained net cash assets of $800,000 at the transaction closing date. This
transaction closed in December 6, 1995.
In March 1996, Sector completed two Private Placement Offerings, issuing
768,000 shares of its Common Stock and 216,500 Common Stock purchase Warrants
having an exercise price of $12.00 per share. These two Offerings yielded net
proceeds of approximately $5,102,000 after related expenses of $317,500. The
company is using these proceeds to undertake European research and clinical
trial activities including the establishment of a laboratory and manufacturing
facility in Edinburgh Scotland, currently under construction, the purchase of
laboratory equipment and related working capital. On May 2, 1996, Sector changed
its name to Viragen (Europe) Ltd.
In December 1994, the Company completed a 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 were 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 and working capital. 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 continued development of Omniferon, acquisition
of laboratory production equipment, the purchase of a Company-wide computer
system, development of clinical study protocols, employment of additional
operating and administrative personnel and working capital.
While subject to significant limitation, the Company at June 30, 1996 has
available net tax operating loss carryforwards of approximately $18,000,000
expiring between 1996 and 2010, which may be used to offset taxable income, if
any, during those periods.
Management believes that the Company's Omniferon product currently under
development can be manufactured in sufficient quantity and will be priced at a
level to offer patients an attractive alternative treatment to the Synthetic
Interferons currently being marketed. Management further believes that working
capital currently on hand will provide the Company with the funds necessary for
the foreseeable future to continue its current level of operations, focused on
current research projects, the establishment of a research and manufacturing
facility in Scotland and the commencement of EU clinical trials. In addition,
the Company expects to be able to draw upon its remaining $35 million in
financing available through the issuance of additional 5% Series B Convertible
Preferred Stock by April 1997. The additional funding raised will be used to
supplement funding of EU clinical trials as needed, commence clinical trial
studies in the U.S. of its Omniferon product, the establishment of one of more
domestic production facilities, the possible acquisition of one or more
businesses complimentary to the Company's operations and for general working
capital.
13
<PAGE> 16
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
For the past several years, the Company's limited revenues have been
derived from sales of the Company's Alpha Leukoferon Product through Florida
physicians (primarily neurologists) for the treatment of Multiple Sclerosis.
Distribution of the Company's Product was limited to the State of Florida and
was sanctioned by, and subject to, the provisions of Florida Statute 499.018.
This statute permitted controlled distribution of the Product in a clinical
trial environment only within the state of Florida (commercialization of
products under this statute is not permitted). In an Agreement reached with the
Department of Health and Rehabilitation Services (HRS), the Company discontinued
enrollment of new patients in its 499 Program and all revenues under this
program ceased in March 1996.
The Company currently has 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 additional
investment capital to fund and complete such trials.
Losses from operations have been incurred since inception and totaled
$4,785,015 and $3,951,839 for the years ended June 30, 1996 and 1995,
respectively.
Sales revenues for the year ended June 30, 1996 totaled $230,000 compared
to $574,000 for the previous year, and were derived from distribution of the
Company's Alpha Leukoferon product for the clinical study treatment of multiple
sclerosis. The decline in revenues 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.
In March 1996, the Company received approval from the HRS under the 499
Program to conduct an investigational study in Florida, in collaboration with
Biodoron, of the Company's Alpha Leukoferon product for the treatment of
HIV/AIDS in hemophiliacs on a no charge basis. The Company subsequently entered
into an agreement with Quantum Health Resources, Inc., whereby they provided
$330,000 to the Company for the conduct of the study. Quantum Health Resources,
Inc. is a national provider of alternate site therapies and support services for
patients afflicted by chronic disorders, including hemophilia.
Cost of sales expense as a percentage of sales revenues totaled 78% for the
year ended June 30, 1996 compared to 61% for the preceding year. This increase
was due to a significant (44%) drop in the selling price of the Company's Alpha
Leukoferon product for patients enrolling during and subsequent to fiscal 1994.
A portion of the sales revenues recorded in fiscal 1995, reflected shipments to
patients enrolled prior to the reduction in sales price. This sharp price
reduction reflected 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 totaled $1,503,000 for fiscal 1996 compared
to $605,000 for 1995. This sharp increase was attributable to significantly
expanded research efforts associated with the Company's newly-developed Natural
Interferon (alpha) product Omniferon. These costs are expected to continue to
significantly increase at least through fiscal 1997. The Company intends to
continue its process development refinement efforts and work toward regulatory
submissions in the EU to conduct clinical trials of Omniferon. The expanded
research efforts are focused on improved methods of manufacturing aimed at
maintaining or improving product quality, production yields and manufacturing
efficiencies. Components of the increases include the hiring of additional
research personnel with salaries and related taxes and benefits totalling
approximately $404,000 and an increase in research laboratory supplies expense
of approximately $256,000 representing 45% and 29%, respectively, of the overall
increase. Additionally, fiscal 1996 expenses reflected increases in travel,
equipment rentals and support functions associated with the overall increases in
the level of research activities.
Selling and general administrative expenses totalled $3,501,000 for fiscal
1996 compared to $2,029,000 for the preceding year. Components of this overall
increase of approximately $1,472,000 included $298,000 in consulting expense
reflecting the issuance of 336,000 common stock purchase options, $316,000
resulting from
14
<PAGE> 17
the write-down of the Company's Miami facility pursuant to Financial Accounting
Standards Board Statement No. 121 and an increase in administrative salaries
with related taxes and benefits of approximately $262,000. In addition, the
Company recognized $243,000 in compensation expense reflecting the issuance of
400,000 shares of Viragen (Europe) Ltd. to the officer/directors of Viragen
(Europe) Ltd. and one employee of the Company. The increase also reflects the
overall level of administrative activity including European travel associated
with the establishment of the European production facility located in Edinburgh,
Scotland and related corporate development efforts.
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. The
Company recognized compensation expense of $183,144 as a result of these options
which has been included in general and administrative expenses.
RESULTS OF OPERATIONS
1995 Compared to 1994
Distribution of the Company's Product during this time was limited to the
State of Florida and was 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. The Company discontinued
enrollment of new patients in its 499 Program and all revenues under this
program ceased 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.
Losses from operations have been incurred since inception and totalled
$3,952,000 and $1,083,000 for the years ended June 30, 1995 and 1994,
respectively.
Sales revenues for the year ended June 30, 1995 totalled $574,000 compared
to $625,000 for the previous year and were derived from the distribution of the
Company's Alpha Leukoferon product for the clinical study treatment of Multiple
Sclerosis under the State of Florida 499 Program. Sales revenues during the
second half of fiscal 1995 declined sharply due to discontinuance of the
enrollment of new patients based upon an agreement with the Florida HRS.
In December 1994, the Company received notification from the Florida Health
and Rehabilitative Services to postpone enrollment of new patients under its 499
Program until such time as the Company provided certain administrative reports
to the HRS and satisfied certain FDA inspection-related comments concerning the
Company's manufacturing processes and facility. On March 17, 1995, the Company
received further notice from HRS requesting that the Company demonstrate that
its production technology complies with FDA promulgated cGMP and for the Company
to continue the postponement of the enrollment of new patients under the 499
Program until the Company demonstrated such compliance. The Company continued to
provide Product to patients then currently receiving treatment, or enrolled in
the Company's 499 Program (consistent with existing treatment protocols and
reporting procedures established for the 499 Program). In July 1995, management
of the Company determined to discontinue enrollment of new patients under its
499 Program. This decision was based primarily on management's intention to
focus the Company's efforts on obtaining FDA and EU approvals for Omniferon and
avoiding complications associated with any further expansion of the 499 Program,
which potentially had increasing commercial implications which could hinder the
Company's efforts in securing regulatory approvals. In August 1995, the Company
reached a settlement agreement with the Florida HRS which provided for the
discontinuation of enrollment of new patients in its 499 Program (except for
certain possible limited enrollments approved by the Florida HRS for
humanitarian purposes), the continued participation by currently enrolled
patients in the 499 Program and resolution of all other issues. Accordingly, the
Company recorded a $788,000 write-down of its inventory balances to a level
reflecting product then on-hand needed to complete the course of treatment for
patients actively receiving the Product and enrolled prior to the
discontinuation of new enrollments.
15
<PAGE> 18
Cost of sales as a percentage of sales revenues totalled 61% for the year
ended June 30, 1995 compared to 52% 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 product. This sharp price reduction reflects the
Company's efforts to make the Product more price competitive with the Synthetic
Interferons.
Research and development costs increased significantly during fiscal 1995
over the prior year reflecting the lack of research capital earlier in fiscal
1994 and significantly expanded research efforts associated with the development
of the Company's Omniferon product. These costs are expected to continue to
significantly increase over future periods as the Company continues to seek
improved methods of manufacturing aimed at maintaining or improving product
quality and manufacturing efficiencies. Components of the overall increase of
approximately $600,000 include the hiring of research personnel over the course
of the year with salaries and related taxes and benefits totalling approximately
$167,000 or 27% of the overall increase. Additionally, research laboratory
supplies expense increased approximately $308,000 between the periods. The
increase was also due to increases in consulting fees, research related travel
and equipment rentals.
Selling general and administrative expenses increased approximately 60% in
fiscal 1995 over the previous year. Components of this net increase which
totalled $764,000 included the forgiveness of debt for certain officers and
directors associated with Company stock purchases of $338,000 (See Part III,
Item 10, "Executive Compensation") an increase in administrative salaries of
approximately $406,000 a significant portion of which was attributable to, and
off-set by, the cancellation of MMS Agreement and the related assumption of
certain related employment agreements, and the addition of administrative
support clerical personnel with related taxes and benefits. Additionally, fiscal
1995 reflected an increase in travel related expense of approximately $80,000 a
significant portion of which was attributed to travel associated with the
establishment of a European production facility and related fact-finding and
marketing efforts. During fiscal 1995 the Company also incurred financial
consulting fees of approximately $52,000 not incurred in the prior year and an
increase in utilities and general office expenses associated with the overall
increase in administrative activities. During fiscal 1994, the Company incurred
expenses of $117,000 attributable to stock options granted during that period
with no similar expense being incurred during fiscal 1995.
Bad debt expense increased significantly over the prior year primarily due
to four patients utilizing the Company's Alpha Leukoferon product under the 499
Program being unable to obtain anticipated insurance reimbursement for product
shipments due to product's investigational status. Sales made during fiscal 1994
were not as dependent upon insurance reimbursement for ultimate realization of
the related receivables.
The Company has recognized contract termination expenses of $525,000 in
December 1994, 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, which
opinion was received in December 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
16
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS OFFICER
POSITION WITH AND/OR
NAME AGE THE COMPANY DIRECTOR SINCE
- -------------------------------------- --- ------------------------------------- -----------------
<S> <C> <C> <C>
Gerald Smith.......................... 65 President and 1993
Chairman of the Board 1994
Robert H. Zeiger...................... 52 Chief Executive Officer and Director 1995
Dennis W. Healey...................... 48 Executive Vice President 1993
Chief Financial Officer, Treasurer 1980
Secretary, and 1994
Director 1984
Charles F. Fistel..................... 35 Executive Vice President and 1994
Director 1996
Peter D. Fischbein.................... 56 Director 1981
Sidney Dworkin, Ph.D.................. 74 Director 1994
Jay M. Haft........................... 60 Director 1994
William B. Saeger..................... 44 Director 1994
Fred D. Hirt.......................... 53 Director 1996
</TABLE>
GERALD SMITH, accordance with a February 1993 Stock Agreement, became a
Director on February 5, 1993, the date of the Initial Purchase by Cytoferon. On
May 12, 1993, Mr. Smith became President of the Company. In June 1994, Mr.
Healey relinquished his position as Chairman of the Board of Directors in favor
of Mr. Smith. Mr. Smith remains as Chairman of the Board and President of the
Company. Since 1982, he was a principal stockholder, President, Chief Executive
Officer and director of Business Development Corp. ("BDC"), which has served as
a managing entity and consultant to several high technology ventures including
Compupix Technology Joint Venture. From August 1991 to December 1991, Mr. Smith
was the Chief Executive Officer of Electronic Imagery, Inc., a company engaged
in the development of imaging software. Mr. Smith is also the President, Chief
Executive Officer and a director of Cinescopic Corporation and International
Database Service, Inc., computer-oriented companies which developed database
technology using the personal computer for audio, video, animation and real time
communication. Mr. Smith has discontinued BDC's operations in order to devote
all of his time to the Company. Mr. Smith is also Chairman of the Board and
President of VEL and VUSA.
ROBERT H. ZEIGER was appointed Chief Executive Officer and Chief Operating
Officer and was elected as a Director in May 1995. Mr. Zeiger is a
pharmaceutical executive. From 1985 to 1994, Mr. Zeiger was employed by GLAXO,
Inc., Research Triangle Park, North Carolina, serving as Vice President and
General Manager of their Dermatological Division from 1985 to 1988, Vice
President and General Manager of Alan & Hansburg from 1988 to 1991, and Vice
President and General Manager of Glaxo Pharmaceuticals from 1991 to 1994. Mr.
Zeiger also served as Vice President, Marketing and Sales with Stiefel
Laboratories, Inc., Coral Gables, Florida, from 1979 to 1985, and as National
Sales Manager to Knoll Pharmaceutical Company, Whipping, New Jersey from 1971 to
1979. Mr. Zeiger is also Chief Executive Officer and a Director of VEL.
DENNIS W. HEALEY is a Certified Public Accountant and was appointed
Chairman of the Board and Chief Executive Officer on April 13, 1993. In June
1994, Mr. Healey relinquished his position as Chairman of the Board to Mr. Smith
and in July 1994, relinquished the position of Chief Executive Officer upon the
employment of Mr. Fistel. Upon Gerald Smith becoming President on May 12, 1993,
Mr. Healey became an Executive Vice President and has served as Chief Financial
Officer and Treasurer of the Company since 1980. Mr. Healey was appointed
Secretary in 1994. Until his resignation in July 1996, Mr. Healey served as
Senior Vice President, Principal Financial Officer and Treasurer of Medicore,
Inc. ("Medicore") and Executive Vice
17
<PAGE> 20
President of its Techdyne affiliate. He also served as Treasurer of most of
Medicore's subsidiaries and as a Vice President of Dialysis Corporation of
America ("DCA"), a subsidiary of Medicore and Secretary, Treasurer and director
of other DCA subsidiaries. Mr. Healey joined Medicore in 1976 as its Controller.
Mr. Healey is also Executive Vice President, Treasurer, Secretary and a Director
of VEL and VUSA.
CHARLES F. FISTEL was appointed Chief Executive Officer of the Company upon
his employment in July 1994, which position he relinquished to Mr. Robert H.
Zeiger in May 1995, becoming an Executive Vice President of the Company. Mr.
Fistel was elected a Director of the Company in June 1996. Mr. Fistel, prior to
joining the Company, served for two years as an independent financial advisor to
publicly-traded and privately-held emerging growth companies. Prior thereto,
between 1986 and 1992, he served as Executive Vice President, Chief Financial
Officer and a director of Tiger Direct, Inc. (formerly BLOC Development
Corporation), a Miami, Florida-based publicly-traded computer technology
development, marketing and distribution company. From 1981 to 1986, Mr. Fistel,
who is also a Certified Public Accountant, actively practiced public accounting.
Mr. Fistel is also Executive Vice President and a Director of VUSA.
PETER D. FISCHBEIN is an attorney who has been practicing law for
approximately 31 years. Mr. Fischbein served as the Company's Secretary between
May and December 1994. His former firm on occasion represented the Company,
Medicore and the Viragen Research Associates Limited Partnership ("Limited
Partnership") which has certain contracts with the Company. Mr. Fischbein is
also a director of Medicore (since 1984) and Techdyne (since 1985). Mr.
Fischbein has been a general partner of several limited partnerships engaged in
oil exploration and real estate development.
