<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K/A
<TABLE>
<C> <S>
(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
</TABLE>
COMMISSION FILE NUMBER 0-10252
VIRAGEN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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/A or any amendment to
this Form 10-K/A. / /
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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<PAGE> 2
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: October 18, 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 October 18, 1996
- ----------------------------------------------- Directors, Principal
Gerald Smith Executive Officer and
President
/s/ ROBERT H. ZIEGER Chief Executive Officer October 18, 1996
- ----------------------------------------------- and Director
Robert H. Zieger
/s/ DENNIS W. HEALEY Executive Vice President, October 18, 1996
- ----------------------------------------------- Treasurer and Principal
Dennis W. Healey Financial Officer
/s/ CHARLES F. FISTEL Executive Vice President, October 18, 1996
- ----------------------------------------------- Director
Charles F. Fistel
/s/ PETER D. FISCHBEIN Director October 18, 1996
- -----------------------------------------------
Peter D. Fischbein
Director , 1996
- -----------------------------------------------
Sidney Dworkin
/s/ JAY M. HAFT Director October 18, 1996
- -----------------------------------------------
Jay M. Haft
/s/ WILLIAM B. SAEGER Director October 18, 1996
- -----------------------------------------------
William B. Saeger
Director , 1996
- -----------------------------------------------
Fred D. Hirt
</TABLE>
32
<PAGE> 3
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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 --
Contract termination fee paid in common stock................. -- 525,000 --
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) (2,803,928) (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 -- --
Private placement issuance cost................................. -- -- (112,100)
Expense payments on SB-2 registrations.......................... -- (128,031) --
----------- ---------- ----------
Net cash provided by financing activities................... 20,384,659 4,055,527 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> 10
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 --
Contract termination fee paid in common stock..................... -- 525,000 --
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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>
- -----------
*Filed herewith.
<PAGE> 1
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/A) for the year ended June 30, 1996.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
October 11, 1996
Miami, Florida
