<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K/A1
<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/A1 or any amendment to
this Form 10-K/A1. [ ]
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.
================================================================================
<PAGE> 2
VIRAGEN, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K/A1
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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
Disclosure................................................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 18
Item 11. Executive Compensation and Employment Agreements............................. 20
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 24
Item 13. Certain Relationships and Related Transactions............................... 26
PART IV
Item 14. Exhibits and Reports on Form 8-K............................................. 29
</TABLE>
<PAGE> 3
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
1
<PAGE> 4
million prior to December 31, 1996 and the final $15 million prior to April 30,
1997, with the initial investors or other investor groups. 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
2
<PAGE> 5
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
3
<PAGE> 6
Sclerosis ("MS"). In 1996, Biogen, Inc. received FDA approval for its
recombinant beta interferon for relapsing/remitting 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
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
4
<PAGE> 7
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 and preclinical 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.
5
<PAGE> 8
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
6
<PAGE> 9
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.
7
<PAGE> 10
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 States) 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
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....................... (5,570) (3,955) (1,087) (313) (573) (730)
Loss per average common
shares...................... (.15) (.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 statements contained in this report on Form 10-K/A1 that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including expected product clinical trial introductions, expected research and
development expenditures, new facility completion data and related anticipated
costs. All forward looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below and the risks
discussed in the "Risk Factors" section included in the Company's Registration
Statement Form SB-2, as filed with the Securities and Exchange Commission
(effective on August 14, 1995 with related Post-Effective Amendment effective
May 30, 1996). You should also consult the risk factors listed from time to time
in the Company's Reports on Form 10-Q, 8-K, 10-K and Annual Reports to the
Stockholders.
The biopharmaceutical industry is highly competitive and subject to rapid
technological change. Significant competitive factors in the pharmaceutical and
biopharmaceutical markets include product efficacy, price and timing of new
product introductions. Increased competition from existing biopharmaceutical
companies as well as the entry into the market of new competitors could
adversely affect the Company's financial condition or results of operations.
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing technology
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products. There can
be no assurance that any patent owned by the Company will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
12
<PAGE> 13
competitive advantages to the Company or that any of the Company's future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology, duplicate
the Company's technology or design around the patents, if any, owned by the
Company.
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.
On June 7, 1996 (the "close date"), 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,
with the initial investors or other investor groups, 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, 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 (reduced by an additional 2% per month commencing the
90th day following the close date, until the related Registration Statement is
declared effective by the SEC) 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. Loss attributable to common stock reflects adjustments
for cumulative preferred dividends, and in 1996, was restated to reflect
embedded dividends arising from discounted conversion terms on the Convertible
Preferred Stock, Series B. It is the Company's policy to invest its temporarily
idle cash exclusively in U.S. Treasury and Agency Securities which are
relatively liquid, providing market rates of return and are not intended to
speculate in interest rate movements. Depending upon short-term capital
requirements, a portion of the portfolio is held in a Money-Market Fund which
invests exclusively in U.S. Government obligations.
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.
13
<PAGE> 14
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. The Company's ability to generate revenues during
future periods is dependent upon obtaining regulatory approvals of the Product.
As the Company cannot be assured as to its ultimate success in obtaining the
necessary regulatory approvals, the Company is unable to conclude that
realization of benefits from its deferred tax assets is more likely than not, as
prescribed by SFAS 109. Accordingly, the Company has recognized a valuation
allowance to offset 100% of the deferred tax assets related to these
carryforwards.
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. The Company
expects to be able to draw upon its remaining $35 million in financing available
through the issuance of additional Convertible Preferred Stock by April 1997
under its June Agreement or similar amounts from other investor groups during
the same period. The additional funding raised will be utilized in the continued
development of the Company's Omniferon product including the funding of EU
clinical trials with estimated costs of: completion of Scottish production
facility -- $3.4 million; pre-clinical Phase I and Phase II trials -- $1.5
million and Phase III studies -- $12 million. In addition, anticipated funding
requirements for U.S. operations include: the establishment of domestic
manufacturing capacity -- $6 million; joint research and development
projects -- $4 million and commencement of domestic preclinical Phase I and
Phase II studies -- $1.5 million. Funding will also be utilized for continued
product development research, general working capital purposes including
administrative support functions and the possible acquisition of one or more
businesses complementary to the Company's operations.