SIDNEY DWORKIN, PH.D., elected a Director in August 1994, was a founder,
former President, Chief Executive Officer and Chairman of Revco, Inc. Between
1987 and the present, Dr. Dworkin has also served as Chief Executive Officer of
Stonegate Trading, Inc., an importer and exporter of various health, beauty
aids, groceries and sundries. Between 1988 and the present, Dr. Dworkin has
served as Chairman of the Board of Advanced Modular Systems, which is engaged in
the sale of modular buildings. Between June 1993 and the present, Dr. Dworkin
has also served as Chairman of Global International, Inc., which is involved in
the sale and leasing of modular buildings to hospitals and radiology groups.
Between 1993 and the present, Dr. Dworkin has also served as Chairman of the
Board of Comtrex Systems, which is engaged in development and sale of
programmable cash registers. Dr. Dworkin also serves on the Board of Directors
of CCA Industries, Inc., Interactive Technologies, Inc. and Northern
Technologies International Corporation, all of which are publicly-traded
companies.
JAY M. HAFT, elected a Director in August 1994, is an attorney and of
counsel to Parker Duryee Rosoff & Haft, New York, NY has been a practicing
lawyer since 1959. Mr. Haft has specialized in the representation of emerging
growth companies, and has participated in fund raising for a number of leading
edge medical technology companies and is Managing General Partner of Venture
Capital Associates, Ltd. and GenAm "1" Venture Fund, a domestic and
international venture capital fund, respectively. Mr. Haft is also a Director of
numerous public and private corporations.
WILLIAM B. SAEGER, elected a Director in August 1994, is a Certified Public
Accountant with seventeen years experience in corporate strategic planning,
financial and tax planning, acquisitions, corporate capitalizations, analysis
and management of financial assets. Mr. Saeger has served as a portfolio manager
and analyst for a number of funds and is currently Vice President of Fundamental
Management and serves as a director of Telemac Cellular Corp. Mr. Saeger has
also written for financial publications on federal taxation and investment
portfolio management.
FRED D. HIRT, elected as Director in June 1996, is a health care executive
and serves as the President and Chief Executive Officer of Mount Sinai Medical
Center in Miami Beach, Florida. Mr. Hirt is active in numerous community
healthcare and charitable organizations and serves on many of their Board of
Directors.
There is no family relationship between any of the officers and directors.
On August 15, 1994, the Company expanded its Board of Directors to include
Messrs. Sidney Dworkin, Jay M. Haft and William B. Saeger. At that time, the
Company constituted its Audit, Executive and Compensation Committees. The audit
committee consists of Messrs. Healey, Dworkin and Saeger. The
18
<PAGE> 21
Executive Committee consists of Messrs. Smith, Zeiger, Healey and Fistel. The
Compensation Committee consists of Messrs. Haft and Dworkin.
The Audit Committee oversees the Company's audit activities to protect
against improper and unsound practices and to furnish adequate protection to all
assets and records. The Audit Committee also acts as liaison to the Company's
independent certified public accountants, and conducts such work as is necessary
and receives written reports, supplemented by such oral reports as it deems
necessary, from the audit firm. The Executive Committee is empowered to act for
the full Board in intervals between Board meetings, with the exception of
certain matters which by law may not be delegated. The Executive Committee will
meet, as necessary, and all actions by the Committee are to be reported at the
next Board of Directors meeting. The Compensation Committee provides overall
guidance for officer compensation programs, including salaries and other forms
of compensation. While the audit committee and the compensation committee has
met periodically on an informal basis, the Board of Directors has chosen to meet
as a full Board to evaluate audit and compensation matters.
The term of office for the Company's Directors is one year and they will
serve until the next annual meeting of stockholders. The Company anticipates
holding its next annual meeting during the fourth calendar quarter of 1996.
ITEM 11. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS
The following table sets forth information concerning the compensation and
employment agreements of the Chief Executive Officers of the Company and two
other most highly compensated executive officers as of June 30, 1996.
<TABLE>
<CAPTION>
ALL OTHER
OTHER ANNUAL RESTRICTED ----------------------
NAME AND --------------------- STOCK OPTIONS/ LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS(#) PAYOUTS COMPENSATION
- ------------------------------- ---- -------- ------ ------------ ---------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald Smith, Chairman of Board
and Pres.(1)................. 1996 $154,615 $7,500 $ 14,000 -- 1,600,000 -- --
1995 70,000 $ 9,317 -- 50,000(5) -- --
1994 7,500 -- -- -- --
Robert H. Zeiger, CEO,
Director(2).................. 1996 $ 66,653 $ -- $ 5,000 -- 100,000 -- --
1995 11,538 1,000,000
Dennis W. Healey, Exec., V.P.,
Treas., CFO and
Director(3).................. 1996 $ 78,653 $1,250 $ 8,500 -- 500,000 -- --
1995 75,000 0 10,167 -- 50,000(6) -- --
1994 7,200 1,250 -- -- -- -- --
Charles F. Fistel, Exec. VP,
Director(4).................. 1996 $110,000 $ -- $ 6,000
1995 $106,615 $ 19,208 -- 110,000 -- --
1994
</TABLE>
- ---------------
(1) Mr. Smith is Chairman of the Board, Chief Executive Officer and President of
Cytoferon, a former affiliate of the Company. Cytoferon previously had a
consulting and marketing agreement with the Company pursuant to which
Cytoferon was entitled to receive consulting fees, commissions, fees for
certain foreign transactions and foreign royalties.
In November 1993, as modified on December 15, 1994, Mr. Smith entered into
a two-year employment agreement expiring November 18, 1995, with the
Company at no salary. The agreement provided for the sale of 750,000 shares
of common stock at $.30 per share payable through the issuance of a
promissory note with the shares being issued into escrow pending cash
payments reflecting the shares to be released from escrow in increments of
no less than $3,000. These shares were purchased through the issuance of a
note in the principal amount of $217,500 in April 1994 with Mr. Smith
receiving a bonus equal to the par value ($7,500) of shares purchased. On
May 15, 1995, the Company forgave Mr. Smith's note in lieu of bonus for the
1995 fiscal year, following unanimous approval of the independent members
of the Board of Directors. The agreement also provided for the issuance of
750,000 options to purchase common stock
19
<PAGE> 22
subject to meeting certain production related or capital raising criteria.
The criteria were successfully met with the closing of the Company's $3.5
million Private Placement in August 1994 and, accordingly, these options
became exercisable.
Mr. Smith had an employment agreement with Cytoferon effective June 2,
1992, for a term ending June 30, 1995. He was provided with an annual
salary of $120,000 the first year, $130,000 the second year and $140,000
the third year. The salary for the period prior to May 12, 1993, the
completion of the Stock Agreement, was accrued and was payable from
available cash. Mr. Smith was entitled to participate in any Cytoferon
benefit plans of which there were none. The Cytoferon employment agreement
further provided Mr. Smith with certain severance arrangements if there was
a change in control of Cytoferon or the Company. In August 1994, the Board
of Directors of the Company voted to terminate the Management and Marketing
Services Agreement with Cytoferon, terminating all fees payable thereunder,
concurrent with the issuance of the 1,750,000 contingently issuable shares
subject to receipt of a fairness opinion which was subsequently received.
In connection with this transaction, the Company agreed to assume the
obligations of Mr. Smith's employment agreement with Cytoferon through
November 18, 1995. The Company entered into a two-year employment agreement
with Mr. Smith, effective October 6, 1995, under terms similar to his
previous employment agreement, modified to increase his salary by $20,000
and $10,000 for the first and second years, respectively. In January 1996
Mr. Smith exercised options to purchase 750,000 shares of common stock
through the issuance of a note in the principal amount of $217,500 with the
shares being issued into escrow pending cash payments reelecting the shares
to be released from escrow in increments of no less than $3,000. Mr. Smith
received a bonus equal to the par value ($7,500) of the shares purchased.
On June 6, 1996, the Company forgave Mr. Smith's note in lieu of bonus for
the 1996 fiscal year, following unanimous approval of the independent
members of the Board of Directors. See Item 13, "Certain Relationships and
Related Transactions".
(2) On May 9, 1995, the Company entered into a two-year employment agreement
expiring May 1, 1997, with Robert H. Zeiger to serve as Chief Executive
Officer and Chief Operating Officer of the Company at an annual salary of
$120,000. The agreement provides for health, life and similar employee
benefits generally made available to other employees of the Company, use of
an automobile and related maintenance expenses and reimbursement for
expenses incurred in fulfilling his normal responsibilities to the Company.
The agreement provides for the issuance of options to purchase the
aggregate of 1,000,000 shares of Common Stock of the Company at an exercise
price of $.96 per share, exercisable with respect to 500,000 shares
commencing May 8, 1996 through May 8, 2000 and exercisable for the
remaining 500,000 shares commencing May 8, 1997 through May 8, 2001. The
right to exercise such options may be accelerated upon the occurrence of
certain material corporate transactions. The options are terminable prior
to the lapse of their respective terms only if Mr. Zeiger's employment
should be terminated for cause, and, in that event, the options must be
exercised to the extent that they have vested within 90 days of such
termination.
(3) In April 1994, as modified on December 15, 1994, Mr. Healey entered into an
employment agreement expiring November 18, 1995, with the Company at an
annual salary of $75,000. The agreement provides for health, life and
similar employee benefits generally made available to other employees of
the Company, an automobile and related expenses. The agreement further
provided for the sale of 125,000 shares of common stock at $.30 per share
payable through the issuance of a promissory note with the shares being
issued into escrow pending cash payments reflecting the shares to be
released from escrow in increments of no less than $3,000 shares. These
shares were purchased in June 1994 through the issuance of a note in the
principal amount of $36,250, with Mr. Healey receiving a bonus equal to the
par value ($1,250) of the shares purchased. On May 15, 1995, the Company
forgave Mr. Healey's note in lieu of bonus for the 1995 fiscal year,
following unanimous approval of the independent members of the Board of
Directors. The agreement also provided for the issuance of 125,000 options
to purchase common shares at $.30 per share subject to the Company reaching
certain production levels or raising certain minimums in capital during the
employment contract period, consistent with similar provisions contained in
Mr. Smith's November 1993 employment agreement. These criteria were met in
August 1994 and, accordingly, these options became exercisable. The Company
entered into a two-year employment
20
<PAGE> 23
agreement with Mr. Healey, effective October 6, 1995, under terms similar
to his previous employment agreement, modified to increase his salary by
$5,000 and $5,000 for the first and second years, respectively. In July
1996, Mr. Healey resigned all positions he held with Medicore and its
subsidiaries and entered into an employment agreement with Viragen (Europe)
Ltd. This agreement provides for a salary of $85,000 per year and expires
in September 1997 concurrent with the expiration of his employment
agreement with the Company. In January 1996 Mr. Healey exercised options to
purchase 125,000 shares of common stock through the issuance of a note in
the principal amount of $36,250 with the shares being issued into escrow
pending cash payments reelecting the shares to be released from escrow in
increments of no less than $3,000. Mr. Healey received a bonus equal to the
par value ($1,250) of the shares purchased. On June 6, 1996, the Company
forgave Mr. Healey's note in lieu of bonus for the 1996 fiscal year,
following unanimous approval of the independent members of the Board of
Directors.
(4) On July 1, 1994, as modified on December 15, 1994, the Company entered into
a two-year employment agreement expiring July 1, 1996, with Charles Fistel
to serve as Chief Executive Officer (which position he relinquished to Mr.
Zeiger in May 1995, assuming the position of Executive Vice President) at
an annual salary of $110,000. The agreement provides for health, life, and
similar employee benefits generally made available to other employees of
the Company, use of an automobile and related expenses. The agreement
provides for the issuance of options to purchase the aggregate of 300,000
shares of common stock at an exercise price of $.30 per share, exercisable
with respect to 150,000 shares commencing June 30, 1995, through July 1,
1999, and exercisable for the remaining 150,000 shares commencing June 30,
1996, through July 1, 2000. The right to exercise such options have
accelerated based on the Company having raised certain minimums in capital.
On July 1, 1996, upon the expiration of Mr. Fistel's 1994 employment
agreement, Mr. Fistel entered into a two year employment under terms
similar to his previous employment agreement modified to increase his
salary $30,000 and $10,000 in the first and second years, respectively.
In November 1995, VSL, a wholly-owned subsidiary of VEL issued an aggregate
of 7.144 shares of VSL common stock at $56.00 per share to individuals
serving as officers and directors of VEL and one employee of the Company.
Pursuant to the Agreement and Plan of Reorganization, these shares were
exchangeable into an aggregate of 400,000 shares of VEL. Of these options,
100,000 were granted each to (i) Mr. Gerald Smith, (ii) Mr. Robert H.
Zeiger, and (iii) Mr. Dennis W. Healey, all serving as officers and
directors of VEL. All options in VSL were exercised and the related shares
exchanged for VEL common stock. The Company recognized $243,000 in
compensation expense as a result of the issuance of these shares.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1996 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
GRANTED(#) FISCAL YEAR ($/SHARE) DATE
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Gerald Smith.................................... 1,600,000 52.2% $ .50 10-05-00
Robert H. Zeiger................................ 100,000 3.3 .50 10-05-00
Dennis W. Healey................................ 500,000 16.3 .50 10-05-00
Charles F. Fistel............................... 110,000 3.6 .50 10-05-00
</TABLE>
21
<PAGE> 24
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise of
options to purchase shares of Common Stock during the fiscal year ended June 30,
1996 to each person named in the Summary Compensation Table and the unexercised
options held as of the end of the 1996 fiscal year:
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR
AND 1996 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
VALUE REALIZED IN THE MONEY OPTIONS AT
MARKET PRICE NUMBER OF UNEXERCISED FY-END (BASED ON FY-END
SHARES AT EXERCISE OPTIONS AT FY-END PRICE OF $5.44/SHARE)
ACQUIRED LESS PRICE --------------------------- ---------------------------
NAME ON EXERCISE EXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald Smith............. 750,000 $348,750 1,650,000 $ 8,126,000
Robert H. Zeiger......... 75,000 494,470 525,000 500,000 2,363,000 $ 2,240,000
Dennis W. Healey......... 125,000 58,125 550,000 2,692,000
Charles F. Fistel........ -- -- 410,000 -- 2,085,400 --
</TABLE>
1995 AMENDED STOCK OPTION PLAN
On May 15, 1995 the Board of Directors adopted, subject to approval by the
stockholders, a stock option plan called the "1995 Amended Stock Option Plan."
On September 22, 1995, the Board of Directors amended the 1995 Stock Option Plan
(collectively the "Plan") to define certain terms and clarify the minimum
exercise price of the Non-Qualified Options, described herein, as not less than
55% of the fair market value. The Plan was submitted to the stockholders of the
Company at the Annual Meeting of Stockholders held on December 15, 1995, and the
Stockholders ratified the Plan at that time.
Under the Plan, the Company has reserved an aggregate of 4,000,000 shares
of Common Stock for issuance pursuant to options granted under the Plan ("Plan
Options"). The full Board of Directors or the Compensation Committee of the
Board of Directors (the "Committee") administers the Plan including, without
limitation, the selection of the persons who will be granted Plan Options under
the Plan, the type of Plan Options to be granted, the number of shares subject
to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Compensation Committee.
The per share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
22
<PAGE> 25
Officers, directors, key employees and consultants of the Company and its
subsidiaries are eligible to receive Non-Qualified Options under the Plan. Only
officers, directors and employees of the Company who are employed by the Company
or by any subsidiary thereof are eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is permanently and
totally disabled within the meaning of Section 22(c)(3) of the Internal Revenue
Code of 1986, the Plan Option granted to him lapses to the extent unexercised on
the earlier of the expiration date of the option or one year following the date
of such disability.
The Board of Directors or Committee may amend, suspend or terminate the
Plan at any time, except that no amendment shall be made which (i) increases the
total number of shares subject to the Plan or changes the minimum purchase price
therefor (except in either case in the event of adjustments due to changes in
the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate on May 15, 2005. Any such termination of the Plan shall not
affect the validity of any Plan Options previously granted thereunder.
As of August 20, 1996, 3,714,500 options has been issued under the 1995
Amended Stock Option Plan.
ADDITIONAL STOCK OPTIONS
On October 6, 1995, the Board of Directors awarded options to purchase
2,835,000 shares of Common Stock to the officers and directors of the Company
exercisable of $0.50 per share at any time on or prior to October 6, 2000. The
options were granted to the following individuals: Gerald Smith (1,600,000),
Robert H. Zeiger (100,000), Dennis W. Healey (500,000), Charles F. Fistel
(110,000), Peter D. Fischbein (225,000), Sidney Dworkin (100,000), Jay W. Haft
(100,000) and William B. Saeger (100,000). In addition, between October 1995 and
June 1996, the Company awarded options to purchase up to 500,500 shares of
Common Stock to other employees of the Company, which options are exercisable at
prices ranging from $0.50 to $5.90 per share during the five-year term of the
options.
In June 1995, the Company issued 33,000 Incentive Stock Options to
non-executive employees under the Plan. The options granted vest over different
periods not exceeding two years.
In May 1995, the Company issued 1,000,000 Common Stock purchase options to
Mr. Robert H. Zeiger, Chief Executive Officer, Chief Operating Officer and a
director, pursuant to an Employment Agreement. Under the terms of the Agreement,
500,000 options become exercisable in May 1996 and 500,000 options become
exercisable in May 1997. The options carry a five year term and are exercisable
at $.96 per share.
In August 1994, the Company issued five-year options to purchase an
aggregate of 350,000 shares exercisable at $1.00 per share which were divided
equally among the seven directors of the Company (one of whom subsequently
resigned). In addition, between May 1994 and March 1995, the Company issued
five-year options to purchase an aggregate of 570,000 shares of Common Stock at
exercise prices ranging from $.62 to $1.00 per share to six key employees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned at August 20, 1996, (i) by each person who is
known by the Company to own beneficially or exercise
23
<PAGE> 26
voting or dispositive control over 5% or more the Company's Common Stock, (ii)
by each of the Company's directors, and (iii) by all officers and directors as a
group. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60 days.
At September 20, 1996, there were 38,094,239 shares of Common Stock of the
Company outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- --------------------------------------------------------------------- ------------ ----------
<S> <C> <C>
Gerald Smith......................................................... 2,000,000(3) 5.3%
Robert H. Zeiger..................................................... 1,025,000(4) 2.7
Dennis W. Healey..................................................... 675,000(5) 1.8
Charles F. Fistel.................................................... 626,255(6) 1.7
Peter D. Fischbein................................................... 400,000(7) 1.1
Sidney Dworkin, Ph.D................................................. 325,244(8) 0.9
Jay M. Haft.......................................................... 212,744(9) 0.6
William B. Saeger.................................................... 1,919,855(10) 5.1
Fred D. Hirt......................................................... 25,000(11) .0
Officers & Directors (as a Group 12 persons)......................... 7,634,098 20.0%
</TABLE>
- ---------------
(1) Based upon information furnished to the Company by the principal security
holders or obtained from the stock transfer books of the Company. Other
than indicated in the notes, the Company has been informed that such
persons have sole voting and dispositive power with respect to their
shares.
(2) Based on 38,094,239 shares of Common Stock outstanding as of September 20,
1996. Exclusive of (i) 11,289 shares of Common Stock reserved for issuance
pursuant to conversion of 2,650 outstanding shares of Preferred Stock each
convertible into 4.26 shares of Common Stock; and (ii) 6,493,672 shares of
Common Stock reserved for issuance pursuant to exercise of options and
warrants of the Company.
(3) Mr. Smith is Chairman of the Board of Directors and President of the
Company. Includes (i) 350,000 shares owned directly by Mr. Smith; (ii)
50,000 options exercisable at $1.00 per share granted to all Directors in
August 1994; and (iii) 1,600,000 options exercisable at $.50 per share
granted in October 1995 pursuant to the provisions of the Plan.
(4) Mr. Zeiger is Chief Executive Officer, Chief Operating Officer and a
Director of the Company. Includes (i) 25,000 shares owned directly by Mr.
Zeiger and (ii) 1,000,000 Common Stock purchase options exercisable at $.96
per share pursuant to Mr. Zeiger's Employment Agreement.
(5) Mr. Healey is Executive Vice President, Treasurer, Chief Financial Officer,
Secretary and a Director of the Company. Includes (i) 125,000 shares held
in Mr. Healey's name; (ii) 50,000 options exercisable at $1.00 per share
granted to all Directors in August 1994; and (iii) 500,000 options
exercisable at $.50 per share granted in October 1995 pursuant to the
provisions of the Plan.
(6) Mr. Fistel is an Executive Vice President and was elected a Director of the
Company in June 1996. Includes (i) 216,255 shares owned directly by Mr.
Fistel; (ii) 300,000 options exercisable at $.30 per share; and (iii)
110,000 options exercised at $.50 per share pursuant to the Plan.
(7) Mr. Fischbein is a Director of the Company. Includes (i) 125,000 shares
held in Mr. Fischbein's name; (ii) 50,000 options exercisable at $1.00 per
share granted to all Directors in August 1994; and (iii) 225,000 options
exercisable at $.50 per share granted in October 1995 pursuant to the
provisions of the Plan.
(8) Mr. Dworkin is a Director of the Company. Includes (i) 175,244 shares owned
directly by Mr. Dworkin and his wife; (ii) 50,000 options exercisable at
$1.00 per share granted to all Directors in August 1994; and (iii) 100,000
options exercisable at $.50 per share granted in October 1995 pursuant to
the provisions of the Plan.
(9) Mr. Haft is a Director of the Company. Includes (i) 62,744 shares owned
directly by Mr. Haft; (ii) 50,000 options exercisable at $1.00 per share
granted to all Directors in August 1994; and (iii) 100,000 options
exercisable at $.50 per share granted in October 1995 pursuant to the
provisions of the Plan.
(10) Mr. Saeger is a Director of the Company. Includes (i) 99,100 shares owned
directly by Mr. Saeger; (ii) 1,670,775 shares held by Fundamental
Management Corp. and Hedge Fund Management. Mr. Saeger
24
<PAGE> 27
holds a controlling position as Fund Manager of the Fundamental Fund Group,
holder of these shares and is considered a beneficial owner; (iii) 50,000
options exercisable at $1.00 per share granted to all Directors in August
1994; and (iv) 100,000 options exercisable at $.50 per share granted in
October 1995, pursuant to the provisions of the Plan.
(11) Mr. Hirt was elected a Director of the Company in June 1996. Includes
25,000 options exercisable at $3.96 per share granted in June 1996 pursuant
to the provisions of the plan.
On October 6, 1995, the Board of Directors awarded options to purchase
2,835,000 shares of Common Stock to the officers and directors of the Company
exercisable of $0.50 per share at any time on or prior to October 6, 2000. The
options were granted to the following individuals: Gerald Smith (1,600,000),
Robert H. Zeiger (100,000), Dennis W. Healey (500,000), Charles F. Fistel
(110,000), Peter D. Fischbein (225,000), Sidney Dworkin (100,000), Jay W. Haft
(100,000) and William B. Saeger (100,000). In addition, between October 1995 and
June 1996, the Company awarded options to purchase up to 500,500 shares of
Common Stock to other employees of the Company, which options are exercisable at
prices ranging from $0.50 to $5.90 per share during the five-year term of the
options.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange act requires the Company's directors and
executive officers, and persons who own more than ten percent (10%) of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent (10%) stockholders are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representation that no other
reports were required, during the fiscal year ended June 30, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent (10%) beneficial owners were completed except that Mr. Robert H.
Zeiger did not file one report, covering one transaction, in a timely manner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gerald Smith, Chairman of the Board of Directors, President and Director of
the Company, is the sole stockholder of Cytoferon, a former active affiliate of
the Company.
Peter D. Fischbein is a Director of the Company, and a director of Medicore
and Techdyne, was a member of a law firm, now dissolved, which firm acted as
counsel to the Company, and Medicore from time to time. Mr. Fischbein's firm
also handled the legal work for the Limited Partnership which has licensing
agreements with the Company. In December 1994, Mr. Fischbein resigned as
Secretary of the Company. In July 1994, Mr. Fischbein, in recognition for
several years of service as a Director of the Company, was provided the right to
purchase 125,000 shares of Common Stock at $.30 per share (market price at that
time was approximately $.53 per share), payable through the issuance of a note
in the principal amount of $36,250, with Mr. Fischbein receiving a bonus equal
to the par value ($1,250) of the shares purchased. On May 15, 1995, the Company
forgave Mr. Fischbein's note in lieu of a bonus for the 1995 fiscal year,
following unanimous approval of the independent members of the Board of
Directors.
On February 5, 1993, the Stock Agreement with Cytoferon was executed, the
initial $100,000 investment was made by Cytoferon and Gerald Smith, Chief
Executive Officer, director and principal of Cytoferon became a Director of the
Company. Upon Cytoferon's additional investment in May 1993, pursuant to which
Cytoferon had invested $1,000,000 for 6,000,000 shares of Common Stock of the
Company, Seymour Friend resigned as director. Mr. Friend is an officer and
director of Medicore. In May 1993, Cytoferon moved its offices to the Company's
facilities in Hialeah, Florida. In November 1993, the Company entered into the
Additional Stock Purchase Agreement with Cytoferon and thereafter, issued
1,333,333 shares of common stock to Cytoferon for an additional investment of
$400,000.
25
<PAGE> 28
In connection with Cytoferon's investments, the Company entered into a
Marketing and Management Services Agreement ("MMS Agreement") with Cytoferon
pursuant to which agreement Cytoferon became consultant to and exclusive
distributor of products of the Company not approved by the U.S. Food and Drug
Administration ("FDA") for national distribution in exchange for certain fees
and commissions. The MMS Agreement provided for a management consulting fee of
$240,000 per year subject to Cytoferon meeting certain per year and aggregate
initial term and renewal term sales requirements. In addition, the MMS Agreement
provided that Cytoferon was to have been the exclusive worldwide distributor,
subject to maintaining certain sales minimums for all of the Company's non-FDA
approved products for three years, a 4% sales commission on such sales, 50% of
all fees received by the Company from the sale of any foreign franchises,
licenses, technology transfer or joint venture agreements and 20% of any ongoing
foreign royalty payments.
Cytoferon had obtained funds for such investments through sale of
$2,181,500 principal amount of its Debentures between February 1993 and March
1994 (net of $849,250 of Debentures which were retired as a result of the
settlement of the Cytoferon Debenture holders' suit against Cytoferon, Viragen
and certain other parties). Each of the series of Debentures issued by Cytoferon
carried an identical interest rate of 8.5%, were convertible into Common Stock
of Viragen at $.30 per share and were secured by Common Stock of Viragen
acquired through Cytoferon's investment in Viragen. The Cytoferon's Debentures
were converted into 7,271,666 shares of Common Stock of Viragen in December
1994, at which time accrued interest of $133,364 was converted into 444,547
shares of Common Stock of Viragen also at a conversion ratio of $.30 per share.
The Company's management believed it was in the long-term best interest of
the Company to unify and consolidate management functions and efforts and
eliminate conflicts that could 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 the Subsequent Agreement, subject to receipt of a fairness opinion
received in December 1994, which terminated the MMS Agreement, the Stock
Purchase Agreement and Additional Stock Purchase Agreement and accelerated the
issuance of the 1,750,000 shares previously contingently issuable under the
Additional Stock Agreement concurrent with the cancellation of the
aforementioned agreements.
Messrs., Sydney Dworkin, Jay M. Haft, and William B. Saeger, Directors of
the Company, Mr. Jerome E. Treisman, a former director, and Charles F. Fistel,
an Executive Vice President of the Company, purchased Cytoferon 8 1/2%
Convertible Debentures in the respective principal amounts of $40,000, $62,500,
$150,000, $22,500 and $50,000 which were convertible into common stock of the
Company. The principal amount of such Debentures together with accrued interests
were converted, effective September 30, 1994, at $.30 per share and accrued
interest into 175,244 shares, 220,744 shares, 533,766 shares, 78,668 and 177,922
shares of common stock of the Company.
In November 993, the Company issued $200,000 in 8 1/2%, three-year
convertible debentures. These debentures were converted at $.30 per share in
666,668 shares of common stock on October 31, 1994. These shares are held by
Fundamental Management Corp. and Hedge Fund Management, which are investment
funds managed by William B. Saeger, a Director of the Company.
On December 8, 1995, the Company consummated an Agreement and Plan of
Reorganization with Sector Associates, Ltd. (the former name for Viragen
(Europe), Ltd.) pursuant to which VEL acquired 100% of the outstanding capital
stock of Viragen (Scotland) Ltd. and in exchange for which Viragen received
newly issued shares of convertible securities of VEL which represented
approximately 94% of the then issued and outstanding capital stock of VEL. Prior
thereto, on July 12, 1995, Viragen Technology, Inc., a wholly-owned subsidiary
of the Company, entered into a License Agreement with VSL pursuant to which VSL
obtained certain exclusive rights applicable to the EU countries and
non-exclusive rights throughout the world (except within the United States and
its territories) to engage in the research, development and manufacture of
certain proprietary products and technologies relating to the therapeutic
application of human leukocyte interferon. The term of the license is for 15
years, which is automatically renewed for successive 15-year periods. At the
present time, the Company maintains a 72% capital stock interest in VEL, which
in turn owns all of the capital stock of VSL.
26
<PAGE> 29
Messrs. Gerald Smith, Robert Zeiger and Dennis W. Healey, who are principal
executive officers with the Company, also serve as the principal executive
officers of VEL. Commencing in July 1996, following his resignation from
Medicore and subsidiaries. Mr. Healey who is serving as VEL's Executive Vice
President, Treasurer and Secretary, began receiving an annual salary of $85,000
per year. In November 1995, VSL issued options to purchase 100,000 shares of
each of its Common Stock to Messrs. Smith, Zeiger and Healey, which following
the consummation of the Sector reorganization agreement were converted into
options to purchase and aggregate of 300,000 shares of Common Stock of VEL
exercisable at $.001 per share. All of such options were exercised at January,
1996.
27
<PAGE> 30
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING IS A LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL
REPORT.