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
14
<PAGE> 15
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., a subsidiary of Olsten Services Corp., 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 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.
15
<PAGE> 16
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.
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
16
<PAGE> 17
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.
17
<PAGE> 18
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 -- 110,000 -- --
1995 $106,615 $ 19,208
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
20
<PAGE> 19
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
21
<PAGE> 20
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>
22
<PAGE> 21
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.
23
<PAGE> 22
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
2,935,000 shares of Common Stock to the officers, directors and key employees 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), William B. Saeger (100,000) and to key employees (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
24
<PAGE> 23
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: November 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 November 27, 1996
- ----------------------------------------------- Directors, Principal
Gerald Smith Executive Officer and
President
/s/ ROBERT H. ZIEGER Chief Executive Officer November 27, 1996
- ----------------------------------------------- and Director
Robert H. Zieger
/s/ DENNIS W. HEALEY Executive Vice President, November 27, 1996
- ----------------------------------------------- Treasurer and Principal
Dennis W. Healey Financial Officer
/s/ CHARLES F. FISTEL Executive Vice President, November 27, 1996
- ----------------------------------------------- Director
Charles F. Fistel
/s/ PETER D. FISCHBEIN Director November 27, 1996
- -----------------------------------------------
Peter D. Fischbein
Director , 1996
- -----------------------------------------------
Sidney Dworkin
/s/ JAY M. HAFT Director November 27, 1996
- -----------------------------------------------
Jay M. Haft
/s/ WILLIAM B. SAEGER Director November 27, 1996
- -----------------------------------------------
William B. Saeger
Director , 1996
- -----------------------------------------------
Fred D. Hirt
</TABLE>
33
<PAGE> 24
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> 25
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> 26
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> 27
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 (restated for
1996)......................................... 894,976 -- --
----------- ----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCK............... $(5,569,897) $(3,955,289) $(1,086,796)
=========== =========== ===========
LOSS PER COMMON SHARE, after deduction for
required dividends on convertible preferred
stock......................................... $ (0.15) $ (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> 28
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> 29
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> 30
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> 31
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> 32
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. Loss
attributable to common stock reflects adjustments for cumulative preferred
dividends, and in 1996, was restated to reflect embedded dividends arising from
discounted conversion terms on the Convertible Preferred Stock, Series B.
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
F-9
<PAGE> 33
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. The Company also 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.
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
F-10
<PAGE> 34
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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.
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.
F-11
<PAGE> 35
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 (reduced by an additional 2% per month
commencing the 90th day following the close date, until the related Registration
Statement is declared effective by the SEC) 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> <C>
Convertible preferred stock, series A.................................. 11,289 14,697
Convertible preferred stock, series B.................................. 3,000,000 --
</TABLE>
<TABLE>
<CAPTION>
EXERCISE PRICE
--------------
<S> <C> <C> <C>
Warrants -- consultant (exercisable through February
2003)................................................ $0.60-$ 5.12 924,729 480,340
Employee option plans (exercisable through June
2003)................................................ $0.30-$ 7.13 500,000 2,563,000
Officers and directors options (exercisable through May
2002)................................................ $0.30-$ 3.96 4,385,000 650,000
Warrants -- private placements (exercisable through
August 1999)......................................... $0.52-$10.59 633,821 765,650
--------- ---------
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> 36
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> 37
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.
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
F-14
<PAGE> 38
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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,
F-15
<PAGE> 39
VIRAGEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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-16
<PAGE> 40
EXHIBIT INDEX
VIRAGEN, INC.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ---------------------------------------------------------------------------------
<C> <S> <C>
(11) Statement re: Computation of loss per share
(23) Consent of Independent Certified Public Accountants
</TABLE>
<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..................... 894,976 -- --
----------- ----------- -----------
Net loss attributable to common stock........... $(5,569,897) $(3,955,289) $(1,086,796)
=========== =========== ===========
Loss per common share after deduction for
required dividends on convertible preferred
stock......................................... $ (0.15) $ (0.12) $ (0.06)
=========== =========== ===========
</TABLE>
<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/A1) for the year ended June 30, 1996.
Ernst & Young LLP
December 17, 1996
Miami, Florida