1. All financial statements
See Index to Consolidated Financial Statements
2. Exhibits
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(i) Plan of Merger between Florida Immunological Institute, Inc. and
Vira-Tech, Inc., dated September 30, 1986 (incorporated by reference to the
Company's registration statement on Form S-2, dated October 24, 1986, as
amended File No. 33-9714 ("1986 Form S-2"), Part II, Item 16, 2.1)
(ii) Articles of Merger of Florida Immunological Institute into
Vira-Tech, Inc., dated September 30, 1986 (incorporated by reference to
1986 Form S-2, Part II, Item 16, 2.2)
(3) (i) Articles of Incorporation and By-Laws (incorporated by reference to
the Company's (ii) Amended Certificate of Incorporation (incorporated by
reference to 1986 Form S-2, Part II, Item 16, 4.2)
(4) Instruments defining the rights of security holders, including
indentures
(i) Certificate of Designation for Series A Preferred Stock, as
amended (incorporated by reference to 1986 Form S-2, Part II, Item 16, 4.4)
(ii) Specimen Certificate for Unit (Series A Preferred Stock and Class
A Warrant) (incorporated by reference to 1986 Form S-2, Part II, Item 16,
4.5)
(iii) Omitted
(iv) Omitted
(v) Omitted
(vi) Omitted
(vii) Omitted
(viii) Form of three year 8.5% Convertible Subordinated Debenture
(incorporated by reference to the Company's Current Report on Form 8-K
dated November 17, 1993)
(ix) Form of Stock Option Agreement dated November 19, 1993, issued to
Messrs. Dennis W. Healey and Peter D. Fischbein (incorporated by reference
to the Company's Current Report on Form 8-K dated November 17, 1993)
(x) 1995 Stock Option Plan
(xi) Certificate of Designation of Series B Preferred Stock
(incorporated by reference to the Company's Current Report on Form 8-K
dated June 7, 1996)
(10) Material contracts
(i) Research Agreement between the Registrant and Viragen Research
Associates Limited Partnership dated December 29, 1983 (incorporated by
reference to Medicore's S-1, File No. 2-89390, dated February 10, 1984
("Medicore's S-1"), Part II, Item 16(a)(10)(xxxiii))
(ii) License Agreement between the Registrant and Viragen Research
Associates Limited Partnership dated December 29, 1983 (incorporated by
reference to Medicore's S-1, Part II, Item 16(a)(10)(xxxiv))
(iii) Omitted
28
<PAGE> 31
(iv) Royalty Agreement between the Company and Medicore, Inc. dated
November 7, 1986 (incorporated by reference to the November 1986 Form 8-K,
Item 7(c)(i))
(v) Amendment to Royalty Agreement between the Company and Medicore,
Inc. dated November 21, 1989 (incorporated by reference to the Company's
Current Report on Form 8-K dated December 6, 1989, Item 7(c)(i))
(vi) Promissory Note from the Company to Medicore, Inc. dated August
6, 1991 (incorporated by reference to the Company's 1991 Form 10-K, Part
IV, Item 10(a)(10)(xx))
(vii) Loan Agreement between the Company and Medicore, Inc. dated
January 31, 1991 (incorporated by reference to the Company's Current Report
on Form 8-K dated February 26, 1991, Item 7(c)(ii))
(viii) Amendment to Loan Agreement between the Company and Medicore,
Inc. dated August 6, 1991 (incorporated by reference to the Company's 1991
Form 10-K, Part IV, Item 14(a)(10)(xxi))
(ix) Florida Real Estate Mortgage and Security Agreement from the
Company to Medicore, Inc. dated August 6, 1991 (incorporated by reference
to the Company's 1991 Form 10-K, Part IV, Item 14(a)(10)(xxii))
(x) Omitted
(xi) Omitted
(xii) Promissory Note to Equitable Bank dated August 2, 1991
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the second quarter ended June 30, 1991 ("June, 1991 Form 10-Q"), Part
II, Item 6(a)(28)(i))
(xiii) Mortgage and Security Agreement issued to the Equitable Bank
dated August 2, 1991 (incorporated by reference to the Company's June, 1991
Form 10-Q, Part II, Item 6(a) (28)(ii))
(xiv) Acquisition Agreement between the Company and Medicore, Inc.
dated August 2, 1991 (incorporated by reference to the Company's 1991 Form
10-K, Part IV, Item 14(a)(10)(xxiii))
(xv) Lease between the Company and Medicore, Inc. dated December 8,
1992 (incorporated by reference to the Company's Current Report on Form
8-K, dated January 21, 1993 ("January 1993 Form 8-K"), Item 7(c)(10)(i))
(xvi) Addendum to Lease between the Company and Medicore, Inc. dated
January 15, 1993 (incorporated by reference to the Company's January 1993
Form 8-K, Item 7(c) (10) (ii))
(xvii) Agreement for Sale of Stock between the Company and Cytoferon
Corp. dated February 5, 1993 (incorporated by reference to the Company's
Current Report on Form 8-K, dated February 11, 1993, Item 7(c)(28))
(xviii) Addendum to Agreement for Sale of Stock between the Company
and Cytoferon Corp. dated May 4, 1993 (incorporated by reference to the
Company's Current Report on Form 8-K dated May 5, 1993, Item 7(c)(28)(i))
(xix) Amendment No. 2 to the Royalty Agreement between the Company and
Medicore, Inc. dated May 11, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xix))
(xx) Note and Mortgage Modification Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xx))
(xxi) Amendment No. 2 to the Loan Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xxi))
29
<PAGE> 32
(xxii) Amendment to Acquisition Agreement between the Company and
Medicore, Inc. dated August 18, 1993 (incorporated by reference to the
Company's June 30, 1993 Form 10-K, Part IV, Item 14(a)(10)(xxii))
(xxiii) Marketing and Management Services Agreement between the
Company and Cytoferon Corp. dated August 18, 1993 (incorporated by
reference to the Company's June 30, 1993 Form 10-K, Part IV, Item
14(a)(10)(xxiii))
(xxiv) Agreement for Sale of Stock between Cytoferon and the Company
dated November 19, 1993 (incorporated by reference to the Company's June
30, 1994 Form 10-K, Part IV, Item 14(a)(10)(xxiv))
(xxv) Employment Agreement between Gerald Smith and the Company dated
November 19, 1993 (incorporated by reference to the Company's June 30, 1994
Form 10-K, Part IV, Item 14(a)(10)(xxv)) as amended by modified Employment
Agreement dated December 15, 1994 (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27(10)(xxv))
(xxvi) Common Stock Purchase Warrant Agreement between Northlea
Partners Ltd. and the Company dated January 6, 1994 (incorporated by
reference to the Company's June 30, 1994 Form 10-K, Part IV, Item
14(a)(10)(xxvi))
(xxvii) Management Consulting Agreement between the Company, Medvest,
Inc. and Dr. John Abeles dated January 6, 1994 (incorporated by reference
to the Company's Current Report on Form 8-K, dated November 17, 1993)
(xxviii) Employment Agreement between Dennis W. Healey and the Company
dated April 8, 1994 (incorporated by reference to the Company's June 30,
1994 Form 10-K, Part IV, Item 14(a)(10)(xxvii)) as amended by Modified
Employment Agreement dated December 15, 1994 (incorporated by reference to
the Company's 1995 SB-2, Part II, Item 27 (10) (xxvii))
(xxix) Promissory Note between the Company and Gerald Smith dated
April 18, 1994 (incorporated by reference to the Company's June 30, 1994
Form 10-K, Part IV, Item 14(a)(10)(xxviii))
(xxx) Employment Agreement between Charles F. Fistel and the Company
dated July 1, 1994 (incorporated by reference to the Company's June 30,
1994 Form 10-K, Part V, Item 14(a)(10)(xxix)) as amended by Modified
Employment Agreement dated December 15, 1994 (incorporated by reference to
the Company's 1995 Form SB-2, Part II, Item 27(10)(xxix))
(xxxi) Placement Agent Agreement and Common Stock Purchase Warrant
issued to Laidlaw Equities, Inc. and designees (incorporated by reference
to the Company's 1995 Form SB-2, Part II, Item 27(10)(xxxi))
(xxxii) Amendment No. 1 to Agreement for Sale of Stock with Cytoferon
(incorporated by reference to the Company's 1995 Form SB-2, Part II, Item
27(10)(xxxii))
(xxxiii) Modified Sale of Stock and Stock Option Agreement with Peter
D. Fischbein (incorporated by reference to the Company's 1995 Form SB-2,
Part II, Item 27(10) (xxxiii)),
(xxxiv) Agreement with Moty Hermon (incorporated by reference to the
Company's 1995 Form SB-2, Part II, Item 27(10)(xxxiv))
(xxxv) Agreement with University of Nebraska-Medical Center
(incorporated by reference to the Company's 1995 Form SB-2, Part II, Item
27(10)(xxxv))
(xxxvi) License and Manufacturing Agreement with Common Services
Agency (incorporated by reference to the Company's 1995 Form SB-2, Part II,
Item 27(10)(xxxvi))
(xxxvii) Agreed Motion for Consent Final Order and Settlement
Agreement dated August 29, 1995
30
<PAGE> 33
(xxxviii) Agreement and Plan of Reorganization dated November 8, 1995
and Amendment thereto (incorporated by reference to the Company's
Post-Effective Amendment No. 1 to Registration Statement on Form SB-2)
(xxxix) Securities Purchase Agreement dated June 7, 1996 (incorporated
by references to the Company's current report on Form 8-K dated June 7,
1996).
(xl) Employment Agreement between Charles F. Fistel and the Company
dated July 1, 1996.
(xli) Stock option agreement between the Company and Fred D. Hirt
(Director) dated August 2, 1996.
(11) Statement re computation of loss per share
(21) Subsidiaries of the registrant
(27) Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K filed during the fourth quarter
(i) Item 5 -- Other Events and Item 7 -- Financial Statements,
Proforma Financial Information and Exhibits filed June 25, 1996.
(ii) Item 7 -- Financial Statements, Proforma Financial Information
and Exhibits filed July 11, 1996.
31
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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,
Principal Financial and Accounting
Officer
Dated: September 27, 1996
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------------------- ------------------------- -------------------
<C> <S> <C>
/s/ GERALD SMITH Chairman of the Board of September 27, 1996
- ----------------------------------------------- Directors, Principal
Gerald Smith Executive Officer and
President
/s/ ROBERT H. ZIEGER Chief Executive Officer September 27, 1996
- ----------------------------------------------- and Director
Robert H. Zieger
/s/ DENNIS W. HEALEY Executive Vice President, September 27, 1996
- ----------------------------------------------- Treasurer and Principal
Dennis W. Healey Financial Officer
/s/ CHARLES F. FISTEL Executive Vice President, September 27, 1996
- ----------------------------------------------- Director
Charles F. Fistel
/s/ PETER D. FISCHBEIN Director September 27, 1996
- -----------------------------------------------
Peter D. Fischbein
/s/ SIDNEY DWORKIN Director September 27, 1996
- -----------------------------------------------
Sidney Dworkin
/s/ JAY M. HAFT Director September 27, 1996
- -----------------------------------------------
Jay M. Haft
/s/ WILLIAM B. SAEGER Director September 27, 1996
- -----------------------------------------------
William B. Saeger
Director September , 1996
- -----------------------------------------------
Fred D. Hirt
</TABLE>
32
<PAGE> 35
VIRAGEN, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Viragen, Inc. and
subsidiaries are included:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants............................ F-2
Consolidated balance sheets -- June 30, 1996 and 1995......................... F-3
Consolidated statements of operations -- Years ended June 30, 1996, 1995 and
1994........................................................................ F-4
Consolidated statements of stockholders' equity -- Years ended June 30, 1996,
1995 and 1994............................................................... F-5
Consolidated statements of cash flows -- Years ended June 30, 1996, 1995 and
1994........................................................................ F-7
Notes to consolidated financial statements -- June 30, 1996 and 1995.......... F-9
</TABLE>
F-1
<PAGE> 36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Viragen, Inc.
We have audited the accompanying consolidated balance sheets of Viragen,
Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 consolidated financial position of
Viragen, Inc. and subsidiaries at June 30, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Miami, Florida
August 16, 1996
F-2
<PAGE> 37
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 19,449,059 $ 1,904,687
Accounts and notes receivable, less allowance of $11,668 and
$19,039 at June 30, 1996 and 1995, respectively............... 26,086 52,884
Inventory....................................................... -- 211,200
Prepaid expenses................................................ 87,765 104,525
Due from employees.............................................. 97,340 --
Other current assets............................................ 104,269 7,928
------------ ------------
TOTAL CURRENT ASSETS.................................. 19,764,519 2,281,224
PROPERTY, PLANT AND EQUIPMENT
Land, building and improvements................................. 1,195,209 1,191,183
Equipment and furniture......................................... 1,647,762 1,353,068
Construction in progress........................................ 21,811 --
------------ ------------
2,864,782 2,544,251
Less accumulated depreciation................................... (2,026,830) (1,512,069)
------------ ------------
837,952 1,032,182
DEPOSITS AND OTHER ASSETS....................................... 14,955 16,300
------------ ------------
$ 20,617,426 $ 3,329,706
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................. $ 310,039 $ 205,543
Accrued expenses and other liabilities........................ 503,340 399,190
Current portion of long-term debt............................. 685,211 62,728
------------ ------------
TOTAL CURRENT LIABILITIES............................. 1,498,590 667,461
ROYALTIES PAYABLE............................................... 107,866 107,866
LONG-TERM DEBT, less current portion............................ 115,563 856,593
MINORITY INTEREST............................................... 1,620,222 --
STOCKHOLDERS' EQUITY
Convertible 10% Series A cumulative preferred stock, $1.00 par
value. Authorized 375,000 shares; issued and outstanding
2,650 and 3,450 shares at June 30, 1996 and 1995,
respectively. Liquidation preference value: $10 per share,
aggregating $26,500 and $34,500 at June 30, 1996 and 1995,
respectively............................................... 2,650 3,450
Convertible 5% Series B cumulative preferred stock, $1.00 par
value. Authorized 15,000 shares; issued and outstanding
15,000 shares.............................................. 15,000 --
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 37,896,072 and 35,355,532 shares at
June 30, 1996 and 1995, respectively....................... 378,959 353,555
Capital in excess of par value................................ 38,618,391 18,406,086
Common stock subscribed....................................... -- 45,296
Deficit....................................................... (21,782,872) (17,110,601)
Foreign currency translation adjustment....................... 43,057 --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................ 17,275,185 1,697,786
------------ ------------
$ 20,617,426 $ 3,329,706
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 38
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Revenues........................................ $ 229,967 $ 573,677 $ 624,814
Research subsidy................................ 330,000 -- --
Interest and other income....................... 179,069 148,219 51,807
----------- ----------- -----------
739,036 721,896 676,621
COST AND EXPENSES
Cost of goods sold.............................. 178,368 348,642 322,262
Inventory valuation............................. -- 788,052 --
Research and development costs.................. 1,503,434 605,025 17,476
Selling, general and administrative expenses.... 3,500,494 2,028,747 1,264,334
Contract termination fee........................ -- 525,000 --
Depreciation and amortization................... 200,209 97,329 47,257
Bad debt expense................................ 48,970 186,220 20,600
Interest expense................................ 92,576 94,720 88,038
----------- ----------- -----------
5,524,051 4,673,735 1,759,967
----------- ----------- -----------
Loss before minority interest................... (4,785,015) (3,951,839) (1,083,346)
Minority interest in loss of consolidated
subsidiaries.................................. 112,744 -- --
----------- ----------- -----------
NET LOSS........................................ (4,672,271) (3,951,839) (1,083,346)
Deduct required dividends on convertible
preferred stock, Series A..................... 2,650 3,450 3,450
Deduct required dividends on convertible
preferred stock, Series B..................... 47,917 -- --
----------- ----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCK............... $(4,722,838) $(3,955,289) $(1,086,796)
=========== =========== ===========
LOSS PER COMMON SHARE, after deduction for
required dividends on convertible preferred
stock......................................... $ (0.13) $ (0.12) $ (0.06)
=========== =========== ===========
Weighted average common shares outstanding...... 36,198,302 32,137,693 18,686,751
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 39
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
PREFERRED PREFERRED CAPITAL IN COMMON CURRENCY NOTES DUE
STOCK, STOCK, COMMON EXCESS OF STOCK TRANSLATION FROM
SERIES A SERIES B STOCK PAR VALUE SUBSCRIBED DEFICIT ADJUSTMENT OFFICERS
--------- --------- -------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993... $ 3,700 $ $178,737 $11,993,947 $ $(12,075,416) $ $
Options granted to
Directors............. 117,033
Conversion of Note
Payable to Stockholder
(260,130 shares)...... 2,601 75,437
Purchase of stock
warrants.............. 20,000
Purchase of stock by
Cytoferon (1,333,333
shares)............... 13,333 386,667
Stock purchase by
officer (750,000
shares)............... 7,500 217,500 (217,500)
Stock purchases by
officer, directors,
and affiliate (375,000
shares)............... 112,500 (108,750)
Conversion of Series A
Preferred Stock....... (250) 11 239
Private Placement of
Common Stock
(2,534,375 shares).... 1,013,750
Private Placement
issuance cost......... (112,100)
Net Loss.......... (1,083,346)
------ -------- -------- ----------- ----------- ------------ -------- ---------
Balance at June 30,
1994.................... 3,450 202,182 12,698,723 1,126,250 (13,158,762) (326,250)
Repurchase of Warrants
(584,160 shares)...... (14,604)
Conversion of
Convertible Debentures
(666,668 shares)...... 6,666 193,334
Shares to Cytoferon from
modification of
Agreement............. 17,500 507,500
Purchase of stock by
Officers and
affiliates (375,000
shares)............... 3,750 108,750 (112,500)
Private placement of
Common Stock
(8,919,000 shares).... 89,190 3,478,410 (1,013,750)
Issuance costs.......... (382,633)
Private placement of
Common Stock
(3,426,667 shares).... 34,267 2,021,733
Issuance costs.......... (77,096)
Registration costs for
form SB-2............. (128,031)
Stock subscribed by
Financial
Consultants........... 45,296
Officers' notes forgiven
on stock purchases.... 326,250
Net loss.......... (3,951,839)
------ -------- -------- ----------- ----------- ------------ -------- ---------
Balance at June 30,
1995.................... $ 3,450 $ $353,555 $18,406,086 $ 45,296 $(17,110,601) $ $
</TABLE>
F-5
<PAGE> 40
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN
PREFERRED PREFERRED CAPITAL IN COMMON CURRENCY NOTES DUE
STOCK, STOCK, COMMON EXCESS OF STOCK TRANSLATION FROM
SERIES A SERIES B STOCK PAR VALUE SUBSCRIBED DEFICIT ADJUSTMENT OFFICERS
--------- --------- -------- ----------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995.................... $ 3,450 $ $353,555 $18,406,086 $ 45,296 $(17,110,601) $ $
Issuance of Common Stock
to Consultants (59,600
shares)............... 596 44,700 (45,296)
Exercise of Warrants by
Consultants (772,028
shares)............... 7,719 451,945
Compensation expense on
directors, officers,
and employees
options............... 183,144
Exercise of warrants
from private placement
(358,912 shares)...... 3,589 183,212
Exercise of warrants by
Directors (50,000
shares)............... 500 14,500
Exercise of warrants by
management, officers
and employees
(1,293,500 shares).... 12,935 445,437 (290,000)
Compensation expense on
consultants'
options............... 316,300
Proceeds from subsidiary
offering.............. 3,511,061
Proceeds from initial
investment in Sector
Associates, Ltd....... 774,206
Issuance of Viragen
(Europe) Ltd. stock to
Directors and
Affiliate of
subsidiary............ 243,000
Officers' notes forgiven
on stock purchases.... 290,000
Conversion of Series A
Preferred Stock....... (800) 65 735
Sale of Series B
Preferred Stock, net
of issuance
costs of $940,935..... 15,000 14,044,065
Foreign currency
translation
adjustment............ 43,057
Net Loss.......... (4,672,271)
--------- --------- -------- ----------- ----------- ------------ ----------- ---------
Balance at June 30,
1996.................... $ 2,650 $15,000 $378,959 $38,618,391 $ $(21,782,872) $ 43,057 $
======= ======= ======== ========== ========== =========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 41
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Loss.......................................................... $(4,672,271) $(3,951,839) $(1,083,346)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 200,209 97,329 47,257
Interest paid through stock issue............................. -- -- 11,438
Issuance of common stock to officers, employees and others.... -- -- 11,250
Consulting fees paid in stock warrants........................ 316,300 45,296 --
Compensation expense on stock options......................... 183,144 -- 117,033
Officers and directors notes forgiven on stock purchases...... 294,652 326,250 --
Gain on sale of equipment..................................... -- (6,000) --
Minority interest in loss of subsidiary....................... (112,744) -- --
Provision for bad debt expense................................ 48,970 186,220 20,600
Loss due to write-down of inventory........................... -- 788,052 --
Loss due to write-down of land, building and improvements..... 316,267 -- --
Issuance of Viragen (Europe) Ltd. stock to Directors and
affiliate of subsidiary..................................... 243,000 -- --
Increase (decrease) relating to operating activities from:
Escrow account................................................ -- -- 68,535
Accounts and notes receivable................................. (22,172) (142,130) (117,574)
Inventory..................................................... 211,200 (232,781) (676,345)
Prepaid expenses.............................................. 16,760 (68,336) (19,080)
Other current assets.......................................... 94,007 1,725 (7,968)
Deposit and other assets...................................... 1,345 (5,993) (3,572)
Accounts payable.............................................. 57,155 (214,506) 224,792
Accrued expenses and other liabilities........................ 104,150 (152,215) 350,559
----------- ---------- ----------
Net cash used in operating activities....................... (2,720,028) (3,328,928) (1,056,421)
INVESTING ACTIVITIES
Proceeds from sale of equipment................................. -- 6,000 --
Additions to property, plant and equipment, net................. (163,316) (232,838) (11,643)
----------- ---------- ----------
Net cash used in investing activities....................... (163,316) (226,838) (11,643)
FINANCING ACTIVITIES
Payments on long term debt...................................... (277,477) (54,459) (51,066)
Proceeds from sale of preferred stock Series B, net............. 14,059,065 -- --
Proceeds from subsidiary's sale of common stock, net............ 5,101,752 -- --
Proceeds from sale of Common Stock to Cytoferon................. -- -- 400,000
Sale (repurchase) of warrants................................... -- (14,604) 20,000
Proceeds from exercise of options and warrants.................. 732,496 -- --
Proceeds from issuance of convertible debentures................ -- -- 200,000
Proceeds from sale of common stock, net......................... -- 4,252,621 911,250
Cash acquired through reverse acquisition of Sector Associates,
Ltd........................................................... 768,823 -- --
Contract termination fee paid in common stock................... -- 525,000 --
Private placement issuance cost................................. -- -- (112,100)
Expense payments on SB-2 registrations.......................... -- (128,031) --
----------- ---------- ----------
Net cash provided by financing activities................... 20,384,659 4,580,527 1,368,084
Effect of exchange rate fluctuations on cash...................... 43,057 -- --
----------- ---------- ----------
Increase in cash.................................................. 17,544,372 1,024,761 300,020
Cash and cash equivalents at beginning of period.................. 1,904,687 879,926 579,906
----------- ---------- ----------
Cash and cash equivalent at end of period......................... $19,449,059 $ 1,904,687 $ 879,926
=========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................................... $ 91,194 $ 87,297 $ 74,930
</TABLE>
F-7
<PAGE> 42
VIRAGEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
During the years ended June 30, 1996, 1995 and 1994, the Company had the
following non-cash investing and financing activity:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Issuance of Notes for Purchase of Common Stock.................... $ 290,000 $ -- $ --
Issuance of Common Stock to stockholders in payment of
note payable.................................................... -- -- 326,250
Issuance of Common Stock for convertible debentures............... -- 200,000 66,000
Issuance of Common Stock to officers and affiliates............... -- 112,500 --
Stock subscriptions receivable.................................... -- -- 102,500
Equipment acquired through capital leases......................... 158,930 54,200 --
Issuance of Viragen (Europe) Ltd. stock to Directors and
affiliate....................................................... 243,000 -- --
Other receivables acquired through reverse acquisition of Sector
Associates, Ltd................................................. 195,000 -- --
Liabilities assumed through reverse acquisition of Sector
Associates, Ltd................................................. 47,341 -- --
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 43
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation: Viragen, Inc. and subsidiaries are engaged
in the research, development and manufacture of certain immunological products
for commercial application. The consolidated financial statements include the
accounts of Viragen, Inc., its wholly-owned subsidiaries, Vira-Tech, Inc.,
Viragen USA, Inc. and Viragen Technology, Inc., and its majority owned
subsidiary Viragen (Europe) Ltd. ("VEL"), including its wholly-owned subsidiary,
Viragen (Scotland) Ltd. ("VSL"), collectively known as the Company. All material
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents approximate their fair values.
Inventory: The Company has capitalized the human leukocyte-derived
interferon manufactured in its laboratories at the lower of average cost or
market. The timing of the realization of the interferon inventory is dependent
upon future events. During the year ended June 30, 1995 as part of an agreement
reached with the Florida Department of Health and Rehabilitation Services and
determination by 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 $788,052. At June 30, 1995, the remaining
interferon inventory was 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 by using
the straight-line method over the estimated useful life for financial reporting
purposes and using accelerated methods for income tax purposes.
Sale of Stock By Subsidiaries: The Company accounts for sales of stock by
its subsidiaries as capital transactions for financial reporting 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.
Reclassification: Certain reclassifications have been made to the June 30,
1995 and 1994 financial statement amounts to conform to the presentation for the
June 30, 1996 financial statements.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Income Taxes: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between the
financial accounting and tax basis of assets and liabilities.
Deferred Expenses: Deferred expenses are amortized on the straight-line
method, over their estimated benefit period ranging to 60 months.
Foreign Currency Translation: The financial statements of VSL have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated
using the current exchange rates at the balance sheet date. Income statement
amounts have been translated using the average exchange rate for the reporting
period. The translation adjustments resulting from the change in exchange rates
from year to year have been reported separately as a component of stockholders'
equity. Foreign currency transaction gains and losses, which are not material,
are included in
F-9
<PAGE> 44
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
results of operations. These gains and losses result from exchange rate changes
between the time transactions are recorded and settled, and for unsettled
transactions, exchange rate changes between the time transactions are recorded
and the balance sheet date.
New Pronouncements: The Company adopted the provisions of FAS
121-Accounting for the Impairment of Long-Lived Assets, as of July 1, 1995. FAS
121 requires impairment losses to be recorded on long-lived assets when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Also, on July 1, 1996, the Company plans to adopt the provisions of FAS
123-Accounting for Stock-Based Compensation. The Company will continue to
account for stock-based compensation plans under the provisions of APB
25-Accounting for Stock Issued to Employees. The Company will disclose the pro
forma information required for stock-based compensation plans in accordance with
FAS 123, upon adoption of the pronouncement.
NOTE B -- CAPITAL STOCK
In December 1993, a stockholder and former director converted a convertible
promissory note payable of $66,600 with related accrued interest of $11,439 into
260,130 shares of common stock.
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 treated as compensation expense and a
note receivable was recorded on 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
treated as compensation expense and a note receivable from each
individual/entity was recorded on the remaining balance of $36,250. In May 1995,
the Board of Directors forgave these notes and related interest.
In fiscal 1994, 250 shares of the convertible 10% Series A cumulative
Preferred Stock were converted into 1,065 of the Company's common stock.
In August 1994, the Company concluded a Private Placement of its common
stock which concluded subsequent to June 30, 1995 with the issuance of 8,919,000
shares at $.40 per share. 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 $0.52 per share for a period of five years from date of
issuance.
In October 1994, $200,000 of Convertible Debentures were converted into
666,668 shares of common stock.
In November 1994, the Company commenced a second Private Placement solely
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 were intended to be utilized for the establishment of a research and
manufacturing facility currently under construction in Edinburgh, Scotland and
for general working capital purposes. Subject to receipt of additional funding
to conduct European-based clinical trials, it is the Company's intention to
commence European clinical trials and seek the necessary approvals for the sale
of its Omniferon(TM) product in Europe.
During the fiscal 1994, Cytoferon Corporation purchased 1,333,333 shares of
common stock at $.30 per share under the terms of an additional stock purchase
agreement. Also during the period, the Company entered into stock purchase 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
F-10
<PAGE> 45
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were subject to certain performance criteria. Subsequent to year end, the option
related performance criteria were met and the remaining 1,125,000 options became
exercisable. During the year ended June 30, 1994, $117,000 was charged to
operations upon the issuance of the officer and director options.
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.
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 have been
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
provisions 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. The
Company recognized compensation expense of $183,144 as a result of these grants.
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. In December 1995, a Director of the Company exercised 50,000 options
with an exercise price of $.30 per share.
In March 1996, the Company issued 636,000 Common Stock Purchase Warrants,
300,000 of which were associated with the Company's Florida HIV Study with the
balance issued for financial consulting services. The Company recognized expense
during fiscal 1996 resulting from these issuances of $316,300.
During the third quarter of fiscal 1996, officers and directors exercised
1,000,000 options granted in June 1994, at $.30 per share through the issuance
of promissory notes totaling $290,000 secured by the related stock which was
held in escrow pending payment of the related promissory notes. The notes and
related interest due were forgiven by the Company during the fourth quarter of
fiscal 1996.
Each share of Series A 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 Series A
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.
In fiscal 1996, 800 shares of Series A Preferred Stock were converted into
6,500 shares of Common Stock.
On June 7, 1996, the Company entered into a Securities Purchase Agreement
(the "Agreement") with GFL Performance Ltd., GFL Advantage Fund Ltd. and Proton
Global Asset Management, LDC (collectively the "Purchaser") pursuant to which
the Purchaser acquired 15,000 shares of the Company's recently established 5%
Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock") for $15 million. The sale of the Series B Preferred Stock represented
the completion of the first stage of a $50 million financing commitment. The
Company expects to complete the balance of the financing, subject to market and
other conditions, as follows: $20 million prior to December 31, 1996 and $15
million prior to April 30, 1997.
Under the terms of the Series B Preferred Stock, the holders will be
entitled to receive a cash dividend equal to 5% of the stated value of the
Series B Preferred Stock payable quarterly commencing September 7,
F-11
<PAGE> 46
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, although the Company has the option to utilize shares of its Common Stock,
under certain conditions, to satisfy the dividend requirement. The Purchaser has
the right to convert the Series B Preferred Stock commencing August 21, 1996
into shares of Common Stock of the Company at a conversion price equal to the
lesser of 85% of the average market price for the Company's Common Stock, as
described in the Agreement, prior to the conversion date or $8.74. The Company
also has a right to require the Purchaser, under certain terms and conditions,
to convert the Series B Preferred Stock commencing 9 months following the
effective date of a Registration Statement registering the resale of the shares
of Common Stock of the Company underlying the Series B Preferred Stock. The
Series B Preferred Stock does not carry any voting rights except as required
under the Delaware General Corporation Law.
In connection with the sale and issuance of the Series B Preferred Stock,
the Company issued warrants to purchase 225,000 shares of Common Stock of the
Company at $10.59 per share for a period of 3 years from date of issuance along
with approximately $900,000 in cash fees to certain finders and an investor
representative who participated in the transaction. The Company incurred
approximately $41,000 in additional costs related to the issuance of the Series
B Preferred Stock.
In June 1996, a new Director was elected into the Board of Directors. The
Director was granted 25,000 common stock options upon election to the Board. The
options are exercisable at $3.96 per share for a period of five years.
Shares of the Company's common stock reserved at June 30, 1996 and 1995 for
possible future issuance are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Warrants -- consultant...................................... 924,729 480,340
Convertible preferred stock, series A....................... 11,289 14,697
Convertible preferred stock, series B....................... 3,000,000 --
Employee option plans....................................... 500,000 2,563,000
Officers and directors options.............................. 4,385,000 650,000
Warrants -- private placements.............................. 633,821 765,650
--------- ---------
9,454,839 4,473,687
========= =========
</TABLE>
NOTE C -- ROYALTY AGREEMENT
In May 1993, the Company renegotiated its royalty agreement with Medicore,
Inc. ("Medicore"). Under the new terms, the Company will pay Medicore 5% of
sales to $7 million; 4% of the next $10 million; and 3% on the next $55 million
to a maximum of $2.4 million in royalty payments. Royalties incurred in prior
years under the previous agreement, totaling approximately $108,000 are included
in royalties payable. This amount will be paid as the final payment under the
$2.4 million total royalty agreement. Royalties expense incurred totaled
$11,901, $28,826 and $28,000 in 1996, 1995 and 1994, respectively.
F-12
<PAGE> 47
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- LONG TERM DEBT
Long-term debt at June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
First mortgage note secured by land, building and equipment
with a net book value of $837,952 and $1,032,182 at June 30,
1996 and 1995, respectively. Monthly principal payments of
$2,500 plus interest at prime plus 2% with the unpaid balance
due August 1, 1996........................................... $453,439 $483,439
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............................................... 196,048 384,671
Capital lease obligations resulting from acquisition of
equipment, with a cost totaling $213,130 and $54,200 at June
30, 1996 and 1995, respectively, capitalized from three to
five years................................................... 151,287 51,211
-------- --------
800,774 919,321
Less current portion........................................... 685,211 62,728
-------- --------
$115,563 $856,593
======== ========
</TABLE>
The prime rate was 8.25% and 9.00% at June 30, 1996 and 1995, respectively.
Scheduled maturities of Long-term debt at June 30, 1996 are:
1997 -- $685,211; 1998 -- $36,435; 1999 -- $40,141; 2000 -- $32,982; and 2001
and thereafter -- 6,005.
At June 30, 1995, the Company was not in compliance with certain
non-financial covenants on its mortgage note. The lender waived these defaults
and waived compliance with these covenants through July 1, 1996. Both mortgage
notes were paid in full at maturity in August 1996.
Medicore had guaranteed the principal and interest on the first mortgage
note and expenses and fees upon any default. Medicore had the right to cure
defaults and had an Acquisition Agreement with the Company giving Medicore the
right to assume the mortgage.
Future minimum lease payments under capital lease obligations and the
present value of the minimum lease payments as of June 30, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 53,891
1998.............................................................. 49,944
1999.............................................................. 48,629
2000.............................................................. 35,987
2001 and thereafter............................................... 6,380
--------
Total minimum lease payments...................................... 194,831
Less: amount representing interest................................ 43,544
--------
Present value of minimum lease payments........................... $151,287
========
</TABLE>
NOTE E -- CORPORATE REORGANIZATION
On September 20, 1995, the Company entered into an agreement and Plan of
Reorganization ("Agreement") with Sector Associates, Ltd. ("Sector"), a Delaware
corporation. Under the terms of the Agreement, the Company acquired a 94%
interest in Sector, a publicly traded corporation, in consideration for a 100%
interest in VSL. VSL was organized during April 1995, by Viragen, Inc. to cause
or to undertake clinical trials in the European Union ("EU"), and for sales of
Viragen's natural leukocyte-derived alpha interferon and related products in the
EU and other countries outside the United States. Viragen retained an
F-13
<PAGE> 48
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
84% ownership interest in Sector, as shares in Sector were disbursed to the new
Directors and to an affiliate. Shares were also disbursed as finders' fees.
On November 7, 1995, the Agreement was amended to provide for an interim
loan of $500,000 by Sector to VSL, the filing of certain financial reports by
Sector prior to closing, an additional capital contribution of $300,000 into
Sector within thirty days, and the modification of a related investment banking
agreement. The $500,000 loan was funded November 9, 1995, bearing interest at 4%
per annum, secured by a 3.77% equity interest in VSL, and was guaranteed by
Viragen, Inc. Upon the closing of the Agreement on December 8, 1995, the
principal amount of the note was deemed contributed capital to Sector.
The Agreement was finalized and became effective on December 8, 1995.
In March 1996, Sector completed two Private Placement Offerings, issuing
768,000 shares of Common Stock and 216,500 Common Stock Purchase Warrants having
an exercise price of $12.00 per share. These two Offerings yielded net proceeds
of approximately $5,102,000 after related cash expenses of $371,500. The Company
intends to use these proceeds to undertake European research and clinical trial
activities including the construction of a laboratory and manufacturing facility
in Scotland.
Effective May 2, 1996, Sector's name was changed to Viragen (Europe) Ltd.
NOTE F -- INCOME TAXES
Viragen, Inc. and its wholly-owned subsidiaries file consolidated federal
and state income tax returns. VEL (formerly Sector) will be included in the
Company's consolidated federal and state income tax returns for the period
December 8, 1995 through March 15, 1996, as Viragen, Inc.'s percentage ownership
of VEL exceeded 80% only during this period. VSL files separate income tax
returns in the United Kingdom.
F-14
<PAGE> 49
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities
Tax over book depreciation................................ $ 33,000 $ 65,000
Other..................................................... 20,000 15,000
-------- ----------
Total deferred tax liabilities.................... 53,000 80,000
Deferred tax assets
Net operating loss carryforwards.......................... 6,426,000 4,781,000
Research and development credit........................... 145,000 230,000
Investment tax credit..................................... 11,000 40,000
Other..................................................... 635,000 255,000
-------- ----------
Total deferred tax assets......................... 7,217,000 5,306,000
Valuation allowance for deferred tax assets............... 7,164,000 5,226,000
-------- ----------
53,000 80,000
-------- ----------
Net deferred taxes................................ $ -- $ --
======== ==========
</TABLE>
The increase in the valuation allowance in 1996 was primarily a result of
operating losses during the year ended June 30, 1996.
The Company had net operating loss carryforwards of $17.7 million and $14.1
million and tax credits of $156,000 and $230,000 for income tax purposes that
expire in years 1997 through 2011, at June 30, 1996 and 1995, respectively. 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
Section 382 which caused the utilization of the net operating loss and tax
credits, at that time, to be limited to approximately $1,266,000 per year.
NOTE G -- TRANSACTIONS WITH RELATED PARITIES
In November 1993, the Company issued $200,000 in 8 1/2%, three year
convertible debentures. The debentures, at the holder's 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.
Legal fees of $24,000 were paid to the former secretary of the Company
during the year ended June 30, 1994.
During the fourth quarter 1994, the Company made a series of short-term
borrowings from Cytoferon Corp. ("Cytoferon") (see Note I) represented by notes
payable bearing interest at 10%.
NOTE H -- IMPAIRMENT OF LONG-LIVED ASSETS
Subsequent to year end, the Company entered into negotiations with Medicore
for the sale of its land, building and related improvements. Preliminary
negotiations established the fair value of the land, building and improvements
to be $400,000. At year end, the land, building and improvements had a net
carrying value of $716,267. In accordance with FAS 121, the Company has recorded
an impairment loss of $316,267, which has been included as part of selling,
general and administrative expenses.
F-15
<PAGE> 50
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company anticipates closing on the sale of the land, building and
improvements by December 1996.
NOTE I -- 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 $1.5 million ("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, $1.0 million in exchange for
6.0 million 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.
The funds invested enabled the Company to reinitiate production of its
Alpha Leukoferon(TM) product, and to reinitiate the marketing of the product
through physicians specializing in the treatment of multiple sclerosis and AIDS
related cancer 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 prorata. 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% of fees paid for foreign licensing, franchising
and transfer of technology plus 20% of any 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
years ended June 30, 1995 and 1994, the company incurred management fees of
$140,000 and $100,100, and sales commission expenses of $10,690 and $25,100,
respectively, under the terms of the MMS Agreement.
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 believes 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.
NOTE J -- LICENSE AND MANUFACTURING AGREEMENTS
Through a License Agreement granted by Viragen, Inc., VEL and its
wholly-owned subsidiary, VSL, secured certain rights to engage in the research,
development, and manufacture of certain proprietary products and technologies
that relate to the therapeutic application of human leukocyte-derived interferon
(the "Product") for various diseases that affect the human immune system.
Pursuant to these rights, on July 20, 1995, VSL entered into a License and
Manufacturing Agreement with the Common Services Agency, an
F-16
<PAGE> 51
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agency acting on behalf of the Scottish National Blood Transfusion Service
("SNBTS") pursuant to which SNBTS, on behalf of VSL, will manufacture and supply
VSL's Product to VSL for distribution in the European Union in return for
certain fees. It was considered critical to VSL's operations and to planned
clinical trials to secure a sufficient qualified source of human source
leukocyte, a critical component in the manufacture of the Product. VSL commenced
operations concurrent with the execution of its agreement with SNBTS.
NOTE K -- RESEARCH AND DEVELOPMENT AGREEMENTS
In 1983, the Company contracted with Viragen Research Associated Limited
Partnership, ("Limited Partnership") for the company to perform the research and
development with respect to two therapeutic products for the topical treatment
of herpes virus infections. The Company received $456,500 from the Limited
Partnership and assigned all of its patent rights to the processes and topical
products to the limited Partnership for $5,000 and an exclusive worldwide
licensing agreement. The Limited Partnership is to receive 5% of the gross
revenues of such products until it has received approximately $900,000 and,
thereafter, it is to receive 2% of the gross revenues of such products. The
Company is not presently pursuing the development or commercialization of a
topically applied product.
NOTE L -- COMMITMENT
In June 1996, the Company executed a five-year lease on property located in
Edinburgh, Scotland that will serve as the Company's laboratory and production
facilities. Monthly rental on the property is approximately $10,000. In
addition, the Company may extend the term of the lease at its option, for four
five-year periods.
F-17
<PAGE> 52
EXHIBIT INDEX
VIRAGEN, INC.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ---------------------------------------------------------------------------------
<C> <S> <C>
(10) (xl) Employment Agreement between Charles F. Fistel and the Company dated July 1, 1996
(xli) Stock Option Agreement between the Company and Fred D. Hirt (Director) dated
August 2, 1996
(11) Statement re: Computation of loss per share
(21) Subsidiaries of the registrant
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
(10) (xl) EMPLOYMENT AGREEMENT BETWEEN CHARLES F. FISTEL AND THE COMPANY
DATED JULY 1, 1996.
<PAGE> 2
EMPLOYMENT AGREEMENT
AGREEMENT dated as of July 1, 1996 (the Effective Date) by and between
VIRAGEN, INC., a Delaware corporation ("Employer or the Company"), and CHARLES
F. FISTEL ("Employee").
W I T N E S S E T H:
WHEREAS, Employer desires to employ the Employee upon the terms and
conditions hereinafter set forth and Employee desires to accept employment upon
such terms and conditions; and
WHEREAS, Employer and Employee desire to set forth in writing the terms
and conditions of their agreements and understandings with respect to
Employee's employment by Employer.
NOW, THEREFORE, Employer hereby employs Employee and Employee hereby
accepts employment under the following terms and conditions:
1. EMPLOYMENT
Employer hereby employs Employee, and Employee hereby accepts
employment by Employer, upon all the terms and conditions hereinafter set
forth.
2. TERM
Subject to the provisions for earlier termination set forth in
Section 9 hereof, this Agreement shall commence on the Effective Date and shall
end as of the close of business on June 30, 1998 (the "Employment Term"). The
term "first year", as used herein, means the period commencing on the Effective
Date and ending as of the close of business on June 30, 1997, the term "second
year", as used herein, means the period commencing on July 1, 1997 and ending
as of the close of business on June 30, 1998, and the term "year", as used
herein, means, as the context requires, the first year or the second year.
Notwithstanding any of the foregoing to the contrary, if this Employment
Agreement is terminated prior to the expiration of the Employment Term, a year
shall mean, with respect to the year during which termination occurs, the
period commencing on the first day of such year and ending as of the close of
business of the day of termination of Employee's employment, and "Employment
Term" shall mean the period commencing on the Effective Date and ending as of
the close of business of the day of termination of Employee's employment.
3. EMPLOYEES REPRESENTATIONS AND WARRANTIES
Employee represents and warrants to Employer that he is free to
accept employment with Employer as contemplated herein and has no other written
or oral obligations
<PAGE> 3
or commitments of any kind or nature which would in any way interfere with his
acceptance of employment pursuant to the terms hereof or the full performance
of his obligations hereunder or the exercise of his best efforts in his
employment hereunder.
4. DUTIES AND EXTENT OF SERVICES
Employee shall be employed as Employer's Executive Vice
President and, as such, shall, subject to the direction of Employer's
President, supervise the conduct of certain of the Employer's operations and
affairs as assigned by the President, and perform such other duties and
responsibilities as may be assigned to Employee from time to time consistent
with such title by Employer's President. Employee agrees to devote sufficient
time, skill, attention and energy diligently and competently to perform the
duties and responsibilities reasonably assigned to him hereunder or pursuant
hereto to the best of his abilities. Employee shall use his best efforts to be
loyal and faithful at all times and constantly endeavor to improve his ability
and his knowledge of the business of Employer in an effort to increase the
value of his services for the mutual benefit of Employer and Employee.
Employee agrees not to enter into any other employment agreement, other than
with subsidiaries and/or affiliates of the Company as may be approved by the
Companys Board of Directors, during the term hereof.
5. COMPENSATION
Employee shall receive an annual salary during the Employment
Term as follows: $140,000 for the period July 1, 1996 to June 30, 1997, and
$150,000 for the period July 1, 1997 to September 30, 1998. Employees salary
shall be payable in accordance with the Companys normal payroll process,
currently bi-weekly. Additional consideration payable to Employee hereunder
consists of fringe benefits, if any, that shall be made available to Employee
further described herein.
6. FRINGE BENEFITS AND EXPENSES
A. Employee Plans. Employee shall be eligible (subject to
the terms and conditions of particular plans and programs) to participate in
such medical, hospitalization, group health, accident, disability and life
insurance programs and plans, such pension, profit sharing, stock option,
incentive compensation and stock purchase plans and such other employee benefit
programs to the same extent such plans and programs are made generally
available from time to time by Employer to all of its other similarly-situated
employees; provided, however, Employer shall be under no obligation to make any
of such plans or programs available to its employees or continue any which
currently or in the future exist, except as otherwise required by law.
B. Automobile. For the term of this Agreement, Employer
shall provide to Employee an automobile, acceptable to the Employers President,
and shall pay all gas, maintenance, insurance and other expenses related
thereto, for performance of Employees duties on behalf of Employer as specified
herein.
2
<PAGE> 4
C. Other Expenses. Employer shall promptly pay directly
or reimburse Employee for his reasonable out-of-pocket costs and expenses
incurred in connection with the performance of his duties and responsibilities
hereunder subject to the submission by Employee of appropriate invoices,
receipts and other supporting documentation, consistent with Employer's
customary reimbursement policies and procedures.
7. VACATIONS
Employee shall be entitled to normal vacation (of not less than
two weeks) taken by other members of senior management during each twelve-month
period of the Employment Term. Employee shall not be entitled to be
compensated for any unused vacation upon termination of this Agreement. The
periods during which Employee will be absent from work shall be determined by
Employee taking into account the needs of Employer's business.
8. FACILITIES
Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, supplies and personnel as it
reasonably determines is adequate for Employee's performance of his duties and
responsibilities under this Agreement.
9. TERMINATION OF EMPLOYMENT
A. Termination Events. Notwithstanding any provisions of
this Agreement to the contrary, Employee's employment may be terminated by
Employer with Cause (as hereinafter defined) effective upon the delivery of
written notice to Employee. In addition, Employee's employment shall terminate
(i) upon Employee's death or (ii) upon Employee becoming Disabled (as
hereinafter defined).
B. Definition of Disabled. For purposes of this
Agreement, Employee shall be deemed to be "Disabled" when, by reason of
physical or mental illness or of injury, he is unable to perform substantially
all of the duties and responsibilities required of him in connection with his
employment hereunder. No disability shall be deemed to exist until after
Employee shall be unable to perform his duties hereunder for ninety (90)
consecutive days (the "Disability Period"). If Employee shall have been under
a disability but shall have returned to work prior to the end of the Disability
Period, any new disability commencing within thirty (30) days of the
termination of the prior disability shall be a continuation of the prior
disability, and the period of all such disabilities shall be added together to
determine whether, or how much of, the Disability Period has elapsed.
C. Definition of Cause. For purposes of this Agreement,
"Cause" shall be: (a) conviction for fraud or criminal conduct (other than
conviction of, or a plea of guilty to, a traffic violation), from which no
appeal can be taken; (b) habitual drunkenness or drug addiction; (c)
embezzlement; (d) material sanctions against Employee in his capacity as an
employee of Employer by regulatory agencies governing Employer or against
Employer because of wrongful acts or conduct of Employee which have a material
adverse affect upon the Employer and its
3
<PAGE> 5
business; (e) material breach or default by Employee of any of the material
terms or conditions of this Agreement, and the continuation of such material
breach or default by Employee for a period of seven (7) days following the date
of receipt of written notice from Employer specifying the breach or default of
Employee; or (f) the resignation or quitting of Employee prior to the end of
the Employment Term (in this last event, Employee's employment shall be deemed
terminated with Cause on the date that he resigns or quits).
If Employees employment is terminated by Employer without Cause
as defined in this Section, Employee shall be given sixty (60) days written
notice of termination by Employer and be entitled to receive the greater of (i)
two years compensation and fringe benefits/expenses as provided for in Sections
5 & 6 hereof or (ii) compensation and fringe benefits/expenses as provided for
in sections 5 & 6 payable through the remainder of the Employment Term as
provided for in Section 2 hereof. Additionally, in the event of termination
without Cause, or non-renewal of this Agreement at the end of the Employment
Term, any outstanding but unexercised stock options or warrants granted to
Employee shall continue to be fully exercisable through their stated respective
Exercise Period(s).
10. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
A. Confidential Information. Employee acknowledges that
Employee has been informed that it is the policy of Employer to maintain as
secret and confidential all information relating to (i) the financial
condition, businesses and interests of Employer and its affiliates, (ii) the
systems, know-how, products, services, costs, inventions, patents, patent
applications, formulae, research and development procedures, notes and results,
computer software programs, marketing and sales techniques and/or programs,
methods, methodologies, manuals, lists and other trade secrets heretofore or
hereafter acquired, sold, developed and/or used by Employer and its affiliates
and (iii) the nature and terms of Employer's and its affiliates' relationships
with their respective customers, clients, suppliers, lenders, vendors,
consultants, independent contractors and employees (all such information being
hereinafter collectively referred to as "Confidential Information"), and
Employee further acknowledges that such Confidential Information is of great
value to Employer and its affiliates and, in and by reason and as a result of
Employee's employment by Employer, Employee will be making use of, acquiring
and/or adding to such Confidential Information. Therefore, Employee
understands that it is reasonably necessary to protect Employer's and its
affiliates' trade secrets, good will and business interests that Employee agree
and, accordingly, Employee does hereby agree, that Employee will not directly
or indirectly (except where authorized by the Board of Directors of Employer
for the benefit of Employer and/or its affiliate(s) and/or as required in the
course of his employment) at any time hereafter divulge or disclose for any
purpose whatsoever to any persons, firms, corporations or other entities other
than Employer or its affiliates (hereinafter referred to collectively as "Third
Parties"), or use or cause or authorize any Third Parties to use, any such
Confidential Information, except as otherwise required by law.
B. Employer's Materials. In accordance with the
foregoing, Employee furthermore agrees that (i) Employee will at no time retain
or remove from the premises of
4
<PAGE> 6
Employer or its affiliates any research and development materials, drawings,
notebooks, notes, reports, formulae, software programs or discs or other
containers of software, manuals, data, books, records, materials or documents
of any kind or description for any purpose unconnected with the strict
performance of Employee's duties with Employer and (ii) upon the cessation or
termination of Employee's employment with Employer for any reason, Employee
shall forthwith deliver or cause to be delivered up to Employer any and all
research and development materials, drawings, notebooks, notes, reports,
formulae, software programs or discs or other containers of software, manuals,
data, books, records, materials and other documents and materials in Employee's
possession or under Employee's control relating to any Confidential Information
or any property or information which is otherwise the property of Employer or
its affiliates.
11. COVENANT-NOT-TO-COMPETE
In view of the Confidential Information to be obtained by or
disclosed to Employee, because of the know-how acquired and to be acquired by
Employee, and as a material inducement to Employer to enter into this
Agreement, issue the Options (as defined below) and continue to employ
Employee, Employee covenants and agrees that, so long as Employee is employed
by Employer and for a period of two (2) years after Employee ceases for any
reason to be employed by Employer, Employee shall not, directly or indirectly,
(i) divert business from, (ii) solicit or transact any business competitive
with Employer or its affiliates with, or (iii) sell any products or services
sold or offered by Employer or its affiliates to, any customer or former
customer of Employer or its affiliates. In addition, Employee covenants and
agrees that, so long as Employee is employed by Employer and for a period of
two (2) years after Employee ceases for any reason to be employed by Employer,
Employee hereby agrees to refrain from, anywhere in the world (the
"Geographical Area"), directly or indirectly owning, managing, operating,
controlling or financing, or participating in the ownership, management,
control or financing of, or being connected with or having an interest in, or
otherwise taking any part as a stockholder, director, officer, employee, agent,
consultant, partner or otherwise in, any business competitive with that engaged
in or being developed by Employer or its affiliates during Employee's term of
employment. Without limitation of the foregoing, Employer's business is
acknowledged to include the development, manufacture and sale of human
leukocyte interferon therapy and products and other natural or recombinant
technologies aimed at enhancing the human immune system. Employee acknowledges
that Employer's business is anticipated to be international in scope, that a
similar business could effectively compete with Employer's and its affiliates
businesses from any location in the world, and that, therefore, the restricted
Geographical Area is reasonable in scope to protect Employer's and its
affiliates' trade secrets and legitimate business interests.
5
<PAGE> 7
12. EMPLOYER'S REMEDIES FOR BREACH OF SECTIONS 10 & 11
Employee covenants and agrees that if Employee shall violate or
breach any of Employee's covenants or agreements provided for in Sections 10 or
11 hereof, Employer and/or its affiliates shall be entitled to an accounting
and repayment of all profits, compensation, commissions, remunerations or
benefits which Employee directly or indirectly has realized or realizes as a
result of, growing out of or in connection with any such violation or breach.
In addition, in the event of a breach or violation or threatened or imminent
breach or violation of any provisions of Sections 10 or 11 hereof, Employer
and/or its affiliates shall be entitled to a temporary and permanent injunction
or any other appropriate decree of specific performance or equitable relief,
without posting of bond, from a court of competent jurisdiction in order to
prevent, prohibit or restrain any such breach or violation or threatened or
imminent breach or violation by Employee, by Employee's partners, agents,
representatives, servants, employers or employees and/or by any third parties.
Employer shall be entitled to such injunctive or other equitable relief in
addition to any damages which are suffered, and the prevailing party shall be
entitled to reasonable attorneys' and paralegals' fees and costs and other
costs incurred in connection with any such litigation, both before and at trial
and at all tribunal levels. Resort by Employer and/or its affiliates to such
injunctive or other equitable relief shall not be deemed to waive or to limit
in any respect any other rights or remedies which Employer or its affiliates
may have with respect to such breach or violation.
13. REASONABLENESS OF RESTRICTIONS
A. Reasonableness. Employee acknowledges that any breach
or violation of Sections 10 or 11 hereof will cause irreparable injury and
damage and incalculable harm to Employer and its affiliates and that it would
be very difficult or impossible to measure the damages resulting from any such
breach or violation. Employee further acknowledges that Employee has carefully
read and considered the provisions of Sections 10, 11 and 12 hereof and, having
done so, agrees that the restrictions and remedies set forth in such Sections
(including, but not limited to, the time period, geographical and types of
restrictions imposed) are fair and reasonable and are reasonably required for
the protection of the business, trade secrets, interests and goodwill of
Employer and its affiliates.
B. Severability. Employee understands and intends that
each provision and restriction agreed to by Employee in Sections 10, 11 and 12
hereof shall be construed as separate and divisible from every other provision
and restriction and that, in the event that any one of the provisions of, or
restrictions in, Sections 10, 11 and/or 12 hereof shall be held to be invalid
or unenforceable, the remaining provisions thereof and restrictions therein
shall nevertheless continue to be valid and enforceable as though the invalid
or unenforceable provisions or restrictions had not been included therein, and
any one or more of such valid provisions and restrictions may be enforced in
whole or in part as the circumstances warrant. In the event that any such
provision relating to time period and/or geographical and/or type of
restriction shall be declared by a court of competent jurisdiction to exceed
the maximum or permissible time period, geographical area or type of
restriction
6
<PAGE> 8
such court deems reasonable and enforceable, said time period and/or
geographical and/or type of restriction shall be deemed to become and shall
thereafter be the maximum time period and/or geographical restriction and/or
type of restriction which such court deems reasonable and enforceable.
C. Survivability. The restrictions, acknowledgments,
covenants and agreements of Employee set forth in Sections 10, 11, 12 and 13 of
this Agreement shall survive any termination of this Agreement or of Employee's
employment (for any reason, including expiration of the Employment Term).
D. Comparable Restrictions. Employer agrees that it will
use its best efforts to have other senior executives execute and observe
agreements containing similar provisions as are contained in Sections 10, 11
and 12 hereof.
14. EMPLOYEES DISCLOSURES, REPRESENTATIONS AND
WARRANTIES.
Employee hereby acknowledges, represents and warrants to,
and/or agrees with Employer that Employee has full right, power and authority
to perform all obligations under this Agreement.
Employee hereby agrees to indemnify and hold harmless Employer and its
shareholders, directors, officers, employees and agents from and against any
and all loss, damage, liability, cost or expense (including reasonable
attorneys' and paralegals' fees and costs before and at trial and at all
appellate levels) due to or arising out of any material inaccuracy in, or
material breach of, any material representation, warranty or covenant of
Employee contained herein.
15. INDEPENDENT COUNSEL
Employer and Employee agree that each of them have been, or
were advised and fully understand that they are entitled to be represented by
independent legal counsel with respect to all matters contemplated herein from
the commencement of negotiations at all times through the execution hereof.
16. LAW APPLICABLE
This Agreement shall be governed by and construed pursuant to
the laws of the State of Florida, without giving effect to conflicts of laws
principles.
7
<PAGE> 9
17. NOTICES
Any notices required or permitted to be given pursuant to this
Agreement shall be sufficient, if in writing, and if personally delivered or
sent by certified or registered mail, return receipt requested, to his
residence, in the case of Employee, or to its then principal office, in the
case of Employer.
18. SUCCESSION
This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective legal representatives, heirs,
assignees and/or successors in interest of any kind whatsoever; provided,
however, that Employee acknowledges and agrees that he cannot assign or
delegate any of his rights, duties, responsibilities or obligations hereunder
to any other person or entity.
19. ENTIRE AGREEMENT
This Agreement constitutes the entire final agreement between
the parties with respect to, and supersedes any and all prior agreements, both
oral and written, between the parties hereto, except as related to rights of
the Employee and obligations related thereto of Employer regarding previously
granted stock options and previously purchased stock, as may have been modified
from time to time. The subject matter hereof may not be amended, modified or
terminated except by a writing signed by the parties hereto.
20. SEVERABILITY
If any provision of this Agreement shall be held to be invalid
or unenforceable, and is not reformed by a court of competent jurisdiction,
such invalidity or unenforceability shall attach only to such provision and
shall not in any way affect or render invalid or unenforceable any other
provision of this Agreement, and this Agreement shall be carried out as if such
invalid or unenforceable provision were not contained herein.
21. NO WAIVER
A waiver of any breach or violation of any term, provision or
covenant contained herein shall not be deemed a continuing waiver or a waiver
of any future or past breach or violation. No oral waiver shall be binding.
22. ATTORNEYS' FEES
In the event that either of the parties to this Agreement
institutes suit against the other party to this Agreement to enforce any of his
or its rights hereunder, the prevailing party in such action shall be entitled
to recover from the other party all reasonable costs thereof, including
reasonable attorneys' and paralegals' fees and costs incurred before and at
trial and at all tribunal levels.
8
<PAGE> 10
23. COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall be an original, but both of which together shall constitute one and the
same instrument.
24. INDEMNITY OF EMPLOYEE
Employer shall indemnify and hold harmless Employee from and
against any and all claims, judgments, fines, penalties, liabilities, losses,
costs and expenses (including reasonable attorneys' fees and costs) asserted
against or incurred by Employee as a result of acts or omissions of Employee
taken or made in the course of performing his duties for Employer or by reason
of Employee acting or having acted as a director or officer of Employer, to the
maximum extent permitted by law, including Section 607.0850, Florida Statutes
(including the advancement of expense provisions thereof); provided, however,
that such indemnity shall not apply to acts or omissions of Employee which
constitute misconduct, gross negligence or which were intended by Employee to
personally benefit Employee, directly or indirectly, at the expense of
Employer, unless the matter which benefits Employee was first fully disclosed
to the Board of Directors of Employer and approved by said Board.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands on
the day and year first above written.
VIRAGEN, INC.
By: /s/ Gerald Smith
---------------------
GERALD SMITH
President
EMPLOYEE
/s/ Charles F. Fistel
---------------------
CHARLES F. FISTEL
9
<PAGE> 1
(xli) STOCK OPTION AGREEMENT BETWEEN THE COMPANY AND FRED D. HIRT (DIRECTOR)
DATED AUGUST 2, 1996
<PAGE> 2
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of August 2, 1996 (the "Grant Date" or the
"Effective Date") between Viragen, Inc. a Delaware Corporation (the Company) and
Fred D. Hirt ("Optionee").
The Company, pursuant to the provisions of its 1995 Stock Option Plan (the
"Plan"), hereby grants to Optionee a qualified Incentive Stock Option ("ISO")
acquire Common Stock, par value $.01 per share, of the Company (the "Common
Stock"), subject to the following terms and conditions:
1. Grant of Option. The Company hereby grants to Optionee an ISO
(the "Option") to purchase up to 25,000 shares of Common Stock (the "Shares"),
to be transferred upon the exercise thereof, fully paid and nonassessable.
2. Exercise Price. The exercise price of the Shares subject to
the Option shall be at market at the Grant Date, $3.96 per share. The Company
shall pay all original issue or transfer taxes upon the exercise of the Option
by Optionee.
3. Exercisability of Option; Rights and Privileges. Subject to
the provisions of Paragraph 6 hereof, the Option shall be exercisable by
Optionee in whole or in part, at any time and from time to time, commencing on
the Effective Date (the "Exercise Date") for a period of five (5) years.
All granted but unexercised Options shall continue to be fully exercisable in
accordance with the provisions herein:
(i) if there occurs any corporate transaction
(which shall include a series of corporate transactions occurring within 60
days or occurring pursuant to a plan), that has the result that shareholders of
the Company immediately before such transaction cease to own at least 66 2/3
percent of the voting stock of the Company in a (a) reorganization, (b)
consolidation, (c) merger, (d) liquidation or (e) a similar of corporate
transaction;
(ii) if the shareholders of the Company shall
approve a plan of merger, consolidation, reorganization, liquidation or
dissolution in which the Company does not survive (unless the approved merger,
consolidation, reorganization, liquidation or dissolution is subsequently
abandoned); or
(iii) if the shareholders of the Company shall
approve a plan for the sale, lease, exchange or other disposition of all or
substantially all the property and assets of the Company (unless such plan is
subsequently abandoned).
<PAGE> 3
4. Non-Assignability of Option. The Option shall not be given,
granted, sold, exchanged, transferred, pledged, encumbered, assigned or
otherwise disposed of by Optionee, other than by will or the laws of descent
and distribution, and during the lifetime of Optionee, shall not be exercisable
by any other person, but only by Optionee.
5. Method of Exercise of Option. Optionee shall notify the
Company by written notice, in the form of the Notice of Exercise attached
hereto, delivered to the Companys principal office, attention: Chief Financial
Officer. At the Optionees option, the payment for the Shares may be made
either by Optionees check payable to the order to the Company in full payment
for the total exercise price of the number of Shares purchased or by execution
and delivery by the Optionee to the Company of a Note(s), in similar form and
content as Notes previously used by the Company for similar purposes
("Note(s)"), dated as of each Notice of Exercise. As soon as practicable after
the receipt of such Notice of Exercise and accompanying payment for the
purchase of Shares, the Company shall, at its principal office, tender to
Optionee a certificate or certificates issued in Optionees name evidencing the
Shares purchased by Optionee hereunder.
6. Non-Disclosure of Confidential Information.
A. Confidential Information. Optionee acknowledges that
Optionee has been informed that it is the policy of the Company to maintain as
secret and confidential all information relating to (i) the financial
condition, businesses and interests of the Company and its affiliates, (ii) the
systems, know-how, products, services, costs, inventions, patents, patent
applications, formulae, research and development procedures, notes and results,
computer software programs, marketing and sales techniques and/or programs,
methods, methodologies, manuals, lists and other trade secrets heretofore or
hereafter acquired, sold, developed and/or used by the Company and its
affiliates and (iii) the nature and terms of the Company's and its affiliates'
relationships with their respective customers, clients, suppliers, lenders,
vendors, consultants, independent contractors and Optionees (all such
information being hereinafter collectively referred to as "Confidential
Information"), and Optionee further acknowledges that such Confidential
Information is of great value to the Company and its affiliates and, in and by
reason and as a result of Optionee's employment by the Company, Optionee will
be making use of, acquiring and/or adding to such Confidential Information.
Therefore, Optionee understands that it is reasonably necessary to protect the
Company's and its affiliates' trade secrets, good will and business interests
that Optionee agree and, accordingly, Optionee does hereby agree, that Optionee
will not directly or indirectly (except where authorized by the Board of
Directors of the Company for the benefit of the Company and/or its affiliate(s)
and/or as required in the course of his term as a director) at any time
hereafter divulge or disclose for any purpose whatsoever to any persons, firms,
corporations or other entities other than the Company or its affiliates
(hereinafter referred to collectively as "Third Parties"), or use or cause or
authorize any Third Parties to use, any such Confidential Information, except
as otherwise required by law.
2
<PAGE> 4
B. Company's Materials. In accordance with the foregoing,
Optionee furthermore agrees that (i) Optionee will at no time retain or remove
from the premises of the Company or its affiliates any research and development
materials, drawings, notebooks, notes, reports, formulae, software programs or
discs or other containers of software, manuals, data, books, records, materials
or documents of any kind or description for any purpose unconnected with the
strict performance of Optionee's duties with the Company and (ii) upon the
cessation of Optionee's employment with the Company for any reason, Optionee
shall forthwith deliver or cause to be delivered up to the Company any and all
research and development materials, drawings, notebooks, notes, reports,
formulae, software programs or discs or other containers of software, manuals,
data, books, records, materials and other documents and materials in Optionee's
possession or under Optionee's control relating to any Confidential Information
or any property or information which is otherwise the property of the Company
or its affiliates.
7. Covenant Not-To-Compete. In view of the Confidential
Information to be obtained by or disclosed to Optionee, because of the know-how
acquired and to be acquired by Optionee, and as a material inducement to the
Company to enter into this Agreement, issue the Options (as defined herein) and
continue Optionees service as a director, Optionee covenants and agrees that,
so long as Optionee is a director of the Company and for a period of two (2)
years after Optionee ceases for any reason to be a director of the Company,
Optionee shall not, directly or indirectly, (i) divert business from, (ii)
solicit or transact any business competitive with the Company or its affiliates
with, or (iii) sell any products or services sold or offered by the Company or
its affiliates to, any customer or former customer of the Company or its
affiliates. In addition, Optionee covenants and agrees that, so long as
Optionee is a director of the Company and for a period of two (2) years after
Optionee ceases for any reason to be a director of the Company, Optionee hereby
agrees to refrain from, anywhere in the world (the "Geographical Area"),
directly or indirectly owning, managing, operating, controlling or financing,
or participating in the ownership, management, control or financing of, or
being connected with or having an interest in, or otherwise taking any part as
a stockholder, director, officer, employee, agent, consultant, partner or
otherwise in, any business competitive with that engaged in or being developed
by the Company or its affiliates during Optionee's term as a director. Without
limitation of the foregoing, the Company's business is acknowledged to include
the development, manufacture and sale of human leukocyte interferon therapy and
products and other natural or recombinant technologies aimed at enhancing the
human immune system. Optionee acknowledges that the Company's business is
anticipated to be international in scope, that a similar business could
effectively compete with the Company's and its affiliates businesses from any
location in the world, and that, therefore, the restricted Geographical Area is
reasonable in scope to protect the Company's and its affiliates' trade secrets
and legitimate business interests.
8. Companys Remedies for Breach of Sections 6 & 7. Optionee
covenants and agrees that if Optionee shall violate or breach any of Optionee's
covenants or agreements provided for in Sections 6 or 7 hereof, the Company
and/or its affiliates shall be entitled to an accounting and repayment of all
profits, compensation, commissions, remunerations or benefits which Optionee
directly or indirectly has realized or realizes as a result of, growing out of
or in
3
<PAGE> 5
connection with any such violation or breach. In addition, in the event of a
breach or violation or threatened or imminent breach or violation of any
provisions of Sections 6 or 7 hereof, the Company and/or its affiliates shall
be entitled to a temporary and permanent injunction or any other appropriate
decree of specific performance or equitable relief, without posting of bond,
from a court of competent jurisdiction in order to prevent, prohibit or
restrain any such breach or violation or threatened or imminent breach or
violation by Optionee, by Optionee's partners, agents, representatives,
servants, the Companys or Optionees and/or by any third parties. The Company
shall be entitled to such injunctive or other equitable relief in addition to
any damages which are suffered, and the prevailing party shall be entitled to
reasonable attorneys' and paralegals' fees and costs and other costs incurred
in connection with any such litigation, both before and at trial and at all
tribunal levels. Resort by the Company and/or its affiliates to such
injunctive or other equitable relief shall not be deemed to waive or to limit
in any respect any other rights or remedies which the Company or its affiliates
may have with respect to such breach or violation.
9. Reasonableness of Restrictions.
A. Reasonableness. Optionee acknowledges that any breach
or violation of Sections 6 or 7 hereof will cause irreparable injury and damage
and incalculable harm to the Company and its affiliates and that it would be
very difficult or impossible to measure the damages resulting from any such
breach or violation. Optionee further acknowledges that Optionee has carefully
read and considered the provisions of Sections 6, 7 and 8 hereof and, having
done so, agrees that the restrictions and remedies set forth in such Sections
(including, but not limited to, the time period, geographical and types of
restrictions imposed) are fair and reasonable and are reasonably required for
the protection of the business, trade secrets, interests and goodwill of the
Company and its affiliates.
B. Severability. Optionee understands and intends that
each provision and restriction agreed to by Optionee in Sections 6, 7 and 8
hereof shall be construed as separate and divisible from every other provision
and restriction and that, in the event that any one of the provisions of, or
restrictions in, Sections 6, 7 and/or 8 hereof shall be held to be invalid or
unenforceable, the remaining provisions thereof and restrictions therein shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable provisions or restrictions had not been included therein, and any
one or more of such valid provisions and restrictions may be enforced in whole
or in part as the circumstances warrant. In the event that any such provision
relating to time period and/or geographical and/or type of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum or
permissible time period, geographical area or type of restriction such court
deems reasonable and enforceable, said time period and/or geographical and/or
type of restriction shall be deemed to become and shall thereafter be the
maximum time period and/or geographical restriction and/or type of restriction
which such court deems reasonable and enforceable.
4
<PAGE> 6
C. Survivability. The restrictions, acknowledgments,
covenants and agreements of Optionee set forth in Sections 6, 7, 8 and 9 of
this Agreement shall survive any termination of this Agreement or of Optionee's
ceasing to be a director of the Company for any reason.
D. Comparable Restrictions. The Company agrees that it
will use its best efforts to have other directors execute and observe
agreements containing similar provisions as are contained in Sections 6, 7, and
8 hereof.
10. Termination of Option. To the extent exercisable but not
exercised, the Option shall terminate upon the first to occur of the following
dates:
(a) five (5) years from the Exercise Date as defined
herein; or
(b) the expiration of ninety (90) days following the date
the Optionees ceases for any reason to be a director of the Company and/or any
of its subsidiaries included in the Plan, except in the case of the Optionees
death or permanent disability, in which case paragraph 7(a) herein would remain
in effect.
Subject to the provisions of this paragraph, in the event of Optionees death,
the exercisable but unexercised portion of the Option may be exercised by the
estate of Optionee, or by the person who acquired the right to exercise the
Option by bequest or inheritance or by reason of the death of Optionee.
11. Pledge of Shares. If payment for the purchase of Shares under
this Option is made through execution and delivery of a Note(s), effective upon
Optionee's purchase(s) of the Shares and the delivery of the Note(s), in order
to secure the Company's obligations under the Note(s), Optionee hereby pledges,
assigns and sets over to the Company, and grants to the Company a security
interest in, the Shares. The Shares pledged pursuant hereto shall be
maintained in escrow with Atlas, Pearlman, Trop & Borkson, P.A. pursuant to the
terms of a Pledge and Escrow Agreement previously used by the Company for
similar purposes, which shall be executed by Optionee and the Company upon
delivery of a Note(s). As long as any Shares remain subject to the lien of the
Pledge, such Shares may not be further pledged or encumbered in any manner, and
shall not be sold, transferred or otherwise disposed of the Escrow Agent shall
not be required to relinquish the Pledge or the Escrow Agent's possession of
the certificates evidencing the Shares, unless no later than concurrently with
the sale of the Shares pursuant to the S-8 registration, all Notes which are
secured by such Shares are paid in full. In the event any of the Shares are to
be titled in the name of an immediate family member of Optionee or a trust
pursuant to the terms herein, as a condition thereto the designated title
holder(s) of such Shares shall execute and deliver to the Company a pledge and
escrow agreement, in form and content reasonably satisfactory to the Company
and its counsel, consistent with the terms herein. No transfer of Shares to,
or designation by Optionee of (for the purposes of owning Shares) any person or
entity shall relieve Optionee of any of his obligations under the Note(s) or
this Agreement. With respect to
5
<PAGE> 7
each Note under which a voluntary prepayment is made by Optionee, provided that
interest payments on such Note are current through the date of prepayment and
such Note is not in default and has not been accelerated, for each $19,800 of
principal paid by Optionee under such Note, 5,000 Shares of the Shares pledged
to secure such Note shall be released from the lien of the Pledge. As long as
no event of default has occurred with respect to a Note and no event giving
right to accelerate such Note has occurred, Optionee shall retain all voting
rights with respect to all Shares securing such Note. Following an event of
default or an acceleration event, the Company shall have and may exercise all
voting rights with respect to such Shares. Optionee hereby irrevocably
appoints the Company Optionee's attorney in fact for such purpose, it being
acknowledged that such appointment is coupled with an interest. Any dividends
or distributions payable in respect of any Shares subject to the Pledge shall
automatically be applied to pay down the Note(s) in inverse order of their
respective maturity date(s). In the event of a default under any Note, in
addition to and not in limitation or lieu of any other rights or remedies the
Company may have against Optionee as a result of such default, the Company may
exercise all of its rights at law and in equity as a secured party, including
without limitation under the Uniform Commercial Code, with respect to all
Shares then securing the Note with respect to which the default has occurred.
Upon a default, without limiting any of the Company's other rights and
remedies, the Company may conduct a public or private foreclosure sale of the
Shares securing the Note with respect to which the default has occurred.
Optionee agrees that 10 days notice to him of any private sale is fair and
reasonable. The Company may be the purchaser at any public foreclosure sale,
and may bid any commercially reasonable amount at such sale. In all events, in
the event of a public or private foreclosure sale, Optionee shall be liable for
any deficiency. All of the Company's rights and remedies under the Note(s),
the Pledge and this Agreement, and at law or in equity, are cumulative, and
none is intended to be in substitution or in lieu of, nor is the exercise of
one intended to be a waiver of, any other. The Company shall have no
obligation to proceed against the Shares before proceeding against Optionee
with respect to any default under any of the Notes.
12. Securities Laws. The Company represents and warrants that (i)
all shares underlying the Options will be issued from shares authorized by and
subject to the provisions of the Plan (ii) the Plan and the shares underlying
the Options have been registered under the applicable regulations of the
Securities and Exchange Commission on Form S-8 (iii) such registration is
effective as of the Effective Date, and (iv) such registration covering the
shares underlying the Options will be maintained as effective for the longer of
(a) the Director Term or (b) the Exercise Period of the Options as defined
herein.
13. Adjustment of Shares. If at any time prior to the expiration
or exercise in full of the Option, there shall be any increase or decrease in
the number of issued and outstanding shares of the Common Stock through the
declaration of a stock dividend or through any recapitalization resulting in a
stock split-up, combination or exchange of the Common Stock, then and in such
event:
6
<PAGE> 8
(i) appropriate adjustment shall be made in the maximum
number of Shares available for grant, so that the same percentage of the
Companys issued and outstanding Shares shall continue to be subject to being so
optioned; and
(ii) appropriate adjustment shall be made in the number of
Shares, and the exercise price per Share thereof, that remain unexercised under
the Option, so that the same percentage of the Companys issued and outstanding
shares of Common Stock shall remain subject to purchase at the same aggregate
exercise price.
Except as otherwise expressly provided herein, the issuance by the Company of
shares of its capital stock of any class, or securities convertible into shares
of capital stock of any class, either in connection with a direct sale of upon
the exercise of rights or warrants to subscribe therefore, or upon conversions
of shares or obligations the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number of exercise price of the Shares that remain
unexercised under the Option.
Without limiting the generality of the foregoing, the existence of unexercised
Shares under the Option shall not affect in any manner the right or power of
the Company to make, authorize or consummate (i) any or all adjustments,
recapitalizations, reorganizations or other changes in the Companys capital
structure or its business; (ii) any merger or consolidation of the Company;
(iii) any issue by the Company of debt securities, or preferred or preference
stock that would rank above the Shares issuable upon exercise of the Option;
(iv) the dissolution or liquidation of the Company; (v) any sale, transfer or
assignment of all or any part of the assets or business of the Company; or (vi)
any other corporate act or proceeding, whether of a similar character or
otherwise.
14. No Rights as Stockholder. Optionee shall have no rights as a
stockholder of the Company in respect of the Shares as to which the Option
shall not have been exercised and payments made therefore as herein provided.
15. Binding Effect. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties hereto,
their heirs, legal representatives, successors and permitted assigns. Optionee
acknowledges that Optionee has read and understands the Plan and agrees to
abide by its terms.
7
<PAGE> 9
16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to the conflict of laws principles thereof. All terms not defined in
this Agreement shall have the same meaning as in the Plan.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
VIRAGEN, INC.
By: /s/ Charles F. Fistel
----------------------------
Charles F. Fistel
Executive Vice President
OPTIONEE
/s/ Fred D. Hirt
----------------------------
Fred D. Hirt
<PAGE> 10
NOTICE OF EXERCISE
The undersigned hereby irrevocably elects to exercise the within Option to the
extent of purchasing __________ shares of Common Stock of Viragen, Inc., a
Delaware Corporation, and hereby makes payments of $________ in payment
thereof.
__________________________
Signature
__________________________
Date
INSTRUCTIONS FOR ISSUANCE OF STOCK AND CORPORATE RECORDS
Name: _______________________________________
(Please type or print in block letters)
Address: _______________________________
_______________________________
Social Security #: ___________________________
Phone #: (____)________________________________
Fax #: (____)________________________________
9
<PAGE> 1
SCHEDULE TO EXHIBIT 11
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding............. 36,198,302 32,137,693 18,686,751
=========== =========== ===========
Net Loss........................................ $(4,672,271) $(3,951,839) $(1,083,346)
Deduct required dividends on convertible
preferred stock, series A..................... 2,650 3,450 3,450
Deduct required dividends on convertible
preferred stock, series B..................... 47,917 -- --
----------- ----------- -----------
Net loss attributable to common stock........... $(4,722,838) $(3,955,289) $(1,086,796)
=========== =========== ===========
Loss per common share after deduction for
required dividends on convertible preferred
stock......................................... $ (0.13) $ (0.12) $ (0.06)
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of
Jurisdiction of Owned by
Incorporation Registrant
-------------- -------------
<S> <C> <C>
Vira-Tech, Inc. Florida 100%
Viragen (Scotland) Ltd. (1) Scotland (UK) 72%
Viragen Technology, Inc. (2) Florida 100%
Viragen (Europe) Ltd. (3) Delaware 72%
Viragen U.S.A., Inc. (4) Delaware 100%
</TABLE>
- -------------------------
(1) Incorporated January 17, 1995, 100% owned by Viragen (Europe) Ltd.
(2) Incorporated January 13, 1995
(3) Acquired December 8, 1995
(4) Incorporated April 4, 1996
<PAGE> 1
(23) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-60131) pertaining to the Viragen, Inc. 1995 Stock Option Plan,
Employment Contracts with Key Executives and Stock Option Agreements with
Directors of Viragen, Inc. of our report dated August 16, 1996, with respect to
the consolidated financial statements of Viragen, Inc. included in the Annual
Report (Form 10-K) for the year ended June 30, 1996.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
September 25, 1996
Miami, Florida
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VIRAGEN, INC. FOR THE PERIOD ENDED JUNE 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 19,449,059
<SECURITIES> 0
<RECEIVABLES> 26,086
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,764,519
<PP&E> 2,864,782
<DEPRECIATION> 2,026,830
<TOTAL-ASSETS> 20,617,426
<CURRENT-LIABILITIES> 1,498,590
<BONDS> 0
0
17,650
<COMMON> 378,959
<OTHER-SE> 16,946,616
<TOTAL-LIABILITY-AND-EQUITY> 20,617,426
<SALES> 229,967
<TOTAL-REVENUES> 739,036
<CGS> 178,368
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,204,137
<LOSS-PROVISION> 48,970
<INTEREST-EXPENSE> 92,576
<INCOME-PRETAX> (4,785,015)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,672,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,672,271)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
